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https://www.courtlistener.com/api/rest/v3/opinions/8497099/ | Chapter 7
MEMORANDUM OPINION DENYING DEBTOR’S MOTION TO STRIP LIEN
KAREN S. JENNEMANN, Chief United States Bankruptcy Judge
Debtor, Donald F. Catalano, seeks to strip off wholly unsecured junior liens attached to his home in Sanford, Florida (the “Property”).1 Although stripping off wholly unsecured junior mortgages is now permitted in a Chapter 7 case pursuant to the Eleventh Circuit’s decision in In re McNeal,2 the circumstances in this case are not typical. Here, although the value of the Property and encumbrances are not in dispute,3 a certificate of sale was issued post-discharge in favor of a wholly unsecured junior lienholder, Lake Forest Master Community Association, Inc. (the “Association”). The issue is whether a valid certificate of sale cuts off a Debtor’s ability to strip off a wholly unsecured junior lien under McNeal. The Court now holds that the Certificate of Sale prevents the Debtor from stripping off the lien and, as such, denies the Motion.
The facts are undisputed:
*656• January k, 2013: The Association obtained a Summary Final Judgment of Foreclosure in County Court,4 which scheduled a foreclosure sale on February 6, 2013.5
• February 6, 2013: Debtor filed his voluntary Chapter 7 petition, effectively stopping the original foreclosure sale.6 Debtor indicated on his Statement of Intentions he planned to retain the Property and to continue paying all creditors with a security interest in the Property “after successful modification.”7
• May 21, 2013: Debtor received a discharge, and the case was closed.8
• July 10, 2013: After the Debtor’s case was closed, the Association proceeded to enforce its in rem rights and filed a Motion to Reschedule Foreclosure Sale in the County Court.9 The County Court rescheduled the foreclosure sale for August 20, 2013.10
• July 29, 2013: The foreclosure sale was noticed for August 20, 2013, at 11:00 a.m.11
• August 20, 2013 at 8:10 a.m.: Debtor filed in the closed Chapter 7 bankruptcy case his Motion to Determine Secured Status of Jimmy and Patricia Ross, Lake Forest Master Community Association, Inc., and Aqua Finance, Inc. and to Strip Lien Effective Upon Discharge (the “Motion to Strip”).12
• August 20, 2013 at 11:00 a.m.: The foreclosure sale took place at which the Association purchased the Property for $100.00.13
• August 20, 2013 at 12Alp p.m.: Debtor filed his Motion to Reopen Chapter 7 Case (the “Motion to Reopen”).14
• August 20, 2013 at 3:17 p.m.: A Certificate of Sale was issued in favor of the Association.15 The Debtor’s Chapter 7 case remained closed, and no automatic stay was in effect at the time of the foreclosure sale and the issuance of the Certificate of Sale.
• August 28, 2013: The Debtor filed his Objection to Sale in County Court on August 28, 2013, asserting he did not receive proper notice of the rescheduled foreclosure sale and arguing the County Court should not issue the Certificate of Title until this Court ruled on the Debtor’s Motion to Strip and the Debtor’s Motion to Reopen.16 The County Court has taken no action on the Debtor’s Objection to Sale.
• November 26, 2013: This Court reopened the Debtor’s case to determine whether it can strip the Association’s wholly unsecured junior lien.17
*657Debtor now moves to strip18 the Association’s lien under § 506 of the Bankruptcy Code19 pursuant to Eleventh Circuit Court of Appeals’ holding in In re McNeal.20 The Association concedes its junior lien is wholly unsecured and otherwise would be subject to stripping off, but for one fatal fact: the Debtor lost any right to the Property upon the issuance of the Certifí-cate of Sale.21 Debtor argues his interest in the Property is lost only after issuance of a Certificate of Title, not the Certificate of Sale, and the Court’s ability to strip the lien is the same as if the request had made before the foreclosure sale had occurred.
Florida’s judicial foreclosure procedures, set forth in Section 45.031 of the Florida Statutes, authorize the sale of real property at public auction pursuant to a final judgment of foreclosure.22 After proper notice, a sale is conducted at which a certificate of sale is issued to the highest bidder.23 “If no objections to the sale are filed within 10 days after filing the certificate of sale, the clerk shall file a certificate of title and serve a copy of it on each party....”24 Title to the property passes to the purchaser when the certificate of title is filed and “the sale shall stand confirmed.” 25 Section 45.031 of the Florida Statutes explicitly empowers a court in the final judgment of foreclosure to fix the time in which the mortgagor may redeem.26 Where the judgment is silent on redemption, the mortgagor’s redemptive rights are lost upon the clerk’s filing of a certificate of sale.27
Paragraph 8 of the Summary Final Judgment provides: “On filing the certificate of sale, Defendant, and all persons claiming under or against him since the filing of the notice of Lis Pendens, are foreclosed of all estate or claim in the property and the purchaser at the sale shall be let into possession of the property.”28 The Certificate of Sale was issued to the Association, but no certificate of title was issued because the Debtor timely filed an Objection to Sale.29 The extent of the Debtor’s interest in the Property after the Certificate of Sale but before the issuance of a certificate of title determines the Court’s authority to strip the Association’s lien.
Under normal circumstances, wholly unsecured junior liens surviving discharge may be subsequently stripped off if a Chapter 7 debtor reopens his or her case and files a motion to strip off such lien s.30 However, such liens must be stripped off before a debtor loses his or her equitable interests in the real property.31 *658Section 506(d) of the Code cannot be used to avoid a lien on property which is not property of the estate.32 “Congress intended to exclude from the estate property of others in which the debtor had some minor interest such as a lien or bare legal title.” 33 This proposition has not been explicitly discussed with respect to lien stripping in Chapter 7 cases, although it has been addressed extensively in the Chapter 13 and Chapter 11 contexts. In those circumstances, the issuance of the certificate of sale cuts off a debtor’s rights in the collateral. As examined below, it does so in Chapter 7 as well.
Similar to the instant case, the debtor’s property in In re Jaar was sold and a certificate of sale issued by the Clerk of the Circuit Court reflecting the sale of the property to a creditor prior to the debtor filing her voluntary Chapter 13 petition.34 The question in the case was whether the debtor’s right to cure the default and reinstate the mortgage terminated as a result of the status of the foreclosure proceeding.35 In Jaar, the court found the mortgagor’s/debtor’s right of redemption expired with the filing of the certificate of sale; further, the court held that an objection to sale filed before the certificate of title was issued did not affect or cloud the title of the purchase in any manner.36 The court went on to hold that a certificate of sale must be set aside for the mortgagor/debtor to have any right to acquire the property.37 The debtor was not permitted to cure and reinstate or redeem the mortgage through a Chapter 13 plan.38
The bankruptcy court in In re Hand also found the filing of the certificate of sale determinative of the debtors’ interest in and right to certain real property.39 There, the court found that filing of the certificate of sale terminated the debtors’ right of redemption and extinguished their interest in the property such that the right to redeem was no longer part of the estate.40
Conversely, in In re Sarasota Land Co., the bankruptcy court found a Chapter 11 debtor’s right of redemption was included in the bankruptcy estate pursuant to § 541 of the Code where the debtor’s real property was sold at a foreclosure sale, but the right of redemption had not been extinguished.41 Importantly, however, at the time In re Sarasota Land Co. was decided, the Florida statutory right of redemption terminated upon issuance of the certificate of title, not the certificate of sale.42
The bankruptcy courts in the abovementioned cases found it necessary for a debtor to have a right to redeem real property in order to take advantage of *659Bankruptcy Code provisions to use or possess the real property or to otherwise alter a creditor’s interest in the real property. Here, the Debtor lost his right to redeem the Property when the Certifícate of Sale was issued to the Association. Without the equitable right of redemption, the Debtor has no ability to strip the liens attached to the Property. Debtor could have requested the relief he now seeks during the pendency of the Chapter 7 case or at any time after the Debtor’s discharge up until the issuance of the Certificate of Sale. He simply failed to timely act to preserve his interest in the Property.
Although the Debtor timely objected to the foreclosure sale, the Objection to Sale does not serve to extend or to preserve his right of redemption. Objections may be made to the regularity of the sale or the amount of the deficiency, but, after the filing of the certificate of sale, the mortgagor no longer has the ability to redeem the property. Any objection to the sale does not affect or cloud the title of the purchaser in any manner.43 The issuance of the certificate of title is merely a ministerial act required to complete the formal transfer of legal title.44
The substance of an objection to a foreclosure sale under Section 45.031(5) must be directed toward conduct that occurred at, or which related to, the foreclosure sale itself. The purpose of allowing an objection to a foreclosure sale “is to afford a mechanism to assure all parties and bidders to the sale that there is no irregularity at the auction or any collusive bidding, etc.”45
In his Objection to Sale, the Debtor asserts he did not have notice of the sale as required by the applicable statute.46 Failure to provide adequate notice of a judicial sale may provide cause for setting aside the sale and not issuing the certificate of title.47 Denial of receipt of notice creates a question of fact, which requires an evidentiary hearing more appropriately conducted by the County Court under whose supervision the sale was conducted.48
The County Court has the blessing of this Court to resolve the Debtor’s pending Objection to Sale. But, given the issuance of the Certificate of Sale, the Debtor has lost any interest in the Property and has forfeited his ability to strip off wholly unsecured liens. The Motion to Strip is denied without prejudice. In the event the Certificate of Sale is vacated, the Debtor may renew his request for relief under § 506 of the Bankruptcy Code. The Court will enter a separate order consistent with the Memorandum Opinion.
ORDER DENYING DEBTOR’S MOTION TO STRIP LIEN
This case came on for consideration on the Debtor’s Motion to Strip Lien (Doc. No. 13) and the Creditor’s Objection to Debtor’s Motion to Strip Lien (Doc. No. 17). Consistent with the Memorandum Opinion, entered simultaneously, it is
ORDERED:
1. Debtor’s Motion to Strip Lien (Doc. No. 13) is denied without prejudice.
*6602.Creditor’s Objection to Debtor’s Motion to Strip Lien (Doc. No. 17) is sustained.
S. The Florida State Court can resolve the Debtor’s pending Objection to Sale, if appropriate.
DONE AND ORDERED in Orlando, Florida, June 5, 2014.
. The Property is located at 4981 Maple Glen Place, Sanford, FL 32771. The legal description of the property is: LOT 366, LAKE FOREST SECION 11A, ACCORDING TO THE PLAT RECORDED IN PLAT BOOK 54, PAGE(S) 53-53, AS RECORDED IN THE PUBLIC RECORDS OF SEMINOLE COUNTY, FLORIDA.
. 477 Fed.Appx. 562 (11th Cir.2012).
. The Property is encumbered by four encumbrances: (i) a first mortgage executed in favor of EquiFirst Corporation, (ii) a second mortgage executed in favor of Jimmy and Patricia Ross, (iii) a lien recorded in favor of the Association for unpaid pre-petition homeowners' associations fees, and (iv) a financing statement form executed in favor of Aqua Finance, Inc. (Doc. Nos. 1 and 13.) According to the Debtor, the amount due on the first mortgage is $628,138, and the value of the property is $457,332 (Doc. No. 13). As such, only the first mortgage is secured by the value of the property. The Association does not dispute that there is not enough equity in the property to provide for payment of its lien.
. All reference to the County Court refers to the County Court of the Eighteenth Judicial Circuit in and for Seminole County, Florida.
. Association’s Exhibit 1.
. Doc. No. 1.
. Doc. No. 1.
. Doc. No. 12.
. Association’s Exhibit 2.
. Association’s Exhibit 3.
. Association’s Exhibit 4. The foreclosure sale was also noticed by publication in the Winter Park/Maitland Observer newspaper. (Association’s Exhibit 6.)
. Doc. No. 13.
. Association's Ex. No. 7.
. Doc. No. 14.
. Association’s Exhibit 7.
. Association's Exhibit 8.
. Doc. No. 21.
. Doc. No. 13.
. All references to the Bankruptcy Code or the Code refer to 11 U.S.C. Section 101, et seq.
. 477 Fed.Appx. 562 (11th Cir.2012).
. Doc. No. 17.
. Fla. Stat. § 45.031 (2014).
. Fla. Stat. §§ 45.031(2), (5) (2014).
. Fla. Stat. § 45.031(5) (2014).
. Fla. Stat. § 45.031(6) (2014).
. Fla. Stat. § 45.0315 (2014).
. Fla. Stat. § 45.0315 (2014); See Emanuel v. Bankers Trust Co., N.A., 655 So.2d 247, 249 (Fla. 5th DCA 1995).
. Association's Exhibit 1.
. Association’s Exhibit 8.
. See generally In re McNeal, 477 Fed.Appx. 562 (11th Cir.2012).
. See generally In re Aliu-Otokiti 6:12-BK-14850-ABB, 2013 WL 1163782 (Bankr.M.D.Fla. Mar. 19, 2013); In re Almeida 6:12-BK-12965-ABB, 2013 WL 1163777 (Bankr.M.D.Fla. Mar. 18, 2013); In re Bustamante 6:12-bk12877-KSJ, 2013 WL 1110886 (Bankr.M.D.Fla. Mar. 15, 2013).
. In re Israel, 112 B.R. 481, 485 (Bankr.D.Conn.1990).
. United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n. 8, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) (citing 124 Cong. Rec. 32399, 32417 (1978) (remarks of Rep. Edwards)).
. In re Jaar, 186 B.R. 148, 149 (Bankr.M.D.Fla.1995).
. Id.
. See id. at 153-54.
. Id.
. Id. at 154-55.
. In re Hand, 52 B.R. 65, 66 (Bankr.M.D.Fla.1985).
. Id.
. In re Sarasota Land Co., 36 B.R. 563, 565-66 (Bankr.M.D.Fla.1983).
. Florida Legislature amended the statutory right of redemption in 1993, to specifically provide that the right to redeem terminates with the filing of the certificate of sale, unless the foreclosure judgment specifies a later time.
. In re Jaar, 186 B.R. 148, 153-54 (Bankr.M.D.Fla.1995).
. In re Sarasota Land Co., 36 B.R. 563, 566 (Bankr.M.D.Fla.1983).
. Id. at 250.
. Association's Exhibit 8.
. Bennett v. Ward, 667 So.2d 378, 382 (Fla. 1st DCA 1995).
. Liberty Mut. Ins. Co. v. Lyons, 622 So.2d 621 (Fla. 5th DCA 1993); In re Jaar, 186 B.R. at 154 n.8. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497100/ | ORDER
W. HOMER DRAKE, Bankruptcy Judge.
This matter comes before the Court on a Motion to Approve Compromise and Settlement Agreement (hereinafter the “Motion”) filed by James G. Baker (hereinafter the “Trustee”), in his capacity as Chapter 7 Trustee for the estate of Dennis H. McDowell (hereinafter the “Debtor”). In addition to the Trustee and the Debtor, other parties to the Settlement Agreement (hereinafter the “Agreement”) include Jackie Sue Duke McDowell; Dennis H. McDowell, II; Sherry Husby; Josh Hus-by; Joe Husby; Christian McDowell; Dennis Hunter Ray McDowell; D.H. McDowell Family LLLP (hereinafter the “FLP”); and Griffin Howell, III, Chapter 7 Trustee for the estate of Dennis H. McDowell, II (collectively the “Settlement Parties”). Bank of North Georgia (hereinafter “BNG”) opposes the Motion. This Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 157(b)(1), as a core proceeding defined under 28 U.S.C. §§ 157(b)(2)(A) & (0). See also 28 U.S.C. § 1334.
Procedural History and Statement of Facts.
On October, 24, 2011, the Debtor filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code.1 Griffin Howell, III was initially appointed as Trustee for the estate, but on April 16, 2012, Howell resigned his appointment. Thereafter, the United States Trustee assigned James G. Baker to administer the Debtor’s estate. Following his appointment, the Trustee diligently investigated the financial affairs of the Debtor. The Trustee participated in 2004 examinations of the Debtor; Dennis H. McDowell, II (Debtor’s son); Keith Bollendorf (business associate of the Debtor); and Larry Terrell (tax preparer for the FLP). Additionally, he reviewed the deposition testimony of Jackie McDowell (Debtor’s wife) and Sherry Husby (Debtor’s adult daughter). Moreover, a substantial number of other documents were supplied to the Trustee by interested parties, including BNG.
After undertaking his investigation, the Trustee found it appropriate to file a complaint against the Debtor and the Settlement Parties. On August 8, 2013, he initiated two adversary proceedings that were ultimately consolidated, the substance of which provides the underlying motivation for the Agreement before the Court today. The Trustee’s complaint sought recovery for the benefit of the estate of a number of assets, including substantial assets known as (1) Debtor’s individual Merrill Lynch Account, with a balance as of October 31, 2012 of $3,818,728.89; (2) the Bull Creek Ranch property, with an estimated value of approximately $4,000,000.00; (3) the Crone Note, with an estimated value of approximately $500,000.00; and (4) Debt- or’s 49% interest in the FLP, with an estimated value of approximately $9,000,000.00.2 For his purposes, the *662Trustee asserted multiple bases for recovery: (1) resulting and constructive trusts; (2) fraudulent transfer; and (3) ineffective gifting.
The Trustee, the Debtor, and the Settlement Parties entered into discussions for the purpose of resolving the adversary proceeding, but no resolution was forthcoming. On September 11, 2013, the parties requested to mediate this case before Judge Paul Bonapfel, United States Bankruptcy Judge for the Northern District of Georgia. By Order, the Court granted their request on September 16, 2013. The mediation transpired on October 4, 2013. Following nine and a half hours of negotiation proceedings, the parties reached a settlement in resolution of the Trustee’s claims, the terms of which the parties subsequently memorialized into the Agreement before the Court. Essential to the Court’s review are the following:
(b) Settlement Amount. The Debtor, Jackie Sue Duke McDowell, and the FLP will pay or cause to be paid to the Trustee $2,050,000.00 (two million and fifty thousand dollars) as the settlement amount (the “Settlement Amount”). The Trustee will pay to Trustee Howell $50,000 from the Settlement Amount....
(d) Dismissal of Litigation. Within seven (7) days after receipt of the Settlement Amount, the Trustee will file a motion in the Litigation [requesting the Court to dismiss the adversary proceeding(s) ].
(e) Effective upon the Trustee’s receipt of the Settlement Amount, the following described interests in property of the Debtor’s bankruptcy estate will be deemed abandoned by the Trustee: subject to limitations provided for in 1(g) below, all property listed by Debtor in his schedule “A” or schedule “B”, as amended....
2. Releases.
[multiple releases for the Trustee, Debtor, and Settlement Parties from any and all claims, as defined in the Agreement, of any kind that the Trustee, Debtor, or member of the Settlement Parties has or may claim to have now or in the future connected with any commission or omission as of the date of the Agreement]
Trustee’s Mot. to Approve Compromise, Ex. A., at 3-6.
The Trustee filed this Motion on January 10, 2014. BNG’s formal objection was filed on February 5, 2014. On notice to all creditors, the United States Trustee, and the Settlement Parties, the Court conducted a hearing on February 7, 2014 to consider whether to approve the Agreement. Present at the hearing were the Trustee, counsel for the Trustee, Trustee Howell, counsel for Trustee Howell, the Debtor, counsel for both the Debtor and the Settlement Parties, counsel for BNG, and counsel for both Charter Bank and Southern States Bank. At the hearing, the Court permitted, without objection, the Trustee’s request to proffer what his testimony would be if required to take the stand. Additionally, the Court allowed all present parties to present their positions regarding the Agreement. Upon the conclusion of the hearing, the Court took the matter under advisement for further consideration.
Conclusions of Law.
Based on the proffer, the Trustee determined that the Agreement is in the best interest of the estate and its creditors, that he came to this determination by means of his business judgment, and that he recommends the Court approve the Agreement. The Trustee proffered that his primary duty requires him expeditiously to turn assets of the Debtor into cash and distribute the funds to creditors. Of *663particular benefit to the Trustee, this Agreement ensures that the estate’s creditors receive a distribution and that these proceeds can be distributed in a relatively short period of time. The Trustee also expounded on many concerns, beyond the inherent risks, with this litigation, many of which potentially negate recovery in their entirety, including: (1) statute of limitations defenses, (2) solvency questions, and (3) potential Stem v. Marshall3 issues.
BNG is the fourth largest creditor, holding approximately thirteen percent (13%) of the claims on the estate. Claims on the estate amount to $50,256,595.10. The Debtor owes BNG $6,461,377.97. BNG primarily objects because, in its opinion, the Trustee failed to set forth a settlement proposal that falls within the range of reasonableness. BNG contends that the Debtor’s fraudulent actions amount to over $20 million being removed from the estate, and if the Court approves the settlement, it not only sanctions the unlawful actions of the Debtor, but also rewards him with an $18 million boon. In the opinion of BNG, there are indeed aspects that favor settlement, however, not at such a steep discount in light of the relevant factors.
When a bankruptcy court evaluates whether to approve or disapprove a settlement agreement, it must consider:
(a) the probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection;
(c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; [and]
(d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544, 1549 (11th Cir.1990) (quoting Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1381 (9th Cir.1986)) cert. den., 498 U.S. 959, 111 S.Ct. 387, 112 L.Ed.2d 398 (1990). In making its evaluation, the Court must not rest its approval of any proposed settlement on a resolution of the ultimate factual and legal issues underlying the compromised disputes. Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Serv., Inc.), 762 F.2d 185, 189 (2nd Cir.1986). Rather, the Court should consider the probable outcomes of the litigation, including its advantages and disadvantages, and make a pragmatic decision based on all equitable factors. Florida Trailer and Equip. Co. v. Deal, 284 F.2d 567, 571 (5th Cir.1960).4
Factor 1: Probability of Success in the Litigation.
BNG believes that the Trustee has, at the least, a reasonable likelihood of success in the litigation. According to BNG, there is a clear “paper trail,” and this documentary evidence and testimony “unequivocally support” the Trustee’s claim of fraudulent transfers totaling over $20 million. Moreover, BNG agrees that the evidence supports the Trustee’s claims of ineffective gifting with regards to the Debtor’s 49% interest in the FLP. Ultimately, BNG contends that the potential reward to the estate more than outweighs any potential risks associated with the litigation.
The Trustee spoke of the inherent risk associated with any litigation, focusing on the nominal return to creditors in the event of failure, but primarily concentrated *664on the pitfalls that plagued the landscape were this case to go forward without approval of the Agreement. First, the Trustee was concerned with the Debtor’s statute of limitations defenses. The Debtor filed his petition in October of 2011. Many of the transactions, including all but 9% of the 49% FLP transfer, took place in or before 2007, more than four years before the petition date. The Trustee pointed out that under Georgia law there is a four year statute of limitations with regards to fraudulent transfers, and though the Trustee retains an argument for why those bars should not apply, he considered then-existence when acceding to this Agreement.
The Trustee also expressed concern with the Debtor’s solvency defenses. Apparently, much of the Debtor’s net worth was invested in a fluctuating real estate market. To prevail under either of Georgia’s two fraudulent transfer provisions, “a plaintiff ultimately must prove: (3)[the] [defendant was insolvent or likely to become insolvent” at the time or as a result of the questionable transfer. Atlanta Fiberglass USA LLC v. KPI, Co., Ltd., 911 F.Supp.2d 1247, 1265 (N.D.Ga.2012) (internal quotations omitted) (citing Official Code of Georgia Annotated §§ 18-2-74(a) & 18-2-75(a)). With a large portion of the Debtor’s 'assets tied up in an uncertain market, the Trustee contends that with some of the suspect transfers, the Debtor’s solvency at the time he made the transfers would be a serious issue.
Finally, the Trustee displayed unease with the Court’s authority to issue a final judgment in this case, in light of Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) and its uncertain ramifications. In Stem, the Supreme Court held that when a claim is “a state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on [a] creditor’s proof of claim in bankruptcy,” a bankruptcy court lacks constitutional authority to enter a final judgment. Stern, 131 S.Ct. at 2611. Additionally, the Supreme Court held in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) that when an entity, which had taken no part in the bankruptcy process, is sued on behalf of the bankruptcy estate seeking to recover a fraudulent transfer, the entity is entitled to a jury trial as a private right that Congress cannot divest by relabeling it and assigning it to a specialized non-article III court. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 36-50, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). Extrapolating from the Supreme Court’s decisions, the Sixth Circuit suggested that Stern and Granfinanciera combined to stand for the proposition that where a bankruptcy estate reaches out to file a fraudulent transfer claim against a party who makes no claim on the estate, the Bankruptcy Court has no authority to issue a final ruling. In re Global Technovations, Inc., 694 F.3d 705, 722 (6th Cir. 2012). Although there is debate about the Court’s authority and whether defendants can waive the jurisdictional issue deriving from Stern, compare, In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir.2012), cert. granted, — U.S. -, 133 S.Ct. 2880, 186 L.Ed.2d 908 (2013) with Waldman v. Stone, 698 F.3d 910, 918 (6th Cir.2012), cert. den., — U.S. -, 133 S.Ct. 1604, 185 L.Ed.2d 581 (2013), its existence causes uncertainty to any ruling by this Court. Moreover, assuming that none of the Settlement Parties filed proofs of claim against the estate, as it appears that none have, Granfinanciera seemingly entitles the Defendants to a jury trial, subjecting the Trustee’s case to all the elevated risk associated with such proceedings. See Granfinanciera, 492 U.S. at 36-50, 109 S.Ct. 2782.
*665
Factor 2: The Difficulties, if Any, to he Encountered in the Matter of Collection.
BNG argues that the ordinary difficulty in identifying assets for liquidation has been assuaged in these proceedings. In this case, the Trustee knows the assets and their rough evaluations.5 By BNG’s calculation, at least $10 million of identified property is fairly liquid.6
The Trustee agrees with BNG’s assessment insofar as his ability to identify the assets. However, he maintains that other than the Individual Merrill Lynch Account, nothing is easily “monetized.” Real property takes time and effort to market at or near fair market value. Moreover, nearly half of the transferred assets are comprised of units of the FLP. The Trustee expressed considerable doubt as to what actions he could take with regard to the partnership. In fact, he articulated uncertainty as to whether he could be a partner beyond a mere economic sense. Would he have the authority to make decisions or sell assets? Would this role require him to fight the other unit-holders tooth and nail for every painstaking scrap? Would wrapping up or liquidating a portion of this family partnership require the appointment of a receiver? These were all questions that plagued the Trustee. It was expressed at the hearing that getting the judgment is the easy part; the practical realities of collecting on it is another matter. Ultimately, the Trustee’s independent assessment presents the process of collection as more difficult than BNG characterizes, with little “low hanging fruit” for the Trustee’s pickings.
Factor III: Complexity of the Litigation, and Expense, Inconvenience, and Delay Necessarily Attending it.
BNG argues that the actual litigation in this matter only appears cumbersome because of the number of parties involved and the total value of assets transferred, but insists that the legal questions and claims are straightforward, with very little complexity. Moreover, BNG stresses that the majority of the Trustee’s work has been completed. The Trustee was blessed with an opportunity to benefit from extensive work conducted by interested third parties, primarily BNG. Consequently, BNG maintains that the previously completed work shall expedite any pretrial period, including discovery, and ease the expenses and burdens of the Trustee. Moreover, considering the value on the table, prosecution of the case justifies a little delay.
The Trustee believes that, despite the efforts already expended by BNG and other interested parties and assuming the Court’s denial of the Trustee’s Motion, the parties are looking at years — not months — worth of litigation with no certainty in the outcome. The Trustee voiced concern over the potential delay of settling the Stem questions. Although the primary elements of the Trustee’s claims may be straight forward, the tangential elements of Stem considerably elevate the *666complexity, especially in lieu of differing approaches taken by the circuits. Additionally, the Stem issues require attention before any court addresses the substance of this litigation. Assuming the respective parties exhaust their appellate rights, the litigants are contemplating years of litigating a jurisdictional issue before undertaking the core of the Trustee’s complaint.
When it comes to the essence of the litigation, the costs of contesting the Debt- or’s solvency defense also troubles the Trustee. The Trustee explained that he foresees expending six-figures for the hiring of a forensic accountant, whose sole purpose shall be identifying the Debtor’s insolvency at the time of or as a result of each transaction. The Trustee feels the Agreement justifiably avoids this excessive expense and inconvenience.
Finally, assuming the Trustee disposes of these hurdles, he must still wind up the estate. Assuming the Trustee possesses the legal authority to act within the FLP, he believes the partnership will inevitably require the appointment of a receiver, whose duties, the Trustee estimates, could take 3-4 years to complete sufficiently.
The Trustee takes the position that the Agreement avoids the inconvenience and delay caused by Stem and the actual difficulties connected with liquidation of the estate. Simultaneously, the Trustee accounts for the inherent complexity and expense associated with a case as cumbersome as this one, while factoring in the risk previously discussed, and concludes that the Agreement is in the best interests of the estate.
Factor TV: The Paramount Interest of the Creditors and a Proper Deference to their Reasonable Views in the Premises.
The Court previously discussed many of the positions that BNG holds with regards to this Motion. However, certain interests of the creditor fail to align with any of the other factors, and the Court would feel remiss should it overlook them. The settlement amount comprises a mere fraction of the overall debts in this case and shall provide an extremely modest dividend; more importantly perhaps, it comprises a mere fraction of the assets that the Trustee’s complaint alleges the Debtor fraudulently removed from the estate, the recovery of which could provide a more impressive dividend. Moreover, BNG fears that the releases contained in the Agreement will cause the Debtor to become “judgment proof.” BNG currently seeks a denial of the Debtor’s discharge by prosecuting its own separate adversary proceeding against the Debtor. Because the releases permit the transferred assets to remain in the names and custody of the transferees, BNG fears that, even assuming a denial of the Debtor’s discharge, there will be little or no actionable recovery against the Debtor, post-bankruptcy, on the executed guarantees. Expecting both a low dividend and no further meaningful recourse against the Debtor, BNG feels doubly victimized by the Agreement.
BNG was not the only-creditor appearing at the hearing, however, and the Court is required to give credence and display proper deference to the interests and perspectives of all creditors, not just those objecting. Counsel for both Charter Bank and Southern States Bank presented the banks’ support of the Agreement. These banks represent the sixth and eighth largest creditors of the estate, collectively possessing $5,376,428.52 of the claims, estimated as approximately 10% of total claims. Counsel for these banks stated that these banks involved themselves throughout the process. While they recognize the tremendous loss incurred, they support the Agreement’s approval. Counsel took the position that BNG’s numbers presume both success in the litigation and *667successfully liquidating all of the transferred assets. Agreeing with the Trustee, the banks likewise show concern with Stem, the Debtor’s solvency defenses, and the statute of limitations defenses, as well as the feasibility of collection. The banks favor the certainty of receiving a guaranteed distribution within a reasonable time and believe that by confirming the Agreement, the Court provides a foreseeable conclusion to this case.
Additionally, the Court notes that creditors holding approximately 77% of the claims failed to attend the hearing. The Court can only assume that these creditors have no position on the matter and acquiesce to the approval of the Agreement.
Conclusion.
The approval of a compromise or settlement in a bankruptcy case resides within the sound discretion of the Bankruptcy Court and will not be disturbed or modified on appeal unless the appellate court finds the approval or disapproval of the settlement to constitute an abuse of discretion. Rivercity v. Herpel (In re Jackson Brewing Co.), 624 F.2d 599, 602-03 (5th Cir.1980).7 For a Court to exercise properly its discretion, it must consider, based on the information before it, whether the proposed compromise or settlement falls within the “lowest point in the range of reasonableness.” Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Serv., Inc.), 762 F.2d 185, 189 (2nd Cir.1985); In re Upshur, 2006 WL 6591826, at *1 (Bankr.N.D.Ga.2006) (Bihary, B.J.).
Having considered the pleadings and arguments of counsel within the context of the Justice Oaks factors, the Court finds that the Agreement does not fall below the “lowest point in the range of reasonableness.” Undoubtedly, the Trustee could have reached a settlement that resulted in more favorable treatment to BNG and the other creditors, but it is not the Court’s prerogative to micromanage affairs that have been entrusted to the Trustee. The Court’s only duty is to ensure that the settlement reached is fair and equitable and reasonable in light of the circumstances presented. Tri-State Financial, LLC v. Lovald, 525 F.3d 649 (8th Cir.2008) (quoting In re Martin, 212 B.R. 316, 319 (8th Cir. BAP 1997)); In re Grot, 291 B.R. 204 (Bankr.M.D.Ga.2003). In light of the proffer, the Court believes the Trustee satisfied his burden. Particularly, the Court finds persuasive the considerations involving the Trustee’s accounting for the jurisdictional issues associated with Stem and its predecessors and progeny, the Debtor’s and Settlement Parties’ defenses to claims, the Trustee’s assessment of the FLP’s collection feasibility, and the counterbalancing interests of the appearing creditors.
Accordingly, it is hereby
ORDERED that the Trustee’s Motion to Approve Compromise and Settlement Agreement is GRANTED. The Trustee is authorized to proceed in whatever manner necessary to consummate the Agreement and carry out its provisions.
The Clerk is DIRECTED to serve a copy of this Order on the parties identified in the Distribution List.
IT IS ORDERED.
. 11 U.S.C. § 101 et seq.
. The overall value of the FLP has fluctuated, but was estimated to be approximately $18,000,000 as of January 4, 2011.
. - U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
. Decisions by the former Fifth Circuit, issued before October 1, 1981, are binding as precedent in the Eleventh Circuit. See Bonner v. City of Prichard, Ala., 661 F.2d 1206, 1207 (11th Cir.1981) (en banc).
. In a related, but alternative argument, BNG maintains that although valuations were previously completed on the transferred property, the parties are not certain what the total values are today, and BNG argues that the Court cannot adequately evaluate the compromise without holding an evidentiary hearing as to what the full value of the assets on the table should otherwise be. The Court disagrees. That line of argument merely distracts the Court from the totality of the larger picture. The parties provided enough information for the Court comparatively to evaluate the settlement amount against the Trustee’s full claim, as a factor to be considered.
. These assets account for the Individual Merrill Lynch Account, the Crone Note, and the Bull Creek Ranch and other real property transfers.
. See supra note 4 and accompanying text. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497101/ | MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.
Before the Court in this dischargeability action is the plaintiffs request to file an amended complaint containing additional factual allegations and new legal theories of relief. Because the deadline for filing objections to the dischargeability of particular debts passed before the proposed amended complaint was filed, the Court must determine whether the amended complaint “relates back” to the date of the original filing and, even if so, whether it would be appropriate to grant leave to amend under the circumstances of this case.
I. FACTS AND POSITIONS OF THE PARTIES1
The debtor in this Chapter 7 bankruptcy case,2 Joshua S. Huggard (the “Debtor”), was formerly one of the principal owners of the now defunct Upper Crust chain of pizza restaurants. Before the commencement of this case and while the Upper Crust was undergoing a company-wide expansion, the Debtor and the two other Upper Crust principals (Jordan Tobins and Brendan F. Higgins, Jr.; collectively with the Debtor, the “principals”) hired ZVI Construction Company, LLC (“ZVI”) to perform renovation and other construction work for the Upper Crust. ZVI was not fully compensated for that work, however, and in April 2012 filed suit in state court against the Upper Crust and its principals to collect payment.
That original contract suit was settled through mediation, with the parties agreeing that the Upper Crust would make an initial $250,000 payment to ZVI, followed by 36 monthly payments of $11,000 each (the “Settlement Agreement”). The $250,000 payment was to come from To-bins, in settlement of yet another dispute between Tobins and the Upper Crust, the Debtor, and Higgins. According to ZVI, Tobins was obligated under the Settlement Agreement to pay the $250,000 (the “Settlement Funds”) to Attorney Franklin Levy (the attorney representing the Upper Crust, the Debtor, and Higgins). Attorney Levy was to hold the Settlement Funds in escrow and ultimately turn them over to ZVI. And ZVI maintains that it would not have executed the Settlement Agreement absent representations made by the Debtor and Higgins that the $250,000 would be paid to ZVI.
On September 28, 2012, Tobins wired the sum of $250,000 to Attorney Levy’s law firm (the “Firm”). But those funds were never turned over to ZVI. Instead, the funds were disbursed by the Firm to several different parties, including the Firm itself, the Debtor, the Debtor’s father, Higgins, the Upper Crust CEO, and bankruptcy counsel for the Upper Crust.3 The *671disbursement of the $250,000 in a fashion other than that expected by ZVI precipitated a lawsuit brought by ZVI in early 2013 against the Debtor, Higgins, Attorney Levy, and the Firm. That suit, through which ZVI sought damages as a result of the defendants’ allegedly unlawful diversion of the Settlement Funds, was stayed as to the Debtor when he filed his Chapter 7 petition on July 31, 2013.
On October 28, 2013, the deadline for filing a complaint objecting to the Debtor’s discharge or the dischargeability of a particular debt, ZVI timely initiated the present adversary proceeding by filing a complaint (the “Original Complaint”) objecting to the dischargeability of ZVI’s claim against the Debtor. The Original Complaint set forth the facts summarized above — facts which ZVI alleged rendered its claim nondischargeable pursuant to § 523(a)(2) of the Bankruptcy Code on account of the Debtor’s “willful misrepresentations and participation in the scheme to convert funds due ZVI.”4 Original Complaint 7 ¶ 31, ECF No. I.5
On January 8, 2014, ZVI filed a motion requesting leave to amend the Original Complaint, although leave of Court was not then required since the motion was filed within 21 days of the Debtor’s answer to the Original Complaint.6 See Fed. R.Civ.P. (the “Federal Rules”) 15(a)(1)(B) (made applicable by Fed. R. Bankr.P. (the “Bankruptcy Rules”) 7015). But ZVI withdrew its initial request to amend after the Debtor filed a motion to strike that pleading on grounds that ZVI had not numbered the paragraphs of the motion, as required by Federal Rule 10 (made applicable by Bankruptcy Rule 7010) and Massachusetts Local Bankruptcy Rule 9013-1. Shortly thereafter, on January 14, 2014, ZVI renewed its request to amend by filing the “Consolidated Motion for Leave to Amend Complaints Objecting to Discharge of Debt” (the “Motion to Amend”) at issue here.7
Many of the changes in the proposed amended complaint (the “Amended Complaint”) are largely stylistic. Other more substantive additions, however, have drawn the Debtor’s objection (the “Objection”). First, the Amended Complaint contains additional factual allegations. Specifically, the Amended Complaint refers to an affidavit of Attorney Levy and emails sent by Attorney Levy to various persons that were neither referenced in, nor attached to, the Original Complaint.8 Second, the Amended Complaint expands the statutory bases for ZVI’s allegation that its claim is nondischargeable, adding to its § 523(a)(2) fraud claim additional *672claims of nondischargeability on account of embezzlement pursuant to subsection (a)(4)9 and willful and malicious injury pursuant to subsection (a)(6).10’11
Through his Objection, the Debtor argues that it is too late for ZVI to raise these additional claims for relief, as the deadline for filing objections to discharge-ability under subsections (a)(4) and (a)(6) has long since passed. ZVI, in turn, maintains that the alternative bases for relief requested in the Amended Complaint arise from the originally-plead factual allegations, and thus “relate back” to the timely-filed Original Complaint.
II. DISCUSSION
In a case under Chapter 7 of the Bankruptcy Code, a creditor asserting the nondischargeability of a debt under §§ 523(a)(2), (4), or (6) must timely commence an adversary proceeding seeking a declaration of nondischargeability, or the creditor’s claim will be discharged. 11 U.S.C. § 523(c)(1); Fed. R. Bankr.P. 4007(c); 7001(6). The deadline for filing that complaint, set by Bankruptcy Rule 4007(c), is 60 days from the first date set for the meeting of creditors required by § 341, unless a motion to extend the time is filed before the deadline has expired (and the court grants an extension). Fed. R. Bankr.P. 4007(c). Here, the Original Complaint was timely filed, but the Amended Complaint was not.
However, while the Debtor is correct that the deadlines for objecting to a debtor’s discharge or the dischargeability of a particular claim are “strictly and narrowly construed,” Objection 11, Feb. 14, 2014, ECF No. 22, the Bankruptcy Rules which establish those deadlines “operate in conjunction with [Bankruptcy] Rule 7015,” Flexi-Van Leasing, Inc. v. Perez (In re Perez), 173 B.R. 284, 290 (Bankr.E.D.N.Y.1994); see also Saunders Real Estate Corp. v. Pearlman (In re Pearlman), 360 B.R. 19, 21 (Bankr.D.R.1.2006), which incorporates Federal Rule 15.12
“Rule 15(c) of the Federal Rules of Civil Procedure governs when an amended pleading ‘relates back’ to the date of a timely filed original pleading and is thus itself timely even though it was filed outside an applicable statute of limitations.” Krupski v. Costa Crociere S.p.A., 560 U.S. 538, 541, 130 S.Ct. 2485, 177 L.Ed.2d 48 (2010). Accordingly, if the Amended Complaint “relates back” to the Original Complaint, it too will be deemed timely filed. Rule 15(c) provides that an *673amended pleading “relates back to the date of the original pleading when ... (B) the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out — or attempted to be set out — in the original pleading.” Fed. R.Civ.P. 15(c)(1)(B).13
“So long as the original and amended petitions state claims that are tied to a common core of operative facts, relation back will be in order.” Mayle v. Felix, 545 U.S. 644, 664, 125 S.Ct. 2562, 162 L.Ed.2d 582 (2005). Here, the Amended Complaint is entirely grounded on the same set of core facts that form the basis of the Original Complaint. In both iterations of the complaint, ZVI predicates its claim for nondischargeability on the Debtor’s allegedly inducing ZVI to settle its contract claims by promising to turn over the funds received from Tobins while having had no intention to do so. The additional facts and exhibits referenced in the Amended Complaint merely amplify the allegations contained in the Original, and do not attempt to ground the relief sought by ZVI in a different set of circumstances. As such, relation back of the additional factual allegations is warranted. See, e.g., Am. Asset Fin., LLC v. Feldman (In re Feldman), 506 B.R. 222, 282 (Bankr. E.D.Pa.2014); 3-15 Moore’s Federal Practice-Civil § 15.19 (LEXIS 2014) (“Amendments that amplify or restate the original pleading or set forth facts with greater specificity should relate back.”).
The same holds true with regard to the additional statutory bases for relief asserted in the Amended Complaint. “Relation back depends on the existence of a ‘common core of operative facts’ uniting the original and newly asserted claims.” Mayle v. Felix, 545 U.S. at 659, 125 S.Ct. 2562. Thus, an amended pleading may relate back even when it asserts new theories of recovery so long as “a sufficient factual nexus exists between the original and amended complaints such that the original pleadings give fair notice of the factual situations from which the amended pleadings arise.” New Century Bank, N.A v. Carmell (In re Carmell), 424 B.R. 401, 413 (Bankr.N.D.Ill.2010).14 ZVI has not altered the core facts upon which it relied for its originally-asserted § 523(a)(2) claim. In fact, in advancing its § 523(a)(4) and (a)(6) claims in the Amended Complaint, ZVI relies on the very same facts raised in the Original Complaint. Accordingly, the Amended Complaint relates back to the Original Complaint such that it will be deemed timely filed and not barred by the deadline set forth in Bankruptcy Rule 4007(c).
While the Amended Complaint clearly relates back to the Original Complaint, the question of whether leave to amend should be granted is a separate issue. Under Rule 15(a), leave of Court is required to amend a pleading (unless the opposing party consents) when the amend*674ment is sought beyond 21 days after the filing of a responsive pleading. Fed. R.Civ.P. 15(a)(1)(B); (2). “The court should freely give leave when justice so requires,” Fed.R.Civ.P. 15(a)(2), and has
wide discretion to grant such leave. It is limited only by the Supreme Court’s admonition that leave to amend should not be permitted where there is “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendment previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment, etc.” Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962).
Newcare Health Corp. v. Midway Health Care Ctr. (In re Newcare Health Corp.), 274 B.R. 307, 311 (Bankr.D.Mass.2002).
Despite the Debtor’s protestations to the contrary, justice clearly requires the Court to allow ZVI to amend its complaint at this juncture. The fault for any delay to date in the progress of this adversary proceeding lies not with ZVI, but with the Debtor. The Debtor requested, with ZVI’s consent, extensions of time both to answer the Original Complaint and to respond to the Motion to Amend. Moreover, ZVI was entitled to amend its complaint as a matter of course when it initially filed its request to amend; leave of this Court was not then required. Were it not for the Debtor’s motion to strike ZVI’s unnecessary request to amend, precipitating ZVI’s withdrawal of its request and subsequent filing of the amendment beyond the “matter of course” deadline, the question of whether the Court should grant leave to do so under Rule 15(a) would not have arisen. No cognizable prejudice to the Debtor would result from allowing an amendment at this juncture — the Court has yet to even conduct the pre-trial conference. ZVI has not been responsible for any undue delay, and therefore there is no cause to require a more exacting burden for amendment of its Original Complaint. Compare, e.g., Giza v. Amcap Mortgage, Inc. (In re Giza), 441 B.R. 395 (Bankr.D.Mass.2011) (where plaintiffs had all evidence available to assert those claims from the outset of the case, plaintiffs denied leave to amend complaint nearly 13 months after the complaint was originally filed in order to add multiple claims which would bring dismissed parties back into case). Accordingly, leave to amend will be granted.
III. CONCLUSION
For all the foregoing reasons, the Motion to Amend will be GRANTED. However, as ZVI has withdrawn one count of the Amended Complaint, see, supra fn. 11, and omitted the exhibits from the proposed Amended Complaint attached to its Motion to Amend, see, supra fn. 8, the Court will order ZVI to file within 7 days a further amended complaint eliminating the withdrawn count and including the referenced exhibits. The Debtor will be ordered to file an answer to that further amended complaint within 21 days thereafter. A pretrial conference will then be scheduled. An order in conformity with this memorandum shall issue forthwith.
.The following recitation of facts is taken from both the original and amended complaints; all factual allegations are assumed as true solely for the purpose of resolving the discrete matter now before the Court.
. See 11 U.S.C. § 101 et seq. (the "Bankruptcy Code” or the "Code”). All references to statutory sections are to the Bankruptcy Code unless otherwise specified.
. The Upper Crust filed its bankruptcy petition less than a week later.
. Section 523(a)(2), in relevant part, excepts from discharge a debt:
for money, property, services, ... 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).
. Although the opening paragraph of the Original Complaint and the last paragraph of the “Claim for Relief” refer to § 523(a)(2), the parenthetical description appearing under the heading "Claim for Relief” refers to subsection (a)(6).
. The Debtor did not file an answer to the Original Complaint until December 19, 2013, with the benefit of ZVI’s assent to extend the time for filing.
. The Motion to Amend was "consolidated” inasmuch as it was also filed in the analogous adversary proceeding brought against Higgins in his personal bankruptcy case. That adversary proceeding, however, has since been settled.
. ZVI neglected to attach any exhibits to its Amended Complaint. However, the descriptions of the substance of those exhibits in the body of the Amended Complaint are sufficient to resolve the present dispute.
. 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)(6) excepts from discharge a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6).
. The Amended Complaint further added an additional basis for nondischargeability under § 523(a)(2); namely, that the amounts owed under the Settlement Agreement were themselves on account of a claim for fraud. At the hearing on the Motion to Amend, however, ZVI withdrew its request to add the additional § 523(a)(2) claim. Feb. 26, 2014 Hr'g Tr. 7:18-20, ECF No. 29.
.To the extent that cases cited herein rely on the version of Federal Rule 15 in effect prior to the 2007 or 2009 amendments of the rule, any differences in those versions of the Rule are immaterial. The First Circuit Court of Appeals has noted that the changes made in 2007 "were 'intended to be stylistic only.’ Fed. R. Civil P. 15 advisory committee notes (2007 Amendment). The various sub-parts of the Rule were rearranged and renumbered but for present purposes the Rule's substance and operation are unchanged," Morel v. DaimlerChrysler AG, 565 F.3d 20, 26 n. 3 (1st Cir.2009), and the changes made by the amendments in 2009 likewise do not alter the outcome of this case.
. Subsections (A) and (C) of Federal Rule 15(c)(1) govern relation back of amended pleadings under circumstances not relevant here.
. See also, e.g., O’Loughlin v. Nat’l R.R. Passenger Corp., 928 F.2d 24, 26-27 (1st Cir.1991); Feldman, 506 B.R. at 232; Rowland v. Walls (In re Walls), 375 B.R. 399, 407 n. 11 (Bankr.S.D.Ohio 2007); Saunders, 360 B.R. at 22; Gattalaro v. Pulver (In re Pulver), 327 B.R. 125, 137 (Bankr.W.D.N.Y.2005); Farmer v. Osburn (In re Osburn), 203 B.R. 811, 813 (Bankr.S.D.Ga.1996); Newman v. Kruszynski (In re Kruszynski), 150 B.R. 209, 211 (Bankr. N.D.Ill.1993); Guar. Corp. v. Fondren (In re Fondren), 119 B.R. 101, 104 (Bankr.S.D.Miss.1990); Am. Honda Fin. Corp. v. Tester (In re Tester), 56 B.R. 208, 210 (W.D.Va.1985); Maine Bonding & Cas. Co. v. Grant (In re Grant), 45 B.R. 262, 264 (Bankr.D.Me.1984); 3-15 Moore’s Federal Practice — Civil § 15.19 (“Courts also allow relation back when the new claim is based on the same facts as the original pleading and only changes the legal theory.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497102/ | OPINION AND ORDER
BRIAN K. TESTER, Bankruptcy-Judge.
Before this Court is a Motion to Alter or Amend Order and/or For Reconsideration of Dismissal [Dkt. No. 51] filed by Debtor, Juan Adames Millan (“Debtor” or “Mr. Adames”). For the reasons set forth below, Debtor’s Motion to Alter or Amend Judgment and/or For Reconsideration is DENIED.
I. Factual Background
On October 18, 2013, Mr. Adames filed his voluntary petition seeking relief pursuant to Chapter 7 of the Bankruptcy Code [Dkt. No. 1]. This is the first time Mr. Adames has filed for bankruptcy relief. The motion before the court stems from Mr. Adames’ failure to obtain a credit counseling briefing during the 180 day period preceding his petition’s filing. While Mr. Adames eventually filed his Certificate of Debtor Education on December 9, 2013 [Dkt. No. 42], he never timely filed a request for a temporary waiver pursuant to 11 U.S.C. § 109(h).
On December 23, 2013, the court entered an order dismissing his case [Dkt. No. 47]. In its order, the court reasoned that dismissal was appropriate due to Mr. Adames’ failure to file a request to waive the pre-petition credit counseling requirement. Moreover, dismissal was warranted because Mr. Adames did not file Exhibit D — “Individual Debtor Statement of Compliance with Credit Counseling Requirement,” an integral part of the voluntary petition.
Mr. Adames then filed the motion for reconsideration that is before the court. Because Mr. Adames’ motion fell outside of the 14 days provided by Fed. R. Bankr.P. 9023, the court will treat his motion for reconsideration pursuant to Fed. R. Bankr.P. 9024.
II. Legal Analysis and Discussion
Mr. Adames fails to establish grounds for relief under Fed. R. Bankr.P. 9024 and Fed.R.Civ.P. 60. Fed. R. Bankr.P. 9024 incorporates Fed.R.Civ.P. 60 with some limited exceptions. Fed. R.Civ.P. 60(b) provides for grounds for relief from a final judgment, order, or proceeding. This rule “seeks to balance the interest in the stability of judgments with the interest in seeing that judgments not become instruments of oppression and fraud.” In re Lugo, 12-04983 BKT, 2014 WL 1117081 (Bankr.D.P.R.2014). However, a motion pursuant to Fed.R.Civ.P. 60(b) is extraordinary in nature and motions invoking the rule should be granted sparingly. Karak v. Bursaw Oil Corp., 288 F.3d 15, 19 (1st Cir.2002). “Thus, a party who seeks recourse under Rule 60(b) must persuade the trial court, at a bare minimum, that his motion is timely; that exceptional circumstances exist, favoring extraordinary relief; that if the judgment is set aside, he has the right stuff to mount a potentially meritorious claim or defense; and that no unfair prejudice will accrue to the opposing parties should the motion be granted.” Id. Mr. Adames has failed to *677allege details showing any inadvertence, mistake and/or excusable neglect. Likewise, no exceptional circumstances exist to justify extraordinary relief. However, even if the court were to entertain his motion as timely filed pursuant to Fed. R. Bankr.P. 9023 and Fed.R.Civ.P. 59, Mr. Adames would still not be entitled to relief.
In order to have his motion granted pursuant to Fed.R.Civ.P. 59(e), Mr. Adames must clearly establish a manifest error of law. F.D.I.C. v. World U. Inc., 978 F.2d 10, 16 (1st Cir.1992) (citing F.D.I.C. v. Meyer, 781 F.2d 1260, 1268 (7th Cir.1986)). Specifically, unless Mr. Adames presents controlling jurisprudence that the court overlooked and may reasonably be expected to amend or alter its conclusion, his motion will be denied. Est. of Rivera v. Dr. Susoni Hosp., Inc., 323 F.Supp.2d 262, 265 (D.P.R.2004) (citing Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2nd Cir.1995)). In his motion, Mr. Adames cites In re Rios, 336 B.R. 177 (Bankr.S.D.N.Y.2005) (citing In Re Hubbard, 333 B.R. 377, 388 (Bankr.S.D.Tex. 2005) and In re Thompson, 344 B.R. 899 (Bankr.S.D.Ind.2006) subsequently vacated, 249 Fed.Appx. 475 (7th Cir.2007) (unpublished) for the proposition that failure to comply with 11 U.S.C. § 109(h)’s credit counseling requirement should result in the striking of his petition, as opposed to its dismissal. However, more recent and persuasive jurisprudence suggests that dismissal is the appropriate result.
While this issue has not been addressed in the First Circuit, in 2006 the Second Circuit Court of Appeals dealt with a factually analogous matter. In re Zarnel, 619 F.3d 156, 158-60 (2d Cir.2010). A debtor, represented by counsel, filed a voluntary Chapter 7 petition on November 29, 2005. Id. at 158. This was the debtor’s first filing, and while her petition was accompanied by the correct schedules, she neither filed a credit counseling certificate, nor sought an extension of time to do so. Id. Approximately two months later, the United States Trustee moved to dismiss the case. Id. at 159. However, instead of dismissing, the bankruptcy court decided to have the case stricken. Id.
Relying on the reasoning in Rios and Hubbard, the bankruptcy court “found that the statutory language of § 109(h), which provides that an individual ‘may not be a debtor’ without prior credit counseling, bars such filers from commencing a case under 11 U.S.C. § 301.” Id. As a result, the bankruptcy court held “that because Congress had not explicitly directed the action a court should take in response to a bankruptcy petition failing to commence a case, it had the power to strike the petitions before it rather than to dismiss the cases.” Id. at 160. The bankruptcy court further noted that “dismissal, which has the potential effect of limiting access to or the duration of § 362’s automatic stay in a subsequent filing, is for the most part an inappropriate remedy for a debtor’s innocuous failure to obtain counseling, prior to filing a bankruptcy petition.” Id. at 160. The court justified the aforementioned by reasoning that it “could always strike a case with prejudice to future filings if it found such a measure to be warranted by a filer’s bad faith or other such circumstances.” Id. The trustee then filed an appeal as to the “issue of whether the bankruptcy court had erred in ruling that the petitions of ineligible debtors had not commenced cases and that the petitions could thus be struck rather than dismissed.” Id. After the district court affirmed the bankruptcy court’s ruling, the trustee appealed to the Second Circuit Court of Appeals. Id. at 161.
The Court of Appeals disagreed with the bankruptcy and district courts, holding that “although an individual may be ineligible to be a debtor under the Bankruptcy *678Code for failure to satisfy the strictures of § 109(h), the language of § 301 does not bar that debtor from commencing a case by filing a petition; it only bars the case from being maintained as a proper voluntary case under the chapter specified in the petition.” Id. at 166-67 (emphasis in original). The Court of Appeals based its holding on the Bankruptcy Code’s definition of a “petition”:
[Under the] Bankruptcy Code’s definition of petition: “The term ‘petition’ means petition filed under section 301, 302, 303, or 304 of this title, as the case may be, commencing a case under this title.” 11 U.S.C. § 101(42) (emphasis added). Thus, a petition filed under §§ 301, 302, or 303 both “operates as a stay,” id. § 362(a), and commences a bankruptcy case.
Id. at 166. In addressing previous and conflicting jurisprudence, the Second Circuit held that “the restrictions of § 301 and § 109(h) are not jurisdictional, but rather elements that must be established to sustain a voluntary bankruptcy proceeding.” Id. at 169. Sections 301, 302, and 303, “(‘Voluntary cases,’ ‘Joint cases,’ and ‘Involuntary cases,’ respectively), define the prerequisites for relief under particular chapters of the Bankruptcy Code, rather than the existence in a jurisdictional sense of a voluntary, joint, or involuntary case.” Id. at 166. Therefore, the Court of Appeals vacated the district court’s judgment and remanded to the bankruptcy court to consider whether striking the matter was appropriate given the court’s determination that the case had in fact commenced. Id. at 172. The bankruptcy court later chose to dismiss the petition in lieu of striking it. In re Osborne, 490 B.R. 75, 79 n. 1 (Bankr.S.D.N.Y.2013).
Given the aforementioned, it is evident that Mr. Adames’ motion would fail pursuant to Fed. R. Bankr.P. 9023. Mr. Adames cannot meet his burden of establishing manifest error. He has presented no controlling jurisprudence that the court overlooked and may reasonably be expected to amend or alter its conclusion. To the contrary, recent on point jurisprudence suggests that the striking of Mr. Adames’ petition is inappropriate because his case was in fact commenced. Therefore, Mr. Adames’ failure to comply with 11 U.S.C. § 109(h)’s credit counseling requirement should result in his case’s dismissal.
III. Conclusion
WHEREFORE, IT IS ORDERED that the Motion to Alter or Amend Order and/or For Reconsideration of Dismissal filed by Debtor shall be, and it hereby is, DENIED. The case remains dismissed. The Clerk shall close the case forthwith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497103/ | MEMORANDUM OF DECISION AFTER REMAND ON DEBTOR’S OBJECTIONS TO CLAIM
MELVIN S. HOFFMAN, Bankruptcy Judge.
Before me are the objections of IDC Clambakes, Inc. (“Clambakes”), the debtor in this long-running chapter 11 case, to four identical proofs of claim filed in this case by Goat Island South Condominium Association, Inc., Capella South Condominium Association, Inc., America Condominium Association, Inc. and Harbor Houses Condominium Association, Inc. (collectively the “Associations”), docketed, respectively, as claims 16, 17, 18, and 19 in the claims register maintained by this court. The dispute giving rise to Clambakes’ claim objections is nearly two decades old and involves a pair of trips to the Supreme Court of Rhode Island. The claims are for damages arising out of Clambakes’ alleged seven-year trespass on a parcel of land known as the “Reserved Area” located on Goat Island, a small island in Narragansett Bay that is part of the city of Newport. The Associations act on behalf of their constituent island condominium owners. The claim objections have been the subject of nearly eight years of litigation, five decisions by three courts, and two remands. In the most recent appeal, the United States Court of Appeals for the First Circuit affirmed the district court on the issue of implied consent to the use and occupancy of the Reserved Area but remanded the case back to the bankruptcy court with instructions to determine “whether the implied consent in this circumstance gives rise to an obligation to pay the fair value for such use and occupancy and, if so, in what amount.” Goat Island S. Condo. Ass’n, Inc. v. IDC Clambakes, Inc. (In re IDC Clambakes Inc.), 727 F.3d 58, 72 (1st Cir.2013). For the reasons that follow, I find that Clambakes is under no obligation *682to compensate the Associations for its use and occupancy of the Reserved Area.
I. The Facts
It should come as no surprise that for a dispute of this vintage and provenance, the First Circuit would describe the record in this case as “problematic.” Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 61. Nevertheless, the underlying facts, which have been examined and expounded upon at length by a number of other courts, are fairly well established. See, e.g., Am. Condo. Ass’n, Inc. v. IDC, Inc., 844 A.2d 117, 119-26 (R.I.2004); In re IDC Clambakes, Inc., 431 B.R. 51, 54-57 (Bankr.D.R.I.2010); Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 61-63. An unabridged retelling of the decades-long history of this dispute is not necessary to the resolution of the narrow issue before me, however, and so I will focus only on salient facts.
On January 13, 1988, Globe Manufacturing Co. recorded in the Land Evidence Records of the City of Newport a declaration of condominium with respect to land on Goat Island. On March 3, 1988, Globe and the Goat Island South Condominium Association amended and restated the declaration. The declaration, among other things, reserved to Globe the right to exercise certain development rights with respect to an undeveloped parcel of land that has come to be known throughout this dispute as the Reserved Area. According to the declaration, as amended, if not exercised by December 31, 1994, these development rights would expire. Through a series of sales and assignments, the development rights were transferred from Globe to IDC, Inc. and finally to IDC Properties, Inc. (“Properties”), both affiliates of Clambakes. At all relevant times, Thomas Roos was the president and sole shareholder of IDC, Inc., Properties and Clambakes.
Between April and December 1994, through a number of amendments to the condominium declaration, IDC, Inc. and Properties attempted to extend the deadline and to exercise the development rights. Properties’ or IDC, Inc.’s rights to develop the Reserved Area hinged on the validity of these declaration amendments. In the years following the adoption of the amendments, the Associations raised concerns regarding their validity. See, e.g., Trans. Aug. 5, 2008 at 11-12, 16; Trans. Aug. 14, 2008 at 82-85; Debtor’s Ex. 59. Discussions and negotiations over the declaration amendments dragged on for years and included execution of a series of statute of limitations tolling agreements, the last expiring on May 31,1999.
In late 1997 and early 1998, Properties constructed a high-end banquet facility, the Newport Regatta Club, in the Reserved Area. Properties bore virtually the entire cost of construction, some $3 million. Trans. Aug. 14, 2008 at 37-39; Debtor’s Ex. 55. Properties built the Regatta Club during the period its development rights were in dispute and at a time when Mr. Roos understood that the Associations were “trying to say that Properties had no right to construct the Regatta Club.” Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 62. Despite their ongoing dispute, there is no evidence in the record of this matter to suggest that the Associations attempted to halt construction of the Regatta Club. In an oft-cited letter during this conflict, a representative of the America Condominium Association wrote to the Newport building inspector on February 9, 1998: “It’s our understanding that a permit application has been filed with your Office for the purpose of constructing [the Regatta Club] ... While we don’t have a particular objection as to the land use with respect to the building itself, we do have a substantial problem with the parking requirements for that [building] ...” Debtor’s Ex. 63 (emphasis added).
*683Clambakes, the debtor here, came into existence on April 18, 1996. The parties agree that Clambakes is a corporate entity-separate and distinct from the other entities owned by Mr. Roos. On March 1,1998, Clambakes leased the Regatta Club from Properties under a twenty-year lease calling for annual rent equal to the higher of $180,000.00 or six percent of annual gross revenues. Creditors’ Ex. P at 1. Under the terms of the lease, Clambakes was permitted to use the Regatta Club and surrounding land making up the Reserved Area to provide event hosting and catering services. Id. at 2. Clambakes began operating the Regatta Club in late 1998. Clambakes paid rent to Properties of $180,000.00 per year starting in 1999. See Creditors’ Ex. U; SOFA Question 3(b); Debtor’s Second Am. Disci. Stmt, at 25. As of June 16, 2005, the date Clambakes commenced this bankruptcy case, it owed Properties $48,500.00 for unpaid rent. Debtor’s Second Am. Disci. Stmt, at 25. Clambakes’ pre-petition financial records indicate that it ran a profitable business during the approximately seven years it operated the Regatta Club. Creditors’ Ex. U; Joint Pretrial Compliance at ¶ 28.
On May 29, 1999, prior to the expiration of the parties’ last tolling agreement, the Associations filed a seven-count complaint against Mr. Roos, IDC, Inc., and Properties in the Newport County Superior Court. In substance the complaint alleged: (1) that Properties failed to exercise its development rights with respect to the Reserved Area prior to the December 31, 1994 expiration date; (2) that the 1994 condominium declaration amendments were invalid to extend the expiration date; and (3) that as a result, fee simple title to the Reserved Area had vested in the condominium unit owners on whose behalf the Associations acted. Nearly five years of litigation and appeals later, the Supreme Court of Rhode Island, in Am. Condo. Ass’n, Inc. v. IDC, Inc., 844 A.2d 117, 131— 33 (R.I.2004) (“America I”), determined that Properties had failed to timely exercise its development rights with respect to the Reserved Area and “[tjhereafter ... the [Reserved Area] vested in fee simple in the unit owners as tenants in common in proportion to their respective undivided interests.” With respect to the Regatta Club building, the America I court held that the defendants were not entitled to any equitable relief on the basis that Properties had made a considerable investment to construct it. Id. at 134-35 (“Considering that they developed the Reserved Area at a time when they were on notice that their right to do so was in dispute, we conclude that they constructed the parcel at their peril and cannot now contend that equity should prevent plaintiffs from prevailing because of their expenditures.”)
Approximately one year later on reargument, the Supreme Court of Rhode Island reaffirmed its America I holding in its entirety but clarified that the Reserved Area “always [was a] common element[], subject to the exercise of said development rights, and title vested with the unit owners in common ownership from the creation of the condominium.” Am. Condo. Ass’n, Inc. v. IDC, Inc., 870 A.2d 434, 443 (R.I.2005) (“America II”). Thus, as of April 8, 2005, the date of the America II decision, it was finally determined that, the development rights having expired without being properly exercised, the unit owners owned the Reserved Area and by implication any improvements thereon, including the Regatta Club.
Clambakes was not a party to the state court litigation1 and in any event the state court action “did not involve any claims of *684trespass, or appear to involve any issues related to trespass or damages flowing therefrom.” Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 62. There is no evidence in the record that the Associations ever demanded or received rent from Clambakes or attempted to enjoin Clambakes’ operation of the Regatta Club prior to the date of the America II decision. See Joint Pretrial Compliance at ¶29 (stipulating that Clambakes never paid the Associations anything for the use and occupancy of the Reserved Area during the claim period from March 1, 1998, the commencement date of the Clambakes-Properties lease, to April 8, 2005, the date of the America II decision). In fact, during this time Harbor Houses Condominium Association and several condominium unit owners contracted with Clambakes to host private events at the Regatta Club. “[I]t is clear that the Associations and the Roos entities have fought over and litigated every conceivable issue except Clambakes’ occupancy and operation of the Regatta Club ...” for the period in question. Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 67 (citing IDC Clambakes, Inc., 431 B.R. at 60-61) (emphasis in original).
In the wake of the America II decision, the Associations asked the state court to issue writs of execution for possession and ejectment with respect to the Reserved Area. To stave off being ejected, on June 16, 2005, Clambakes filed its voluntary petition for relief under chapter 11 of the Bankruptcy Code (11 U.S.C. § 101 et seq.) commencing this case. On August 25, 2005, Judge Arthur N. Votolato entered a consent order permitting Clambakes to continue to operate the Regatta Club until November 5, 2005, and instructing the chapter 11 trustee, whom he had earlier ordered appointed, to pay the Associations $450,000.00 for Clambakes’ use and occupancy of the Reserved Area from April 8, 2005 (the date of the America II decision) through November 5, 2005. Clambakes hosted its final event at the Regatta Club on November 5, 2005, and at midnight turned out the lights, locked the door and left.
A plan of reorganization2 for Clambakes was confirmed by order dated March 15, 2006. Under the terms of the confirmed plan, all creditors other than Mr. Roos and entities owned by him would be paid in full. Debtor’s Second Am. Plan at 8-12. As their claims were in dispute, funds to pay the Associations’ claims in full were escrowed pending a final determination of Clambakes’ claim objections. The funds remain in escrow to this day.
The Associations’ proofs of claim are identical. Each asserts an unsecured claim against Clambakes in the amount of $3,507,290.00. Although each Association filed a separate proof of claim, the exhibit attached to each and the Associations’ briefs filed on remand make it clear that the Associations are collectively asserting a single $3,507,290.00 claim in this case. The basis for the Associations’ claim was “trespass” and the time period covered was “1998 — April 7, 2005.”3 On March 15, *6852006, Clambakes filed its objections4 to the Associations’ proofs of claim. On January 24, 2007, Judge Votolato granted summary judgment in favor of Clambakes disallowing the Associations’ claims in their entirety. The Associations appealed.5 On February 8, 2008, the United States District Court for the District of Rhode Island vacated Judge Votolato’s ruling and remanded with instructions to: (1) “ensure that any disposition of the issue of whether Clambakes trespassed on Association property comport with due process requirements”; (2) “carefully adhere to the elements of trespass under Rhode Island law”; and (3) if a trespass was found “reconsider whether the Association’s [sic] claim for trespass damages is precluded by either [America I] or [America II].” Goat Island S. Condo. Ass’n, Inc. v. IDC Clambakes, Inc., 382 B.R. 178, 179 (D.R.I.2008).
After a nine-day bench trial, Judge Vo-tolato once again disallowed the Associations’ claims, ruling that the Associations had impliedly consented to Clambakes’ use and occupancy of the Reserved Area for the claim period and, thus, Clambakes was not a trespasser. IDC Clambakes, Inc., 431 B.R. at 61. The Associations again appealed to the district court, which affirmed the bankruptcy court’s ruling. In re IDC Clambakes, Inc., 484 B.R. 540, 548-49 (D.R.I.2012).6 The Associations then appealed to the First Circuit which affirmed the district court’s finding of no trespass due to implied consent but remanded to the bankruptcy court for further proceedings “regarding the issue whether the implied consent in this circumstance gives rise to an obligation to pay the fair value for such use and occupancy and, if so, in what amount.” Goat Island S. Condo. Ass’n, Inc., 121 F.3d at 72.
II. The Dispute
The Associations’ argued in their post-trial brief to Judge Votolato that the “[flair rental value [of the Reserved Area] is the same amount that a court would award if either the Associations by their conduct had impliedly consented to Clambakes’ possession (ie., an implied-in-fact contract), or the law and equity compel a finding of implied consent (ie., an implied-in-law or a ‘quasi-contract’).” Pl.’s Post-Trial Mem. at ¶ 56 (emphasis in original). The Associations concluded that “[e]very theory of implied consent gives rise to a corresponding implied obligation to pay for the value of what was received.” Id. In support of their position the Associations rely on three cases: Narragansett Elec. Co. v. Carbone, 898 A.2d 87 (R.I.2006); R & B Elec. Co. v. Amco Constr. Co., 471 A.2d 1351 (R.I.1984); and Bailey v. West, 105 R.I. 61, 249 A.2d 414 (1969). All three are implied contract cases.
Given the opportunity to further brief the issue on remand, the Associations appear to have refined their position. They argue that under Rhode Island law the use and occupancy of another’s land, even with consent, gives rise to a presumed obligation to pay fair value for such use and occupancy absent a showing of contrary intent. Under this formulation, the Associations maintain that Clambakes had the burden to prove that the Associations had consented to its use of the Reserved Area for free and that Clambakes failed to carry its burden. Alternatively, the Associations assert that they are entitled to the fair *686value of Clambakes’ use and occupancy of the Reserved Area under quasi-contract principles. The Associations place the value of Clambakes’ use and occupancy of the Reserved Area for the claim period in the range of $2.6 million to $3.2 million based on expert testimony introduced at trial.
Clambakes asserts first that any claim based on a theory of implied contract, whether implied in fact or law, is not properly before me since the Associations’ claims prior to and during trial were limited to trespass. Based on the First Circuit’s order of remand, Clambakes argues that “[t]he only issue before this Court is whether, under Rhode Island law, implied consent, within the context of trespass, necessarily carries with it an implied obligation to pay and whether the Associations’ apparent consent in this matter gave rise to such an implied obligation.” Debt- or’s Mem. of Law on Remand at 7 (emphasis in original). Clambakes contends that Rhode Island law does not support the proposition that implied consent necessarily gives rise to an obligation to pay fair value and so it is not Clambakes’ burden to prove that the Associations consented to its use of the Reserved Area for free. Furthermore, Clambakes asserts that, even if the Associations’ implied contract claims are properly before me, it was the Associations’ burden, which they have not carried, to prove that an implied-in-fact contract or quasi-contract existed. Accordingly, Clambakes argues that the Associations’ claims should be disallowed in full.
Prior to taking the matter under advisement, I afforded the parties the opportunity to present additional evidence. They declined, choosing instead to rest on the evidentiary record already created, especially the evidence submitted at the trial.
III. The Law and its Application
1. Defíning the Question Presented and Burden of Proof
The First Circuit affirmed Judge Votola-to’s finding of implied consent by the Associations to Clambakes’ occupancy of the Reserved Area and remanded “for further proceedings ... regarding ... whether the implied consent in this circumstance gives rise to an obligation to pay the fair value for such use and occupancy and, if so, in what amount.” Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 72. The parties differ as to the exact parameters of the First Circuit’s remand. The Associations argue that since Rhode Island law presumes an obligation to pay for use and occupancy of the land of another absent evidence to the contrary I am to determine whether Clambakes has carried its burden to show that the Associations consented to use of the Reserved Area for free. Clambakes responds that the Associations’ presumed-obligation-to-pay argument is not supported by Rhode Island law and so the inquiry is over. The parties address recovery under the law of implied contract only in the alternative.
The Associations have failed to cite any Rhode Island law which supports either the proposition that in the context of a trespass action implied consent includes a presumed obligation to pay fair value absent proof of contrary intent or that it is Clambakes’ burden to prove that the Associations impliedly consented to its use of the Reserved Area for free. The Associations do cite a number of secondary sources which provide, for example, that:
In the absence of a contrary agreement, the use of property belonging to another person with that person’s consent, or the use of premises with the consent of the person entitled to assert a right to the possession of the premises, implies an agreement by the tenant to pay the fair *687rental value of the premises. Although mere occupancy does not create a lessor-lessee relationship, recovery for the possession of premises may be based on the doctrine of unjust enrichment, or on a quantum meruit basis, provided that a fair rental value is alleged and proven.
49 Am.JuR.2D Landlord and Tenant § 548 (2006) (emphasis added). These sources stand for the proposition that, generally, the law imposes an obligation to pay fair value for the use and occupancy of the land of another but the right to recover must be based on some independent cause of action such as unjust enrichment, the elements of which the party seeking payment must prove. The Associations also cite a number of implied contract cases, none of which supports the proposition that implied consent necessarily gives rise to a presumptive obligation to pay fair value absent a showing of contrary intent. In each case, the party asserting the existence of an obligation to pay had the burden to prove the existence of an implied contract.
The Associations’ argument that Clambakes must prove not only consent but consent for free in order to defeat its trespass claim is not supported by Rhode Island law. I assume the First Circuit did not tacitly intend to change the law on this point, especially since the wording of its remand is “... gives rise to an obligation ...” and not “... gives rise to a presumed obligation ...” Under Rhode Island law “[ejonsent, in any form, is fatal to a claim for trespass.” Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 61, 65 (“Rhode Island law ... defines a trespasser as one who intentionally and without consent or privilege enters another’s property.”). Thus, when the First Circuit affirmed the lower court’s finding of consent the trespass inquiry ended.
The Associations’ argument, as first presented in their post-trial brief, most closely resembles a request for relief under a theory of implied contract. Moreover, the First Circuit acknowledged that the Associations’ argument was based on three Rhode Island implied contract cases. Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 71. I can only conclude that pursuant to the First Circuit’s remand I am to examine the Associations’ claims under the Rhode Island law of implied contract and under that law it is the Associations’ burden, as the party alleging the existence of an implied contract, to prove the elements of either an implied-in-law contract or quasi-contract. See Bailey, 249 A.2d at 416; Fondedile, S.A. v. C.E. Maguire, Inc., 610 A.2d 87, 97 (R.I.1992). Clambakes is under no obligation to prove that the Associations consented to its use of the Reserved Area for free.
The burden of proof in implied contract eases must be applied in a manner consistent with the allocation of the burden of proof in bankruptcy claim objection proceedings generally. A proof of claim filed pursuant to the Federal Rules of Bankruptcy Procedure represents prima facie evidence of the validity of the claim. Fed. R. Bankr.P. 3001(f); In re Durastone Co., 223 B.R. 396, 397 (Bankr.D.R.I.1998). In In re Colonial Bakery, Inc., 108 B.R. 13, 15 (Bankr.D.R.I.1989) the bankruptcy court summarized the procedure regarding claim objections as follows:
(1) pursuant to Bankruptcy Rule 3001(f), the claimant establishes a prima facie case against the debtor upon the filing of its proof of claim; (2) the objecting party is then required to produce evidence to rebut the claimant’s prima facie case; (3) once the objecting party produces such rebuttal evidence, the burden shifts back to the claimant “to produce additional evidence to ‘prove the validity of the claim by a preponderance of the evidence.’ The ultimate burden *688of proof always rests upon the claimant. ...”
Id.
The Associations’ proofs of claim conform substantially to Official Form BIO, include written statements detailing their claims in compliance with Fed. R. BaNKR.P. 8001(a) and thus constitute prima facie evidence of the validity and amount of their claims. Fed. R. BaNKR.P. 3001(f). For reasons explained below, however, Clambakes has presented sufficient evidence to rebut the prima facie validity of the Associations’ claims. Accordingly, the burden shifts back to the Associations to prove the validity of their claims, i.e. their entitlement to payment under the law of implied contract, by a preponderance of the evidence. Thus the burdens of proof applicable in a state law implied contract action and in this claims objection matter are in harmony — they fall on the Associations.
2. The Existence of an Implied-in-Fact Contract
As a preliminary matter I address Clambakes’ threshold argument that any claim based on implied contract (whether in law or in fact) is not properly before me. The First Circuit has already determined that the implied-obligation-to-pay argument, i.e. the implied contract claim, first raised by the Associations in their post-trial brief was properly raised and preserved. See Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 71-72 (“Although the bankruptcy court never addressed the issue, the Associations did raise the argument.”). Being bound by that determination, I must reject Clambakes’ argument and proceed to the merits of the Associations’ claims.
An implied-in-fact contract “is a form of express contract wherein the elements of the contract are found in and determined from the relations of, and the communications between the parties, rather than from a single clearly expressed written document.” Marshall Contractors, Inc. v. Brown Univ., 692 A.2d 665, 669 (R.I.1997). “The difference between an express contract and an implied-in-fact contract is simply the manner by which the parties express their mutual assent.” Id. The essential elements of an implied-in-fact contract are “mutual agreement, and intent to promise, but the agreement and the promise have not been made in words and are implied from the facts.” Bailey, 249 A.2d at 416.
As to the burden of proof here, Clambakes must have presented sufficient evidence to rebut the prima facie validity of the Associations’ proofs of claim. Evidence sufficient to rebut the prima facie validity of the Associations’ proofs of claim “consists of evidentiary-quality material which, if accepted, would qualify or contradict the claimant’s asserted rights.” In re Perron, 474 B.R. 310, 313-14 (Bankr.D.Me. 2012). The record contains a copy of a lease for the Reserved Area between Clambakes and Properties under which the parties performed for nearly the entirety of the claim period. Further, it is a stipulated fact that Clambakes “did not pay anything to [the Associations] for use and occupancy of the Reserved Area and improvements during the claim period.” Joint Pretrial Compliance at ¶ 29. This evidence, taken together, establishes there was no oral lease between the Associations and Clambakes and is sufficient to rebut the prima facie validity of the Associations’ claims as to the existence of an implied-in-fact contract. Thus, the burden shifts to the Associations to prove their implied-in-fact contract claims by a preponderance of the evidence. Colonial Bakery, 108 B.R. at 15.
The Associations have failed to carry their burden to establish the elements *689of an implied-in-fact contract. There is no evidence that the Associations ever requested a rent payment from Clambakes or that Clambakes ever made a rent payment to the Associations. There is no evidence of mutual agreement as to duration and scope of occupancy. In short, there are no facts in the record that would suggest the existence of mutual intent on the part of the Associations and Clambakes to enter into an agreement for the use and occupancy of the Reserved Area.
It is true that the First Circuit observed that “[t]he America litigation made abundantly clear that even if the Associations consented to the operation of the Regatta Club, they would pursue their rights to ownership of the land and their right to compensation for the land’s use.” Goat Island S. Condo. Ass’n, Inc., 727 F.Sd at 71. But the Supreme Court of Rhode Island’s rulings in the America litigation certainly did not establish the existence of mutual assent between the Associations and the occupants of the Reserved Area. If anything, six years of pre-petition litigation highlights the fact that there was no agreement between the parties. The First Circuit’s conclusion that Clambakes entered into a lease with Properties and thus “understood that it owed money to the property owner (which it mistakenly believed to be IDC Properties) for use of the land” weighs against finding an implied-in-fact contract as well. Id. Clambakes already had a lease with the entity it believed to be the owner of the Reserved Area, so there would be no reason to lease the property again from another entity. For these reasons I find that the Associations have failed to carry their burden of proof as to the existence of an implied-in-fact contract.
3. The Existence of a Quasi-Contract
Rhode Island courts apply essentially the same standards in cases brought on theories of quasi-contract, also referred to as implied-in-law contract, and unjust enrichment. R & B Elec. Co., 471 A.2d at 1355. “Recovery in quasi-contract requires a plaintiff to prove that ‘(1) the plaintiff conferred a benefit on the defendant, (2) the defendant appreciated the benefit, and (3) under the circumstances it would be inequitable for the defendant to retain such benefit without payment of the value thereof.’ ” Fondedile, S.A., 610 A.2d at 97 (quoting Hurdis Realty, Inc. v. Town of North Providence, 121 R.I. 275, 397 A.2d 896, 897 (1979)). To succeed in a quasi-contract action, proof of “neither an actual promise nor privity is necessary.” R & B Elec. Co., 471 A.2d at 1355 (quoting Bailey, 249 A.2d at 417). “The obligation to pay in cases of quasi-contract ‘arises, not from consent of the parties, as in the case of contracts, express or implied in fact, but from the law of natural immutable justice and equity.’ ” Fondedile, S.A., 610 A.2d at 97 (quoting Hurdis, 397 A.2d at 897). Further, an “obligation is imposed despite, and frequently in frustration of,” the parties’ intentions. Bailey, 249 A.2d at 417.
“The concept of quasi-contractual liability rests upon the equitable principle that one shall not be permitted to enrich himself unjustly at the expense of another or to receive property or benefits without making compensation therefor.” R & B Elec. Co., 471 A.2d at 1355. For this reason, “[t]he most significant requirement for a recovery on quasi-contract is that the enrichment to the defendant be unjust.” Id. at 1356. Simply conferring a benefit upon another party is not enough to establish a claim for unjust enrichment, “the court must look at the equities of each case and decide whether it would be unjust for a party to retain the benefit conferred upon it without paying the value of such benefit.” Id.
*690At the nine-day trial in the bankruptcy court, both sides presented expert testimony regarding an appropriate use and occupancy charge for the Reserved Area from March 1, 1998 (the commencement date of the Clambakes-Properties lease) through April 7, 2005 (the day prior to the date of the America II decision). The Associations also presented evidence at trial that they had leased the Regatta Club and Reserved Area to a new tenant after Clambakes vacated the premises on November 5, 2005. Trans. Aug 5, 2008 at 32-34; Creditors’ Ex. L. Under the terms of the new lease the tenant, Longwood Events, Inc., agreed to pay the Associations annual rent equal to the greater of $450,000.00 or eleven percent of annual gross revenues. Creditors’ Ex. L at 1-6. The lease was dated November 18, 2005, and had an initial five-year term, commencing on March 31, 2006, with two five-year renewal options. Id.7 The lease further provided that Longwood would reimburse the Associations for up to $500,000.00 of “litigation costs” related to the Reserved Area. Id. at 8. The Associations considered a number of proposals before entering into the lease with Long-wood. See Trans. Aug. 5, 2008 at 32-34; Creditors’ Ex. K. The Associations’ expert, Steven R. Foster, concluded that the Longwood lease represented “an actual market transaction, negotiated between willing [parties] ... in the open market ... that shows what the value of the site was.” Trans. Aug. 6, 2008 at 78; Creditors’ Ex. Y at 20-21.
With regard to Clambakes’ use and occupancy of the Reserved Area (including the Regatta Club), Mr. Foster ultimately concluded that the value of a use and occupancy claim was $2,600,000.00, based on a yearly rent of $400,000.00 for six and one-half years.8 Creditors’ Ex. Y at 38. Mr. Foster opined further that a fair estimate of rent attributable to the Regatta Club building only was $240,000.00 per year for the claim period and a fair estimate of rent attributable to the land comprising the Reserved Area, including the land under the Regatta Club, was in the range of $200,000.00 to $250,000.00 per year for the claim period based on its current usage. Trans. Aug. 6, 2008 at 97-102; Creditors’ Ex. Y at 21-26.9
*691Clambakes’ expert, Peter M. Scotti, concluded that an appropriate use and occupancy charge for the land and building in the Reserved Area during the claim period was zero. Trans. Aug. 13, 2008 at 11-15; Debtor’s Ex. 37 at 29-30. He reasoned that since the Associations had not paid anything for the construction of the Regatta Club, Clambakes’ liability for use and occupancy should be limited to the land making up the Reserved Area, much like a ground lease. Trans. Aug. 13, 2008 at 8-10. Mr. Scotti determined that an appropriate use and occupancy charge for the land only was in the range of $136,500.00 to $199,100.00 per year or $819,000.00 to $1,194,600.00 total for the claim period, which Mr. Scotti rounded to an even $1,000,000.00. Debtor’s Ex. 37 at 29. Mr. Scotti then concluded that the $1,000,000.00 use and occupancy charge should be offset by value “left ... on the table” when Clambakes vacated the Reserved Area. Trans. Aug. 13, 2008 at 14. In Mr. Scotti’s opinion the Associations were able to rent the Reserved Area to Longwood for $300,000.00 more per year than they otherwise could have because when Clambakes vacated the Reserved Area it left behind a function facility with a well-regarded reputation and established good will built at no cost to the Associations. Id. at 13-15. So, given the initial five-year term of the Longwood lease, Mr. Scotti determined that Clambakes “contributed” $1,500,000.00 in value to the Associations when it vacated the Reserved Area, more than offsetting the $1,000,000.00 use and occupancy amount for the claim period. Debtor’s Ex. 37 at 30.
The fact that the Associations’ own expert testified that the Associations are entitled to $2.6 million in use and occupancy charges, almost $1 million less than their $3.5 million claim amount, casts doubt on the validity of the Associations’ proofs of claim. Further, Mr. Scotti, Clambakes’ expert, credibly testified that the Associations were owed nothing for the claim period due to the fact that they obtained the profitable Regatta Club business at no cost. Mr. Scotti’s testimony is certainly enough to rebut the prima facie validity of the Associations’ claims. See Perron, 474 B.R. at 313-14. Accordingly, the burden shifted to the Associations to prove by a preponderance of the evidence both the validity of their claims and the elements of a quasi-contract. Cobnial Bakery, 108 B.R. at 15.
There is no doubt that the Associations have carried their burden of proof with respect to the first element required to establish entitlement to quasi-contractual relief. “A person confers a benefit upon another if he gives to the other possession of or some other interest in ... land ... or in any way adds to the other’s security or advantage.” Restatement (First) of RestitutioN § 1 cmt.b (1937). “The word ‘benefit,’ therefore, denotes any form of advantage.” Id. Clambakes operated a profitable, high-end banquet facility in the Reserved Area under the terms of its lease with Properties for approximately seven years. This use of the Reserved Area sufficiently advantaged Clambakes to satisfy the first quasi-contract element.
Whether the Associations have met their burden of proof with respect to the second element, appreciation of the benefit, is less clear cut. This element is commonly defined as “knowledge by the defendant of the benefit.” 26 Samuel Williston & Rich-ARd A. Lord, A TREATISE on the Law of CoNtracts § 68:5 (4th ed. 1993). As stated above, the benefit conferred was use of the Reserved Area. Mr. Roos, Clambakes’ sole shareholder and president, was familiar with the boundaries of the Reserved Area and made a conscious decision, through his wholly-owned entities (IDC, Inc., Properties, and Clambakes), to construct and operate the Regatta Club in the
*692Reserved Area. But Mr. Roos believed that Properties was the true owner of the Reserved Area and the Regatta Club. As far as Clambakes was concerned it was using the Reserved Area with permission of the owner and so it had no knowledge of any improper benefit. The Associations argue that Clambakes’ intentional use of the Reserved Area alone is sufficient to satisfy this element. See Narragansett Elec. Co., 898 A.2d at 100. Moreover, Properties constructed and leased the Regatta Club to Clambakes at a time when Mr. Roos was aware that the Associations were “trying to say that Properties had no right to construct the Regatta Club.” Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 62. So there is a colorable argument to be made that Clambakes had reason to know of a benefit conferred by the Associations, at least potentially. Under the circumstances, I find that that the Associations have carried their burden with respect to the second quasi-contract element.
The third prong of the test for establishing entitlement to quasi-contractual relief is proof of the inequity that will result by permitting the recipient of the benefit to avoid paying for it. The Associations assert that the amount they are owed for Clambakes’ use and occupancy of the Reserved Area for the claim period is in the range of $2.6 million to $3.2 million10 based on expert testimony introduced by both sides at trial. This amount represents the value of the use and occupancy of the Reserved Area as improved. So a portion of the rent the Associations claim they are due is attributable to the Regatta Club building. But the Regatta Club building was constructed at no cost to the Associations. The true benefit conferred by the Associations on Clambakes was allowing it to use and occupy the Reserved Area land, including land under the Regatta Club. The value of that benefit is what Clambakes would have paid during the claim period under a ground lease.11
Clambakes’ expert, Mr. Scotti, estimated that a fair yearly rent for a ground lease of the Reserved Area would be in the range of $136,500.00 to $199,100.00, based on its use ancillary to a function facility. Mr. Scotti ultimately settled on $1,000,000.00 as the value of a ground lease for the entire claim period. The Associations’ expert, Mr. Foster, placed the value in the range of $200,000.00 to $250,000.00 per year, for a total for the entire claim period of at most $1,625,000.00.12
A quasi-contract analysis hinges on the circumstances under which this benefit, valued at between $1,000,000.00 and $1,625,000.00, was conferred. There is no evidence that the Associations ever attempted to halt construction of the Regatta Club. Aside from the $3 million in construction costs paid by Properties, Clambakes spent more than $550,000.00 to outfit and maintain the Regatta Club, paid Properties approximately $1,125,000.00 in rent during the claim period, and presumably incurred other costs *693in establishing a profitable, will-regarded business. See Creditors’ Ex. U; Debtor’s Ex. 54; SOFA Question 3(b). Judge Vo-tolato found and the First Circuit agreed that the Associations continuously and unequivocally consented to Clambakes’ operation of the Regatta Club during the claim period. IDC Clambakes, Inc., 431 B.R. at 60 (“This apparently consensual relationship between Clambakes and the Associations continued for more than seven years, with no written or verbal notice, signage, or any other type of claim made against Clambakes to quit the premises”).
As a result of the America litigation, the unit owners represented by the Associations became the owners of the profitable Regatta Club business without spending a penny on construction, business development or maintenance. It appears from the record that the Associations were pursued aggressively by potential tenants for the Regatta Club and executed a lease with Longwood within two weeks of the date Clambakes vacated the premises. See Trans. Aug. 5, 2008 at 112-19; Creditors’ Ex. K; Creditors’ Ex. L. Under the terms of the lease, Longwood promised to pay the Associations $450,000.00 per year in minimum rent, with the potential for higher rent based on gross revenues, and up to $500,000.00 to compensate the Associations for litigation expenses over the course of the initial lease term. Creditors’ Ex. L at 1, 5, 8; See also Debtor’s Ex. 32 (letter from the Associations to unit owners: “sales are booming ... [i]n 2008 we expect that the 11% will come into play for us for the first time.”). In this light, the Associations could be viewed as the recipients of a windfall.
On the other hand, the Associations never asked Mr. Roos or any Roos-owned entity to construct the Regatta Club for them. Indeed, the Supreme Court of Rhode Island found that the defendants in the America litigation (which did not include Clambakes) were not entitled to equitable relief based on expenditures related to the construction of the Regatta Club. Further, the vast majority of Regatta Club construction costs were paid by Properties, not Clambakes, and the new tenant, Long-wood, made a significant investment to renovate the Regatta Club after Clambakes vacated the premises. See, e.g., Trans. Aug. 5, 2008 at 122-25; Debtor’s Ex. 31 (“[m]illions of dollars are going into the property”).
Generally, “the owner of land is entitled to a mandatory injunction to require the removal of a structure that has been unlawfully placed upon his land.” Santilli v. Morelli, 102 R.I. 333, 230 A.2d 860, 863 (1967).13 Mr. Roos testified that he was willing to remove the Regatta Club building from the Reserved Area in the wake of the America II decision and even requested permission to do so. Trans. Aug. 15, 2008 at 85. The Associations denied him permission. Id. As opposed to seeking injunctive relief, “in the exercise of unquestionably astute business judgment” the Associations “wisely are putting their newly acquired property to its obvious highest and best use — as a cash cow with a virtually unlimited life expectancy.” IDC Clambakes, Inc., 431 B.R. at 62.14 In oth*694er words, the Associations have made a conscious business decision to reap the benefits that flow from keeping the Regatta Club building in the Reserved Area.
Quasi-contract analysis focuses on events as they actually occurred, not on could-haves or should-haves. For example, in R & B Electric, supra, an electrical contractor was hired by a corporation, Amco, to perform work on a home owned by another corporation, Eagle Realty. R & B Elec. Co., 471 A.2d at 1352-53. The same two individuals owned Amco and Eagle Realty as equal shareholders. Id. The contractor completed its work but was not paid in full. Id. By the time the contractor brought suit, Amco had dissolved and the home had been sold at a foreclosure sale. Id. The contractor had failed to perfect a mechanic’s lien on the home prior to bringing suit. Id. The court denied the contractor’s quasi-contract claim against Eagle Realty and its two principals because: (1) the contractor had an agreement with Amco, not the other parties; (2) any benefit conferred on Eagle Realty or its principals was fleeting because the foreclosure sale took place shortly after the work was completed; and (3) the contractor bore some responsibility for failure to perfect a mechanic’s lien. Id. at 1356. The dissolution of Amco and the foreclosure sale of the home, while out of the contractor’s control, were ultimately deciding factors, facts on the ground so to speak, in the denial of equitable relief on a theory of quasi-contract.
Here, since the Associations chose to retain and profit from the Regatta Club, the resulting benefit reaped by the Associations must factor into the quasi-contract analysis. As for the Supreme Court of Rhode Island’s determination in America I, that the state court defendants (Mr. Roos, IDC, Inc., and Properties) were not entitled to equitable relief in light of the Regatta Club’s construction costs, first, Clambakes was not a party to that ruling, and second, even if that ruling is preclu-sive as to Clambakes, Mr. Roos, IDC, Inc., and Properties were the ones seeking equitable relief and thus bore the burden of proof to demonstrate their entitlement. Here, the Associations bear the burden of proof and must demonstrate by a preponderance of the evidence that they are entitled to equitable relief. Demonstrating that Clambakes could not carry a similar burden is beside the point.
The fact that Properties, and not Clambakes, incurred the majority of the Regatta Club’s construction costs does not change the outcome. Besides, Clambakes paid Properties rent of approximately $1,125,000.00 over the course of the claim period, which could be viewed in whole or in part as shifting a substantial portion of Properties’ construction costs to Clambakes. Furthermore, the America litigation and this matter arise out of the same facts and circumstances. The fact that the unit owners now own the Regatta Club building as a result of the America litigation must be taken into account when considering the balance of equities in determining whether Clambakes should be required to pay use and occupancy.
As for the fact that Longwood made a significant investment to renovate the Regatta Club building after Clambakes vacated the premises, the evidence does not establish that the pre-renovation state of the Regatta Club affected the amount of rent the Associations were ultimately able to charge or the speed with which a new lease could be executed. On the contrary, the Associations entertained a number of offers and had a new tenant in place within weeks of the date Clambakes vacated the premises. Accordingly, Longwood’s post-lease investment does not affect this analysis.
*695Not every structure Properties could have built on the Reserved Area would have had value to the Associations. But Properties constructed an events center in which Clambakes created a profitable business over the course of seven years and then delivered to the Associations. The most logical way to quantify the value of the Regatta Club to the Associations is to consider the income it has generated and will continue to generate for the Associations from April 8, 2005 (the date of the America II decision) forward. In his report, Mr. Foster, the Associations’ expert, stated that a fair estimate of the annual rent attributable to the Regatta Club building for the claim period would have been $240,000.00 per year. Creditors’ Ex. Y at 26. Mr. Scotti, Clambakes’ expert, estimated rent attributable to the Regatta Club building to be $300,000.00 per year. Debtor’s Ex. 37 at 30. So taking the Associations’ number, the benefit received by the Associations in the wake of the America II decision is at least $240,000.00 per year.15
The quasi-contract analysis boils down to weighing Clambakes’ use of the Reserved Area land valued at $1,000,000.00 to $1,625,000.00 for the claim period against the stream of income to the Associations from the Regatta Club building, sluicing along at a rate of at least $240,000.00 per year. Certainly the amount of building rent which can equitably be attributed to Properties’ and Clambakes’ initial investment will dissipate over time, but not before the value to the Associations surpasses even the most generous estimate of the benefit conferred on Clambakes. The cost to construct the Regatta Club was approximately $3 million, which does not include the costs incurred over seven years to outfit, maintain and market it. Under a quasi-contract analysis, Clambakes is entitled to a “credit” for at least $1,625,000.00 of those costs, equal to the high end of the value of a ground lease by the Associations for the claim period.16 In short, the Associations have not carried their burden of proving that they conferred a benefit on Clambakes under such circumstances that it would be unjust for Clambakes to retain the benefit without paying the fair value thereof. For this reason, I find that the Associations have failed to prove their entitlement to quasi-contractual relief.
IV. The Result
For the reasons set forth above, I find that in the circumstances of this contested matter the Associations’ implied consent to Clambakes’ use and occupancy of the Reserved Area does not give rise to an obligation by Clambakes to pay for the use and occupancy thereof. Accordingly, Clambakes’ objection to each of the Associations’ claims will be sustained. Claims 16, 17, 18, and 19 are disallowed in their entirety. A separate order shall enter.
ORDER
For the reasons set forth in the memorandum of decision issued today, IDC Clambakes, Inc.’s Objection to Claims of America Condominium Association, Inc., *696Capella South Condominium Association, Inc., Harbor Houses Condominium Association, Inc. and Goat Island South Condominium Association, Inc. [# 280] is SUSTAINED. Claims 16, 17, 18, and 19 are DISALLOWED in their entirety.
. On this point the First Circuit noted “because the lease between IDC Properties and IDC Clambakes was never recorded and Clambakes did business under the name *684'Newport Regatta Club,' the record remains vague regarding the extent to which the Associations understood or were aware of the precise role Clambakes had in the development and operation of the Regatta Club.” Goat Island S. Condo. Ass’n, Inc., 727 F.3d at 62. At any rate, Bankruptcy Judge Votolato of this court later determined that the Associations’ claims against Clambakes were not precluded by the America I or America II decisions. IDC Clambakes, Inc., 431 B.R. at 61-62.
. While called a plan of reorganization, it is perhaps more accurate to describe the plan as a liquidating plan since Clambakes ceased operating on November 5, 2005.
. $7,290.00 of each Association's claim was characterized as "restitution” for expenses incurred related to sewer repairs. Judge Voto-lato allowed this portion of the claim in his decision of June 9, 2010. IDC Clambakes, *685Inc., 431 B.R. at 62-63. That determination was not appealed.
.Clambakes objected to the Associations’ proofs of claim in a single, consolidated pleading.
. Clambakes cross-appealed for reasons not relevant here.
. Again Clambakes cross-appealed for reasons not relevant here.
. The lease provides for a third renewal term of five and one-half years, but the Associations retained the right to terminate the lease after the second renewal term if Longwood failed to make certain capital investments over the course of the prior terms. Creditors’ Ex. L at 5-6.
. Even though the period beginning with the commencement date of the Clambakes-Properties lease (March 1, 1998) through the date of the America II decision (April 8, 2005) is approximately seven years and one month, Mr. Foster included six and one-half years' worth of rent in his estimate of the value of the Associations' use and occupancy claim. Mr. Foster did not include the months of March through June 1998 to account for the time it took to construct the Regatta Club. Trans. Aug. 6, 2008 at 96-97. Nor did he include the months of January through April 2005 since Clambakes paid the Associations $450,000.00 for the privilege of using and occupying the Regatta Club and Reserved Area for “most" of 2005 pursuant to Judge Votolato’s August 25, 2005, consent order. Creditors’ Ex. Y at 34
.The method employed by Mr. Foster to calculate ground and building rent is not the method he employed to arrive at his ultimate conclusion regarding rent due for the claim period ($2.6 million). See Creditors' Ex. Y at 33-34. Mr. Foster described the method used to calculate ground and building rent as a "check” on the reasonableness of the $450,000.00 per year rent provided in the Longwood lease. Trans. Aug. 6, 2008 at 98. Nevertheless, Mr. Foster indicated that the figures included in his report were reasonable estimates of ground and building rent for the claim period. See Trans. Aug. 6, 2008 at 96-102; Creditors’ Ex. Y 21-26.
. The Associations attribute the $3.2 million figure to Clambakes’ expert, Mr. Scotti. Although this figure was not included in his report, during cross-examination at trial Mr. Scotti testified that if one party owned both the Reserved Area and Regatta Club building, the "top of the range” for total rent for the claim period would be $3.2 million. Trans. Aug. 13, 2008 at 22-25.
. Both sides' experts testified at trial that a ground lease is a common arrangement whereby a landlord rents a plot of land to a tenant with the expectation that the tenant will construct any improvements thereon at his own expense. Trans. Aug. 6, 2008 at 96-102; Trans. Aug. 13, 2008 at 8-10. See also Black’s Law Dictionary 971 (9th ed. 2009).
.This calculation includes six and one-half years' worth of rent, consistent with Mr. Foster’s report and testimony. See supra, note 8.
. The Santilli court goes on to state that:
[T]he fact that such owner has suffered little or no damage because of the offending structure, or that it was erected in good faith, or that the cost of its removal would be greatly disproportionate to the benefit accruing to the plaintiff from its removal, is not a bar to the granting of coercive relief.
Santilli, 230 A.2d at 863.
. In their May 29, 1999, state court complaint, the Associations, under a count entitled "Estoppel — Development Rights," do seek "a preliminary and permanent injunction ... requiring restoration of the [Reserved Area] to [its] condition as of December 31, 1994 ...” Creditors’ Ex. D at 12-13. Evidently, the Associations abandoned this request.
. Longwood’s base rent for the land and building of $450,000.00 supports this building-only rent figure. Mr. Foster testified that in addition to a building rent figure of $240,000.00 per year, the rent of a ground lease would have been $200,000.00 to $250,000.00 per year.
. This is not to suggest that Clambakes is entitled to credit for more than $1,625,000.00. My ultimate finding that the Associations failed to prove their entitlement to quasi-contractual relief turns heavily on the fact that it is the Associations which bear the burden of proof. It is possible that the equities of this case are such that neither side would be able to prove its entitlement to relief under a theory of quasi-contract or unjust enrichment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497105/ | Chapter 13
MEMORANDUM DECISION FINDING A VIOLATION OF THE AUTOMATIC STAY AND AWARDING DAMAGES
CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE
The Debtor filed a motion for contempt by Order to Show Cause against Federal National Mortgage Association (“FNMA”) and Nationstar Mortgage, LLC (“Nations-tar”) alleging a violation of the automatic stay pursuant to 11 U.S.C. § 362(a)(1) and 11 U.S.C. § 362(a)(3). The asserted violation arises from the issuance of a post-petition summons and complaint seeking a writ of assistance where the parties were notified of the bankruptcy filing. For the reasons set forth in this memorandum decision, the Court finds that a violation of the automatic stay did occur and awards damages.
Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Amended 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); (G) (motions to terminate, annul, or modify the automatic stay).
Background
1
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2
The Debtor resides at 750 Route 292, Holmes, N.Y. 12531 (“Property”). See *725Joint Stmt. ¶ 1, ECF No. 83. The Debt- or’s relatives, Sandy and Ante Salvo, mortgaged the Property. Id. The Debtor’s relatives defaulted on their mortgage loan held by Nationstar. Id. ¶ 2-3. On January 16, 2013, Dutchess County Supreme Court granted a Judgment of Foreclosure and Sale. Id. ¶ 5, Ex. A. FNMA purchased the Property at a foreclosure sale on June 3, 2013. Id. ¶ 6, Ex. B. The Referee’s Deed declared that the transfer of the Property to FNMA had the effect of “foreclosing the mortgage,” thereby terminating Nationstar’s interest. Id. ¶ 7. In seeking possession of the Property, notices to vacate were served on July 3, 2013. Id. ¶ 8, Ex. C. A few months later, ten-day notices to quit were prepared and sent for service upon the occupants. Id. ¶ 10, Ex. D. The law firm of Fein, Such & Crane LLP (“Fein Such”) represented Nationstar in the foreclosure action and FNMA, in the writ of assistance action (collectively, the “Creditors”). Id. ¶¶ 4, 9,16.
On October 11, 2013, approximately one week after being served with the ten-day notice, the Debtor filed for chapter 13. Id. ¶ 12. On October 15, 2013, Debtor’s counsel called Creditors’ counsel advising them of the Debtor’s filing. Id. ¶ 14. On October 16, 2013, Debtor’s counsel sent an email advising Creditors’ counsel of the same. Id. ¶ 15., Ex. E. On October 17, 2013, Nationstar, by its attorneys, filed a motion for a post-foreclosure writ of assistance and sent the same for service upon the Debtor. Id. ¶ 16, Ex. F. The caption of the motion named Nationstar as the plaintiff, even though its interest terminated on June 3, 2013. Id. ¶ 17, Ex. F. The body of the motion named FNMA as the party taking action. Id. Neither party applied to this Court for relief from the automatic stay.
On November 8, 2013, counsel for the Debtor faxed a letter to Creditors’ counsel stating that Creditors were in violation of the automatic stay. Id. ¶ 18, Ex. G. On November 11, 2013, Creditors’ counsel replied, outlining reasons why it believed the stay did not apply. Id. ¶ 19, Ex. H. Shortly thereafter, Debtor’s counsel filed a Motion for Contempt by Order to Show Cause against Nationstar. See Pl.’s Mot. for Contempt, ECF No. 9. The Court signed the Order to Show Cause on November 14, 2013. See Order to Show Cause, ECF No. 10.
On November 18, 2013, Nationstar filed an objection to the Order to Show Cause. Nationstar argues that “nothing related to the subject property passed into the Bankruptcy Estate, and thus, no automatic stay applied.” See Opp’n, ECF No 12. Na-tionstar also argues that it should not be held in contempt since its interest terminated following the delivery of the Referee’s Deed. Id. ¶ 28.
On November 19, 2013, Creditors’ counsel withdrew its motion pending before the Dutchess County Supreme Court. See Joint Stmt. ¶ 21, Ex. I. Also on November 19, 2013, the Court held a hearing, found that the automatic stay was violated, and awarded actual damages. On November 25, 2013, the Court entered an order granting Debtor’s Motion for Contempt and awarded $2,550.00 against Nationstar. See Order Granting Award for Actual Damages, ECF No. 20. On November 26, 2013, counsel for the Debtor filed an application for punitive damages. See Mot. to Approve Appl. for Award of Punitive Damages, ECF No. 24.
On December 6, 2013, Nationstar filed an objection to the Court order and opposition to the Debtor’s application for punitive damages, arguing that FNMA and not Nationstar violated the stay. See Opp’n, ECF No. 26. At the January 15, 2014 hearing, the Court instructed counsel for the Debtor to file a Motion for Contempt by Order to Show Cause against FNMA.
*726On January 31, 2014, Debtor’s counsel filed a Motion for Contempt by Order to Show Cause against FNMA. See Mot. for Contempt, ECF No. 64. On February 5, 2014, the Court signed the Order to Show Cause. See Order to Show Cause, ECF No. 66. Debtor’s counsel argues that FNMA violated § 362(a)(1) by commencing and continuing a judicial proceeding in state court against the Debtor. See Mot. for Contempt, ECF No. 64. Debtor argues that as result of the violation, Debt- or’s counsel was forced to file the current motion against FNMA as well as the prior Nationstar motion. Id. ¶ 19-21. Debtor’s counsel argues that the Court should grant $5,050.00 for actual damages and additional punitive damages. Id.
On March 5, 2014, FNMA filed an objection and opposition to the Order to Show Cause. See Opp’n, ECF No 68. FNMA argues that actual and punitive damages should be denied since no possessory interest transferred into the estate and consequently no automatic stay applied. Id. ¶ 20-57. Alternatively, FNMA argues that any damages awarded should be offset and reduced between $7,238.70 and $26,427.79 due to Debtor not having paid to remain in the Property and FNMA’s good faith belief that no possessory interest transferred. Id. ¶ 58-64.
At the March 11, 2014 hearing, the Court adjourned the contempt motions to May 6, 2014. The Court ordered the parties to submit a statement of undisputed facts and party briefs. See Joint Stmt. Nationstar maintains that under New York Real Property Law their interest terminated upon delivery of the Referee’s Deed. See Mem. of Law, ECF 86. FNMA argues that the Property did not transfer into the bankruptcy estate pursuant to § 541. See Mem. of Law, ECF 87. Debt- or continues to allege that the parties violated the stay by commencing and continuing a judicial proceeding in contravention of § 362(a)(1). See Mem. of Law, ECF. 85. Debtor also maintains that her “mere possessory” interest in the property passed into the estate pursuant to § 541. Id. Debtor’s counsel requests actual damages in the amount of $7,635.00 and additional punitive damages. Id. ¶ 36, Ex. C.
Discussion
I. The Automatic Stay
The filing of a bankruptcy petition invokes the powerful protection of the automatic stay under 11 U.S.C. § 362. The automatic stay is “one of the fundamental debtor protections provided by the bankruptcy code.” Eastern Refractories Co. Inc v. Forty Eight Insulations Inc., 157 F.3d 169, 172 (2d Cir.1998). It is effective immediately upon the filing of a bankruptcy petition without further action. Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527 (2d Cir.1994). The filing also creates an estate consisting of “all legal or equitable interests of the debtor in property” at the time of filing as well as other property that may be recaptured during the bankruptcy. 11 U.S.C. § 541(a)(1); In re Methyl Tertiary Butyl Ether (MTBE) Prods. Liab. Litig., 522 F.Supp.2d 569, 576 (S.D.N.Y.2007). The scope of the stay is broad, encompassing “almost any type of formal or informal action taken against the debtor or the property of the [bankruptcy] estate.” 3 Collier on Bankruptcy ¶ 362.03 (16th ed. 2014).
a. Stay Violation under § 362(a)(1) of the Bankruptcy Code
Pursuant to § 362(a)(1), a bankruptcy petition operates as an automatic stay to “all entities of ... the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case.... ” 11 U.S.C. *727§ 362(a)(1); In re Best Payphones, Inc., 279 B.R. 92, 97 (Bankr.S.D.N.Y.2002) (stating that the stay is applicable to all entities, including litigants as well as non-bankruptcy courts) (citing and quoting Maritime Elec. Co. Inc. v. United Jersey Bank, 959 F.2d 1194, 1206 (3d Cir.1991)). There can be no question that the filing and serving of a writ of assistance is the commencement and continuation of a legal proceeding and a violation of § 362(a)(1). Butler v. Bellwest Mgmt. Corp. (In re Butler), 14 B.R. 532, 534 (S.D.N.Y 1981) (“Clearly an eviction proceeding is a judicial proceeding against the Debtor within s 362(a)(1)....”).
On June 3, 2013, FNMA purchased the Debtor’s residence at a foreclosure sale. Joint Stmt. ¶ 6, Ex. B. On October 13, 2013, the Debtor filed for chapter 13. Creditors were informed of the bankruptcy proceeding on three separate occasions: i) the Bankruptcy Court noticed Nationstar of the commencement of the bankruptcy case by mailing the § 341 notice to its counsel, Fein Such; ii) Debtor’s counsel called Fein Such and informed them of the bankruptcy on October 15, 2013; and iii) Debtor’s counsel faxed Fein Such and asked them not to proceed with the eviction in light of Debtor’s bankruptcy filing on October 16, 2013. Id. ¶ 13-16. Despite acknowledging notice of the Debtor’s bankruptcy filing, on October 17, 2013, Creditors’ attorney, Fein Such, prepared and filed a motion for a post-foreclosure writ of assistance without obtaining relief from the automatic stay from this Court. Id. ¶ 17.
Creditors argue that they did not need to seek stay relief as they believed that the Debtor had no legal or equitable interest in the Property. See Mem. of Law ¶ 8, ECF 87. Creditors’ argument that the Debtor had no interest in the Property ignores § 362(a)(1) of the Bankruptcy Code. In its most basic terms, the automatic stay prevents the “commencement or continuation of legal proceedings ... against the debtor.” 11 U.S.C. § 362(a)(1) (emphasis added). Nationstar, through its counsel, Fein Such, admits that it sued the Debtor because she potentially had an interest in the Property. See Obj. ¶ 7, ECF No. 12. (“Marija Salov was sued and served as a ... person who may have had an occupancy interest in the premises.”).3 By filing a motion for a writ of eviction against the Debtor in state court and serving her with notice of that action, Creditors violated the automatic stay pursuant to § 362(a)(1).
b. Stay Violation under § 362(a)(3) of the Bankruptcy Code.
Having found that the automatic stay was violated under § 362(a)(1), the Court has ample power to award damages pursuant to § 362(k). 11 U.S.C. § 362(k). Despite this, the Court will address whether the Creditors also violated the stay pursuant to § 362(a)(3). Section 362(a)(3) provides that “any act to obtain possession of property of the estate or of property from the estate” is a violation of the automatic stay. 11 U.S.C. § 362(a)(3). According to § 541, the estate includes “all legal and equitable interests of the debtor in property at the commencement of the case.” 11 U.S.C. § 541(a)(1).
i. Debtor’s ownership interest is not relevant
It is well established that a debtor does not have an ownership interest in a property once the right to redeem is extinguished following a foreclosure sale and, as such, a debtor has no ability to prevent the delivery of the deed. Cerrato v. BAC *728Home Loans Serv. (In re Cerrato), 504 B.R. 23, 29 (Bankr.E.D.N.Y.2014) (“It is well established that under New York law, a debtor’s right of redemption of, and interest in real property is extinguished by a foreclosure sale ....”) (collecting cases); Ghosh v. Fin. Fed. Sav. & Loan Ass’n, (In re Ghosh), 38 B.R. 600, 603 (Bankr. E.D.N.Y.1984) (“[A] mortgagor or debtor in a forced sale has no legal or equitable interest in real property after a foreclosure sale, even if the formal transfer of the title has not taken place unless of course he has the right to redeem.”).
Here, Creditors argue that the foreclosure proceeding extinguished the Debtor’s legal and equitable interest in the estate. See Mem. of Law ¶ 3-4, ECF 87; see also Obj. ¶ 37, ECF No. 12. In support of their argument, FNMA attorneys cite In re Rodgers. See Mem. of Law ¶ 4-5, ECF 87. In that case, a debtor filed for bankruptcy following the foreclosure sale of their home. Rodgers v. Cnty. of Monroe (In re Rodgers), 333 F.3d 64, 65 (2d Cir.2003). By filing the petition, the debtor attempted to trigger the automatic stay and prevent the county from recording and delivering the deed. Id. The debtor argued that she remained the owner of the property until the deed was delivered. Id. The county concluded that under New York Real Property Law, the property had been sold, the debtor’s right of redemption had expired and the property was not part of the estate. Id. Accordingly, the country accepted payment, recorded and delivered the deed. Id. The court found that mere possession of title was insufficient to bring the property into the estate and that possession of the title was only incidental to its delivery. Id. at 68. The stay was not violated as the delivery of the title was ministerial. Id. at 69.
Creditors also argue that Cook v. Huey applies. 506 B.R. 174 (N.D.N.Y.2013). Mem. of Law ¶ 6, ECF 87. In that case, the debtors’ residence was sold at a foreclosure sale pre-petition. Cook, 506 B.R. at 175. The debtors argued that the bankruptcy court incorrectly concluded that the foreclosure sale divested them of all legal and equitable interest. Id. Debtors contended that the residence should have been brought into the bankruptcy estate in accordance with their possessory interest. Id. 175-76. The court concluded that under New York Real Property Law, a mortgagor whose property has been foreclosed upon continues to possess an equitable right of redemption until a foreclosure sale occurs. Id. at 176. Once the foreclosure sale takes place, that right is extinguished. Id.
By citing these cases, Creditors argue that since the Property was sold at foreclosure, Debtor has no legal or equitable interest in the Property. However, “property of the estate” is not as simplistic as Creditors would like to make it. Rather, the issues at play in this proceeding are nuanced and an in-depth understanding of property rights and bankruptcy law is necessary to parse them.
ii. Debtor’s possessory interest
Property of the estate encompasses all rights and interests that a Debtor may have in a property. The right to own is a separate right from the right to possess or the right to occupy and yet, all are property of the estate. When a debtor is attempting to redeem a piece of real property or is attempting to prevent the transfer of a deed, it is the debtor’s ownership interest that is in question — not the pos-sessory interest.
Indeed, the Second Circuit in In re Rodgers recognized this distinction when they stated: “Although Rodgers may have retained ... a limited right of possession — the delivery of the deed was a ministerial act that did not impair any property interest retained by Rodgers and, thus, *729was not subject to the automatic stay.” Rodgers, 333 F.3d at 69. In other words, Rodgers maintained a possessory interest and not an ownership interest in the foreclosed property. That possessory interest was not a strong enough interest to claw her ownership interest in the property back into the estate or prevent the delivery of a deed. Id. at 68 (“[T]he critical inquiry is whether she had, under state law, any legal or equitable ownership interest that survived the auction.”) (emphasis added); see also Martyak v. Tioga Cmty. (In re Martyak), 432 B.R. 25, 40 (Bankr.N.D.N.Y.2010) (“Since Debtor had no legal or equitable interest in the property as of the commencement of the case, the property did not become property of the estate and the auction held on August 7, 2008, did not violate the automatic stay. Any possessory interest Debtor may have in the property has remained undisturbed, as the parties stipulated that no eviction proceeding was ever commenced against Debtor.”)
Here, the Debtor’s ownership interest in the Property is not relevant. Debtor is not and never was the owner of the Property. As such, under state law, Debtor never had a right to redeem. She never had an interest in the delivery of the deed. What Debtor did have — and continues to have — is a possessory interest in the real property, which was not affected by the foreclosure sale and remains property of the estate.
“It is well settled that a debtor’s mere possessory interest in premises, even absent any legal interest, is protected by the automatic stay.” In re Dominguez, 312 B.R. 499, 506 (Bankr.S.D.N.Y.2004) (citing In re 48th Street Steakhouse, 835 F.2d 427, 430 (2d Cir.1987) (“A mere pos-sessory interest in real property, without any accompanying legal interest, is sufficient to trigger the protection of the automatic stay.”)). Courts in all ten circuits have found that the automatic stay protects a possessory interest in property. See I.C.C. v. Holmes Transp., Inc., 931 F.2d 984 (1st Cir.1991); Cuffee v. Atlantic Bus. & Cmty. Dev. Corp. (In re Atlantic Bus. & Cmty. Corp.), 901 F.2d 325 (3d Cir.1990); Conn. Pizza, Inc. v. Bell Atlantic-Washington, D.C., Inc. (In re Conn. Pizza, Inc.), 193 B.R. 217 (Bankr.D.Md.1996); Boydstun v. Reed, 218 B.R. 840 (N.D.Miss.1998); Convenient Food Mart No. 144 v. Convenient Indus. America, Inc. (In re Convenient Food Mart No. 144, Inc.), 968 F.2d 592 (6th Cir.1992); In re Wright, 183 B.R. 541 (Bankr.C.D.Ill.1995); Lankford v. Advanced Equities (In re Lankford), 305 B.R. 297 (Bankr.N.D.Iowa 2004); Galam v. Carmel (In re Larry’s Apartment, L.L.C.), 249 F.3d 832 (9th Cir.2001); In re Gagliardi, 290 B.R. 808 (Bankr.D.Colo.2003); Addon Corp. v. Gaslowitz (In re Addon Corp.), 231 B.R. 385 (Bankr.N.D.Ga.1999). “[A] possessory interest in real property is within the ambit of the estate in bankruptcy under Section 541, and thus the protection of the automatic stay of Section 362.” Atlantic Bus. & Cmty. Dev. Corp., 901 F.2d at 328.
Judge Blackshear in In re Reinhardt discusses the fact that “federal legislative history supports the contention that Congress intended for residual possessory interest to fall within the definition of a bankruptcy estate.” In re Reinhardt, 209 B.R. 183, 186-87 (Bankr.S.D.N.Y 1997). Judge Blackshear reasons that the failure of a 1992 bill to amend § 541(b) to include residential agreements is evidence of congressional intent to include mere possession in residential property as a protected interest under the Code. Id. at 187 (“The failure to enact this legislation ... is evidence of congressional intent to include mere possession in residential situations as an interest to be protected under the Code.”).
*730This conclusion is supported by the fact that a writ of assistance proceeding had to be commenced against the Debtor in the first place.
iii. Writ of assistance
If the Debtor had no post-foreclosure interest, New York Real Property Law would not require a purchaser to file a writ of assistance against an occupant who refuses to surrender the property and a sheriff could immediately evict the occupant. Yet, this is not the process that is outlined under New York Property Law.
New York Real Property Law § 221 states:
Where a judgment affecting the title to, or the possession, enjoyment or use of, real property allots to any person a distinct parcel of real property, or contains a direction for the sale of real property, or confirms such an allotment or sale, it also may direct the delivery of the possession of the property to the person entitled thereto, subject to the rights and obligations set forth in section thirteen hundred five of this chapter.
If a party, or his representative or successor, who is bound by the judgment, withholds possession from the person thus declared to be entitled thereto, the court, by order, in its discretion, besides punishing the disobedience as a contempt, may require the sheriff to put that person into possession. Such an order shall be executed as if it were an execution for the delivery of the possession of the property.
N.Y. Real Prop. Law § 221 (McKinney 2014). Thus, pursuant to the plain language of § 221, under New York law, a writ of assistance is necessary in order to “put [the purchaser] into possession.” Id. Nationstar, through its counsel, Fein Such, admitted that the Debtor was “sued and served as a person who may have had an occupancy interest in the premises.” See Obj. ¶ 7, ECF No. 12.
Case law makes clear that the writ of assistance is not a ministerial act like the delivery of a deed. “A ministerial act is one that is essentially clerical in nature.” Soares v. Bockton Credit Union (In re Soares), 107 F.3d 969, 974 (1st Cir.1997). “[W]hen an official’s duty is delineated by, say, a law or a judicial decree with such crystalline clarity that nothing is left to the exercise of the official’s discretion or judgment, the resultant act is ministerial.” Id. New York Property Law requires a purchaser to file for a writ of assistance and provide notice and an opportunity to be heard before one’s possessory interest is adversely affected by the judicial foreclosure process. Nationwide Assoc., Inc. v. Brunne, 216 A.D.2d 547, 629 N.Y.S.2d 769 (N.Y.App.Div.1995) (2d Dept.).
Before a writ of assistance will issue, the movant is required to provide a certain amount of process to a defendant to the action, such as exhibiting a deed, and the application for a writ of assistance can be denied for failure to provide this process. See Colony Mortgage. Bankers v. Mercado, 192 Misc.2d 704, 747 N.Y.S.2d 303, 303 (N.Y.Sup.Ct.2002). Moreover, due process requires that a party have notice to the initial foreclosure to enforce a writ of assistance against that party. Citibank, N.A. v. Plagakis, 21 A.D.3d 393, 394-95, 800 N.Y.S.2d 192 (N.Y.App.Div.2005) (2d. Dept.). This is so, as the evicted party must have an opportunity to be heard before his interest in the property is adversely affected. Id. Furthermore, the writ of assistance is discretionary and its granting lies with the court. Long Island City Sav. & Loan Ass’n v. Levene, 138 N.Y.S.2d 573, 576 (Sup.Ct.1955) (Kings Cnty.). The court must consider the relative equities of the particular situation. Id.
*731If the Debtor was entitled to notice and an opportunity to be heard prior to the issuance of a writ of assistance, then her possessory interest must remain unaltered following a foreclosure sale. See Burg v. City of Buffalo (In re Burg), 295 B.R. 698, 701 (Bankr.W.D.N.Y.2003) (“That the petitioning creditors have need to obtain an order of eviction is itself an acknowledgment of [Debtor’s] possession of the property. As an act to obtain possession of property from the estate, the eviction is subject to the automatic stay of bankruptcy.”).
This Court finds the reasoning of the court in St. Clair persuasive. St. Clair v. Beneficial Mortg. Co. (In re St. Clair), 251 B.R. 660, 665 (D.N.J.2000). In St. Clair, the debtors filed their petition following the foreclosure sale and after the debtors had been served with a writ of possession. Id. The court concluded that “upon issuance of a writ of possession, any possesso-ry interest ... whether by tenancy at sufferance or otherwise, is expunged.” Id; see also Bell v. Alden Owners, Inc., 199 B.R. 451, 459 (S.D.N.Y.1996) (“[The debt- or] forfeited any legal right to possess the [ajpartment upon the [pre-petition] issuance of the writ of eviction, and also forfeited any equitable interest arising from her de facto possession.... ”).
An even more persuasive decision, Perl, was issued between the Court’s May 6, 2014 oral ruling and the publication of this written decision and provides a comprehensive discussion of the issues at play in this case. Eden Place, LLC v. Perl (In re Perl), — B.R. -, -, 2014 WL 2446317, at *1-9 (9th Cir. BAP May 30, 2014). In Perl, the state court issued a writ of assistance to the appellant who purchased the appellee’s property at a foreclosure sale. Id. at -, 2014 WL 2446317 at *1. Soon thereafter, the appel-lee filed a bankruptcy petition. Id. Despite having notice of the bankruptcy action, the appellant executed the writ of assistance. Id. at-, 2014 WL 2446317 at *2. Similar to the present case, appellant argued that following the foreclosure sale, delivery of the deed and issuance of the writ of assistance the appellee no longer had a legal or equitable interest in the property. Id. The court concluded that the appellee still maintained a possessory interest even after the issuance of the writ of possession and its execution was a willful violation of the automatic stay. Id. at -, 2014 WL 2446317 at *4-9 (“[T]he strength of one’s interest is not determinative; ... if debtor or the estate has ‘any’ interest the question becomes: is the creditor’s action violative of the stay. Creditor’s action may be violative even if a minimal interest, such as a squatter’s or possessory interest, is held by the debtor or the estate.”).
In this case, the writ of assistance was filed post-petition. The Debtor’s four-year “mere possessory” interest, even without a legal interest, is still an interest, and thus falls within the meaning of property of the estate. This conclusion, that the Debtor maintained a possessory interest in the Property, is consistent with New York state law dating at least as far back as 1890, as is indicated from the following discussion:
The writ of assistance, so far as foreclosures are concerned, is an old chancery writ.... It may be had to enforce any judgment or order awarding the possession of real property, other than the common judgment, in a direct action for land. A writ of assistance is, in ordinary cases, the process for giving possession of land under an adjudication, and will be granted upon the sale being confirmed, and proof that the purchaser has received a deed of conveyance from the master, which has been shown to the party in possession, accompanied by a *732demand of possession, which has been refused.
The judgment herein cannot be enforced in respect to possession by execution, and the relief required must be obtained by this writ.
O’Connor v. Schaeffel, 11 N.Y.S. 737, 737 (N.Y.City Court 1890) (internal citations omitted). Accordingly, when Creditors moved to obtain a writ of assistance seeking to divest the Debtor of her possessory interest in the Property, that interest had already become property of the estate by the filing of the bankruptcy petition. Therefore, it was the estate’s possessory interest in the Property that Creditors were attempting to divest and, thus, the automatic stay was violated pursuant to § 362(a)(3).
II. Creditor has a Duty to Obtain Relief from the Stay.
The Court does not believe that finding a stay violation in this case places any higher burden upon creditors than is provided by the Bankruptcy Code. The fact is that Creditors could have avoided this result had they heeded Debt- or’s counsel’s warnings and sought relief from the automatic stay in this Court. “[I]t is not the debtor’s responsibility to take action that ensures that she received protection of the automatic stay; rather the creditor bears the burden of seeking relief from the automatic stay before taking post-petition collection actions.” In re Braught, 307 B.R. 399, 402 (Bankr.S.D.N.Y.2004). “A motion for stay relief is not a mere formality that may be ignored in a party’s discretion.” In re Dominguez, 312 B.R. at 505.
“[Wjhile ... [possessory] rights on the part of the debtor ... trigger the applicability of the automatic stay in the first instance, they are not determinative of the fundamentally different question as to whether the stay, once triggered, should be modified or terminated for cause.” In re Éclair Bakery Ltd., 255 B.R. 121, 134 (Bankr.S.D.N.Y.2000). “Congress has declared that actions to terminate, annul, or modify the automatic stay are core bankruptcy proceedings. Consequently, it is undisputed that only a bankruptcy court has jurisdiction to terminate, annul or modify the automatic stay.” In re Dominguez, 312 B.R. at 505 (quoting Siskin v. Complete Aircraft Serv., Inc. (In re Siskin), 258 B.R. 554, 561-62 (Bankr. E.D.N.Y.2001)) (emphasis added).
Simply put, the fact that cause existed to lift the stay is not relevant to a determination as to whether the stay has been violated. See Perl, — B.R. at -, 2014 WL 2446317, at *6 (“A distinction exists between the analyses required for stay relief matters and violation of stay matters.”).
III. Actual and Punitive Damages Against Nationstar and FNMA
a. Nationstar and FNMA are Jointly and Severally Liable
Nationstar argues that it had no involvement in the violation of the automatic stay as its interest in the Property transferred to FNMA four months prior to the occurrence of the violation. Nations-tar argues that under New York Property law, the purchaser of a foreclosed property is permitted to file for a writ of assistance under the foreclosure action caption so long as any person sought to be dispossessed was a party to the underlying foreclosure action. Nationstar in support of its argument cites Lincoln First Bank v. Polishuk, 86 A.D.2d 652, 446 N.Y.S.2d 399 (N.Y.App.Div.1982).
Lincoln First Bank does not adequately address Nationstar’s argument. Rather, the case contains one sentence in which the court finds that the motion for a writ of assistance is proper, despite the caption *733not being under the name of the purchaser. Id.
Despite the fact that the parties agree in the statement of undisputed facts that FNMA prepared the motion for post-foreclosure writ of assistance, this Court cannot definitively conclude that Nationstar was not the movant. See Joint Stmt. ¶ 16. Nationstar is the named Plaintiff in the post-petition action. Moreover, the Creditors share counsel and it is unclear at this time whether Fein Such was acting on behalf of Nationstar, FNMA, or both Creditors at the time it filed the motion. There is simply no way for the Debtor or the Court to determine who, ultimately, is liable. Rather, the Creditors must come forth with evidence showing one or the other made the ultimate decision.
Accordingly, the Court holds both Na-tionstar and FNMA jointly and severally liable — subject to one or the other bringing an action for exculpation. If FNMA believes that it is the responsible party, it may voluntarily assume liability for the stay -violation.
b. Actual Damages pursuant to § S62(k)
Pursuant to § 362(k)(l), “an individual injured by any willful violation of the stay provided by this section shall recover actual damages, including costs and attorney’s fees, and in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k)(l). The party moving for damages bears the burden of proof. In re Pachman, 2010 WL 1489914, at *2 (Bankr.S.D.N.Y. Apr. 14, 2010) (citation omitted). Actual damages include reasonable attorney fees for prosecuting a stay violation. Id.
It is clear that Creditors, through their counsel, were aware that an automatic stay was in effect. On October 15 2013, Creditors’ counsel received a call from Debtor’s counsel advising them of the filing. See Joint Stmt. ¶ 14. On October 16, 2013, Debtor’s counsel transmitted a fax to Creditors’ counsel stating the same. See id. ¶ 15. Creditors’ counsel reviewed the bankruptcy petition and concluded that the property did not enter the estate. See Opp’n ¶ 23, ECF No. 12. On October 17, 2013, Creditors’ counsel prepared a motion for a writ of assistance and sent the same for service and filing. See Joint Stmt. ¶ 16.
The fees sought by Debtor’s counsel are reasonable. An hourly rate of $275 per hour for attorney time and $100 per hour for legal assistant time is at or below the average rate for legal professionals in this district. See Mem. of Law ¶ 36, ECF 85, Ex. C. Due to the complexity of the case, the hours spent by Debtor’s counsel are reasonable. Id.
Accordingly, Nationstar and FNMA are jointly and severally liable for actual damages in the amount of $7,635.00.
c. Nationstar and FNMA are Jointly and Severally Liable for Punitive Damages
The Second Circuit has stated, where a party has willfully violated the automatic stay,
[a]n additional finding of maliciousness or bad faith on the part of the offending creditor warrants the further imposition of punitive damages.... This standard encourages would be violator to obtain declaratory judgments before seeking to vindicate their interests in violation of an automatic stay, and thereby protect debtors’ estates from incurring potentially unnecessary legal expenses in prosecuting stay violations.
Crysen/Montenay Energy Co. v. Esselen Assoc., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1105 (2d Cir.1990).
[When] a person takes a deliberate act ... in violation of a stay, which the violator knows to be in existence ... *734such an act need not be performed with specific intent to violate the stay. Rather, so as long as the violator possessed general intent in taking actions which have the effect of violating the automatic stay, the intent required ... is satisfied.
Sucre v. MIC Leasing Corp. (In re Sucre), 226 B.R. 340, 349 (Bankr.S.D.N.Y.1998) (internal quotations omitted).
In determining an award for punitive damages, the Court is guided by factors set out in In re B. Cohen & Sons Caterers, Inc.: “(1) the nature of the defendant’s conduct; (2) the defendant’s ability to pay; (3) the motives of the defendant; and (4) any provocation by the debtor.” 108 B.R. 482, 484 (E.D.Pa.1989) (citations omitted). As a fifth factor, some courts have considered the defendant’s level of sophistication. In re Pachman, 2010 WL 1489914 at *4; In re Gagliardi, 290 B.R. 808, 813 (Bankr.D.Colo.2003).
Here, FNMA was aware of the bankruptcy filing. See Joint Stmt. ¶ 13-15. Rather than seek to have the automatic stay lifted, Creditors unilaterally concluded that the property was not part of the estate and proceeded with filing and serving a motion for a writ of assistance. See Opp’n ¶ 23, ECF No. 12. In response to Debtor’s counsel’s protestations that they had violated the stay, Creditors’ counsel wrote Debtor’s counsel a letter which stated:
Unfortunately, I do not agree with your broad conclusion that the § 362(a) automatic stay applies in this matter....
[Y]ou are not the first to try this gambit on a post-foreclosure eviction that I have handled. Your threat of a Motion for Contempt does not change the clearly established law. Indeed, I caution you that such a motion would likely violate Bankruptcy Rule 9011.
See Joint Stmt. ¶ 19, Ex. H. As to the first factor, Creditors’ conduct and threats in this case are egregious. As to the second factor, Creditors are large financial organizations capable of paying damages. As to the third factor, Creditors’ motive was to evict the Debtor from the residence despite the bankruptcy proceeding; Creditors did not even mention that there was a pending bankruptcy case in their state court motion papers. Id. ¶16, Ex. F. As to the fourth factor, there is no evidence of provocation by the Debtor. While FNMA, does allege that Debtor’s daughter-in-law called its counsel and made “veiled threats,” such conduct does not rise to the level of provocation and certainly does not excuse a violation of the automatic stay by these large organizations. See Opp’n ¶ 12, ECF No. 68. Moreover, FNMA states that the day after the initial phone call, Debtor’s daughter-in-law called back and advised them that she did not represent the Debtor. Id. at 13. Debtor also called stating same. Id. at 15. As to the fifth factor, Creditors are both sophisticated corporations represented by counsel and capable of understanding the consequences of their actions.
From the letter addressed to Debtor’s counsel, it is clear that Creditors believed that they, and not the Court, had the authority to determine whether the automatic stay was in effect. See Joint Stmt. ¶ 19, Ex. H. By making such a determination, Creditors ran the risk that their actions would be declared void ab initio and that they would be subject to damages. In re Braught, 307 B.R. 399, 404 (Bank.S.D.N.Y 2004); see also Perl, — B.R. at -, 2014 WL 2446317, at *9 (“Whether [creditor] believed in good faith that it had a right to the Residence is irrelevant to the analysis of whether its act was intentional.”).
Creditors could have prevented this outcome by doing a very simple thing—filing a motion for relief from the automatic stay *735prior to proceeding in state court against the Debtor. Instead, Creditors unilaterally concluded that no stay was in effect and the Debtor had no interest in the property. This was an incorrect assumption.
Accordingly, Debtor has met the requirements for punitive damages.
Conclusion
For the foregoing reasons, Nationstar and FNMA are jointly and severally liable and are directed to pay Debtor’s actual damages in the amount of $7,635.00. As for punitive damages, the Court awards $10,000.00, jointly and severally, in the hope that Creditors will think twice about not seeking an order from this Court in future cases. Debtor’s counsel should submit an order consistent with this memorandum decision.
. All references to ECF are from case number 13-37269 unless otherwise indicated.
. All facts are taken from the Statement of Undisputed Facts Between FNMA, NationS-tar and Debtor (“Joint Stmt.”) unless otherwise indicated. See ECF No. 83.
. The Court notes that the original court refers to the Debtor as a "Jane Doe.” This is not a true statement as the motion very clearly lists the Debtor as “Maria Salov” in its caption. See Joint Stmt., Ex. F. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497106/ | Chapter 11
MEMORANDUM DECISION SUSTAINING THE DEBTOR’S OBJECTION TO PROOF OF CLAIM NO. 4
CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE
Introduction
Before the Court is the Debtor’s objection to a proof of claim filed by the Illinois Department of Revenue for unpaid taxes owed by the Debtor’s predecessor-in-interest. For the reasons set forth below, the Court finds that the tax claim was discharged in 1998 by confirmation of the plan of reorganization in the predecessor’s prior bankruptcy case. Even to the extent the claims were not discharged, they are barred by the applicable statute of limitations. Accordingly, the Court sustains the Debtor’s objection.
Jurisdiction
This Court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Amended 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)(B) (allowance or disallowance of claims against the estate).
Background1
On March 17, 2014, Metex Mfg. Corporation (the “Debtor” or “Metex”) filed an *738objection (the “Claim Objection”) to proof of claim number 4 (the “Claim”) filed by the Illinois Department of Revenue (“IDOR”). See Cl. Obj., ECF No. 461. IDOR filed a response (“Response”) to the Claim Objection. See Resp., ECF No. 483. The Debtor filed a reply (“Reply”), and IDOR filed a sur-reply (“Sur-Reply”). See Reply, ECF No. 501; Sur-Reply, ECF No. 503.
The history of this case dates back to the bankruptcy proceedings of Kentile Floors, Inc. (“Kentile”), the predecessor entity of the Debtor. Resolution of this Claim Objection requires a brief discussion of Kentile’s bankruptcy case.
I. Kentile’s Bankruptcy Proceedings
According to the Debtor’s disclosure statement (the “Disclosure Statement”), Kentile began business in the late 1800s as a manufacturer of residential and commercial tile. Disci. Stmt. 1, ECF No. 438. Until the mid-1980s, Kentile used asbestos in certain of its tiles. Id. at 2. Kentile conducted some of its manufacturing activities within the state of Illinois. Id. at 1; Reply ¶ 3. After it discontinued the use of asbestos, Kentile experienced difficulties in maintaining sales and its business deteriorated. Disci. Stmt. 2. As a result, Kentile filed a petition for relief under chapter 11 of the United States Bankruptcy Code in 1992. Id.
IDOR filed original and amended pre-petition and administrative expense claims in Kentile’s bankruptcy case for the same liability it now asserts in the Claim. See Resp. ¶7; Cl. Obj. Ex. 2. Specifically, IDOR filed a proof of claim against Kentile for pre-petition Retailers Occupation and Use tax liabilities in the amount of $10,000 pending completion of an audit, which was later amended to $218,438, and again to $223,933. See id. at Exs. B-D. IDOR also filed an administrative claim against Ken-tile for post-petition Retailers Occupation and Use Tax liabilities in the amount $10,000 pending completion of an audit, which was amended to $71,352, later amended again to $85,557, and finally to $94,296. See id. at Exs. E-H. These claims covered the same period as the Claim now before the Court. Kentile did not object to IDOR’s claims, which consequently became allowed tax and administrative expense claims. See Resp. ¶ 8; Reply ¶ 3.
In December 1998, the Bankruptcy Court confirmed a Plan of Reorganization in Kentile’s 1992 chapter 11 case (“Ken-tile’s 1998 Plan”). As part of Kentile’s 1998 Plan: (i) all outstanding stock of Ken-tile was cancelled and new shares were issued to United Capital Corp., and (ii) Kentile’s name was changed to KF Real Estate Holdings Corporation (“KF”). See Kentile’s 1998 Plan § 5.8.2 Thereafter United Capital caused KF to be merged with Metex Corporation, a subsidiary of United Capital. KF was the survivor of the merger and its name was changed to Metex Mfg. Corporation. See Disci. Stmt. 2. Kentile’s 1998 Plan provided that all asbestos claimants were entitled to pursue their asbestos-related claims solely against Kentile’s insurance coverage provided by Kentile’s various insurers (the “Kentile Insurers”), and enjoined holders of asbestos claims from commencing actions against Kentile and Metex. See Kentile’s 1998 Plan §§ 4.3, 5.5. Kentile’s 1998 Plan also provided for the payment in full of all allowed priority and administrative tax claims. See id. §§ 3.1-3.2. All allowed administrative, priority and tax claims were to be paid by the reorganized debtor (i.e., Metex) from its cash flow. See id. §§ 5.2-5.4.
*739II. Metex’s 2012 Prepackaged Plan of Reorganization
A number of disputes arose among the Kentile Insurers and Metex in the mid-2000s. In 2008, one of the Kentile Insurers instituted an insurance-coverage action against Metex and the other Kentile Insurers in New York State Supreme Court. See Nat’l Fire Ins. Co. of Hartford v. Travelers Cas. & Sur. Co. Index No. 105522/2008 (the “State Court Action”). The parties agreed to stay the State Court Action in mid-2012 to negotiate a consensual resolution. As part of this consensual resolution, the parties agreed Metex would solicit a prepackaged plan of reorganization in which Metex would enter into settlement agreements with the eight remaining solvent Kentile Insurers (the “Prepackaged Plan”).
In June of 2012, Metex began solicitation of the Prepackaged Plan. By the voting deadline, only 66.15% in amount of claims voted in favor of the plan, although more than 84% of those voting cast votes in support. Accordingly, the Prepackaged Plan could not be confirmed. See 11 U.S.C. § 1126(c) (requiring two-thirds in amount of claims to vote in favor of a plan).
III. Metex’s Bankruptcy Case and the Claim Objection
After the Prepackaged Plan failed to receive sufficient votes, Metex filed this chapter 11 case on November 9, 2012. On April 4, 2013, IDOR filed a proof of claim for the Claim in the amount of $575,131.98. See Cl. Obj. Ex. 1. The Claim is for sales taxes (Illinois Retailer’s Occupation Tax and Illinois Use Tax) based on two audits: (1) an audit of the prepetition periods from July 1990 to November 1992 for which a tax deficiency of $173,023.31 plus penalties and interest is asserted; and (2) an audit of the post-petition period from November 1992 through September 1993 for which a tax deficiency of $58,161 plus penalties and interest is asserted. See Resp. ¶ 2. The Illinois Retailer’s Occupation Tax imposes a tax on businesses engaged in the sale of products at retail in the state of Illinois. See 35 Ill. Comp. Stat. 120/2 (2014). The Illinois Use Tax imposes a tax for the privilege of using tangible personal property purchased at retail from a retailer. See id. at 105/3. In its proof of claim for the Claim, IDOR classified its claim as partially secured, partially priority under § 507(a)(8) of the Code, and partially general unsecured. See Cl. Obj. Ex. 1. IDOR claimed secured status in the amount of $142,741.68, priority status in the amount of $415,086.30, and general unsecured status in the amount of $17,304. Id.
On March 17, 2014, the Debtor filed its Claim Objection asserting three grounds: (1) that Kentile was not subject to either the Illinois Retailer’s Occupation Tax or the Use Tax; (2) that the Claim is barred by applicable statute of limitations; and (3) that the Claim was discharged by Kentile’s 1998 Plan. See Claim Obj. ¶¶ 20-24. In the alternative, should the Court allow the Claim, the Debtor also objects to its classification as partially secured and partially priority. Id. ¶¶ 25-28. After IDOR filed a Response and the Debtor filed its Reply, IDOR filed its Sur-Reply. The Sur-Reply acknowledges that the Claim is not entitled to secured status to the extent that the Debtor has no property in Illinois. See id. ¶ 18. IDOR additionally recognizes that it erroneously calculated the priority and unsecured portions of the Claim. See id. ¶¶ 25-29. IDOR now requests that the Court allow the Claim as a priority claim in the amount of $136,391.82, and as a general unsecured claim in the amount of $438,740.16. See id. ¶ 29.
The Claim Objection was set for hearing on May 8, 2014. Due to counsel to IDOR’s *740inability to appear in person at the hearing, IDOR requested that the Court either decide the Claim Objection on the pleadings or alternatively continue the hearing until a later date. See Mot., ECF 510. As the parties concurred that the issues involved in the Claim Objection are legal in nature and do not require an evidentiary hearing, the parties agreed to submit the Claim Objection to the Court on the pleadings.
Discussion
Section 502(a) of the Code provides that “[a] claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.” 11 U.S.C. § 502(a). If a party in interest objects to a claim, § 502(b) provides that, after notice and a hearing, the court “shall determine the amount of [the] claim ... and shall allow [the] claim in such amount, except to the extent that ... [the] claim is unenforceable against the debtor and property of the estate under an agreement or applicable law....” 11 U.S.C. § 502(b). Accordingly, if the creditor’s claim is unenforceable under applicable state law, the claim is unenforceable against the debtor and should be disallowed. See, e.g., In re Hess, 404 B.R. 747, 751 (Bankr.S.D.N.Y.2009). For example, where a creditor’s claim has been discharged through a prior bankruptcy proceeding, the claim is not enforceable against the debtor or its suceessors-in-interest. See 11 U.S.C. § 524(a); see also In re MCI, Inc., 2006 WL 544494, at *1 (Bankr.S.D.N.Y. Jan. 27, 2006). Similarly, as numerous courts have held including this Court in Brill, “[a] challenged claim will not be allowed by the bankruptcy court if the claim is barred by the applicable statute of limitations.” In re Brill, 318 B.R. 49, 53 (Bankr.S.D.N.Y.2004); see also Hess, 404 B.R. at 750.
Courts in the Second Circuit apply a burden shifting framework for claims objections. See In re St. Johnsbury Trucking Co., Inc., 206 B.R. 318, 323 (Bankr.S.D.N.Y.1997), aff'd, 221 B.R. 692 (S.D.N.Y.1998), aff'd, 173 F.3d 846 (2d Cir.1999). A properly filed proof of claim constitutes prima facie evidence of the claim’s amount and validity. See Fed. R. Bankr.P. 3001(f). When a valid proof of claim is properly filed, the party in interest objecting to the claim carries the burden of putting forth evidence sufficient to refute the validity of the claim. See St. Johnsbury Trucking, 206 B.R. at 323. After the objector does so, the burden shifts to the claimant to establish the validity and amount of its claim by a preponderance of the evidence. See In re Porter, 374 B.R. 471, 480 (Bankr.D.Conn.2007). Here, the Debtor does not dispute that IDOR properly filed a valid proof of claim for the Claim, placing the initial burden on the Debtor to refute the claim. See Cl. Obj. Ex. 1. For the following reasons, the Debt- or has met its burden of refuting the Claim. In response, IDOR has failed to carry its resulting burden of establishing the validity and amount of the claim by a preponderance of the evidence. Accordingly, the Court sustains the Debtor’s Claim Objection.
I. The Debtor Is Bound by Kentile’s Failure to Object to the Allowance of Claims for the Same Liability in Its Prior Bankruptcy Case
The Debtor first argues that it was not subject to either the Illinois Retailers’ Occupation Tax or Illinois Use Tax. The Debtor asserts that the only business that Kentile ever conducted in the state of Illinois was the manufacture of flooring tile. Cl. Obj. ¶ 20. Accordingly, the Debtor argues that Kentile was not subject to the Illinois Retailer’s Occupation Tax: it never engaged in a retail business in the state, and is exempt from the Use Tax on equipment used in its manufacturing process. *741See 35 Ill. Comp. Stat. 120/2 (2014); id. at 105/3-5(18). In response, IDOR submits a copy of a sales tax return purporting to demonstrate that Kentile filed sales tax returns during the periods referenced in the Claim. See Resp. Ex. A. IDOR submits that this constitutes evidence that Kentile was subject to both the Retailers’ Occupation Tax and the Use Tax. The tax return plainly indicates that it was submitted by “Kentile, Inc.” See id. The Debtor argues that Kentile, Inc. and Kentile Floors, Inc. are wholly different entities. See Reply ¶ 2. According to the Debtor, Kentile, Inc. was the entity that purchased Kentile Floors, Inc.’s Illinois industrial property in a sale pursuant to § 363 of the Code approved by the Court during Ken-tile’s 1992 chapter 11 case. See id.
The parties’ arguments notwithstanding, the Court need not reach the issue of whether the tax return provided by IDOR proves that the Debtor was subject to the Retailers’ Occupation Tax and the Use Tax. IDOR filed claims for the same tax liability at issue in the instant proceeding against Kentile during the 1992 proceedings. See Cl. Obj. Ex. 2; Resp. Exs. B-H. Kentile failed to object to the allowance of these claims. Thus, the claims were deemed allowed as against Kentile in its bankruptcy proceedings. The Debtor, as successor to Kentile, now seeks to collaterally attack the determination that those claims were allowed as against Kentile. Such a collateral attack is impermissible. See Holly’s, Inc. v. City of Kentwood (In re Holly’s, Inc.), 172 B.R. 545, 562-68 (Bankr.W.D.Mich.1994).
II. IDOR’s Claim was Discharged by Confirmation of Kentile’s 1998 Plan
Despite the fact that IDOR had allowed claims against Kentile, the Debtor correctly asserts that those claims were discharged by confirmation of Kentile’s 1998 Plan in its 1992 bankruptcy proceedings. Article 9.2 of Kentile’s 1998 Plan specifically provided that “[c]onfirmation shall discharge and release the Debtor and its Estate from any and all dischargeable and releasable Claims, debts, liens, security interests, encumbrances and interests that arose before the Confirmation Date, and any debt of a kind specified in Bankruptcy Code section 502(g), (h) or (i).... ” See Kentile’s 1998 Plan § 9.2; see also 11 U.S.C. § 1141. The Claim on its face indicates that it arose prior to confirmation of Kentile’s 1998 Plan. See Cl. Obj. Ex. 1. Accordingly, the Claim was discharged and must be disallowed. See In re MCI, Inc., 2006 WL 544494, at *1-2 (Bankr.S.D.N.Y. Jan. 27, 2006) (holding that discharged claims are unenforceable against the debt- or).
Attempting to refute this point, IDOR argues that Kentile’s 1998 Plan provided for payment in full of both priority and administrative tax claims, and cannot be read as simultaneously discharging those same claims. See Resp. ¶¶ 15-17; see also Kentile’s 1998 Plan §§ 3.1, 3.2 (providing for payment in full of allowed priority and administrative tax claims). IDOR’s argument misconstrues the effect of confirmation under § 1141 of the Code.
“Under the Bankruptcy Code, a confirmed plan of reorganization acts like a contract that is binding on all of the parties, debtor and creditors alike.” Adelphia Recovery Trust v. Bank of Am., N.A., 390 B.R. 80, 88 (S.D.N.Y.2008) (quotation omitted), aff'd, 379 Fed.Appx. 10 (2d Cir.2010). “The effect of confirmation is to discharge the entire pre-confirmation debt, replacing it with a new indebtedness as provided in the confirmed plan.” In re Penrod, 169 B.R. 910, 916 (Bankr.N.D.Ind. 1994), aff'd, 50 F.3d 459 (7th Cir.1995). Thus, following confirmation of a plan of reorganization, the reorganized debtor is obligated to make the payments to credi*742tors that the plan requires. See In re Jordan Mfg. Co., Inc., 138 B.R. 30, 38 (Bankr.C.D.Ill.1992) (quotations and citations omitted). The reorganized debtor’s failure to fulfill its obligations under the plan does not revive the original, prepetition debt. See In re Stratton Grp., Ltd., 12 B.R. 471, 474 (Bankr.S.D.N.Y.1981). “Instead, the creditors remedy is to enforce the obligations contained in the confirmed plan.” Jordan, 138 B.R. at 38 (quotations omitted); see also In re Benjamin Coal Co., 978 F.2d 823, 827 (3d Cir.1992) (“[E]ach claimant’s remedies for any future nonpayment of claims acknowledged in the plan are limited to the usual remedies for the type of claim granted by the plan’s provisions.”); In re Xofox Indus., Ltd., 241 B.R. 541, 543 (Bankr.E.D.Mich.1999) (“It is black-letter law that if a reorganized debtor defaults on plan payments to an unsecured creditor, the creditor can pursue the debtor for the restructured debt under the plan.”). Accordingly, “[a] post confirmation default should be treated as any other contractual default under state law.” Xofox, 241 B.R. at 543 (quotation omitted).
By confirmation of Kentile’s 1998 Plan, IDOR’s tax claims were replaced by the Metex’s obligation as the successor entity to Kentile to pay those claims in full as provided by Kentile’s 1998 Plan. See Ken-tile’s 1998 Plan §§ 3.1-3.2. All allowed administrative, priority and tax claims were to be paid by the reorganized debtor (ie., Metex) from its cash flow. See id. §§ 5.2-5.4. To the extent Metex failed to do so, it breached its contractual obligations under Kentile’s 1998 Plan. IDOR’s remedy is to seek to enforce the obligations in the plan. See Jordan, 138 B.R. at 38. It cannot seek to revive its original prepetition tax claims as it is now attempting to do. See Stratton, 12 B.R. at 474. Those debts were discharged by confirmation of Ken-tile’s 1998 Plan. See Penrod, 169 B.R. at 916.
III. IDOR’s Claim Is Barred Under the Applicable Statute of Limitations in Both Illinois and New York
A. If Interpreted as a Claim Against Metex for Post-Confirmation Default on Its Obligations Under the 1998 Plan, IDOR’s Claim Is Time Barred
IDOR’s claim against Metex for defaulting on its obligations under Ken-tile’s 1998 Plan is properly viewed as a breach of contract claim. See Xofox, 241 B.R. at 543 (finding that a “post confirmation default should be treated as any other contractual default under state law.”). Kentile’s 1998 Plan specifically provides for New York law to apply. See Kentile’s 1998 Plan § 12.10. Under New York Law, “an action upon a contractual obligation or liability, express or implied” must be commenced within six years from the date the claim arose. N.Y. C.P.L.R. § 213(2). This chapter 11 case was filed on November 9, 2012, more than 13 years after Metex was required to make payments due under Kentile’s 1998 Plan. See Kentile’s 1998 Plan §§ 3.1, 3.2. Thus, IDOR’s claim against Metex for its default under Ken-tile’s 1998 Plan is time-barred under New York law.
B. Even if Viewed as a Prepetition Tax Claim, IDOR’s Claim Is Time Barred Under Illinois Law
Even viewing the Claim as a tax claim rather than a breach of contract claim, the Claim is still time-barred. Neither party disputes that suits on collection of tax revenue for the Illinois Retailer’s Occupation Tax and Illinois Use Tax are subject to six-year statutes of limitation under Illinois law. See 35 Ill. Comp. Stat. 120/5, 105/12 (2014); see also Cl. Obj. ¶ 21; Resp. ¶¶ 11-14. IDOR’s Claim was at least 18 years old as of the commencement *743date. See Cl. Obj. ¶22. Accordingly, IDOR is time barred from bringing suit against the Debtor to recover the Claim.
IDOR nonetheless argues that its Claim is not time barred as its “options in collecting sales taxes are not limited to the filing of a law suit.” Resp. ¶ 12. IDOR has the ability under Illinois law to assert an administrative levy “upon property and rights to property (whether real or personal, tangible or intangible) of the taxpayer” in order to enforce the tax liability of the taxpayer. 85 Ill. Comp. Stat. 120/5f (2014). This particular statute provides its own statute of limitations: “No proceedings for a levy under this Section may be commenced more than 20 years after the latest date for filing of the notice of lien under Section 5b of this Act, without regard to whether such notice was actually filed.” Id. The latest date for filing a notice of lien under 35 Ill. Comp. Stat.l20/5b is three years after the tax is finalized. See id. at 120/5a, b, f. As the taxes at issue were finalized on June 14, 1994, IDOR’s right to levy will not be time-barred until June 14, 2017.
These arguments notwithstanding, IDOR’s right to levy is unavailable under the current circumstances as Metex owns no property or interest in property in the state of Illinois, nor did it at the time of the commencement of this bankruptcy case. See Decl. of Anthony J. Miceli ¶¶ 2-3.3 The Court agrees with the Debtor that “[b]ecause the six year limitations period on IDOR’s right to bring suit against the Debtor has expired under Illinois law and there is no property that IDOR can levy upon to recover on its Claim, it would be inequitable to allow IDOR’s Claim to survive.” Reply ¶ 13. Currently, IDOR has no means to recover on its Claims against Metex. As discussed above, IDOR’s Claim is properly viewed as breach of contract claim to the extent Metex defaulted on its obligations under Kentile’s 1998 Plan. That claim is time-barred. Additionally, to the extent that IDOR conceivably still has pre-petition claims for Retailers’ Occupation Taxes and Use Taxes, it is time-barred from asserting suit to collect, and Metex has no property in Illinois against which IDOR can levy.
In sum, IDOR is currently time-barred or otherwise unable to collect on the Claim, whether the Claim is viewed as a tax claim or a breach of contract claim for the Debtor’s default under Kentile’s 1998 Plan. If the Court were to allow the Claim, upon confirmation of Metex’s plan of reorganization, the claim would be replaced “with a new indebtedness as provided in the confirmed plan.” Penrod, 169 B.R. at 916. This new indebtedness would essentially revive the currently time-barred claim and subject it to a new statute of limitations (i.e., for breach of contract under whatever state law is to govern Me-tex’s plan). Such would be an inequitable result. See In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2d Cir.1994) (“It is well settled that bankruptcy courts are courts of equity, empowered to invoke equitable principles to achieve fairness and justice in the reorganization process.”).
As the Court is disallowing and expunging the Claim, it need not address whether the claim is properly classified as partially secured, partially priority unsecured, and partially general unsecured.
Conclusion
For the foregoing reasons, the Court sustains the Claim Objection, and disallows and expunges the Claim in its entirety. The Debtor is directed to submit an order consistent with this opinion.
. Unless otherwise indicated, all citations can be found in case number 12-14554.
. Kentile's 1998 Plan is attached as Exhibit I to the Response. See Resp. Ex. I.
. The Miceli Declaration is attached as Exhibit 1 to the Reply. See Reply Ex. 1. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497107/ | Chapter 11
MEMORANDUM DECISION
MICHAEL B. KAPLAN, U.S.B.J.
I.INTRODUCTION
This matter comes before Court on the motion of Morgan Realty & Development, LLC (“Morgan”), for an Order compelling Amiel Restaurant Partners, LLC (“Debt- or”) (i) to release to Morgan insurance proceeds of $358,800, escrowed with Debt- or’s bankruptcy attorney and derived from Debtor’s personalty destroyed by Super-storm Sandy in Fall 2012 at the restaurant premises which the Debtor leases from Morgan; and (ii) to escrow an additional $724,475 for alleged prepetition defaults and construction costs to rebuild the restaurant. For the reasons below, this decision addresses only the first question. Thus, the issue for the Court is whether Morgan had an insurable interest in the Debtor’s personalty to entitle Morgan to turnover of the insurance proceeds as an additional insured.1 The analysis is complicated because much of the case law on insurable interests involves disputes between a claimant and a carrier and not between competing claimants to the same insurance proceeds.
II. JURISDICTION
The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (E) and (O). Venue is proper in this court under 28 U.S.C. § 1408. The court issues the following findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.
III. BACKGROUND
Morgan owns the Channel Club Marina, 33 West Street, Monmouth Beach, New Jersey. On October 20, 2010, Morgan and the Debtor entered into a commercial lease (“Lease”) for the Debtor to lease from Channel Club Marina certain buildings which it operated as a restaurant and a snack bar for a 20-year term with the option for one 5-year renewal (“the Premises”). Rent for the first two years beginning December 1, 2010 was $12,000/month, *746rising to $13,333/month for years 3 through 5 with percentage increases at each 5-year interval for years 6 through 20; the Debtor also paid CAM charges and a percentage of profits. The Lease required the Debtor to maintain seven types of insurance coverage, including property insurance, and states, in relevant part, as follows:
10. Insurance; Waivers, Subrogation; Indemnity
(a) Insurance. Tenant shall maintain throughout the Term of this Lease the following insurance policies and coverage: ... (ii) fire and extended coverage insurance insuring the Premises against loss or damage by flood, fire, lightning and wind storm, in the full amount of the current replacement value of the Premises, including any alterations therein or thereon; (iii) insurance covering the full value of Tenant’s property and improvements, and other property (including property of others) in the Premises;
.... All such policies shall include a waiver by the insurer(s) of the right of subrogation against Landlord, its agents, representatives, and affiliates. Tenant’s insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstances Landlord’s policy will be excess over Tenant’s policy. Tenant shall furnish to Landlord certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverage required hereunder....
(Docket No. 64, Exhibit 1, Lease). The policy prohibited Morgan and the Debtor from filing claims against each other and required the tenant to indemnify and hold the landlord harmless from “(i) any loss arising from any occurrence on the Premises; or (ii) Tenant’s failure to perform its obligations under this Lease.” (Docket No. 64, Exhibit I, Lease, ¶¶ 10(b) and (e)). The Lease sets forth the following duties of the Debtor and of Morgan if property damage occurred:
17. Fire or Other Casualty.
(a) Repair Estimate. If the Premises are damaged by fire or other casualty (a “Casualty”), Tenant shall, within thirty (30) days after such Casualty, deliver to Landlord a good faith estimate (the “Damage Notice”) of the costs and time needed to repair the damage caused by such Casualty.
(b) Landlord’s and Tenant’s Rights. If a material portion of the Premises is damaged by a Casualty not caused by the negligent or intentional acts of Tenant or its employees, such that Tenant is prevented from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Casualty and Tenant estimates that the damage caused thereby cannot be repaired within one hundred eighty (180) days after the Casualty, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Landlord. If tenant does not so timely terminate this Lease and provided the Casualty was not caused by the negligent or intentional acts of Tenant or its employees, then Rent for the portion of the Premises rendered untenantable by the damage shall be abated from the date of damage until the completion of the repairs.
(c) Repair Obligation. If Tenant does not elect to terminate this Lease following a Casualty as provided in Section 17(b) above, then Tenant shall, as soon as practicable following the date of such Casualty, commence repairs to the Premises and shall proceed with reason*747able diligence to restore the Premises (including any and all Alterations, furniture and equipment that existed therein prior to the Casualty) to the same condition as they existed immediately before such Casualty.
(Docket No. 64, Exhibit 1, Lease). If Debtor defaulted in the payment of rent, paragraph 22 gave Morgan the right of distraint under N.J.S.A. § 2A:33-6 against Debtor’s “goods and chattels” (as provided in the statute). Paragraph 23, key to Morgan’s claim that it has an insurable interest in Debtor’s personalty, defines the premises which the Debtor would ultimately surrender to Morgan:
At the expiration or earlier termination of this Lease, Tenant shall deliver to Landlord the Premises: (i) with all Alterations, additions, improvements, fixtures, trade fixtures, furniture, equipment and other property utilized in connection with the operation of Tenant’s restaurant, bars and Pool Snack Bar (which fixtures, trade fixtures, equipment and other such property shall become the sole property of Landlord at such time) in reasonable good repair and condition ...
(Docket No. 64, Exhibit 1, Lease, ¶ 23).
In partial fulfillment of its insurance obligations, Debtor obtained:
(1) a commercial property insurance policy with Lloyd’s Underwriters for $1,000,000 building coverage and $300, 000/$20,000 replacement cost personal property coverage (for the main building and snack bar) with Morgan named as loss payee (Docket No. 64, Exhibit 5);
(2) a flood insurance policy through Fidelity National Indemnity Insurance Company (“Fidelity”) for $500,000 building and $358,800 personal property coverage with Morgan named as additional insured (Docket No. 64, Exhibit 3); and
(3) an excess building-only flood insurance policy with Lloyd’s Underwriters for $481,174 (over the underlying limit of $500,000) with Morgan named as additional insured (Docket No. 64, Exhibit 4).
According to the declaration pages in these exhibits, these policies were effective January 13, 2012 to January 13, 2013. In its certification, Morgan describes itself as “loss payee with respect to each of the insurance claims submitted” even though, as recited above, two of the policies endorsed Morgan as additional insured and one as loss payee (Docket No. 64, George C. cert., ¶ 15).
Hurricane Sandy struck the premises on October 29, 2012. By written notice dated November 23, 2012, Debtor advised Morgan that Debtor would not terminate the Lease and thereby triggered Debtor’s obligation to repair the premises under Lease ¶ 17(c). On February 4, 2013, Morgan gave Debtor notice of termination of the Lease. Shortly afterward, Debtor sued Morgan and George Chrysthanopoulos in Superior Court of New Jersey, Chancery Division, General Equity Part (the “State Court Action”), for a declaration that the Lease was not terminated and for other relief, to which Morgan filed a counterclaim. On June 22, 2013, five of the six owners of the Debtor assigned their interests to Joseph Amiel who became the 100% owner of the Debtor. On June 24, 2013, the Debtor, through Mr. Amiel as Managing Member and 100% owner, filed a voluntary Chapter 11 petition in bankruptcy. Mr. Chrysthanopoulos certified that, about the time of the filing, the insurance claims were settled, and the following checks were issued or to be issued:
(1) check for $50,040 issued on the Lloyd’s commercial property policy for windstorm damage;
(2) checks for $500,000 (building) and $358,800 (contents) issued on the Fidelity flood insurance policy; and
*748(3) $393,946 is to be issued on the Lloyd’s excess flood insurance policy.
(Docket No. 64, George C. cert., ¶ 14) (emphasis added).
On July 10, 2013, the Debtor removed the State Court Action to the bankruptcy court. Morgan filed a motion for remand, stay relief and abstention on July 15, 2013. By Order entered on August 16, 2013, in partial resolution of the remand motion, the bankruptcy court ordered the Debtor to endorse the buildings proceeds checks ($450,000, $50,000, $50,040 and $393,946) to Morgan to repair the property without waving any claim by Debtor that these monies are estate property or that Debtor may be entitled to share in the proceeds. The Court also ordered Debtor to notify the Court on or before September 16, 2013 as to whether it intended to assume or to reject the Lease. On September 16, 2013, the Debtor filed a motion to assume the Lease. On September 30, 2013, the Court remanded the State Court Action and granted limited stay relief to allow the Superior Court to determine if there were a prepetition default and termination of the Lease. The September 30, 2013 remand Order provides that the finding by State Court on lease termination will have an estoppel effect on the Debtor and on Mr. Amiel in bankruptcy court. The bankruptcy court reserved jurisdiction to determine whether any insurance proceeds were estate property and adjourned the Debtor’s lease assumption motion to January 6, 2014.
Morgan filed the instant motion on March 31, 2014. The Court heard oral argument on May 1, 2014 and permitted additional briefing by both parties. The Court reserved decision on the issue of whether the $358,800 insurance proceeds for building contents from the Fidelity flood insurance policy on which Morgan was endorsed as additional insured are property of the bankruptcy estate, or constitute property of Morgan pursuant to the terms of the Lease. The Court stated on the record, on May 1, 2014, that it would defer deciding the second issue (Morgan’s request for Debtor to pay $724,475 as adequate assurance for cure) until after deciding whether Morgan or the Debtor would receive the $358,800 proceeds.
IV. DISCUSSION
Property of the bankruptcy estate consists of “all legal or equitable interests of the debtor in property as of the commencement of the case,” subject to exceptions set forth in 11 U.S.C. § 541(b) and (c). 11 U.S.C. § 541(a)(1). Property interests are created and defined by state law unless federal law requires a different result. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
Bankruptcy courts distinguish between ownership of an insurance policy and ownership of the proceeds which it generates. First Fidelity Bank v. McAteer, 985 F.2d 114, 117 (3d Cir.1993) (“[ojwnership of a life insurance policy such as involved here, does not necessarily entail ownership of the proceeds of that policy. Several different parties may have a property interest in such a policy or its proceeds, including the owner, the insured, and the beneficiary, all of whom may be different persons”); In re Edgeworth, 993 F.2d 51, 55 (5th Cir.1993) (“courts are generally in agreement that an insurance policy will be considered property of the estate ... because, regardless of who the insured is, the debtor retains certain contract rights under the policy itself.... Acknowledging that the debtor owns the policy, however, does not end the inquiry. ‘The question is not who owns the policies, but who owns the liability proceeds’ ”) (quoting In re Louisiana World Exposition, Inc., 832 F.2d 1391, 1399, 1401 (5th Cir.1987)) (finding that a directors’ and *749officers’ liability policy belonged to the bankruptcy estate but that the liability proceeds belonged to the directors and officers and were not estate property). A primer on insurance in the landlord tenant context defines the parties in interest as follows:
There are three key parties affected by an insurance policy:
• Named insured. The named insured is the party that pays the premium for the property or liability policy. The insurance company underwrites the policy and the premium based on the claims history and risk posed by the named insured.... It is not appropriate for a lease to require the landlord or the tenant to be a named insured or additional named insured on the other’s policy.
• Additional insured. An insurer can add either a landlord or tenant to the other’s property or liability policy as an additional insured. The added party can recover only if it has an insurable interest in the insured’s property.... [I]f a tenant in a turnkey space carries property insurance on its movable trade fixtures, the landlord will have very little, if any, insurance interest under the tenant’s property insurance covering the trade fixtures.
When a party is added as an additional insured, the negligent actions of the insured party will not defeat coverage of the additional insured under the policy. The additional insured has the independent right regardless of the actions of the primary insured to a defense under the insured’s policy, which can supplement the indirect indemnification provisions under the lease....
• Loss payee. An insurer can add either a landlord or tenant to the other’s property or liability policy as a loss payee instead of as an additional insured. This gives the loss payee a mutual claim to the insurance proceeds. Just as an additional insured must have an insurable interest, so much as loss payee. Being a loss payee is not as desirable as being an additional insured, because the loss payee is subject to all defenses that the insurer may have against the primary insured. Further, a loss payee is entitled to the insurance proceeds only if the primary insured decides to pursue a claim.2
Ann Peído Cargile, The Basics of Insurance in Leases, 14 A.B.A. Sec. Probate & Property 19 (Nov./Dec.2000).
To recover from a property insurance policy, “the insured must have had an insurable interest in the property insured at the time of the [fire] loss.” Hyman v. Sun Ins. Co., 70 N.J.Super. 96, 99, 175 A.2d 247 (App.Div.1961). It is not necessary to be “an absolute owner” of the property in order to have an insurable interest in it. Id. The Appellate Division in Hyman adopted the widely-stated formula for insurable interest:
The test of insurable interest in property is whether insured has such a right, *750title or interest therein, [or] relation thereto, that he will be benefited by its preservation and continued existence or suffer direct pecuniary loss from its destruction or injury by the peril insured against.
Hyman, 70 N.J.Super. at 100, 175 A.2d 247 (internal citations omitted in original). The court iterated, “[E]ven one who has no title, legal or equitable, in the property, and no present possession or right of possession thereof, yet has an insurable interest herein, if he will derive benefit from its continuing to exist, or will suffer loss by its destruction.” Id. at 100, 175 A.2d 247. In Hyman, a real estate broker (who had purchased the insurance policy on the property) accepted, in lieu of payment at closing, the assignment without recourse of a $10,000 debt service payment payable from the buyer to the seller who had taken a purchase money mortgage back from the buyer. Id. at 98, 175 A.2d 247. Although the broker did not record the assignment of the $10,000 payment until 9 days after the property was destroyed by fire, the Appellate Division held that the unrecorded assignment gave the broker an insurable interest in the proceeds of the fire policy protecting the property. Id. at 101, 175 A.2d 247. The court concluded that the broker “was entitled to be paid the amount of the policy.” Id. at 101, 175 A.2d 247.
Claimants to insurance proceeds must have “an insurable interest at the time of the loss.” Shotmeyer v. N.J. Realty Title Ins. Co., 195 N.J. 72, 85, 948 A.2d 600 (2008) (under facts inapposite to those in this case, two brothers who transferred real property from their closely held general partnership to their closely held limited partnership without updating their title insurance policy did not have an “insurable interest” when a title defect was discovered because the policy had lapsed at the time of the transfer from one entity to the other, even though the brothers, as sole owners of the successive entities, were beneficial owners of the property throughout). Because the insurable interest does not depend on record ownership, determining whether the claimant has an insurable interest at the time of the loss requires factual as well as legal analysis. In DeBellis Enter, v. Lumbermen’s Mut. Cas. Co., 77 N.J. 428, 431, 390 A.2d 1171 (1978), plaintiff DeBellis purchased from the Internal Revenue Service a tax sale certificate of seized property which gave the plaintiff immediate title to and interest in both real property and personalty formerly owned by the Teeds who were not a party to the action but who retained a 120-day right of redemption. Two months after DeBellis insured the property for $160,000 and paid the $1,413 premium, the property was destroyed by fire; and four days after the fire, the Teeds successfully redeemed the property for $5,264 ($5,000 for purchase price of certificate plus 20% interest). Id. at 431-32, 390 A.2d 1171. Plaintiff DeBellis then sued the carrier for recovery against the insurance policy. Noting that N.J.S.A. § 17:36-5.19, which sets the terms of a fire policy, “does not specify when or how the interest of the insured is to be ascertained,” the court in DeBellis opined that “the Legislature intended that coverage would depend upon the reasonable expectation of the insured. ... [T]he amount of recovery may not necessarily be limited to the precise situation of the insured as of the date of the casualty and subsequent events may be significant in determining the insured’s interest.” DeBellis, 77 N.J. at 436, 390 A.2d 1171 (internal citations omitted) (emphasis added). The court found that plaintiff DeBellis had not been made whole by the redemption and that allowing the carrier to pay nothing created a windfall for the carrier. Id. at 437-38, 390 A.2d 1171. The New Jersey Supreme Court found that DeBellis’s interest in the property *751“was equivalent to at least the amount expended for that interest some three months before the fire” plus 20% interest plus partial refund of the premium for the period after title reverted to the redeeming Teeds. Id. at 438.3 See also Miller v. N.J. Ins. Underwriting Ass’n, 82 N.J. 594, 598-99, 414 A.2d 1322 (1980) (holding that two claimants (separate cases) who had lost title to property through in rem tax foreclosure, which properties were destroyed by fire post-foreclosure, retained an insurable interest in the property under their insurance contracts. The claimants continued to occupy the properties ignorant of the tax foreclosures.)4 The Miller court reiterated:
With respect to real estate, an insurable interest need not rise to the level of legal or equitable title. In the past, New Jersey courts have recognized that an insured retains an insurable interest as long as he has a reasonable expectation of deriving pecuniary benefit from the preservation of the property or would suffer direct pecuniary loss from its destruction.... Courts have differed in assessing the rights of an insured who has less than legal title at the time of a fire or who attempts to insure a possessory or expectancy interest less than complete title.
Miller, 82 N.J. at 600-601, 414 A.2d 1322. The court remanded to allow the claimants to prove the pecuniary value of their interest. Id. at 602-603, 414 A.2d 1322. See also The Columbia Ins. Co. v. Cooper, 50 Pa. 331, 1865 WL 4620, *9 (1865) (where landlord owned a certain amount of machinery on the premises as well as having the right to seize the tenant’s machinery in default of rent (“and it could not be severed from the freehold in [landlord’s] prejudice”), the landlord had “an insurable interest in all the machinery” and committed no fraud by failing to disclose the tenant’s interest); Mutual Fire Ins. Co. of Loudoun Cty. v. Ward, 95 Va. 231, 28 S.E. 209, 214 (1897) (landlord had an insurable interest in the contents of tenant’s residence under the tenant’s insurance policy, where statute gave the landlord the right “to hold the good upon the premises for the payment of the rent”). Compare Balentine v. N.J. Ins. Underwriting Ass’n, 406 N.J.Super. 137, 139-40, 966 A.2d 1098 (App.Div.2009), in which the property owner of record (who was named insured) granted power of attorney to a friend who occupied and managed a real property, but the insurer after an act of vandalism refused to pay insurance proceeds to either the record owner or the friend. Both the trial court and the Appellate Division found that the record owner had an insurable interest in the property and was entitled to the proceeds:
[The carrier] misread the significance of Hyman and Miller. Both cases illustrate that there are times when a person who lacks recorded ownership or title in *752property may, nevertheless, have an insurable interest in those premises because of other nexus factors. Neither case states that a person with such title of record can be deemed outside of the zone of an insurable interest.
Balentine, 406 N.J.Super. at 143, 966 A.2d 1098 (emphases in original). And compare Citigroup, Inc. v. Industrial Risk Insurers, 336 F.Supp.2d 282, 289 (S.D.N.Y.2004), aff'd, 421 F.3d 81, 83 (2nd Cir.2005) (landlord had no insurable interest in tenant’s chattels under landlord’s own policy where chattels would become landlord’s property only if tenant abandoned or intentionally conveyed them). By contrast, in the instant case, Morgan’s right under Lease paragraph 23 to recover the Premises with its contents at the termination of the Lease affords Morgan “a reasonable expectation of deriving pecuniary benefit from the preservation of the property” and therefore an insurable interest in property for which it had been endorsed on the Fidelity flood insurance policy as an additional insured.
The Debtor, in its supplemental brief dated and filed on May 12, 2014, cited at length Arthur Andersen LLP v. Fed. Ins. Co., 416 N.J.Super. 334, 349-50, 3 A.3d 1279 (App.Div.2010) (“Andersen”) for the New Jersey common law doctrine of “insurable interest” already set forth above; however, the Appellate Division in Arthur Andersen upheld the trial court’s ruling against the plaintiff accounting firm which sought to recover on a $204 million business interruption claim against its carriers following the September 11, 2001 attacks on the World Trade Center (“WTC”), finding that Andersen did not have an insurable interest in the WTC property:
The common thread in cases in which an insurable interest if found is the existence of a cognizable relationship between the insured and the property that provides the basis for the insured to derive a direct pecuniary benefit from the property or suffer a direct pecuniary loss if the property is damaged....
The evidence here fails to show that Andersen derived any income, such as rent, from the existence of the WTC or that Andersen bore any potential liability to others based upon its “interest” in the WTC. In short, there are no circumstances of Andersen’s association with the WTC that gave rise to the threat of a direct pecuniary loss to Andersen in the event the WTC was damaged. Andersen’s theory would permit an insured to allege an insurable interest in a class of property so broad as to be impossible to define and certainly not susceptible to a predictable level of risk.
Arthur Andersen, 416 N.J.Super. at 351, 353, 3 A.3d 1279 (emphasis in original).
The facts in Arthur Andersen are distinguishable from those in the instant case in which landlord Morgan anticipated deriving a “direct pecuniary benefit” under paragraph 23 of the Lease which was for a finite term (with one option for a short renewal) and which required the Debtor to turn over to Morgan at the termination of the Lease the Premises “with all Alterations, additions, improvements, fixtures, trade fixtures, furniture, equipment and other property utilized in connection with the operation of Tenant’s restaurant, bars and Pool Snack Bar (which fixtures, trade fixtures, equipment and other such property shall become the sole property of Landlord at such time) in reasonable good repair and condition.” (Docket No. 64, Exhibit 1, Lease, ¶ 23). In re Gibson, 218 B.R. 900, 903 (Bankr.E.D.Ark.1997), also relied on by Debtor, an out-of-circuit ease relying almost entirely on out-of-circuit law for the proposition that both the insurance policy and the insurance proceeds are property of the estate, is at odds with First Fidelity Bank v. McAteer, 985 F.2d 114, 117 (3d Cir.1993), which distinguishes *753between ownership of the policy and ownership of the proceeds. In Gibson, the court found that the interest of a motor vehicle insurer, as loss payee, in a motor vehicle destroyed post-confirmation was limited to and res judicata under the 11 U.S.C. § 506(a) value in the confirmed plan such that the debtor was entitled to use the surplus proceeds to repair another vehicle. The court in Gibson did not conclude that deeming the proceeds estate property cut off the carrier’s insurable interest in the motor vehicle. In re Gibson, 218 B.R. at 908-904. The Debtor also cited SR Int’l Bus. Ins. Co. Ltd. v. World Trade Center Props., LLC, 445 F.Supp.2d 820, 331 (S.D.N.Y 2006) where there was no dispute that a claimant had an “insurable interest” in property but the parties disputed the mechanism for valuing the interest.
V. CONCLUSION
The October 20, 2010 Lease between Morgan Realty & Development, LLC, and Debtor Amiel Restaurant Partners, LLC, mandated that, “at the expiration or earlier termination” of the Lease the Debtor would deliver the premises to Morgan “with all Alterations, additions, improvements, fixtures, trade fixtures, furniture, equipment and other property” which the Debtor used in its operations and which would become the “sole property” of the landlord, irrespective of any default by the Debtor and independent of any action or election by the Debtor (Docket No. 64, Exhibit 1, ¶ 23). Morgan, endorsed as an additional insured on the Fidelity flood insurance policy, has an insurable interest, as recognized in Miller v. N.J. Ins. Underwriting Ass’n, 82 N.J. 594, 600-601, 414 A.2d 1322 (1980) and in Human v. Sun. Ins. Co., 70 N.J.Super. 96, 100, 175 A.2d 247 (App.Div.1961), in the property which the Debtor used in its operations. Under the property rights created in Morgan by the Lease, the proceeds of the Fidelity flood insurance property are not property of the estate, and Morgan is entitled to payment of those proceeds which issued in the amount of $358,800. Counsel for Morgan is directed to submit a proposed form of order consistent with the Court’s decision.
. As explained below, Morgan was endorsed on the policy in issue, the primary flood insurance policy issued by Fidelity National Indemnity Insurance Company, as additional insured and not as loss payee.
. Accord Highway Trailer Co. v. Donna Motor Lines, Inc., 46 N.J. 442, 448, 217 A.2d 617, cert. den. 385 U.S. 834, 87 S.Ct. 77, 17 L.Ed.2d 68 (1966) ("ordinarily the rights of a loss payee are derivative and cannot exceed those of the insured.... But it is also true that a loss payee acquires independent "equitable rights, which the insurer is bound to regard” ”) (internal citations omitted); Rena, Inc. v. TW. Brien, 310 N.J.Super. 304, 317, 708 A.2d 747 (App.Div.1998) ("[a] loss payee is not an insured but only 'a mere appointee [of the insured] who may not recover if the insured has breached any provision of the policy which would prevent recovery by him.' ... If the loss is not payable to the insured, it is not payable to the loss payee”) (internal citations omitted).
. And see reference in DeBellis to the Appellate Division opinion which stated that the buyer’s interest was an “inchoate right” which ripened when the redemption period expired. DeBellis, 77 N.J. at 433, 390 A.2d 1171 (the N.J. Supreme Court in DeBellis noted that the buyer’s right "under the federal [tax sale] certificate was even more significant, for it included the additional attributes of a right to immediate possession of realty and to the prior owner’s title in personal property.”) DeBellis, 77 N.J. at 433, 390 A.2d 1171.
. The second claimant obtained its insurance policy for the lost premises long after the redemption period expired. Id. at 597-98, 414 A.2d 1322. The court appears to have found no defect in tax certificate purchasers’ notice to the property owners, as Tp. of Montville v. Block 69, Lot 10, 74 N.J. 1, 20, 376 A.2d 909 (1977) (requiring mailed notice) applied only prospectively and not to the claimants in Miller. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497109/ | ORDER STAYING ADVERSARY PROCEEDING AND COMPELLING ARBITRATION OF CLAIMS BROUGHT IN ADVERSARY PROCEEDING
LAURA T. BEYER, Bankruptcy Judge.
This matter is before the Court on motions by CMH Homes, Inc. (“CMH”), Fox Den Acres, Inc. (“Fox Den”), and Bryant Realty, Inc. (“Bryant”) to compel arbitration of the claims asserted in the adversary proceedings and to stay the present adversary proceeding pending the outcome of arbitration (the “Motions” [Dkt. Nos. 15, 26]). The Motions have been fully briefed [Dkt. Nos. 16, 22, 28]; the Court held oral argument on March 27, 2014; and the Motions are ripe for adjudication. For the reasons set out herein, the Motions are GRANTED on the terms set out in this order.
FACTUAL AND PROCEDURAL BACKGROUND
Debtor Shannon S. Barker (“Debtor”) filed a voluntary petition for relief pursuant to Chapter 13 of the Bankruptcy Code on November 30, 2012. On July 11, 2013, Debtor filed the present adversary proceeding as Plaintiff against the Defendants.
The adversary complaint makes allegations concerning the March 2003 transactions pursuant to which Debtor and her late husband (collectively the “Borrowers”) acquired a manufactured home (the “Home”) and the real property upon which the Home was placed (the “Land”). Debt- or alleges that the purchases of the Home and the Land arose from a common transaction. The Borrowers purchased the Home from CMH, and in connection with that purchase, the Borrowers executed a Retail Installment Contract — Security Agreement dated February 21, 2003 (the “RIC”) pursuant to which they were obligated to pay for the purchase in installment payments.1 The Borrowers purchased the land from Fox Den, with Bryant serving as the seller’s agent for at least some portion of the real estate transaction. Debtor alleges that the transaction with Fox Den began as a lease to purchase, but that, after twenty-four months, the Borrowers entered into a Real Estate Purchase Agreement and Negotiable Instrument with Fox Den.
In her complaint Debtor makes the following allegations:
• That a $10,000 down payment made by the Borrowers in 2003 was not appor*775tioned properly between CMH and Fox Den so that Borrowers were making a ten percent down payment on the purchase of the Land, and this set of circumstances led to unfavorable and unfair financing terms for the purchase of the Land. Debtor also takes issue with other aspects of the financing with Fox Den.
• That, at the time of her husband’s passing, Debtor was informed by VMF (a non-party to the litigation) that a credit life insurance policy that she had purchased had expired and did not provide coverage, which was inconsistent with Debtor’s understanding of the insurance.
• That collection efforts by Defendant Fox Den and non-party VMF were inappropriate.
• That the Proof of Claim filed by Fox Den in the Chapter 13 case is inaccurate and should be disallowed.2
In connection with these allegations, Debt- or brings the following causes of action: (1) breach of contract against Fox Den and Bryant; (2) unfair and deceptive acts and practices in violation of N.C. Gen.Stat. §§ 75-11, et seq., against Fox Den and Bryant; (3) fraud against Fox Den and Bryant; (4) conversion against Fox Den and Bryant; (5) violation of the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq., against Fox Den and Bryant; (6) violation of North Carolina’s statutory prohibited practices by collection agencies, N.C. Gen.Stat. §§ 58-70-90, et seq., against Bryant; (7) violations of the North Carolina Debt Collection Act, N.C. GeN.Stat. §§ 75-50, et seq., against Fox Den and Bryant; (8) intentional infliction of emotional distress, apparently against all Defendants; (9) negligent infliction of emotional distress, apparently against all Defendants; (10) unconscionability, apparently against all Defendants; (11) civil conspiracy; and (12) improper Proof of Claim against Fox Den only.
Defendants have each responded to the Complaint by seeking arbitration of all claims against them, respectively, based on the following arbitration provision in the R.IC between CMH and Debtor:
ARBITRATION: All disputes, claims or controversies arising from or relating to this contract, or the subject hereof, or the parties, including the enforceability or applicability of this arbitration agreement or provision and any acts, omissions, representations and discussions leading up to this agreement, hereto, including this agreement to arbitrate, shall be resolved by mandatory binding arbitration by one arbitrator selected by Seller with Buyer’s consent. This agreement is made pursuant to a transaction in interstate commerce and shall be governed by the Federal Arbitration Act at 9 U.S.C. Section 1. Judgment upon the award rendered may be entered in any court having jurisdiction. The parties agree and understand that they choose arbitration instead of litigation to resolve disputes. The parties understand that they have a right to litigate disputes in court, but that they prefer to resolve their disputes through arbitration, except as provided herein. THE PARTIES VOLUNTARILY AND KNOWINGLY WAIVE ANY RIGHT *776THEY HAVE TO A JURY TRIAL. The parties agree and understand that all disputes arising under case law, statutory law and all other laws including, but not limited to, all contract, tort and property disputes will be subject to binding arbitration in accord with this contract. The parties agree that the arbitrator shall have all powers provided by law, the contract and the agreement of the parties. These powers shall include all legal and equitable remedies including, but not limited to, money damages, declaratory relief and injunc-tive relief. Notwithstanding anything hereunto the contrary, Seller retains an option to use judicial (filing a lawsuit) or non-judicial relief to enforce a security agreement relating to the Manufactured Home secured in a transaction underlying this arbitration agreement, to enforce the monetary obligation secured by the Manufactured Home or to foreclose on the Manufactured Home. The institution and maintenance of a lawsuit to foreclose upon any collateral, to obtain a monetary judgment or to enforce the security agreement shall not constitute a waiver of the right of any party to compel arbitration regarding any other dispute or remedy subject to arbitration in this contract, including the filing of a counterclaim in a suit brought by Seller pursuant to this provision.
(Emphasis in original) (hereinafter the “Arbitration Agreement”).
CMH contends that the claims asserted against it fall within the plain language of the Arbitration Agreement and, thus, should be compelled to arbitration. Fox Den and Bryant acknowledge that they do not have a signed arbitration agreement with Debtor and that they are not signatories to the R.IC, but they contend that the claims against them should be compelled to arbitration because Debtor has asserted claims against them alleging substantially interdependent and concerted misconduct among all of the Defendants, such that under prevailing law, Debtor is estopped from proceeding with the claims against Fox Den and Bryant in arbitration. At oral argument, counsel for CMH clarified that CMH is requesting arbitration of the causes of action against Fox Den and Bryan based on the manner in which those claims are pled. Debtor opposes arbitration of any of her causes of action.
DISCUSSION
I. CMH’s Motion to Stay the Adversary Proceediny And to Compel Arbitration
CMH argues that the Federal Arbitration Act, codified at 9 U.S.C. §§ 1, et. seq. (the “FAA”), and the decision authority thereunder require a stay of the adversary proceeding and an order requiring Debt- or’s causes of action to be arbitrated. Debtor raises objections to arbitration under North Carolina law and asserts that requiring arbitration of her causes of action would conflict with the Bankruptcy Code. It is this court’s view that arbitration of the causes of action against CMH is appropriate and that there exists no conflict between arbitration of Debtor’s causes of action and the Bankruptcy Code.
The FAA provides that written agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA creates “a liberal federal policy favoring arbitration agreements,” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), premised upon a determination by Congress that arbitration includes “efficient, streamlined procedures” that “reduefe] the cost and increas[e] the speed of dispute resolution.” AT&T Mobility LLC v. Con*777cepcion, 563 U.S. 321, 131 S.Ct. 1740, 1749, 179 L.Ed.2d 742 (2011). Thus, when there is a written agreement to arbitrate, that agreement must be enforced unless there is a legal impediment to its enforcement that is not preempted by the FAA. Id. Where, as here, the agreement to arbitrate includes a delegation clause, which delegates disputes about arbitrability to the arbitrator, the delegation clause must be enforced unless there is a specific challenge to the delegation clause that is separate and distinct from a challenge to the agreement to arbitrate overall. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 70-71, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006). Thus, as a general rule, a court should grant a motion to compel arbitration even if there is a challenge to arbitrability, if (1) there is a written agreement to arbitrate, (2) the agreement to arbitrate is signed by the parties, and (3) the agreement to arbitrate includes a delegation clause.
In some adversary proceedings filed in bankruptcy, further analysis is necessary to determine the propriety of arbitration. Specifically, arbitration may be denied if a party opposing arbitration carries its burden to demonstrate that “Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue[ ]” as shown by the statute’s “ ‘text or legislative history’ or from an inherent conflict between arbitration and the statute’s underlying purposes.” Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 227, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (citations omitted). The text of the Bankruptcy Code does not preclude arbitration; therefore, congressional intent to override arbitration must be found, if at all, on a case-by-case basis only if there is “ ‘an inherent conflict between arbitration and the [Bankruptcy Codej’s underlying purposes.’ ” Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co., L.L.C.), 403 F.3d 164, 168 (4th Cir.2005) (quoting McMahon, 482 U.S. at 237, 107 S.Ct. 2332) (hereinafter White Mountain).
In adjudicating whether there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code, courts generally ask first if a cause of action is core or non-core. If the cause of action is not core, it generally must be submitted to arbitration. See, e.g., The Whiting-Turner Contracting Co. v. Elec. Mach. Enters., Inc. (In re Elec. Mach. Enters., Inc.), 479 F.3d 791, 796 (11th Cir. 2007); Edwards v. Vanderbilt Mortgage & Fin., Inc. (In re Edwards), 2013 WL 5718565, at *2 (Bankr.E.D.N.C. Oct. 21, 2013); TP, Inc. v. Bank of Am., N.A. (In re TP, Inc.), 479 B.R. 373, 382 (Bankr.E.D.N.C.2012).
The inquiry can be somewhat more complex if a cause of action is core. In applying the “inherent conflict” test in the White Mountain case, the Fourth Circuit Court of Appeals declined to rule that there is a categorical proscription on arbitration of core causes of action. White Mountain, 403 F.3d at 169. The Court of Appeals did, however, determine that it was appropriate for the bankruptcy court to retain jurisdiction over certain claims because there was an “inherent conflict between arbitration and the purposes of the Bankruptcy Code ... in [that] case.” Id. at 170. Specifically, in White Mountain, the central issue in both the Chapter 11 bankruptcy and a related arbitration matter pending in England was whether sizeable payments made to a Florida coal company should be considered debt or equity, and any resolution of this issue by an arbitration panel would conflict with the Chapter 11 bankruptcy proceeding by, inter alia, interfering with the bankruptcy court’s jurisdiction to determine classes of *778debt and equity holders and to classify claims of the estate. Id. at 169-70.
The United States Bankruptcy Court for the Eastern District of North Carolina generally retains jurisdiction of claims that are determined to be “constitutionally core” as that concept was discussed in Stern v. Marshall, 564 U.S. -, 131 S.Ct. 2594, 2620, 180 L.Ed.2d 475 (2011). See Moses v. CashCall, Inc. (In re Moses), 2013 WL 53873, at *4 (Bankr.E.D.N.C. Jan. 3, 2013); TP, Inc., 479 B.R. at 383-87. In the Stem case, the United States Supreme Court decided bankruptcy courts lack the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim, 131 S.Ct. at 2620, but the Supreme Court did not have occasion to address the impact of its decision on arbitration of causes of action raised in bankruptcy. A cause of action is constitutionally core under Stem if it (1) arises from the bankruptcy itself or (2) necessarily needs to be resolved in the claims allowance process. Id. at 2618. If a cause of action is constitutionally core, then a bankruptcy court may deny a motion to compel arbitration so long as the White Mountain criteria for denying such a motion are satisfied, namely that the facts and circumstances of the case before the court reveal that there is “ ‘an inherent conflict between arbitration and the [Bankruptcy CodeJ’s underlying purposes’ ” and that “[arbitration is inconsistent with centralized decision-making because permitting an arbitrator to decide a core issue would make debtor-creditor rights ‘contingent upon an arbitrator’s ruling’ rather than the ruling of the bankruptcy judge assigned to hear the debtor’s case.” White Mountain, 403 F.3d at 169 (internal citations omitted).
Even if a matter is constitutionally core, a bankruptcy court possesses broad discretion to grant a motion to compel arbitration if there is a written agreement to arbitrate and if doing so would be helpful to the court and would assist the bankruptcy court in exercising its bankruptcy jurisdiction. Fed. R. Bank P. 9019(c) (“On stipulation of the parties to any controversy affecting the estate the court may authorize the matter to be submitted to final and binding arbitration.”); Second Ave. Holdings, LLC v. Latimer (In re Latimer), 489 B.R. 844, 868-71 (Bankr.N.D.Ala.2013) (granting motion to compel arbitration of state law claims underlying a claim of nondischargeability while retaining ultimate jurisdiction to adjudicate whether a claim was nondischargeable under the Bankruptcy Code). Arbitration of underlying state law causes of action that may bear on a bankruptcy issue promotes efficiency because of streamlined procedures available in arbitration and the limitations on appellate review. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 31, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991) (“[B]y agreeing to arbitrate, a party ‘trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.’ ”) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985)); COMSAT Corp. v. Nat’l Sci. Found., 190 F.3d 269, 276 (4th Cir.1999) (“A hallmark of arbitration — and a necessary precursor to its efficient operation — is a limited discovery process.”) (citing Burton v. Bush, 614 F.2d 389, 391 (4th Cir.1980)).
In the case sub judice, CMH has presented the RIC, which is four pages in length, which is signed by the Borrowers on pages two and four, and which includes an agreement to arbitrate on the bottom of page three. The arbitration clause is set out prominently, and the RIC cautions, in boldface type, that the borrowers should *779read carefully before signing. The text of the arbitration clause is set out above on page 4 of this order, and it requires binding arbitration of the causes of action that Debtor brings against VMF. Debtor makes three arguments that the agreement to arbitrate should not be enforced as to CMH. As is explained further below, this Court is unpersuaded by Debtor’s arguments.
Debtor first argues that it is unclear whether she executed the arbitration agreement. The basis for this argument is that Debtor’s signature appears on page four of the RIC, whereas the arbitration clause is on page three, and Debtor does not recall whether the same version of page three was part of the RIC when she executed it. Debtor does not dispute, however, that she executed the RIC. Significantly, Debtor does not offer any evidence that page three was any different at the time she executed it, and a review of the RIC tends to indicate that it had not been modified, altered, or changed. Thus, contrary to Debtor’s assertions, she has not presented the court with any ambiguity concerning whether the contract she executed included an arbitration clause as was the case in Routh v. Snap-On Tools Corporation, 108 N.C.App. 268, 423 S.E.2d 791 (1992). Further, as the North Carolina Court of Appeals held in Martin v. Vance, the execution of an agreement charges the signatory with knowledge and assent to the contents of it, including an arbitration clause, and “where there is any doubt concerning the existence of an arbitration agreement, it should be resolved in favor of arbitration.” 133 N.C.App. 116, 120, 514 S.E.2d 306, 309 (1999) (citing Johnston County v. R.N. Rouse & Co., 331 N.C. 88, 92, 414 S.E.2d 30, 32 (1992)). The Court FINDS and CONCLUDES that the Debtor and her late husband executed the RIC and that, at the time of execution, the RIC included the arbitration agreement.
Debtor next argues that the court should not compel arbitration because she modified the RIC in bankruptcy pursuant to 11 U.S.C. § 365(p)(3). The provision of the Bankruptcy Code cited by Debtor applies to executory leases of personal property and thus has no application here. The RIC is not a lease and is not executo-ry. See 1 Gmsberg & Martin ON Bankrupt-oy § 7.01[B] (5th ed. 2012-2 Supp.) (defining “executory contract”). In any event, modification of an executory contract would not constitute rejection of an arbitration agreement. Selby’s Mkt., Inc. v. PCT (In re Fleming Cos.), 2007 WL 788921, at *3 (D.Del. Mar. 16, 2007). Accordingly, the court CONCLUDES that 11 U.S.C. § 365(p)(S) and the filing of Debt- or’s petition for relief under the Bankruptcy Code did not result in modification or rejection of the Arbitration Agreement.
Debtor next argues that arbitration of her claims against CMH would be inconsistent with the Bankruptcy Code. However, Debtor’s causes of action against CMH are state law causes of action that do not arise under a provision of the Bankruptcy Code, CMH is not a current creditor of Debtor, and CMH has not submitted a claim against the estate. Accordingly, Debtor’s causes of action against CMH are not core. See 28 U.S.C. § 157(b)(2). Even if Debtor’s causes of action against CMH were core, or even constitutionally core, there would be no conflict between arbitration and the underlying purposes of the Bankruptcy Code, as there would be no prejudice to the administration of the bankruptcy case and no negative impact on the determination of bankruptcy issues if Debtor’s causes of action against CMH are arbitrated. To the contrary, it would be helpful to the Court and more efficient and cost-effective for the parties if Debtor’s state law causes of action against CMH proceed in arbitration, after which this court can address any bankruptcy implica*780tions of the arbitrator’s decision concerning the state law claims. Accordingly, the Court CONCLUDES that there is no inherent conflict between arbitration of Debtor’s causes of action against CMH and the underlying purposes of the Bankruptcy Code.
In her fourth and final argument concerning CMH’s motion to compel arbitration, Debtor contends that the Arbitration Agreement is unconscionable. Debtor offers no affidavit or other testimony in support of her argument concerning un-conscionability and instead relies upon the RIC itself and arguments premised upon the North Carolina Supreme Court’s analysis in Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 102-03, 655 S.E.2d 362, 370 (2008). As the North Carolina Court of Appeals recently observed, Tillman’s unconscionability analysis has been superseded by AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurant, — U.S. -, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013). Torrence v. Nationwide Budget Fin., 753 S.E.2d 802, 811 (N.C.Ct.App.2014) (“[T]he holdings of the North Carolina Supreme Court in Tillman conflict with those of the United States Supreme Court in Concepcion and Italian Colors. Ultimately, we are bound by the decisions of the United States Supreme Court construing federal laws, such as the FAA.”); Knox v. First S. Cash Advance, 753 S.E.2d 819, 822 (N.C.Ct.App.2014). In any event, the Arbitration Clause includes a delegation clause, which reserves disputes about arbitrability for determination by an arbitrator, and Debtor has not made a specific and separate challenge to the delegation clause. Consequently, Debtor’s uncon-scionability challenge to the Arbitration Agreement should be decided by an arbitrator in accordance with the United States Supreme Court’s decision in Rent-A-Center, West, Inc. Accordingly, the court FINDS and CONCLUDES that Debtor has not carried her burden to raise an unconscionability challenge that precludes arbitration of Debtor’s causes of action and CONCLUDES that any issues Debtor may raise with respect to arbitra-bility should be decided by an arbitrator.
Based on the foregoing analysis, this court CONCLUDES that CMH’s motion to stay the adversary proceeding as to CMH and to compel arbitration of the causes of action against CMH should be and hereby is GRANTED. The adversary proceeding is stayed and the causes of action against CMH must be arbitrated in accordance with the court’s instructions in Section III of this Order.
II. Fox Den’s and Bryant’s Motion to Compel Arbitration
Fox Den and Bryant are not parties to the RIC between Debtor and CMH; however, they each seek arbitration of the claims against them under the arbitration provision of the RIC. Fox Den and Bryant contend that Debtor is estopped from avoiding arbitration of her causes of action against them based on the manner in which she has pled her claims. In particular, Fox Den and Bryant assert that the adversary complaint raises allegations of substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract. This court agrees.
Generally, only signatories to an agreement to arbitrate may seek to compel arbitration under that agreement. R.J. Griffin & Co. v. Beach Club II Homeowners Ass’n, 384 F.3d 157, 160 (4th Cir.2004). However, a signatory to an agreement to arbitrate may be estopped from opposing arbitration of claims against a nonsignatory to that agreement if: (1) “ ‘the signatory to a written agreement containing an arbitration clause must “rely on the terms of the written agreement in *781asserting its claims” against the non-signatory,’ ” or (2) “ ‘ “the signatory raises allegations of ... substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract.” ’ ” Brantley v. Republic Mortgage Ins. Co., 424 F.3d 392, 395-96 (4th Cir.2005) (quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir.1999)); see also Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 632, 129 S.Ct. 1896, 173 L.Ed.2d 832 (2009) (“[A] litigant who was not a party to the relevant arbitration agreement may invoke [the FAA] if the relevant state contract law allows him to enforce the agreement.”); Klopfer v. Queens Gap Mountain, LLC, 816 F.Supp.2d 281, 292 n. 5 (W.D.N.C.2011) (“North Carolina’s law of equitable estop-pel is the same as Fourth Circuit law.”).
Fox Den and Bryant seek to proceed under the exception for allegations of “substantially interdependent and concerted misconduct.” With respect to that exception, the Fourth Circuit Court of Appeals has held that “there must be allegations of coordinated behavior between a signatory and non-signatory defendant and that the claims against both the signatory and non-signatory defendants must be based on the same facts, be inherently inseparable, and fall within the scope of the arbitration clause.” Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 374 (4th Cir.2012) (internal citations and quotations omitted).
In the present case, Debtor’s state law causes of action against Fox Den and Bryant fall within the “substantially interdependent and concerted misconduct” exception. Specifically, Debtor alleges that the purchases of the Home and the Land began as a common transaction; that there was concerted misconduct in the application of the $10,000 down payment, which in turn led both to unfavorable financing terms for the purchase of the Land and to collection activities with which the Debtor takes issue. Further, the Debtor has alleged a claim for civil conspiracy in which the Debtor asserts that:
Upon information and belief, the Defendants in this case formed an agreement between themselves to do all of the unlawful acts alleged herein and to do all of the lawful acts alleged herein in unlawful ways.
The acts that created this civil conspiracy resulted in injuries to the Debtor including, but not limited to, financial injury, emotional distress and mental suffering.
These wrongful acts were done by one or more of the conspirators pursuant to the common scheme and in furtherance of the common object.
The liability of the conspirators is joint and several, in that all Defendants are equally deemed in law a party to every act which had before been done by the others, and a party to every act which may afterwards be done by any of the others in furtherance of such common design.
Thus, Debtor alleges common facts, which are inherently inseparable, and inasmuch as Debtor apparently seeks to make CMH liable for the conduct of the nonsignatory Defendants, Debtor’s claims fall within the scope of the arbitration provision of the RIC between Debtor and CMH.
Further, given the manner in which Debtor has pled her causes of action, it is inappropriate for the claims against the Defendants to proceed in different fora. Multiple proceedings would result in increased costs and confusion; there would be a risk of inconsistent verdicts if the claims proceed separately; and there is a possibility of crossclaims that could not be adjudicated as effectively if there is more than one proceeding among the parties based on the same claims. Accordingly, *782the court FINDS that the adversary complaint alleges substantially interdependent and concerted misconduct among all of the Defendants and CONCLUDES that Debt- or is therefore estopped from opposing Fox Den’s and Bryant’s motion to compel arbitration of the causes of action asserted them, even though Fox Den and Bryant are nonsignatories to the agreement to arbitrate.
Fox Den also seeks arbitration of Debtor’s cause of action alleging that Fox Den’s proof of claim is improper and alleging that Fox Den violated 11 U.S.C. § 362 by including certain charges in the proof of claim. This cause of action, alone, raises a claim under a specific provision of the Bankruptcy Code and involves the application of bankruptcy law that must be applied by the court. Accordingly, this court will retain ultimate jurisdiction of the cause of action for improper proof of claim. However, the court FINDS and CONCLUDES that it would be helpful to the court and would aid the court in exercise of its bankruptcy jurisdiction to have the arbitrator determine the facts concerning this claim, after which the matter will return to this court for application of the Bankruptcy Code to this particular cause of action.
Based on the foregoing analysis, this court CONCLUDES that Fox Den’s and Bryant’s motion to stay the adversary proceeding and to compel arbitration of the causes of action against them should be and hereby is GRANTED. The adversary proceeding is stayed and this matter must be arbitrated in accordance with the court’s instructions in Section III of this Order.
III. The Court’s Instructions Concerning Arbitration
Because the matters to be arbitrated involve at least one claim over which this court is retaining ultimate jurisdiction, and because the resolution of the claims against Fox Den otherwise may impact the administration of the bankruptcy case, this court will exercise its discretion to retain supervisory and enforcement authority with respect to the arbitration. In exercise of this jurisdiction, the court hereby ORDERS the parties (and to the extent applicable, the arbitrator) to comply with the following instructions:
1. The Arbitration Agreement provides that the causes of action “shall be resolved by mandatory binding arbitration by one arbitrator selected by Seller with Buyer’s consent.” Within ten days of the entry of this Order, CMH shall propose at least five candidates to serve as the arbitrator. Within twenty days after entry of this Order, Debtor, Fox Den, and Bryant shall either agree to use one of the candidates proposed by CMH or they shall propose additional candidates. If the parties are initially unable to agree on an arbitrator, they shall make good faith efforts to select an agreed-upon arbitrator within thirty days after the entry of the Order. The parties shall promptly inform the court in writing of the name of the person selected to serve as the arbitrator. If the parties are unable to agree upon an arbitrator, the court will appoint an arbitrator pursuant to 9 U.S.C. § 5. The parties may agree, unanimously and in writing, to use more than one arbitrator, and if they so agree, they shall inform the court consistent with deadlines set out in this Order. If the parties do not agree unanimously and in writing to use more than one arbitrator, then they must proceed with one arbitrator as set out in the Arbitration Agreement.
2. The parties shall provide the arbitrator with sufficient information to permit him to determine whether he has any conflicts that would create the appearance of impropriety if he or she *783serves as the arbitrator. The proposed arbitrator shall perform a diligent conflict check and shall notify the parties of any conflicts. If there are no conflicts, the arbitrator shall execute a verified and sworn acknowledgement in which the arbitrator swears or affirms, under oath, before a notary that he or she will serve as a fair and impartial neutral and will determine the facts and apply the law correctly to the best of his or her ability.
3. The Arbitration Agreement provides that it “shall be governed by the Federal Arbitration Act at 9 U.S.C. Section 1.” Accordingly, the arbitrator shall conduct the arbitration proceedings in accordance with 9 U.S.C. § 7.
4. The arbitration hearing must begin within ninety days of the appointment of an arbitrator and must be concluded within thirty days after it begins. The arbitrator shall issue a written, reasoned decision not later than thirty days after the conclusion of the arbitration hearing.
5. The parties shall provide status reports to the court every thirty days and shall promptly notify the court in writing of the following items: (1) the date when the arbitration hearing is scheduled to begin; (2) the date when the arbitration hearing concludes; (3) the date when the arbitrator’s award is due. Further, the parties shall promptly notify the court if any deadline established in this Order will not be met and the reason(s) why the deadline will not be met.
6. Upon entry of an award by the arbitrator, the parties shall notify the court in writing of the substance of the award.
7. The parties shall have thirty days from the date of the transmission of the arbitrator’s award to file any motions to confirm, modify, or vacate the award, and the party filing any such motions shall be responsible for noticing a hearing on the same.
8.The court will hold a hearing to determine the bankruptcy issues concerning the cause of action objecting to Fox Den’s proof of claim at the same time the court conducts a hearing on any motions to confirm, modify, or vacate the arbitrator’s award.
IV. Decree
The motions of CMH, Fox Den, and Bryant are GRANTED. Pursuant to 9 U.S.C. § 3, the adversary proceeding is STAYED. Pursuant to 9 U.S.C. § 4, Debtor’s causes of action are COMPELLED to mandatory, binding arbitration in accordance with the Arbitration Agreement. The parties and the arbitrator are ORDERED to comply with the deadlines and instructions set out in this Order.
IT IS SO ORDERED.
. In the RIC, CMH assigned the RIC to Vanderbilt Mortgage and Finance, Inc. ("VMF”). VMF is the current creditor for the RIC, and it is not a named party to the adversary proceeding. However, Debtor does make a number of allegations concerning VMF in the adversary complaint. To the extent Debtor wishes to bring claims against VMF, those claims should proceed in arbitration consistent with this Order. If Debtor decides to bring VMF into the action, she may add VMF as a party prior to the appointment of the arbitrator.
. Paragraph 211(v) of the Complaint alleges that Fox Den's Proof of Claim is “defective” because it includes "[p]ast petition late fees which are not allowed by 11 U.S.C. § 362.” At oral argument, Debtor’s counsel asserted that with this allegation, Debtor is asserting a claim for violation of the automatic stay-in bankruptcy. As is further explained below, this Court is retaining its ultimate authority to make bankruptcy rulings concerning the cause of action related to the Proof of Claim. This Court will determine the scope of the claim when the matter returns to this Court after arbitration. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497110/ | MEMORANDUM OPINION
PATRICK M. FLATLEY, Bankruptcy Judge.
Fairmont General Hospital, Inc. (the “Debtor”), and District 1199 West Virginia/Kentucky/Ohio, Service Employees International Union (“District 1199”), request a declaration from the court that their November 1, 2013 Collective Bargaining Agreement (the “CBA”) was executed in the ordinary course of the Debt- or’s business under 11 U.S.C. § 363(c)(1) and is consequently an effective agreement under the Bankruptcy Code.1
UMB Bank, N.A., as successor indenture trustee with respect to certain hospital revenue bonds (the “Indenture Trustee”), objects on the basis that that the CBA requires court approval because the Debtor is in Chapter 11 and seeks to sell substantially all its assets. The Indenture Trustee asserts that court approval of the CBA should be denied on the grounds that the existence of the CBA may result in a lower sales price for the Debtor’s business as potential purchasers may not desire to purchase a business with a unionized workforce. In addition, the Indenture Trustee states that the CBA constitutes a settlement agreement under Fed. R. Bankr.P. 9019 which must be approved by the court.
For the reasons stated herein, the court finds that the CBA was executed in the *786ordinary course of the Debtor’s business and is effective under § 363(c)(1) without obtaining court approval. The court also finds that the CBA does not constitute a settlement as contemplated under Rule 9019.
I. BACKGROUND
The Debtor operates a 207-lieensed bed acute care hospital in Fairmont, West Virginia. It has approximately 731 full and part-time employees and 28 physicians. Nearly 340 of these employees are represented by District 1199.
The Debtor and District 1199 executed a collective bargaining agreement on November 1, 2010, which was set to expire on April 30, 2013. By agreement of the parties, the November 1, 2010 Collective Bargaining Agreement was extended to October 31, 2013.
The Debtor filed its Chapter 11 bankruptcy petition on September 3, 2013. On October 3, 2013, the Debtor and District 1199 negotiated a “Settlement Agreement” that set forth the general terms of the parties’ labor agreement following October 31, 2013. The October 3, 2013 Settlement Agreement contained better terms for the Debtor as compared to the November 1, 2010 Collective Bargaining Agreement. The October 3, 2013 Settlement Agreement served as the bridge between the contractual termination of the November 1, 2010 Collective Bargaining Agreement and the memorialization of a new collective bargaining agreement that was to be finalized after November 1, 2013, but made effective as of that date:
This SETTLEMENT AGREEMENT constitutes a full and complete collective bargaining agreement between the parties, which shall commence at 12am on November 1, 2013, and shall remain in full force and effect until midnight on the 31st day of October, 2016.
The parties will later execute a reformatted “clean copy” of this collective bargaining agreement; however, it is agreed that this Settlement Agreement and the provisions incorporated herein constitute the terms of the Agreement.
(Exhibit 3).
District 1199 states that the CBA was not memorialized in a document taking the normal form of a collective bargaining agreement until January 17, 2014. Under Article 38, however, the new CBA was effective “from November 1, 2013, up to and including October 31, 2016.” (Exhibit 4). Pursuant to Appendix R of the CBA, the Debtor is required to seek court approval of the CBA. Consequently, on March 17, 2014, the Debtor filed its motion with the court to approve the CBA. The parties have been continuously operating under the CBA since November 1, 2013.
Meanwhile, on May 9, 2014, the Debtor filed its motion for an order to approve the sale of its business to Alecto Healthcare Services Fairmont, LLC. That motion and the sale process is currently pending before the court. Pursuant to Article 37 of the CBA, if the Debtor were to sell the hospital, the Debtor will:
require the successor to its interest to assume and agree to be bound by all provisions of this Agreement, so long as the successor to the Hospital’s interest continues operations on the Hospital’s premises.
(Exhibit 4, art. 37).
II. DISCUSSION
The Indenture Trustee asserts that court approval of the CBA is required on the grounds that the Debtor has filed a petition under Chapter 11 of the Bankruptcy Code and is actively seeking to sell substantially all its assets. In addition, the Indenture Trustee contends that the *787CBA is a settlement agreement that requires court approval.
A. Ordinary Course of Business
The Debtor and District 1199 have been operating under the CBA for over six months and believe the CBA is effective without court approval as execution of a collective bargaining agreement is a common practice in the hospital industry. The Debtor asserts that its CBA with District 1199 represents a continuation of the Debtor’s pre-petition business relationship and is the type of transaction that its creditors would reasonably expect the Debtor to execute given the nature of the Debtor’s business.
Debtors in possession operating in Chapter 11 are statutorily authorized to “enter into transactions ... in the ordinary course of business, without notice or a hearing.” 11 U.S.C. § 363(c)(1). In determining what constitutes a transaction in the ordinary course of business, “courts have engaged in a two-step inquiry ...: a ‘horizontal dimension’ test and a ‘vertical dimension’ test.” In re Roth Am., Inc., 975 F.2d 949, 952 (3d Cir.1992) (citing Benjamin Weintraub & Alan Resnick, The Meaning of “Ordinary Course of Business” Under the Bankruptcy Code — Vertical and Horizontal Analysis, 19 UCC L.J. 364 (1987)); see also; In re Ohio Valley Amusement Co., Case No. 03-50356, 2008 WL 5062464 at *3-4, 2008 Bankr.LEXIS 3191 at *11-12 (Bankr.N.D.W.Va. Dec. 1, 2008) (applying the vertical and horizontal dimension tests).
The “horizontal dimension” test considers “whether from an industry-wide perspective, the transaction is of the sort commonly undertaken by companies in that industry.” Roth Am., 975 F.2d at 953. The “vertical dimension” test considers the creditors’ expectations and whether the economic risk of the transaction is different from those accepted by creditors that extended credit to the debtor pre-petition. Ohio Valley Amusement Co., 2008 WL 5062464 at *4, 2008 Bankr.LEXIS 3191 at *12. Consonant with the horizontal and vertical dimension tests, the Court of Appeals for the Fourth Circuit in Bowers v. Atlanta Motor Speedway (In re Southeast Hotel Props. Ltd. P’ship), 99 F.3d 151, 158 (4th Cir.1996), analyzed a post-petition transaction to see whether the type of transaction was a “common practice” in the debtor’s industry, and whether a creditor could “reasonably expect” a debtor to enter into that type of post-petition transaction. See also Devan v. Phoenix Am. Life Ins. Co. (In re Merry-Go-Round Enters.), 400 F.3d 219, 226 (4th Cir.2005) (same).
Regarding the “horizontal dimension,” or the common practice in the Debt- or’s industry, the Debtor presented the testimony of Kevin Carr, the Debtor’s labor lawyer,2 who stated that: (a) hospitals across the country enter into collective bargaining agreements with unions representing hospitals’ employees; (b) none of the provisions of the November 1, 2013 CBA were unusual as compared to collective bargaining agreements executed at different hospitals — including the provision in Article 37 imposing successor liability; and (c) the Debtor’s November 13, 2013 CBA is generally consistent with market terms. Mr. Carr’s testimony regarding collective bargaining agreements in the hospital industry, and comparison of the November 1, 2013 CBA to a general industry collective bargaining agreement, is not contested. The court concludes, therefore, that it is not unusual for hospitals to em*788ploy unionized staff to provide labor and to enter into collective bargaining agreements to secure the benefits of a unionized workforce. See, e.g., In re Anything Elec. Contrs. Co., Case No. 96-10751, 2005 Bankr.LEXIS 3447 at *13-14 (Bankr. N.D.N.Y. Jan. 18, 2005) (“It would not be unusual for electrical contractors to employ union electricians to provide labor and to enter into collective bargaining agreements in order to secure the benefits of a unionized work force.”); In re Leslie Fay Cos., 168 B.R. 294, 303 (Bankr.S.D.N.Y.1994) (“[A]s a general rule, a debtor whose employees are covered by a collective bargaining agreement is permitted to enter into a new collective bargaining agreement or a modification to an existing agreement post-petition without notice and a hearing.”).
Regarding the “vertical dimension” test, the court admitted into evidence Debtor’s Exhibit 1, the November 1, 2010 Collective Bargaining Agreement between the Debtor and District 1199. Importantly, the November 1, 2010 Agreement was executed nearly three years before the Debtor filed its bankruptcy petition, it was set to terminate on April 30, 2013, and it was temporarily extended to October 31, 2013. The November 1, 2013 CBA — which offers more advantageous terms to the Debtor — represents a continuation of the Debtor’s pre-petition business relationship with District 1199. Creditors of the Debt- or must reasonably expect it to employ staff while it operates in Chapter 11 and enter into such employment terms as are ordinary in that industry to avoid labor strife. Consequently, the Debtor has satisfied the vertical dimension test by demonstrating a continuation of a pre-petition business relationship upon common labor terms. See, e.g., In re Illinois-California Express, Inc., 72 B.R. 987, (D.Colo.1987) (finding the execution of a collective bargaining agreement to be reasonably expected by creditors considering that the collective bargaining relationship in the case was about 30 years old); In re DeLuca Distributing Co., 38 B.R. 588, 593-94 (Bankr.N.D.Ohio 1984) (“Given our national labor policy of encouraging collective bargaining agreements and avoiding labor strife, the court finds the reasonable expectation of creditors is that the debtor will enter into collective bargaining agreements. The debtor’s history of union representation supports this conclusion.”); cf., In re Roth Am., Inc., 975 F.2d 949, 953 (3d Cir.1992) (finding that the post-petition collective bargaining agreement was not reasonably expected by creditors because it was “fundamentally different” from the terms of the pre-petition collective bargaining agreement).
The Indenture Trustee asserts, however, that the Debtor’s business industry is not all hospitals generally, but only that small subset of hospitals that have filed a Chapter 11 petition with the intention of selling substantially all their assets. The Indenture Trustee contends that execution of a collective bargaining agreement in advance of a sale is not a common practice for businesses in this smaller industry subset and creditors do not reasonably expect a debtor hospital in the process of consummating a sale of substantially all its assets to enter into a three-year collective bargaining agreement that it knowingly cannot and will not perform beyond a few months. In its view, such an action is inimical to the bankruptcy sale process contemplated by the Debtor.
The Indenture Trustee’s argument equates the definition of “industry” to be a process of liquidation in bankruptcy. What constitutes the “ordinary course of business” in the process of selling assets through Chapter 11 of the Bankruptcy Code, however, is not the basis for “ordinariness” under § 363(c)(1). The Indenture Trustee’s argument confuses an ordi*789nary course of business transaction for a debtor operating a business under the privileges afforded by Chapter 11 with whether such an ordinary course of business transaction is the best decision for the estate and its creditors. Congress has already statutorily determined through 11 U.S.C. §§ 363(c)(1), 1107(a), and 1108, that debtors in Chapter 11 have the right to exercise the privileges of their Chapter 11 status, which includes the right operate the bankrupt business without a prerequisite of obtaining creditor and/or court approval of ordinary business transactions. In re Phillips, Inc., 29 B.R. 391, 394 (S.D.N.Y.1983) (“Where the debtor in possession is merely exercising [its] right to exercise the privileges of its Chapter 11 status, which include the right to operate the bankrupt business, there is no general right to notice and hearing concerning particular transactions.”).
The Indenture Trustee cites to In re Crystal Apparel, Inc., 220 B.R. 816, 831-32 (Bankr.S.D.N.Y.1998), to support its position that the court must take into consideration the “changing circumstances inherent in hypothetical creditor expectations” to determine whether “ ‘the nature of the [transaction] ventures beyond the domain of transactions that a hypothetical creditor would reasonably expect to be undertaken in the circumstances.’ ” (citation omitted) This language, the Indenture Trustee contends, directs the court to consider the fact that the Debtor in this case is attempting to sell substantially all its assets and hypothetical creditors of the Debtor should not be deemed to reasonably expect the Debtor to execute a 3-year collective bargaining agreement in advance of a contemplated sale.
Crystal Apparel is consistent with the general theory that post-petition agreements that would otherwise fall within the ordinary course of the debtor’s business nevertheless require court approval when the result of the agreement is inimical to the theory or philosophy of the Bankruptcy Code. See, e.g., In re Hillard Dev. Co., Case No 90-27588, 2004 WL 1347049 at *1 fn. 1, 2004 Bankr.LEXIS 931 at *3 fn. 1 (Bankr.S.D.Fla. April 16, 2004) (“The only time post-petition collective bargaining agreements require court approval is when they obligate the debtor to do something ‘extraordinary, such as giving the union a lien on the debtor’s property, or to do an act which is inimical to the theory and philosophy of the Code, such as the payment of pre-petition indebtedness.’ ”) (citation omitted). More specifically, in Crystal Apparel, the court addressed so-called “golden parachutes” for the bankrupt business’s executives. 220 B.R. at 833 (“[I]t is inimical to the policies of the Bankruptcy Code to so prefer top management without notice to creditors.”). Crystal Apparel was decided in 1998. In 2005, Congress enacted 11 U.S.C. § 503(c) to statutorily address the issue of executive compensation in bankruptcy. 2005 Pub.L. No. 109-8, § 331 (2005). Consequently, the court does not believe that Crystal Apparel attempts to change the “ordinariness” standard of for a business that files bankruptcy; rather, the court finds that Crystal Apparel stands for the proposition that “golden parachute” agreements for executive compensation require court approval because such agreements are inimical to the philosophy and theory of the Bankruptcy Code.
Moreover, the court notes that, in this case, the Debtor filed its Chapter 11 petition on September 3, 2013. One month later, it executed the October 3, 2013 Settlement Agreement that was later reformatted into the November 1, 2013 CBA. While the Debtor may have been contemplating a sale of its business as of October 3, 2013, at that time no one could accurately predict whether or when the Debtor would succeed in attracting a bona fide *790purchaser, obtain approval of the proposed sale, close the sale, and transfer the assets. In fact, as of the date of this memorandum opinion, a sale of the Debtor’s business still has not occurred and approximately 7 of the 36 months of the CBA’s term have expired. Without execution of the October 3, 2013 Settlement Agreement and the November 1, 2013 CBA, the Debtor may have exposed itself to significant labor problems which may have resulted in a depressed sale value. The Indenture Trustee’s contention that the November 1, 2013 CBA chills potential bidding and may result in a depressed sale value is just as speculative. At bottom, however, when considering the facts of this case, the court finds nothing in the November 1, 2013 CBA that is inimical to the theory or philosophy of the Bankruptcy Code, or to the Debtor’s proposed course of action while in Chapter 11, such that it would require the Debtor to obtain court approval of the CBA.
Therefore, the court finds that the November 1, 2013 CBA was executed in the Debtor’s ordinary course of business and is valid without court approval as it constitutes the type of transaction contemplated by 11 U.S.C. § 363(c)(1).
B. Settlement under Rule 9019
The Indenture Trustee asserts that the October 2013 Settlement Agreement negotiated between the Debtor and District 1199 constitutes a settlement under Fed. R. Bankr.P. 9019 and that the Debtor failed to introduce evidence that the Rule 9019 settlement is in the best interest of the Debtor’s bankruptcy estate.
Under Rule 9019, “[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.” A court reviews a Rule 9019 motion to compromise against “the outcome of four factors: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors.” In re Buffalo Coal Co., No. 06-366, 2006 WL 3359585 at *3, 2006 Bankr.LEXIS 3076 at *12 (Bankr.N.D.W.Va. Nov. 15, 2006) (citing Fry’s Metals, Inc. v. Gibbons (In re RFE Industries, Inc.), 283 F.3d 159, 165 (3d Cir.2002)); see also Protective Committee for Indep. Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414, 424-25, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968) (stating that, in determining whether a compromise is fair and equitable, a bankruptcy judge should form “an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained.... Basic to this process in every instance, of course, is the need to compare the terms of the compromise with the likely rewards of litigation.”).
Importantly, as evident from the standards used to consider the approval of a compromise or settlement, Rule 9019 requires a claim or cause of action by one party against another: Rule 9019 does not include within its scope ordinary business decisions and negotiations. For Rule 9019 to apply, a claim or cause of action must exist for which the parties subsequently agree to accept compensation that is different from what might be gained after a trial on the merits.
Here, the Debtor and District 1199’s November 1, 2010 Collective Bargaining Agreement expired by its terms on April 30, 2013, and was extended by agreement to October 31, 2013. Thus, unless further action was taken by the parties, on November 1, 2013, the Debtor and District 1199 would not have any formal labor agreement. The October 3, 2013 Settlement Agreement contains the following important terms:
*791This SETTLEMENT AGREEMENT constitutes a full and complete collective bargaining agreement between the parties, which shall commence at 12am on November 1, 2013, and shall remain in full force and effect until midnight on the 31st day of October, 2016.
The parties will later execute a reformatted “clean copy” of this collective bargaining agreement; however, it is agreed that this Settlement Agreement and the provision incorporated herein constitute the terms of the Agreement.
(Exhibit 3).
The contents of the October 3, 2013 Settlement Agreement demonstrate that the Debtor and District 1199 were not compromising or settling claims arising out of the November 1, 2010 Collective Bargaining Agreement; rather, the old agreement was expiring based on its contractual terms and the October 3, 2013 Settlement Agreement was the bridge that governed the parties’ relationship after October 31, 2013, until such time as a reformatted, clean copy of new agreement could be finalized. The new agreement was finalized on January 17, 2014, and made retroactively effective to November 1, 2013 consistent with the terms of the Settlement Agreement. Kevin Carr testified that no claim or cause or action was compromised or settled in the CBA.
The Indenture Trustee cites one motion and one case in support of its argument that modifications to a collective bargaining agreement require court approval under Rule 9019, both of which are distinguishable. In re Patriot Coal Co., 12-51502, Doc. No. 4460, p. 5 (Bankr.E.D.Mo. Aug. 13, 2013); In re Git-N-Go, Inc., 322 B.R. 164 (Bankr.N.D.Okla.2004).
In Patriot Coal Co., the Indenture Trustee cites to a motion in case docket that was filed by the debtor company. The document requests court approval of new collective bargaining agreements under Rule 9019. In the motion, the debtor company specifically states that it worked to negotiate modifications to existing agreements, id. at ¶ 5, it was compromising a cause of action for rejection of the agreements and their breach, id., and the motion “resolved contentious and complex ongoing appellate litigation.” Id. at ¶ 18.
Similarly, in Gitr-N-Go, Inc., the court determined that a post-petition contract between Git-N-Go and its armored car service compromised a $57,000 pre-petition contract claim of the armored car service against the bankruptcy estate. 322 B.R. at 175. The court determined that its approval was required under Fed. R. Bankr.P. 9019 because the post-petition contract was a compromise of existing, pre-petition litigation claims. In this case, no party has pointed to any term in the October 3, 2013 Settlement Agreement or the November 1, 2013 CBA that demonstrates the settlement of pre — or post-petition claims arising between the Debtor and District 1199 for which a motion to compromise or settle under Rule 9019 would be required. The only evidence and testimony elicited was that the October 3, 2013 Settlement Agreement and the November 1, 2013 CBA constituted a new agreement between the Debtor and District 1199 that followed the expiration of the then-existing collective bargaining agreement and that no existing claims were being resolved through that process. Both Patriot Coal and Git-N-Go are factually inapposite.
III. CONCLUSION
For the above-stated reasons, the court will enter a separate order that declares the execution of the November 1, 2013 CBA to be a transaction in the ordinary course of the Debtor’s business under 11 *792U.S.C. § 363(c)(1) that is valid and effective as executed.
. The Debtor originally sought court approval of the CBA pursuant to 11 U.S.C. § 363(b)(1) as a transaction outside of its ordinary course of business. The Debtor stated that this was done because Appendix R to the CBA states: "the Hospital agrees to seek approval of the new collective bargaining agreement by the Bankruptcy Court.” (Exhibit 4). At the May 12, 2014 hearing, however, both the Debtor and District 1199 asserted their belief that the CBA was executed in the ordinary course of the Debtor's business under § 363(c)(1) and did not need court approval under § 363(b)(1). The court received evidence and testimony on whether the CBA required court approval under the standards of § 363(b)(1), or if the court could approve the agreement under § 363(c)(1) as being in the ordinary course of the Debtor's business. The court also allowed the parties a period of lime to brief the issue following the evidentiary hearing. Because the court finds that the execution of the CBA is in the Debtor’s ordinary course of business under § 363(c)(1), the court will not address the standards for approving the agreement pursuant to § 363(b)(1) or the arguments of the parties concerning that issue.
. Mr. Carr has served as the Debtor’s labor lawyer for over 12 years and was the chief negotiator for the Debtor in the execution of three collective bargaining agreements between the Debtor and District 1199. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497400/ | OPINION
DANIEL S. OPPERMAN, Bankruptcy Judge.
Thé issue on appeal before the Panel is whether the bankruptcy court erred in avoiding the transfer of real property to Carolyn Blackwell pursuant to 11 U.S.C. § 548 and ordering recovery of transferred property from Carolyn Blackwell pursuant to 11 U.S.C. § 550 and in denying Carolyn Blackwell a claim pursuant to 11 U.S.C. § 550(e). After reviewing the *533record, the parties’ briefs, and applicable law, the Panel concludes that the bankruptcy court did not err. Accordingly, for the reasons stated in the bankruptcy court’s thorough and well-reasoned opinions entered on December 17, 2013, Tabor v. Lineback, (In re Lineback), Ch. 7 Case No. 12-11369, Adv. No. 12-5154 (Bankr.W.D.Tenn.2013) ECF No. 48, and February 6, 2014, Tabor v. Lineback, (In re Lineback), Ch. 7 Case No. 12-11369, Adv. No. 12-5154 (Bankr.W.D.Tenn.2013) ECF No. 59, we affirm. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497404/ | ORDER GRANTING RACHMALE’S MOTION TO REMAND TO STATE COURT AND DENYING DEFENDANTS’ MOTION TO TRANSFER TO THE UNITED STATES BANKRUPTCY COURT IN DELAWARE
MARK A. RANDON, Bankruptcy Judge.
I. INTRODUCTION
Avinash Rachmale founded and grew Lakeshore TolTest Corporation (“LTC”)— in Michigan — into an award-winning, global construction and environmental services company with a book of business valued in *569the hundreds of millions. He was once the majority shareholder and proudly served as LTC’s CEO, President, and Chairman of the board of directors. But times have changed: Rachmale is currently a minority shareholder; he resigned from LTC’s board; and, LTC has filed for bankruptcy.
Rachmale blames Defendants (six directors of LTC, two corporations that contributed equity to LTC, and five affiliated corporations (collectively, “Defendants”)) for the company’s financial demise, which personally damaged him as a shareholder. He sued Defendants in Michigan’s Wayne County Circuit Court for $100 million, asserting state law claims related to Defendants’ alleged plan to squeeze him out of LTC.
After Rachmale’s lawsuit was filed, LTC and its affiliates — none of whom is a named defendant in this lawsuit — filed for bankruptcy in Delaware, where LTC is incorporated.1 Defendants timely removed Rachmale’s lawsuit to this Court and now move to transfer the case to the Delaware Bankruptcy Court; Rachmale moves for remand.
Defendants contend that' Rachmale’s claims are intertwined with LTC — and, in some instances, may constitute property of LTC’s bankruptcy estate — such that they must be heard in conjunction with LTC’s bankruptcy proceeding. Rachmale disagrees. He says that Defendants’ attempt to transfer the case to a faraway forum is an unfounded tactical maneuver designed to thwart his legal rights. He believes his claims for personal injuries, which arose in Michigan against non-parties to the bankruptcy, belong in state court. The Court heard argument on the parties’ motions on August 7, 2014.
Because the Court has jurisdiction — but nonetheless believes an equitable remand is appropriate — Rachmale’s motion to remand is GRANTED; Defendants’ motion to transfer is DENIED AS MOOT.2
II. FACTUAL AND PROCEDURAL BACKGROUND3
A. LTC’s Promising Beginnings
LTC had its start in Michigan in 1994. That year, Rachmale founded Lakeshore Engineering Services, Inc. (“Lakeshore”), an engineering firm that performed environmental assessment and remediation for construction projects. Over the years, Lakeshore grew quickly in number of employees, revenue, and the significance of its contracts.
In 2010, Lakeshore acquired TolTest, Inc., an engineering and construction firm which, for decades, tackled large infrastructure projects around the world; at *570the time, TolTest’s annual revenues exceeded $200 million. LTC was the product of the merger. Rachmale became LTC’s CEO and President, and, the newly formed LTC raked in over $600 million. LTC’s rapid success and positive reputation were acknowledged by the local business community, and it earned a place among Crain’s Detroit Business’s list of the region’s fastest growing companies.
B. The 2011 Gridiron Equity Investment
In 2011 — with LTC valued at $150 million — Defendant Gridiron Capital sought to invest in LTC. In exchange for $50 million, Rachmale sold 35% of LTC to Gridiron. As part of the transaction, LTC — then incorporated in Michigan— was reincorporated in Delaware, but its Michigan presence remained strong: LTC’s headquarters, principal place of business, and registered office stayed in Detroit, Michigan.4 Rachmale continued as LTC’s CEO and President, and chairman of its board of directors. Half of the board members were directors from Rach-male’s group; the other half was comprised of directors from the Gridiron group.
Rachmale says the makeup of LTC’s board soon changed: members from his group were replaced with new directors affiliated with Gridiron, ultimately placing Gridiron squarely in control of corporate decision making. These changes marked the start of the sweeping transformations of LTC alleged in Rachmale’s Complaint, including: mismanagement of LTC; removal of all persons of Indian descent from top positions at LTC; alienation of Rachmale from LTC’s daily affairs and corporate decision making; and, withholding certain economic dues owed to Rach-male as LTC’s part-owner. In July 2011, Defendant Jeff Miller was appointed CFO and Treasurer. Before Miller’s appointment, Rachmale had long managed LTC’s finances. But Miller did not collaborate with Rachmale, who was then CEO; instead, he opted to take direction directly from the Gridiron group.
By 2012, seven of eight LTC board members were from the Gridiron group; only Rachmale remained. That year, Defendant Grant McCullagh was appointed CEO and President. The fallout found Rachmale without his officer positions and effectively shut out of LTC’s affairs; persons of Indian descent were allegedly removed from top positions; and, Rach-male’s staff was replaced with McCullagh’s own, seemingly unseasoned staff: individuals with comparatively less construction and overseas expertise. LTC also stopped bidding on overseas-market contracts and other strategic growth areas.
C. LTC’s Financial Difficulties
Things began to turn thoroughly sour for LTC throughout 2012 and 2018: jobs— including lucrative projects in Afghanistan — began to fail; new business ceased; cash flow dried up; and, bonding difficulties mounted, leaving a multitude of subcontractors unpaid.
In May 2013, in an effort to shore up LTC’s finances, Gridiron contributed $5 million to LTC. In exchange, Gridiron acquired an additional 30% of LTC’s common stock — then valued at just $0.89 per share. Rachmale says this value did not account for various underbillings on LTC’s accounts, leaving Gridiron with a greatly in*571flated portion of LTC stock and Rach-male’s shares diluted.
D.The Detroit Portfolio Transaction
A few months later, Defendants changed the terms of the Detroit Portfolio Transaction. The original terms, discussed in December 2012, were that Rachmale would start his own company — Lakeshore Global — in order to acquire all of LTC’s Detroit municipal contracts; transfer 1,175,000 shares of voting common stock to LTC; take over LTC’s lease obligations on properties he owned (valued at approximately $8 million), while LTC paid him approximately $2 million to cover the cost of rent (the “Municipal Services Agreement”); and, continue to receive compensation as a company executive through September 2015 (the “Amendment to Employment Agreement”).
But, one month before the deal closed, Defendants eliminated the provision providing for Rachmale’s acquisition of the Detroit contracts: Rachmale would simply provide consulting services as reasonably requested to support the success of LTC’s Detroit municipal contracts. The Detroit Portfolio Transaction was signed — with that one significant alteration — in October 2013.
In December 2013, Rachmale stopped receiving payments under the Municipal Services Agreement. And, in February 2014, Rachmale’s compensation and benefits under the Amendment to Employment Agreement ended abruptly. Among other alleged harm, the mortgage on one of the buildings involved in the botched Detroit Portfolio Transaction is in default, and sureties of Lakeshore Global continue to make financial demands against Rachmale.
E. Rachmale’s Resignation
In light of LTC’s various dealings and financial difficulties, Rachmale requested documentation and an explanation of financial affairs and corporate condition, including an accounting of bonding contracts in March 2014; his requests went unanswered. Still, Defendants demanded that Rachmale contribute his own finances to cover LTC’s various bonding liabilities.
Rachmale resigned from LTC’s board of directors on April 2, 2014. Mismanagement, he claims, has led LTC to the brink of financial ruin and, along the way, may have crossed over into illegal conduct.5 Yet, Rachmale says he has neither maintained a management position nor had any control over LTC’s daily affairs since July 2012; and, Defendants have refused to sufficiently or accurately inform him of the true depth of LTC’s problems.
F. Summary of Rachmale’s State Law Claims
Rachmale recently filed an 11-count Complaint against Defendants in the Wayne County Circuit Court in Detroit, Michigan. Neither LTC nor any other debtor in the pending bankruptcy case was a named defendant. Defendants removed the case. The counts are summarized below:
1. Count I — Shareholder Oppression
Rachmale alleges Defendants violated their special duty of care to act fairly in the balancing of their personal interests against those of other shareholders. Specifically, Defendants are alleged to have violated Michigan Compiled Laws § 450.1489 by acting illegally; fraudulently; in a willfully, unfair, and oppressive manner; and, self-dealing as to both Rach-male and LTC.6
*5722.Count II — Breach of Fiduciary Duties
Rachmale alleges that some of the Defendants (LTC shareholders, officers, and directors) violated fiduciary duties owed to him: care, good faith, loyalty, and fair dealing.
3.Count III — Breach of Contract
This count relates to an alleged violation of the Municipal Services Agreement and Amendment to Employment Agreement. Rachmale concedes that LTC was a party to this agreement — rendering it likely within the realm of LTC’s bankruptcy trustee. He has, therefore, agreed to the dismiss this claim.
4.Count IV — Breach of Duty of Good Faith and Fair Dealing
This is closely related to count III; Rachmale also agreed to dismiss this count.
5.Count V — Tortious Interference
Rachmale alleges that Defendants improperly interfered with and damaged business relationships that he cultivated. These relationships, he says, had a reasonable likelihood of future economic benefit to him.
6.Count VI — Civil Conspiracy
Rachmale claims Defendants conspired amongst themselves and with non-parties to cause LTC to engage in misconduct.
7.Count VI — Violation of Michigan’s Elliot Larsen Civil Rights Act
Rachmale alleges that Defendants took adverse action against him because of his race or national origin, which adversely affected his pay and other terms or conditions of his employment. See Mich. Comp. Laws § 37.2201(a).
8. Count VIII — Unjust Enrichment/Quantum Meruit
Rachmale alleges that by engaging in wrongful actions, Defendants received valuable benefits — at his expense — that would be unjust for them to retain.
9. Counts IX, X and XI
Rachmale also agreed to dismiss counts IX, X, and XI (for Removal or Suspension of Director or Officer, Accounting and Payment, and Appointment of Receiver, respectively).
Rachmale’s Complaint sets forth no federal claims; Defendants assert federal jurisdiction arising only from LTC’s pending bankruptcy.
III. ANALYSIS
The Court must first determine whether it has subject matter jurisdiction. If it does, the Court must then decide whether it is most appropriate to: (1) abstain from exercising its jurisdiction; (2) equitably remand the case; or, (3) transfer some or all of the claims to the Delaware Bankruptcy Court. If jurisdiction is not proper, the Court must remand.
A. The Court has Jurisdiction over Rachmale’s Claims
Upon referral from the district court, a bankruptcy court has subject-matter jurisdiction over all cases “under title 11,” and all civil proceedings “arising under,” “arising in,” or “related to” a case under title 11. 28 U.S.C. § 1334(a), (b). Actions “arising under” title 11 involve claims created or determined by a statutory provision of title 11. In re Bliss Technologies, Inc., 307 B.R. 598, 602 (Bankr.E.D.Mich.2004). “Arising in” proceedings are those that are not based on any right *573expressly created by title 11, but would not exist outside of the bankruptcy. Id.
The parties make various arguments on the applicability of arising in, arising under, and related to jurisdiction. However, under section 1334(b), the Court need not distinguish between these categories: they “operate conjunctively to define the scope of jurisdiction.” In re Wolverine Radio Co., 930 F.2d 1132, 1141 (6th Cir.1991) (citing In re Wood, 825 F.2d 90, 93 (5th Cir.1987)). Here, the Court finds that Rachmale’s Complaint minimally provides the Court with “related to” jurisdiction.
An action is “related to” a case under title 11 if its outcome could “conceivably have any effect” on the bankruptcy estate. Wolverine Radio Co., 930 F.2d at 1142 (finding that even where an indemnification agreement “may ultimately have no effect on the debtor,” no conceivable effect could not be ruled out; related to jurisdiction was established).
LTC’s Articles of Incorporation and Management Agreement may obligate it to indemnify some or all Defendants. Rachmale argues that, because Defendants acted in bad faith, indemnification is not required. But questions of bad faith are factual determinations. And, section 1334(b) “does not require a finding of definite liability of the estate as a condition precedent to holding an action related to a bankruptcy proceeding.” Wolverine Radio Co., 930 F.2d at 1142. Because any judgment that results from Rachmale’s Complaint could conceivably effect LTC’s bankruptcy estate, through the indemnification provisions, the Court has subject matter jurisdiction.7
Jurisdiction exists. The Court finds equitable remand the most appropriate course of action.
B. Equitable Remand Pursuant to 28 U.S.C. § 1452(b) is Appropriate
Section 1452(b) allows the Court to remand “on any equitable ground.” 28 U.S.C. § 1452(b) (emphasis added). Courts have established a number of considerations relevant to this determination:
(1) duplicative and uneconomical effort of judicial resources in two forums; (2) prejudice to the involuntarily removed parties; (3) forum non conveniens; (4) the state’s ability to handle a suit involving questions of state law; (5) comity considerations; (6) lessened possibility of an inconsistent result; and (7) the expertise of the court in which the matter was originally pending[.]8
*574In re River City Resort, Inc., 14-10745, 2014 WL 3700564, at *11 (Bankr.E.D.Tenn. July 24, 2014). The Court has broad discretion to determine whether to equitably remand. Best v. Galloway (In re Best), 417 B.R. 259, 270 (Bankr.E.D.Pa.2009). The seven considerations relevant to equitable remand are discussed, separately, below.
1. Duplicative and Uneconomical Effort of Judicial Resources
Rachmale’s claims for (1) breach of contract and (2) breach of good faith and fair dealing directly involve LTC.9 At argument, Rachmale agreed to dismiss these and other claims, most likely to effect the pending bankruptcy proceeding. With these claims dismissed, the possibility of dual litigation is remote. Rachmale also agreed to amend his Complaint, upon remand, to remove all language seeking damages for harm to LTC; any damages sought must be limited to those Rachmale personally and distinctly experienced.
The Court acknowledges the existence of LTC’s potential indemnification obligations. But, the effect of this obligation on LTC’s bankruptcy estate — if any — will be minimal, and therefore insufficient to impede the efficient administration of judicial resources. Rachmale would first need to establish Defendants’ liability; the court would need to make a finding on bad faith; and, any subsequent claims against LTC arising out of Rachmale’s state court lawsuit would then be addressed with the remarkably large number of unsecured creditors listed in LTC’s Chapter 7 bankruptcy proceeding — any eventual pro rata distribution to Defendants would, thus, be minimal.
Rachmale also emphasizes his request for a jury trial and his unwillingness to consent to the bankruptcy court’s jurisdiction. See 28 U.S.C. 157(e) (“[i]f the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specifically designated to exercise such jurisdiction by the district court and with the express consent of all the parties”). Rachmale contends that, if the case were to be heard in Delaware Bankruptcy Court, he would *575potentially be subjected to two proceedings to obtain a final resolution, should, for example, a district court require additional proof upon de novo review. The right to a jury trial weighs in favor of equitable remand. See In re Cont'l Holdings, Inc., 158 B.R. 442, 445 (Bankr.N.D.Ohio 1993) (citing generally Granfinanciera v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989)).
2. Prejudice to Rachmale
Given the case’s nascency, prejudice is not at issue.
3. Forum Non Conveniens
Rachmale resides in Michigan; the claims arise out of conduct and events that took place almost exclusively in Michigan; key witnesses and evidence remain here; and, none of the individual defendants is a Michigan resident. Defendants concede that just one event occurred in Delaware: LTC’s incorporation. But this, standing alone, is insignificant — Michigan is the most convenient forum.
4. Questions of State Law
Issues of state law predominate: Rach-male’s Complaint is steeped in state law claims — some of which are statutory. For example, in Count I of his Complaint, Rachmale alleges Defendants violated Michigan Compiled Laws Section 450.1489, which reads, in relevant part:
A shareholder may bring an action in the circuit court of the county in which the principal place of business or registered office of the corporation is located to establish that the acts of the directors or those in control of the corporation are illegal, fraudulent, or willfully unfair and oppressive to the corporation or to the shareholder.
Mich. Comp. Laws § 450.1489(1) (emphasis added). The Michigan Court of Appeals has interpreted this provision to create a direct — not derivative — cause of action for shareholders purportedly abused by individuals in control. Estes v. Idea Eng’g & Fabrications, Inc., 250 Mich.App. 270, 649 N.W.2d 84, 89 (2002).10 These claims are best-adjudicated by a Michigan court.
Finally, to the extent Defendants argue that Delaware law should apply to some of Rachmale’s claims under its shareholder choice of law provision, Michigan courts are capable of applying Delaware law.
5.Comity
Comity considerations dictate that “federal courts should be hesitant to exercise jurisdiction when ‘state issues substantially predominate^]’ ” Citibank v. White Motor Corp. (In re White Motor Credit), 761 F.2d 270, 274 (6th Cir.1985). Such is the case here.11
6.Lessened Possibility of an Inconsistent Result
As discussed above, duplicative litigation is unlikely; remand does not present a likelihood of inconsistent results.
7.Expertise of Michigan State Court
Michigan courts are well-equipped to handle the important questions of Michigan law at issue.
IV. CONCLUSION
Because this Court has jurisdiction — but nonetheless believes an equitable remand is appropriate — Rachmale’s motion is GRANTED; Counts III, IV, IX, X, and XI of Rachmale’s Complaint are DISMISSED. Rachmale’s remaining claims are REMANDED; upon remand, Rach-male shall file an amended complaint strik*576ing any language alleging damage to LTC. Defendants’ motion to transfer is DENIED AS MOOT.
. In re LTCCORP Gov’t Services, Inc., No. 14-11113-CSS (Bankr.D.Del.).
. Even though Rachmale’s underlying claims are non-core, the Court may enter a final order: both motions, by their very nature, could exist only in connection with a bankruptcy case, and are therefore core matters over which a bankruptcy court exercises jurisdiction. See, e.g., Official Unsecured Creditors’ Comm. v. Cohen (In re Hearthside Baking Co.), 391 B.R. 807, 811 (Bankr.N.D.Ill.2008) (finding that the bankruptcy court had jurisdiction to enter a final order on a motion to abstain and remand a non-core "related to” proceeding); Frelin v. Oakwood Homes Corp., 292 B.R. 369, 376 (Bankr.E.D.Ark.2003) (holding that a bankruptcy court had jurisdiction to enter final orders on motions for abstention, remand, and transfer).
.While some of the facts set out in this section are undisputed, most are taken from the Complaint, to which Defendants have yet to respond. The Court recognizes that Defendants will contest some of these facts as the case progresses: they, in large part, represent Rachmale’s view of what happened. This section therefore does not represent the Court’s findings of facts, but rather is an attempt to contextualize this matter.
. According to Rachmale, these locations changed in 2013, but remained in Detroit at all times relevant to this lawsuit.
. The United States Department of Justice is allegedly investigating LTC.
. On remand, Rachmale has agreed to amend his Complaint to make clear that he only *572seeks relief on his behalf — not LTC’s — so as not to invade the trustee’s province.
. Moreover, after removal, Rachmale stipulated to the dismissal of certain claims, arguably belonging to the bankruptcy trustee. See Harper v. AutoAlliance Intern., Inc., 392 F.3d 195, 210 (6th Cir.2004) (“[t]he existence of subject matter jurisdiction is determined by examining the complaint as it existed at the time of removal”).
. The Court may also abstain from hearing a particular proceeding "arising under” tide 11 of the Code or “arising in” or "related to” a case under tide 11 of the Code "in the interest of justice, or in the interest of comity with State courts or respect for State law.” 28 U.S.C. § 1334(c)(1). Courts look to a number of similar factors in determining whether permissive abstention under § 1334(c)(1) is appropriate:
(1) the effect or lack thereof on the efficient administration of the estate if a court recommends abstention;
(2) the extent to which state law issues predominate over bankruptcy issues:
(3) the difficulty or unsettled nature of the applicable law;
(4) the presence of a related proceeding commenced in state court or other non-bankruptcy court;
(5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334;
(6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
*574(7) the substance rather than the form of an asserted core proceeding;
(8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
(9) the burden of the bankruptcy court’s docket;
(10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties;
(11) the existence of a right to a jury trial; and
(12) the presence in the proceeding of non-debtor parties.
In re Martin Designs, Inc., 08-60431, 2009 WL 2707215, at **6-7 (Bankr.N.D.Ohio Aug. 26, 2009) (citing Delphi Automotive Systems, LLC v. Segway, Inc., 519 F.Supp.2d 662, 670-71 (E.D.Mich.2007)). Here, state law claims predominate over any bankruptcy issues; the state law claims are only indirectly related to the bankruptcy case; there is no independent basis for bankruptcy court jurisdiction; and, Defendants are all non-debtor parties. While the grounds relevant to equitable remand do not align perfectly with those for permissive abstention, "[t]he analysis under § 1334(c)(1) is largely the same as under § 1452(b).” In re National Century Fin. Enters., Inc. Inv. Litig., 323 F.Supp.2d 861, 885 (S.D.Ohio 2004); see also Mann v. Waste Management of Ohio, Inc., 253 B.R. 211, 215 (N.D.Ohio 2000) ("Permissive abstention under § 1334(c)(1) and equitable remand under § 1452(b) are essentially identical.”). As such, the presence of factors supporting remand of the lawsuit to state court pursuant to 1452(b) also provide ample equitable grounds for discretionary abstention pursuant to 1334(c)(1).
. LTC was a party to the contract.
. Whether the statute applies to LTC, a Delaware corporation, is another matter. But, this too is best resolved by a Michigan court.
. See footnote 6. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497405/ | OPINION AND ORDER DENYING DEBTOR’S MOTION TO ALTER OR AMEND ORDER
JACK B. SCHMETTERER, Bankruptcy Judge.
Debtor’s Confirmed Chapter 13 Plan provided for payment of 7% of unsecured debt over 36 months, Debtor moved to amend the Plan (Docket No. 25) to end it after 36 months even though only 1.85% will then be paid. Debtor has no financial trouble with making payments. After oral argument, an Order (Docket No. 26) was entered denying that Motion. Debtor now moves (Docket No. 27) under Rule 9023 Fed. R. Bank. P. to alter or amend that order. Under rule 9023, she must show legal error or factual mistake.
A. § 1825(a) does not provide basis for Debtor’s motion
Debtor argues that § 1325(a) only requires payment of all disposable income for an applicable commitment period and that any percentage provided for under a confirmed Plan is only an “estimate,” not a binding term, citing In re Greenig, 152 F.3d 631, 635 (7th Cir.1998). Greenig did hold that the amount of money that a debtor would have to pay in the plan discussed therein was an estimate, and not final. Here, the confirmed Plan has provisions which are labeled as estimates, such as Section H(2) “Estimated disbursements by the trustee for non-GUCs,” Section H(3) “Estimated payments available for GUCs and interest during initial plan term”, and Section H(4) “Estimated payments required after initial plan term.”
The confirmed Plan in this case provided that the Debtor was to pay to the Chapter 13 Trustee $200 per month for 36 months, totaling $7200. (Section D, ¶ 1) If the amount thus paid is not enough to pay general unsecured creditors the amounts provided in ¶¶ 8 and 9 of Section E, “then the Debtor shall make additional monthly payments, during the maximum plan term allowed by law, sufficient to permit the applied payments.” (Section D, ¶ 2) “The plan will conclude before the end of the initial term at any time that the debtor pays to the trustee the full amounts specified in Paragraphs 1 and 2.” (Section D, ¶ 3), (emphasis supplied).
Section E, Paragraph 8 of the Plan further provided as follows:
8. General unsecured claims (GUCs). All allowed nonpriority unsecured claims, not specially classified, including unsecured deficiency claims under 11 U.S.C. § 506(a), shall be paid, pro rata, to the extent possible from the payments set out in Section D, but not less than 7% of their allowed amount. [Enter minimum payment percentage on Line 4b of Section H.] (Emphasis supplied.)
*578Where the confirmed Plan provided that a term was an estimate, the term was clearly labeled as an estimate. But none of the language providing that the plan will be extended to provide full payment of the required minimum percentage was labeled as an “estimate.”
Debtor argues that nothing in the Bankruptcy Code requires a minimum percentage to be paid to creditors. Nonetheless, the confirmed Plan in this case provided for a firm minimum percentage, and “the provisions of a confirmed plan bind the debtor and each creditor.” 11 U.S.C. § 1327(a).
B. Court has discretion under § 1329 to Deny Amendment
Section 1329(a) of the Bankruptcy Code provides for when a confirmed plan may be modified at the request of the debtor, but does not provide any situation when a confirmed plan must be amended. Since no provision of the Bankruptcy Code provides that the plan must be modified, Debtor has not shown legal error. Nor were any new factual grounds raised. Therefore, Debt- or’s motion to alter or amend judgment will be denied.
Amendment of a confirmed plan is permitted by § 1329. A Seventh Circuit Court of Appeals panel has held that while § 1329 does not require any threshold requirement for a party to seek modification of a confirmed plan, “[wjhether a modification is granted is within the bankruptcy court’s discretion.” In re Witkowski, 16 F.3d 739, 748 (7th Cir.1994). In Witkow-ski, many of the debtor’s creditors failed to timely file proofs of claim, and the trustee moved to modify debtor’s plan to increase the percentage paid to creditors but to keep the plan term the same. Id. at 741. The debtor objected on the grounds that his plan provided a percentage payment to creditors, but allowed the length of the plan to fluctuate. The Seventh Circuit held that the bankruptcy court did not abuse its discretion by granting a modification sought by the trustee to increase the percentage paid to creditors. Id. at 748. The Witkowski opinion also reasoned that a plan modification requires that a modified plan to be proposed in good faith, but that “all proposed modifications need not be approved and in practice not all modifications are approved.” Id. at 746. In determining whether good faith is shown by a proposed amendment, one factor is whether the plan demonstrates “fundamental fairness in dealing with one’s creditors.” Id. (citing In re Smith, 848 F.2d 813, 817 (7th Cir.1988)). Here, Debtor has no difficulty making plan payments, and did not allege or show any difficulty from continuing plan payments until nonpriority unsecured creditors achieve a 7% dividend as provided in the confirmed plan. Therefore, it was within this court’s discretion to deny the requested modification of plan.
CONCLUSION
Clearly the 7% provision in the subject confirmed Plan is a mandated requirement, not in any sense an “estimate.” No change in circumstances warranted a reduction. Therefore, the Order denying a plan change that would reduce payments to a total of 1.65% was correct. Debtor has not shown a legal error or factual mistake as a basis to alter or amend it, and Debtor’s present Motion to alter or amend the Order denying the requested change is hereby DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497406/ | MEMORANDUM DECISION ON DEBTOR’S OBJECTION TO CLAIM FILED BY MARYIN THOMAS KNIGHTON
SUSAN V. KELLEY, Bankruptcy Judge.
The issue is whether the proof of claim of Marvin Thomas Knighton (“Mr. Knigh-ton”) should be disallowed as barred by either the First Amendment or the statute of limitations. The Court has authority to enter a final order on this dispute pursuant to 28 U.S.C. § 157(b)(2)(B).
Statement of Facts
The Archdiocese of Milwaukee (the “Debtor”) filed a petition for relief under Chapter 11 of the Bankruptcy Code on January 4, 2011. Mr. Knighton timely filed Proof of Claim No. 119 in the amount of $475,745 (the “Claim”), alleging that he is owed back-pay resulting from his wrongful termination as a Catholic priest. The Claim specified that $414,903 was for “Gross Compensation,” $21,866 was for “Retirement Savings Supplement,” and $38,976 was for “Professional Expenses.”
On February 12, 2014, the Debtor filed an objection to the Claim, urging disallowance under 11 U.S.C. § 502(b)(1) because the Claim is “unenforceable against the debtor ... under any agreement or applicable law.” (Debtor’s Obj. to Proof of Claim 119 ¶8.) Specifically, the Debtor’s objection is based on the Seventh Circuit Court of Appeals’ ruling in McCarthy v. Fuller, 714 F.3d 971 (7th Cir.2013), and the applicable statute of limitations. (Id.)
Mr. Knighton responded to the Claim objection in correspondence filed on March 17, 2014. He alleged that the Debtor wrongfully terminated him from the priestly ministry and refused to compensate him. (Docket No. 2589, at 1-2; Aff. Marvin Thomas Knighton Ex. C.) Even though Mr. Knighton was found not guilty of second degree sexual assault of a child in a jury trial in Milwaukee County, he was terminated as a Catholic cleric following two canonical trials. (Aff. Marvin Thomas Knighton Ex. D, Ex. C.) Mr. Knighton suggests that he was the victim of defamation, slander, libel, “Refusal of employment,” racial discrimination, and a violation of the Privacy Act of 1974. (Docket No. 2589, at 3-4.) Finally, Mr. Knighton notes that the Debtor did not abide by Canon Law, and “simply chose to do it their way.” (Id. at 4.)
After a preliminary hearing, the Debtor moved for summary judgment, claiming that even if all Mr. Knighton’s factual allegations are presumed true, his Claim cannot be allowed as a matter of law. The Debtor’s supporting brief argues that Mr. Knighton’s claims are barred by both the First Amendment of the United States Constitution and the applicable statute of limitations. (Debtor’s Br. Supp. Mot. Summ. J. (hereinafter “Debtor’s Brief’) 2.)
Summary Judgment Standard
Summary judgment is governed by Rule 56 of the Federal Rules of Civil Procedure, made applicable by Rule 7056 of the Federal Rules of Bankruptcy Procedure, and should be granted if the Debtor can establish that there is no genuine issue of material fact and that the Debtor is entitled to judgment as a matter of law. Fed. *581R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Material facts are facts that “might affect the outcome of the suit.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The Court should grant the Debtor’s summary judgment motion if Mr. Knighton failed to establish an essential element of his claim on which he bears the burden of proof at trial. Celotex, 477 U.S. at 322-23, 106 S.Ct. 2548. “The non-moving party, however, cannot rest on the pleadings alone, but instead must identify specific facts to establish that there is a genuine triable issue.” Bilow v. Much Shelist Freed Denenberg Ament & Rubenstein, P.C., 277 F.3d 882, 893 (7th Cir.2001). “[CJonclusory statements, not grounded in specific facts, are not sufficient to avoid summary judgment.” Lucas v. Chicago Transit Auth., 367 F.3d 714, 726 (7th Cir.2004).
Analysis
Mr. Knighton claims that the Debtor, a religious organization, wrongfully terminated him from the Catholic ministry as well as violated his state and federal rights. It is undisputed that Mr. Knighton served as a cleric in the Catholic Church in the Milwaukee Archdiocese, and that the Debtor removed Mr. Knighton from ministry following a canonical trial. In determining whether to allow the Claim, the Court must consider the scope of the rule precluding federal courts from interfering with a religious organization’s ability to choose its own ministers. And, assuming that the First Amendment does not bar the allowance of Mr. Knighton’s Claim, the Court must apply the statute of limitations to determine if the Claim is time-barred.
The First Amendment
The First Amendment to the United States Constitution begins, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof_” U.S. Const, amend. I. The Debtor principally relies on the ministerial exception as an affirmative defense to Mr. Knighton’s otherwise cognizable claim. Hosanna-Tabor Evangelical Lutheran Church & Sch. v. EEOC, — U.S. -, 132 S.Ct. 694, 705, 181 L.Ed.2d 650 (2012) (“[T]he Courts of Appeals have uniformly recognized the existence of a ‘ministerial exception,’ grounded in the First Amendment, that precludes application of [employment discrimination laws] to claims concerning the employment relationship between a religious institution and its ministers.”). In Hosanna-Tabor, the Supreme Court found such an exception when a minister sued her former employer under the Americans with Disabilities Act. The Equal Opportunity Employment Commission and Cheryl Perich brought suit against Hosanna-Tabor Evangelical Lutheran Church and School, claiming unlawful retaliation. Hosanna-Tabor moved for summary judgment, and the district court granted the motion because the suit was barred by the ministerial exception. The Sixth Circuit Court of Appeals vacated the district court decision and remanded the case, directing the district court to reach the merits on the retaliation claim. The Supreme Court reversed the judgment of the court of appeals.
In analyzing the historical underpinnings of the First Amendment, the Court explained, “The Establishment Clause prevents the Government from appointing ministers, and the Free Exercise Clause prevents it from interfering with the freedom of religious groups to select their own.” Id. at 703. According to the Court, “Requiring a church to accept or retain an unwanted minister, or punishing a church for failing to do so, intrudes upon more than a mere employment decision.” Id. at 706. The Court noted that at the time of *582the decision, Perich was no longer seeking reinstatement of her position; however, she continued to seek back-pay, compensatory and punitive damages, and attorneys’ fees. Importantly for this case, the Court stated,
An award of such relief would operate as a penalty on the Church for terminating an unwanted minister, and would be no less prohibited by the First Amendment than an order overturning the termination. Such relief would depend on a determination that Hosanna-Tabor was wrong to have relieved Perich of her position, and it is precisely such a ruling that is barred by the ministerial exception.
Id. at 709.
The Supreme Court favorably cited Serbian Eastern Orthodox Diocese for United States and Canada v. Milivojevich, 426 U.S. 696, 96 S.Ct. 2872, 49 L.Ed.2d 151 (1976), which addressed the propriety of a state court civil action challenging a church’s decision to terminate a cleric. In Milivojevich, the Illinois Supreme Court essentially reinstated the respondent as diocesan bishop, finding that the church failed to comply with its own laws and regulations when it removed him for defying the church hierarchy. In reversing the judgment, the Supreme Court explained that the First Amendment allows “hierarchical religious organizations to establish their own rules and regulations for internal discipline and government, and to create tribunals for adjudicating disputes over these matters. When this choice is exercised ... the Constitution requires that civil courts accept their decisions as binding upon them.” Id. at 724, 96 S.Ct. 2872. According to the Court, by investigating whether the church had properly adhered to its own church laws, the Illinois Supreme Court had “unconstitutionally undertaken the resolution of quintessentially religious controversies whose resolution the First Amendment commits exclusively to the highest ecclesiastical tribunals” within the church. Id. at 720, 96 S.Ct. 2372.
The Seventh Circuit Court of Appeals also addressed the ministerial exception in Tomic v. Catholic Diocese of Peoria, 442 F.3d 1036 (7th Cir.2006).1 In that case, Richard Tomic served as the music director and organist for the Peoria diocese, but after a dispute over the selection of Easter music, Tomic was dismissed and replaced with a much younger person. Tomic sued the diocese, claiming age-discrimination. He noted that the diocesan employment handbook specifically described the diocese as “ ‘an Equal Opportunity Employer’ that does not discriminate on account of race, sex, etc.— including age,” which Tomic argued subjected the diocese to employment discrimination laws. Id. at 1037. The district court dismissed Tomic’s suit, and the court of appeals affirmed. After determining that the ministerial exception applied to a diocesan music director, the court of appeals explained that federal courts are secular agencies that are precluded from exercising jurisdiction over the employment decisions of religious organizations.2 Id. at 1042. The court of appeals noted that “in investigating employment discrimination claims by ministers against their church, secular authori*583ties would necessarily intrude into church governance in a manner that would be inherently coercive, even if the alleged discrimination were purely nondoctrinal.” Id. at 1039.
Mr. Knighton argues that he was wrongfully dismissed from the church after canonical trials conducted by the Debt- or and the Archdiocese of Cincinnati. (Docket No. 2589, at 1-2; Aff. Marvin Thomas Knighton Ex. C.) Mr. Knighton complains about “violations within the canonical process.”3 (Docket 2589, at 2.) Mr. Knighton also claims that “this matter at hand does not have anything to do with the First Amendment of the Constitution. This matter has to do with the responsibilities of an Employer following through on their written rules and laws as an Employer to their employees.” (Knighton Response 2.) He cites several excerpts from Canon Law, suggesting that the Debtor violated these laws. (Knighton Response 3-4.) Specifically, Mr. Knighton argues that the Debtor’s failure to compensate him for the period from 2002 until his dismissal from the clerical state on June 10, 2011, was the most serious violation of Canon Law committed by the Debtor. (Knighton Second Response 2.) Finally, Mr. Knighton claims racial discrimination, arguing that “I believe that this matter was somewhat racially motivated.” (Docket No. 2589, at 3.)
Mr. Knighton misunderstands the law— this case is unquestionably governed by the First Amendment and applicable case law, including Hosannctr-Tabor, Milivoje-vich, and Tomic. Federal courts cannot assert themselves into the internal employment decisions of religious organizations. To allow Mr. Knighton’s Claim, this Court would be required to determine that the Debtor violated Canon Law and canonical trial procedures in its employment decisions. This is prohibited by the ministerial exception.
Mr. Knighton stresses the importance of the Debtor’s role as an employer and the necessity of following the law governing that relationship. (Knighton Response 2.) He also alleges that his termination from the clerical state was possibly racially motivated. (Id. at 2-3; Docket No. 2589, at 3.) However, this Court is bound to follow Supreme Court precedent which clearly provides that, with respect to its ministers, the Debtor is not subject to the same rules and regulations as non-religious employers. See Hosanna-Tabor, 132 S.Ct. at 705 (“Since the passage of Title VII of the Civil Rights Act of 1964, and other employment discrimination laws, the Courts of Appeals have uniformly recognized the existence of a ‘ministerial exception,’ grounded in the First Amendment, that precludes application of such legislation to claims concerning the employment relationship between a religious institution and its ministers.”); see also Tomic, 442 F.3d at 1040 (“But [the church] would not be constrained ... by employment laws that would interfere with the church’s internal management, including antidiscrimination laws.”); Rweyemamu v. Cote, 520 F.3d 198 (2nd Cir.2008) (applying the ministerial exception to an African-American Catholic priest’s racial discrimination claim against the bishop and the Diocese of Norwich). This Court cannot revisit the decisions of the Canon Law tribunals. As the Supreme Court stated in Milivojevich:
In short, the First and Fourteenth Amendments permit hierarchical religious organizations to establish their *584own rules and regulations for internal discipline and government, and to create tribunals for adjudicating disputes over these matters. When this choice is exercised and ecclesiastical tribunals are created to decide disputes over the government and direction of subordinate bodies, the Constitution requires that civil courts accept their decisions as binding upon them.
426 U.S. at 724-25, 96 S.Ct. 2372. Accordingly, this Court cannot second-guess whether the Debtor followed applicable law — whether Canon Law or federal employment discrimination law — in terminating or failing to compensate Mr. Knighton.
Finally, allowing Mr. Knighton’s Claim would signify that the Debtor was wrong to have dismissed Mr. Knighton from the clerical state — a ruling strictly prohibited by the ministerial exception. Like the minister in Hosanna-Tábor, Mr. Knighton is essentially seeking back-pay after an allegedly wrongful termination. However, the First Amendment ensures that religious organizations have complete “authority to select and control who will minister to the faithful.” Hosanna-Tabor, 132 S.Ct. at 709. Since the church alone decides the employment and termination of its ministers, this Court cannot find the Debtor liable for making a decision that Mr. Knighton disputes. In this case, if the Court allows Mr. Knighton’s Claim, it would “operate as a penalty on [the Debt- or] for terminating an unwanted minister, and would be no less prohibited by the First Amendment than an order overturning the termination.” Id. Mr. Knighton’s claims mimic the claims of the minister in Hosanna-Tabor and the choir director in Tomic, who complained about churches’ violations of employment laws and disputed the fairness of the process used to terminate them. But they could not find relief in civil court, and neither can he. The ministerial exception applies to bar Mr. Knighton’s Claim against the Debtor.
Statute of Limitations
Given the application of the ministerial exception, arguably the Court does not need to reach the Debtor’s statute of limitations argument. Nevertheless, to the extent that Mr. Knighton raises allegations that are not covered by the ministerial exception, the Court notes that Mr. Knighton’s Claim is time-barred. First, Mr. Knighton argues that the Debtor committed “Defamation/Slander/Libel,” noting that the Debtor’s website has “me down as a sex offender which I am not!”4 (Docket No. 2589, at 3.) Mr. Knighton also suggests that the Debtor contacted the Arizona Department of Education regarding the sexual abuse allegations against him in order to “thwart, destroy not only me as a person but this ministry I treasure along with my financial livelihood.” (Id.)
The Wisconsin statute of limitations for intentional tort claims is straightforward. According to the statute, “An action to recover damages for libel, slander, assault, battery, invasion of privacy, false imprisonment or other intentional tort to the person shall be commenced within 3 years after the cause of action accrues or be barred.” Wis. Stat. § 893.57. In this case, Mr. Knighton’s name was first published on the Debtor’s website on July 9, 2004. (Aff. of Lindsey M. Greenawald ¶4, Ex. A.) Accordingly, to be timely, Mr. Knigh-ton’s suit against the Debtor must have been filed by July 2007. See Ladd v. Uecker, 2010 WI App 28, ¶ 12, 323 Wis.2d 798, 780 N.W.2d 216 (applying the single-*585publication rule specifically to publication on the Internet in Wisconsin).
Mr. Knighton also claims that the Debtor contacted the Arizona Department of Education regarding the sexual abuse allegations against Mr. Knighton. The record is ambiguous on the date of the alleged contact but indicates that the Professional Practice Advisory Committee recommended that Mr. Knighton’s teacher certification application be granted on January 4, 2005. (Aff. Marvin Thomas Knigh-ton, Ex. E.) Presumably, if Mr. Knighton’s allegations are correct, the Debtor would have contacted the Arizona Department of Education close to that date, setting the statute of limitations for Mr. Knighton’s cause of action in approximately January 2008. Since he did not file a suit prior to that time, Mr. Knighton’s Claim arising from this activity is also time-barred.
Mr. Knighton cites the “Privacy Act of 1974” as support for his Claim. (Docket No. 2589, at 4.) According to Mr. Knighton, “These past eleven years the Archdiocese of Milwaukee simply violated my privacy by altering information from my records with the Archdiocese to shamefully disgrace me.” (Id.) First, as the Debtor correctly notes, the Privacy Act of 1974 is not applicable to the Debtor because the Debtor is a religious organization that does not fall within the statute’s definition of “agency”. See, e.g., Ehm v. Nat’l R.R. Passenger Corp., 732 F.2d 1250, 1255 (5th Cir.1984) (despite Amtrak’s definition as a “mixed ownership Government corporation,” Amtrak is not an “agency” subject to the Privacy Act); Ryans v. New Jersey Comm’n for the Blind & Visually Impaired, 542 F.Supp. 841 (D.N.J.1982) (Federal Privacy Act governs federal agencies only).
Additionally, claims under the Privacy Act are subject to a two-year statute of limitations. 5 U.S.C. § 552a(g)(5) (“An action to enforce any liability created under this section may be brought in the district court of the United States ... within two years from the date on which the cause of action arises-”). Mr. Knighton’s specific allegations under the Privacy Act are unclear, and other than his vague reference to the past eleven years, there is no indication that this cause of action arose within two years of the Debtor’s bankruptcy. Thus, either because the Privacy Act does not apply to the Debtor or because the action is time-barred, Mr. Knighton’s claim under the Privacy Act of 1974 fails.
Finally, Mr. Knighton alleges racial discrimination, arguing that he was one of the “first Black priest[s] for the Archdiocese of Milwaukee” and that “this matter was somewhat racially motivated.” (Docket No. 2589, at 3.) Although Mr. Knighton does not specify the statutory authority for his racial discrimination claim, the Debt- or’s brief assumes that Mr. Knighton’s claim arises under 42 U.S.C. § 1983.5 In Gray v. Locke, 885 F.2d 399, 409 (7th Cir.1989), the Seventh Circuit Court of Appeals held that a discrimination claim under § 1983 is subject to Wisconsin’s six-year statute of limitations for personal rights.
According to the Debtor, Mr. Knighton was terminated in 2002, requiring him to file his claim by January 1, 2009. (Debt- or’s Brief 7.) Mr. Knighton does not dispute the 2002 termination, as his correspondence to the Court states: “I have not officially worked or serve [sic] for the *586Archdiocese of Milwaukee since March of 2002.” (Docket No. 2589, at 3.) Even assuming that Mr. Knighton’s claim did not accrue until all of his appeal rights were exhausted in 2011, the Court would still disallow his § 1983 claim, as the Debtor is not a state actor and was not acting under color of law when it terminated Mr. Knigh-ton.
Title 42 U.S.C. § 1983 provides:
Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State ... subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law....
For liability to attach under § 1983, there must be state action or the defendant must be acting under the color of state law. See Rendell-Baker v. Kohn, 457 U.S. 830, 838, 102 S.Ct. 2764, 73 L.Ed.2d 418 (1982) (quoting Lugar v. Edmondson Oil Co., 457 U.S. 922, 937, 102 S.Ct. 2744, 73 L.Ed.2d 482 (1982)) (“The ultimate issue in determining whether a person is subject to suit under § 1983 is the same question posed in cases arising under the Fourteenth Amendment: is the alleged infringement of federal rights ‘fairly attributable to the State?’ ”). The actions of the Debtor, a religious organization, cannot constitute state action, and the Debtor does not act under color of law for purposes of this statute. Accordingly, Mr. Knighton’s claims against the Debtor under § 1983 must fail.
Conclusion
For the reasons stated above, Mr. Knighton’s Claim is barred by the ministerial exception, the statute of limitations, and the plain meaning of the applicable statutes. The Court will enter a separate order disallowing the Claim.
. The Debtor also cites McCarthy v. Fuller, 714 F.3d 971 (7th Cir.2013); however, the court of appeals’ decision in McCarthy does not add more to the analysis than already provided by the court of appeals’ decision in Tomic.
. In Hosanna-Tabor, the Supreme Court declared the ministerial exception an affirmative defense, rather than a jurisdictional bar. 132 S.Ct. at 709 n. 4.
. Mr. Knighton claims unfairness and partiality within the proceedings, and he also suggests that transcripts from the trial were altered and that information was omitted. (Docket No. 2589, at 2.)
. Mr. Knighton also notes that his picture and name were printed in the newspaper as well. (Docket No. 2589, at 3.)
. An alternative theory would be Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e, et seq. But that statute carries a prerequisite of filing a charge with the EEOC within 180 days of the alleged discriminatory act. 42 U.S.C. § 2000e-5(e)(l). There is no evidence that such a charge was filed in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497407/ | MEMORANDUM DECISION ON TRUSTEE’S OBJECTION TO CONFIRMATION
SUSAN V. KELLEY, Bankruptcy Judge.
Beth Ann Read (the “Debtor”) was not contributing to a retirement account when she filed her Chapter 13 case. Post-petition, she started making monthly contributions to a 401(k) account established by her employer. The Trustee objected to confirmation of her Chapter 13 plan, contending that, because of the retirement contributions, the Debtor is not dedicating all projected disposable income to her unsecured creditors as required by 11 U.S.C. § 1325(b).
Statement of Facts
The facts are straightforward and undisputed. Beginning in 2006, the Debtor made regular contributions to her 401(k) account, but at some point in 2008, she stopped. (Hearing 11:04:33.) In January 2014, prior to filing bankruptcy, she contacted her employer to resume the contributions, but her employer informed her that she would need to wait until the next quarterly enrollment period in April. (Hearing 11:06:07.) On February 20, 2014, the Debtor filed her Chapter 13 petition. Her income is below the median income for her family size in the State of Wisconsin.
Although she had not yet started making contributions, she listed a payroll deduction of $124.21 for voluntary retirement plan contributions on her Schedule I income schedule. (Hearing 11:04:48.) She actually started contributing to her 401(k) account on April 1, 2014. (Hearing 11:05:01.) Given the proposed duration of the Debtor’s plan, approximately $6,500 would be available for payments to unsecured creditors if the 401(k) contribution is disallowed. (Hearing 11:09:37.)
Analysis
The Court has jurisdiction under 28 U.S.C. § 1334. Chapter 13 plan confirmation disputes are core proceedings as defined by 28 U.S.C. § 157(b)(2)(L); as this matter stems from the Bankruptcy Code itself, this Court has authority to enter a final order.
Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), “disposable income” included both 401(k) contributions and 401(k) loan repayments. Seafort v. Burden (In re Seafort), 669 F.3d 662, 665 (6th Cir.2012) (collecting cases). BAPCPA introduced two disposable income provisions related to 401(k) contributions. First, § 1322(f) governs 401(k) loan repayments and provides that “any amounts required to repay such loan shall not constitute ‘disposable income’ under section 1325.” Second, a “hanging paragraph” in § 541(b)(7), states:
(b) Property of the estate does not include ...
(7) any amount—
(A) withheld by an employer from the wages of employees for payment as contributions—
(i) to-
il) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a governmental plan under section *588414(d) of the Internal Revenue Code of 1986 ...
except that such amount under this sub-paragraph shall not constitute disposable income as defined in section 1325(b)(2)[.]
Courts have noted that the hanging paragraph is “inelegantly drafted.” Seafort, 669 F.8d at 671; In re Egan, 458 B.R. 836, 843 (Bankr.E.D.Pa.2011) (“[L]ike many of the provisions of the Bankruptcy Code added by BAPCPA, this Court finds the text of § 541(b)(7) less than clear.”)
Faced with this ambiguity, courts have developed at least three different approaches to determine whether Chapter 13 debtors can make voluntary 401(k) contributions without running afoul of the disposable income requirements. The view advanced by the Debtor — often dubbed the Johnson approach — permits the deduction of voluntary retirement contributions when calculating disposable income, subject to a good faith analysis. Baxter v. Johnson (In re Johnson), 346 B.R. 256, 263 (Bankr.S.D.Ga.2006) (“Debtors may fund 401(k) plans in good faith, so long as their contributions do not exceed the limits legally permitted by their 401(k) plans.”); In re Drapeau, 485 B.R. 29, 38 (Bankr.D.Mass.2013) (“In sum, the Court holds that § 541(b)(7) excludes postpetition voluntary contributions to the retirement plans and annuities specified therein from the scope of disposable income under § 1325(b)(2), so long as made in good faith.”); Egan, 458 B.R. at 848 (“[T]his Court finds that Congress’s omission from § 541(b)(7) of any reference to the petition date suggests that that Congress did not intend a debt- or’s petition date to be determinative of the amount of post-petition retirement contributions a debtor may offset from her projected disposable income.”). Under this view, a Chapter 13 debtor can deduct voluntary post-petition contributions to calculate disposable income, even if the debtor was not making the contributions at the time of filing.
The converse position, frequently called the Prigge view, holds that § 541(b)(7) completely forbids a debtor from deducting voluntary retirement contributions to compute disposable income. In re Prigge, 441 B.R. 667, 677 (Bankr.D.Mont.2010). Prigge reasoned that Congress created an express exclusion for 401(k) loan repayments in § 1322(f), but did not include a similar exception for 401(k) contributions. Id. (“If Congress had intended to exclude voluntary 401(k) contributions from disposable income it could have drafted § 1322(f) to provide for such an exclusion, or provided one elsewhere. The absence of any exclusion of voluntary 401(k) contributions from the Code simply reinforces the Court’s conclusion that ... contributions to voluntary retirement plans are not a necessary expense.”) Endorsing Prigge, the bankruptcy court in In re McCullers, 451 B.R. 498 (Bankr.N.D.Cal.2011), focused on the language “except that” in § 541(b)(7)(A):
Use of the term “except that” suggests that the purpose of the language is merely to counteract any suggestion that the exclusion of such contributions from property of the estate constitutes postpetition income to the debtor. If Congress had intended to exclude pre-petition contributions from the calculation of disposable income more generally, it would have been much more natural for Congress to provide that such contributions are excluded from property of the estate “and” in the calculation of disposable income. Prigge’s more limited interpretation is reinforced by the fact that Congress used much more direct language in excluding retirement loan repayments from disposable income. Section 1322(f) was *589placed within the confínes of chapter IB itself, and states explicitly “any amounts required to repay such loan shall not constitute ‘disposable income’ under section 1325.”
Id. at 504.
A third view, adopted by the bankruptcy appellate panel in Burden v. Seafort (In re Seafort), 437 B.R. 204 (6th Cir. BAP 2010), allows the deduction of voluntary retirement contributions only to the extent that contributions were being made when the petition was filed. According to Seafort:
Read together, § 541(a) and (b) establish a fixed point in time at which parties and the bankruptcy court can evaluate what assets are included or excluded from property of the estate. Section 541(a) clearly establishes this point as the commencement of the case. Therefore, only 401(k) contributions which are being made at the commencement of the case are excluded from property of the estate under § 541(b)(7).
Id. at 209. To support the conclusion, the court cited a legislative intent to balance the interest of the creditors with a debtor’s interest in saving for retirement. Id. at 209-10.
This Court adopted Seafort’s reasoning in In re Noll, No. 10-35209, 2010 WL 5336916, 2010 Bankr.LEXIS 4868 (Bankr.E.D.Wis. Dec. 21, 2010). Noll involved the disposition of the debtors’ 401(k) loan repayments when the loan was scheduled to be paid in full prior to the completion of the Chapter 13 plan. The debtors proposed to convert the loan repayments to voluntary 401(k) contributions for the balance of the plan, but the Trustee objected, arguing that once the loan was satisfied, the debtors should increase their plan payments. Focusing on the express reference to 401(k) loan repayments in § 1322(f), this Court concluded that “the Debtors may only exclude their loan repayments from disposable income so long as they are loan repayments. As soon as the loan is satisfied, the shield of § 1322(f) is removed, and the funds become available to creditors. If the Debtors had been making voluntary contributions pre-petition, they would be allowed to continue those contributions, but they cannot convert loan repayments into voluntary contributions and satisfy the Code’s projected disposable income test.” Id. at *2-3, 2010 Bankr.LEXIS 4868, at *6 (emphasis supplied).
After Noll was decided, the Sixth Circuit Court of Appeals considered an appeal in Seafort. The court of appeals affirmed the decision of the bankruptcy appellate panel, “although for slightly different reasons than those provided by the BAP majority in this case,” and held that “Congress intended to exclude from disposable income and projected disposable income available for unsecured creditors only voluntary retirement contributions already in existence at the time the petition is filed.” Seafort v. Burden (In re Seafort), 669 F.3d 662, 674 (6th Cir.2012). According to the court of appeals, “Congress’s placement of 401(k) loan repayments within Chapter 13 itself and placement of the exclusion for voluntary retirement contributions elsewhere was deliberate ... The easy inference is that Congress did not intend to treat voluntary 401(k) contributions like 401(k) loan repayments, because it did not similarly exclude them from ‘disposable income’ within Chapter 13 itself.” Id. at 672; see also Keene Corp. v. United States, 508 U.S. 200, 208, 113 S.Ct. 2035, 124 L.Ed.2d 118 (1993) (quoting Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983)) (“Where Congress includes particular language in one section of a statute but omits it in another ..., it is generally presumed that Congress acts intentionally and purposely in *590the disparate inclusion or exclusion.”). Seafort also reasoned that Congress’s inclusion of the hanging paragraph in § 541(b)(7)(A) was meant to be read within the broader context of § 541(a)(1), excluding voluntary 401(k) contributions made before the petition date from property of the estate. 669 F.3d at 672.
The Debtor contends that the statutory analysis of Seafort and Prigge is inapplicable here because the Debtor’s income is below-median. This argument ignores the fact that the debtors in Noll also had below-median income, and this Court held that their post-petition voluntary contributions could not be excluded from disposable income. The bankruptcy court in In re Bruce, 484 B.R. 387 (Bankr.W.D.Wash.2012), more recently examined whether a below-median debtor’s 401(k) contributions could be deducted to reach projected disposable income. While disagreeing with some of the analysis in Prigge and McCul-lers, Bruce adopted the reasoning of the bankruptcy appellate panel in Seafort, holding that since the debtor was making the contributions pre-petition, the contributions could be excluded from the disposable income calculation. The court concluded:
In summary, this Court accepts [In re ] Parks’s [475 B.R. 703 (9th Cir. BAP 2012) ] holding that under § 541(b)(7)(A) only prepetition 401(k) contributions are excluded from property of the estate and therefore only prepetition contributions are excluded from disposable income as defined in § 1325(b)(2). But this Court further holds that the “except that” clause at the end of § 541(b)(7)(A)(i) excludes prepetition contributions from the calculation of CMI if such contributions were made in the six-month look-back period. If 401(k) contributions are deducted from the debtor’s income during that six-month period prepetition, they are not disposable income “as that term is defined in section 1325(b)(2),” and the monthly average of the contributions during that period must be deducted in the calculation of disposable income.
Id. at 394.
The Debtor urges the Court to reconsider its decision in Noll, follow the Johnson view, and allow her to deduct her 401(k) contributions to calculate her disposable income. But the relevant statutory provisions have not changed since Noll, and neither has the Court’s evaluation of this issue. As a result, the Debtor’s timing in this case is fatal to her arguments. She did not start making contributions until after the petition date. The hanging paragraph in § 541(b)(7)(A) is applicable only to voluntary contributions existing as of the commencement of the bankruptcy case by virtue of § 541(a)(1). See Seafort, 669 F.3d at 673. Moreover, as recognized in Seafort, Prigge, and Noll, there is great significance in § 1322(f)’s express exclusion of 401(k) loan repayments, but not voluntary 401(k) contributions.
Finally, the Debtor asks the Court to consider that she is a 34-year-old woman with only $5,100 currently saved for retirement. Presumably, the Debtor stands to gain some benefit from Chapter 13. A delay in her ability to save for retirement is one of the costs of that benefit. At 34, the Debtor has most of her working life ahead of her. She can resume retirement savings after she completes her Chapter 13 plan.
Conclusion
Since the Debtor was not making a voluntary contribution to her retirement plan at the time she filed her case, her post-petition contributions are not excluded from the disposable income calculation. The Debtor is thus not dedicating sufficient disposable income to her unsecured *591creditors. The plan cannot be confirmed. The Court will issue a separate order sustaining the Trustee’s objection. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497409/ | Chapter 11
MEMORANDUM DECISION ON MOTIONS TO DISMISS
DENNIS MONTALI, U.S. Bankruptcy Judge
I. INTRODUCTION
Plaintiff Allan B. Diamond, chapter 11 Trustee (“Trustee”) for debtor Howrey LLP (“Howrey” or “Debtor”), filed multiple nearly identical complaints for avoidance and recovery of actual and constructive fraudulent transfers and for an accounting and turnover and other relief, seeking to recover from several law firm defendants the value of profits received by them with respect to unfinished business that previously had been handled by Debtor. Relying on District of Columbia law which in turn relies on Jewel v. Boxer, 156 Cal.App.3d 171, 203 Cal.Rptr. 13 (1984), Trustee seeks to recover profits realized or to be realized by the defendant law firms from Debtor’s unfinished business (“Howrey Unfinished Business”). Trustee alleges that pre-petition waivers executed by Howrey partners relieving them of their duty to account for profits made on the Howrey Unfinished Business (the “Jewel Waiver”) constituted fraudulent transfers, and that the defendant law firms are liable as subsequent transferees. Several defendants moved for dismissal of the complaints, and on February 7, 2014, this court issued a memorandum decision (“First MTD Decision”) explaining why it was denying the motions in part and granting them in part, with leave to amend.1 See Diamond v. Pillsbury Winthrop Shaw Pittman, LLP, 2014 WL 507511 (Bankr.N.D.Cal. Feb. 7, 2014).
In the First MTD Decision, the court relied in part on its prior decisions in Greenspan v. Orrick Herrington & Sutcliffe (In re Brobeck, Phelger & Harrison LLP), 408 B.R. 318 (Bankr.N.D.Cal.2009) (“Brobeck”)-, Heller Ehrman LLP v. Arnold & Porter LLP (In re Heller Ehrman LLP), 2011 WL 1539796 (Bankr.N.D.Cal. Apr. 22, 2011) (“Heller I”); Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2013 WL 951706 (Bankr.N.D.Cal. Mar. 11, 2013) (“Heller II”)-, and Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2014 WL 323068 (Bankr.N.D.Cal. Jan. 28, 2014). The Brobeck and Heller actions pertained to unfinished business that was acquired by defendant law firms after the dates of dissolution of the debtor law firms. In the Howrey case, however, Trustee is also seeking recovery of profits made by several defendant law firms on Howrey Unfin*627ished Business brought to them by partners who departed before dissolution.
After the First MTD Decision, Trustee amended his complaints in his actions against various law firms, including seven of the eight defendant law firms that have filed the underlying motions to dismiss: Neal, Gerber & Eisenberg LLP (A.P. No. 13-3057) (“Neal”); Kasowitz Benson Torres & Friedman LLP (A.P. No. 13-3060) (“Kasowitz”); Sheppard Mullin Richter & Hampton LLP (A.P. No. 13-3062) (“Sheppard”); Jones Day LLP (A.P. No. 13-3093) (“Jones Day”); Hogan Lovells U.S. (A.P. No. 13-3094) (“Hogan”); Pillsbury Winthrop Shaw Pittman LLP (A.P. No. 13-3095) (“Pillsbury”); and Seyfarth Shaw LLP (A.P. No. 13-3254) (“Seyfarth”). He filed a new action against Perkins Coie LLP (A.P. No. 14-3032) (“Perkins”). Five of these eight firms (Neal, Kasowitz, Sheppard, Hogan, and Seyfarth) solely acquired Howrey partners prior to dissolution; the other three (Jones Day, Pillsbury, and Perkins) acquired Howrey partners both pre- and post-dissolution.
Trustee asserts four claims against all of the defendants based on their acquisition of Howrey Unfinished Business from partners who departed prior to dissolution: (1) for an accounting of unfinished business under 11 U.S.C. § 542; (2) for a turnover of profits under 11 U.S.C. § 542; (3) for an equitable accounting; and (4) for unjust enrichment. Trustee asserts an additional four claims for profits on Howrey Unfinished Business against the three firms that acquired post-dissolution partners: (1) for avoidance and recovery of the Jewel Waiver as an actual fraudulent transfer under 11 U.S.C. §§ 548(a)(1)(A) and 550; (2) for avoidance and recovery of the Jewel Waiver as an actual fraudulent transfer under 11 U.S.C. §§ 544 and 550 and D.C.Code § 28-3104(a); (3) for avoidance and recovery of the Jewel Waiver as a constructively fraudulent transfer under 11 U.S.C. §§ 548(a)(1)(B) and 550; (4) for avoidance and recovery of the Jewel Waiver as a constructively fraudulent transfer under 11 U.S.C. §§ 544 and 550 and D.C.Code § 28-3104(a).
The motions to dismiss the various complaints filed by the eight identified defendant law firms focused primarily on the claims relating to the pre-dissolution partners.2 However, after the motions to dismiss were filed, the United States District Court for the Northern District of California issued a decision in four “unfinished business” adversary proceedings in Heller Ehrman, LLP, holding that the defunct law firm could not recover profits generated by hourly rate matters brought by departing attorneys to new firms. Heller Ehrman, LLP v. Davis, Wright, Tremaine, LLP, — B.R. -, 2014 WL 2609743 (N.D.Cal. June 11, 2014) (the “Heller USDC Decision”). In addition, the New York Court of Appeals, in response to certifications of questions by the Second Circuit in the cases of Thelen LLP and Coudert Brothers LLP, held that a dissolved law firm’s pending hourly fee matters are not partnership “property” or “unfinished business” within the meaning of New York partnership law. In re Thelen LLP, 24 N.Y.3d 16, — N.Y.S.2d -, — N.E.3d -, 2014 WL 2931526 (July 1, 2014) (“Thelen”). As a consequence of the intervening case law, Trustee and the three movants who acquired post-dissolution partners expanded the scope of the briefing to address the new decisions and their applicability in the Howrey case.
*628On July 29, 2014, the court held a hearing on the motions to dismiss. For the reasons stated below, the court is granting the motions to dismiss the section 542 accounting and turnover claims and the equitable accounting claims arising from pre-dissolution acquisition of former How-rey partners. It is denying the balance of the motions to dismiss.3
II. DISCUSSION
A. Trustee Has Asserted Cognizable Claims Relating to Unfinished Business Acquired Post-Dissolution
The Heller USDC Decision holds that under California law the “unfinished business rule” of Jewel and its progeny is inapplicable when attorneys from a dissolving law firm join other law firms and bring with them work that the dissolving law firm necessarily could not complete. The Thelen decision deals with New York law and holds that the unfinished business rule does not apply to hourly rate matters.
Here, however, the law of the District of Columbia governs, and the District of Columbia courts have applied the unfinished business rule to hourly and contingency fee cases, have rejected the position that “new retention agreements” executed by former clients preclude enforcement of the unfinished business rule, and have overruled policy objections similar to those underlying the Heller USDC Decision. See, Beckman v. Farmer, 579 A.2d 618 (D.C.1992) and Robinson v. Nussbaum, 11 F.Supp.2d 1 (D.D.C.1997) (both discussed in more detail in the First MTD Decision).
Notwithstanding the interpretation of California law in the Heller USDC Decision and the change in New York law by the Thelen decision, no party has cited, and the court has not found, any change in the law of the District of Columbia since the First MTD Decision. Therefore, the court will adhere to District of Columbia law as set forth in that decision. The motions to dismiss the claims based on Howrey Unfinished Business acquired post-dissolution will be DENIED.
B. Trustee Has Not Asserted Cognizable Claims Relating to Unfinished Business Acquired Pre-Dis-solution Under Bankruptcy Code Section 542
In the First MTD Decision, the court rejected the Trustee’s attempt to use fraudulent transfer laws to recover profits on pre-dissolution matters that “no longer belonged to Debtor on the date of the critical transfer” (i.e., March 9, 2011, the date that the Howrey partners voted to dissolve the firm and adopted the Jewel Waiver). First MTD Decision at 20. The court continued:
Stated otherwise, when partners left Debtor prior to dissolution, taking How-rey Unfinished Business with them, that business itself and any future profits to be realized on it was no longer property of Debtor that could have been subsequently disposed of by the Jewel Waiver, a fraudulent transfer. Heller II, 2013 WL 951706 at *5; Heller I, 2011 WL 1539796 at *5; Brobeck, 408 B.R. at 338.
Id. (emphasis added).
As the “business itself and any future profits” from it were not property of the Debtor as of the date of dissolution, the court held that the Trustee’s section 542 *629claims were unsustainable. Id. at 24-25. The court also observed that “on the date of the Jewel Waiver the Howrey Unfinished Business that had already been taken by previously departed partners did not belong to Debtor and thus there was no transfer”. Id. Trustee still has not demonstrated how the business taken by pre-dissolution partners was property of Debt- or at the time of dissolution, and the court will abide by its prior holdings in the First MTD. The motions to dismiss the section 542 claims will be GRANTED without leave to amend.
C. Trustee Has Not Asserted Cognizable Claims For An Equitable Accounting Relating to Unfinished Business Acquired Pre-Dis-solution
Trustee alleges that when the pre-dissolution partners left Debtor, they had a duty to account for and turn over any profits generated on account of pre-disso-lution matters pursuant to D.C.Code §§ 33 — 104.04(b)(1) and 3S-106.08(b)(3). This is based on the premise that those pre-dissolution partners had a duty of loyalty to Debtor under that law to account to the partnership and hold as trustee any property, profit or benefit derived by the partner in the conduct and winding up of the partnership business.
The duty to account for profits by those partners is found in D.C.Code § 33-106.03(b)(3), which states in relevant part:
Upon a partner’s dissociation ... [t]he partner’s duty of loyalty under § 33-104.04(b)(1) [to account for partnership profits] ... continue^] only with regard to matters arising and events occurring before the partner’s dissociation....
D.C.Code § 33-106.03(b)(3) (emphasis added).
Trustee argues that those pre-dissolution partners therefore had a statutory duty of loyalty to Debtor with respect to “matters arising” prior to their departure, and alleges that the law firm defendants have collected revenues and/or profits relating to the pre-dissolution matters. Without an accounting from those law firm defendants, Trustee allegedly cannot determine the amount of the revenue received or the status of those pre-dissolution matters. He asserts that because the partners themselves had fiduciary duties to account, the law firm defendants must provide an accounting or Trustee will not have an adequate remedy at law.
The court rejects the Trustee’s theory as it attempts to impose fiduciary duties owed by individual departing partners on the defendant law firms, when no such duty exists. As stated in Heller II, the law firm defendants do not have fiduciary obligations to the Debtor or the Trustee. Heller II at *5 (Defendant firm contended “that it had no fiduciary duty to Heller. The court agrees.”) Because an accounting is a remedy imposed upon fiduciaries, it cannot be imposed upon those defendants here.
While the Trustee cites scant authority for the proposition that an accounting can be acquired from a non-fiduciary, that principle does not hold up under further examination. Although this court relied on Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP (In re Coudert Brothers LLP), 480 B.R. 145, 160-61 (S.D.N.Y.2012) in the First MTD Decision, its reasoning was rejected in Thelen. Despite Trustee’s reliance on Robinson, that case did not extend the duty to account to a third party not previously a member of the partnership formed by the litigants.
Further, older decisions that predate modern discovery seem out of date. More persuasive are the recent decisions relied *630upon by Defendants, including Haynes v. Navy Federal Credit Union, — F.Supp.3d -, 2014 WL 2591371 (D. D.C. June 10, 2014). There the district court rejected an aggrieved mortgagor’s claim for an accounting, holding:
Plaintiffs request for an accounting in equity as part of the overall relief in this case also fails, as this is a remedy premised on a breach of fiduciary duty or contract that Plaintiff does not establish. ‘An accounting is a detailed statement of debits and credits between parties arising out of a contract or a fiduciary relation.’ Bates v. Nw. Human Servs., Inc., 466 F.Supp.2d 69, 103 (D.D.C.2006). Such relief may be obtained at the close of litigation ... as long as the plaintiff is able to show that the remedy at law is inadequate. (Quotation marks omitted; emphasis added.)
Haynes, — F.Supp.3d at -, 2014 WL 2591371, *7.
Although the Trustee’s claim under this theory must fail, as discussed below, he may have an adequate remedy at law on his remaining count.
D. Trustee Has Asserted Cognizable Claims For Unjust Enrichment Relating to Howrey Unfinished Business Acquired Pre-Dissolution
In the similar counts in the complaints under this theory, the Trustee alleges that when the pre-dissolution partners left Howrey and joined their respective law firms, they transferred or caused' a transfer of revenue and/or profits on the Howrey Unfinished Business to their new law firms. He contends that because the partners failed to account for the revenue and/or profits, a benefit has been conferred upon the respective defendants and he has a superi- or claim to those profits because those pre-dissolution partners had a duty to hold profits in trust as required by District of Columbia law. Because he assets that if the defendants are allowed to retain those benefits the result will be unjust and inequitable, he seeks restitution of the amounts of profits collected and a judgment against the respective law firms in an amount of their gain.
Defendants argue that unjust enrichment under District of Columbia law requires that the plaintiff have parted with some value. They rely on cases such as Nevius v. Africa Inland Mission Intn’l, 511 F.Supp.2d 114 (D.D.C.2007) and Oceanic Exploration Co. v. ConocoPhillips, Inc., 2006 WL 2711527 (D.D.C. Sept. 21, 2006).
Those cases state that an element of unjust enrichment is that the plaintiff confer a benefit. But those cases do not rule out the situation where a plaintiff has an expectation of the benefit that it loses to a third party. In Nevius and Oceanic, the parties who bestowed the benefit had no connection with the plaintiff, nor did they deprive the plaintiff of anything it was otherwise entitled to. In contrast, cases cited by the Trustee do not state the rule in the active voice, viz., plaintiff conferred a benefit; they do so in the passive voice, viz., a benefit was conferred upon the defendant. See, for example, State Farm Gen’l Ins. Co. v. Stewart, 288 Ill.App.3d 678, 224 Ill.Dec. 310, 681 N.E.2d 625 (1997) for the proposition that:
A plaintiff alleging an unjust enrichment may be seeking to recovery benefits which he gave directly to the defendant, or one which was transferred to the defendant by a third party.
288 Ill.App.3d at 691, 224 Ill.Dec. 310, 681 N.E.2d 625, citing HPI Health Care *631Servs., 131 Ill.2d 145, 137 Ill.Dec. 19, 545 N.E.2d 672.
Under District of Columbia law, in Ellipso, Inc. v. Mann, 460 F.Supp.2d 99 (D.D.C.2006), the court described an unjust enrichment action as a quasi-contract, a contract implied in law, when a person retains a benefit (usually money) which in justice and equity belongs to another. Id. at 104, citing 4934, Inc. v. District of Columbia Dept. Of Employment Servs., 605 A.2d 50, 55 (D.C.1992).
The court recognized that the elements of unjust enrichment are similar to those of quantum meruit, with the added element that the plaintiff must show that it would be unjust for the recipient of a benefit to retain that benefit. Id. citing United States v. Ideal Electronic Security Co., Inc., 81 F.3d 240 (D.C.Cir.1996) (internal quotation marks omitted). Similarly, the district court in Bates v. Nw. Human Servs., Inc., 466 F.Supp.2d 69 (D.D.C.2006), cited Ellipso and noted that the District of Columbia Court of Appeals requires that plaintiff bringing a claim for unjust enrichment show that the plaintiff had a reasonable expectation of payment, the defendant should reasonably have expected to pay, or society’s reasonable expectations of person and property would be defeated by nonpayment, citing Heller v. Fortis Benefits Ins. Co., 142 F.3d 487, 495 (D.C.Cir.1998).
The rule has been stated slightly otherwise in Lorazepam & Clorazepate Antitrust Litigation, 295 F.Supp.2d 30 (D.D.C.2003). There the court stated that to articulate a general claim for unjust enrichment, plaintiffs must establish that they conferred a legally cognizable benefit upon defendants; defendants possessed an appreciation or knowledge of the benefit; and defendants accepted or retained the benefit under inequitable circumstances.
This result is consistent with the Restatement of Restitution and Unjust Enrichment which states that if third party makes a payment to a defendant, a claimant with a better legal or equitable right is entitled to restitution from the defendant to prevent unjust enrichment. See, RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 48 (2011).4
Taking all of this together, the court is satisfied that the Trustee has the better argument here and that he has properly stated a claim for unjust enrichment.
The pre-dissolution partners who left Debtor abrogated their responsibility under applicable District of Columbia law and as alleged, deprived Debtor of pre-dissolution partnership profits with regard to “matters arising”5 (namely Howrey Unfinished Business) before the partners’ dissociation.
With Debtor’s expectations frustrated, it follows that the law firm defendants do not have a greater legal or equitable claim to the profits the pre-dissolution partners brought with them, away from Debtor.
Finally, the court will not conclude that, on the mere allegations of the complaints alone, that retention of such profits by the law firm defendants is “just” rather than what the Trustee contends is “unjust.” Whether the Trustee may only recover profits on Howrey Unfinished Business attributed to the former Debtor partners themselves or he may recover all profits *632realized by the law firms may require the finder of fact to determine how much would be “just” to return to the Trustee and how much would be “unjust” to take from the defendants. The motions to dismiss this claim will be DENIED.
III. CONCLUSION
Counsel for the Trustee should serve and upload orders disposing of the motions to dismiss in each adversary proceeding consistent with this Memorandum Decision. The court will hold status conferences in each adversary proceeding on October 22, 2014, at 9:30 a.m.
. The court entered the First MTD Decision and separate orders in the following adversary proceedings: A.P. No. 13-3056 (Haynes & Boone LLP); A.P. No. 13-3057 (Neal, Gerber & Eisenberg LLP); A.P. No. 13-3060 (Ka-sowitz Benson Torres & Friedman LLP); A.P. No. 13-3093 (Jones Day LLP); A.P. No. 13-3094 (Hogan Lovells US); and A.P. No. 13-3095 (Pillsbury Winthrop Shaw Pittman LLP).
. In A.P. No. 13-3095, Trustee asserts various claims against certain former Debtor partners who joined Pillsbury. Those claims are not part of Pillsbury's motion to dismiss and are not dealt with in this memorandum decision.
. The eight adversary proceedings have not been consolidated but the motions were argued together. This Memorandum Decision is being filed in each of those adversary proceedings, with changes only in the caption of each.
. Defendants argue that the District of Columbia has not adopted this section of the Restatement. The Trustee argues persuasively that other provision have been adopted and this one like would be adopted too.
. See, D.C.Code § 33-106.03(b)(3), quoted, infra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497411/ | Chapter 7
MEMORANDUM OPINION GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
KAREN S. JENNEMANN, Chief United States Bankruptcy Judge
Defendant, Shane Garner, owned and operated various entities that carried out a fraudulent scheme to provide purported debt management services targeting desperate consumers with large amounts of debt. Plaintiff, the State of Texas, filed suit in Texas state court against Garner and his businesses alleging violations of the Texas Deceptive Practices-Consumer Protection Act and the Texas Consumer Debt Management Services Act.1 Before a judgment was rendered in the state court case, the Defendant filed for Chapter 7 relief, prompting the Plaintiff to file the present complaint seeking a determination that Garner’s liability for deceptive trade practices under the aforementioned statutes should be excepted from the discharge under 11 U.S.C. § 523(a)(2)(A).
Defendant Garner was the owner, Director, President, and Chief Executive Officer of Credit Alliance Group, Inc. (“CAG”)2 and exercised complete control over CAG’s operations. CAG targeted consumers with high unsecured debt and offered to perform debt management services its customers, claiming that use of its services would allow customers to settle their obligations for sums as low as 20 to 60 percent of the unsecured debt. Customers would pay CAG, usually monthly, and CAG promised to maintain at least a portion of that money in trust account for debt settlement purposes.
Plaintiffs Texas lawsuit alleged that Garner, through CAG, made numerous misrepresentations to induce customers into paying for debt settlement services it never provided. Further, the Plaintiff alleged that Garner and CAG commingled *646customer funds in its own operating account after representing each customer’s funds were held in trust, and Garner used customer funds for personal expenses. Plaintiff also asserted that CAG operated for seven years without being properly registered as a debt management services provider with the State of Texas. All of the Plaintiffs claims were based on violations of Texas’ Consumer Debt Management Services Act and Texas’ Deceptive Trade Practices-Consumer Protection Act.3
After Garner filed for Chapter 7 relief and the Plaintiff filed this proceeding, the Court abated this adversary proceeding to allow the Plaintiff to obtain relief on the underlying claims in Texas state court. The Texas state court entered a Final Judgment and Permanent Injunction (“Final Judgment”)4 based on agreed stipulations and agreed findings of fact and conclusions of law, which held Garner liable to pay $12,100,000 to the Plaintiff, jointly and severally with CAG, “as Restitution to consumers and other identifiable persons pursuant to Texas Business and Commerce Code Section 17.47(d).”5 The Final Judgment further held Garner liable to pay the Plaintiff $24,000,000 in civil penalties and $640,000 for attorney fees, all joint and several with CAG.6
Plaintiff now seeks summary judgment in this adversary proceeding.7 Under Federal Rule of Civil Procedure 56, made applicable by Federal Rule of Bankruptcy Procedure 7056, a court may grant summary judgment where “there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.”8 The moving party has the burden of establishing the right to summary judgment.9 Conclusory allegations by either party, without specific supporting facts, have no probative value.10 In determining entitlement to summary judgment, “facts must be viewed in the light most favorable to the nonmoving party only if there is a ‘genuine’ dispute as to those facts.”11 “Where the record, taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.”12 “Once the movant ... satisfies its initial burden under Rule 56(c) of demonstrating the absence of a genuine issue of material fact, the burden shifts to the nonmovant to ‘come forward with “specific facts showing that there is a genuine issue for trial.” ’ ”13
In its summary judgment motion, the Plaintiff primarily relies on the *647collateral estoppel effect of the Final Judgment’s findings to establish nondischarge-ability under § 523(a)(2)(A) of the Bankruptcy Code.14 Collateral estoppel “bars the relitigation of any ultimate issue of fact actually litigated and essential to the judgment in a prior suit, regardless of whether the second suit is based upon the same cause of action.”15 Here the Final Judgment rests on agreed stipulations between the Plaintiff and the Chapter 7 trustee, not the Defendant Garner.16 As such, the Court was hesitant to lend unquestioned collateral estoppel effect to the Final Judgment, particularly given that “the application of collateral estoppel in a particular case is a matter of trial court discretion.”17
To determine whether a state court judgment should be afforded collateral estoppel effect, “the collateral es-toppel law of that state must be applied to determine the judgment’s preclusive effect.”18 The Final Judgment was issued by a Texas state court, so the Court applies Texas collateral estoppel law to determine whether collateral es-toppel applies. “Under Texas law, a party is collaterally estopped from raising an issue when: (1) the facts sought to be litigated in the second case were fully and fairly litigated in the first; (2) those facts were essential to the prior judgment; and (3) the parties were cast as adversaries in the first case.”19 “Collateral estoppel principles apply under Texas law whether the issue is heard and determined through adjudication by a tribunal or is determined by the agreement of the parties.”20
The Court’s main concern over the Final Judgment’s preclusive effect is that the findings of fact and conclusions of law were based on agreement between the Plaintiff and the Chapter 7 trustee. Garner did not sign the agreed Final Judgment, and despite some unclear language, the Court concludes that Garner, individually, did not agree to its findings.21 How can an agreed judgment collaterally estop a party who did not agree to its terms?22 *648The Chapter 7 trustee clearly had authority to settle the state court case on behalf of the Debtor’s business entities and his bankruptcy estate, but that was the extent of his authority. The fact that the Final Judgment’s findings were based an “agreement” that Garner did not sign leads the Court, in its discretion, to decline lending the Final Judgment collateral estoppel effect.
Garner however never challenged or appealed the validity of the Final Judgment. So, even though the Court refuses to allow any of collateral estoppel effect to the Final Judgment, the Final Judgment is still in full force and effect and serves as valid evidence of the debt owed to the Plaintiff. Garner has not shown any evidence of an appeal of the Final Judgment. In fact, he has not filed anything at all in this case, as an answer to the Plaintiffs complaint or in response to the Plaintiffs motion for summary judgment.
The Plaintiff properly served Garner, who even initiated settlement discussions through his attorney in the main bankruptcy case.23 Nevertheless, Garner completely failed to respond to the Plaintiffs complaint. Federal Rule of Civil Procedure 8(b)(6), made applicable in bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7008, states that “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.”24 The Bankruptcy Rules required Garner to file an answer to the Plaintiffs complaint by December 16, 2013.25 Garner never filed an answer or any responsive pleading by the deadline. Consequently, the statements made in the Plaintiff’s complaint are deemed admitted. The factual allegations made in the Plaintiff’s Texas state court complaint (“State Court Complaint”), which the Plaintiff incorporated into its complaint in this case, are also deemed admitted.26
“By failing to submit an answer or other pleading denying the factual allegations of Plaintiff’s complaint, Defendant admitted those allegations, thus placing no further burden upon Plaintiff to prove its case factually.”27 To prevail, however, the Plaintiff must still show that the facts asserted in the complaint establish liability under § 528(a)(2)(A). “[W]ith respect to liability, a defendant’s default does no more than concede the complaint’s factual allegations; it remains the plaintiffs burden to demonstrate that those uncontro-verted allegations, without more, establish the defendant’s liability on each asserted cause of action.”28
Plaintiffs complaint only seeks relief on one count, alleging that the monies owed to it as restitution for the Defendant’s fraudulent actions should be determined nondischargeable under § 523(a)(2)(A). “Courts have generally interpreted § 523(a)(2)(A) to require the traditional elements of common law fraud.”29 *649To prove fraud, the plaintiff must establish these elements by a preponderance of the evidence: (i) the debtor made a false representation with intent to deceive the creditor; (ii) the creditor relied on the misrepresentation; (iii) the reliance was justified; and (iv) the creditor sustained a loss as a result of the misrepresentation.30 The Court now looks to the averments in the Plaintiffs complaint to determine if the debt created by the Final Judgment meets the elements listed above.
Restitution awarded under state consumer protection statutes often is deemed nondischargeable under section 523(a)(2)(A) because those statutes aim to recoup consumer losses resulting from misrepresentation and deceptive trade practices.31 The elements of proof mimic the elements needed to prove fraud. Plaintiff however still must prove the elements under § 523(a)(2)(A) by a preponderance of the evidence.
First, Garner clearly made false misrepresentations intended to deceive consumers. Garner falsely represented: (1) participation in CAG’s debt management services would result in settlement of the consumers’ debts for 20% to 60% of the outstanding balance within 6 to 36 months;32 (2) that customers would not “owe a dime” if Garner and CAG failed to successfully settle their customers’ debts;33 (3) that customers’ funds would be held in an FDIC-insured escrow account under the customer’s control;34 (4) that CAG was a member of the FDIC;35 (5) that customer’s funds would be held in trust and under the customer’s sole control; 36 (6) that CAG was properly registered as a debt counselor/service provider with the Texas Office of Consumer Credit Commissioner;37 and (7) that certain con-*650tactual authorizations were valid when they were in fact void for the aforementioned failure to properly register with the Texas Office of Consumer Credit Commissioner.38
The two reliance elements are less clear from the Plaintiffs complaint, but nonetheless the Court finds them satisfied. Plaintiff, in its complaint, states that “[t]he consumers reasonably relied on the misrepresentations or failures to disclose.”39 Section 523(a)(2)(A) requires actual reliance and justifiable reliance, not reasonable reliance. But because this statement is deemed an admission by Garner, and reasonable reliance is a higher standard of reliance than the required justifiable reliance, the Court finds the second two elements of actual fraud under § 523(a)(2)(A) satisfied.40
Last, the Plaintiff must show that it sustained a loss as a result of the debtor’s misrepresentations. Plaintiff states in its complaint that consumers sustained losses of over twelve million dollars; this statement is deemed admitted by Garner.41 The Final Judgment further evidences a liquidated determination of consumer loss due to Garner’s actions. Plaintiff has proven loss sufficient to satisfy the fourth element of fraud under § 523(a)(2)(A).
Plaintiff has proven all four elements under § 523(a)(2)(A) for the $12,100,000 restitution portion of the Final Judgment. As to the $640,000 attorney fee award also provided for in the Final Judgment, attorney fees resulting from a nondischargeable debt under § 523(a)(2)(A) also are deemed nondis-chargeable.42 Similarly, the Court finds the $24,000,000 civil penalty imposed by the Final Judgment that arose from Garner’s fraud also is not dischargeable43
In conclusion, the Court will grant the Plaintiffs motion for summary judgment,44 not because collateral estoppel applies, but because the Final Judgment is valid and enforceable and the Plaintiff has established all four elements required to make the Final Judgment nondischargeable under § 523(a)(2)(A) of the Bankruptcy Code.
The Court will enter a separate Final Judgment consistent with these findings.
DONE AND ORDERED in Orlando, Florida, on September 5, 2014.
. The Texas Attorney General, specifically the Consumer Protection Division, is authorized to bring suit on behalf of aggrieved consumers under the Texas Deceptive Practices-Consumer Protection Act. See Tex. Bus. & Com. Code § 17.47. Plaintiff is also a creditor with standing to pursue this nondischargeability claim. See In re Smith, 39 B.R. 690 (Bankr.N.D.Ill.1984).
. Garner and CAG also did business as Credit Services Today.
. Doc. No. 1, Exhibit A at pp. 12-14. See generally Tex. Fin. Code Ann. § 394 et seq. (Consumer Debt Management Services Act); Tex. Bus. & Com.Code Ann. § 17.41 et seq. (Deceptive Trade Practices-Consumer Protection Act).
. Doc. No. 21, Exhibit 14.
. Doc. No. 21, Exhibit 14 at ¶ 4.1.
. Id.
. Doc. No. 21.
. Fed.R.Civ.P. 56.
. Fitzpatrick v. Schlitz (In re Schlitz), 97 B.R. 671, 672 (Bankr.N.D.Ga.1986).
. Evers v. General Motors Corp., 770 F.2d 984, 986 (11th Cir.1985).
. Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 1776, 167 L.Ed.2d 686 (2007).
. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).
. Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir.1997) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986)).
. All references to the Bankruptcy Code refer to 11 U.S.C. § 101 et. seq.
. In re Gibralter Res., Inc., 197 B.R. 246, 252-53 (Bankr.N.D.Tex.1996) aff'd sub nom. In re Gibraltar Res., Inc., 202 B.R. 586 (N.D.Tex.1996).
. See Doc. No. 21, Exhibit 14.
. Balbirer v. Austin, 790 F.2d 1524, 1526 (11th Cir.1986).
. In re St. Laurent, 991 F.2d 672, 675-76 (11th Cir.1993).
. In re Gamble-Ledbetter, 419 B.R. 682, 694 (Bankr.E.D.Tex.2009).
. Id. (citations omitted).
. The Final Judgment states "for purposes of the agreed stipulations, agreed findings of fact and conclusions of law, definitions, restitution, civil penalties, attorneys' fees and costs, Credit Alliance Group, Inc., agreed permanent injunction, and other relief in Sections I. through VI. of this Final Judgment, appeared by and through their Chapter 7 Bankruptcy Trustee-” (Doc. No. 21, Exhibit 14 at p.l.) Some language throughout the Final Judgment states that Garner, individually, did not agree to the judgment’s injunctive relief, which may imply that he agreed to the other relief provided for in the Final Judgment. (See, e.g., id. at p.2, ¶ 1.12.) However, considering that Garner’s signature does not appear on the Final Judgment, and the Trustee "represented” him in the case, the Court concludes that the Final Judgment does not establish that Garner, in his individual capacity, agreed to the findings.
."A consent or agreed judgment is contractual in nature and in effect is a written agreement between the parties as well as an adjudication. It is as conclusive as any other judgment as to the matters adjudicated.” Gamble-Ledbetter, 419 B.R. at 694 (citing Wagner v. Warnasch, 156 Tex. 334, 295 S.W.2d 890, 893 (1956)).
. Doc. No. 4. Garner’s main case attorney, Christopher Shipley, later clarified that he does not represent Garner in this adversary proceeding. (Doc. No. 20.)
. Fed.R.Civ.P. 8(b)(6); Fed. R. Bankr.P. 7008.
. Fed. R. Bankr.P. 7012(a).
. Doc. No. 1, ¶ 23. The State Court Complaint is attached as Exhibit A to Doc. No. 1.
. Burlington N.R. Co. v. Huddleston, 94 F.3d 1413, 1415 (10th Cir.1996) (discussing identical former Rule 8(d)).
. Gunawan v. Sake Sushi Rest., 897 F.Supp.2d 76, 83 (E.D.N.Y.2012).
. SEC v. Bilzerian (In re Bilzerian), 153 F.3d 1278, 1281 (11th Cir.1998).
. SEC v. Bilzerian (In re Bilzerian), 153 F.3d 1278, 1281 (11th Cir.1998). See also Field v. Mans, 516 U.S. 59, 73-75, 116 S.Ct. 437, 445-46, 133 L.Ed.2d 351 (1995) (holding that Section 523(a)(2)(A) requires justifiable rather than reasonable reliance).
. See, e.g., In re Taite, 76 B.R. 764, 773 (Bankr.C.D.Cal.1987); In re Audley, 268 B.R. 279 (Bankr.D.Kan.2001).
. Doc. No. 1, ¶¶ 26, 29 ("[T]he State Court Defendants ultimately failed to provide the debt settlement services as promised and failed to refund the fees charged, thereby defrauding consumers.”); State Court Complaint (Doc. No. 1, Ex. A), at ¶ 11.2 ("CAG failed to provide the debt settlement services for which it charged fees to consumers.”).
. Doc. No. 1, ¶ 28; State Court Complaint (Doc. No. 1, Ex. A), at ¶ 11.2 ("The cover page of enrollment packages has included the promise that customers would not owe Defendants’ "a dime” if Defendants failed to perform as promised.”). Gamer and his businesses failed to perform the promised services. See supra note 32.
. Doc. No. 1, ¶ 30; State Court Complaint (Doc. No. 1, Ex. A), at ¶ 11.5 ("CAG not only charged fees for services never provided, it also diverted customers' funds in CAG’s own operating account, including the account Defendant GARNER used to pay personal bills.”) and ¶ 13.1(e).
. Doc. No. 1, II 30 ("CAG enrollment packages have included an insignia stating 'Member FDIC’ but CAG is not a member of the FDIC.”); Doc. No. 21, Exhibit 15 (affidavit by FDIC stating that CAG "is not an insured depository entity and does not have a pending application with FDIC”).
. Doc. No. 1, ¶ 31 ("[T]he State Court Defendants unlawfully diverted consumer funds that were to be held in trust for negotiations.”) and ¶ 32; State Court Complaint (Doc. No. 1, Ex. A), at ¶¶ 11.5 & 11.6 ("Dissatisfied customers have discovered not only that they cannot get a refund of amounts paid as advance fees, but that they likewise have no control over, and cannot recover any of the funds CAG promised to hold in escrow.”).
. Doc. No. 1, ¶ 33; State Court Complaint (Doc. No. 1, Ex. A), at ¶¶ 11.6-11.8.
. Doc. No. 1,11 34.
. Doc. No. 1, ¶ 40.
. See Field v. Mans, 516 U.S. 59, 73, 116 S.Ct. 437, 445, 133 L.Ed.2d 351 (1995) (holding the proper standard of reliance under § 523(a)(2)(A) is “justifiable reliance,” and that it stands somewhere between "mere reliance” and "reasonable reliance”).
. Doc. No. 1, ¶ 41.
. Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998).
. See Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (interpreting § 523(a)(2)(A)’s exception to discharge to encompass "any liability arising from money, property, etc., that is fraudulently obtained, including treble damages, attorney’s fees, and other relief that may exceed the value obtained by the debtor.”); In re Audley, 268 B.R. 279, 285 (Bankr.D.Kan.2001).
.Doc. No. 21. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497412/ | Chapter 7
ORDER ON MOTION TO DISMISS PURSUANT TO 11 U.S.C. SECTION 707(b)(1) BASED ON PRESUMPTION OF ABUSE ARISING UNDER 11 U.S.C. SECTION 707(b)(2) AND ABUSE ARISING UNDER 11 U.S.C. SECTION 707(b)(3)
PAUL M. GLENN, United States Bankruptcy Judge
THIS CASE came before the Court to consider the Motion to Dismiss Pursuant to 11 U.S.C. Section 707(b)(1) based on Presumption of Abuse Arising under 11 *652U.S.C. Section 707(b)(2) and Abuse Arising under Section 707(b)(3). (Doc. 80). The Motion was filed by the United States Trustee (UST).
The parties agree that the controlling issue for resolution of the Motion is whether § 707(b)(2) applies to bankruptcy cases that were initially filed under Chapter 13 of the Bankruptcy Code and later converted to Chapter 7.
The Court finds that § 707(b)(2) applies to converted cases, in part because (1) the conversion of a Chapter 13 case operates as an order for relief under Chapter 7; (2) upon conversion, the debtor is required to file an Official Form 22A, which includes the Determination of § 707(b)(2) Presumption; and (3) the Bankruptcy Code and Rules establish an intent to apply the abuse analysis after conversion.
Because § 707(b) applies to converted cases, the UST’s Motion should be granted, and this case should be dismissed in accordance with the parties’ agreement.
Background
The Debtor, Christina M. Summerville, filed a petition under Chapter 13 of the Bankruptcy Code on June 24, 2011.
On October 7, 2011, the Court entered an Order Confirming the Debtor’s Chapter 13 Plan. (Doc. 23). The confirmed plan was subsequently modified on March 27, 2012, May 22, 2012, and November 2, 2012. (Docs. 36, 45, 59).
On April 1, 2013, the Court entered an Order dismissing the Chapter 13 case based on the Debtor’s failure to make payments under the confirmed plan. (Doc. 68). The effective date of the Order was delayed to allow the Debtor to convert her case to another chapter of the Bankruptcy Code.
On April 23, 2013, the Debtor filed a Notice of Conversion from Chapter 13 Case to Chapter 7 Case, and the case was converted on April 24, 2013. (Docs. 72, 73).
On July 22, 2013, the UST filed a Motion to Dismiss the Debtor’s Chapter 7 case pursuant to § 707(b)(1) of the Bankruptcy Code. Generally, the UST asserts that the case should be dismissed based on the presumption of abuse that arises under § 707(b)(2), and also based on the Debtor’s bad faith and the totality of the circumstances under § 707(b)(3). (Doc. 80, pp. 8-9).
On January 22, 2014, the UST filed an Agreed Motion to cancel the final eviden-tiary hearing on its Motion to dismiss the case, and stated:
5. The parties have conferred and agree that a disputed legal issue is entirely dispositive of this case. Specifically, the parties disagree as to whether 11 U.S.C. § 707(b)(2) applies to cases converted from chapter 13 of the bankruptcy code. If section 707(b)(2) applies, the parties agree that the UST’s Motion to dismiss should be granted and the case should be dismissed. If section 707(b)(2) does not apply, the parties agree that the UST’s Motion to Dismiss should be denied.
(Doc. 95, ¶ 5). On January 26, 2014, the Court entered an Order granting the Agreed Motion, and directed the parties to file briefs “regarding whether 11 U.S.C. § 707(b)(2) applies in cases converted from chapter 13.” (Doc. 96).
Discussion
Generally, § 707(b)(2) provides that the Court shall presume that a Chapter 7 case is abusive if the debtor’s current monthly income, reduced by the expenses or payments determined under subsection (b)(2), is greater than certain threshold amounts set forth in the section. 11 U.S.C. § 707(b)(2). The calculation is *653known as the Means Test, and is the method to determine whether the case is presumptively abusive for purposes of dismissal under § 707(b)(1) of the Bankruptcy Code.
Section 707(b)(1) provides that the Court may dismiss a Chapter 7 case is it finds that the granting of relief would be an abuse of the provisions of Chapter 7. Specifically, § 707(b)(1) of the Bankruptcy Code provides in part:
11 U.S.C. § 707. Dismissal of a case or conversion to a case under Chapter 11 or 13
(b)(1) After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title if it finds that the granting of relief would be an abuse of the provisions of this chapter.
11 U.S.C. § 707(b)(l)(Emphasis supplied). A threshold question under § 707(b)(1) is whether the section applies only to cases that were initially “filed under” Chapter 7, or whether it also applies to cases that were initially filed under another chapter, and later converted to a case under Chapter 7.
A. St. Jean
This Court previously considered the question in the case of Michael John and Kim Ann St. Jean, Case No. 3:09-bk-6745-PMG, and determined that the abuse analysis of § 707(b) applies not only to cases that were initially filed under Chapter 7, but also to cases that were originally filed under Chapter 13 and later converted to liquidations under Chapter 7. (Case No. 3:09-bk-6745-PMG, Order on Motion to Dismiss Pursuant to 11 U.S.C. Section 707(b)(1), Doc. 65, January 24, 2011).
In evaluating the issue, the Court considered the interplay of a number of provisions of the Bankruptcy Code and the Bankruptcy Rules. In re St. Jean, Doc. 65, pp. 4-9. Based on the provisions, the Court concluded that § 707(b) applies to converted cases for three primary reasons.
First, the conversion of a Chapter 13 case operates as an order for relief under Chapter 7. Section 348 of the Bankruptcy Code provides that the conversion of a case from one chapter to another “constitutes an order for relief under the chapter to which the case is converted.” 11 U.S.C. § 348(a). Under § 348, “the original filing date is retained upon conversion, but the case is otherwise treated as if the debtor had originally filed under the converted chapter.” St. Jean, Doc. 65, pp. 10-11 (citing In re Kerr, 2007 WL 2119291, at 3.).
Second, a debtor who converts his case is required to file an Official Form 22A, which includes the Determination of § 707(b)(2) Presumption. Specifically, Rule 1019(1)(A) of the Federal Rules of Bankruptcy Procedure requires a debtor in a converted case to comply with Rule 1007. Fed.R.Bankr.P. 1019(1)(A). Rule 1007 requires a Chapter 7 debtor to file a statement of current monthly income as prescribed by the appropriate Official Form. Fed.R.Bankr.P. 1007(b)(4). The Official Form for Chapter 7 debtors is Form 22A. Form 22A is based on § 707(b)(2) of the Bankruptcy Code, and is used to calculate the debtor’s monthly income for purposes of determining whether the presumption of abuse arises under that section. St. Jean, Doc. 65, pp. 11-12 (citing In re Boule, 415 B.R. 1, 4 n. 4 (Bankr.D.Mass.2009)).
*654Third, the Bankruptcy Code and Rules establish an intent to apply the abuse analysis after the conversion of a Chapter 13 case to a Chapter 7 case. Under § 704(b)(1), for example, the UST is under a duty to evaluate the Official Form 22A submitted by individual debtors in Chapter 7 cases. 11 U.S.C. § 704(b). Following the UST’s evaluation, § 342(d) and § 348(c) require the clerk to notify creditors in converted cases if the presumption of abuse has arisen under § 707(b). If the UST or another interested party asserts that a converted case is an abuse of Chapter 7, Rule 1019(2)(A) provides for the commencement of a new time period after conversion for the filing of a motion under § 707(b). Fed.R.Bankr.P. 1019(2)(A). St. Jean, Doc. 65, pp. 13-14.
For these primary reasons, the Court found in St. Jean that the abuse analysis of § 707(b) applies to cases that were initially filed under Chapter 13 and later converted to liquidations under Chapter 7. The conclusion is consistent with the purpose of § 707(b) “to remedy the abuses that occur when a consumer debtor receives a discharge of all of his debt despite his ability to repay a portion of it through a chapter 13 plan.” In re Naut, 2008 WL 191297, at 12 (Bankr.E.D.Penn.).
B. Subsequent decisions
After the decision in St. Jean, at least three other Bankruptcy Courts in the Middle District of Florida have considered whether § 707(b) applies in converted cases, and adopted the “plain language” view. See In re Thoemke, 2014 WL 443890 (Bankr.M.D.Fla.); In re Martin, Case No. 3:11-bk-7928-JAF (Doc. 101); and In re Layton, 480 B.R. 392 (Bankr.M.D.Fla.2012). Under the “plain language” view, § 707(b) does not apply to Chapter 7 cases that were converted from Chapter 13, because the converted cases were not “filed by an individual debtor under this chapter [7]” as provided by § 7G7(b)(l);
Clearly, the plain language view is recognized as a “permissible reading” of § 707(b) of the Bankruptcy Code. In re Davis, 489 B.R. 478, 480 (Bankr.S.D.Ga.2013). Nevertheless, this Court is persuaded that the better approach is to evaluate § 707(b) in light of the entire statutory framework surrounding § 707(b). See In re St. Jean, Case No. 3:09-bk-6745-PMG, Doc. 65.
As indicated above, the “plain language” Courts decline to apply § 707(b) to converted cases because such cases were not “filed under” Chapter 7. According to these Courts, the inapplicability of § 707(b) to converted cases would not lead to abuses of the bankruptcy process, because other remedies are available to prevent debtors from avoiding the means test by filing Chapter 13 cases that they do not intend to pursue, and immediately converting them to cases under Chapter 7. In re Thoemke, 2014 WL 443890, at 2; In re Layton, 480 B.R. at 397-98.
The remedy to address abuses of the Chapter 7 process, however, is found in § 707(b), which expressly provides that a Chapter 7 case may be dismissed if the Court “finds that the granting of relief would be an abuse of the provisions of Chapter 7.” 11 U.S.C. § 707(b)(1). The alternative provisions cited by the plain language Courts, such as § 707(a), are designed as a remedy for other failures or deficiencies. See In re Lassiter, 2011 WL 2039363, at 7 (“Cause” under § 707(a) is a separate and distinct ground for dismissal from “abuse” under § 707(b), and Courts have treated § 707(a) and § 707(b) as mutually exclusive grounds for dismissal, the former for “cause,” and the latter for “abuse.”). In other words, the “avenue” to address abusive practices in Chapter 7 *655eases is § 707(b), regardless of whether the case was originally filed as a Chapter 13 case or a Chapter 7 case.
Additionally, a number of recent decisions have been guided by the case law that interpreted § 707(b) prior to the BAPCPA amendments of 2005.
Moreover, the language at issue “may dismiss a case filed by an individual debtor under this chapter” has remained unchanged since § 707(b) was originally enacted as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984. 6 Collier on Bankruptcy, ¶ 707.LH (16th ed. rev.2012). In the years since its original enactment, bankruptcy courts have consistently applied § 707(b) to cases that were converted to chapter 7 from other chapters....
... “Pre-BAPCPA bankruptcy practice is telling because *we will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.’ ” Hamilton v. Lanning, [560] U.S. [505], 130 S.Ct. 2464, 2473, 177 L.Ed.2d 23 (2010); ... Thus, applying § 707(b) in converted cases is consistent with pre-BAPCPA practice, and Congress has not clearly indicated an intent to depart from established precedent.
In re Davis, 489 B.R. at 483-84. “As explained above, the operative language has not changed since it was enacted in 1984 and, since that time, courts routinely have applied section 707(b) to converted cases.” In re Reece, 498 B.R. 72, 81 (Bankr.W.D.Va.2013).
In considering the entire statutory framework surrounding § 707(b), the Court finds that § 707(b) applies to cases that were initially filed under Chapter 13, and later converted to Chapter 7. In re Reece, 498 B.R. at 81; In re Davis, 489 B.R. at 485.
C. Presumption
As indicated above, the abuse analysis of § 707(b) includes a determination of whether the presumption of abuse arises under § 707(b)(2)(A). It should be noted, however, that the abuse analysis of § 707(b) also includes a provision for rebuttal of the presumption under § 707(b)(2)(B). Specifically, § 707(b)(2)(B) provides in part:
§ 707, Dismissal of a case or conversion to a case under chapter 11 or 13
(B)(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.
11 U.S.C. § 707(b)(2)(B)(i)(Emphasis supplied). The two examples of special circumstances cited in the statute “are nonexclusive by virtue of the precedent words ‘such as.’ (Citation omitted.) A Bankruptcy Court has broad discretion to determine on a case by case basis whether special circumstances exist.” In re Stocker, 399 B.R. 522, 530 (Bankr.M.D.Fla.2008).
If the debtor in a converted case disputes the application of the presumption of abuse under § 707(b)(2)(A), therefore, he may seek to rebut the presumption by showing the existence of special circumstances under § 707(b)(2)(B).
Conclusion
The UST filed a Motion to Dismiss the Debtor’s Chapter 7 case under § 707(b) of the Bankruptcy Code. The parties agree that the controlling issue for resolution of *656the Motion is whether § 707(b)(2) applies to bankruptcy cases that were initially filed under Chapter 13 of the Bankruptcy Code, and later converted to Chapter 7.
The Court finds that § 707(b)(2) applies to converted cases, in part because (1) the conversion of a Chapter 13 case operates as an order for relief under Chapter 7; (2) upon conversion, the debtor is required to file an Official Form 22A, which includes the Determination of § 707(b)(2) Presumption; and (3) the Bankruptcy Code and Rules establish an intent to apply the abuse analysis after conversion.
Accordingly:
IT IS ORDERED that the Motion of the United States Trustee to Dismiss Pursuant to 11 U.S.C. Section 707(b)(1) Based on Presumption of Abuse Arising Under 11 U.S.C. Section 707(b)(2) and Abuse Arising Under 11 U.S.C, Section 707(b)(3) is granted, and this Chapter 7 case is dismissed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497413/ | ORDER
W. HOMER DRAKE, Bankruptcy Judge.
Currently before the Court is the Motion for Summary Judgment (hereinafter “Motion”) filed by Griffin E. Howell, III (hereinafter the “Trustee”), Chapter 7 Trustee for the bankruptcy estate of Matthew Steven Pritchett and Candice Renee Pritchett (hereinafter the “Debtors”). The Motion arises in connection with Trustee’s Complaint to Avoid Lien and Security Interest as Preferential against Gary L. Brown (hereinafter the “Defendant”). This Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(b)(2)(A) & (F); § 1334.
Because the Defendant failed to respond to the allegations contained in paragraphs 1-10 of the Trustee’s complaint, failed to respond to Trustee’s requests for admissions, and failed to controvert the Trustee’s statement of material facts made in accordance with this Motion, all facts included respectively therein are deemed admitted. See Fed. R. Bankr.P. 7008(a) (incorporating Fed.R.Civ.P. 8(b)(6) (“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.”)); Fed. R. BaNKR.P. 7036 (incorporating Fed.R.Civ.P. 36(a)(3) & (b) (“A matter is admitted unless, within 30 days after being served [a request for admissions], the party to whom the request is directed serves on the requesting party a written answer or objection.... A matter admitted under this rule is conclusively established unless the court, on motion, permits the admission to be withdrawn or amended.”)); BLR 7056-l(a)(2), N.D.Ga. (“All material facts contained in the moving party’s statement that are not specifically controverted in respondent’s statement shall be deemed admitted.”); see also Anheuser Busch, Inc. v. Philpot, 317 F.3d 1264, 1265 n. 1 (11th Cir.2003) (citing U.S. v. 2204 Barbara Lane, 960 F.2d 126, 129 (11th Cir.1992)). Accordingly, the following constitutes the Court’s findings of facts and conclusions of law.
Procedural History and Findings of Fact
The Debtors purchased a 2002 BMW Model X5 bearing a vehicle identification number of “5UXFA53582LV72414” (hereinafter the “BMW”) from Defendant.1 In connection with the purchase of the BMW, the Debtors executed a promissory note, dated June 1, 2008, payable to Defendant in the original principal amount of $20,049.62. The note grants Defendant a security interest in the BMW. However, Defendant did not perfect the security interest until April 4, 2012, when he acquired the notation on the certificate of title. Twenty-Two days later, on April 26, 2012, the Debtors sought relief under Chapter 7 of the United States Bankruptcy Code.2 The Trustee initiated this action on October 17, 2013. The Trustee’s complaint seeks to avoid the security interest transferred to Defendant pursuant to 11 U.S.C. § 547(b) and seeks an award of attorney’s fees in accordance with the Official Code of Georgia Annotated (hereinafter the “O.C.G.A.”) § 13-6-11.
Summary Judgment Standard
In accordance with Federal Rule of Civil Procedure 56 (applicable to bankruptcy under Fed. R. BankeP. 7056), this Court will *658grant summary judgment only if “there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law.” Fed. R.CrvP. 56(a); Chavez v. Mercantil Commercebank, N.A., 701 F.3d 896, 899 (11th Cir.2012). A fact is material if it might affect the outcome of a proceeding under the governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute of fact is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id. The moving party has the burden of establishing the right of summary judgment, Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir.1991); Clark v. Union Mut. Life Ins. Co., 692 F.2d 1370, 1372 (11th Cir.1982), and the Court will read the opposing party’s pleadings liberally. Anderson, 477 U.S. at 249, 106 S.Ct. 2505.
In determining whether a genuine issue of material fact exists, the Court must view the evidence in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); Rosen v. Biscayne Yacht & Country Club, Inc., 766 F.2d 482, 484 (11th Cir.1985). The moving party must identify those eviden-tiary materials listed in Rule 56(c) that establish the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); see also Fed.R.CivP. 56(e). Once the moving party makes a prima facie showing that it is entitled to judgment as a matter of law, the nonmov-ing party must go beyond the pleadings and demonstrate that there is a material issue of fact which precludes summary judgment. Celotex, 477 U.S. at 324, 106 S.Ct. 2548; Martin v. Commercial Union Ins. Co., 935 F.2d 235, 238 (11th Cir.1991).
Conclusions of Law
A 11 U.S.C. § 517
Subject to certain exceptions not relevant here, the Trustee “may avoid any transfer of an interest of the debtor in property,” which is made: (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) while the debtor was insolvent; (4) within 90 days of the filing of the petition; and (5) enabling such creditor to receive more than such creditor would receive if the transfer had not been accomplished, and the creditor received payment only to such extent as authorized by the provisions of Chapter 7 of the Bankruptcy Code. 11 U.S.C. § 547(b). Having considered the admitted facts, the Court concludes that the Trustee satisfied his burden establishing this lien as a preferential transfer, subject to avoidance.
The Debtors purchased the automobile prior to the petition date and continued their ownership until the instance of the transfer of the security interest, thus causing them to have an interest in the BMW.3 The Debtors granted a security interest in the BMW to the Defendant, thereby effecting a transfer within the meaning of the Code.4 Defendant admitted *659to being a creditor of the Debtors at the time of the transfer. Based on the admissions and the documents deemed genuine in this case, the Debtors transferred the security interest at least four years after the debt arose,5 thereby making the transfer on account of an antecedent debt owed by the Debtors to the Defendant. The Debtors were insolvent at the time of the transfer.6 The transfer occurred within the 90-day preference period. And finally, the transfer provides the Defendant more than he would have received from a Chapter 7 ease had the security interest never been transferred and he received a pro rata proportion of the liquidated estate assets along with other unsecured creditors. Accordingly, the Court finds that the lien should be avoided.
B. O.C.G.A § 13-6-11
The second count of the Trustee’s complaint asks for $3,615 in attorney’s fees pursuant to O.C.G.A. § 13-6-11, for stubborn litigiousness and for causing unnecessary trouble and expense. O.C.G.A. § 13-6-11 provides that “the expenses of litigation generally shall not be allowed as a part of damages; but where the plaintiff has specially pleaded and has made prayer therefor and where the defendant has acted in bad faith, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble and expense, the [finder of fact] may allow them. Ga.Code Ann. § 13-6-11.7 However, there is no evidence in the record to substantiate the claim. Defendant failed to answer Trustee’s request for admission number 13, which states “[a]d-mit that you have been stubbornly litigious and caused Plaintiff unnecessary trouble and expense in this proceeding.” Pl.’s Notice of Filing Disc., ECF No. 18. Nevertheless, this is a legal conclusion, and admissions regarding pure conclusions of law are not binding on the Court. See In re Valliani, 2014 WL 345700, at *4 (Bankr.E.D.Tex. January 30, 2014) (citing Carney v. IRS, 258 F.3d 415, 419 (5th Cir.2001) and Warnecke v. Scott, 79 Fed.Appx. 5, 6 (5th Cir.2003)). Accordingly, Plaintiff is required to point to facts that support an award of attorney’s fees for bad faith, stubborn litigiousness, or unnecessary trouble and expense.
First, nothing on the record supports either of these assertions as of the filing of the complaint. In fact, there is no mention that the Trustee ever contacted the Defendant prior to filing the complaint. The Trustee seems to believe that Defendants actions with regard to his insufficient answer and his failure to participate in discovery adequately satisfies his prima facie burden. It is uncertain whether an initial claim for attorney’s fees in the complaint can be substantiated through subsequent conduct.8 Assuming arguendo that *660the Trustee’s claim for attorney’s fees can derive from Defendant’s post-complaint inaction, the Court fails to see stubborn litigiousness or any cause leading to the accrual of unnecessary trouble and expense. The Defendant did not file unnecessary motions or counterclaims and did not frivolously object to actions taken by the Trustee. He simply failed to defend himself.9 Moreover, Defendant already suffered repercussions for his nonfeasance by having adverse facts admitted against him, and it seems inequitable to punish him a second time for the same failures.10 In actuality, Defendant’s inactivity may have simplified the Trustee’s prosecution of this case by reducing the necessary workload. Accordingly, the Court denies the Trustee’s request for an award of expenses and costs associated with this litigation.
Conclusion.
After reviewing all filings in this matter and considering the facts in a light most favorable to the non-moving party, the Court concludes that the Trustee is entitled to judgment as a matter of law on Count I of his complaint, which requests the Court’s finding that the security interest in the BMW is a preferential transfer in accordance with 11 U.S.C. § 547(b). The Court does not find the Trustee entitled as a matter of law as to Count II of his complaint, requesting attorney’s fees under O.C.G.A. § 13-6-11. Accordingly, it is hereby
ORDERED that the Trustee’s Motion for Summary Judgment is GRANTED in part and DENIED in part. The transfer of the security interest in the BMW, which Defendant perfected during the preference period, shall be avoided and preserved for the benefit of the estate in accordance with 11 U.S.C. § 547 and 11 U.S.C. § 551. The request for Trustee’s attorney’s fees is denied. The Court shall issue a judgment in accordance with this Order.
The Clerk is DIRECTED to serve a copy of this Order upon the Trustee, Trustee’s counsel, and the Defendant.
IT IS ORDERED.
. The exact date of the purchase is unclear to the Court, but the Debtors’ schedules reflect that the debt to the Defendant was incurred in September of 2006.
. 11 U.S.C. § 101 et seq.
. The Supreme Court interpreted “interest of the debtor in property” to mean "that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.” 5 Colliers on Bankruptcy ¶ 547.03[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. rev. 2013) (quoting Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990)).
. The Code defines a transfer as, inter alia, "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with ... an interest in property.” 11 U.S.C. § 101(54).
. For purposes of Section 547, the Code provides that a transfer is made at the time such transfer is perfected, if such transfer is perfected after 30 days. 11 U.S.C. § 547(e)(2)(B). Because the security interest was created in June of 2008 but not perfected until April of 2012, the transfer is presumed to have taken place upon the later date.
. For purposes of Section 547, a debtor is presumed to be insolvent during the 90-day period immediately preceding the date of the filing of the petition. 11 U.S.C. § 547(f).
. Alternatively, it appears from his brief that the Trustee feels fees should be awarded under the Court’s inherent authority to assess attorney’s fees where a party has acted "in bad faith, vexatiously, wantonly, or for oppressive reasons.” See Maid of the Mist Corp. v. Alcatraz Media, LLC, 446 Fed.Appx. 162, 164 (11th Cir.2011).
. Case law from Georgia’s appellate courts suggests disapproval of substantiating a claim by directing a court’s attention to subsequent actions of a defendant. In the case of Nash v. Studdard, the trial judge found the record *660devoid of facts showing bad faith and stubborn litigiousness, but decided that because the case was still pending, actions could arise ex post facto causing a substantiated claim to be pursued at a later time and upon a proper showing. Nash v. Studdard, 294 Ga.App. 845, 851-852, 670 S.E.2d 508 (Ga.Ct.App.2008). The appellate court found this inappropriate, stating that "the trial judge should not have deferred ruling after concluding that the record failed to show bad faith.” Id. at 852, 670 S.E.2d 508.
. The Court also keeps in mind that it is supposed to treat the actions or, in these circumstances, the inactions of a pro se defendant with leniency. See e.g., McWeay v. Citibank, N.A., 521 Fed.Appx. 784, 788 n. 3 (11th Cir.2013)
. The Court also acknowledges that, first and foremost, it is a court of equity. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497416/ | MEMORANDUM OPINION
THOMAS M. LYNCH, Bankruptcy Judge.
McHenry Savings Bank seeks relief from both the automatic stay and the co-debtor stay to proceed with its pending foreclosure proceeding with respect to real property commonly known as 8220 Crystal Springs Road, Woodstock, Illinois 60098 (the “Crystal Springs Property”). For the reasons stated below, the motions for relief from stay and relief from the co-debtor stay will be granted.
JURISDICTION AND PROCEDURE
The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G).
FINDINGS OF FACT
The Debtor, Perry Moy, filed for protection under Chapter 13 of the Bankruptcy Code on April 20, 2012. He filed an initial proposed Chapter 13 plan on June 22, 2012, and amended plans on July 20, 2012, November 29, 2012, February 19, 2013, April 30, 2013, and December 2, 2013. The Debtor’s proposed plan has not yet been confirmed, in part because there is a pending and unresolved dispute over whether certain of Perry’s obligations to his ex-wife, Miriam Moy, under their marital settlement agreement constitute “domestic support obligations” as defined in the Bankruptcy Code.
The state court entered a judgment for dissolution of marriage on March 14, 2008, incorporating the terms of a marital settlement agreement (the “MSA”) between Perry and Miriam. The marital settlement agreement provides that Miriam is to have possession of the Crystal Springs Property but that it was to be placed for sale.1 Upon sale Miriam is to receive the first $400,000 in proceeds after payment of certain costs, expenses and debts. Any excess proceeds above $400,000 are to be split on a 50/50 basis between Perry and Miriam.2 On or about the date of the dissolution of marriage Perry signed a *711quitclaim deed for the Crystal Springs Property in favor of Miriam, which was duly recorded on March 17, 2008.
The Crystal Springs Property is encumbered by a mortgage recorded April 12, 2004, signed by both Perry and Miriam in favor of McHenry Savings Bank (the “Bank”). The mortgage secures a promissory note in an original amount of $442,000 signed by both Perry and Miriam in favor of the Bank. The note calls for interest at an annual rate of 6.75% and monthly payments of $8,360.81. Pursuant to the terms of the MSA, Perry is responsible for “past and present liability for mortgage, any special assessments, insurance premiums, property taxes and any and all other expenses incidental to or related to [the Crystal Springs Property] until the date of sale.” Perry is also obligated under the marital settlement agreement to pay Miriam $3,000 per month until the Crystal Springs Property is sold, and then $6,000 per month thereafter.
The Bank filed a foreclosure complaint in McHenry County on November, 17, 2009, seeking to foreclose on its mortgage of the Crystal Springs Property. Perry, Miriam, and several potential lien-holders were named as defendants in the foreclosure action. Apparently Miriam raised a number of defenses and counterclaims, and the foreclosure action remained pending through 2012 when Perry filed his bankruptcy petition. McHenry Savings Bank filed a proof of claim in Perry’s bankruptcy case with respect to the Crystal Springs Property on August 15, 2012 for $608,588.67. The initial proof of claim asserted that $450,000 of this debt was secured. However, the Chapter 13 Trustee objected on the ground that the Debtor had surrendered any interest he had in the Crystal Springs Property, and the Bank subsequently amended its proof of claim to show the full amount as unsecured.
Certain other creditors commenced an involuntary Chapter 7 case against Miriam on May 16, 2012, and an order for relief was entered on August 20, 2012. Miriam was granted a Chapter 7 discharge on March 12, 2013, and the Chapter 7 trustee filed a no-asset report in her case on May 28, 2014. Miriam’s case was closed on May 29, 2014.
Once Miriam received a discharge and her case was closed, her interest in the Crystal Springs Property, which was duly listed in her bankruptcy schedules, was deemed abandoned by the Chapter 7 trustee pursuant to Section 554(c). Accordingly, pursuant to Section 362(c)(1) the auto- . matic stay imposed in her bankruptcy case lifted with respect to that property.
None of the plans or amended plans filed in Perry’s Chapter 13 case provide for payment in full of McHenry Savings Bank’s claim related to the Crystal Springs Property. Perry’s initial plan did not expressly mention the Crystal Springs Property. However, all of his amended plans contained a statement that Perry “is surrendering his interest in the property,” further stating that the property is occupied by his ex-wife, listed for sale and part of a foreclosure proceeding. Although his proposed plan as amended provides for a $2,700 per month current mortgage payment to McHenry Savings Bank outside the plan, that appears to concern a separate mortgage debt on his residence in Woodstock, Illinois. This mortgage on his home was the only secured claim he listed in his schedule D to the petition. The debt with respect to the Crystal Springs Property was instead listed in schedule F as an unsecured debt.
Perry’s current Chapter 13 plan provides for only a 16% distribution to general unsecured creditors, and estimates that McHenry Savings Bank will have a deficiency claim of $183,588.67 after foreclo*712sure on the Crystal Springs Property. All of the proposed plans have provided for direct monthly payments to Miriam under the divorce decree and a related contingent claim of as much as $100,000 depending on the disposition of the Crystal Springs Property. His most recent plan clarifies that the monthly payments to Miriam are $3,000 per month but will increase to $6,000 per month after the sale of the property.
Perry testified at trial that he has not made any mortgage payments on the Crystal Springs Property debt to McHen-ry Savings Bank since 2009. Nor has he paid any property taxes on the property since then. The parties stipulated that Miriam has not made any payments on the note since 2009, either. The parties stipulated for purposes of the stay lift motion that the value of the residence portion of the Crystal Springs Property is $430,000 and that the value of the empty lot portion is $80,000. There is no objection to McHenry Savings Bank’s proof of claim for $608,588.67. The parties expressly stipulated that Perry has no equity in the Crystal Springs Property.
McHenry Savings Bank has filed its motion in Perry’s case for relief from the automatic stay pursuant to Section 362(d) and a motion for relief from the co-debtor stay pursuant to Section 1301(c). Neither Perry nor the Chapter 13 Trustee objects to the Bank’s motions for relief. However, Miriam objects to both, asserting standing as both a creditor in Perry’s case and as a co-debtor on the obligation to the Bank.3 The court received certain stipulations and exhibits and held a trial on the motions at which Perry, Miriam, the Chapter 13 Trustee and a representative of McHenry Savings Bank testified.
DISCUSSION
I. Section 362(d)
Section 362(d) provides that the court shall grant relief from the automatic stay:
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; [or]
(2) with respect to a stay of an act against property under subsection (a) of this section, if—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization.
11 U.S.C. § 362(d).
Section 362(g) divides the burden of proof for motions for relief from the stay such that “(1) the party requesting such relief has the burden of proof on the issue of the debtor’s equity in property; and (2) the party opposing such relief has the burden of proof on all other issues.” 11 U.S.C. § 362(g).
The Bank has clearly met its burden of demonstrating the Debtor’s lack of equity in the Crystal Springs Property. The parties have stipulated that the Debtor has no equity in the property. Further, it is undisputed that Perry quitclaimed his interest in the property to Miriam several years before filing his petition. Even if the MSA gave him some form of indirect and contingent financial interest in the property in the event that a sale would net proceeds of over $400,000, the stipulated *713values show that the property is not sufficient even to pay off the mortgage to McHenry Savings Bank.
Miriam, the party opposing the motion for relief, has failed to meet her burden of demonstrating that the Crystal Springs Property is necessary for Perry’s effective reorganization. Perry’s proposed Chapter 13 plan does not rely on the Crystal Springs Property as a source of funds for any plan payments, nor is it necessary as his residence. Instead, the plan expressly provides for surrender of the Crystal Springs Property. The property is a residence occupied not by Perry, but by his ex-wife who does not pay him rent. Therefore, the property does not generate any income to be used towards his plan. Further, the plan does not rely on any proceeds from the sale of the Crystal Springs Property. To the contrary, both the proposed plan and the stipulated facts recognize that the Crystal Springs Property is not worth enough to pay off the secured debt encumbering it.
It is true that courts have not limited the term property “necessary to an effective reorganization” to that which directly generates income in Chapter 13 or individual Chapter 11 cases. In doing so, for example, they have recognized that individual debtors generally must have a place to live in order to earn income that funds a plan. See, e.g., In re Boomgarden, 780 F.2d 657, 664 (7th Cir.1985) (“One of the primary reasons for filing a Chapter 13 petition is to preserve a residence from foreclosure.”); In re Herrin, 325 B.R. 774, 777 (Bankr.N.D.Ind.2005) (“a debtor’s principal residence which the debtor’s Chapter 13 plan proposes to retain is always necessary for the debtor’s reorganization.”). But the Crystal Springs Property is not Perry’s principal residence. He lives in Woodstock. Therefore, because the plan provides for surrender of the Crystal Springs Property, because Perry does not own the property and because the property does not and will not generate any income to fund his plan of reorganization, the Crystal Springs Property is clearly not necessary for debtor Perry Moy’s effective reorganization.
Miriam is left to argue that because Perry is obligated to pay the mortgage under the MSA the property is somehow necessary for his effective reorganization. This is so, she suggests, because if she loses the house, the “payments would be for naught.” Her argument ignores the fact that the MSA orders the sale of the property and, therefore, already envisions the need for Miriam to find another place to live. Indeed, the MSA includes a step up in monthly payments from $3,000 to $6,000 upon sale of the residence, presumably on the understanding that Miriam will incur increased expenses for rent or a new mortgage at her new location. The fact that the MSA envisions sale of the property with a subsequent step up in payments also evidences that lifting the stay or the loss of the property does not make compliance with the MSA impossible or otherwise conflict with its terms.
Ultimately, Miriam’s argument ignores Perry’s proposed plan. It is undisputed that neither Perry nor anyone else has been making the mortgage payments for the past five years. More importantly, Perry has never provided for payment of the mortgage to McHenry Savings Bank in any plan he has proposed. Neither Perry’s proposed plan nor schedule J to his bankruptcy petition show that he will make current or past-due payments on the Crystal Springs Property mortgage, other than paying a pro-rata share to the Bank On a general unsecured deficiency claim after the property is sold. Miriam argues that Perry’s plan should provide for payment of the mortgage because, in her view, *714that obligation constitutes a domestic support obligation which must be paid as a requirement for confirmation or discharge. But the determination whether property is necessary to an effective reorganization for purposes of Section 362(d)(2) is not based on what a creditor believes the Chapter 13 debtor “should” propose. Unlike Chapter 11, creditors cannot file competing plans in a Chapter 13 case. Compare 11 U.S.C. § 1321 with 11 U.S.C. § 1121(c). Indeed, rather than a reason to maintain the automatic stay, the fact that a debtor’s proposed plan is not confirmable is generally a reason to lift the stay. See United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (“mat 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.”).
Therefore, the Bank’s motion to lift the stay will be granted.
II. Section 1301(c)
McHenry Savings Bank also has met its burden of demonstrating that it is entitled to relief from the co-debtor stay. Pursuant to Section 1301(c)(2) relief from the co-debtor stay shall be granted with respect to a creditor “to the extent that ... the plan filed by the debtor proposes not to pay such claim.” 11 U.S.C. § 1301(c)(2). Courts interpreting this language construe the provision to require that the claim be paid in full. See, e.g., Harris v. Fort Oglethorpe State Bank, 721 F.2d 1052, 1054 (6th Cir.1983) (relief from co-debtor stay available “when the debtor’s plan proposes not to pay the creditor in full”); Southeastern Bank v. Brown, 266 B.R. 900, 908 (S.D.Ga.2001) (“The [co-debt- or] stay should be lifted to the extent the bankruptcy debtor does not pay the full debt through the repayment plan.”).4 The legislative history of Section 1301 further supports this interpretation: if “the debtor proposes not to pay a portion of the debt under his Chapter 13 individual repayment plan, then the stay is lifted to that extent. The creditor is protected to the full amount of his claim....” H.R.Rep. No. 95-595, at 122 (1977), U.S.Code Cong. & Admin. News 1978, at 5787, 6083.
None of the Chapter 13 plans proposed in this case have provided for payment in full of the McHenry Savings Bank claim. They have not proposed either to make current payments or to pay arrearages to cure the mortgage. Instead, the plans have proposed to surrender the Crystal Springs Property. It is undisputed that the loan balance owing to McHenry Savings Bank is greater than the value of the Crystal Springs Property. While Perry’s current plan acknowledges that the Bank may have a claim for a deficiency after the property is sold in foreclosure, the plan would treat such claim at best as a general unsecured claim to be paid an estimated 16%.
*715Again Miriam argues that Perry’s obligation to pay the mortgage is a “domestic support obligation” under the marital settlement agreement, and that therefore his plan must provide for its payment in full. But again, under Section 1301(c)(2) the issue is not what plan a debtor should propose but instead what plan a debtor actually proposes. The statute expressly states that what is relevant is “the plan filed by the debtor.” 11 U.S.C. § 1301(c)(2). This is because the co-debtor stay is designed primarily to protect the debtor and the debtor’s estate, not the co-debtor. As explained by the Sixth Circuit Court of Appeals, the purpose of the co-debtor stay in a Chapter 13 case:
is to enable the consumer-debtor to propose a repayment plan without undue pressure to give preference to a debt involving a co-signer. Congress believed that if a creditor could automatically reach the assets of a co-signer, who is generally a close friend or a relative of the debtor, then the co-signer would induce the debtor to give preference to that debt. Such a preference could easily frustrate the ability of the debtor to submit an acceptable plan.
Harris v. Fort Oglethorpe State Bank, 721 F.2d 1052, 1053 (6th Cir.1983). But if a debtor is voluntarily proposing to not pay such claims, such as here, it is unlikely that the debtor is being swayed by any such pressure or being induced to pay such debt. Indeed here the Debtor not only proposes a plan that does not pay the joint debt in full, but also has not objected to lifting the co-debtor stay.
The use of the words “to the extent” in Section 1301(c) indicates that the co-debtor stay should only be lifted to permit the creditor to pursue against the co-debtor the portion of the creditor’s claim that is not provided for in the plan, and that the creditor must wait to be paid through the debtor’s plan for the remainder. See, e.g., Southeastern Bank v. Brown, 266 B.R. 900, 906 (S.D.Ga.2001) (“Thus if the debtor proposes to pay only $70 of a $100 debt on which there is a cosigner, the creditor must wait to receive the $70 from the debtor under the plan but may move against the co-debtor for the remaining $30 and for any additional interest, fees, or costs for which the debtor is liable.”) (quoting H.R.Rep. No. 95-595, at 122 (1977), U.S.Code Cong. & Admin. News 1978, at 5787, 6083); In re Jacobsen, 20 B.R. 648, 650 (9th Cir. BAP 1982) (by proposing plan that would pay creditor less than full claim “the debtor has in effect stated the respective dimensions of his liability and that of the co-maker. Section 1301( [c] )(2) provides the creditor with freedom to pursue, to the latter extent, its claim against a co-debtor.”); In re Degroot, No. 97-83327, 1997 WL 33475065 (Bankr.C.D.Ill. Dec. 29, 1997) (“To the extent that full payment is not proposed, and only to that extent, a creditor can obtain permission to pursue the codebtor without waiting for the termination of the case.”) (quoting 8 Collier on Bankruptcy ¶ 1301.03[2][b]).
Here, Perry’s proposed plan does propose to pay a portion of McHenry Savings Bank’s claim:
The estimated deficiency claim owed to McHenry Savings Bank is $183,588.67. The bank is to be paid 16% of its claim under the Plan, and the Trustee is to hold $489.57 of each monthly payment for the claim of McHenry Sayings Bank and distributed once a deficiency claim is filed.
(Amended Plan, Dec. 2, 2013, ECF No. 158). But McHenry Savings Bank’s motion does not seek to collect this portion of its claim through the foreclosure proceeding. By definition the “deficiency claim” to be paid through the plan is only whatev*716er debt is left after the property is sold through the foreclosure proceeding. Nor does the Bank seek to enforce the deficiency claim against the co-debtor Miriam. Miriam has already received a Chapter 7 discharge, discharging her personal liability on the debt to McHenry Savings Bank. The Bank therefore does not, and indeed, is unable to seek its deficiency claim against her individually.
Accordingly, the motion for relief from the co-debtor stay will be granted.
CONCLUSION
For the foregoing reasons, both McHen-ry Savings Bank’s motion for relief from the automatic stay under Section 362(d) and its motion for relief from the co-debtor stay under Section 1301(c) will be granted. The foregoing constitutes findings of fact and conclusions of law as required by Fed. R.Civ.P. 52(a) and Fed. R. Bankr.P. 7052. A separate order shall be entered giving effect to the determinations reached herein.
. The Crystal Springs Property consists of both a residence and an adjacent lot. Under the terms of the MSA, the empty lot was to be placed for sale immediately, and the residence after being "brought into salable condition."
. If the net proceeds after payment of the enumerated costs and expenses are less than $100,000, Perry is obligated under the MSA to pay Miriam the difference between $100,000 and the net proceeds.
. McHenry Savings Bank argues that because Miriam did not file a timely proof of claim in Perry’s case, she lacks standing to object to the Bank’s motions. However, because the court finds that Miriam failed to support her objections, and therefore overrules the objections on the merits, it need not determine whether she has proper standing to object.
. In Southeastern Bank v. Brown, the issue was whether payment in full requires payment of post-petition interest in addition to the balance as of the petition date. The plan provided for payment of the creditor’s claim in full but did not provide for post-petition interest. The district court held that Section 1301(c) requires payment of post-petition interest and therefore reversed the bankruptcy court and remanded for the co-debtor stay to be lifted. 266 B.R. at 909. Other courts have agreed that the plan must propose to pay the claim in full but have held that post-petition interest is not required. See, e.g., Simon v. Myers, 2008 WL 276546 (Bankr.S.D.Ill. Jan. 30, 2008). The court need not address this issue, however, because Perry's proposed plan does not even propose to pay the principal indebtedness to the Bank in full much less interest. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497417/ | MEMORANDUM OPINION
ARTHUR B. FEDERMAN, Chief Judge.
Plaintiff Joseph R. Wilson seeks a determination that Debtor Michael Aubrey Walker owes him a debt and that such debt be nondischargeable under 11 U.S.C. § 523. He also requests that the Court enforce any judgment jointly and severally against the Debtor’s non-filing spouse, Ta-mar Walker, and her limited liability company, Precious Princess Productions, LLC (now Unchained Productions, LLC). Wilson also seeks a denial of the Debtor’s general discharge under 11 U.S.C. § 727. The Debtor, in turn, asserts a counterclaim against Wilson. For the reasons that follow, judgment will be entered in *729favor of the Defendants on the Complaint and in favor of Wilson on the counterclaim.
INTRODUCTION
The Debtor is a musical performer. Wilson became his manager in 2002. Three written management agreements were later signed between them. The final such agreement, signed in 2008, was to run for a period of 25 years, with Wilson having the right to extend for an additional eight years beyond that.
The issues here are (1) whether' the bankruptcy court has authority to enter final judgment in this case; (2) whether the 2008 management agreement is enforceable; (3) if enforceable, whether either the Debtor or Wilson failed to pay the other monies owed under such agreement and, if so, how much; (4) if monies are owed by the Debtor to Wilson, whether such debt is nondischargeable in the Debt- or’s bankruptcy case; and (5) whether the Debtor’s general discharge should be denied. I hold that the management agreement between Wilson and the Debtor is void as being unconscionable, so that there is no debt owed by either to the other. I farther hold that the Debtor is entitled to a discharge.
FACTUAL BACKGROUND
Wilson’s working career began in his parents’ international wallpaper business. He eventually developed his own construction business, known as JW Enterprises, in the Washington, D.C. area. While doing so, Wilson also wrote songs and, from 1993 on, spent part of his time in Nashville, Tennessee. He later sold JW Enterprises to his partner, a Mr. Bhalala, who changed the company’s name to JW Ram Enterprises, LLC. After the sale, Wilson testified, his connection to JW Ram was “complicated,” but in any event, he held an ongoing right to at least 50% of JW Ram’s profit. More recently, Wilson repurchased the company and is operating it.
Wilson and the Debtor met in Nashville in 2002. At the time they met, Wilson was approximately 45 years old, and the Debt- or was 26. By all accounts, the Debtor is a very talented singer, particularly as an impressionist. Prior to 2002, the Debtor had been trying to make a living as a karaoke singer, and later doing impressions of Elvis Presley, Conway Twitty, and others. He had recently cut an album with Dreamworks, and was being promoted by Dale Morris, who Wilson described as being the strongest, most productive manager in Nashville. Ultimately, Dream-works folded and the Dreamworks album did not produce much for the Debtor. He and Morris parted ways.
Prior to meeting the Debtor, Wilson testified, he had managed “a couple” of acts in the Washington, D.C. area. This was while he was also involved in the construction business.
In any event, the two men became good friends, and in late 2003 or early 2004, Wilson verbally agreed to help manage the Debtor’s career. This was not a full-time job for Wilson at the time, as he still had the business interests in the D.C. area. The Debtor had no money to make promotional records or videos, and Wilson agreed to provide advice, counsel, and some funds to help him get started. According to Wilson, at that point, they thought they would just record some songs and see what happened.
Prior to 2005, while operating under this informal arrangement, they got a few bookings, but made no money after payment of expenses. In April 2005, Wilson retained an attorney who drafted an Artist Management Agreement (“the 2005 AMA”), which was signed by both Wilson *730and the Debtor.1 Under the 2005 AMA and all later AMAs (discussed below), Wilson was obligated to advise and counsel the Debtor in all matters concerning development of his act, publicizing himself, selection of venues, and terms of contracts. However, Wilson had little applicable experience in this area, inasmuch as his prior experience with contract terms was primarily in the construction business, other than the limited music management work he had done in the D.C. area.
As most relevant, the 2005 AMA provided for a three year term, and gave Wilson the right to renew for up to four additional one-year terms, or a total potential term of seven years.2 Wilson’s compensation was to be 15% of “gross compensation” from the Debtor’s performances and publishing, but 25% from any voice impression work the Debtor did.3 Wilson testified that the difference in the percentages was intended to recognize that it takes longer to build a career as an impressionist than it does for other singers. The 2005 AMA further provided that, in the event an individual or corporation wished to buy out the right to manage the Debtor’s affairs, Wilson would be entitled to $2 million to withdraw.4 Wilson testified in general that the purpose of this provision was to prevent more powerful people from coming in and taking away the benefit of his work in developing the Debtor’s talent. Finally, as relevant here, the 2005 AMA provided that, in the event that Wilson was not personally able to render services under the agreement, then the Debtor had the option to terminate the agreement upon thirty days written notice to Wilson.5
While the Debtor contends their arrangement was intended to be a partnership, the evidence demonstrates that this was instead a sole proprietorship, with Wilson being, in effect, the employer and the Debtor the employee. Wilson acted as the Debtor’s manager as a sole proprietorship in the name of W & W Enterprises, a fictitious name he registered with the Missouri Secretary of State. The Debtor does not challenge the enforceability of the 2005 AMA, which in any event has expired by its terms.
After the 2005 AMA was entered into, Wilson spent funds on demo records and video tapes of the Debtor performing, a photo shoot, and trips to Las Vegas and Atlantic City to view other impressionists. Wilson contends that between 2005 and 2008, he invested in excess of $100,000 in promoting the Debtor’s career, but did not adequately document such expenses, and did not prove what proceeds, if any, he received from the Debtor’s performances.
On July 1, 2006, Wilson signed, on behalf of the Debtor, an Exclusive Booking Agreement with A1 Embry International, LLC. This agreement had a term of two years, with a two year extension option.
On April 1, 2007, in the name of W & W Enterprises, Wilson entered into a 5-year Performance Agreement for the Debtor to perform at the Mickey Gilley Theater in Branson.6 This contract was the result of Mickey Gilley’s having seen the Debtor perform at the Legends Bar in Nashville. According to the Debtor, it was A1 Embry who connected them with Gilley.
*731Soon after entering into the Performance Agreement with the Gilley Theater, on April 30, 2007, Wilson and the Debtor entered into a new Artist Management Agreement (“the 2007 AMA”) to replace the 2005 AMA.7 Unlike the 2005 AMA, Wilson prepared the 2007 AMA without the advice of an attorney. Wilson, who testified he had one year of college education, said he used the 2005 AMA as a template for the 2007 AMA. However, he radically changed several provisions to make them much more favorable to himself. It is this 2007 AMA, as well as another signed in 2008, which the Debtor challenges here.
Specifically, the 2007 AMA extended the term to twenty years with four two-year options, which, as before, were exercisable only by Wilson.8 Notably, Wilson had the Debtor initial this particular paragraph in the 2007 AMA. In addition, the 2007 AMA increased Wilson’s percentage to 25% on all receipts.9 It further raised the buyout option for another organization or individual to acquire the rights to the Debtor to $10 million.10 Finally, although the 2007 AMA now permitted the Debtor to “purchase” from Wilson, for the price of $8 million, any remaining period from the twenty-year agreement, it expressly eliminated any right the Debtor previously had to terminate Wilson.11 Further, the 2007 AMA removed a provision allowing the Debtor to terminate on thirty days’ notice if Wilson were unable to perform; rather, under the 2007 AMA, if Wilson were unable to render the services described in the agreement, Wilson had the right to secure “temporary” replacement management for the remaining period under the agreement.12 Both the 2005 and 2007 AMAs provided that the Debtor would only work at such times and places as were approved by Wilson in writing.13
At the Gilley Theater, performers are given a time slot, with the theater taking a specified amount per ticket sold, and the rest going to the performer. Under this arrangement, the performer is responsible for expenses such as a backup band and lighting. Wilson testified that, even though the 2007 AMA provided that the Debtor was responsible for payment of expenses, both parties knew that as a practical matter, Wilson was so responsible. Wilson paid those expenses incurred in 2007 in large part with funds he borrowed from his construction business partner, as well as funds that the Debtor was able to borrow from a family friend in Tennessee. Wilson also testified that the Debtor was paid a salary by W & W, and was issued Form 1099’s by W & W.
While Gilley had predicted that W & W would not make money the first year, particularly since the Debtor was working in a 5:00 p.m. time slot, the Debtor’s show was a hit, and they at least broke even and *732repaid all loans. W & W’s revenues for the Debtor’s 2007 performances totaled $154,549, from which all loans and expenses were repaid. Thus, Wilson had no unrecovered investment for the 2007 year.
The season in Branson ended in December 2007 and was set to resume in about March of 2008. During that off-season period, the Debtor married Defendant Ta-mar Walker, also a performer in Branson.
In January 2008, Wilson was contacted by one Eddie Rhines, a booking agent, about moving the Debtor’s show to a new venue to be created in Pigeon Forge, Tennessee. Rhines had seen the Debtor perform, and was impressed. The venue, known as The Father’s House, was a former church which was to be renovated to seat approximately 1200 people. The purchase and renovation, Rhines said, was to be paid for by a Bob Deason, in partnership with Sherri Bowman. Rhines was to play an unspecified role in that partnership. The financial terms offered by Rhines were much more favorable to the parties than had been the case at the Gilley Theater, with compensation for the Debtor’s performances being $7,500 per week from April to December 2008, plus a percentage if more than 2,500 tickets were sold in a given week.14 Apparently unbeknownst to Deason, Wilson agreed to kick back a portion of monies received by W & W to Rhines. In any event, the total package was to be in the range of $275,000 per year to W & W for two years. In addition, Rhines agreed that Deason would pay Wilson and the Debtor’s living expenses, and the cost of a backup band. Wilson and the Debtor were both enthusiastic about the possibility. And, the Debt- or testified, Wilson had told him they needed to get out of Branson because no one liked Wilson there.
On March 21, 2008, Wilson signed a Letter of Intent with an entity created by Deason, Smoky Mountain Entertainment, LLC (“SMEC”), to move the act to Pigeon Forge.15 This move necessarily required W & W Enterprises to break the five-year contract with the Gilley Theater in Bran-son at the end of April 2008, which was after performances had resumed there. Understandably, Gilley was not happy with that decision, although he testified he agreed to let the Debtor pursue the Pigeon Forge deal.16 While Wilson contends that he and the Debtor acted jointly in deciding to go to Pigeon Forge and break the contract with Gilley, it was Wilson’s responsibility to advise the Debtor on such matters. And, under the 2007 AMA, the Debtor could not perform anywhere else without Wilson’s approval.
Wilson did almost no meaningful due diligence on the viability of the Tennessee operation. Nevertheless, based on the Letter of Intent, which was contingent on SMEC closing on the purchase of the intended church property venue, Wilson and the Debtor moved to Pigeon Forge on or about May 1, 2008, and soon began rehearsals, thereby incurring expenses for lodging and band costs. Under the deal Wilson had made with Deason, those expenses were to be paid by SMEC.
On May 20, 2008, SMEC, W & W Enterprises, and the Debtor entered into an Artist Performance Agreement,17 which referred to W & W Enterprises and the Debtor collectively as the “Artist.” The performances under the contract were to take place in the former church property that SMEC was to acquire and renovate. *733The contract also provided that, upon acquisition of the church property, SMEC would deposit $245,000 in an escrow account, to be drawn on to make payments due W & W during the first year of the contract.18 But the contract also provided that the escrow account would be controlled by SMEC,19 meaning that it provided no real security to Wilson or the Debtor at all. In any event, SMEC never acquired the church property, and never deposited the $245,000 into escrow.
Out of money and unable to pay the Debtor’s and his own living expenses, Wilson then signed an amendment to the Artist Performance Agreement with SMEC providing that performances could be in either the church venue or in other leased property.20 So instead of the 1200-seat church property, the show ended up in a smaller 200-seat venue, which obviously affected the financial viability of the operation. SMEC was obligated to make biweekly payments to Wilson of $15,000 once rehearsals began on May 13, 2008, and to pay Wilson and the Debtor’s living expenses.21 SMEC failed to timely make the bi-weekly payments, failed to timely pay all living expenses incurred, and failed to reimburse the parties for all the band and lodging expenses they incurred.
The move to Pigeon Forge was ill-conceived because Wilson did not do sufficient research on the financial viability of the project or its backer, Deason. And, again without the advice of counsel, he entered into an agreement that was, in effect, unenforceable, particularly since he had the Debtor begin work without requiring that the funds to pay W & W be placed in a secure escrow account. And, as will be seen, associating himself and the Debtor with the people connected to SMEC was itself a poor decision: In sum, as discussed more fully below, the Pigeon Forge deal ended with multiple lawsuits, a taped conversation of a threat of bodily harm, extortion, and negative publicity. Suffice it to say that the consequence of these poor management decisions has had devastating effects on the Debtor’s career.
Meanwhile, during the period in which Wilson was advising the Debtor to move to Pigeon Forge under the new arrangement, and to break the contract with Gilley, Wilson himself filed a Chapter 7 bankruptcy case in Nashville, on March 6, 2008, listing various business and personal debts.22 None of the debts listed relate to W & W Enterprises, or to expenses related to the Debtor’s performance at the Gilley Theater or elsewhere. The list of assets he filed in his bankruptcy case indicated that he had a management agreement in the name of W & W Enterprises, but did not state that he was owed any monies under that agreement, by the Debtor or anyone else. Given Wilson’s position that the Debtor was in effect his employee, and that he was the sole owner of W & W, that position would be correct.23
*734In any event, Wilson’s bankruptcy schedules contain a number of omissions. Most pertinently, Wilson failed to list his ongoing profit interest in JW Ram Enterprises. In 2007, the year prior to his bankruptcy filing, he had been paid $15,870 by JW Ram.24 That ongoing interest would have been an asset of his estate available to pay his creditors. Instead, he listed assets of just $5,012 in value, including 40 published songs of no value. He also failed to list any executory contracts, though at the time W & W Enterprises had four years left with the Gilley Theater. He listed debts totaling $97,501.56.
During the same period as his own bankruptcy, and about the time they moved to Pigeon Forge to begin rehearsals, Wilson prepared a new Artist Management Agreement (“the 2008 AMA”).25 Once again, Wilson took the original 2005 AMA and modified it to his advantage, and once again, he did not seek the advice of counsel in doing so. Wilson testified that the changes made in the 2008 AMA were made at the Debtor’s request, but, given the changes made, discussed below, I find that assertion to be lacking in credibility.
The 2008 AMA, which was signed on April 28, 2008, extended the term to 25 years from signing, with Wilson having the right to exercise options for up to an additional eight years.26 Wilson’s compensation was increased from 25 to 50% of gross revenues received by W & W.27 The provision stating that Wilson could not be replaced or fired for any reason — which had been added into the 2007 AMA — remained, but the provision allowing the Debtor to buy out Wilson’s contract was removed.28 Finally, this new version retained Wilson’s sole right to secure replacement management for the remaining period of the agreement if he were to become unavailable to render services, but added a provision stating that, in the event that Wilson died during the term of the agreement, the Debtor was required to permit Wilson’s “benefactor” to select a replacement manager “acceptable” to the Debtor for the remaining term.29 Although not entirely clear, this amendment also appears to require the Debtor to pay the “benefactor” at the same rate of compensation Wilson was to be paid under the agreement, regardless of whether the benefactor procured an acceptable replacement. And, if the benefactor had agreed to pay a replacement manager at a lesser rate, the benefactor was to receive the difference.30
Wilson contends that one of the aspects of consideration for this further extension was that he gave up his right to collect *735from the Debtor the more than $100,000 he had invested in the Debtor’s career since 2003.31 As stated, however, there was scant documentation for expenses in that amount. Further, this argument presumes that the Debtor, in effect, borrowed monies from Wilson. But, as Wilson also argues, W & W Enterprises was a sole proprietorship, with Wilson as its owner and the Debtor, in effect, as his employee. Any monies which Wilson may have advanced, and did not receive back, were an investment in his sole proprietorship, not a loan to the Debtor. In addition, even if Wilson had some right to collect funds from the Debtor, that right would have been an asset of Wilson’s bankruptcy estate available for payment to his creditors. In his bankruptcy case, which had been filed less than two months prior to the signing of the 2008 AMA, Wilson listed no debt due from the Debtor to him.
In any event, while the contract that Wilson signed with SMEC purported to guarantee income to W & W Enterprises of $7,500 per week from April to December 2008, and for the same months in 2009, SMEC terminated it effective July 18, 2008, after less than a month’s worth of performances.
The parties disagree as to why the contract with SMEC was terminated. Attendance in the smaller venue had been low after opening night. Wilson contends that the sole reason the contract was terminated was that the Debtor had met with Deason and other representatives of SMEC, and outlined a series of suggestions as to how they might improve attendance, based on the Debtor’s experience in Branson. The Debtor testified that he did meet with the SMEC representatives out of frustration, both that attendance was low, and that Wilson was not requiring SMEC to timely make payments due or to put the required funds in escrow for payment of the sums owed to them for the balance of the year. And, the Debtor testified, Deason and Bowman had never operated a theater before, and he simply shared with them the ways his act had been successfully publicized in Branson.
However, that meeting is not the reason that SMEC representatives gave immediately after the termination; instead, their attorney was quoted in the local newspaper blaming Wilson for the termination. Specifically, the newspaper quoted SMEC’s attorney saying that Wilson “was very difficult to get along with, effectively trying to run my clients’ theater, and became so difficult to get along with that, rather than keep an excellent performer [that being the Debtor], we felt we had to terminate him because of the relationship with the manager.”32 As discussed more fully below, Wilson later sued Deason and Bowman, in part based on defamation over this comment, and that litigation ended with Wilson giving Deason an extortion tape involving Eddie Rhines in exchange for money, a guitar collection, and a retraction of the newspaper comment faulting Wilson for the termination.
After the termination of his show by SMEC, Rhines, who by that time had also split with Deason and Bowman over the collapse of the show in Tennessee, and who was involved in separate litigation with them, arranged for Wilson and the Debtor to meet with the well-known producer, Don King, in Florida.
There, after a series of meetings over two days, Wilson and the Debtor signed an “Entertainment Personal Management *736Agreement” with Don King Productions.33 The agreement had a term of three years, with one three-year extension period, unless either party notified the other that they did not want to extend.34 Under this agreement, the Debtor engaged King Productions as his “Career Business Manager,” with Wilson being a party to the contract as the Debtor’s “Personal Business Manager.” King was to act as the Debt- or’s “sole and exclusive Career Business Manager and general business advisor, and ... to supervise, guide, and direct [the Debtor’s] professional career as an entertainer, individually, and to attend to and assist in all business arrangements in connection with [the Debtor’s] career in entertainment.” 35 King was to be paid 50% of revenues.36 Of course, Wilson still claimed that he was entitled to 50% of what was left for the Debtor. In the end, no work for the Debtor came out of that arrangement, and King has made no claim for entitlement to any revenues earned by the Debtor over that three-year period.
Once again, Wilson and the Debtor disagree as to the reasons no work came out of the King contact. Wilson claims the problem was that the Debtor refused to go with King to the 2008 Olympics in China immediately after the meetings in Florida, although he also testified that King had said he was going to the Olympics, and would work on getting the Debtor a show in Las Vegas or elsewhere upon his return. Regardless, a more plausible explanation is that, as the Debtor testified, Wilson insisted on being an actual party to the contract between the Debtor and King, which King did not want. Also, being short of money, Wilson at least twice contacted King’s representative after the contract was signed (and while King was in China) asking for advances — as much as $100,000 — against monies to be earned under the contract.37 After the second such request, Wilson and the Debtor never heard from King again. I find that, while the original contact with King came about at least in. part because of Wilson’s relationship with Rhines, it was Wilson’s management style that prevented the Debtor from using that contact to further his career. And it was the Debtor’s talent, not Wilson’s, which created opportunities such as that one in the first place.
In any event, with no source of income following the termination of the Pigeon Forge deal, the Debtor and his wife had gone first to live with his parents for a while, and then to live with her parents for several weeks. Around the time it became apparent that nothing was to come of the King deal, and feeling as though he had overstayed his welcome with his wife’s parents, the Debtor went back to Branson to find work. When Wilson became aware of that, he threatened Mickey Gilley with a lawsuit if Gilley engaged the Debtor directly, without paying Wilson 50% of any amounts earned by the Debtor.38
On September 15, 2008, the Debtor sent Wilson an email giving notice that he was terminating Wilson as his manager.39 In the email, he said that an artist’s manager is a reflection of the character of the artist. He said: “In the trail that we have left behind thus far since we have been to*737gether, we can’t go back to anyone that we have had business with ... because of the way that you have handled the business side of things. There is no way I will enter into an agreement with anyone or any deal in the future without first consulting a lawyer.”40 He also stated that “the tension in Branson was so high because of your conversations with Mickey Gilley concerning the sewing [suing] of Ozark Entertainment [Gilley’s company] and telling everyone that you tape your conversations.”41 The letter also states that Wilson had failed to find work for the Debtor and, while he could get work right away with Mickey Gilley and others in Branson, his avenues to do so were blocked because the owners of those venues refused to work with Wilson.
Indeed, by letter dated September 26, 2008, Mickey Gilley notified the Debtor that he could not engage him for performances at his theater, “[d]ue to past experiences with your manager, Joe Wilson ....”42 That same day, an attorney hired by the Debtor notified Wilson in writing that the Debtor was terminating the 2008 AMA.43 In response, Wilson’s attorney took the position that the 2008 AMA could not be terminated and that any alleged claim of breach had to be brought in an arbitration proceeding in Virginia.44
From the fall of 2008 to August 2009, the Debtor worked mostly for tips singing in an open area at the Branson Mall. In August 2009, the Debtor was booked to perform at the God & Country Theatre, where he has performed off and on since.45 He also received small amounts as “love offerings” for church singing, and for a small number of single performances.
Wilson claims that all such performances are subject to his 50% cut under the 2008 AMA. Toward that end, Wilson has contacted a number of venues at which the Debtor has performed since 2009, and threatened litigation if they did business with the Debtor without including Wilson. By way of example, the owner of the God & Country Theater, Richard Lee Easton, testified that Wilson contacted him to advise him that the Debtor was under a management contract with Wilson. He further testified that Wilson said he was planning to sue the owner of the Branson Mall, and would sue him as well. Mr. Easton testified that Wilson’s threat did not deter him from dealing with Walker through the company the Debtor’s wife had just created, Precious Princess Productions, discussed below. Similarly, the Debtor testified that, in the middle of a booking for a series of performances with D & D Entertainment at a resort in Cancun, Mexico, in 2012, Wilson contacted D & D in this manner and, as a result, the Debtor testified he was put on a plane home and the booking terminated.46 Indeed, there was testimony at trial that Wilson did, in fact, sue D & D Entertainment over the Cancún deal in 2012.
As mentioned, in August 2009, the Debt- or’s wife, Defendant Tamar Walker, set up a separate company, Defendant Precious Princess Productions, to manage the Debt- or’s performances, and to receive the funds from such performances47 Tamar Walker is herself a singer and performs with a *738group called Angels of Country Music. Tamar also arranged performances for Angels of Country Music through Precious Princess. In 2012, Tamar created a successor company to Precious Princess, Unchained Productions LLC.48 Through Unchained Productions, Tamar continues to manage the Debtor and Angels of Country Music. Essentially the income for performances by both spouses is funneled through Unchained Productions, from which the expenses incurred in their performances, as well as the household living expenses, are paid.
On July 30, 2012, the Debtor filed this Chapter 7 bankruptcy case. The Debtor seeks to reject the 2008 AMA as an execu-tory contract, and Wilson objects. In addition, Wilson filed this adversary proceeding seeking a determination that the debt owed to him under the 2008 AMA is non-dischargeable under § 523 and that the Debtor’s discharge should be denied generally under § 727 of the Bankruptcy Code. He also seeks recovery of the Debt- or’s income which was funneled through Precious Princess and Unchained Productions. The Debtor asserts a counterclaim for funds and a guitar collection Wilson received in connection with Wilson’s litigation with Deason and Bowman, discussed more fully in the discussion of the counterclaim below.
THIS COURT’S AUTHORITY TO ENTER JUDGMENT
Prior to dealing with those issues, I consider whether a bankruptcy judge— who serves pursuant to Article I of the United States Constitution — has the statutory and constitutional authority to enter final judgment here, or must instead submit proposed findings of fact and conclusions of law to an Article III district court judge.
By statute, matters connected to a particular bankruptcy case are either core or non-core proceedings. If core, the bankruptcy court may enter final judgment. If non-core, the bankruptcy court may only enter final judgment with the consent of the parties; otherwise, the court must submit proposed findings of fact and conclusions of law to the District Court, which is then authorized to enter final judgment.49
Core proceedings are those in which, pursuant to 28 U.S.C. § 157, the bankruptcy judges are empowered to enter final judgment. Section 157(b)(2)(C) defines core proceedings to include “counterclaims by the estate against persons filing claims against the estate.”
In Stem v. Marshall,50 the debtor’s stepson had previously filed a claim against her bankruptcy estate for defamation. In response, the debtor filed a counterclaim based on tortious interference with debt- or’s expectancy of an inheritance. The Supreme Court held that the statutory grant of authority to bankruptcy judges to decide counterclaims was too broad, and must be limited to those that need to be resolved in order to rule on the proof of claim itself. Since the debtor’s counterclaim was “a state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the cred*739itor’s proof of claim,”51 the Supreme Court held that the bankruptcy court did not have constitutional authority to enter final judgment, the statute notwithstanding. As the Court said, in ruling on the counterclaim, the bankruptcy court exercised the judicial power of the United States under Article III of the Constitution “in one isolated respect,”52 that being the ruling on the counterclaim. Thus, the Court did not limit the bankruptcy court’s authority to allow or disallow claims against the estate,53 just counterclaims that need not be resolved in order to rule on such claims.
In sum, the Stem decision resulted in three types of causes of action in bankruptcy cases: (i) core matters; (ii) non-core matters; and (iii) Stem matters— those that are statutorily core because they are listed in 28 U.S.C. § 157(b)(2), but are too broad to fit within the constitutional authority of non-Article III courts.54
In Executive Benefits Insurance Agency v. Arkison, the Supreme Court ruled that bankruptcy judges are constitutionally empowered to hold hearings on Stem-type causes of action, provided they make proposed findings of fact and conclusions of law to the District Court, which alone has the power to enter final judgment.55 This procedure is identical to that used in non-core proceedings in which the parties have not consented to final judgment by the bankruptcy court.56 The Court did not rule on whether the bankruptcy court could enter final judgment in non-core and Stem matters without consent of the parties.
Wilson did not raise the issue until prompted to do so following the post-trial issuance of the Supreme Court’s decision in Arkison, but Wilson now contends that, with the exception of his objection to the Debtor’s general discharge, all other relief he requests is either non-core or a Stem proceeding. Although Rule 7008(a) requires that a complaint “shall contain a statement that the proceeding is core or non-core and, if non-core, that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy judge,”57 and Wilson did not so state in his Complaint, he now contends that he does not consent to final judgment being entered by the bankruptcy court.58
The threshold question on this issue is whether this is a constitutionally core proceeding. If so, the bankruptcy court may enter final judgment regardless of consent. If not, the next question is whether the bankruptcy court is empowered to enter final judgment with the consent of the parties. I conclude that this proceeding is constitutionally core. And, even if not, I conclude that all parties are deemed to have consented to entry of final judgment in the bankruptcy court, and that this Court has constitutional authority to enter final judgment with such consent.
This is a Core Proceeding
A bankruptcy discharge — which enables debtors to be relieved from certain obligations incurred pursuant to state *740or other federal law — is itself created by federal law.59 Exceptions to such discharge are also created by federal law.60 Wilson claims here that any debt owed to him by the Debtor should be excepted from discharge pursuant to § 523(a)(2)(A), (4), and (6) of the Bankruptcy Code.61 Any such debt would have been automatically discharged in the Debtor’s bankruptcy case if Wilson had not filed an action such as this one and obtained a judgment of nondischargeability as to his claim, or a judgment denying the Debtor’s discharge as to all debts. An action for nondis-chargeability under the Code sections alleged by Wilson may be brought only in the bankruptcy court, not state court.62 Since the objection to discharge, and the objection to dischargeability of Wilson’s debt, can only be brought in this court, it goes almost without saying that such objections are not “state law action[s] independent of the federal bankruptcy law.”63 Therefore, the objection to discharge and to dischargeability are both statutorily and constitutionally core.
There are three additional issues to consider in determining whether this case is constitutionally core under Stem. The first is that, in addition to a determination of dischargeability, Wilson, as the Plaintiff, seeks judgment for damages, and for continued enforcement of the 2008 AMA. The Debtor answers that, among other things, the contract upon which Wilson’s suit is based is not enforceable. Under Stem, the bankruptcy court has constitutional authority to decide the amount owed under the proof of claim filed by Wilson.64 And, in determining that amount, the bankruptcy court must necessarily determine whether the contract upon which that claim was based was enforceable. Not surprisingly then, courts post-Simi have continued to hold that bankruptcy courts have authority to enter judgment for damages in connection with dischargeability determinations.65 Nothing in Arkison changed that conclusion.
The second issue concerns the counterclaim filed by the Debtor here,66 in which he contends that Wilson breached 2008 AMA by, among other things, not sharing with the Debtor the funds (and guitars) Wilson received as a consequence of the deal in Pigeon Forge. In Stem, the Supreme Court had stated that “[tjhere was never reason to believe that the process of *741ruling on Pierce’s proof of claim [which was constitutionally core] would necessarily result in the resolution of Vicki’s counterclaim [which, the Court held, was not].”67
The counterclaim here is different from the one filed by the debtor in Stem, since this one arises out of the very contract upon which the dischargeability action is based. If that contract is found to be enforceable, this Court cannot make a complete determination of what is owed by the Debtor to Wilson without ruling on the counterclaim. Therefore, the mere filing of that counterclaim does not convert the dischargeability action into a non-core or Stem proceeding.
The third issue is that, in addition to the Debtor, Wilson filed suit against the Debtor’s wife, Tamar Walker, and against her company, Precious Princess Productions, LLC (now Unchained Productions). As stated, after the rift developed between Plaintiff and the Debtor, Tamar Walker created Precious Princess, and on its behalf entered into performance agreements with venues at which the Debtor performed. Tamar and the Debtor contend that, even if the management agreements are enforceable, revenues received by Precious Princess and Unchained Productions are not covered by them, and need not be shared with Wilson. In his suit, Wilson asks that the Court, in effect, pierce the corporate veil, determine the amount of revenue received by Precious Princess and Unchained Productions that should have been shared with him, and enter judgment jointly and severally against the Debtor and the other Defendants for that amount. Tamar and Precious Princess contend that if the agreements are not enforceable against the Debtor in the first place, there can be no judgment against them, so no joint and several liability. Thus, while the contention that the corporate veil should be pierced as to those Defendants is based on state law, such contention does not exist independent of the dischargeability action. Because I conclude that all claims and counterclaims in this ease arise out of the same series of transactions, particularly the 2007 and 2008 AMAs, they are both statutorily and constitutionally core.
The Court Has Authority to Decide Statutorily or Constitutionally Noncore Matters With Consent of the Parties, and Such Consent Was Given Here
Regardless, I hold that even if this is a noncore proceeding, for statutory or constitutional reasons, all parties have consented, expressly or impliedly, to entry of final judgment by this Court, and such consent is constitutionally valid. In Stem, the creditor had argued that the defamation action upon which his proof of claim was based was a personal injury tort claim which could only be tried in the district court.68 That issue was raised for the first time on appeal. The Supreme Court held that if the creditor believed the bankruptcy court did not have the authority to decide his claim for defamation, then he should have said so, and said so “promptly.” 69
As the current case demonstrates, cases do not always fit neatly into one of the three categories described in Stem and Arkison. For that reason, and in order to avoid sandbagging by a party for whom trial does not go well, the bankruptcy rules require a complaint or counterclaim to “contain a statement that the proceeding is *742core or noncore, and, if noncore, that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy judge.”70
In his Complaint, Wilson alleged that this is a core proceeding and stated that “[t]his Court has jurisdiction under 28 U.S.C. § 157(c)(1) with respect to Tamar Walker and Precious Princess Productions, LLC if not a core proceeding because all actions are related to this bankruptcy proceeding and determine potential assets of the estate.”71 Tellingly, despite the requirement of Rule 7008, the Complaint did not state whether Wilson consents to final judgment in this court if the proceeding were determined to be non-core. Only after trial, when this Court asked for the parties’ positions on the court’s authority in light of the recent Arkison decision, did Wilson state that he does not consent to this Court’s entry of final judgment as to noncore matters.72 That assertion, coming some eighteen months after the Complaint was filed, is not “prompt.” I hold that by failing to assert any position at the earliest opportunity, Wilson waived his right to object, and consented to entry of final judgment here. And, while the Supreme
Court has not specifically decided whether bankruptcy judges may enter final judgment in noncore and Stem matters with consent,73 the Court has held that “Article Ill’s guarantee of an impartial and independent federal adjudication is subject to waiver, just as are other personal constitutional rights that dictate the procedures by which civil and criminal matters must be tried.”74 Most pertinently, the Court has held that a consensual referral to a magistrate judge — whose authority likewise is grounded in Article I — suffices to give that judge authority to enter final judgment.75
I find, therefore, that even if the parties’ consent to final judgment was required, the parties did so consent, and such consent serves to give this Court authority to enter final judgment in any event.
NONDISCHARGEABILITY UNDER 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6)
Wilson asserts that the Debtor has breached both the 2007 and 2008 AMAs, and that any resulting debt should be excepted from discharge pursuant to § 528(a)(2), (a)(4), and (a)(6) of the Bank*743ruptcy Code.76 The threshold question as to the § 523 dischargeability claims, however, is whether the Debtor owes Wilson a debt at all.
Each of the three AMAs provided that Virginia law shall control. Under Virginia law:
As a general principle, one who accepts a written agreement or contract is presumed to know and assent to its contents. In addition, it is hornbook law that one who signs a written contract will normally be bound by its terms and that ignorance ... of the terms will not ordinarily affect the liability of such person under the contract.77
Virginia law, however, permits a court to void a contract if it is unconscionable:
In Virginia, a contract is unconscionable if it is one that no man in his senses and not under a delusion would make, on the one hand, and that no fair man would accept on the other. The substantive terms of the contract must be so grossly inequitable that it shocks the conscience. The party asserting unconscionability of a contract has the burden of proving that the contract is unconscionable by clear and convincing evidence. Moreover, whether a contract is unconscionable is a question of law for a court to decide.78
Courts cannot relieve one of the consequences of a contract merely because it was unwise or rewrite a contract simply because the contact may appear to reach an unfair result.79
“A court may well find a substantive abuse in the form of harshness, evident either in an overall imbalance of the whole contract or in a particularly unreasonable provision that has been included in an agreement without the employment of any procedural abuse in • its formation.”80 “Under this rationale, oppression includes those provisions, however obtained, which result in oppressive effects.”81 As between substantive and procedural uncon-cionability, courts often employ a balancing approach: the greater the harshness or unreasonableness of the substantive terms, the less important the regularity of the process of contract formation that gave rise to the term becomes, and vice versa.82
“A court may void a contract on the grounds that it is unconscionable if the inequality is so gross as to shock the conscience.” 83
Although Wilson was the more sophisticated of the two parties, and the Debtor testified that Wilson often asked him to *744sign the documents without giving him the opportunity to read them, any procedural imbalance in the execution of any of the AMAs is significantly overshadowed by the substantive provisions which, I find, are exceptionally harsh and oppressive against the Debtor. That would be so even if, as Wilson contends, the Debtor was fully informed of the provisions of the 2007 and 2008 AMAs.
First, the term: The 2007 AMA extended the original term of three years with a four one-year options to twenty years with Wilson having four exclusive two-year renewal options. Although Wilson now says the insertion of “25” into the 2008 AMA was a typographical error, the 2008 AMA appears to have extended the term even further to 25 years from signing, with Wilson having the exclusive right to exercise options for up to an additional eight years, for a total of 83 years. In any event, neither the evidence nor the law supports the long terms under either the 2007 AMA or the 2008 AMA.
First, Mickey Gilley testified about the term of a typical management agreement such as the AMAs here. Gilley has been in the entertainment industry since 1957, and in short, has extensive experience as a country music performer,84 a country music nightclub owner, and, for about 24 years, a country music theater owner in Branson. He testified that a typical management agreement such as the one between Wilson and the Debtor would be three to five years. Renewal options are usually for the same term as the original term. He said he once had a ten-year agreement with his manager, but that unusually-long term was because he and his manager also co-owned a nightclub in Texas. He testified he had never seen a management agreement with a term of twenty years, and, in his opinion, such a term would be “unreasonable.” A 25-year term would be “very unreasonable,” he said. Indeed, although Virginia does not have a statutory maximum duration for personal services contracts such as the AMAs here, California has a seven-year statutory maximum,85 which is consistent with Gilley’s testimony that a three- to five-year term is typical. This is also consistent with the original 2005 AMA, drafted by an entertainment attorney, which had a duration of three years with four one-year options to renew.
Wilson attempted to justify the term of up to 33 years by arguing that it takes longer to develop the career of an impressionist (as opposed to a typical singer/recording artist) and that, once developed, an impressionist’s career tends to last longer. But Wilson had no experience managing impressionists, and little experience managing other performers. He testified that the first act he managed, named “Heavy Country,” was in the D.C. area in 1992 or 1993. He then managed the lead singer of that group briefly, whose last *745name was Wompler. Wilson thought his first name might have been “Harry,” but wasn’t sure. Later, he managed another singer who he remembered being named “Skip.” That management experience over a ten-year period prior to meeting the Debtor hardly justified a contract of up to 33 years.
Finally, I find it noteworthy that, when the parties signed the 2007 AMA, Wilson had the Debtor initial the paragraph which extended the term from three years to twenty years. None of the other paragraphs were initialed. Wilson acknowledged at trial that he requested the Debtor to initial that paragraph because twenty-year period looked “awkward” and he wanted to be clear that they were not creating a short-term project. So, even Wilson realized at the time that the 20-year term was, at the very least, unusual.
Second, and greatly exacerbating the unreasonable length of the contract, the Debtor had no practical ability under either the 2007 AMA or 2008 AMA to terminate Wilson for any reason, including incompetence or inability to perform. More specifically, Wilson added the following language to the 2007 AMA, which was not included in the original version drafted by an attorney: “It is understood by ARTIST that MANAGER cannot be replaced or fired for any reason or circumstances during this twenty (20) years [sic] Agreement, exception [sic] specified in paragraph (12).”86 Paragraph 12 provided for a cure period for any alleged breach and required arbitration in Virginia in the event of an uncured breach. The 2008 AMA retained these provisions. However, the AMAs did not really require Wilson to do anything, except give “advice and counsel,” which, by the summer of 2008, the Debtor was alleging Wilson was in breach of.
Recall, by the summer of 2008, the Debtor had come to the conclusion that Wilson was not adequately representing him, and hired an attorney who tried to terminate the contract, but Wilson took the position that he could not do so. And, the evidence was that, by the summer of 2008, it was clear that Wilson’s representation was, in fact, incompetent.
More specifically, prior to 2008, the Debtor was performing at the Gilley Theater and was being paid under a five-year contract there. He was a new act, but Gilley testified that the Debtor was doing quite well for a new act and believed his talent would develop a following in Bran-son. However, Gilley testified, it takes up to three years for an act to start making money. In any event, it was just as the Debtor was starting to gain momentum in Branson that Wilson decided to walk out on the contract with Gilley and go to Tennessee — without a signed contract in Tennessee, without an actual venue in Tennessee, without the promised money being placed in escrow, and without doing any due diligence as to Deason and Bowman’s wherewithal, either professionally or financially, to fulfill the promises they had made. Indeed, in responding to a question at trial about why he did not list anything relating to his relationship with the Debtor on his own bankruptcy schedules, including Question 17 concerning any anticipated increase or decrease in income, Wilson responded that they were getting ready at that time to move to Pigeon Forge and that that deal was “very speculative” at the time.
Further, after the Tennessee deal failed miserably, the Debtor testified, and I find, Wilson torpedoed the potential deal with Don King by his behavior at the meetings and by demanding large advances not pro*746vided by the contract. And, Gilley told the Debtor he would have him back to the Gilley Theater, but only without Wilson. It was at that point that the Debtor attempted to terminate the 2008 AMA, but Wilson took the position that the Debtor could not get out of it for any reason. In effect, the Debtor was going to be stuck with Wilson until at least the year 2036 (and perhaps 2041) — essentially his entire career87 — regardless of how competently, or incompetently, Wilson was performing his duties.
“[CJontracts in the entertainment industry generally include a termination provision that permits one or both of the parties to terminate the agreement under specified situations.”88 As a practical matter, the 2007 and 2008 AMAs did not. And, when the Debtor attempted to terminate, Wilson refused and demanded that the matter go to arbitration. When they got to arbitration, Wilson discovered that it was prohibitively expensive to seek redress there so, without either side paying his share, the arbitration proceeding died. So Wilson’s position is that disputes can only be decided in arbitration, but that he is not willing to pay his share of the freight for doing so. The result is that the Debtor would be stuck for the duration of the term.
Third, Wilson’s level of compensation under the 2008 AMA was excessive. Under each of the AMAs, Wilson was to act as the Debtor’s “personal manager, advis- or and counselor.”89 The AMAs expressly state that Wilson is not an employment agent, theatrical agent, or licensed artist manager, and that Wilson was not promising to procure, nor was he obligated to produce or attempt to produce, any employment or engagements for the Debtor.90
A treatise on the law of contracts in the entertainment industry describes the role of a personal manager as follows:
The primary roles of a personal manager in the entertainment industry include counseling, advising, and supervising the development of an artist’s career development. The role of the personal manager differs from the role of the agent in that an agent is licensed by the state to perform a function that is predominantly business related, to procure employment for an artist. The manager’s duties, however, include both business and personal matters. By organizing an artist’s day-to-day personal matters, a manager frees the artist to concentrate more on creative matters.... 91
Wilson’s listed duties under each of the three AMAs are consistent with this description of a personal manager.
*747The 2008 AMA provided that Wilson’s commission was 50% of the Debtor’s “gross compensation” from all sources. Further, the Debtor was solely responsible for “all expenses that may arise in connection with [the Debtor’s] activities in the entertainment industry, including, but not limited to, the cost of material, equipment, facilities, transportation, lodging and living expenses, costume, make-up, accounting and legal fees, and [Wilson] shall not have liability what so ever [sic] in such connection.” 92 Under these provisions, then, the Debtor could, in theory, end up with no compensation at all after payment of Wilson’s share from the gross receipts and paying all the expenses from his own share. The 2007 AMA had similarly made the Debtor responsible for all expenses. Thus, while Wilson argues he was operating as a sole proprietor, the contract provides that his employee — the Debtor — was responsible for the sole proprietorship’s expenses. To the extent Wilson needed to pay those expenses himself notwithstanding the contract, because the Debtor couldn’t do so, that is further evidence of the uneonscionability of the contract terms.
In stark contrast to the 50% commission in the 2008 AMA, “[t]he commission for a personal manager traditionally ranges from 15-20%. ”93 This is reflected in the original 2005 AMA, written by an entertainment attorney, which provided for a 15% commission.
In addition, Mickey Gilley described the role of a personal manager similar to that described by the treatise above, and testified that the typical fee under a management agreement would be 10-25%. He did testify that he and his original manager had a 50/50 deal at one point, but, again, that was only because they also owned a nightclub together. Indeed, it has been said that “[t]he famous exception [to the traditional 15-20% commission for a personal manager] was Colonel Tom Parker, the manager of Elvis Presley, who received a commission of 50%.”94 Don King’s deal was for 50%, but only on acts that Don King actually booked for the Debtor, and this deal was negotiated by Wilson on the Debtor’s behalf. Plus, even during the two-day meeting in Florida, Don King was making initial connections on the Debtor’s behalf with the likes of Donald Trump and Michael Jackson. Even if rare exceptions such as Colonel Parker and Don King are able to command commissions in the 50% range, Wilson’s record and experience simply do not support a commission at that level.
Wilson testified that he increased the percentage from 25% under the 2007 AMA to 50% under the 2008 AMA, in part because he was now agreeing to represent the Debtor to the exclusion of other artists and that he was incurring additional risk as a result. However, the traditional 15-20% already takes much of that risk into account.95 And, Wilson failed to prove that any other performers at that time *748were desirous of Wilson’s representation or that he had turned down other management work as a result of his representation of the Debtor. Moreover, as stated, it is now apparent that Wilson’s management of the Debtor’s career was ineffectual up to that point, regardless of whether Wilson was representing other artists. The unusual level of compensation was, I find, further evidence of the unconscionability of the 2008 AMA.
Finally, as discussed above, the original 2005 AMA provided, in relevant part:
If MANAGER is not personally available to render the services of MANAGER as described herein (except for limited periods not to exceed ninety (90) days because of illness), then ARTIST shall have the option to terminate this Agreement upon thirty (30) days written notice to MANAGER.96
The corresponding provision in the 2007 AMA was amended to provide, in relevant part:
If MANAGER is not personally available to render the services of MANAGER as described herein (except for limited periods not to exceed one hundred eighty (180) days because of illness), MANAGER will have the right to secure temporary replacement management for the remaining period of this Agreement.97
The 2008 AMA went even further:
If MANAGER is not personally available to render the services of MANAGER as described herein (except for limited periods not to exceed one hundred eighty (180) days because of illness), MANAGER will have the right to secure temporary replacement management for the remaining period of this Agreement. In the event MANAGER pass’s [sic] away, ARTIST will allow MANAGER’S benefactor the right to hire at benefactores] cost, a replacement MANAGER (ACCEPTIBLE [sic] TO ARTIST) for the remainder period of contract with no options. Payments will be paid at [the] same existing rate to benefactor and will be paid monthly by ARTIST or new MANAGER less MANAGE R[’]S prior arranged fee from benefactor with a detailed account of monthly receipts.98
In essence, these changes permitted Wilson to hire a replacement for the remainder of the term if he were unable to perform, no matter how long the remainder was, instead of allowing the Debtor to terminate. And, upon his death, Wilson’s “benefactor” is empowered to choose a replacement, albeit with the Debtor’s approval — but at the same rate of compensation. Regardless, though, it appears that Wilson’s “benefactor” would be entitled to compensation for the balance of the term, regardless of whether the benefactor was able to procure an acceptable replacement manager.
I find, based on the foregoing, that the Debtor has proven by clear and convincing evidence that both the 2007 and 2008 AMAs are such that no person in his senses and not under a delusion would make, on the one hand, and that no fair person would accept on the other. The substantive terms of these contracts are, indeed, so grossly inequitable as to shock the conscience. They are, therefore, void and unenforceable.
Moreover, I find that Wilson lost no investment he may have made pursuant to either the 2007 or 2008 AMA. As shown, all expenses and loans for 2007 were paid, *749and no W & W debts arising from that year, or any years since he had begun managing the Debtor, were listed in Wilson’s bankruptcy schedules. Nor is there any evidence that Wilson lost any investment in the Tennessee venture in 2008. While SMEC did not fully and timely comply with its obligations under its contract with W & W, Wilson did not have significant unpaid expenses in the period between his bankruptcy filing on March 6 and the sudden termination by SMEC on or about July 19, 2008. The 2008 AMA, as stated, provides that Wilson is entitled to recover all expenses he incurs before the Debtor becomes entitled to his 50% share. Thus, when Wilson received $6,000 on July 15, 2008,99 he testified that the Debtor would have received a similar amount. Indeed, the evidence shows that during the years 2007 and 2008, Wilson and the Debt- or each received approximately 50% of funds paid out by W & W, with Wilson receiving $43,647.86,100 and the Debtor receiving $43,755.101 While not necessarily relevant on the issue of whether the 2007 and 2008 AMA’s were unconscionable, it is worth noting that Wilson was out little actual money, if any, in the period after his bankruptcy filing. And, as stated, recovery of any funds he invested prior to his own bankruptcy would have been available to his creditors, not him.
Having found that the 2007 and 2008 AMAs, upon which the claim of nondis-chargeability is based, are void, I hold that the Debtor owes Wilson no debt which can be declared nondischargeable under any provision of § 523 of the Bankruptcy Code.
DENIAL OF DISCHARGE PURSUANT TO 11 U.S.C. § 727
Wilson asserts that the Debtor’s discharge should be denied generally pursuant to § 727(a)(2), (a)(3), (a)(4), and (a)(5) of the Bankruptcy Code. Section 727(a) provides, in relevant part:
(a) The court shall grant the debtor a discharge, unless—
* * *
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(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;
(B) presented or used a false claim;
(C) gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forbearing to act; or
(D) withheld from an officer of the estate entitled to possession under *750this title, any recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs; [or]
(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities .... 102
Denying a debtor a discharge is a harsh penalty.103 Consequently, § 727 is strictly construed in favor of the debt- or.104 Nevertheless, a discharge in bankruptcy and the associated fresh start are privileges, not fundamental rights.105 The burden of proof is on the objecting party to prove each element of a § 727 action by a preponderance of the evidence.106
Wilson’s argument under § 727 focuses on the creation of Precious Princess Productions and Unchained Productions. As discussed above, Tamar Walker created Precious Princess in August 2009, after it became evident that Wilson was not going to give up his efforts to collect half of all of the Debtor’s gross income. In 2012, she created Unchained Productions as a successor to Precious Princess. Since August 2009, any income the Debtor has earned from performances and sales of CDs and DVDs has been paid to Precious Princess,, and now Unchained Productions. Unchained Productions, in turn, pays the Debtor $50 per show, and pays for all the family’s living expenses.
Section 727(a)(2)
As to § 727(a)(2), the elements of proof under paragraphs (A) and (B) are “virtually the same, differing only in the requisite timing of the debtor’s acts and the nature of the property involved.”107
To prevail under either subsection 727(a)(2)(A) or (B), [Wilson] must prove by a preponderance of the evidence: (1) the act serving as the basis for the claim took place within one year before the petition date (subsection A) or after the petition for relief (subsection B); (2) the act was that of Debtor; (3) the act amounted to a transfer, removal, destruction, mutilation or concealment of property of the bankruptcy estate; and (4) the act was done with an intent to hinder, delay, or defraud a creditor or the trustee.108
I do find that the Walkers’ method of funneling income through Precious Princess and Unchained Productions were transfers of funds which occurred both within one year before the petition date and after the petition date. I further find that they created these entities in direct response to Wilson’s efforts to prevent the Debtor from getting any work without Wilson’s participation. However, as discussed above, I hold that Wilson is owed nothing and is, therefore, not a creditor. Other than Wilson, the Debtor lists debts totaling $52,722. I further find that Wilson did not prove that the Debtor or Tamar transferred the Debtor’s income to Precious Princess or Unchained Productions with the intent of defrauding anyone else. *751Therefore, Wilson has failed to prove the fourth element for denial of discharge under § 727(a)(2).
• Section 727(a)(3)
“To prevail under § 727(a)(8), a party seeking the denial of the debtor’s discharge must establish that a debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debt- or’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case....”109 “Once that party has shown that the debt- or’s records are inadequate, the burden of production shifts to the debtor to offer a justification for his record keeping (or lack thereof); however, the objecting party bears the ultimate burden of proof with respect to all elements of this claim.”110
This case presents a somewhat unusual situation with regard to the record-keeping. The Debtor is an individual. However, everything he earns as a self-employed entertainer is run through his wife’s LLC. All of Tamar Walker’s income for her work with Angels of Country Music is also run through Unchained Productions. As stated, Unchained Productions pays all of the Walker family’s living expenses, including the Debtor’s child support. Much time was spent at trial trying to hash out the financial records of Precious Princess and Unchained Productions, which consisted primarily of checking account records, tax returns, and pieces of paper concerning sales of merchandise. Suffice it to say that the records were difficult to sort through. Wilson therefore met his burden of proving that the records were inadequate. Thus, the burden shifts to the Debtor to show that the inadequate record keeping was justified under the circumstances.
Although the Bankruptcy Code does not require an impeccable system of bookkeeping, the records must sufficiently identify the transactions so that intelligent inquiry can be made of them. Even if poorly organized, there must be a reasonably sufficient basis upon which to ascertain the debtor’s financial condition. Various factors may be utilized to determine whether the records are inadequate for purposes of applying § 727(a)(3) and include: the debtor’s education, the debtor’s business experience, the sophistication of the debtor, the volume of the debtor’s business, the complexity of the debtor’s business, the debtor’s personal financial structure, and any other circumstances that should be considered in the interest of justice.111
The Debtor, based on my observation of him, has limited formal education, and no experience or skills at keeping books. He may be a talented performer, but he is far from a sophisticated businessman. Indeed, as discussed above, the very reason performers such as the Debtor hire personal and business managers to handle the business duties is so that the artist can focus on what he is good at: creative matters. When the Debtor was managed by Wilson, it was Wilson’s responsibility to keep the books. When the Debtor was managed by Precious Princess and Unchained Produc*752tions, the record-keeping duty fell to Ta-mar.
Although Tamar has more experience at bookkeeping than her husband does, she is not particularly sophisticated in business matters, either. Further, the Walkers testified that Tamar became pregnant with twins in mid-September 2009, and that she had complications with the pregnancy. She lost one of the twins very soon after becoming pregnant, and then lost the other twin in October. Tamar testified she had to have surgery as a result of that pregnancy. She then became pregnant again in March 2010, again with twins. Tamar testified that, with this pregnancy, she developed a complication she referred to as “twin-to-twin transfusion syndrome,” whereby one of the babies gives the other all of the in-vitro nutrients, resulting in one of the babies being too small. According to the Debtor, Tamar was on bed-rest during much of this time period. She was then transferred to a hospital in Texas, and had a Caesarian section in July 2010. One of the babies died in October 2010. Tamar testified that, while the Debtor returned to Branson to perform at the God & Country Theater, she stayed in Texas with the surviving baby, who remained in the hospital until December that year. Tamar then lived with her parents in Oklahoma for a period of time, and did not return to Branson until April 2011 for the spring season. Meanwhile, the Walkers’ child apparently continued to have some health problems because Tamar also testified that, while they were in Cancún for a series of performances, she had to return to the States with her son so he could have another surgery. Tamar testified that she was trying to keep the books during this time period, even when she was in Texas, but she admitted was not doing a very good job at that time.
Given her lack of business sophistication and the nature of their business, and particularly considering the circumstances relating to the children, I find that Tamar’s failure to keep detailed books and records during the 2009 to 2012 time period was both understandable and justifiable. Although it was not easy to put the information together at trial, the evidence was sufficient to reasonably ascertain the Walkers’ financial condition during that time period. Most pertinently, the evidence showed that, after payment of expenses needed for their performances, the Walkers did not have sufficient funds remaining from their monthly income to pay reasonable living expenses. For example, the 2009 joint tax return of the Walkers shows gross income of $5,707, less expenses of $5,520, for a net of $187. The return for Precious Princess shows gross income of $18,570, cost of goods sold (such as DVDs) of $10,497, expenses of $7,913, and a net profit of $160.112 For obvious reasons, the Walkers testified they had to borrow money from her family from time to time to pay their living expenses. Thus, the Debtor has maintained records sufficient to ascertain that they had no income available after expenses.
I find that the Walkers’ failure to keep better records was justified under the circumstances of the case, and that Wilson has not met his burden for denial of the discharge under § 727(a)(3).
Section 727(a)(4)
Section 727(a)(4) provides that the court is to deny a debtor a discharge if the debtor “knowingly and fraudulently, in connection with the case ... made a false oath or account.” Wilson asserts that the Debtor’s schedules are inaccurate because they only show $50 per month in income, *753even though he earns significantly more from his actual performances and sales of merchandise.
The Debtor’s schedules list $50 per month in income attributed to himself. Tamar’s column states that she is the owner and operator of Precious Princess Productions and that she earns $2,013.42 per month. Schedule I also discloses that “Debtor performs shows in Branson, Missouri] weekly. He receives $50.00 per show, averaging 2 shows per week this season; money is paid by theater to non-filing spouse’s business Precious Princess Productions, LLC.”
As stated, while the Walkers structured their finances so as to avoid Wilson, the Debtor did disclose that arrangement on his schedules. In addition, “in order for a false statement, made in connection with a case, to bar a debtor’s discharge, the statement must be both material and made with intent.”113 I find that, to the extent the schedules are inaccurate in any other way, the Debtor did not intend to deceive anyone, and such misstatements are not material. Wilson has, therefore, failed to prove that the Debtor’s discharge should be denied under § 727(a)(4).
THE DEBTOR’S COUNTERCLAIM AGAINST WILSON
After the quote appeared in the newspaper stating that Wilson was the cause of the Debtor being fired from the Pigeon Forge deal,114 Wilson sued Deason and Bowman on September 18, 2008, for, inter alia, breach of contract and defamation.115 He alleged in his lawsuit that Deason was “a convicted felon of various federal and international fraud-related offenses.”116 A month later, on October 18, 2008, although Wilson had been represented by counsel in that litigation on a contingency basis, Wilson settled the lawsuit on his own, without advising his attorneys.117
As part of that October 18, 2008, transaction, Wilson, Deason, and Bowman signed two separate documents. One of them, entitled “Mutual Release,” provided that Wilson would dismiss the pending lawsuit in exchange for Deason and Bowman’s payment of $3,000 to him.118 The second, entitled “Agreement,” provided that Deason and Bowman would give Wilson four items: (i) $7,000 in cash; (ii) a collection of guitars signed by various musicians which had been displayed in the lobby of the venue where the Debtor performed in Pigeon Forge; (iii) “[a] letter addressed to Joseph R. Wilson correcting the newspaper article and stating that it was Mike Walker, not Joseph R. Wilson[,] who was responsible for Mike Walker being fired”; and (iv) “a copy of the handwritten letter from Mike Walker.”119 One can easily infer that the third and fourth items — in effect, cleaning up the allegations of misconduct on Wilson’s part— were requested by Wilson at least in part in anticipation of litigation with the Debt- or.
*754But the more disturbing aspect of this second document is the consideration Wilson agreed to provide Deason and Bowman in exchange. Specifically, shortly before October 18, 2008, Wilson had made a secret tape recording of a phone conversation he had had with Eddie Rhines. Although he declined to offer many specifics at trial, Wilson described the content of the tape as being vile and violent, and that Rhines was saying he was going to have Deason harmed.120 He also testified that that tape was something which Deason badly wanted: Specifically, Deason intended to use the tape against Rhines in separate ongoing litigation between Deason and Rhines.121 In essence, Deason wanted to use the tape to extort Rhines into dismissing a multi-million lawsuit against him.122 Wilson testified that he initially demanded $100,000 from Deason for the tape, but ultimately settled for the $7,000, the guitars, and the retraction letter.
Thus, in sum, the agreement provides that, in return for the $7,000, the guitars, and the letter retracting the newspaper quote, Wilson would “authenticate, in any manner required, the tape recording made of a phone conversation between Joseph R. Wilson and Eddie Rhines, the contents of which were made known to [Deason and Bowman].”123 Recall, this was despite the fact that Wilson had just described Deason a month earlier in his Complaint as a felon convicted of federal and international fraud charges.
In any event, the Debtor asserts in his counterclaim that Wilson’s lawsuit against Deason and Bowman stemmed from the Pigeon Forge agreement between SMEC and W & W Enterprises, which, in turn, is tied to the 2008 AMA. Thus, if the 2008 AMA is enforceable, then the Debtor asserts the money and guitars received under the settlement documents are all fruits of the 2008 AMA, to which the Debtor is entitled to half. Wilson contends here, as he had in the litigation with the contingency-fee attorneys, that the second document was, in effect, a “sale” of the Rhines tape in exchange for the $7,000, guitars and the retraction and, therefore, was not related to the lawsuit over the contract between SMEC and W & W Enterprises. It was a separate “transaction,” he asserts. Clearly, however, the settlement of the litigation between Wilson and Deason and Bowman was affected, and tied to, the Agreement concerning the extortion tape. However, because I have concluded that the 2007 and 2008 AMAs are not enforceable, the Debtor’s counterclaim based on either of those agreements must also fail.
CONCLUSION
Accordingly, by separate Order, the Clerk of the Court will be directed to enter judgment as follows:
*7551. In favor of the Defendants as to the Complaint;
2. In favor of the Plaintiff as to the counterclaim filed by certain of the Defendants;
3. Granting the Debtor a general discharge of all debts; and
4. Rejecting both the 2007 and 2008 Artist Management Agreements between Plaintiff and the Debtor.
. Exhibit 7.
. MatHlO.
. Id. at ¶ 5.
. Id. at ¶ 14.
. Id. at ¶ 16.
. Exhibit 9. The parties testified that the initial contract with the Gilley Theater was one year, but that the contract was extended to five years.
. Exhibit 10.
. Id. at ¶ 10.
. Id. at % 5.
. Id. atH14.
. Id. at ¶ 10 ("It is understood by ARTIST that MANAGER cannot be replaced or fired for any reason or circumstances during this twenty (20) years [sic] Agreement, exception [sic] specified in paragraph (12). However ARTIST may at any time during this Agreement pay MANAGER the sum of EIGHT MILLION DOLLARS ([$]8,000,000.00) to purchase any remaining period from twenty year [sic] Agreement.”). Paragraph 12 of the AMAs provided for a cure period for any claimed breach and, in the event of no such cure, required that the parties submit to arbitration in the State of Virginia.
. Id. atH16.
. Exhibit 7 at ¶ 3.b; Exhibit 10 at ¶ 3.B.
. See Exhibit 11.
. Id.
. See also Exhibits 13 and 14.
. Exhibit 15.
. Id. at ¶ 2.d.
. Id.
. Defendants' Exhibit G at ¶ 1.
. Id. at ¶ 2.b and g.
. Defendants' Exhibits Z and AA.
. Because Wilson’s claim against the Debtor here might have been an asset in Wilson’s own bankruptcy case, on February 14, 2014, upon learning of Wilson's bankruptcy, this Court ordered Wilson’s counsel to notify the United States Trustee and the Chapter 7 Trustee in Wilson’s case of this adversary proceeding and his right to intervene in it, if the Trustee concluded this case had any value to Wilson’s bankruptcy estate. Order Denying Joint Motion of Defendants to Add Additional Affirmative Defenses (Cancellation Based on Fraudulent or Unfair Concealment and Lack of Standing) (Doc. No. 133). The Trustee has not intervened.
. Exhibit 101.
. Exhibit 12.
. Id. at ¶ 10. The 2008 AMA actually states that the term was "for a period of time twenty years (25) commencing from the date of the execution of this Agreement.” It was pointed out at trial that this is internally inconsistent. Wilson testified at one point that the "25” was a typographical error, and that the term under the 2008 AMA actually remained at twenty years. In any event, as discussed below, I find that, even if the term remained at twenty years with eight years of options, that term was also unreasonable.
. Id. at ¶ 5.
. Id. at ¶ 10.
. Id. atH 16.
. Id. ("In the event MANAGER pass’s [sic] away, ARTIST will allow MANAGER’S benefactor the right to hire at benefactor['] cost, a replacement MANAGER (ACCEPTABLE TO ARTIST) for the remainder period of contract with no options. Payments will be paid at same existing rate to benefactor and will be paid monthly by ARTIST or new MANAGER less MANAGER[’]S prior arranged fee from benefactor with a detailed account of monthly receipts.”).
. See id. at ¶ 1.1.
. Exhibit 57.
. Exhibit 16.
. Id. at h 3.
. Id. atHl.a.
. Jd. at ¶ 4.
. See, e.g., Exhibit 113 (e-mails between Wilson and Don King’s representative, Jimmy Adams, concerning Wilson's demand for a loan against future income).
. See, e.g., Exhibit 42; Defendants’ Exhibit K.
. Exhibit 18.
. Id. at 1.
. Id.
. Exhibit 21.
. Exhibit 20.
.Exhibit 22.
. See Exhibit 28.
. See also Exhibit 47.
. See Exhibits 26 and 27.
. Exhibit 31.
. 28 U.S.C. §§ 1334, 157; Order Regarding Reference of Bankruptcy Matters to United States Bankruptcy Judges, United States District Court for the Western District of Missouri (en banc) (August 15, 1984) (referring all cases under Title 11 and all proceeding arising under Title 11 or arising in or related to cases under Title 11 to the bankruptcy judges of this district).
. — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
. Stern v. Marshall, 131 S.Ct. at 2611.
. Id. at 2620.
. 28 U.S.C. § 157(b)(2)(B).
. See Executive Benefits Ins. Agency v. Arkison, - U.S. -, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014) (describing the three types of causes of action in bankruptcy cases).
. 134 S.Ct. 2165.
. See 28 U.S.C. § 157(c)(1).
. Fed. R. Bankr.P. 7008(a).
. Doc. No. 148.
. 11 U.S.C. § 727.
. 11 U.S.C. §§ 523 and 727.
. Generally speaking, § 523(a)(2)(A) excepts from discharge debts obtained by false pretenses, a false representation, or actual fraud; § 523(a)(4) excepts from discharge debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; and § 523(a)(6) excepts from discharge debts for willful and malicious injury by the debtor.
. 11 U.S.C. § 523(c)(1).
. Stern v. Marshall, 131 S.Ct. at 2611.
. Claim No. 1-1, filed December 18, 2012.
. Hart v. Southern Heritage Bank (In re Hart), 564 Fed.Appx. 773, 775 (6th Cir.2014) (holding that Stem did not strip the bankruptcy court of its constitutional authority to enter a final monetary judgment in a § 523(a)(2)(B) dischargeability action). See also Cai v. Shenzhen Smart-In Indus. Co., Ltd., 571 Fed.Appx. 580, 2014 WL 1647730 (9th Cir. April 25, 2014) (holding that bankruptcy court had authority to liquidate debt which it found to be nondischargeable by entering money judgment in favor of plaintiff-creditors); Cohen v. Third Coast Bank, SSB, 2014 WL 2729608 at *7 (E.D.Tex. June 16, 2014) (holding that Stem did not change Fifth Circuit precedent holding that bankruptcy courts have the authority to enter a final money judgment when determining the dischargeability of creditors’ claims in bankruptcy).
.Doc. No. 94.
. Stern v. Marshall, 131 S.Ct. at 2617-18.
. 28 U.S.C. § 157(b)(5).
.131 S.Ct. at 2594, 2608.
. Fed. R. Bankr.P. 7008(a).
. Complaint, ¶¶ 5 and 6.
. Doc. No. 148.
. See Wellness Intern. Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir.2013), cert. granted in part, - U.S. -, 134 S.Ct. 2901, - L.Ed.2d - (2014) (granting certiorari on whether the a bankruptcy court has constitutional authority to enter a final order deciding whether property is property of the bankruptcy estate under § 541, even where there is a presence of a subsidiary state property law issue and whether Article III permits the exercise of judicial power of the United States by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent is sufficient).
. Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 848, 106 S.Ct. 3245, 3255, 92 L.Ed.2d 675 (1986).
. See Roell v. Withrow, 538 U.S. 580, 123 S.Ct. 1696, 155 L.Ed.2d 775 (2003) (holding that, under 28 U.S.C. § 636(c)(1), a consensual referral gives a magistrate judge full authority over dispositive motions, conduct of trial, and entry of final judgment, all without district court review, and that consent to proceedings before a magistrate judge can be inferred from a party’s conduct during litigation). See also Pacemaker Diagnostic Clinic of America, Inc. v. Instromedix, Inc., 725 F.2d 537 (9th Cir.1984) (en banc) (Kennedy, J.) (holding that the section of the Federal Magistrate Act (28 U.S.C. § 363(c)) which allows magistrates to conduct civil trials and enter final judgment with the consent of all parties does not violated the Constitution).
. Complaint, ¶ 11.
. Reel v. Anderson Fin. Servs., LLC, No. 5:07CV00080, 2008 WL 53222 at *5 (W.D.Va. Jan. 2, 2008) (not reported) (citation and internal bracket marks omitted).
. Fransmart, LLC v. Freshii Dev., LLC, 768 F.Supp.2d 851, 870-71 (E.D.Va.2011) (citations, internal quotation marks, and brackets omitted). See also Reel v. Anderson Fin. Servs., 2008 WL 53222 at *6 n. 7 (W.D.Va. Jan. 2, 2008).
. Id. at 871.
. 8 Williston on Contracts § 18:14 (4th ed.) (footnotes omitted).
. Id. (footnote omitted).
. Id. (footnotes omitted). See also Thomas D. Selz, Melvin Simensky, Patricia Acton & Robert Lind, 2 Entertainment Law 3d: Legal Concepts and Business Practices § 9:140 (describing a sliding scale for unconscionability in talent contracts in California, under which "the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required, and vise ver-sa.”).
. Reel v. Anderson Fin. Servs., 2008 WL 53222 at *6 n. 7 (citation and internal brackets omitted; emphasis added).
. Mickey Gilley testified he has 39 top-ten and 17 number-one records recorded in the 1970s and 1980s.
. Cal. Lab.Code § 2855(a) ("Except as otherwise provided in subdivision (b), a contract to render personal service ... may not be enforced against the employee beyond seven years from the commencement of service under it.”). See also Thomas D. Selz, Melvin Simensky, Patricia Acton & Robert Lind, 2 Entertainment Law 3d: Legal Concepts and Business Practices § 9:142 at 1 n. 2 ("This is a major reason why the compensation of talent working on successful television shows increases so dramatically when the show has aired longer than seven years. Television production companies must renegotiate the talent contracts, providing the talent with the bargaining power to obtain sizeable increases in compensation.”) (citing Josef Adalian, Staying "Friends,” Daily Variety, Feb. 12, 2002, at 1).
. Exhibit 10 at ¶ 10.
. As stated above, when the parties met in 2002, Wilson was approximately 45 years old, and Walker was 26. Thus, by the time the 2008 AMA was signed, Wilson was approximately 51 and Walker was approximately 32. If Wilson asserted a 25-year term and exercised all of the renewal options under the 2008 AMA, Walker would be 84 and Walker would be 65 years old before Walker would be free of Wilson.
. Thomas D. Selz, Melvin Simensky, Patricia Acton & Robert Lind, 2 Entertainment Law 3d: Legal Concepts and Business Practices § 9:125.
. Exhibit 7 at 1; Exhibit 10 at 1; Exhibit 12 at 1.
. Exhibit 7 at ¶ l.g; Exhibit 10 at ¶ l.G; Exhibit 12 at ¶ l.H.
. Thomas D. Selz, Melvin Simensky, Patricia Acton & Robert Lind, 2 Entertainment Law 3d: Legal Concepts and Business Practices § 8:7 at 1 (footnotes omitted). Further: "Personal managers primarily advise, counsel, direct, and coordinate the development of the artist's career. They advise in both business and personal matters, frequently lend money to young artists and serve as spokespersons for the artists. A personal manager attempts to make the artist as marketable and attractive to talent buyers as possible.") Id. at 1, n. 1 (citations and internal quotation marks omitted).
. Exhibit 12 at ¶ 7.
. 2 Entertainment Law 3d § 8:7 at 1 (emphasis added).
. Id. at 1, n. 5. A "business manager,” typically an accountant, is primarily responsible for the financial needs of the talent and "traditionally receives a 5% commission on all of the compensation received by the talent.” 1 Entertainment Law 3d. % 8:10.
. 1 Entertainment Law 3d. § 8.7 at 1, n. 5 ("Due to their greater degree of involvement with the artist and the risk they take in representing artists without established track records, personal managers typically have a smaller client base than do talent agents and charge higher commissions than talent agents.”).
. Exhibit 7 at ¶ 16.
. Exhibit 10 at ¶ 16.
. Exhibit 12 at ¶ 16.
. See Exhibit 96 at 689.
. Trial Aid 15.
. Trial Aid 1.
. 11 U.S.C. § 727(a).
. Allred v. Vilhauer (In re Vilhauer), 458 B.R. 511, 514 (8th Cir. BAP 2011).
. Id.
. Bauer v. Iannacone (In re Bauer), 298 B.R. 353, 357 (8th Cir. BAP 2003).
. Floret v. Sendecky (In re Sendecky), 283 B.R. 760, 763 (8th Cir. BAP 2002).
. Kaler v. Hentz, (In re Hentz), 2013 WL 1197616 at *8 (Bankr.D.N.D. March 24, 2013) (slip copy).
. Id. (citations omitted).
. McDermott v. Swanson (In re Swanson), 476 B.R. 236, 240 (8th Cir. BAP 2012) (citation omitted).
. Id.
. United States Trustee v. Kouangvan (In re Kouangvan), 2012 WL 2931182 at *3 (Bankr.S.D.Iowa July 18, 2012) (slip copy) (citations, internal quotation marks, and brackets omitted).
. Exhibit 124.
. In re Sendecky, 283 B.R. at 765.
. Exhibit 57.
. Exhibit 19.
. Id. at ¶ 2.
. Because Wilson settled the case in contravention of the contingency fee agreement and thus, cut his lawyers out of the deal, Wilson’s attorneys filed a lawsuit against him asserting an attorneys' lien on December 15, 2008. See Defendants’ Exhibit O.
. Exhibit 23.
. Exhibit 24.
. Also, in a pleading Wilson filed in the litigation with his contingency fee attorneys, Wilson said: "In early October, 2008, I had a conversation with Rhines in which he asked me if I knew anyone he might be able to hire to cause bodily harm to Deason and others. I recorded the conversation.” Memorandum in Support of Defendant and Counter-Plaintiff s Opposition to Motion for Summary Judgment, Defendant’s Exhibit V at 2.
. Apparently, Rhines, who was represented by the same contingency-fee attorneys representing Wilson, was suing Bowman and Dea-son for a significant amount of money based on, inter alia, the failed Pigeon Forge deal.
. See Defendants’ Exhibits O, P, Q, R, S, T, and U (litigation documents discussing the extortion tape and subsequent events).
. Exhibit No. 24. Wilson’s contingency-fee attorney alleged in his own lawsuit against Wilson that, in effect, Wilson had also tried to extort $10,000 from Eddie Rhines for the tape. Defendants’ Exhibit O at ¶ 14. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497418/ | MEMORANDUM AND ORDER ON MOTION TO COMPEL TURNOVER OF ESTATE PROPERTY
DANIEL P. COLLINS, Chief Judge.
I. INTRODUCTION
Before the Court is the motion of William E. Pierce, the Chapter 7 trustee (“Trustee”), to compel turnover of $88,979.37 in proceeds (“Proceeds”) the Debtors received from the postpetition sale of their Arizona homestead (“Turnover Motion”).1 In the Turnover Motion, the Trustee argues that, since the Debtors sold their homestead and have failed to reinvest the Proceeds in a new Arizona homestead within Arizona’s statutory reinvestment period, the homestead exemption *757they declared at the outset of the case has “lapsed” and the Proceeds have become property of the estate which the Trustee can administer. The Debtors filed an opposition (“Opposition”) arguing that (a) the Court’s order authorizing them to sell their homestead “free and clear of the estate” bars the Trustee from claiming an interest in the Proceeds; (b) the homestead exemption they claimed at the outset of the case protected their exemption in the Proceeds; and (c) even if the sale of the homestead triggered the requirement under Arizona law that those proceeds be reinvested within 18 months of the sale, the Debtors’ purchase of a new home in Utah within that 18-month period satisfied the requirement. The Trustee filed a Reply to the Opposition. The Court heard oral argument on June 9, 2014, and took the matter under advisement. Subsequently, the Court issued an order directing the Trustee to file a declaration explaining why he has not closed this 4 year-old case, and directing the Debtors to file a declaration detailing their use of the Proceeds. Based on the papers, arguments, and the record before it, the Court partially grants the Trustee’s Turnover Motion.
II. BACKGROUND
The facts presented by the parties are not in dispute. The docket reflects the following events leading up to the instant Turnover Motion, which events the Court sets out in some detail in view of certain issues raised by the Debtors:
• The Debtors filed their Chapter 7 petition on June 25, 2010 (“Petition Date”). Along with the petition, the Debtors filed all schedules, including Schedule A listing their residence loeat-ed at 9205 E. Mountain View Road, Prescott Valley, AZ (“Property”), and Schedule C claiming the Property exempt in the amount of $70,279.00 (“Exemption”) pursuant to A.R.S. § 33-1101(A).2 The schedules have not been amended.
• The first meeting of creditors required under 11 U.S.C. § 341(a)3 was held July 23, 2010.
• No objection to the Exemption (or any other exemption) was filed.
• The Debtors received their discharge on September 28, 2010.
• On July 25, 2012, just over 2 years from the Petition Date, the Debtors filed a Motion To Sell Property Free And Clear Of The Estate And Pay Off Mortgage (“Sale Motion”). The Sale Motion indicated the Debtors were under contract to sell the Property for $280,000.00, with a closing set for August 30, 2012. The Sale Motion also stated that, “Any equity that the debtors realize from the sale of the home will be protected by the debtors’ homestead exemption. A.R.S. § 33-1101(A). Thus, the debtors should be permitted to sell the Property free and clear of the bankruptcy estate.” No opposition to the Sale Motion was filed. The Sale Motion was heard July 31, 2012. The Honorable Redfield T. Baum’s minute entry from the sale hearing reflects that only Debtors’ counsel attended and stated: “It is confirmed that the trustee was noticed.” The Sale Motion was granted by Judge Baum’s order entered August 1, 2012 (“Sale Order”). The sale closed *758on August 30, 2012 (“Sale”).4
• On March 8, 2013, the Debtors filed a Motion To Determine That Proceeds From Post-Petition Sale Of Debtors’ Homestead Are Not Property Of The Estate Under A.R.S. § 33-1101(0 (“Motion To Determine”). In that Motion, the Debtors reported the result of the sale of the Property and stated,
In subsequent communications with the Chapter 7 Trustee, undersigned counsel has been advised that the Trustee intends to make a claim for the proceeds from the sale of the Property pursuant to A.R.S. § 33-1101(C) ... The Trustee asserts that the proceeds from the post-petition sale of the Debtors’ homestead may become property of the estate unless the Debtors use that money to purchase a new residence before the expiration of eighteen months.
The Motion To Determine essentially makes the same arguments the Debtors make in their opposition to the instant Turnover Motion.
• On March 22, 2013, the Trustee filed an Objection to the Motion To Determine, essentially stating the same arguments which the Trustee made in his Turnover Motion. In his Objection, the Trustee stated: “Unless the debtors reinvest this money in another homestead with[in] 18 months after the sale, the exemption in the proceeds will terminate and the money must be turned over to the trustee.”
• The docket does not reflect any further events in connection with the Motion To Determine. Although this was the type of motion that requires a hearing pursuant to LBR 9013-l(k), the docket does not indicate that any hearing on the Motion was set or that any notice of hearing was filed or served by the Debtors pursuant to LBR 9013 — l(j).5
• The Trustee filed his Turnover Motion on May 16, 2014. The next most recent affirmative filing by the Trustee in this case was his Motion For Examination Pursuant To Bankruptcy Rule 2004 filed on June 4, 2011, almost three years prior to the Turnover Motion.
III. ISSUES PRESENTED
The issues raised by the parties are as follows:
1. Where the Debtors have exempted their homestead under A.R.S. § 33-1101(A), does a voluntary, postpetition sale of the homestead, after the deadline for objecting to the exemption has passed but while the bankruptcy case is still open, subject the exemption to the conditions of A.R.S. § 33-1101(C)?
2. Does the Court’s Sale Order preclude the Trustee from pursuing turnover of the Proceeds?
3. Does the Debtors’ purchase of a new homestead in another jurisdiction within 18 months of the Sale qualify to continue the exemption in the Proceeds under A.R.S. § 33-1101(0?
4. What uses of homestead sale proceeds are permitted in “establishing] a new homestead” within the meaning of A.R.S. § 33-1101(0?
*7595. Do the equities of this case require that the Turnover Motion be denied?
IV. DISCUSSION
In this case, the Court wades into an area well-known to the 9th Circuit:
The bankruptcy status of the Arizona 18-month temporary homestead sale proceeds exemption is a festering sore. We wrestle with ARIZ.REV.STAT. § 33-1101(0 for the third time in two years. Our Smith and [In re ] Konnoff [356 B.R. 201 (9th Cir. BAP 2006) ] decisions validated the estate’s interest in such proceeds, emboldened trustees, and prompted two bankruptcy court published opinions.
In re White, 389 B.R. 693 (9th Cir. BAP 2008). Some clarification has been provided in the more recent decision of the 9th Circuit in In re Jacobson, 676 F.3d 1193 (9th Cir.2012), but the instant case demonstrates that the sore still festers.
We start, as always, with the statutes governing this dispute.
A. The Statutes
The Trustee does not cite his authority under the Bankruptcy Code for seeking turnover of the Proceeds, but § 542(a) appears to be the source of that authority. That subsection provides as follows:
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 debt- or 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.
A key requirement of this provision, and key to the first issue presented, is that property subject to turnover must be “property that the trustee may use, sell or lease under section 363.” Section 363 confers such powers on the trustee only as to “property of the estate.” See § 363(b)(1) and (c)(1). Section 522 entitles individual debtors to exempt certain property from property of the estate. In Arizona, the exemptions to which bankruptcy debtors are entitled are those created under Arizona law. A.R.S. § 33-1133.
Debtors’ Schedule C filed in this case lists the Property as exempt pursuant to A.R.S. § 33-1101(A), which provides in pertinent part as follows:
A. Any person the age of eighteen or over, married or single, who resides within the state may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred fifty thousand dollars in value, any one of the following:
1. The person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides....
The Trustee cites A.R.S. § 33-1101(0) for the proposition that the Sale Proceeds are no longer exempt from property of the estate. That subsection provides as follows:
C. The homestead exemption, not exceeding the value provided for in subsection A, automatically attaches to the person’s interest in identifiable cash proceeds from the voluntary or involuntary sale of the property. The homestead exemption in identifiable cash proceeds continues for eighteen months after the date of the sale of the property or until the person establishes a new homestead with the proceeds, whichever period is shorter. Only one homestead exemp*760tion at a time may be held by a person under this section.
B. The Trustee’s Position
The Trustee relies on In re Jacobson, 676 F.3d 1193 (9th Cir.2012) as precedent requiring this Court to order turnover of the Proceeds. In Jacobson, the debtor claimed her homestead as exempt at the commencement of her California bankruptcy case. California’s homestead exemption scheme does not prevent the involuntary sale of a homestead if there is sufficient equity above all liens and encumbrances to satisfy the statutory exemption amount. Jacobson, 676 F.3d at 1198. In Jacobson, the bankruptcy court lifted the stay and permitted a judgment creditor to force a sale of the homestead, after which the debtor and her husband received their statutory exemptions totaling $150,000 from the sale proceeds. They did not reinvest those proceeds in a new homestead within the 6-month reinvestment period provided under California’s statutory homestead exemption scheme. The bankruptcy court ruled against the trustee on his complaint for turnover of the proceeds. The Bankruptcy Appellate Panel affirmed. The 9th Circuit Court of Appeals reversed. Its decision noted the basis for the bankruptcy court’s ruling:
The bankruptcy court reasoned that bankruptcy exemptions are fixed at the time of the bankruptcy petition and cannot be changed by postpetition events. The bankruptcy court viewed the homestead exemption as covering the Kens-ington property itself and concluded that post-petition conversion of the Kensing-ton property into sale proceeds could not change its exempt status.
676 F.3d at 1197-1198. In rejecting that view, the 9th Circuit reasoned as follows:
Under the so-called “snapshot” rule, bankruptcy exemptions are fixed at the time of the bankruptcy petition. See White v. Stump, 266 U.S. 310, 313, 45 S.Ct. 103, 69 L.Ed. 301 (1924). Those exemptions must be determined in accordance with the state law “applicable on the date of filing.” 11 U.S.C. § 522(b)(3)(A). And “it is the entire state law applicable on the filing date that is determinative” of whether an exemption applies. In re Zibman, 268 F.3d 298, 304 (5th Cir.2001) (emphasis in original). In this case, the entire state law includes a reinvestment requirement for the debtor’s share of the homestead sale proceeds. [ ]
... [W]e analyze the California homestead exemption in terms of the exact scope of the rights it confers at the time of the bankruptcy petition. In In re Golden, 789 F.2d 698 (9th Cir.1986), the debtor had filed for bankruptcy after selling his California homestead and had then let the reinvestment period lapse without investing his exempt share of the proceeds. Id. at 699. The debtor argued the proceeds were nonetheless exempt because they had been exempt when he filed for bankruptcy. Id. at 700. We rejected that argument and held the debtor had received the proceeds subject to the reinvestment condition. Id. Those proceeds could thus lose their exempt status once the reinvestment period lapsed. Id.
There is no material difference between Golden and this case. The homestead exemption gave the Jacobsons clearly defined rights with respect to the Kensington property. The Jacobsons had a right to $150,000 in proceeds. That right was contingent on their reinvesting the proceeds in a new homestead within six months of receipt. The Ja-*761cobsons did not abide by that condition and thus forfeited the exemption.
The Jacobsons argue Golden is inap-posite because Myrna filed for bankruptcy before the homestead was sold and thus claimed an exemption in the Kens-ington property, not the proceeds. We reject the argument. The homestead exemption merely gave the Jacobsons a conditional right to a portion of the proceeds from the sale of the Kensington property. There was no exemption in the Kensington property itself. To the contrary, the exemption explicitly allowed Cunningham to force a judicial sale of the Kensington property. [ ] The Jacobsons could thus expect no more than $150,000 in proceeds that were subject to a reinvestment requirement.
Jacobson, 676 F.3d at 1199-1200 (statutory citations omitted).
While Jacobson involved California homestead law, this Court finds that Arizona’s homestead law is indistinguishable from the provisions that governed the Jacobson decision. See also In re Smith, 342 B.R. 801, 805 (9th Cir. BAP 2006) (“Debtors argue that ... unlike the homestead provisions of California ..., Arizona does not require that the sale proceeds be reinvested into another homestead. According to Debtors, under Arizona law, there is no clear language conditioning the allowance of the exemption on a requirement to be met over a period of time. We disagree.”). Jacobson instructs this Court to include the reinvestment requirement under A.R.S. § 33-1101(C) in determining whether the Debtors’ claimed exemption under A.R.S. § 33-1101(A) continues in the Proceeds, notwithstanding that the original exemption was never challenged.
Applying the provisions of A.R.S. § 33-1101(0 to this case, the Debtors were required to reinvest the Proceeds within 18 months of August 30, 2012, i.e., by February 27, 20146, in order to preserve their exemption. The Debtors purchased a home in Utah on June 7, 20137, well within the 18-month reinvestment period. Nevertheless, the Trustee asserts that a Utah homestead does not qualify for the Arizona homestead exemption, quoting language of A.R.S. § 33-1101(A). However, having sold their Arizona homestead, the question is no longer whether the Debtors are entitled to an exemption under A.R.S. § 33-1101(A), but whether, after sale of their Arizona homestead, their exemption continues in the Proceeds under A.R.S. § 33-1101(C). The Court acknowledges the plain language of A.R.S. § 33-1101(A), limiting the exemption to a person “who resides within the state,” but A.R.S. § 33-1101(0 does not contain that limitation and is silent as to where the new homestead must be established with the homestead sale proceeds. The fact that this limitation is expressed in A.R.S. § 33-1101(A) but absent in A.R.S. § 33-1101(0 evidences the Arizona Legislature’s intent that there not be such a limitation on a qualified reinvestment of proceeds. The Court declines to write that limitation into A.R.S. § 33-1101(0. Besides the unwarranted judicial legislation that would represent, in this day and age of easy mobility across state lines, imposing the requirement advanced by the Trustee would fly in the face of comity and the fresh start goal of the Bankruptcy Code.
*762Next the Trustee contends the Debtors did not use all of the Proceeds to establish a new homestead. The Trustee argues that only the earnest money and down payment paid by the Debtors at the closing on their purchase of the Utah home represent proceeds reinvested in a homestead.
In In re White, 377 B.R. 633 (Bankr.Ariz.2007), aff'd, 389 B.R. 693 (9th Cir. BAP 2008), the court examined permissible uses of homestead sale proceeds. In White, Judge Curley granted a turnover motion concerning proceeds of the debtor’s prepetition sale of his homestead where the debtor had “placed the vast majority of his funds into a brokerage account from which he purchased, sold, or obtained a number of investments that were contrary to an intent to reinvest in a new homestead or any exempt property.” 377 B.R. at 645. In affirming Judge Curley’s order, the 9th Circuit B.A.P. noted that Arizona authority is sparse on the question of what uses of homestead sale proceeds are permissible during the period of exemption, but predicted that the Arizona Supreme Court would not permit use of sale proceeds “in a manner inconsistent with Arizona’s exempt purposes.” 389 B.R. at 703-704. The Panel gleaned those purposes from Arizona Supreme Court case law, describing them as “preserv[ing] funds to provide shelter for the family” and allowing the owner of a homestead “to substitute one family home for another.” Id. (citations omitted).
This Court finds it appropriate to consider the Debtors’ reasonable expenditures to find and acquire their new home in Utah, to prepare it for occupancy, and to relocate there, as being within the meaning and spirit of “establish[ing] a new homestead” under A.R.S. § 33-1101(C). Those expenditures are itemized in the Debtors’ declaration which identifies moving expenses totaling $2,395.75, interim housing rent for 13 months totaling $13,200.00, the cash paid by the Debtors at the closing on their purchase of the new homestead totaling $30,782.158, and repairs, improvements, landscaping and appliances for the new homestead totaling $20,062.699, for a grand total of $66,440.59. The Court finds that the foregoing expenditures were reasonable and qualify as a timely reinvestment of the Proceeds. The Court finds that the balance of the Proceeds were used for purposes that do not qualify as expenditures made to establish a new homestead. Subtracting the qualified expenditures from the gross amount of the Proceeds, the amount as to which the homestead exemption lapsed under A.R.S. § 33-1101(C) and that is subject to turnover is $22,538.78.10
C. The Debtors’ Position
The Debtors make two arguments in support of their position that the Turnover Motion should be denied.
*7631. Estoppel
First, the Debtors argue that the Sale Order extinguished any claim of the estate and precludes the Trustee from now claiming the estate has an interest in the Sale Proceeds. The Debtors reason that ordinarily a debtor would not be required to obtain court approval of a sale of their homestead two years after the entry of discharge, but here they were obliged to do so because the Trustee had not yet closed the case, and the fact that the case remained open was not the fault of the Debtors. The Court views this argument as one of estoppel arising from the entry of the Sale Order, and also arising from the Trustee not having closed the case by the time of the Sale for reasons that were not the fault of the Debtors.
In New Hampshire v. Maine, 532 U.S. 742, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001), the Supreme Court discussed the doctrines of claim and issue preclusion, as well as judicial estoppel:
Claim preclusion generally refers to the effect of a prior judgment in foreclosing successive litigation of the very same claim, whether or not relitigation of the claim raises the same issues as the earlier suit. Issue preclusion generally refers to the effect of a prior judgment in foreclosing successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, whether or not the issue arises on the same or a different claim.... [JJudicial estoppel, “generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.... Because the rule is intended to prevent “improper use of judicial machinery,” judicial estoppel “is an equitable doctrine invoked by a court at its discretion.”
532 U.S. at 748-749, 121 S.Ct. at 1814 (citations omitted).
The Court finds the effect of the Sale Order is unclear. The Sale Motion does not cite any authority under the Bankruptcy Code for the relief requested, so the effect of the Sale Order cannot be determined with reference to any specific statutory provision. The “free and clear” language of the Sale Motion and the Sale Order is found in § 363(f) of the Code but the powers of sale free and clear of interests under that provision are conferred on a trustee, not a Chapter 7 debtor. Moreover, a sale authorized under that subsection “may be free and clear of any interest in such property of an entity other than the estate” (emphasis added) — the exact opposite of what is stated in the Sale Order. The Court is aware of the common reality that the title company upon which a buyer depends for title insurance, or perhaps the lender the Debtors sought to pay off with the sale proceeds, might have demanded this form of “comfort order” from the Court. However, the Court is unwilling to endow the Sale Order with the effect of estoppel against the Trustee, or to find that the Sale Order cut off the rights and interests the Trustee is asserting in his Turnover Motion.
2. Equities of the case
Next, the Debtors argue that, “Allowing the Trustee to claim the proceeds from the post-petition sale of the Debtors’ homestead under these circumstances would be fundamentally unfair and would frustrate the Bankruptcy Code’s goal of giving debtors a fresh start.” The Debtors describe “these circumstances” by way of attempting to distinguish this case from Jacobson. Their points of distinction, and the Court’s views on these points, are as follows:
(a) The Debtors argue that, unlike the debtor in Jacobson, the Debtors have *764not engaged in fraudulent activity. The Court does not see that this point had any bearing on the decision in Jacobson, and the Debtors have not directed the Court’s attention to any part of the Jacobson opinion that makes a connection between that debtor’s fraudulent activity and the court’s decision. Myrna Jacobson’s fraudulent activity and denial of discharge are mentioned in the Court’s recitation of the background, but not in the analysis or reasoning for the decision on the exemption issue.
(b) The Debtors next contend that, unlike Jacobson, where the debtor’s homestead was sold by forced sale shortly after the commencement of the case and after lifting the stay, the Debtors before this Court sold their home over two years after the commencement of the case, on their own motion, and under an order that approved the sale free and clear of the bankruptcy estate. As previously discussed, the Court does not find that the Sale Order resolves the Turnover Motion. Moreover, the Court does not view the distinction between a forced or voluntary sale as being relevant. A.R.S. § 33 — 1101(C) specifically states that it applies to “the voluntary or involuntary sale of the property.”
(c) Finally, the Debtors argue that the Jacobson court was not faced with a bankruptcy case that “languished” on the docket for years through no fault of the Debtor. The Court is concerned about this aspect of the case and views the Debtors’ argument as a laches defense. In determining whether the equitable doctrine of laches may be used as a defense in a dischargeability action, the 9th Circuit stated,
Our analysis begins with a recognition of two fundamental tenets of bankruptcy law. The first is the “long[-]recognized” principle that “a chief purpose of the bankruptcy laws is ‘to secure a prompt and effectual administration and settlement of the estate of all bankrupts within a limited period[.]’ ” Katchen v. Landy, 382 U.S. 323, 328, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) (citation omitted). The second is the understanding that a bankruptcy court is a court of equity and should invoke equitable principles and doctrines, refusing to do so only where their application would be “inconsistent” with the Bankruptcy Code. In re Myrvang, 232 F.3d 1116, 1124 (9th Cir.2000) (citing SEC v. United States Realty & Improvement Co., 310 U.S. 434, 455, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940)); see also Katchen, 382 U.S. at 327, 86 S.Ct. 467 (noting bankruptcy courts “are essentially courts of equity”). These two principles combine to create a presumption that the equitable doctrine of laches, which has as its goal the prevention of prejudicial delay in the bringing of a proceeding, is a relevant and necessary doctrine in the bankruptcy context.
In re Beaty, 306 F.3d 914, 922 (9th Cir.2002) (emphasis added). While the 9th Circuit reached this conclusion in the context of a dischargeability action, this Court finds Beaty to be instructive in the instant matter.
“The affirmative defense of laches ‘requires proof of (1) lack of diligence by the party against whom the defense is asserted, and (2) prejudice to the party asserting the defense.’ ” In re Beaty, 306 F.3d at 926 (citations omitted). The Bankruptcy Code speaks to the diligence required of a Chapter 7 trustee. Under § 704(a), “The 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”.
*765Here, the Debtors claim this case has “languished” on the docket. The docket reflects no affirmative action on the part of the Trustee in the nearly three years leading up to the Turnover Motion. However, this Court is aware that often a Chapter 7 trustee’s efforts take place off-docket. The Trustee’s declaration filed in this matter reveals that the reasons he did not close this estate long ago are wholly unrelated to homestead issues before the Court. In light of the Trustee’s declaration, the Court does not find that the Trustee has failed to proceed diligently in this case or that the Turnover Motion was unduly delayed. While the Trustee filed the Turnover Motion one year after the Debtors purchased their Utah home, it was filed only about six weeks after expiration of the 18-month reinvestment period.
Even if the timing of the Turnover Motion was “delay”, for a laches defense to succeed the delay must also have been prejudicial. In re Beaty, 306 F.3d at 926. On this point, the Court notes that the Debtors brought their Motion To Determine on March 8, 2013, over six months after the Sale of the Property and three months before they bought their new home in Utah. In the Motion To Determine, the Debtors acknowledged being aware of the Trustee’s position that the Sale Proceeds had to be reinvested within 18 months of the Sale in order to maintain the exemption. The Trustee reiterated his position in his Objection to that Motion. Nevertheless, the Debtors did not bring the issue to a head by requesting a hearing or by bringing a motion to compel the Trustee to abandon the estate’s interest in the Proceeds. The Court will not conclude that any delay occasioned by the Trustee or lack of diligence by the Trustee following the Debtors’ filing of the Sale Motion was prejudicial to the Debtors. The Debtors passed up the opportunity at that time to resolve the very issues that are now before the Court.
y. CONCLUSION
For all of the foregoing reasons, the Court finds that the Proceeds from the sale of the Debtors’ exempt Arizona homestead remain exempt to the extent that the Proceeds were utilized to find and acquire their new home in Utah, to prepare it for occupancy, and to relocate there. However, $22,538.78 of the Arizona homestead sale Proceeds were not so utilized by the Debtors within Arizona’s 18-month reinvestment period. This sum must be turned over to the Trustee by the Debtors.
So ordered.
. While this case is assigned to the Honorable Madeleine C. Wanslee, oral argument on the Turnover Motion was heard by Judge Daniel P. Collins, therefore this decision is rendered by Judge Collins.
. This amount appears to have been calculated by subtracting the scheduled deed of trust balance encumbering the Property, $179,721.00, from the scheduled value of the Property, $250,000.00.
. Unless otherwise indicated, all statutory citations are to the Bankruptcy Code, Title 11, United States Code.
. This date is only referenced by the Trustee in his Reply and in his oral argument. In their papers and oral argument, the Debtors do not state a specific closing date. As the August 30, 2012 date has not been disputed by the Debtors, the Court finds that it is the date the Property was sold.
. LBR 9013 — l(j) provides:
For any motion that requires a hearing, it shall be the responsibility of the moving party to obtain from the court the date, time and location of the hearing and to provide notice thereof to all interested parties ...”
. Assuming, without deciding, that the 18-month reinvestment period is counted from August 30, 2012 — the next-to-last day of August 2012 — to the next-to-last day of the 18th month thereafter, February 27, 2014.
. This date only appears in the Trustee’s Reply and in the settlement statement ("Settlement Statement”) attached to the Reply. The Debtors have not disputed its accuracy.
. This figure is calculated by subtracting the amount the Debtors borrowed to purchase the new homestead, $183,658.00, from the gross amount paid by the Debtors for the purchase, $214,440.15, according to the Settlement Statement.
. The receipts provided for this category of expenditures in the Debtors’ Declaration, Exhibit F, include several for purchases consisting primarily of personal care items such as bedding, health and beauty products, and food and beverages, totaling $745.74. The Court does not find these purchases to be within the meaning of expenses associated with establishing a new homestead.
.The largest of the unqualified expenditures is $14,471.25 used to pay off the balance owed on a 2011 Ford Escape, a vehicle different from the 2002 Ford TSS which was scheduled and exempted in the amount of $1,850 at the outset of this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497419/ | MEMORANDUM OF DECISION RE PLAINTIFF’S MOTION TO ALTER OR AMEND MEMORANDUM OF DECISION AFTER TRIAL AND JUDGMENT (D.E. 108)
ERNEST M. ROBLES, Bankruptcy Judge.
On March 8, 2012, Robert Mitelhaus (“Plaintiff’) initiated an adversary proceeding by filing a complaint seeking a *779determination that certain debts be held non-dischargeable as to Roxanna Ramey (“Ramey”) and Mark Jenkins (“Jenkins”) (collectively, the “Debtors” or “Defendants”). (D.E. 1.) The Court conducted a three day trial on October 2, 15, and 31, 2013. On February 4, 2014, the Court took the matter under submission. On April 2, 2014, the Court entered a Memorandum of Decision and Judgment in favor of the Plaintiff. (D.E. 104 and 105.)
On April 16, 2014, Plaintiff filed the instant “Motion to Alter or Amend ‘Memorandum of Decision After Trial’ and ‘Judgment’” (“Motion”). (D.E. 108.) Plaintiff brings the Motion pursuant to Fed. R.Civ.P. 59 (“Rule 59”), made applicable to this bankruptcy case pursuant to Fed. R. Bankr.P. 9023 (“Rule 9023”). Plaintiff asserts that in considering a Rule 59(e) motion, a court is not limited to the four typical grounds for which reconsideration may be granted1, but may also consider whether amendment is necessary as essentially a clerical task, such as incorporating undisputed facts into a judgment. Allstate Ins. Co. v. Herron, 634 F.3d 1101, 1111 (9th Cir.2011). Plaintiff asserts that the Memorandum and Judgment should be amended to correct five (5) asserted errors.
I
SUMMARY OF MOTION
First, Plaintiff requests that the Judgment be amended to reflect the entire amount of the Arbitration Award of $289,526.62, plus additional interest at 10% per annum ($79.3224 per day) from and after September 23, 2009, for a total Judgment in the amount of $420,487.90 as of April 2, 2014. Plaintiff also requests the Court amend the Judgment to reflect applicable interest that has accrued since April 2, 2014. Plaintiff contends that, because the Arbitration Award was confirmed by the Superior Court, the Arbitration Award is a valid California state court judgment with preclusive effect and must be afforded “full faith and credit.” Plaintiff relies on Ninth Circuit case law for the proposition that even where there is properly an issue about the dischargeability of a judgment that is not determined by application of collateral estoppel, the amount of the judgment is fixed. In re Sasson, 424 F.3d 864, 872 (9th Cir.2005). To this end, Plaintiff asserts that none of the issues of law or fact litigated by the parties or determined by this Court had anything to do with the amount of the Arbitration Award. Thus, Plaintiff contends this Court should have determined the entire Arbitration Award to be nondischargeable.
Second, Plaintiff requests the Court amend the Judgment with respect to the Court’s nondischargeability determination of Plaintiffs’ attorneys’ fees incurred in defending the KS Action in the total amount of $77,284.50 (the “KS Fees”). Plaintiff asserts that because the Arbitration Award included the KS Fees, this Court is required to include the KS Fees in the Judgment as a nondischargeable debt. Additionally, Plaintiff states that the Arbitrator found that Jenkins was liable for KS Fees on the basis that if Jenkins had properly applied the funds paid by Plaintiff to purchase errors and omissions insurance coverage, the KS Fees would have been covered by insurance and Plaintiff would not have incurred the KS *780Fees as an out-of-pocket cost. Plaintiff asserts that under applicable California law, when a defendant has wrongfully made it necessary for a party to defend a lawsuit brought by a third person, the damages caused by the defendant’s improper actions include the attorney’s fees incurred by that party in the defending the action involving the third party. Prentice v. North American Title Guaranty Corp., 59 Cal.2d 618, 621, 30 Cal.Rptr. 821, 381 P.2d 645 (1963); Gray v. Don Miller & Associates, Inc., 35 Cal.3d 498, 505, 198 Cal.Rptr. 551, 674 P.2d 253 (1984); Brandt v. Superior Court, 37 Cal.3d 813, 817-19, 210 Cal.Rptr. 211, 693 P.2d 796 (1985). Thus, Plaintiff contends that the direct consequence of Jenkins’ wrongful act, in committing larceny as to the $3,197.00 of wrongfully withheld errors and omissions insurance, was that Plaintiff had to expend $77,284.50 in fees to defend the KS Action. Plaintiff highlights that this Court determined the $3,197.00 amount to be nondis-chargeable under § 523(a)(4) and contends that the resulting KS Fees should therefore be rendered nondischargeable.
Third, Plaintiff asserts that if this Court is not inclined to afford the Arbitration Award “full faith and credit,” the Court should consider the additional evidence adduced at trial to conclude that the Defendants wrongfully withheld $62,000.00 worth of Nasr lease commissions and such amount should be included in the nondis-chargeability Judgment.
Fourth, Plaintiff states that although the Memorandum refers to prejudgment interest awarded by the Superior Court in the amount of $49,184.50, the Court should amend the Judgment to include the entire amount of prejudgment interest. In the alternative, Plaintiff indicates that if the Court is not inclined to amend the Judgment to include the KS Fees, the appropriate amount of prejudgment interest to be included is $24,124.48.
Finally, Plaintiff contends that to the extent the Court is not inclined to afford the Arbitration Award “full faith and credit,” the Court should also amend the Judgment to render the Arbitration Award non-dischargeable as to Ramey. In support, Plaintiff cites two non-binding bankruptcy cases in which the courts imputed liability under §§ 523(a)(4) and (6) based on an agent-principal relationship. See In re Day, 2012 WL 4627484, 2012 Bankr.LEXIS 4708 (Bankr.D.Az.2012); In re Palillo, 493 B.R. 248, 256-67 (Bankr.D.Colo.2013).
II
DISCUSSION
As set forth above, in general, there are four basic grounds upon which a Rule 59(e) motion may be granted: (1) if such motion is necessary to correct manifest errors of law or fact upon which the judgment rests; (2) if such motion is necessary to present newly discovered or previously unavailable evidence; (3) if such motion is necessary to prevent manifest injustice; or (4) if the amendment is justified by intervening change in controlling law. Allstate Ins. Co. v. Herron, 634 F.3d 1101, 1111 (9th Cir.2011). Amending a judgment after its entry remains an extraordinary remedy which should be used sparingly. Id. A motion to reconsider is not appropriate to present a new legal theory for the first time or to raise legal arguments which could have been raised earlier. In re JSJF Corp., 344 B.R. 94, 103 (9th Cir. BAP 2006) aff'd and remanded, 277 Fed.Appx. 718 (9th Cir.2008). Additionally, a motion to reconsider is not permitted to rehash the same arguments made the first time or to simply express the opinion that the court was wrong. Id.
*781A. The Court denies the Motion to the extent that it requests the Court reconsider its findings regarding the nondischargeability of the Arbitration Award.
The Court finds that Plaintiff has not demonstrated cause to reconsider the Judgment for the purpose of adopting the entire amount of the Arbitration Award as a nondischargeable debt. Plaintiff is correct that principles of collateral estoppel apply to proceedings seeking exceptions from discharge brought under 11 U.S.C. § 523(a) and that California’s preclusion laws govern the preclusive effect of a California state court judgment pursuant to 28 U.S.C. § 1738 of the Full Faith and Credit Act. In re Baldwin, 249 F.3d 912, 917 (9th Cir.2001) citing Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir.1995). As such, a bankruptcy court can give collateral estoppel effect to those elements of a claim that are identical to the elements required for discharge and which were actually litigated and determined in the prior action. Grogan, 498 U.S. at 284, 111 S.Ct. 654. The party asserting the doctrine has the burden of proving that all of the threshold requirements have been met. In re Honkanen, 446 B.R. 373, 382 (9th Cir. BAP 2011), citing In re Kelly, 182 B.R. 255, 258 (9th Cir. BAP 1995), aff'd, 100 F.3d 110 (9th Cir.1996).
In this case, the Arbitration Award is comprised of several components of damages based on different conduct. Therefore, this Court was tasked with determining which components of the Arbitration Award resulted from findings that satisfied the requisite elements of § 523(a)(4) and (a)(6), and which did not. In the Motion, Plaintiff asserts that the Court impermissibly changed the “amounts” awarded by the Arbitration Award. However, the Court finds that Plaintiff is merely trying to challenge the Court’s determinations with respect to the preclusive effect of the Arbitrator’s findings and which amounts should be nondis-chargeable. Plaintiff does not present any newly discovered evidence but relies on rehashing facts which the Court was aware of in making its ruling. Additionally, Plaintiff submits no intervening changes in controlling law, and the cases cited in the Motion could have reasonably been presented at an earlier date. Therefore, the Court denies reconsideration on this basis.
B. The Court denies the Motion to the extent that it requests that the Court reconsider its findings regarding the dischargeability of the KS Fees.
The Court finds that Plaintiff has not demonstrated cause to reconsider the Judgment with respect to the discharge-ability of the KS Fees. Plaintiff’s Motion relies on: 1) the Arbitrator’s inclusion of the KS Fees in the Arbitration Award in light of Jenkins’ failure to purchase errors and omissions insurance; and 2) this Court’s determination that the amounts withheld for errors and omissions insurance are nondischargeable.
Plaintiff misconstrues the Arbitration Award. The Arbitrator awarded the KS Fees based on a breach of contract theory and rejected Plaintiff’s allegations with respect to fraud. Plaintiff’s Exhibit 11, at p. 14. Specifically, the Arbitration Award states:
The Arbitrator does not believe that Nu-tec intentionally decided to “skip” the coverage during the “gap” period, but more likely Nutec simply failed to realize that the coverage had lapsed. The Negligence on the part of Nutec does not, however, excuse Nutec from non*782performance of the contractual obligation to obtain and maintain coverage.
The only issue, accordingly, is whether Nutec acted fraudulently when it accepted premiums during the “gap” period from August 1, 2003 through August 6, 2004 (meaning the period when there was no coverage). The Arbitrator does not believe that Nutec intended to be “bare” of coverage during this period. The Arbitrator believes that Nutec thought it had coverage and that Mr. Jenkins and Ms. Ramey were genuinely surprised and upset to learn that the coverage had lapsed during that period. At best, the collection of premiums during the gap period was negligent.
Id. at pp. 14 and 27. Therefore, although the Arbitration Award entitles Plaintiff to a claim for the KS Fees, it does not render those fees nondischargeable pursuant to § 523(a)(4) or (a)(6). That determination was reserved for this Court by way of the instant adversary proceeding.
After a full trial, this Court determined that “Nutee’s and Jenkins’ taking of the [errors and omissions insurance] payments was wrongful and done with the intent to deprive Plaintiff of these sums, to the extent that the insurance was not purchased and the payments were not returned to Plaintiff.” Memorandum of Decision, at p. 11 (emphasis added). Therefore, the Court determined that “the portion of the Arbitration Award attributable to Plaintiffs payment for errors and omissions insurance which was not purchased in the amount of $3,197.00 is non-dischargeable pursuant to § 523(a)(4).” Id. However, the Court found that “there [was] no showing that [the KS Fees] should be nondischargeable pursuant to § 523(a)(4) or (a)(6).” Id. In making this determination, the Court considered all of the evidence set forth at trial and concluded that Plaintiff did not establish by a preponderance of the evidence that the wrongful taking of the errors and omissions insurance fees occurred prior to the initiation of the KS Action. Based on the foregoing, the Court finds that Plaintiff has not identified any manifest injustice based on an error of law or fact. Moreover, Plaintiff does not assert that there has been any intervening change in law or newly discovered evidence. The Court denies reconsideration on this basis.
C. The Court denies the Motion to the extent that it requests that the Court reconsider its findings regarding the dischargeability of the Nasr Lease Commissions.
Plaintiff has not established entitlement to reconsideration of the Judgment with respect to the $62,000.00 in Nasr lease commissions. Plaintiff restates arguments that were previously raised and rejected by the Court without setting forth any newly discovered evidence or establishing the existence of a manifest error of fact or law. Therefore, the Court denies reconsideration on this basis.
D. The Court grants the Motion and awards Plaintiff pre and post Judgment interest.
The Court finds that the Judgment should be amended to incorporate the prejudgment interest in the Arbitration Award in the amount of $24,124.48. In its Memorandum of Decision, the Court indicated its inclination to include such interest in Plaintiffs nondischarge-ability claim, but. did not do so because Plaintiff did not provide a proper method for calculating the interest in light of the Court’s determination that only certain components of the Arbitration Award were nondischargeable. Memorandum of Decision, p. 11, n. 8. (D.E. 104.) The Court *783finds that the amount awarded for pre-petition interest is an undisputed fact and Plaintiff’s calculations as to the $24,124.48 is based on a straight forward calculation of percentages. Therefore, the Judgment will be amended to add $24,124.48 in prejudgment interest to Plaintiffs nondis-chargeability award.. For similar reasons, the Court also finds that Plaintiff is entitled to the post judgment interest awarded in the Arbitration Award based on the nondischargeable amounts. The Judgment will be amended to add $84,667.752 in post judgment interest as of April 2, 2014, plus interest of $51.28 per day after April 2, 2014.
E. The Court denies the Motion to the extent that it requests that the Court reconsider its findings regarding dischargeability as to Ra-mey.
Plaintiff has not established entitlement to reconsideration of the Judgment with respect to nondischargeability as to Ramey. Plaintiff restates arguments that were previously raised and rejected by the Court without setting forth any newly discovered evidence or establishing the existence of a manifest error of fact or law. Therefore, the Court denies reconsideration on this basis.
Ill
CONCLUSION
Based on the foregoing, the Court grants the Motion to the extent it requests pre and post judgment interest. The Court awards prejudgment interest in the amount of $24,124.48 and post judgment interest in the amount of $84,667.75 as of April 2, 2014, plus post judgment interest of $51.28 per day after April 2, 2014. The Court denies the remainder of the Motion in its entirety. The Court shall prepare an order consistent with this Memorandum of Decision and an amended Judgment to include the pre and post judgment interest award.
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF’S MOTION TO ALTER OR AMEND MEMORANDUM OF DECISION AND JUDGMENT (D.E. 108)
For the reasons set forth fully in the Memorandum of Decision Re Plaintiffs Motion to Alter or Amend Memorandum of Decision and Judgment (“Decision”) entered on May 5, 2014, the Court HEREBY GRANTS the Motion to Alter or Amend Memorandum of Decision and Judgment (“Motion”) to the extent that it seeks pre and post judgment interest. The Court grants prejudgment interest in the total amount of $24,124.48 and post judgment interest in the total amount of $84,667.75 as of April 2, 2014, plus interest of $51.28 per day after April 2, 2014. The Court DENIES the remainder of the Motion in its entirety.
IT IS SO ORDERED.
. (1) if such motion is necessary to correct manifest errors of law or fact upon which the judgment rests; (2) if such motion is necessary to present newly discovered or previously unavailable evidence; (3) if such motion is necessary to prevent manifest injustice; or (4) if the amendment is justified by an intervening change in controlling law. See Allstate Ins. Co. v. Herron, 634 F.3d 1101, 1111-12 (9th Cir.2011).
. Total Award: $187,181.80. This includes Compensatory damages of $74,399.38 ($151,-683.88 minus $77,284.50 KS Fees) + PreJudgment Interest of $24,124.48 + Arbitrator’s Fees and Costs of $6,375.00 + Attorney’s Fees and Costs in connection with Arbitration of $80,742.94 + Additional Attorneys’ Fees and Costs in connection with Arbitrator’s award of $1,540.00. Post-Judgment interest is therefore based on the total award of $187,181.80, which is 64.650981 % of $289,526.62. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497421/ | Chapter 7
ORDER
Michael E. Romero, Chief Judge, United States Bankruptcy Court
This case offers an object lesson in the oft-cited dangers of doing business with friends. The Plaintiffs paid $900,000 to their friends, the Defendants, in exchange for a particular investment. What Plaintiffs received was far from what was promised. They now seek a finding their debt is nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6).1
JURISDICTION
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) as it concerns a determination as to the dis-chargeability of a particular debt.
BACKGROUND
Plaintiff Wonjoong Earn (“W. Kim”) is a professor at the University of Seoul, Korea, where he resides most of the year, visiting his family in the United States two to three times per year for a month at a time. His wife, Co-Plaintiff Yoonee Kim *794(“Y. Kim”), and their daughters reside in Colorado. Beginning in approximately 2001, the Kims became friends with Defendants Hyungkeun Sun (“H. Sun”) and Yeo-nam Kim Sun (“Y. Sun”), who attended their church. By 2006, the Kims and the Suns had become very close, a relationship both the Kims and the Suns described as “like family.”
H. Sun had an excellent reputation in the church and in the area’s Korean community as a successful real estate investor. When W. Kim found it difficult to transfer funds from Korea to fund family expenses, he asked H. Sun for advice in finding a commercial property for purchase which would generate a monthly income stream. The Kims told H. Sun they wished to limit their investment to $500,000, retaining $400,000 of their approximately $900,000 in savings to purchase a house in Colorado.
In March 2007, H. Sun contacted W. Kim with a proposal to purchase an interest in a commercial site on West Colfax in Denver (the “JCRS Property”) for $900,000. The JCRS Property was owed by the Suns’ wholly-owned corporation, Y & K Sun, Inc. (“YKSI”). H. Sun convinced the Kims to invest their entire $900,000 by making the following representations:
• The JCRS Property needed $1 million for renovations and improvements.
• The JCRS Property was encumbered by a current loan of $8 million.
• H. Sun had arranged a refinancing of $4 million for the JCRS Property, and that such financing was a “done deal.” He showed the Kims a copy of a mortgage application for the JCRS Property in support of the assertion.2
• The JCRS Property would be worth approximately $6 million when the renovations were completed and the expected lessees had moved in.3
• After the refinancing paid off the existing $8 million loan, the Suns and the Kims would split the remaining $1 million in refinancing proceeds fifty-fifty.4 This would provide an almost immediate return of $500,000 of the Kims’ investment to enable the Kims to purchase a house, while the improved JCRS Property would provide the Kims $3,000 per month in income beginning three months after the investment.
• There were already new leases signed for a clothing store and a restaurant on the JCRS Property.
• H. Sun would guarantee the value of the investment.5
None of the above representations was true. Instead of using the investment to purchase a real estate interest in the JCRS Property, as originally proposed, H. Sun constructed the $900,000 investment as a purchase by the Kims of 50% of the shares of YKSI. Allegedly, this resulted from a concern expressed by the Suns’ attorney, Carl Reem, that a sale of a partial interest in the JCRS Property could trigger the existing mortgage’s “due on sale” clause. As part of this investment change, a stock purchase agreement (the “First SPA”)6 was drafted. H. Sun represented the value of the stock was equal to *795or greater than the value of the $900,000 investment. The Kims signed the First SPA on April 17, 2007.
However, W. Kim’s Korean bank refused to release the funds for the purchase absent evidence of a real property sale and a deed of trust in accordance with the original proposal. After the bank balked, W. Kim contacted H. Sun and told him he was no longer interested in the deal. But H. Sun convinced the Kims to complete the transaction and supplied a contract for purchase and sale of real property7 to be sent to the Korean bank. Upon receipt of the contract, the bank released the $900,000.8 Immediately upon the Kims’ receipt of the $900,000, H. Sun again transformed the deal into a stock purchase transaction. A new stock purchase agreement (the “Second SPA”) was thereafter drafted and signed by the wives, Y. Sun and Y. Kim, on May 17, 2007.9
At Y. Sun’s direction, Y. Kim made the $900,000 check payable to “Y + K Sun.”10 Y. Kim believed she was giving a check to YKSI for the purchase of 50% of the company.11 Although the Kims had become 50% shareholders, Y. Sun had, without the Kims’ knowledge, opened a new personal bank account into which she, “Y. K. Sun,” deposited the $900,000 check.12
YKSI’s 2007 and 2008 amended tax returns indicate the Kims “contributed $900,000 to Y & K Sun, Inc.” and show the $900,000 investment as a “loan” to the Suns as shareholders of YKSI.13 No such loan was ever authorized by YKSI’s board of directors.
In April 2008, YKSI sold a commercial property on East Mississippi Avenue in Aurora, Colorado (the “Mississippi Property”) to an entity known as S & B Nova, which was controlled by a Mr. and Mrs. Lee (the “Lees”). The sale was financed by Hanmi Bank, which held a first priority lien against the Mississippi Property in the approximate amount of $1,726,000.14 YKSI received from S & B Nova a promissory note (the “S & B Nova Note”), secured by a junior lien, in the approximate amount of $1,035,000, and $347,000 in cash. Although the Kims owned 50% of YKSI’s stock, the Kims were not informed of the Mississippi Property sale, and received no distribution from the proceeds of the sale.
Three months later, H. Sun told the Kims he was going to put YKSI into bankruptcy, and the Kims would lose their $900,000 investment unless they exchanged their 50% interest in YKSI for YKSI’s interest in the $1,035,000 S & B Nova note.15 H. Sun explained the note paid monthly income of $6,200, but the Kims would only receive half of that amount. H. Sun represented the remaining half interest would be retained by the Suns as they *796and YKSI were in financial distress. H. Sun did not inform the Efims the S & B Nova Note was in a subordinate position to Hanmi Bank’s note. H. Sun also failed to inform the Kims the S & B Nova Note was worth $168,000 less than the face amount of the note,16 due to payments previously made by S & B Nova.
On July 14, 2008, the Kims surrendered their shares of YKSI, and resigned as directors. YKSI then assigned the S & B Nova Note to the Kims. According to W. Kim, they received approximately $3,100 monthly on the S & B Nova Note.
YKSI’s amended tax return for 2008 reflects the Kims resigned from YKSI on July 14, 2008, and received substitute assets, as well as a payment of $23,000 in cash.17 However, the Kims never received a $23,000 payment. Rather, Y. Sun paid $23,000 to her sister, Yeorang Kim.18
In January, 2009, H. Sun again approached the Kims. He told the Kims if they wished to protect their investment, they would need to exchange their interest in the S & B Nova Note for shares of stock in S & B Nova.19 H. Sun indicated the transaction would make Y. Kim (who would hold the shares) a 24% shareholder in S & B Nova. He informed the Kims that certain covenants associated with existing loans to S & B Nova prevented the Kims from acquiring more than a 24% interest. Therefore, S & B Nova would also issue two new promissory notes, both payable to W. Kim, in the amount of $260,000 and $372,OOO.20 H. Sun told the Kims S & B Nova owned a gas station, a convenience store, and a check cashing business, in addition to the Mississippi Property.
On January 13, 2009, the original S & B Nova Note was canceled.21 Y. Kim was issued the S & B Nova shares. However, H. Sun had convinced the Kims to give 5% of the S & B Nova stock to Y. Sun, citing the Suns’ tax problems. Therefore, Y. Kim received only 19% of S & B Nova’s stock.
*797Over the lives of these transactions, the Kims received payments in the aggregate amount of $109,794 over four years. They have received no payments since 2011. Subsequently, S & B Nova was liquidated and the Lees filed for bankruptcy protection.22
DISCUSSION
Section 523(a) exceptions to discharge must be “narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor’s favor.”23 The claimant bears the burden of proving nondischargeability under § 523(a) by a preponderance of the evidence.24
A. 11 U.S.C. § 523(a)(2)(A)
Section 523(a)(2)(A) states in relevant part:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition .. .25
A claimant may sustain a claim under § 523(a)(2)(A) by proving false pretenses, false representation or actual fraud, and these three independent causes of action require proof of different elements.26 The Bankruptcy Appellate Panel for the Tenth Circuit explained the § 523(a)(2)(A) framework as follows:
To sustain a claim for false representation under Section 523(a)(2)(A), the claimant must prove by a preponderance of the evidence that: 1) the debtor made a false representation; 2) with the intent to deceive the creditor; 3) the creditor relied on the false representation; 4) the creditor’s reliance was [justifiable]; and 5) the creditor was damaged as a result. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996). Intent to deceive can be inferred from the totality of the circumstances. Copper v. Lemke (In re Lemke), 423 B.R. 917, 922 (10th Cir. BAP 2010) (citing Young, 91 F.3d at 1375).
False pretenses under Section 523(a)(2)(A) are implied misrepresentations intended to create and foster a false impression.... False pretenses can be “defined as any series of events, when considered collectively, that create a contrived and misleading understanding of a transaction, in which a creditor is wrongfully induced to extend money or property to the debtor.” Stevens v. *798Antonious (In re Antonious), 358 B.R. 172, 182 (Bankr.E.D.Pa.2006) (citing Rezin v. Barr (In re Barr), 194 B.R. 1009, 1019 (Bankr.N.D.Ill.1996)).
A claimant may also sustain a claim under Section 523(a)(2)(A) by proving that the debtor engaged in actual fraud.... Actual fraud occurs “when a debtor intentionally engages in a scheme to deprive or cheat another of property or a legal right.” Id. at 690 (quoting Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (6th Cir. BAP 2001)).27
While the elements for each theory under § 523(a)(2)(A) differ, the common thread is a debtor’s intent to defraud a creditor.
1. False Representations
To sustain a claim of false representation, the Kims must prove the following elements: 1) the Suns made a false representation or material omission; 2) the Suns made the representation or omission with the intent to deceive the Kims; 3) the Kims relied on the representation or' omission; 4) the Kims’ reliance was justifiable; and 5) the Suns’ representation or omission caused the Kims to sustain damages.28
a. False Representations and Material Omissions.
The evidence clearly shows both Suns made material false representations and omissions to the Kims. Specifically, H. Sun represented the Kims’ $900,000 would be spent on the JCRS Property. Instead, Y. Sun convinced Y. Kim to give her a $900,000 check, which Y. Sun deposited in her separate account. The Suns then spent the $900,000 as they chose.29 H. Sun admitted only about $57,137 of these funds actually went to the JCRS project.30 Y. Sun therefore misled Y. Kim as to where the funds were deposited, and H. Sun misled the Kims as to how the money was to be used.31
Thereafter, H. Sun convinced the Kims to return the YKSI shares in exchange for the interest in the S & B Nova Note, but failed to inform them the note was subordinate to the Hanmi Bank note. While it is true the Kims received income payments from S & B Nova for several years, the failure to inform them of a $1.7 million senior lien on the note’s collateral significantly misrepresented the risk of the investment.
The Suns’ argument they offered to let the Kims “back in” to the JCRS Property does not excuse the misrepresentations and omissions. In any event, such an assertion is speculative. No evidence showed any discussion of terms of such a deal.
b. The Suns Intended to Deceive the Kims.
“Intent to deceive under [§ 523(a)(2)(A) ] may be inferred from the totality of the circumstances, and includes reckless disregard of the truth. Moreover, the scienter requirement may be established by material omissions.”32
*799Here, the Suns deny intending to defraud the Kims, but their actions clearly tell otherwise. The Suns did not observe corporate formalities. H. Sun never treated Y. Kim as the 50% owner of YKSI. Instead, he sold the Mississippi Property without informing the Kims or seeking their approval, even though Y. Kim was a director of YKSI.33 In addition, following Y. Sun’s intentional ruse to deposit the Kims’ $900,000 into a non-corporate account, the Suns proceeded within a few months to spend the $900,000 largely on non-JCRS expenses.34
Further, H. Sun acknowledged he received an offer to purchase the JCRS Property in July 2007, approximately two months after the Kims made their investment. The offer was for $4.95 million. H. Sun claims he rejected the offer because it was contingent on the JCRS Property being fully leased, which it was not at the time.35 When asked if he told W. Kim about the offer, he stated:
Q Did you tell the Kims about this offer?
A Yes, to Mr. Kim. I told Mr. Kim that we cannot sell the [JCRS Property] because the property is not open yet, you know, so I didn’t want to sell the property for that particular amount either.
Q Did you ask Mr. Kim how he would vote on selling the [JCRS Property]?
A Well, at the time he was not in the position because I was to take care of all the responsibilities in terms of managing and operating the whole business there. If we are to lose the money, then I’ll lose the money. If we have to make money, then we’ll split the profits. That’s what was the situation at the time.36
Then, when under financial distress, the Suns persuaded the Kims to switch their investment to a note obtained in a sale of which the Kims had not been informed, and from which the Kims had received none of the cash paid to YKSI. H. Sun demonstrated at the very least reckless disregard for the truth by failing to tell the Kims the S & B Nova Note was subordinate to the Hanmi Bank note. For these reasons, the Court finds the totality of the circumstances clearly shows both Suns’ intent to defraud the Kims.
c. The Kims Justifiably Relied on the Suns’ Misrepresentations and Omissions.
The Kims testified they relied on the Suns’ misrepresentations because the Suns were close friends and H. Sun had a reputation as a knowledgeable and successful real estate investor. The Court finds this line of testimony to be credible. The question is whether such reliance was justifiable. The standard “is not ‘reasonableness’ in the sense of whether an objectively reasonable person would have relied upon the debtor’s false representations. Rather, the correct inquiry is whether the actual creditor’s reliance was ‘justifiable’ from a subjective standpoint.”37 As noted by Judge Tallman:
In order for the Plaintiff to have justifiable reliance on a representation under 11 U.S.C. § 528(a)(2)(A), the Plaintiff need only perform a cursory inspection of the representation to the extent that it should be very obvious that the repre*800sentation is fraudulent. Field v. Mans, 516 U.S. 59, 71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Justifiable reliance is not reasonable reliance, so the objective reasonable person standard does not apply; it is merely what a cursory examination of the representation would uncover. Id. at 72,116 S.Ct. 437.38
In this case, the Court finds the Kims justifiably relied on the Suns’ misrepresentations. W. Kim is well-educated, but his area of expertise is engineering, not finance or real estate.39 He does not understand English well and it is undisputed he has little knowledge of investments in the United States. Y. Kim’s command of English is similarly limited, and her educational background is in art. By contrast, H. Sun was well-known in the parties’ church and in the community as a successful and wealthy real estate investor. H. Sun testified he started as a construction worker in the United States in 1985 and worked his way up in the real estate business, becoming experienced with “fix and flip” transactions.40 Y. Sun is eomplicit with the real estate business and writes all the checks under H. Sun’s supervision.41
The Suns argue the Kims should not have relied on their representations without asking more questions. However, the Kims offered unrebutted testimony indicating Korean transactions of this type have one attorney representing both parties, and further indicating Korean culture emphasizes trust between friends and the expectation the statement of a friend would be truthful. While the benefit of hindsight may suggest the Kims should have consulted independent professionals or obtained more information, that is not the legal standard. The standard is whether people with the Kims’ mind set and experience were justified in relying on the Suns, and the Court finds this standard was satisfied.42
The Court has considered and accepts the Kims’ testimony indicating reputation, trust and status are important in Korean culture, lending to a finding of justifiable reliance. The Court further finds H. Sun’s reputation and his wife’s role in his real estate business support a finding of justifiable reliance by the Kims on the Suns. In addition, the Court finds the close relationship of the parties gives additional weight to a finding the Kims’ reliance on their friends’ advice was justified.
d. The Kims Suffered Damages.
The issue of specific damages will be addressed below. However, the Court notes, for purposes of the elements of fraudulent representation, the Kims’ testimony indicates they would not have invested the $900,000 had they known the funds were going to the Suns individually, not Y *801& K Sun, Inc.43 They have lost their initial investment (although they received some payments totaling $109,794 from S & B Nova). They have therefore established they have suffered damages as a result of the Suns’ conduct.
Pursuant to § 523(a)(2)(A), the Court finds the Kims have established the requisite elements of false misrepresentations.
2. False Pretenses
“Unlike false representations, which are express misrepresentations, false pretenses include conduct and material omissions.”44 For example, false pretenses may be shown when a debtor’s statements and conduct conceal the debt- or’s true intent.45
a. The Suns made omissions and implied misrepresentations.
The evidence clearly shows each of the Suns made both omissions and implied misrepresentations to the Kims.46 Specifically, H. Sun took the Kims and other members of the parties’ church to view the JCRS Property, and promoted the impression of his success in real estate investing. Moreover, H. Sun portrayed the refinancing and new leases as being almost completed, assuring the short-term return of the $500,000 and the expenditure of the remaining funds on the JCRS Property. The SPAs contained similar language.47 In addition, the Suns discussed the investment with the Kims so as to create the impression the Kims’ money would be spent on renovation of the JCRS Property, all the while planning to deposit the funds in a personal account and use it for their own purposes.
Thereafter, the Suns concealed the true nature of the S & B Nova Note, and created a sense of urgency to convince the Kims to give up their shares of YKSI in exchanges for the note. The Suns used the same urgency tactic to convince the Kims to exchange their interest in the S & B Nova Note for two lesser notes and shares in S & B Nova.
Particularly striking is the Suns’ “moving target” ploy with the Kims. Over the course of the parties’ dealings since 2007, the Suns continuously changed the nature of the Kims’ investment. The Kims’ position steadily deteriorated, with less collateral backing their initial $900,000 investment.
b. The Suns promoted these omissions and misrepresentations knowingly and willingly.
The Court further finds the Suns intentionally and deliberately misled the Kims *802in these transactions. The evidence shows H. Sun was an experienced investor and understood the difference between what he proposed and what the Kims received in all the transactions. Moreover, Y. Sun obviously knew and intended for Y. Kim to believe the $900,000 was going into a corporate account, when in fact it went to Y. Sun’s personal account.
c. The Suns created a contrived and misleading understanding by the Kims of the parties’ transactions.
The Suns repeatedly assured the Kims their investment was safe, and the Suns were protecting the Kims’ interests due to their friendship. However, the Suns were actually following a quite different agenda of their own, using the Kims’ money however they pleased, and moving the Kims’ interest to increasingly risky investments. The Suns deliberately took advantage of their friendship with the Kims, as well as the Kims’ relative inexperience in real estate investment. The Suns created a false sense of protection and fair treatment for the Kims’ investment. The real activity, however, allowed the Suns to avoid repayment of the Kims’ $900,000 investment, and eventually regain control of YKSI.
d. The contrived and misleading understanding created by the Suns wrongfully induced the Kims to advance money or property to the Suns.
Lastly, the testimony of the Kims demonstrates they were wrongfully induced to participate in the transactions with the Suns. Specifically, the Suns changed the nature of the JCRS Property transaction, sent fraudulent documents to W. Kim’s Korean bank, and otherwise disguised the fact the original $900,000 investment was not a real estate investment. Thereafter, the Suns engaged in telling half-truths and in omitting crucial facts in inducing the Kims to change this investment in ways that benefitted only the Suns, and damaged the Kims’ interest.
For the above reasons, the Court finds the Kims satisfied their burden of proving the Suns obtained money ($900,000) and later property (the YKSI stock and interests in the S & B Nova notes) through false pretenses under § 528(a)(2)(A).
S. Actual Fraud
The Court finds the evidence as set forth above also indicates the presence of actual fraud by the Suns. The above facts establish the Suns’ ongoing pattern of fraud as part of a scheme to obtain the $900,000 from the Kims on the pretense of investing in the JCRS Property, and then to use those funds for their own purposes. After obtaining the initial $900,000 investment, the Suns continued to mislead the Kims over a period of several years. During that time, the Suns abused their friendship and community reputation in favor of perpetrating a scheme to prey on the Kims’ inexperience and manipulate the Kims’ investment for their own benefit. The Suns did not intend to proceed with the promised real property transaction. Rather, they sold stock to the Kims, and later recaptured the stock by threatening bankruptcy. The Suns then persuaded the Kims to accept an interest in a promissory note which was subordinate to a concealed senior lienor. Finally, they convinced Y. Kim to participate in S & B Nova’s business, and to become a shareholder of S & B Nova, accepting two smaller S & B Nova notes. The Suns failed to disclose these notes were subject to Hanmi Bank’s senior position.
In viewing the continuous fraud perpetrated on the Kims, the Court finds the evidence also demonstrates actual fraud by the Suns under § 528(a)(2)(A).
*803B. 11 U.S.C. § 523(a)(4)
Pursuant to § 523(a)(4), “(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”48 The Kims did not present any evidence of a fiduciary relationship between the Kims and the Suns. Accordingly, the Kims cannot prevail on a claim for fraud or defalcation while acting in a fiduciary capacity.
However, § 523(a)(4) does not require the existence of a fiduciary relationship in order to establish that a debt created by acts of embezzlement or larceny is nondischargeable in bankruptcy.49 The difference between embezzlement and larceny has been explained as follows:
Embezzlement is the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come. It differs from larceny in the fact that the original taking of the property was lawful, or with the consent of the owner, while in larceny the felonious intent must have existed at the time of the taking.
In short, section 523(a)(4) excepts from discharge debts resulting from the fraudulent appropriation of another’s property, whether the appropriation was unlawful at the outset, and therefore a larceny, or whether the appropriation took place unlawfully after the property was entrusted to the debtor’s care, and therefore was an embezzlement.50
This Court previously adopted the prevailing five-part standard in this District for embezzlement under § 523(a)(4), requiring evidence of the following: 1) entrustment (originally lawfully obtaining); 2) of the property; 3) of another; 4) misappropriating the property (using it for a purpose other than that for which it is entrusted); and 5) with fraudulent intent.51 As noted above, the difference between larceny and embezzlement “is that with embezzlement, the debtor initially acquires the property lawfully, whereas larceny requires that the funds originally come into the debtor’s hands unlawfully.”52
In this case, Y. Sun convinced Y. Kim to give her a $900,000 check, which Y. Kim reasonably believed was to be deposited in the account of YKSI and used for the purposes of renovating and marketing the JCRS Property. Instead, Y. Sun deposited the check into a recently-opened personal account. This action constitutes re-*804eeiving the money wrongfully, and with prior intent, since the personal account was opened under the name “Y. K. Sun” before Y. Kim gave Y. Sun the check. The remainder of the elements are met, as the funds were not used for their represented purpose, with fraudulent intent. Thus, the Suns’ debt to the Kims is nondischargeable as larceny.53
C. 11 U.S.C. § 523(a)(6)
Section 523(a)(6) of the Bankruptcy Code provides “(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... (6) for willful and malicious injury by the debtor to another entity or to the property of another entity.”54 The Tenth Circuit Bankruptcy Appellate Panel has stated the following regarding § 523(a)(6):
Section 523(a)(6) excepts from discharge any debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” To state a claim for relief under § 523(a)(6), the creditor must include allegations that would support a reasonable inference that the debtor caused a deliberate or intentional injury to the creditor. Debts resulting from recklessness or negligence do not fall within § 523(a)(6).
[A]s the Supreme Court made clear in Kawaauhau v. Geiger, an intent to cause injury is required to bring a debt within § 523(a)(6). Since a person can convert property without intending to injure the interests others may have in the property, a creditor must include allegations suggesting the debtor committed the conversion with the intent to injure to adequately state a claim for relief under § 523(a)(6).55
Willfulness “may be established by direct evidence of specific intent to harm a creditor or the creditor’s property. Willful injury may also be established indirectly by evidence of both the debtor’s knowledge of the creditor’s ... rights and the debtor’s knowledge that the conduct will cause particularized injury.”56 The requirement of maliciousness “is satisfied upon a showing the injury was inflicted without just cause or excuse.”57
As discussed above, the Suns intentionally obtained the Kims’ $900,000 check and did not use the majority of it for the represented purposes, but for their personal expenses and non-JCRS business expenses. It is clear the Kims suffered substantial economic damage in the form of the loss of the majority of their savings.
Further, the Court finds the Suns intentionally and deliberately misled the Kims *805in several transactions over several years, and the Suns knew or should have known they would cause significant damage to the Kims’ financial affairs. Essentially, the Suns continuously “strung along” the Kims in a scheme not only to avoid repaying their $900,000 investment, but to regain control of YKSI by persuading the Kims to give up their shares in return for various interests in S & B Nova, without disclosing the true nature of those transactions. In doing so, the Suns obtained the outcome they knew was substantially certain to occur — they got most of the Kims’ money and the return of the shares of YKSI, and the Kims got virtually none of what they bargained for. Accordingly, the Court finds, in addition to being nondischargeable under § 523(a)(2)(A) and § 523(a)(4), the Kims’ debt is nondischargeable under § 523(a)(6).
D. Damages
This case involves two different measures of damages because the Kims sought relief based on fraud and misrepresentation, under both § 523(a)(2)(A) and § 523(a)(6), and relief based on larceny and embezzlement under § 523(a)(4). However, the Kims are not entitled to double recovery.58 Therefore, the amount reached by the method giving the lowest recovery will be subsumed into the amount reached by the method resulting in a higher recovery, giving the Kims all the damages to which they are entitled without awarding them a double recovery.
1. Damages Under § 523(a) (If).
As noted by the Bankruptcy Appellate Panel for the Tenth Circuit, “damages for conversion or embezzlement claims are limited to money or property that was used in an unauthorized way....”59 As to their § 523(a)(4) claim, the Court concludes the Kims are entitled to recover the money wrongfully taken from them by larceny. The Kims’ actual damages are $900,000, less the aggregate $109,794 they received from the S & B Nova Note, for a total of $790,206.
2. Damages Under § 523(a)(2)(A) and (a)(6).
The proper measure of fraud damages within the § 523 context has been reviewed at length in several opinions in the case of In re Mascio.60 In Mascio, with respect to property regarding which fraud or misrepresentation has been shown, the United States District Court for the District of Colorado (the “District Court”) stated:
Under Colorado law, [the plaintiff] is entitled to receive “the difference between the actual value of the property at the time of purchase and its value at that time had the representation been true.” ... Under Colorado law, values prior to or subsequent to the date of payment are irrelevant... ,61
*806In this case, the parties reached an agreement for the exchange of promises and performances on May 17, 2007, whereby the Kims agreed to pay $900,000 in exchange for a 50% interest in the JCRS Property.62 Although the Kims were hesitant to invest this entire amount because they wanted to retain funds to purchase a house, the Suns induced the Kims to invest the full $900,000 by misrepresenting the JCRS Property would be promptly refinanced. Thus, at the time of the investment, the Kims reasonably believed their $900,000 payment was worth at least the following: short term repayment of $500,000; a $400,000 interest in the JCRS Property (representing 50% or some other percentage); and a $3,000 per month income stream.63
To convince the Kims of the safety of the proposal, H. Sun gave the Kims an appraisal of the JCRS Property as of May 2006, valuing the real property at $4.3 million. This appraisal stands as the most recent professional opinion of value as of May 17, 2007, supporting a finding the Kims’ investment was worth at least $2.15 million at the time it was made. H. Sun also told W. Kim the actual value of the JCRS Property was approximately $6 million,64 and suggested to Y. Kim the JCRS Property could be sold in three to four years for as much as $8 million.65 Under such a scenario, the Kims would receive a return of $1 million on their $400,000 remaining investment after repayment of $500,000. However, the Court finds the $8 million valuation is speculative, and cannot be considered as reliable.
Regardless of the value used within the $4.3 million to $6 million range, the representations made by H. Sun to the Kims provided a false impression of equity in the JCRS Property. The Kims reasonably relied on these values for the JCRS Property, and at the time of the transaction, believed the JCRS Property was worth more than enough to cover repayment of $500,000 in the short term, and protect their remaining $400,000 investment with an ongoing income stream of approximately $3,000 per month.
After obtaining the $900,000, the Suns changed the terms of the deal to give the Kims a one-half interest in YKSI, which owned the JCRS Property.66 The Suns *807represented this interest had the same value as the originally proposed $500,000 short-term repayment, $400,000 ownership interest, and the monthly income stream.
The Kims did not receive what they bargained for in return for their investment of $900,000. They did not receive $500,000 following a refinancing, because the Suns stopped trying to refinance the JCRS Property. They did not receive any income stream from the JCRS Property. They never received $400,000 or $900,000 in return for their shares of YKSI, or any appreciation on their investment. Instead, the Suns fraudulently convinced the Kims to surrender those shares in return for the S & B Nova Note, without telling the Kims the note was subordinate to a senior lien on property owned by S & B Nova.
The only funds the Kims ever saw following their investment of $900,000 was the $109,794 paid over several years on the various S & B Nova notes. Therefore, the difference between what the Kims bargained for and what they received, valued as of May 17, 2007, may be expressed as follows:
1. The Kims paid $900,000.
2. The Kims were to receive:
a) $500,000 repayment;
b) $400,000 in value for a one-half interest in the real estate or an interest in the company that owned the real estate, which interest was valued at the time at between $4.8 million and $6 million, with a potential for appreciation;
c) $8,000 per month from six months after the investment (November 2007 through the month of this Order, or 78 months at $3,000 per month for a total of $252,000).
Total: $1,152,000
3. The Kims received: $109,794.
4. $1,152,000 less $109,794 equals total benefit of the bargain damages of $1,042,206.
E. The Kims Are Not Entitled to Attorneys’ Fees and Costs, But Are Entitled to Prejudgment Interest and Postjudgment Interest.
1. Attorneys’Fees and Costs.
The Kims’ Closing Argument argues, for the first time in this adversary proceeding, as follows:
The Stock Purchase Agreement of May 16, 2007 (Exhibit 9, p. 4), states that Y & K Sun shall indemnify the Kims related to all “interest,” “damages, losses, costs and expenses (including attorneys and experts fees and court costs) of every kind and nature” resulting from “misrepresentation or breach by [Y & K Sun] of any representation or warranty” and “nonfulfillment, failure to comply or breach” of any “covenant, promise or agreement.” The Stock Purchase Agreement is also construed in accordance with Colorado law (Exhibit 9, p. 6).
Y & K Sun is an alter ego of the Suns. Pursuant to McCallum Family LLC v. Winger, 221 P.3d 69, 73-74 (Colo.App.2009), Courts look at the following non-exhaustive list of factors to determine alter ego status: (1) the corporation is operated as a distinct business entity; (2) funds are commingled; (3) adequate corporate records are maintained; (4) the nature and form of the entity’s ownership and control facilitate misuse by an insider; (5) the business is thinly capitalized; (6) the corporation is used *808as a “mere shell;” (7) legal formalities are disregarded; and (8) corporate funds are assets are used for non-corporate purposes.
The evidence in this case has proved that the corporation is a mere instrumentality for the transaction of the Suns’ own affairs and vice versa; it was not operated as a distinct business entity, funds were commingled, adequate corporate records were not maintained, and the form of the corporation’s control facilitated pervasive misuse by the Suns. Clear and convincing evidence shows the guise of investment in Y & K Sun was used to perpetrate fraud on the Kims and weighs in favor of piercing the corporate veil. Achieving an equitable result is the paramount goal of piercing of the corporate veil.
When the corporate structure is used so improperly that recognition of the corporation as a separate legal entity would be unfair, the corporate entity may be disregarded. Here, equity permits Y & K Sun’s corporate form to be disregarded. Accordingly, pursuant to the Stock Purchase Agreement, the Kims request they be awarded attorneys’ fees and costs, as well as prejudgment and post-judgment interest, all at 8% compounded annually per Colo. Rev. Stat. § 5-12-102.67
The Kims assert, although they did not include an alter ego claim in their Complaint, they should be allowed to seek such a finding because the evidence presented at trial demonstrated alter ego and veil piercing claims, and was submitted without objection. The Court disagrees.
The Kims rely on Fed. R. Civ. P. 15(b)(2), which states:
When an issue not raised by the pleadings is tried by the parties’ express or implied consent, it must be treated in all respects as if raised in the pleadings. A party may move — at any time, even after judgment — to amend the pleadings to confirm them to the evidence and to raise an unpleaded issue. But failure to amend does not affect the result of the trial of that issue.68
It is undisputed the Suns did not expressly consent to trying issues of alter ego or piercing the corporate veil. Rather, the Kims contend the matters were tried by implication by failure of the Kims to object to the Kims’ evidence. The United States Court of Appeals for the Tenth Circuit has noted implied consent in such matters is obtained when 1) the party said to be consenting by implication introduces its own evidence on the issue; or 2) failing to object when the opposing party introduces such evidence.69 However, implied consent cannot be based on “the introduction of evidence that is relevant to an issue already in the case if the party presenting the evidence does not indicate that it intended to raise a new issue.”70
Here, the Kims introduced evidence to show the fraudulent behavior of the Suns. The Kims did not indicate until their closing argument this same evidence was intended to raise additional claims for *809alter ego and piercing the corporate veil. Therefore, the Kims have not shown issues of alter ego and piercing the corporate veil were tried by implication, and the Court will deny their request for attorneys’ fees and costs arising from that argument.
Furthermore, as it relates to alter ego and piercing the corporate veil, such evidence would, at best, support a finding the Suns observed corporate formalities only when it served their own purposes.71 However, this is only one isolated factor to consider in the overall alter ego prong of a veil piercing analysis.72 Even if the Court permitted this claim as tried by implication, which the Court is not inclined to do, the Kims failed to present sufficient evidence necessary to satisfy the high evidentiary standard for piercing the corporate veil.73 Thus, the Court determines an award for attorneys’ fees and costs under this theory is improper.
However, while there is no bankruptcy statute or rule specifically providing for attorney fees in the context of § 523(a)(2), (a)(4) and (a)(6), Fed. R. Bankr. P. 7054(b) provides for an award of costs to the prevailing party.74 As set forth herein, the Kims are the prevailing parties, and the Suns were put on notice of the potential award of costs as early as the Kims’ Complaint in this proceeding. In this case, the Court in its discretion finds an award of costs in favor of the Kims is appropriate. Thus, the Court will allow reimbursement of costs incurred by the Kims in connection with this Adversary Proceeding in accordance with Fed. R. Bankr.P. 7054 and 28 U.S.C. § 1920.75
*810
2. Prejudgment and Postjudgment Interest.
As recently noted by Judge Elizabeth Brown of this Court:
Under federal law, prejudgment interest may generally be awarded if “1) the award of prejudgment interest would serve to compensate the injured party, and 2) the award of prejudgment interest is otherwise equitable.” In re Bakay, 454 Fed.Appx. [652] at 654 [ (10th Cir.2011) ] (citing In re Inv. Bankers, Inc., 4 F.3d 1556, 1566 (10th Cir.1993)). “Thus under federal law prejudgment interest is ordinarily awarded, absent some justification for withholding it.” Id. (citing U.S. Indus., Inc. v. Touche Ross & Co., 854 F.2d 1223, 1256 (10th Cir.1988)). However, prejudgment interest is not recoverable as a matter of right but is instead governed by considerations of fundamental fairness. Id. The decision to award prejudgment interest is a matter left to the sound discretion of the trial court. In re Butcher, 200 B.R. [675] at 680 [ (Bankr.C.D.Cal.1996) ].76
The Court concludes the circumstances of this case warrant an award of prejudgment interest at the Colorado statutory rate accruing from the date of the parties’ bargain — May 17, 2007. Therefore, prejudgment interest shall be awarded as requested in the Kims’ Complaint, at the rate of 8% per annum, compounded annually, pursuant to Colo. Rev. Stat. § 5-12-102.
In addition, the Court finds the Kims are entitled to postjudgment interest from the date of judgment until paid at the rate set forth in 28 U.S.C. § 1961.77
CONCLUSION
For the above reasons,
IT IS ORDERED the debt of Defendants Hyungkeun Sun and Yeonam Kim Sun to Plaintiffs Wonjoong Kim and Yoo-nee Kim is nondischargeable pursuant to § 523(a)(2)(A), (a)(4) and (a)(6). A final Judgment shall enter in favor of Plaintiffs and against Defendants in the amount of $1,042,206, plus prejudgment interest from May 17, 2007, through the date of the final judgment at 8% per annum, compounded annually, plus postjudgment interest at the rate set forth in 28 U.S.C. § 1961, plus costs incurred in connection with this adversary proceeding in accordance with Fed. R. BankR.P. 7054 and 28 U.S.C. § 1920. Each party shall bear its own attorneys’ fees.
IT IS FURTHER ORDERED that within fourteen (14) days from the date of this Order, the Kims shall file a bill of costs pursuant to Fed. R. Civ. P. 7054 containing their total expenses under 28 U.S.C. § 1920 incurred in connection with this adversary proceeding.
. Unless otherwise noted, all future statutory references in the text are to Title 11 of the United States Code.
. Exhibit 3.
. See Transcript of March 20, 2014, p. 140, lines 20-22 (W. Kim testified H. Sun told him the property was really worth $6 million).
. See Exhibit 1.
. According to H. Sun, he also told the Kims a sale of the JCRS Property in a so-called “1031 exchange” was possible within six months to a year, following the leasing of the renovated property.
. Exhibit 4.
. Exhibit 8.
. The Court also notes the First SPA (Exhibit 8) did not represent the true transaction of the parties. Specifically, the purchase and sale agreement stated the "purchase price” for 50% of the JCRS Property was $4.3 million, with $900,000 serving as "earnest money." See Exhibit 8, p. 1, and p. 2, ¶ 4-A. See also Transcript of March 20, 2014, p. 86, line 4-p. 87, line 6 (testimony of W. Kim).
. Exhibit 9.
. Exhibit 12.
. Stock certificates were issued to Mr. and Mrs. Kim. Exhibits 10 and 11. The parties stipulated Mrs. Kim became a member of the board of directors for YKSI.
. Exhibit 13.
. Exhibits 35, pp. 15-16 and Exhibit 36, pp. 18-19.
. See Exhibit 26, Lender’s Instruction Letter from Hanmi Bank.
. Exhibit 19.
. The discrepancy was apparently due to a prior payment made to YKSI from S & B Nova, but the evidence does not show the purpose of such payment. Exhibit 20 is a copy of the S & B Nova Note with a handwritten notation indicating the $163,000 reduction. However, W. Kim testified he did not see that document until after the transaction, and the Court finds his testimony credible. See Transcript, March 20, 2014, p. 162, lines 1-3. The Court also notes the Suns’ attorney’s attempt to indicate the note’s reduced value of $872,665 was somehow tied to the Kims’ giving up $240,000 of the note’s principal to gain the S & B Nova stock to be inapposite, since the stock transaction took place six months later. See Transcript, March 20, 2014, p. 162, line 9-p. 163; line 6. Moreover, W. Kim testified he understood the stock and the two notes to represent the value of the $872,665 interest only after H. Sun explained to him the actual value of the S & B Nova Note was less than the face value. Id., p. 163, lines 10-13.
. Exhibit 36, pp. 18 and 22.
. Transcript, March 21, 2014, p. 125, line 5-p. 127, line 8. Y. Kim noted, however, she loaned the Suns $25,000 on November 11, 2007. See Exhibit 16. She stated Y. Sun repaid $22,000 of that amount on December 28, 2007. See Exhibit 17. The parties presented no further evidence as to this $25,000 loan. Interestingly, the $22,000 repayment check had "West Colfax” written on the memo line, and was drawn on the same individual bank account at U.S. Bank into which Y. Sun deposited the Kims’ $900,000. The Court further notes the parties disputed whether Yeorang Kim was Y. Sun’s biological sister or close friend, but the Court finds this issue to be irrelevant.
. See Exhibit 22, Consent for Transfer of Shares in S & B Nova, signed by Hee Sook Lee.
. See Exhibits 24 and 25, New Promissory Notes dated January 13, 2009.
. See Exhibit 23.
. Transcript of March 20, 2014, p. 110, line 15-p. Ill, line 2. See also Transcript of March 26, 2014, p. 46, lines 3-7 (testimony of Y. Kim).
. Oklahoma Dep't of Sec., ex. rel. Faught v. Wilcox, 691 F.3d 1171, 1174 (10th Cir.2012) (citing In re Sandoval, 541 F.3d 997, 1001 (10th Cir.2008)).
. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
. § 523(a)(2)(A).
. Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 222-223 (10th Cir. BAP 2013); see also Diamond v. Vickery (In re Vickery), 488 B.R. 680, 691 (10th Cir. BAP March 13, 2013), appeal docketed, No. 13-1148 (10th Cir. April 11, 2013) (recognizing "[i]n order to give full effect to the plain meaning of the disjunctive 'or' in § 523(a)(2)(A), we conclude that ‘actual fraud’ is an independent basis for nondis-chargeability under that subsection.”).
. Id.
. See Field v. Mans, supra, at 70, 116 S.Ct. 437; Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 789 (10th Cir.2010).
. See Exhibit 14, schedule of checks written by Y. Sun on the newly-opened U.S. Bank account, and Exhibit 15, copies of the same.
.Transcript, March 27, 2014, p. 96, line 15-p. 97, line 17.
. Further, according to W. Kim, H. Sun told him because the investment was for 50% of the company and the company owned real estate, this was a 50% sale of property.
. Columbia State Bank v. Daviscourt (In re Daviscourt), 353 B.R. 674, 685 (10th Cir. BAP 2006).
. Transcript, March 27, 2014, p. 70, line 21-p. 71, lines 1-5.
. See Exhibits 14 and 15.
. See Exhibit 44; Transcript, March 27, 2014, p. 70, line 21-p. 71, lines 1-5.
. Transcript, March 27, 2014, p. 71, lines 6-18.
. Johnson v. Riebesell, supra, at 791-92.
. Adams County Dept. of Social Services v. Sutherland-Minor (In re Sutherland-Minor), 345 B.R. 348, 354, n.4 (Bankr.D.Colo.2006). See also Field v. Mans, 516 U.S. at 74, 116 S.Ct. 437 and Fowler Bros. v. Young, 91 F.3d at 1373.
. The only evidence of his attempts at real estate investment involve a very small commercial property in Korea, recommended to him by Y. Kim's brother, which he stated he still owns.
. Transcript of March 27, 2014, p. 5, lines 1-18; p. 14, lines 10-13.
. Transcript of March 27, 2014, p. 10, lines 12-15; p. 67, line 22 through p. 68, line 8.
. See Williams v. Sato (In re Sato), 512 B.R. 241, 249-50 (Bankr.C.D.Cal.2014) (Although available information might have alerted an investor to fact the debtor was not the prosperous, experienced real estate developer he purported to be, the investor’s non-real estate background and lack of prior real estate investment experience meant he justifiably relied the on debtor’s showing of prosperity and knowledge).
. Transcript, March 20, 2014, p. 89, lines 89-90; Transcript, March 21, 2014, p. 113, lines 20-23.
. Sturgeon, 496 B.R. at 223 (citing Marks v. Hentges (In re Hentges), 373 B.R. 709, 725 (Bankr.N.D.Okla.2007) (false pretenses are "implied misrepresentations or conduct intended to create and foster a false impression.”) (internal quotations omitted)).
. See Nielsen v. Pollan (In re Pollan), 2014 WL 2756527, at *4 (Bankr.D. Kan June 16, 2014) (Slip Copy) (finding the debtor’s statements and conduct in purchasing and financing a car but arranging for a friend to make the loan payments created a false impression the friend would ultimately receive title to the car, concealing the debtor’s secret intent to retain ownership).
. The Court also finds that, on the several occasions when the Suns’ testimony conflicted with that of the Kims, the Kims’ testimony was more credible, while the Suns’ testimony was rambling, evasive, and inconsistent.
. See Exhibit 9, Stock Purchase Agreement dated May 16, 2007, p. 1, stating Y & K Sun, Inc. as "Seller” seeks capital to renovate and market the JCRS Shopping Center. Further, the Stock Purchase Agreement provided the $900,000 was to be paid to the "Seller,” i.e. YKSI Id.
. § 523(a)(4).
. See Bryant v. Lynch (In re Lynch), 315 B.R. 173, 175 (Bankr.D.Colo.2004) ("A claim for nondischargeability under Section 523(a)(4) may rest on proof of larceny or embezzlement, without requiring proof of a fiduciary relationship.”).
. 4 Collier on Bankruptcy ¶523.10[2] (16th ed.). See also Lynch, 315 B.R. at 179 ("The courts define embezzlement and larceny as having the same elements, with the one distinction that, with larceny, the original taking and possession of property was unlawful rather than authorized.”); Hartwig v. Markley (In re Markley), 446 B.R. 484, 489 (Bankr.D.Kan.2011) ("Embezzlement requires allegations of misappropriation of property of another by a person in whom said property was lawfully entrusted for a specific purpose. Larceny is misappropriation of property of another by theft.”).
. In re Meagher, No. 10-12324 MER, 2012 WL 5893483 (Bankr.D.Colo. Nov. 23, 2012) (following Bombardier Capital, Inc. v. Tinkler (In re Tinkler), 311 B.R. 869, 876 (Bankr.D.Colo.2004) (citing Bryant v. Tilley (In re Tilley), 286 B.R. 782, 789 (Bankr.D.Colo.2002)).
. In re Ghaemi, 492 B.R. 321, 325 (Bankr.D.Colo.2013).
. Even if Y. Sun had lawfully received and deposited the $900,000 check, which the Court does not believe is the case, the remaining elements of embezzlement have been established. Thus, absent the requisite wrongful receipt demonstrating larceny, the Court would have found in the alternative the Suns’ debt to the Kims is nondischargeable as embezzlement.
. § 523(a)(6).
. Barenberg v. Burton (In re Burton), 2010 WL 3422584, *6 (10th Cir.BAP, August 31, 2010) (unpublished decision) (citations omitted).
. Mitsubishi Motors Credit of America, Inc. v. Longley (In re Longley), 235 B.R. 651, 657 (10th Cir. BAP 1999). See also Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir.2004) (willfulness may be shown where a debtor intends the injury or takes action substantially certain to cause the injury).
. Wagner v. Wagner (In re Wagner), 492 B.R. 43, 55 (Bankr.D.Colo.2013) (citations omitted).
. See In re Thomas, 2013 WL 6840527, at *23.
. Hernandez v. Musgrave (In re Musgrave), 2011 WL 312883, at *11 (10th Cir. BAP Feb. 2, 2011) (Slip Copy); see also Brown v. Kuwazaki (In re Kuwazaki), 438 B.R. 355, at *6 (10th Cir. BAP 2010) (unpublished decision) (citing Int’l Fid. Ins. Co. v. Fox (In re Fox), 357 B.R. 770, 778 (Bankr.D.Ark.2006); Telmark, LLC. Booher (In re Booher), 284 B.R. 191, 214 (Bankr.W.D.Pa.2002)).
. See Gronewoller v. Mascio (In re Mascio), 2007 WL 3407516 (D.Colo.2007).
. Mascio v. Gronewoller (In re Mascio), 454 B.R. 146 (D.Colo.2011). Further, the District Court stated:
Under Colorado law, "the measure of damages in [fraud] cases is the ‘benefit of the bargain’ rule, designed to give a plaintiff his or her expectation interest for loss of bargain.” Ballow v. PHICO Ins. Co., 878 P.2d 672, 677 n. 5 (Colo.1994). Thus, a plaintiff *806is entitled to receive "the difference between the actual value of the property and what its value would have been had the representation been true.” Otis & Co. v. Grimes, 97 Colo. 219, 48 P.2d 788, 791 (1935).
Id. at 150 n.4. See also Immel v. Tani (In re Tani), 2012 WL 2071766 (Bankr.D.Colo. June 8, 2012) (Slip Copy) (applying the Mas-cio standards).
. May 17, 2007, is when the parties entered into the bargain, thus it is the date governing the valuation of damages.
. The parties did not discuss the effect of the return of the $500,000 to the Kims. It is therefore not clear whether the Kims would have then had their 50% interest in the JCRS Property or YKSI reduced by 60%, giving them a 20% interest. The fact the Suns did not discuss this with the Kims provides further support of the Suns’ intent to conceal the true nature of the transaction.
. See Transcript of March 20, 2014, p. 140, lines 10-22 (testimony of W. Kim).
. See Transcript of March 2, 2014, p. 86, lines 19-24 (testimony of Y. Kim):
Well, at the time Mr. Sun said, you know, if you sell this property in the near future, then maybe you could sell it for $8 million and if that happens then maybe you could split the profit proceeds, like a half, you know, 50-50, which will come to $1 million each, so $1 million for Professor Kim and $ 1 million for me, Mr. Sun.
. It is unclear when the Kims became aware YKSI owned other assets besides the JCRS Property. See Transcript of March 20, 2014, p. 154, lines 2-12 (testimony of W. Kim). *807However, H. Sun testified he believed the $900,000 stock transaction pertained "only to the one building,” presumably the JCRS Property. See Transcript of March 26, 2014, p. 88, lines 8-12 (testimony of H. Sun).
. Plaintiffs Written Closing Argument, Docket No. 77, pp. 21-22 (footnotes omitted).
. Fed. R. Civ. P. 15(b)(2).
. Eller v. Trans Union, LLC, 739 F.3d 467, 480 (10th Cir.2013).
. ACE, USA, v. Union Pacific R. Co., Inc., 2011 WL 6097138, at *4 (D.Kan, Dec. 7, 2011) (Not Reported in F.Supp.2d) (citing Green Country Food Market, Inc. v. Bottling Group, LLC, 371 F.3d 1275, 1280 (10th Cir.2004); Koch v. Koch Indus., Inc., 203 F.3d 1202, 1218 (10th Cir.2000); and Moncrief v. Williston Basin Interstate Pipeline Co., 174 F.3d 1150, 1162) (10th Cir.1999).
. See Plaintiff’s Written Closing Argument, supra, pp. 20-21, and citations to the record therein.
. Colorado law provides piercing the corporate veil “is appropriate when three elements are present: (1) the corporation was a mere alter ego of the shareholder, (2) the corporate structure was used to perpetrate a wrong, and (3)piercing the corporate veil would achieve an equitable result.” In re Burton, 2010 WL 3422584, at *5 (10th Cir. BAP 2010) (unpublished decision).
. "A claimant seeking to pierce the corporate veil must make a clear and convincing showing that each consideration has been met.” Connolly v. Englewood Post No. 32 VFW, et al v. Phillips (In re Phillips), 139 P.3d 639, 644 (Colo.2006) (citing Contractors Heating & Supply Co., 163 Colo. 584, 432 P.2d 237, 239 (1967)). See also In re First Financial Services, LLC, 2011 WL 2971841, at *7 (Bankr.D.Colo. July 21, 2011) (Slip Copy); In re First Assured Warranty Corporation, 383 B.R. 502, 527 (Bankr.D.Colo.2008) (both relying on Phillips). Veil-piercing remains the exception, not the rule, and the corporate veil will be pierced only in "extraordinary circumstances.” Phillips, 139 P.3d at 644 (citing Leonard v. McMorris, 63 P.3d 323, 330 (Colo.2003) and Water, Waste & Land, Inc. v. Lanham, 955 P.2d 997, 1004 (Colo.1998)).
. Fed. R. Bankr. P. 7054 provides:
(a) Judgments. Rule 54(a)-(c) F.R.Civ.P. applies in adversary proceedings.
(b) Costs. The court may allow costs to the prevailing parly except when a statute of the United States or these rules otherwise provides. Costs against the United States, its officers and agencies shall be imposed only to the extent permitted by law. Costs may be taxed by the clerk on 14 days’ notice; on motion served within seven days thereafter, the action of the clerk may be reviewed by the court.
. 28 U.S.C. § 1920, taxation of costs, provides:
A judge or clerk of any court of the United States may tax as costs the following:
(1) Fees of the clerk and marshal;
(2) Fees for printed or electronically recorded transcripts necessarily obtained for use in the case;
(3) Fees and disbursements for printing and witnesses;
(4) Fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case;
(5) Docket fees under section 1923 of this title;
(6) Compensation of court appointed experts, compensation of interpreters, and *810salaries, fees, expenses, and costs of special interpretation services under section 1828 of this title.
A bill of costs shall be filed in the case and, upon allowance, included in the judgment or decree.
. McArthur Company v. Cupit (In re Cupit), 514 B.R. 42, 57 (Bankr.D.Colo.2014).
. 28 U.S.C. § 1961 provides, in part: "Interest shall be allowed on any money judgment in a civil case recovered in a district court.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497426/ | Chapter 7
ORDER ON MOTION TO DISMISS PURSUANT TO 11 U.S.C. SECTION 707(b)(1)
PAUL M. GLENN, Chief Bankruptcy Judge
THIS CASE came before the Court to consider the Motion to Dismiss Pursuant to 11 U.S.C. Section 707(b)(1) filed by Donald F. Walton, the United States Trustee for Region 21 (the UST). (Doc. 45). The Debtors, Michael John St. Jean and Kim Ann St. Jean, filed a written Response to the Motion. (Doc. 58).
A threshold issue presented by the Motion and Response is whether the UST may file a motion to dismiss a case pursuant to § 707(b) if the case was originally filed under Chapter 13 of the Bankruptcy Code and later converted to a case under Chapter 7. The Court finds that § 707(b) applies to converted cases.
Additionally, the Court finds that the Debtors in this case are individuals whose debts are primarily consumer debts within the meaning of § 707(b) of the Bankruptcy Code. The presumption of abuse has arisen under § 707(b)(2), and has not been rebutted by a showing of special circumstances. Consequently, the UST’s Motion to Dismiss should be granted.
Background
The Debtors filed a petition under Chapter 13 of the Bankruptcy Code on August 12, 2009.
On November 22, 2009, the Debtors filed a Second Amended Chapter 13 Plan. (Doc. 19).
On December 23, 2009, the Court entered an Order Confirming Chapter 13 Plan, Allowing Claims, and Directing Distribution. (Doc. 22).
On March 11, 2010, the Chapter 13 Trustee filed a Motion to Dismiss for Failure to Make Confirmed Plan Payments. (Doc. 27).
On April 7, 2010, the Debtors filed a Notice of Conversion from Chapter 13 Case to Chapter 7 Case. (Doc. 30).
*866On May 24, 2010, the UST entered a statement on the docket that the case was presumed to be an abuse under § 707(b) of the Bankruptcy Code.
On June 23, 2010, the UST filed a Motion to Dismiss Pursuant to 11 U.S.C. Section 707(b)(1) Based on Presumption of Abuse Arising under 11 U.S.C. Section 707(b)(2) and Abuse Arising under 11 U.S.C. Section 707(b)(3). (Doc. 45). In the Motion, the UST asserts that the Debtors’ annualized current monthly income is $127,963.80, which exceeds the median income for a household of four in Florida, and that the Debtors’ disposable income is $2,357.38 per month (or at least $141,442.72 over a 60-month term). Accordingly, the UST contends that the Debtors’ case is presumed to be an abuse under § 707(b) of the Bankruptcy Code. (Doc. 45, pp. 4-7).
On October 31, 2010, the Debtors filed a written Response to the Motion. (Doc. 58). The Debtors do not attempt to rebut the presumption of abuse by demonstrating special circumstances pursuant to § 707(b)(2)(B) of the Bankruptcy Code. Instead, the Debtors assert that the provisions of § 707(b) do not apply to their case for two reasons.
First, the Debtors assert that § 707(b) applies only to cases “filed by an individual debtor under this chapter.” Since their case was originally filed under Chapter 13, and not Chapter 7, the Debtors contend that § 707(b) does not apply to their converted case. Second, the Debtors assert that § 707(b) should not apply to their case because their debts are not “primarily consumer debts” within the meaning of the statute.
Discussion
For the reasons discussed below, the Court finds that § 707(b) applies to cases that were initially commenced as Chapter 13 cases and later converted to Chapter 7 cases. Additionally, the Court finds that the Debtors in this case are individuals with primarily consumer debts under § 707(b) of the Bankruptcy Code.
I. “Filed by an individual debtor under this chapter”
Section § 707(b)(1) of the Bankruptcy Code provides in part:
11 USC § 707. Dismissal of a case or conversion to a case under Chapter 11 or 13
(b)(1) After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title if it finds that the granting of relief would be an abuse of the provisions of this chapter.
11 U.S.C. § 707(b)(l)(Emphasis supplied). A threshold question under § 707(b)(1) is whether the section applies only to cases that were initially “filed under” Chapter 7, or whether it also applies to cases that were initially filed under another chapter, but later converted to a case under Chapter 7.
The decisions that have addressed the issue are not unanimous. A number of courts have held that § 707(b)(1), or the related presumption of abuse analysis under § 707(b)(2), applies to converted cases. Justice v. Advanced Control Solutions, Inc., 2008 WL 4368668 (W.D.Ark.); In re Willis, 408 B.R. 803 (Bankr.W.D.Mo.2009); In re Kellett, 379 B.R. 332 (Bankr.D.Or.2007); In re Kerr, 2007 WL 2119291 (Bankr.W.D.Wash.); In re Perfetto, 361 B.R. 27 (Bankr.D.R.I.2007).
*867Other courts, however, have held that converted cases are not subject to dismissal or the abuse analysis under § 707(b) of the Bankruptcy Code. In re Chapman, 431 B.R. 216 (Bankr.D.Minn.2010); In re Guarin, 2009 WL 4500476 (Bankr.D.Mass.); In re Dudley, 405 B.R. 790 (Bankr.W.D.Va.2009); In re Ryder, 2008 WL 3845246 (Bankr.N.D.Cal.); In re Fox, 370 B.R. 639 (Bankr.D.N.J.2007).
A. The Code and Rules
It is clear from the cases cited above that the issue involves the interplay of multiple provisions of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.
1. The initial Chapter 13 case
A bankruptcy case is commenced by the filing of a petition. Section 301 of the Bankruptcy Code provides that a voluntary bankruptcy case is commenced by the filing of a petition, and that the commencement of the case constitutes an order for relief. 11 U.S.C. § 301.
The duties of a debtor in a bankruptcy case are set forth in § 521 of the Bankruptcy Code. Section 521(a)(l)(B)(v), for example, requires the debtor to file a “statement of the amount of monthly net income, itemized to show how the amount is calculated.” 11 U.S.C. § 521(a)(I)(B)(v). Additionally, Rule 1007(b)(6) of the Federal Rules of Bankruptcy Procedure provides:
(b) Schedules, Statements, and Other Documents Required.
(6) A debtor in a chapter 13 case shall file a statement of current monthly income, prepared as prescribed by the appropriate Official Form, and, if the current monthly income exceeds the median family income for the applicable state and household size, a calculation of disposable income made in accordance with § 1325(b)(3), prepared as prescribed by the appropriate Official Form.
Fed.R.Bankr.P. 1007(b)(6)(Emphasis supplied).
The Official Form for Chapter 13 debtors is Form 22C. Part I of Official Form 22C requires the Chapter 13 debtor to report his income based on the “average monthly income received from all sources, derived during the six calendar months prior to filing the bankruptcy case.”
Part V of Official Form 22C is entitled “Determination of Disposable Income under § 1325(b)(2).” Section 1325 of the Bankruptcy Code sets forth the confirmation requirements for Chapter 13 Plans. 11 U.S.C. § 1325. For a Chapter 13 Plan to be confirmed over an objection by the trustee or a creditor, the Plan must provide that all of the debtor’s projected disposable income will be applied to payments under the Plan. 11 U.S.C. § 1325(b)(1)(B).
2. Conversion from Chapter 13 to Chapter 7
Section 1307 of the Bankruptcy Code provides that a Chapter 13 debtor may convert his case to a case under Chapter 7 at any time. 11 U.S.C. § 1307(a).
The effect of a conversion is governed by § 348 of the Bankruptcy Code. Subsections (a) and (b) of § 348 provide:
11 U.S.C. § 348. Effect of conversion
(a) Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) of this section, does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.
(b) Unless the court for cause orders otherwise, in sections 701(a), 727(a)(10), 727(b), 728(a), 728(b), 1102(a), 1110(a)(1), *8681121(b), 1121(c), 1141(d)(4), 1146(a), 1146(b), 1201(a), 1221 and 1228(a), 1301(a), and 1305(a) of this title, “the order for relief under this chapter” in a chapter to which a ease has been converted under section 706, 1112, 1208, or 1307 of this title means the conversion of such case to such chapter.
11 U.S.C. § 348(a),(b)(Emphasis supplied).
In addition to the statutory effect of conversion, Rule 1019 of the Federal Rules of Bankruptcy Procedure sets forth the procedural requirements that a debtor must satisfy upon conversion of his case. Rule 1019(1)(A) provides:
Rule 1019. Conversion of a Chapter 11 Reorganization Case, Chapter 12 Family Farmer’s Debt Adjustment Case, or Chapter 13 Individual’s Debt Adjustment Case to a Chapter 7 Liquidation Case
When a chapter 11, chapter 12, or chapter 13 case has been converted or reconverted to a chapter 7 case:
(1) Filing of Lists, Inventories, Schedules, Statements.
(A) Lists, inventories, schedules, and statements of financial affairs theretofore filed shall be deemed to be filed in the chapter 7 case, unless the court directs otherwise. If they have not been previously filed, the debtor shall comply with Rule 1007 as if an order for relief had been entered on an involuntary petition on the date of the entry of the order directing that the case continue under chapter 7.
Fed.R.Bankr.P. 1019(l)(A)(Emphasis supplied).
Rule 1019(1)(A) requires the debtor in a converted case to comply with Rule 1007. Rule 1007 governs the lists, schedules, statements, and other documents that a debtor is required to file. For Chapter 7 debtors, Rule 1007(b)(4) provides:
(b) SCHEDULES, STATEMENTS, AND OTHER DOCUMENTS REQUIRED.
(4) Unless § 707(b)(2)(D) applies, an individual debtor in a chapter 7 case shall file a statement of current monthly income prepared as prescribed by the appropriate Official Form, and, if the current monthly income exceeds the median family income for the applicable state and household size, the information, including calculations, required by § 707(b), prepared as prescribed by the appropriate Official Form.
Fed.R.Bankr.P. 1007(b)(4)(Emphasis supplied).
The Official Form for Chapter 7 debtors is Form 22A. Part II of Official Form 22A is entitled “Calculation of Monthly Income for § 707(b)(7) Exclusion;” Part III is entitled “Application of § 707(b) Exclusion;” Part IV is entitled “Calculation of Current Monthly Income for § 707(b)(2);” and Part VI is entitled “Determination of § 707(b)(2) Presumption.”
3. Dismissal of a Chapter 7 case
The provisions for dismissal of a Chapter 7 ease, or for conversion of a Chapter 7 case to a case under Chapter 11 or 13, are found in § 707 of the Bankruptcy Code.
Section 707(a), for example, provides that the Court may dismiss a Chapter 7 case for “cause,” including unreasonable delay by the debtor that is prejudicial to creditors, or failure of the debtor to file the information required by § 521(1) of the Bankruptcy Code. 11 U.S.C. § 707(a).
Separate grounds for dismissal or conversion of a Chapter 7 case are set forth in § 707(b).
Section 707(b)(2)(A) creates a presumption that the granting of relief would be an abuse of the provisions of Chapter 7 if the debtor’s current monthly income, after cer*869tain reductions, exceeds an amount calculated according to the section. 11 U.S.C. § 707(b)(2)(A)®.
Section 704(b)(1) of the Bankruptcy Code requires the UST to review the documents submitted by a Chapter 7 debtor in order to determine whether the presumption created by § 707(b)(2)(A) arises. Section 704(b)(1) provides:
11 USC § 704. Duties of trustee
(b)(1) With respect to a debtor loho is an individual in a case under this chapter—
(A) the United States trustee (or the bankruptcy administrator, if any) shall review all materials filed by the debtor and, not later than 10 days after the date of the first meeting of creditors, file with the court a statement as to whether the debtor’s case would be presumed to be an abuse under section 707(b).
11 U.S.C. § 704(b)(l)(Emphasis supplied). If a presumption of abuse has arisen, creditors are to receive notice of the presumption pursuant to § 342(d) of the Bankruptcy Code.
11 USC § 342. Notice
(d) In a case under chapter 7 of this title in which the debtor is an individual and in which the presumption of abuse arises under section 707(b), the clerk shall give written notice to all creditors not later than 10 days after the date of the filing of the petition that the presumption of abuse has arisen.
11 U.S.C. § 342(d)(Emphasis supplied). Section 348(c) of the Bankruptcy Code provides that the notice requirement of § 342 applies in converted cases:
11 USC § 348. Effect of conversion
(c) Sections 3A2 and 365(d) of this title apply in a case that has been converted under section 706, 1112, 1208, or 1307 of this title, as if the conversion order were the order for relief.
11 U.S.C. § 348(c)(Emphasis supplied).
Finally, if a case involves primarily consumer debts, § 707(b)(1) provides that the UST may file a motion to dismiss on the grounds that the granting of relief would be an abuse of the provisions of Chapter 7.
11 USC § 707. Dismissal of a case or conversion to a case under Chapter 11 or 13
(b)(1) After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a ease under chapter 11 or 13 of this title if it finds that the granting of relief would be an abuse of the provisions of this chapter.
11 U.S.C. § 707(b)(l)(Emphasis supplied). If the motion is based upon a presumption of abuse under § 707(b)(2), the UST must file its statement regarding the presumption and motion to dismiss within the time periods set forth in § 704(b). 11 U.S.C. § 704(b). For converted cases, however, the time period for the UST to file a motion under § 707(b)(2) is governed by Rule 1019(2):
Rule 1019. Conversion of a Chapter 11 Reorganization Case, Chapter 12 Family Farmer’s Debt Adjustment Case, or Chapter 13 Individual’s Debt Adjustment Case to a Chapter 7 Liquidation Case
When a chapter 11, chapter 12, or chapter 13 case has been converted or reconverted to a chapter 7 case:
*870(2) New Filing Periods. A new time period for filing a motion under § 707(b) or (c), ... shall commence under Rules 1017....
F.R.Bankr.P. 1019(2)(Emphasis supplied). The new time period is measured from the date of the meeting of creditors in the converted case. 11 U.S.C. § 704; Fed. R.Bankr.P. 1017(e).
B. Section 707(b) applies to converted cases.
After evaluating § 707(b) in the context of the statutory provisions and Rules cited above, the Court finds that the abuse analysis under § 707(b) applies not only to cases that were initially filed under Chapter 7, but also to cases that were initially filed under Chapter 13 and later converted to a ease under Chapter 7. The Court reaches this conclusion for three primary reasons: (1) the conversion of a Chapter 13 case operates as an order for relief under Chapter 7; (2) upon conversion, the debtor is required to file an Official Form 22A, which includes the Determination of § 707(b)(2) Presumption; and (3) the Bankruptcy Code and Rules establish an intent to apply the abuse analysis after conversion.
1. The conversion operates as an order for relief under Chapter 7.
Under § 707(b), the Court may dismiss “a case filed by an individual debtor under this chapter” if “the granting of relief would be an abuse of the provisions of this chapter.” The section appears in Chapter 7 of the Bankruptcy Code, and applies only in cases under Chapter 7. 11 U.S.C. § 103(b).
Pursuant to § 348, the conversion of a Chapter 13 case to a case under Chapter 7 constitutes an order for relief under Chapter 7. 11 U.S.C. § 348(a). “Section 348(a) stands for the general proposition that the conversion of a case constitutes the order of relief under the chapter to which the case was converted.” In re Willis, 408 B.R. at 809. Under § 348, “the original filing date is retained upon conversion, but the case is otherwise treated as if the debtor had originally filed under the converted chapter.” In re Kerr, 2007 WL 2119291, at 3(Emphasis supplied). See also In re State Airlines. Inc., 873 F.2d 264, 268 (11 th Cir.1989); In re Perfetto, 361 B.R. at 30-31.
Following conversion, a Chapter 7 trustee is appointed under § 701 and § 702 of the Bankruptcy Code, the Chapter 7 trustee administers the estate pursuant to his duties under § 704 of the Bankruptcy Code, property of the estate is distributed under § 726 of the Bankruptcy Code, and the debtor receives his discharge under § 727 of the Bankruptcy Code.
In other words, the conversion order acts as an order for relief under Chapter 7 pursuant to § 348 of the Bankruptcy Code. Upon conversion, all of the debtor’s assets and liabilities, together with the debtor’s rights and obligations, are administered pursuant to the operating sections of Chapter 7. Since § 707 appeal’s in Chapter 7, the Court finds that it applies in converted cases in the same manner that the other sections of Chapter 7 apply in converted cases.
2. The debtor is required to file an Official Form 22A upon conversion.
A debtor who files a Chapter 13 case is required to file Official Form 22C. Fed. R.Bankr.P. 1007(b)(6). Official Form 22C is entitled “Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income.”
*871Upon converting his case to a case under Chapter 7, the debtor is required to file Official Form 22A. Fed.R.Bankr.P. 1019(1)(A), 1007(b)(4). Form 22A is entitled “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation.”
The requirement to file the additional form is significant because Form 22A serves a different purpose from Form 22C. As the title demonstrates, Form 22C required in Chapter 13 cases is based on § 1325(b)(3) of the Bankruptcy Code, and is used to calculate the debtor’s disposable income and commitment period for purposes of his Chapter 13 Plan. Form 22A as required in Chapter 7 cases, however, is based on § 707(b)(2) of the Bankruptcy Code, and is used to calculate the debtor’s monthly income for purposes of determining whether the presumption of abuse arises under that section. In re Boule, 415 B.R. 1, 4 n. 4 (Bankr.D.Mass.2009).
The Court finds that a debtor in a converted case is required to file Form 22A because of the combined effect of Rule 1019 and Rule 1007(b)(4). Rule 1019 governs the documents that must be filed when a case is converted from Chapter 13 to Chapter 7. Rule 1019(1)(A) provides that a debtor in a converted case is required to comply with Rule 1007 in the event that the documents required by that Rule were not previously filed. Fed. R.Bankr.P. 1019(1)(A).
Rule 1007(b)(4) provides that an individual debtor “in a chapter 7 case” shall file the statement of current monthly income prepared in accordance with Official Form 22A. Fed.R.Bankr.P. 1007(b)(4). By its terms, the Rule applies to all individuals who are debtors in a case being administered under Chapter 7, without regard to whether the case was initially filed under that Chapter.
After considering these Rules, several Courts have expressly concluded that an individual debtor in a converted Chapter 7 case is required to file Form 22A upon conversion. In re Kellett, 379 B.R. at 339-40; In re Kerr, 2007 WL 2119291, at 4(“Each of the debtors in the instant cases is now ‘in a chapter 7’ and therefore subject to the requirements of Rule 1007(b)(4)”); In re Perfetto, 361 B.R. at 31.
Official Form 22A includes the calculation to determine whether the presumption of abuse arises under § 707(b)(2) of the Bankruptcy Code. The Court has considered Rule 1019 and Rule 1007(b)(4) of the Federal Rules of Bankruptcy Procedure, together with the decisions that have evaluated Rule 1019 and Rule 1007(b)(4), and finds that debtors in converted Chapter 7 cases are required to file Official Form 22A upon the conversion of their eases.
3. The Bankruptcy Code and Rules establish an intent to apply the abuse analysis after conversion.
Rule 1019 and Rule 1007(b)(4) require an individual debtor in a converted Chapter 7 case to file Official Form 22A and the incorporated Calculation of Current Monthly Income for § 707(b)(2). Additionally, several other provisions of the Bankruptcy Code and Rules also demonstrate that the abuse analysis contained in § 707(b) is intended to apply in converted cases.
Section 704(b)(1) of the Bankruptcy Code, for example, relates to all individual debtors “in a case” under Chapter 7. The section directs the UST to review the documents of Chapter 7 debtors and to file a statement as to whether the presumption of abuse arises under § 707(b). 11 U.S.C. § 704(b)(1).
Additionally, § 342(d) of the Bankruptcy Code directs the clerk to notify creditors in “a case under chapter 7” if the presumption of abuse has arisen under § 707(b). 11 U.S.C. § 342(d).
*872Neither § 342(d) nor § 704(b)(Z) are limited to cases initially filed under Chapter 7. Further, § 348(c) of the Bankruptcy Code specifically provides that the notice' requirement of § 342 applies in converted cases. 11 U.S.C. § 348(c).
Finally, Rule 1019 of the Federal Rules of Bankruptcy Procedure sets forth the procedures that apply following the conversion of a case from Chapter 13 to Chapter 7. When a case has been converted to Chapter 7, Rule 1019(2) provides for the commencement of a new time period for filing a motion under § 707(b). Fed. R.Bankr.P. 1019(2).
In short, the UST is under a duty to evaluate the documents submitted by individual debtors in Chapter 7 cases, including Official Form 22A entitled “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation.” 11 U.S.C. § 704(b)(1). Following the UST’s evaluation, § 342(d) and § 348(c) require the clerk to notify creditors in converted cases if the presumption of abuse has arisen under § 707(b). If the UST or another interested party alleges that the case is an abuse of Chapter 7, Rule 1019(2) then provides for a new time period to commence in converted cases for the filing of a motion under § 707(b).
These provisions contain specific procedures for the assertion of abuse in converted cases. Consequently, the Court finds that the Code and Rules establish an intent to apply the abuse analysis of § 707 following the conversion of a case to Chapter 7.
C. Conclusion
For the foregoing reasons, the Court finds that the abuse analysis under § 707(b) applies not only to cases that were initially filed under Chapter 7, but also to cases that were initially filed under Chapter 13 and later converted to a case under Chapter 7. This conclusion is consistent with the remedial purpose of § 707(b).
In 2005, the landscape for bankruptcy filings dramatically changed. Responding to a growing belief that “bankruptcy relief may be too readily available and is sometimes used as a first resort, rather than a last resort,” and the prevalence of “opportunistic personal filings and abuse,” Congress enacted BAPCPA in order to require above-median income debtors to make more funds available for the payment of unsecured creditors.
The centerpiece of the Act is the imposition of a “means test” for Chapter 7 filers, which requires would-be debtors to demonstrate financial eligibility to avoid the presumption that their bankruptcy filing is an abuse of the bankruptcy proceedings.
Schultz v. United States, 529 F.3d 343, 346-47 (6th Cir.2008)(quoted in Justice v. Advanced Control Solutions, Inc., 2008 WL 4368668, at 3). If the debtor in a converted case disputes the outcome of the abuse analysis, of course, he may seek to rebut the presumption of abuse by showing the existence of special circumstances under § 707(b)(2)(B).
II. “Primarily consumer debts”
Pursuant to § 707(b) of the Bankruptcy Code, the Court may dismiss a case filed by an individual debtor under Chapter 7 “whose debts are primarily consumer debts.” 11 U.S.C. § 707(b)(1). The Debtors in this case contend that they incurred substantial business losses during their operation of a gift shop between 2005 and 2009, and that their case therefore does not fall within the scope of § 707(b)(1).
A consumer debt is a “debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C. § 101(8). The term “primarily” as it appears in § 707(b) means consumer debt that exceeds fifty percent of the total *873debt. In re Baird, 456 B.R. 112, 118-19 (Bankr.M.D.Fla.2010); In re Benedetti, 372 B.R. 90, 92 n. 3 (Bankr.S.D.Fla.2007).
On their schedules, the Debtors in this case listed a home mortgage in the amount of $208,931.00, two personal vehicle loans in the aggregate amount of $60,348.00, priority sales tax liabilities in the amount of $3,215.00, and general unsecured liabilities in the amount of $99,592.25.
The deadline for filing claims in their bankruptcy case was August 12, 2010. Secured claims were filed in the case in the amount of $267,063.26, consisting of the home mortgage in the amount of $206,391.45 and the automobile loans. Additionally, general unsecured claims were filed in the total amount of $81,162.92, and unsecured priority claims were filed in the amount of $2,285.10.
The issue therefore turns on whether the Debtor’s home mortgage is a consumer debt for purposes of § 707(b). If the home mortgage is consumer debt, the Debtors’ consumer debt exceeds fifty percent of their total debt, even if a portion of their unsecured debt arose from the operation of their business. The home mortgage constitutes 56% of the scheduled claims, and 59% of the filed claims.
The home mortgage is consumer debt for purposes of § 707(b). In re Woodard, 2009 WL 1651234, at 3 (Bankr. M.D.N.C.)(A “debt secured by a debtor’s residence is a consumer debt within the meaning of Section 101(8) of the Bankruptcy Code”); In re Tindall, 184 B.R. 842, 844 (Bankr.M.D.Fla.l994)(“The secured debt is a note and mortgage for the Debtors’ residence, which is a consumer debt”). Accordingly, the Debtors’ debts are primarily consumer debts.
The Debtors argue that in 2006 to 2009 they operated a small business, Fer-nandina Beach Winery & Gifts, and that business losses totaling $124,685.00 claimed on their tax returns for those years show that the Debtors’ debts are not primarily consumer debts. However, losses that the Debtors incurred prior to the filing of their petition are not necessarily “claims” and are not necessarily included in the calculation of “debt” under the Bankruptcy Code if the losses were not obligations of the Debtors when the case was filed. Section 101(12) of the Bankruptcy Code defines a “debt” as a “liability on a claim.” 11 U.S.C. § 101(12). A “claim” is generally defined as a right to payment, 11 U.S.C. § 101(5), and is generally determined “as of the date of the filing of the petition.” 11 U.S.C. § 502(b). Consequently, a “loss” that is claimed as a deduction from ordinary income on a debt- or’s tax return for a tax period prior to the filing of a bankruptcy petition is different than a “debt” under the Bankruptcy Code, and not necessarily included in the computation of consumer debt under § 707(b).
Since the Debtors’ home mortgage is a consumer debt, and since their consumer debt exceeds fifty percent of their total debt, the Court finds that the Debtors are individuals whose debts are primarily consumer debts within the meaning of § 707(b) of the Bankruptcy Code.
Conclusion
The UST filed a Motion to Dismiss the Debtors’ converted Chapter 7 case pursuant to § 707(b)(1) of the Bankruptcy Code. Section 707(b) applies to cases that were converted from Chapter 13 to Chapter 7 because (1) the conversion operates as an order for relief under Chapter 7; (2) upon conversion, a debtor is required to file Official Form 22A, which includes the Determination of § 707(b) Presumption; and (3) the Bankruptcy Code and Rules establish an intent to apply the abuse analysis after conversion.
Additionally, in this case the Court finds that the Debtors are individuals whose debts are primarily consumer debts within *874the meaning of § 707(b) of the Bankruptcy Code.
Consequently, since the presumption of abusé has arisen under § 707(b)(2), and the presumption was not rebutted by a demonstration of special circumstances under § 707(b)(2)(B), the UST’s Motion should be granted. In re Woodruff, 416 B.R. 369, 374 (Bankr.D.Mass.2009).
Accordingly:
IT IS ORDERED that:
1. The Motion to Dismiss Pursuant to 11 U.S.C. Section 707(b)(1) filed by Donald Walton, the United States Trustee for Region 21, is granted.
2. The Debtors, Michael John St. Jean and Kim Ann St. Jean, may re-convert their case to a case under Chapter 13 of the Bankruptcy Code within twenty-one (21) days of the date of this Order. In the event that the case is not re-converted to a case under Chapter 13, the above-captioned Chapter 7 case shall be dismissed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497427/ | Chapter 7
MEMORANDUM OPINION ON REQUEST TO CLAW BACK PRIVILEGED DOCUMENTS
Michael G. Williamson, United States Bankruptcy Judge
Kirkland & Ellis previously represented Trans Healthcare, Inc. (“THI”), Trans Health Management, Inc. (“THMI”), THI Holdings, LLC (“THI Holdings”), THI of Baltimore, Inc. (“THI-B”), and the GTCR Group on various matters, some with respect to a corporate restructuring and others regarding litigation in Ohio.1 Kirkland & Ellis sent communications to some or all of those clients (some of which attached documents prepared by the firm) and was the recipient of communications from them. Before this bankruptcy case was filed, THI’s state-court receiver disclosed some of the communications (as well as some of the documents prepared by Kirkland & Ellis) to a probate estate that had sued THMI. The Trustee also received some of those communications during discovery in this adversary proceeding. The Court must now decide whether the Trustee has to return those documents to the GTCR Group because they are privileged.2
The Court concludes that all of the documents before the Court are privileged (including ones sent to individuals who served as officers and/or directors of both THI and THMI).3 But the Trustee (standing in the shoes of THMI) is entitled to keep any communications relating to the defense of the lawsuits in Ohio because THMI was a co-client with THI and GTCR in that litigation. The Trustee, however, is not entitled to invoke the co-client exception to obtain any of the other documents — namely, documents relating to the restructuring of THI or any potential THMI bankruptcy. THMI was not a co-client with THI or the GTCR Group with respect to the restructuring or potential bankruptcy. Nor was the privilege waived when those documents were inadvertently produced before and during this proceeding. Accordingly, the Court will enter an order (i) requiring the Trustee to turn over to the GTCR *877Group all of the documents other than those specifically relating to the defense of the Ohio litigation; and (ii) directing the Trustee not to disclose the documents to anyone who would destroy the privilege.
Background
This discovery dispute, like most of the others that have recently arisen in this case, relates to a previous ruling this Court made regarding the co-client exception to the attorney-client privilege.4 That ruling arose out of a request by the Trustee for (among other things) the litigation files for the defense of various negligence claims filed against THI and THMI in state court by six probate estates (the “Probate Estates”). Because THI and THMI were represented by the same lawyers in those cases, this Court ruled that the Trustee (standing in the shoes of THMI) was entitled to all of THMI’s litigation files — including any communications between THI (or its state-court receiver) and any of the lawyers representing THI and THMI — under the co-client exception to the attorney-client privilege.5
In response to that ruling, various law firms that had defended THI and THMI produced their litigation files to the Trustee. One of the firms — Wisler Pearl-stine — included an e-mail in their production that contained the username and password to a database maintained by the Proskauer Rose law firm. That database — referred to as the Relativity database — contained files that the THI Receiver had uploaded (at least in part) for the benefit of lawyers defending THI and THMI in the state-court negligence cases. The Trustee accessed the Relativity database and gained access to the files the THI Receiver had uploaded. Part of that production included fifteen documents prepared by — or communications to and from — Kirkland & Ellis.6
Those fifteen Kirkland & Ellis documents (along with another six Kirkland & Ellis documents that are at issue) can generally be separated into two categories. The first category of documents consists of memoranda and other documents relating to the proposed restructuring of THI and other corporate matters, including an analysis of a proposed THI bankruptcy filing and documents relating to the March 2006 transaction in which THI sold all of the stock in THMI to the Debtor. The second category of documents relates to lawsuits that were filed against THI and THMI (as well as others) in Ohio by the landlords, lenders, and receivers of two THI subsidiaries. The GTCR Group seeks to claw back both categories of documents as privileged.7
It appears the GTCR Group, which is currently represented by Kirkland & Ellis in this proceeding, was previously represented by the firm with respect to general corporate matters, as was THI, THI-B, and THI Holdings. The GTCR Group, along with THI, THMI, and others, also retained Kirkland & Ellis to represent them in the Ohio litigation. The docu*878ments at issue have to do with matters relating to Kirkland & Ellis’ representation of the GTCR Group and others.
In response to the GTCR Group’s privilege claim, the Trustee says she is entitled to retain and use. both categories of documents for three reasons: First, she says at least one of the Kirkland & Ellis documents — an April 13, 2005 litigation planning memorandum — is not privileged in the first place because it was sent to three THMI employees. Second, the Trustee (standing in the shoes of THMI) claims she is entitled to the documents relating to the Ohio litigation under the co-client exception since Kirkland & Ellis represented THI and THMI in those cases. Third, to the extent the Court concludes that the Kirkland & Ellis documents are privileged and that the Trustee is not entitled to them under the co-client exception, the Trustee says the attorney-client privilege was waived when the documents were produced to one of the Probate Estates during pre-bankruptcy litigation and to the Trustee in this adversary proceeding. The Court will address each of these arguments in turn.
Conclusions of Law8
The Kirkland & Ellis documents sent to Brad Bennett, Mark Fulchino, and Sean Nolan are privileged
The Trustee’s claim that the April 2005 memorandum is not privileged in the first place hinges on the fact that the documents were sent to three individuals who worked for THMI: Brad Bennett (THMI’s CEO), Mark Fulchino (THMI’s CFO), and Sean Nolan (THMI’s CAO). It is true, of course, that a document cannot be privileged, generally speaking, if it is disclosed to someone other than the attorney or client (or an agent of either). But here, the THMI employees that received the April 2005 memorandum were also officers of THI.9
According to the Third Circuit Court of Appeals’ somewhat recent decision in In re Teleglobe Communications, a communication by an attorney to an officer of a parent corporation is privileged even if the officer of the parent also serves as an officer or director for a subsidiary corporation.10 As the Third Circuit observed, individuals often serve as officers and directors of parent and subsidiary corporations.11 And courts generally presume that an officer is wearing his or her “parent hat” — not the “subsidiary hat” — when acting for the parent.12 Under the Third Circuit’s analysis, which this Court agrees with, documents disclosed to Bennett, Ful-chino, and Nolan are privileged unless they were disclosed to those individuals in their capacity as THMI employees.13
The Trustee argues that the April 2005 memorandum was necessarily sent to *879those individuals in their capacity as THMI employees. For starters, each of them testified during their deposition that THMI was their employer and paid them their salary.14 Moreover, THI was merely a holding company; it did not have employees.15 Finally, the Trustee argues that the April 2005 memorandum implicates THMI’s interests.16 After its in-camera review of the April 2005 memorandum, the Court concludes that it was sent to Bennett, Fulchino, and Nolan in their capacity as THI — not THMI — officers.
Most telling, the April 2005 memorandum does not even mention THMI. To be sure, it does discuss the Ohio litigation, which THMI is a party to. But from what the Court can tell, THI and the GTCR Group were the principal defendants in that litigation. THMI presumably is a defendant because of some sort of guarantee. In any case, the memorandum deals with the possibility of putting THI into bankruptcy. Given all that, the Court concludes that the April 2005 memorandum is privileged even though it was sent to individuals who worked for THMI.
The Trustee is only entitled to documents relating to the defense of the Ohio litigation under the co-client exception
Under this Court’s previous co-client ruling, the fact that THI retained (and paid for) Kirkland & Ellis to represent itself and THMI in the Ohio litigation, by itself, does not mean the Trustee (standing in the shoes of THMI) is permitted to invoke the co-client exception to obtain otherwise privileged documents relating to the March 2006 transaction or the Ohio litigation:
[C]ourts have not been satisfied to simply ask whether each of two persons sought legal service or advice from a particular lawyer in her professional capacity.17
Rather, the test is whether it would have been reasonable for THMI — taking into account all the relevant circumstances — to have inferred that it was a client of Kirkland & Ellis.18
Taking into account all of the relevant circumstances, it would not have been reasonable for THMI to infer it was a client of Kirkland & Ellis with respect to the March 2006 transaction. To begin with, the retainer agreement between Kirkland & Ellis and THI specifically provides the attorney-client relationship is between the firm and THI and that no subsidiary of THI — i.e., THMI — had the status of a “client.”19 On top of that, the March 2006 transaction culminated in a stock purchase agreement that likewise provided that THI “retained Kirkland & Ellis ... to act as its counsel in connection with the transactions” and “that none of the other parties has the status of a client of [Kirkland].” And even if THMI somehow could, have inferred it was a client, the stock purchase agreement expressly provided that the “attorney-client privilege and the expectation of client con-*880fídence belongs to [THI]” and that it “shall not pass to or be claimed by [the Debtor] or [THMI].”20 So the Trustee (standing in the shoes of THMI) is not entitled to invoke the co-client exception to obtain documents relating to the March 2006 transaction.
Documents related to the defense of the Ohio litigation, however, are a different story. Here, it appears that (i) THI retained Kirkland & Ellis to represent THMI in the Ohio litigation; (ii) Kirkland & Ellis actually appeared in the Ohio litigation on behalf of THMI; and (in) Kirkland & Ellis advanced legal positions on THMI’s behalf. The First Circuit Court of Appeals, in FDIC v. Ogden, expressly held that a party is a “client” of a firm and therefore entitled to invoke the co-client exception where, like here, the law firm appeared in litigation on behalf of the client seeking to invoke the co-client exception and advanced legal positions on the client’s behalf.21
Notwithstanding that, the GTCR Group raises four arguments why the co-client exception does not apply here. First, it says this Court previously ruled that the Trustee was not entitled to documents unrelated to the defense of the state-court negligence cases under the co-client exception. Second, the Court’s previous co-client ruling was based, at least in part, on a contractual right of equal access to information between two clients, and no such contractual right exists here. Third, the purpose of the co-client exception is to prevent an unjustifiable inequality in access to information necessary to resolve a dispute over the subject of the joint representation. This adversary proceeding, however, has nothing to do with the Ohio litigation. Fourth, the terms of the parties’ joint representation shows that the parties never contemplated one of the parties could unilaterally use joint communications against another.22 While those arguments are all true so far as they go, they do not prevent the Trustee from invoking the co-client exception with respect to the Ohio litigation.
Nothing in this Court’s previous co-client ruling limits the application of that exception here. To be sure, this Court did previously rule, as the GTCR Group argues, that the Trustee could only invoke the co-client exception to obtain communications relating to the defense of the state-court negligence cases. But that was because that was the only issue before the Court. The Court, of course, was not deciding the scope of the co-client exception for all purposes or ruling that the defense of the negligence case was the only joint representation between THI and THMI. It is likewise true that, unlike with the state-court negligence cases, there does not appear to be any contractual right of access to communications here. As this Court previously explained, however, the existence of a contractual right of access is simply one of many factors serving as a proxy for the ultimate issue — i.e., whether it was reasonable under all the circumstances for THMI to infer it was a client for purposes of the co-client exception.23 And in any event, the purpose of the co-client exception is served here since there is, in fact, a dispute between the GTCR *881Group and THMI relating to the Ohio litigation (as evidenced by the claims in this proceeding), even if they do not relate to the underlying liability in those cases.
That leaves the GTCR Group’s argument that the terms of the joint defense agreement reflect an intent to prohibit one party from using joint communications unilaterally against another. In its previous ruling on the co-client exception, this Court considered the effect of a joint defense agreement in bankruptcy. Relying on In re Ginn-LA St. Lucie, Ltd., the Court explained that the attorney-client privilege must give way when necessary to promote an important public policy, and enforcing a joint defense in bankruptcy (in some instances) could offend public policy by thwarting a trustee’s statutory duty to investigate claims for the benefit of creditors.24 Enforcing the joint defense agreement here, like in this case before, would offend public policy.
So the Trustee is entitled to documents relating to the Ohio litigation, subject to two limitations: First, similar to the Court’s previous co-client ruling, the Trustee (standing in the shoes of THMI) is only entitled communications relating to the defense of the Ohio litigation. Second, the Trustee is not entitled to share those documents with any third party that would destroy the co-client privilege. Documents unrelated to the defense of the Ohio litigation otherwise remain privileged.
The attorney-client privilege was not waived by an inadvertent disclosure
Even though documents other than those relating to the defense of the Ohio litigation are privileged, the Trustee says she is entitled to them because the GTCR Group waived the privilege by disclosing the privileged documents to third parties. The Eleventh Circuit has recognized, as has virtually every other court of appeal, that attorney-client communications are no longer confidential once they have been disclosed to third parties.25 At first glance, the Trustee makes a compelling argument the attorney-client privilege was waived with respect to the Kirkland & Ellis documents.
According to the Trustee, the attorney-client privilege with respect to the Kirkland & Ellis documents was waived for four reasons:26 First, the THI Receiver produced at least some of the documents between May 24, 2011 and July 22, 2011 in state-court litigation between THMI and one of the Probate Estates (the Estate of Nunziata). Second, the Trustee says at least some of those documents were used by the Estate of Jackson in proceedings supplementary it initiated in connection with the state-court negligence case against THI and THMI. In particular, the Probate Estates filed some of the documents on the district court docket27 and later used them during the deposition of Ned Jannotta. Third, the Trustee says the Plaintiffs in this proceeding included portions of some of the privileged documents in their amended complaint in this proceeding. Fourth, the Trustee says the Kirkland & Ellis documents were again produced during discovery in this proceeding, and disclosure of those documents was consented to by the THI Receiver. The *882problem is the Trustee’s retelling of the history of the production and use of the Kirkland & Ellis documents largely overlooks two key facts.
The Trustee overlooks the fact that the initial disclosure of the privileged documents in 2011 and the later disclosure in this proceeding was inadvertent. The THI Receiver apparently included (some or all of) the twenty-one Kirkland & Ellis documents — totaling a couple hundred pages or so at most — as part of its production of 110,000 pages of documents in the Nunzia-ta state-court litigation. The GTCR Group has filed an affidavit of the THI Receiver attesting to the fact that the production was inadvertent.28 In fact, the Trustee does not really appear to dispute whether the disclosure itself was inadvertent as much as she suggests the GTCR Group did not do enough to rectify the inadvertent disclosure, which leads to the second overlooked fact.
The GTCR Group repeatedly objected to each and every use of the privileged documents. There is no need for the Court to catalogue each instance in which the GTCR Group did so. The GTCR Group actually attached a helpful — and, it appears, unrebutted — chronology to a supplemental memorandum it filed that outlines each use of the privilege documents and the GTCR Group’s objection to each such use.29 So the GTCR Group unquestionably objected to use of the privileged documents. The Trustee’s argument seems to be that the GTCR Group has waived the privilege because it has not taken any — or perhaps enough — action to have the privileged documents removed from the district court’s electronic docket.
That argument implicates one of the five factors Florida courts typically look at in determining whether a disclosure was inadvertent: (i) the reasonableness of precautions taken to prevent inadvertent disclosure; (ii) the number of inadvertent disclosures; (iii) the extent of the disclosure; (iv) any delay and measure taken to rectify the disclosures; and (v) whether the overriding interests of justice would be served by relieving a party of its error.30 Even if the GTCR Group could have done more to rectify the inadvertent disclosure (i.e., have the privileged documents removed from the docket) or was delayed in doing so, the Court nevertheless finds the privilege has not been waived.
It is worth noting initially that the measures taken to rectify an inadvertent disclosure is only one of five factors courts consider in determining whether the privilege has been waived. And each of the other four factors weighs in favor of finding the privilege has not been waived. The Court is comfortable that the GTCR Group has taken reasonable precautions in preventing disclosure of privileged communications, there were (at most) only two inadvertent disclosures of the same documents, the extent of the disclosure was minimal compared to the extent of the overall production, and the overriding interests of justice would not be served by finding the privilege was waived. On that last point, the Trustee’s argument is that the public interest would be served because having the privileged documents would help her prosecute her claims for relief in this proceeding.31 But if that were the standard, that factor would al*883ways weigh in favor of finding the privilege has been waived. So the Court is not convinced that the privilege would be waived even if the measures taken by the GTCR Group to rectify the disclosure were deficient.
But in any event, the Court is not convinced the GTCR Group’s efforts were deficient, at least so far as waiving the privilege goes. It is true, on the one hand, that the GTCR Group never had the privileged documents removed from the docket. On the other hand, the Trustee is overlooking the burden the Florida Rules of Civil Procedure impose on her counsel and counsel for the Probate Estates. Interestingly, most of the five factors courts consider when determining whether an inadvertent disclosure waives the privilege deal with what happens before or at the time of disclosure. Florida law imposes a separate set of obligations on parties receiving notice of an inadvertent disclosure.
Under Florida law, a party receiving an inadvertent disclosure must do three things: (i) promptly return, sequester, or destroy the privileged materials; (ii) promptly notify the party whose documents were inadvertently disclosed; and (iii) take reasonable steps to retrieve the materials that were inadvertently disclosed.32 That coincides with an attorney’s ethical obligation to notify opposing counsel if the attorney knows or reasonably should know that a privileged document was inadvertently disclosed.33 From the record before the Court, it appears counsel for the Probate Estates or the Trustee largely failed to comply with their obligations.
It is true that counsel for the Trustee and Probate Estates redacted their amended complaint in this proceeding when notified it contained potentially privileged information. But apart from that, it does not appear counsel for the Probate Estates or Trustee notified counsel for the THI Receiver when they received what are, at a minimum, arguably privileged documents. Nor does it appear they sequestered or destroyed the documents. In fact, they repeatedly attempted to use them after they were notified the documents were potentially privileged. More significantly, it does not appear counsel for the Probate Estates ever made any attempt to have the privileged documents removed from the district court’s on-line docket.
None of this is to say that any of the lawyers involved committed any sort of ethical breach. It is not clear that the GTCR Group is directly claiming that is the case. And the Court certainly does not have enough record evidence — nor is it inclined to conclude — that they did. It is only to say that the Trustee cannot claim that the GTCR Group has waived the privilege by not doing enough to rectify an inadvertent disclosure when her counsel (and counsel for the Probate Estates) failed to satisfy their obligations to retrieve and destroy any inadvertently produced documents or, at a minimum, seek a ruling from the district court or this Court before using them.
The GTCR Group has standing to raise its privilege objections
It is worth addressing one more global issue raised by the Trustee — that is, THI’s involvement or lack thereof in this claw-back motion. The Court has already addressed THI’s initial involvement in inadvertently disclosing the Kirkland & Ellis documents. But the Trustee also points out that when she asked the THI Receiver if he objected to her disclosing documents she received under the co-client exception (which included some of the inadvertently *884produced documents), the THI Receiver did not object. That is notable, according to the Trustee, because she says the privilege is really the THI Receiver’s to assert or waive.
The Court concludes that the GTCR Group has standing to assert the privilege, irrespective of whether the GTCR Group was the sender or recipient of the communication. It is clear from the Court’s review of the record that Kirkland & Ellis represented the GTCR Group (a fact that the Trustee does not dispute) and that the GTCR Group and THI were co-clients with respect to the restructuring and Ohio litigation. As THI’s co-client, the GTCR Group is entitled to invoke the attorney-client privilege, and THI cannot waive that privilege unilaterally.34
Conclusion
The Court concludes that all twenty-one of the Kirkland & Ellis documents identified on the GTCR Group’s original privilege log are privileged. But the Trustee is entitled to some of them — i.e., any communications relating to the defense of the Ohio litigation — because THMI was a co-client with THI and GTCR in that litigation. The Trustee is not entitled to invoke the co-client exception to any of the other documents since THMI was not a co-client with THI or the GTCR Group with respect to the restructuring of THI. Accordingly, the Court will enter an order (i) requiring the Trustee to turn over to the GTCR Group all of the documents other than those specifically relating to the defense of the Ohio litigation; and (ii) directing the Trustee not to disclose the documents to anyone who would destroy the privilege.
. THI Holdings was previously the parent company of THI and THI-B. THMI, in turn, was THI's wholly owned subsidiary. And the GTCR Group, which is comprised of a number of different entities, was THI Holding's primary shareholder.
. Adv. Doc. Nos. 129, 129, 576 & 591.
. The GTCR Group filed a privilege log identifying twenty-one documents at issue. Adv. Doc. No. 191-3. As discussed below, the Trustee obtained possession of fifteen of those documents (Privilege Log Doc. Nos. 2-9, 11, 14, 16-19 & 21). Adv. Doc. No. 129 at 4 n. 8. The GTCR Group apparently later amended its privilege log to add three more documents. Adv. Doc. No. 191 at 5 n. 3. The Court does not have that privilege log. Without the additional three documents or the amended privilege log, the Court cannot determine whether those documents are privileged. So the Court is only ruling on the twenty-one documents identified on the original privilege log. Adv. Doc. No. 191-3.
. In re Fundamental Long Term Care, Inc., 489 B.R. 451, 463-69 (Bankr.M.D.Fla.2013).
. Id.
. The Trustee says she received the following documents identified on the GTCR Group’s privilege log from the Wisler Pearlstine production: Doc. Nos. 2-9, 11, 14, 16-19 & 21 (technically, the Trustee’s motion does not say she received Doc. No. 11, but she later produced it to the Court). Adv. Doc. No. 129. The remaining documents on the GTCR Group's privilege log (Adv. Doc. No. 191-3) apparently were produced to the Probate Estates by the THI Receiver during state-court litigation. The GTCR Group says those documents were produced inadvertently. As set forth in footnote 2 above, the Court is not addressing the three documents not included on the GTCR Group’s original privilege log.
. Adv. Doc. Nos. 191 & 591.
. 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. Accordingly, the parties are deemed to have consented to this Court entering a final order or judgment.
. Adv. Doc. Nos. 191-9; 191-10, 191-11 & 191-12.
. Teleglobe USA, Inc. v. BCE, Inc. (In re Teleglobe Commc’ns), 493 F.3d 345, 372 (3d Cir.2007).
. Id. (citing United States v. Bestfoods, 524 U.S. 51, 69, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998)).
. Id.
. In re Teleglobe Commc’ns, 493 F.3d at 372.
. Adv. Doc. No. 302 at pp. 31-34.
. Id.
. Id.
. In re Fundamental Long Term Care, Inc., 489 B.R. 451, 464-65 (Bankr.M.D.Fla.2013) (quoting Sky Valley Ltd. P’ship v. ATX Sky Valley, Ltd., 150 F.R.D. 648, 651 (N.D.Cal.1993)).
. Id.
. The retainer agreement between THI and Kirkland & Ellis was attached as Exhibit A to the GTCR Group’s claw-back motion. Adv. Doc. No. 191. Exhibit A was filed with the Court under seal.
. Adv. Doc. No. 191-1 at§ 9D.
. FDIC v. Ogden Corp., 202 F.3d 454, 461-63 (1st Cir.2000).
. The parties’ joint defense agreement was attached to GTCR's claw-back motion as Exhibit F. Exhibit F, like the THI retainer agreement, was filed with the Court under seal.
.In re Fundamental Long Term Care, Inc., 493 B.R. 620, 625 (Bankr.M.D.Fla.2013).
. In re Fundamental Long Term Care, Inc., 489 B.R. 451, 472-73 (Bankr.M.D.Fla.2013) (relying on In re Ginn-LA St. Lucie, Ltd., 439 B.R. 801, 804-05 (Bankr.S.D.Fla.2010)).
. United States v. Suarez, 820 F.2d 1158, 1160 (11th Cir.1987).
. Adv. Doc. No. 576.
. It appears the proceedings supplementary were originally filed in state court but later removed to district court.
. Adv. Doc. No. 191-5.
. Adv. Doc. No. 591-1.
. Lightbourne v. McCollum, 969 So.2d 326, 333 n. 6 (Fla.2007). The Federal Rules of Evidence adopt similar factors. See Fed. R.Evid. 502.
.Adv. Doc. No. 576 at 12-14.
. Fla. R. Civ. P. 1.285.
. R. Reg. Fla. Bar 4-4.4(b).
. In re Fundamental Long Term Care, Inc., 489 B.R. 451, 463 (Bankr.M.D.Fla.2013). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497428/ | Chapter 11
ORDER DENYING DEBTOR’S EMERGENCY VERIFIED MOTION TO SET ASIDE FORFEITURE
MICHAEL G. WILLIAMSON, United States Bankruptcy Judge
THIS CASE came before the Court on the Emergency Verified Motion to Set Aside Forfeiture (Doc. No. 56), filed by Duval at Gulf Harbors (“Debtor”).
On November 30, 2011, the Debtor executed a Warranty Deed granting to LB & JF Holdings, Inc. (a company partly owned by Julian Raymond Ford), the following property:
Real property located at 12802 College Hill Drive, Hudson, Florida, being the same premises conveyed to LB & JF Holdings, Inc., on November 30, 2011, and recorded on December 8, 2011, in Pasco County in Book 8631, Pages 3443, including all improvements thereon and appurtenances thereto, the legal description for which is as follows: Lot 177, Country Club Estates Unit 1-B, according to the map or plat thereof as recorded in Plat Book 8, Page 148, Public Records of Pasco County, Florida.
Property Identification Number: 03-25-16-0060-00000-1770.
(the “Real Property”).
A Promissory Note indicates that LB & JF Holdings, Inc. borrowed from the Debtor $79,000, which would be repaid by November 30, 2013. This note appears to have been secured by the Real Property.
On October 1, 2013, a Grand Jury returned an indictment against Julian Raymond Ford, for possession with intent to distribute 280 grams or more of a mixture and substance containing a detectable amount of crack cocaine, in violation of 21 U.S.C. §§ 841(a)(1), (b)(l)(A)(iii), and (b)(1)(D). See United States v. Julian Raymond Ford, Case Number 8:13-cr-469-T-27TBM (M.D.Fla.) (Doc. 1). Contained in the Indictment were forfeiture allegations, providing that the United States would seek to forfeit the Real Property, as property involved in the offense. Id., p. 3.
On December 10, 2013, the defendant pled guilty to Count One of the Indictment, and on December 31, 2013, United States District Judge James D. Whitte-more accepted the defendant’s plea and adjudicated him guilty. See Ford, Case Number 8:13-cr-469-T-27TBM (M.D.Fla.) (Doc. 18).
In his plea agreement, the defendant admitted that (1) he and another person were the registered owners of the Real Property, (2) that the he used the Real Property as a storage location for distribution quantities of narcotics, and that, when law enforcement officers searched the Real Property, they found and seized 366.8 *886grams of crack cocaine, ten pounds of marijuana, 3.8 grams of Oxycodone, and 17.5 grams of MDMA. Id., Doc. 17, pp. 18-19. Moreover, the defendant consented to the forfeiture of the property and admitted that it was used, or intended to be used, to facilitate the commission of the drug offense to which he pled guilty. Id., p. 8.
On February 14, 2014, the United States District Court for the Middle District of Florida issued a Preliminary Order of Forfeiture, forfeiting the Real Property to the United States. Ford, 8:13-er-469-T-27TBM (Doc. 25).
Also on February 14, 2014, the United States sent notices of the forfeiture action and instructions on filing claims to the Real Property, via certified United States mail and first class mail, to all parties believed to have any potential interest in the asset, including Duval at Gulf Harbors, LLC.
Specifically, the United States sent notice packages to George Kregas, Registered Agent for Duval at Gulf Harbors, LLC., at 5798 West Shore Drive, New Port Richey, Florida 34652, the address listed on the Promissory Note. The certified mail was returned and marked “unclaimed.” The first class mail was not returned and there is no indication it was not received.
In addition to attempting to send notice to the Debtor through Mr. Kregas via first class and certified mail, the United States also attempted to personally provide notice to Harry Pappas, who was listed a Manager of the Debtor. Specifically, on April 22, 2014, United States Marshal Senior Inspector Michael McClung attempted to provide notice directly to Mr. Pappas at the address provided for him on a Warranty Deed filed by the Debtor in March of 2014. No one answered the door.
On April 23, 2014, Senior Inspector McClung spoke to Mr. Pappas on the phone, and explained what he was attempting to deliver and that he would like Mr. Pappas to sign an acknowledgment that he had received the forfeiture notice. Mr. Pappas told Senior Inspector McClung that he would not sign anything unless Senior Inspector McClung gave the documents to his attorney, Robert Petitt, at Petitt Worrell Law Firm.
On April 24, 2014, Senior Inspector McClung called the law firm, explained why he had been asked to call, and was told by a legal assistant to email the documents to the firm for Mr. Petitt’s review. Later that day, Senior Inspector McClung emailed the documents and called the assistant again, and she confirmed she had received the documents. Mr. Pappas never signed an acknowledgement of his receipt of the forfeiture notice.
Pursuant to 21 U.S.C. § 853(n), the Debtor had 30 days from his receipt of notice of the forfeiture to file a claim in the District Court contesting the forfeiture, or the Debtor would be foreclosed from asserting any potential interest in the Real Property.1 The Debtor did not file any claim before the District Court. See Ford, Case Number 8:13-cr-469-T-27TBM (Docket Sheet).
*887On May 22, 2014 — over three months after the District Court forfeited the Real Property to the United States, and approximately two months after the Debtor’s right to assert any claim to the Real Property had expired — the Debtor filed his bankruptcy petition.
On July 9, 2014, the District Court entered the Final Order of Forfeiture, vesting with finality all right and interest in the Real Property in the United States. See Ford, Case Number 8:13-cr-469-T-27TBM (Doc. 41).
In its present Emergency Motion, the Debtor asks this Court to set aside the District Court’s Final Order of Forfeiture. The Debtor asserts that any matter involving the Real Property should have been automatically stayed pursuant to 11 U.S.C. § 362 at the time he filed his bankruptcy petition. Because the Final Order of Forfeiture was entered after the Debtor filed its petition, the Debtor claims the order is invalid. This Court disagrees.
First, criminal forfeiture proceedings are exempt from the automatic stay by 11 U.S.C. § 362(b)(4), which creates an exception for governmental units exercising their police and regulatory powers. See United States v. Erpenbeck, 682 F.3d 472, 480-81 (6th Cir.2012) (the automatic stay provision of bankruptcy law does not apply to criminal forfeitures, so the district court properly entered a preliminary order).
Second, 21 U.S.C. § 853(k) makes clear that the Debtor must seek any relief from a criminal order of forfeiture in the ancillary forfeiture proceeding before the District Court. United States v. Kennedy, 201 F.3d 1324, 1326 n. 6 (11th Cir.2000) (third parties cannot establish their interests in property subject to criminal forfeiture through other actions); United States v. McCorkle, 143 F.Supp.2d 1311, 1318-19 (M.D.Fla.2001) (“Congress has established the procedure for adjudicating third party interests in forfeited property. 21 U.S.C. § 853(n). A petitioner must follow the specified procedure, and may not commence a separate action against the United States concerning the validity of his alleged interest in the forfeited property. 21 U.S.C. § 853(k).”). Having failed to file a claim in the District Court as required by 18 U.S.C. § 853(n), the Debtor cannot now seek relief from the forfeiture in Bankruptcy Court.
Accordingly, it is
ORDERED that the Debtor’s motion is DENIED.
. In accordance with 21 U.S.C., 853(n) and Rule 32.2(b)(6)(C), the United States published notice of the forfeiture and of its intent to dispose of the asset on the official government website, www.forfeiture.gov, from May 3, 2014 through June 1, 2014. (Doc. 37.) The publication gave notice to all third parties with a legal interest in the asset to file with the Office of the Clerk United States District Court, Middle District of Florida, Sam Gibbons Federal Courthouse, 2nd Floor, 801 North Florida Avenue, Tampa, Florida 33602 a petition to adjudicate their interests within 60 days of the first date of publication. In this instance, the first date of internet publication was May 3, 2014. Accordingly, the final date for filing a petition to adjudicate an interest in the asset was July 1, 2014, and the time for filing such a petition has expired. This notice deadline does not apply to persons *887who received direct notice. In any event, Debtor failed to contest the forfeiture even within this extended claims period. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497429/ | *890Chapter 7
MEMORANDUM OPINION PARTIALLY GRANTING DEFENDANT’S AND PLAINTIFF’S MOTIONS FOR SUMMARY JUDGMENT
KAREN S. JENNEMANN, Chief United States Bankruptcy Judge
The Chapter 11 Trustee, Soneet R. Ka-pila, seeks to avoid and to recover four prepetition transfers totaling $341,051 (the “Transfers”) made by one of the consolidated debtors, Trans Continental Airlines, Inc. (“TCA”), to the Defendant, SunTrust Mortgage, Inc. (“SunTrust”), as mortgage payments for Michael Crudele, a seller of the faux securities at the heart of Lou Pearlmaris Ponzi scheme. The Trustee filed a five-count complaint to avoid the alleged actual and constructive fraudulent transfers under § 548 of the Bankruptcy Code1 and § 726 of the Florida Statutes (the Florida Uniform Fraudulent Transfer Act or “FUFTA”).2 Both parties now seek summary judgment.3 The Court grants both motions at least in part holding that the Transfers are avoidable as constructively fraudulent transfers but that, as to two Transfers totaling $238,540.93, the Trustee cannot recover the monies from the Defendant under the “single satisfaction” rule.
Debtor Louis J. Pearlman and his co-debtor companies — Trans Continental Air*891lines (“TCA”), Trans Continental Records (“TCR”), and Louis J. Pearlman Enterprises (“Enterprises”) — carried out various Ponzi schemes. Two schemes offered “investments” fitting the classic Ponzi scheme model. In one scheme, Pearlman offered investments in an entity called “Transcontinental Airlines Travel Services, Inc.,” a defunct company dissolved in 1999 and had no assets (the “TCTS Stock Program”). The other scheme involved investments in an “Employee Investment Savings Account,” through which Pearlman solicited investments into a purported high yield savings account based on misrepresentations (the “EISA Program”). For both Ponzi schemes, Pearlman used new investors’ funds to pay off old investors and pocketed much of the investors’ cash.
Michael Crudele sold investments in the TCTS Stock Program and the EISA Program for Pearlman and solicited other sales agents to sell the fraudulent securities.4 Between 2003 and 2006, Crudele’s company, AIGIS Consulting, received nearly $5,000,000 in sales commissions from selling TCTS and EISA program securities. Crudele personally received $1,959,513 in sales commissions.5 Crudele also maintained an account with TCA through which he could direct TCA to pay his personal expenses.6 Using this account, TCA made four transfers to Sun-Trust to pay Crudele’s mortgage payments on two parcels of real estate.7
Two Transfers, totaling $238,540.93, were applied to the note and mortgage on property in Illinois called the “Captains Drive Property”. TCA paid SunTrust via two checks — one for $100,000 on February 11, 2005, and another for $138,540.93 on March 10, 2005 (the “Captains Drive Transfers”).8 The two payments left a remaining balance of $678.27 on the note, which was soon satisfied.9 SunTrust executed a satisfaction of the mortgage on the Captains Drive Property on May 9, 2005.10
Less than a year later, on February 27, 2006, the Crudeles sold the Captains Drive Property to unrelated parties and received $515,619.44 from the sale.11 Little more than a week after the sale, on March 8, 2006, Crudele deposited exactly $515,619.44 into his account with TCA.12
The remaining two Transfers, totaling $102,509.96, were paid by TCA towards Crudele’s note and mortgage encumbering a different property in Florida called the “San Marco Street Property”. Both payments were made by check drawn on *892TCA’s checking account — one for $100,000 drawn on February 11, 2005, and another for $2,509.96 drawn on March 10, 2005 (“San Marco Street Transfers”).13 Sun-Trust applied both payments to Crudele’s loan on the San Marco Street Property.14 On December 23, 2005, Crudele sold the San Marco Street Property for $1,126,949.92, and used the proceeds to acquire a substitute property, the “Mandalay Avenue Property”, via a 1031 exchange.15 Months later, on September 29, 2006, Crudele sold the Mandalay Avenue Property to Lou Pearlman for $1,425,000.16 Crudele received $1,394,223.98 from the Mandalay Avenue Property sale, and, a few days later, on October 3, 2006, he deposited $295,000 into his TCA account.17
The Trustee seeks summary judgment on all counts.18 SunTrust does not dispute the avoidability19 of the Transfers but, in its own motion,20 seeks summary judgment arguing that the Trustee can recover no monies from SunTrust under Section 550 of the Bankruptcy Code because, as to the two Captains Drive Transfers, the monies already were repaid to TCA and, therefore, the “single satisfaction” rule applies barring duplicate payments on the same obligation. SunTrust also argues that recovery of the two San Marco Street Transfers is not possible because (i) the Defendant is not the initial transferee and is entitled to rely on the good faith defense of § 550(b) of the Bankruptcy Code, (ii) the “single satisfaction” rule again applies, albeit factual issues exist that preclude summary judgment, and (iii) equity prohibits recovery against Sun-Trust.21
*893The Parties move for summary judgment under Federal Rule of Civil Procedure 56.22 Rule 56(a) provides that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”23 The moving party has the burden of establishing the right to summary judgment.24 A “material” fact is one that “might affect the outcome of the suit under the governing law.”25 A “genuine” dispute means that “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”26 Once the moving party has met its burden, the non-movant must set forth facts showing there is a genuine issue for trial.27 In determining entitlement to summary judgment, “facts must be viewed in the light most favorable to the nonmoving party only if there is a ‘genuine’ dispute as to those facts.”28
The Transfers are Avoidable as Constructive Fraudulent Transfers
The Trustee argues that the Transfers are both actually and constructively fraudulent under § 548 of the Bankruptcy Code and § 726.105 of the Florida Statutes. SunTrust advances no argument challenging the avoidability of the Transfers.29 *894Rather, SunTrust primarily argues that, even if the Transfers technically are avoidable, they are not recoverable under § 550.
The Transfers are avoidable under both the federal and state fraudulent transfer law. The Trustee’s state law fraudulent transfer claims, asserted through § 544(b) of the Bankruptcy Code, are analogous “in form and substance” to their bankruptcy counterparts “and may be analyzed contemporaneously.” 30 The only material difference between the state and bankruptcy provisions is the favorable four-year look-back period under the Florida law.31 To assert his state law claims under § 544(b), the Trustee must allege and prove “the existence of at least one unsecured creditor of the Debtor who at the time the transfer in question occurred could have, under applicable local law, attacked and set aside the transfer under consideration.”32 The undisputed evidence shows that a Ponzi scheme was ongoing while TCA made the Transfers to SunTrust, and any of the hundreds of investor-creditors in this case could have brought a claim under § 726.105 of the Florida Statutes.33 The Court analyzes the Trustee’s claims under § 548 of the Bankruptcy Code and § 726 of the Florida Statutes together.34
To prevail under the constructive fraud theory, the Trustee must prove by a preponderance of evidence that the Debtor was (1) “insolvent at the time the transfer was made” and (2) “received less than reasonably equivalent value in exchange for the transfer.”35 As for the first prong, insolvency, “[t]here is little debate that a company run as a Ponzi scheme is insolvent as a matter of law.”36 This Court already has held that the TCTS Stock Program and the EISA Program were both Ponzi schemes.37 SunTrust does not dispute the existence of a Ponzi scheme and repeatedly refers to the “Pearlman *895Ponzi Scheme” throughout its response to the Trustee’s motion.38 And the undisputed record evidence, including Pearlman’s plea agreement, shows that the TCTS Stock Program and the EISA Program were both Ponzi schemes.39 Further, the Trustee, who is intimately familiar with the TCA’s books and records, accounts, and business operations, concluded that the Debtor was insolvent when the Transfers were made.40 TCA was insolvent when the Transfers were made.
The Trustee also showed that TCA did not receive reasonably equivalent value for the Transfers. The Trustee advances the “wrong payor” argument: because TCA paid SunTrust to satisfy Cru-dele’s mortgage obligation, TCA did not receive value from the transaction, only Crudele did. The “wrong payor” argument rests on the “general rule of fraudulent transfer law” that holds “a debtor’s payment on behalf of a third party typically remains avoidable in bankruptcy unless there was clear benefit (or ‘value’) to the debtor.”41 Crudele benefitted from the mortgage payments, but based on the record evidence, the Court cannot find that TCA received any value or benefit from the mortgage payments by TCA to Sun-Trust.
The Transfers are avoidable as constructive fraudulent transfers under § 548(a)(1)(B) of the Bankruptcy Code and § 726.105(l)(b) of the Florida Statutes via § 544 of the Bankruptcy Code. Because the transfers clearly are avoidable under constructive fraud theories, the Court declines to reach the factual issues raised in the actual fraud counts, although such actual fraud likely occurred given Crudele’s close relationship with Mr. Pearlman and his intimacy with the Pearlman Ponzi Scheme. The Court partially grants the Trustee’s motion for summary judgment in this limited respect — to hold that the Captains Drive Transfers and the San Marco Street Transfers are avoidable as constructively fraudulent. But, avoidability does not necessitate recoverability.
Recoverability of Transfers under 11 U.S.C. § 550
Once a transfer is deemed avoidable, the court then must determine whether the recipient is liable for the return of the property or for the payment of the property’s value under § 550 of the Bankruptcy Code.42 “In fraudulent transfer actions, *896there is a distinction between avoiding the transaction and actually recovering the property or the value thereof.”43
SunTrust argues under § 550 it is not liable for the Transfers because (i) under the “single satisfaction” rule, TCA already received payment for the Captains Drive Transfers and factual issues preclude a determination of TCA’s receipt of payment of the San Marco Street Transfers,44 (ii) Crudele, not SunTrust, is the initial transferee of the Transfers and SunTrust may rely on the good faith defense of § 550(b), and (iii) equity prohibits any recovery.
TCA was Repaid in Full for the Captains Drive Transfers
SunTrust first argues that TCA was fully repaid for the Captains Drive Transfers ($238,540.98) when Crudele deposited the proceeds from the sale of the Captains Drive Property ($515,619.44) back into TCA. SunTrust relies on the “single satisfaction” rule arguing that Crudele’s repayment of traceable proceeds from the sale of the mortgaged property put TCA back into the same or better position than it was in before the Captains Drive Transfers were made.45
“The power of the trustee to avoid certain transfers prevents the depletion of the estate, promotes an equitable distribution of the debtor’s assets, and protects creditors who advanced credit in ignorance of fraud.”46 Consistent with these aims, § 550(d) states that a trustee “is entitled to only a single satisfaction under subsection (a) of this section.”47 This “single satisfaction rule” seeks to limit the trustee to a single recovery for his or her fraudulent transfer claim to ensure the bankruptcy estate is put back in its pre-transfer position but receives no windfall through the avoidance provisions. Application of § 550(d) is a matter of federal common law.48
Section 550(d) typically is used to prevent a trustee from collecting from multiple parties for the same transfer, i.e., an initial transferee and a subsequent transferee.49 Courts also use § 550(d) however to temper the harsh application of § 550(a) when the estate already has received full repayment of the challenged transfers be*897fore the bankruptcy case was filed.50 These decisions rely on the principle that § 550 “is designed to restore the estate to the financial condition that would have existed had the transfer never occurred.”51 The crux of the argument holds that if the bankruptcy estate receives prepetition repayment of fraudulent transfers, then the estate, at filing, is in the same position it would have been in notwithstanding the transfers.
In Sawran, the debtor transferred $20,000 from a personal injury settlement to her father prior to bankruptcy.52 Because the debtor’s father was concerned about the debtor’s excessive spending, he planned to periodically disburse money to the debtor for her necessary expenses.53 But the father fell ill and transferred the $20,000 to two of his other children, the defendants, who he then tasked with ensuring the debtor’s expense were paid. True to their promise, the defendants disbursed $12,000 of the $20,000 to the debtor before the petition date.54 The bankruptcy court held that to permit the trustee to recover the $12,000 repaid prepetition from the defendants would result in a windfall to the estate and violate § 550(d)’s single satisfaction rule.55 The court also held that “[t]o the extent that the Defendants made prepetition payments to the Debtor, the preferential transfer to the initial transferee has been satisfied.”56
After Sawran, Judge Hyman applied the same principles to slightly different facts in In re Kingsley.57 In Kingsley, the recipient of an actually fraudulent transfer used most of the transferred funds to pay expenses and creditors of the debtor.58 The court again applied § 550(d) to hold that the trustee’s claim was satisfied “to the extent the fraudulent transfer was repaid.”59 One notable distinction between Kingsley and Sawran is that in Kingsley, the court specifically found that the defendant was a wrongdoer and took the transfer knowing its fraudulent nature.60 Still, the bankruptcy court held that it was impermissible to allow the trustee to receive a windfall and recover the fraudulent transfers under § 550 when the transferee had repaid most of the money transferred for the debtor’s benefit prepetition.61 The Eleventh Circuit affirmed, holding that the bankruptcy court was within its equitable discretion to limit the trustee’s recovery.62
The Trustee attempts to distinguish the “single satisfaction” rule articulated in Sawran and Kingsley making three argu*898ments. First, Crudele, not SunTrust, made the subsequent deposit back into TCA. Second, SunTrust benefitted from the Transfers. And third, TCA did not retain possession of the funds Crudele “repaid” because, after depositing the proceeds from the Captains Drive sale, he subsequently withdrew more money and depleted the estate. The Court will address each argument.
Because Crudele, not SunTrust, returned the proceeds from the Transfers to TCA does defeat the “single satisfaction” rule. The focus is whether the transfer was repaid, not who repaid it. Section 550(d)’s primary aim is to prevent the estate from receiving a windfall.63 Recall that in Sawran, the bankruptcy court ultimately held “[t]o the extent that the Defendants [subsequent transferees] made prepetition payments to the Debtor, the preferential transfer to the initial transferee has been satisfied.”64 The court there determined that the fraudulent transfer to the initial transferee was satisfied by payments made by the mediate transferees.
The bankruptcy court took a similar stance in In re Bassett,65 where the trustee sought to avoid a fraudulent transfer of real property to a subsequent transferee. Pre-petition, the subsequent transferee refinanced a note payable by the debtor and secured by the property.66 Because the subsequent transferee’s refinancing of the note released the debtor (and the estate) from liability on the original note, the court held that the trustee received satisfaction of the fraudulent transfer.67 Similar to this case, the court further held that the subsequent transferee’s (Crudele’s) satisfaction through the refinancing also prevented the trustee from recovering from the initial transferee (SunTrust).68
Application of the single satisfaction rule as to the Captains Drive Transfers is appropriate in this adversary proceeding. Section 550(d) typically is used to protect one transferee when a different transferee in the transfer chain already has repaid the claim. One transferee’s actions shield another transferee from duplicate liability. The Trustee here is not entitled to both the repayment of the transfer and to a separate judgment against a transferee. Here, Crudele repaid the transfer to Sun-Trust by returning the proceeds from the Captains Drive Property’s sale to TCA plus almost $200,000 more. SunTrust is not liable to the Trustee for monies it received to pay Crudele’s mortgage when TCA already received the proceeds from the sale of Captains Drive Property.
Second, that SunTrust benefitted from the Captains Drive Transfers is immaterial. SunTrust likely earned interest on the underlying mortgage loan. Sun-Trust’s income, however, has absolutely nothing to do with the fraudulent transfer analysis asserted by the Trustee that focuses exclusively on loss to the bankruptcy estate. SunTrust’s gain or loss simply is not a factor.
*899Third, the Trustee argues that, even though Crudele deposited the proceeds from sale of the Captains Drive Property into TCA, his subsequent withdrawal of funds from TCA should count against any “repayment.” The Trustee’s argument expands the analysis too far beyond the transfers in question. The issue is whether the transfers or traceable proceeds from the transfers were returned to TCA. They were. Crudele’s subsequent actions cannot be attributed to SunTrust.
Each of the Trustee’s arguments are true red herrings. TCA paid roughly $238,000 to SunTrust, and later received back about $515,000 from Crudele after the sale of the real estate. The proceeds more than repaid the earlier transfers. SunTrust is entitled to summary judgment holding that, although the Captains Drive Transfers are avoidable, the Trustee cannot recover them from SunTrust under § 550(d) of the Bankruptcy Code.
Because the San Marco Street Transfers are more complex, however, factual issues preclude a similar finding as to their re-coverability by the Trustee. The Court will consider the other arguments raised by SunTrust as to the recoverability of the San Marco Street Transfers.
SunTrust was an Initial Transferee
SunTrust next asks the Court to decide that Crudele, not SunTrust, was the initial transferee of the Transfers. After a transfer is deemed avoided under “section 544 ... [or section] 548” of the Bankruptcy Code, § 550(a) of the Bankruptcy Code entitles a bankruptcy trustee to recover 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.69
Section 550(a)(2) however grants successor transferees a “good faith” defense denied to initial transferees. Section 550(b) specifically holds that a trustee may not recover from an immediate or mediate transferee that “takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided.” The distinction therefore between initial transferee and a subsequent transferee who is allowed to argue good faith as a defense to recoverability is very meaningful.
In the Eleventh Circuit’s In re Harwell decision, the Court looked to its precedents interpreting “initial transferee,” specifically within the context of the judicially-crafted “mere conduit” exception to initial transferee liability. The court “observed that a literal or rigid interpretation of the statutory term ‘initial transferee’ in § 550(a) means that the first recipient of the debtor’s fraudulently-transferred funds is an ‘initial transferee. ‘ “70 However, the court’s precedents showed that it had “carved out an equitable exception to the literal statutory language of ‘initial transferee,’ known as the mere conduit or control test, for initial recipients who are ‘mere conduits’ with no control over the fraudulently-transferred funds.”71
Harwell provides guidance in determining whether a transferee is an initial transferee, but the decision mainly focused on “mere conduit” exception — the application of which is inapposite to the facts of this case.72
*900This Court however has applied Har-well ’s broader principles to circumstances somewhat similar to the present case. In In re ATM Financial Services, LLC,73 I held that even though the defendant, the IRS, received payment for a non-debtor’s tax obligations directly from the debtor’s funds, the non-debtor — not the IRS — was the initial transferee. The IRS was entitled to § 550(b)’s good faith defense.
Like this bankruptcy case, ATM Financial involved a Ponzi scheme. Prepetition, the debtor made a large payment to the IRS for the tax obligations of a non-debtor entity, BDL, which the debtor’s owner and principal, Vance Moore, Jr., also owned and ran.74 After receiving several demands for payment of BDL’s delinquent taxes from the IRS, Moore purchased a cashier’s check drawn on the debtor’s bank account to satisfy BDL’s tax obligations.75 The cashier’s check labeled BDL as the remitter and accompanied a letter printed on BDL’s letterhead, which directed the IRS to apply the check to BDL’s tax liabilities.76 After the Ponzi scheme was uncovered and the debtor entered chapter 7, the trustee filed a complaint to recover the transfer from the IRS as an initial transferee because, on the transaction’s face, the check came from the debtor and was paid directly to the IRS.
The IRS argued, like SunTrust, that it should be a subsequent transferee and was entitled to § 550(b)’s “good faith” defense. In ruling that BDL, not the IRS, was the initial transferee, I held that the IRS was qualified as a subsequent transferee and entitled to § 550(b)’s defense.77 Because Moore was a principal of both the debtor and BDL, after he purchased the cashier’s check with the debtor’s funds, he took control of the funds as BDL’s president, rendering BDL the initial transferee.78 When Moore mailed the check to the IRS with a letter on a BDL letterhead, BDL transferred the check to IRS; the IRS became a transferee from BDL and a subsequent transferee from the debtor.
The key distinction from the present case is that in ATM Financial, a transfer occurred from the debtor to BDL. Cru-dele’s mere direction to TCA does not effectuate a transfer from TCA to Crudele. Both the Bankruptcy Code and FUFTA define “transfer” as “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in property.” 79 Crudele told TCA to pay SunTrust to pay his mortgage; however, TCA never transferred any funds to Crudele. TCA retained full control over the funds until it paid SunTrust.80 SunTrust was the initial *901transferee of the transfers and cannot benefit from § 550(b)’s good faith defense in connection with the recoverability of the Transfers.
Equitable Defense is Premature
SunTrust lastly argues that equity should prevent the Trustee from recovering the San Marco Street Transfers. Both the Bankruptcy Code and FUFTA contain provisions that permit a bankruptcy court to consider equitable concerns in deciding how much a trustee should recover from a fraudulent transfer.81 “[T]he cornerstone of the bankruptcy courts has always been the doing of equity.”82 Section 105(a) of the Bankruptcy Code permits a bankruptcy courts to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”83 These powers “must and can only be exercised within the confines of the Bankruptcy Code.”84 Courts have interpreted this limitation to mean that § 105(a) cannot be used “to authorize any relief that is prohibited by another provision of the Code.”85 In this case, the Court will reserve ruling on whether equitable considerations should excuse SunTrust from repaying the San Marco Street Transfers until further evidence is presented at trial. The Court will not consider the issue on summary judgment.
Conclusion
The Court will partially grant the Trustee’s motion for summary judgment86 concluding that all four Transfers are constructively fraudulent transfers and are avoided. The Court will deny the balance of the Trustee’s motion as to SunTrust’s liability to repay the avoided Transfers. Similarly, the Court will grant SunTrust’s motion for partial summary judgment87 concluding that SunTrust has no liability to repay the Captains Drive Transfers under the “single satisfaction” rule.
Factual issues preclude summary judgment on these remaining issues relating to the recoverability of the San Marco Street Transfers totaling $102,509.96: (1) Has TCA been repaid so that the “single satisfaction” rule absolves SunTrust from liability? (2) Do equitable considerations excuse SunTrust’s liability? The Court encourages the parties to confer on possible settlement and trial preparation matters prior to the scheduled pre-trial conference set for 2:45 p.m. on October 8, 2014. The Court simultaneously will enter a separate Partial Final Judgment consistent with this Memorandum Opinion.
FINAL PARTIAL SUMMARY JUDGMENT
Plaintiff, Soneet R. Kapila, Chapter 11 Trustee, and Defendant, SunTrust Mortgage, Inc., moved for summary judgment on the adversary proceeding complaint against Defendant, SunTrust Mortgage, Inc.1 Consistent with the Memorandum Opinion Partially Granting Defendant’s and Plaintiffs Motions for Summary Judgment, simultaneously entered, it is *902ORDERED:
1. Partial Final Summary Judgment is granted in favor of the Plaintiff, Soneet R. Kapila, and against the Defendant, Sun-Trust Mortgage, Inc.2
2. All four Transfers are constructively fraudulent transfers and are avoided. The Court will deny the balance of the Trustee’s motion as to SunTrust’s liability to repay the avoided Transfers.
3. Partial Summary Judgment is granted in favor of the Defendant, Sun-Trust Mortgage, Inc., and against the Plaintiff, Soneet R. Kapila.3
4. SunTrust has no liability to repay the Captains Drive Transfers totaling $238,540.93, under 11 U.S.C. § 550(d), the “single satisfaction” rule.
DONE AND ORDERED in Orlando, Florida, on September 26, 2014.
. 11 U.S.C. Section 101 et. seq. (the “Bankruptcy Code”).
. The counts are titled:
Count I: Actual Fraud - Avoidance and Recovery of Fraudulent Transfers Received by Defendant under 11 U.S.C. §§ 544(b), 548(a)(1)(A), 550 and Florida Statutes 726.01 etal.
Count II: Actual Fraud - Avoidance and Recovery of Fraudulent Transfers Received by Defendant under 11 U.S.C. §§ 544(b)(1) and 550 and Fla. Stat. §§ 726.105(l)(a) and 726.108
Count III: Constructive Fraud - Avoidance and Recovery of Fraudulent Transfers Received by Defendant under 11 U.S.C. §§ 548(a)(1)(B) and 550 Count IV: Constructive Fraud - Avoidance and Recovery of Fraudulent Transfers Received by Defendant under 11 U.S.C. §§ 544(b)(1) and 550 and Fla. Stat. §§ 726.106(l)(b), 726.106(1), and 726.108. Count V: Unjust Enrichment
.Doc. Nos. 40 and 58.
. See Crudele Plea Agreement (Doc. No. 42, Ex. D) at 18-19.
. Crudele Plea Agreement (Doc. No. 42, Ex. D) at 19-20.
. Crudele's account statement from TCA (Doc. No. 57, Ex. C) contains a number of "deposits” with asterisks after the line item description. His plea agreement suggests that all "deposits” identified with an asterisk on the account statement were actually based on a credit system where funds would be drawn from the fraudulent TCA and EISA programs to satisfy his withdrawals. See Cru-dele Plea Agreement (Doc. No. 42, Ex. D) at 22-23.
. See Doc. No. 57, Exhibit C (showing the Transfers as "withdrawals” of $200,000 on February 11, 2005, $138,540.93 on March 10, 2005, and another $2,509.96 on March 10, 2005).
. Doc. No. 58-1, Exhibit 9.
. Doc. No. 58-1, Exhibit 6.
. The satisfaction on the mortgage for the Captains Drive Property was recorded in Carroll County, Illinois on May 31, 2005. (Doc. No. 58-1, Exhibit 8.)
. See Doc. No. 58-2 and attached Exhibits.
. E.g., Doc. No. 57, Exhibit C (Crudele’s TCA account statement produced by the Trustee); Doc. No. 61 at ¶ 13 (Trustee’s affidavit).
. Doc. No. 58-1, Exhibit 9.
. Doc. No. 58-1, Exhibit 5.
. (Doc. No. 57-4, Exhibit B; Doc. No. 57-5, Exhibit A.) A "1031” exchange refers to an exchange under 26 U.S.C. § 1031, which provides that “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” 26 U.S.C. § 1031.
. Doc. No. 57-6, Exhibit 3.
. Doc. No. 57-6, Exhibit 3 (showing "Cash to Seller” of $1,394,223.98); Doc. No. 57, Exhibit C (Crudele's TCA account statement produced by Trustee); Doc. No. 61 at ¶ 13 (Trustee’s affidavit).
. The Trustee's motion and related filings include: Doc. Nos. 40, 41, 42 46 and 61.
. SunTrust’s responses to the Trustee’s motion for summary judgment include: Doc. Nos. 44, 51, and 57.
. Doc. No. 58. The Trustee filed a response to SunTrust’s motion for summary judgment: Doc. No. 62. SunTrust filed a reply. Doc. No. 63.
.SunTrust also initially argued that this Court cannot finally adjudicate the Trustee’s fraudulent transfer claims, despite being labeled as "core” claims under 28 U.S.C. Section 157(b)(2). (Doc. No. 44 at 7-8.) See generally Stern v. Marshall, - U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Sun-Trust later filed its own motion for partial summary judgment seeking affirmative relief and making no reference to its Stem objection. (Doc. No. 58.) By asking this Court for a final judgment in its favor, SunTrust has consented to this Court’s jurisdiction and waived its Stem objection. "If a Stem objection were not deemed waived by the party making it seeking summary judgment, then the party could seek or permit a substantive ruling by the Bankruptcy Court, and then waive that objection if the ruling is favorable but insist on it if unfavorable, and get a second bite at the apple.” In re Carter, 506 B.R. 83, 88 (Bankr.D.Ariz.2014); see also Ogier v. Johnson, 1:13-CV-01490-WSD, 2013 WL 6843476 at *6 (N.D.Ga. Dec. 27, 2013).
In ruling, this Court explicitly declines to decide whether the Trustee’s claims fall in the gambit of Stem claims. Compare In re Glad*893stone, 513 B.R. 149, 160 (Bankr.S.D.Fla.2014) ("[T]his Court is guided by 11th Circuit precedent that fraudulent transfer claims brought under 11 U.S.C. §§ 548 or 544 are core matters subject to entry of final orders and judgments in the bankruptcy court.”) with In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 565 (9th Cir.2012) (holding bankruptcy courts cannot enter final judgment on fraudulent transfer claims) aff'd sub nom.Executive Benefits Ins. Agency v. Arkison, - U.S. -, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014) (affirming but declining to decide whether bankruptcy courts can enter final judgment on fraudulent transfer claims).
Finally, if the Court enters a final judgment and the District Court later determines a jurisdictional issue, the Middle District of Florida’s Standing Order of Reference permits the district court to treat this Court's ruling as proposed findings of fact and conclusions of law. In re: Standing Order of Reference Cases arising Under Title 11, Unites States Code, 6:12-mc-2 6-ORL-22 (M.D.Fla. Feb. 22, 2012) ("The district court may treat any order of the bankruptcy court as proposed findings of fact and conclusions of law in the event the district court concludes that the bankruptcy judge could not have entered a final order or judgment consistent with Article III of the United States Constitution.”).
. Fed.R.Civ.P. 56, made applicable to adversary proceedings by Fed. R. Bankr.P. 7056.
. Fed.R.Civ.P. 56(a).
. Fitzpatrick v. Schlitz (In re Schlitz), 97 B.R. 671, 672 (Bankr.N.D.Ga.1986).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1307 (11th Cir.2011).
. Anderson, 477 U.S. at 248, 106 S.Ct. at 2510.
. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
. Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007).
. In its initial response (Doc. No. 44), Sun-Trust argued that TCA received reasonably equivalent value, albeit for § 548(c) purposes, because it owed a debt to Crudele for commissions that was satisfied by the Transfers to SunTrust. But SunTrust did not point to any evidence meeting the standards of Rule 56 to show TCA was liable to pay Crudele the value of the transfers. See Fed.R.Civ.P. 56(c)(1) ("A party asserting that a fact ... is genuinely disputed must support the assertion by citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations, ... admissions, interrogatory answers, or other materials....”). Conclusory allegations by either party, without specific supporting facts, have no probative value. Evers v. General Motors Corp., 770 F.2d 984, 986 (11th Cir.1985). *894SunTrust did not meet its burden to “come forward with specific facts showing a there is a genuine issue for trial” on whether TCA received value. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).
. In re Stewart, 280 B.R. 268, 273 (Bankr.M.D.Fla.2001). See also In re Toy King Distributors, Inc., 256 B.R. 1, 126-27 (Bankr.M.D.Fla.2000).
. Compare 11 U.S.C. § 548(a)(1) (providing for two-year look-back period) with Fla. Stat. § 726.110 (2014) (providing for four-year look-back period). See also In re McCarn’s Allstate Finance, Inc., 326 B.R. 843, 848-49 (Bankr.M.D.Fla.2005).
. In re Smith, 120 B.R. 588, 590 (Bankr.M.D.Fla.1990); accord In re McCarn’s Allstate Finance, Inc., 326 B.R. 843, 848-49 (Bankr.M.D.Fla.2005).
. See, e.g., Affidavit of Soneet Kapila (Doc. No. 41 at 4-7); Pearlman Plea Agreement (Doc. No. 42, Exhibit A) at 18.
. The applicable petition date is March 1, 2007. "[T]he relevant reach back period begins on the petition date and encompasses all transfers within the four years prior, per the FUFTA statute of limitations.” Kapila v. TD Bank, N.A. (In re Pearlman), 460 B.R. 306, 314-15 (Bankr.M.D.Fla.2011); see also 11 U.S.C. § 546(a). The first two Transfers, made on February 11, 2005, are governed solely by § 726 of the Florida Statutes because they fall outside § 548's two-year look-back period. The latter two Transfers, made on March 10, 2005, can be analyzed under both statutes because they occurred within both look-back periods.
. In re Evergreen Sec., Ltd., 319 B.R. 245, 253 (Bankr.M.D.Fla.2003) (citing In re XYZ Options, Inc., 154 F.3d 1262, 1275 (11th Cir.1998)).
. In re ATM Fin. Servs., LLC, 6:08-BK-969-KSJ, 2011 WL 2580763 (Bankr.M.D. Fla. June 24, 2011).
. See In re Pearlman, 440 B.R. 569, 575-76 (Bankr.M.D.Fla.2010) ("[T]he EISA Program and the TCTS Stock Program ... are both undisputedly Ponzi schemes.”).
. See Doc. No. 44 at 1-3.
. A Ponzi scheme generally is defined as a “phony investment plan in which monies paid by later investors are used to pay artificially high returns to the initial investors, with the goal of attracting more investors.” United States v. Silvestri, 409 F.3d 1311, 1317 n.6 (11th Cir.2005). All evidence showed this was precisely what occurred. See e.g., Pearl-man Plea Agreement (Doc. No. 42, Exhibit A) at 17-22 (stating that the TCTS Stock Program and the EISA Program "were ‘Ponzi’ schemes by which money raised from later investors would be used to pay off earlier investors”); Affidavit of Soneet Kapila (Doc. No. 41) atffl 16-22.
. Doc. No. 41 at ¶ 35.
. In re Seaway Intern. Transport, Inc., 341 B.R. 333, 334 (Bankr.S.D.Fla.2006).
. In re McCarn’s Allstate Fin., Inc., 326 B.R. 843, 852 (Bankr.M.D.Fla.2005) ("Once a court determines that transfers are avoidable under Bankruptcy Code section 548 or under Florida Statutes section 726.105, (available to the Trustee under Bankruptcy Code section 544(b)), the Court must then look to Bankruptcy Code section 550 to determine the liability of the transferee of the avoided transfer.”); see also In re Int’l Admin. Servs., Inc., 408 F.3d 689 (11th Cir.2005) (discussing re-coverability issues under § 550 for transfers avoided under § 544 and FUFTA). But see In re Jackson, 318 B.R. 5, 26 (Bankr.D.N.H.2004) subsequently aff'd, 459 F.3d 117 (1st Cir.2006) (holding that because the plaintiff could not prove avoidance of the transfers *896under § 548, and only proved elements of the state law fraudulent transfer causes of action through § 544, the plaintiff was limited to the state law recovery scheme and not § 550).
. In re Kingsley, 518 F.3d 874, 877 (11 th Cir.2008) (quoting In re Int’l Admin. Servs., 408 F.3d 689, 703 (11 th Cir.2005)).
. SunTrust only seeks summary judgment as to the Captains Drive Transfers. Although its argument is essentially the same as to the San Marco Street Transfers, SunTrust maintains that factual issues — namely the traceability of Crudele’s deposit and its relationship to the sale of the property — preclude summary judgment of those transfers.
. SunTrust makes a similar “single satisfaction” argument in connection with the San Marco Street Transfers but agrees material factual disputes preclude summary judgment as to the recoverability of those two transfers at this point. (Doc. No. 58 at n.2.)
. In re Prudential of Florida Leasing, Inc., 478 F,3d 1291, 1299 (11th Cir.2007)
. 11 U.S.C. § 550(d).
. Prudential of Florida Leasing, 478 F.3d at 1300-01.
. See, e.g., Prudential of Florida Leasing, 478 F.3d at 1297 ("In other words, the Trustee cannot obtain twice the full value of a fraudulent transfer by recovering that value from both the initial transferee and a subsequent transferee.”); Harrison v. Brent Towing Co. (In re H & S Transp. Co.), 110 B.R. 827, 832 (M.D.Tenn.1990) (preventing trustee from recovering from both initial and subsequent transferee).
. See, e.g., In re Kingsley, 06-12096-BKC-PGH, 2007 WL 1491188 (Bankr.S.D.Fla. May 17, 2007) aff'd, 518 F.3d 874 (11th Cir.2008); In re Sawran, 359 B.R. 348 (Bankr.S.D.Fla.2007); In re Clarkston, 387 B.R. 882 (Bankr.S.D.Fla.2008).
. In re Kingsley, 518 F.3d 874, 877 (11th Cir.2008) (quoting Sawran, 359 B.R. at 354).
. 359 B.R. 348 (Bankr.S.D.Fla.2007).
. Id. at 352.
. See id. at 350-51. The defendants did disburse the remaining $8,000 to the debtor, but, because they did so postriti on, the estate did not benefit, and the defendants were liable to repay the $8,000. See id. at 354-55.
. Id. at 353.
. Id. (emphasis added).
. 06-12096-BKC-PGH, 2007 WL 1491188 (Bankr.S.D.Fla. May 17, 2007) aff'd, 518 F.3d 874 (11th Cir.2008).
. Id. at *1.
. Mat *4.
. Id.
. Id. at *4-6.
. In re Kingsley, 518 F.3d 874 (11th Cir.2008).
. See In re Clarkston, 387 B.R. 882, 891 (Bankr.S.D.Fla.2008).
. Id. (emphasis added). The adversary proceeding in Sawran was filed against only the subsequent transferees. A separate judgment already was entered against the debtor's father in a prior case, where he unfortunately acted pro se. Regrettably, he did not argue the “single satisfaction” defense to recovera-bility in the adversary proceeding against him.
. 221 B.R. 49 (Bankr.D.Conn.1998).
. Id. at 51.
. Bassett, 221 B.R. at 55.
. Id.
. 11 U.S.C. § 550(a).
. Id. at 1322.
. Id.
.The “mere conduit” exception is “an equitable exception to the literal statutory language of ‘initial transferee,' ... for initial recipients who are ‘mere conduits’ with no *900control over the fraudulently-transferred funds.” Harwell, 628 F.3d 1312, 1322 (11th Cir.2010). Because SunTrust was the end recipient of the Transfers, it certainly was not a mere conduit.
. 446 B.R. 564 (Bankr.M.D.Fla.2011).
. ATM Financial, 446 B.R. at 566.
. Id.
. Id.
. Id. at 568-71.
. Id. at 570-71.
. 11 U.S.C. § 101(54); Fla. Stat. § 726.102(12).
. See In re Wayne, 237 B.R. 506, 508-09 (Bankr.M.D.Fla.1999) (holding that because debtor retained control of property, a transfer had not yet occurred). See also Barnhill v. Johnson, 503 U.S. 393, 401, 112 S.Ct. 1386, 1391, 118 L.Ed.2d 39 (1992) (holding that upon payment by check, a transfer does not occur until the bank honors the check, reasoning that "until the moment of honor the debtor retains full control over disposition of the account and the account remains subject to a variety of actions by third parties.”).
. See Kingsley, 518 F.3d at 877.
. Kingsley, 518 F.3d at 877 (quoting In re Waldron, 785 F.2d 936, 941 (11th Cir.1986)).
. 11 U.S.C. § 105(a).
. Northwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988).
. In re Transit Group, Inc., 286 B.R. 811, 815-16 (Bankr.M.D.Fla.2002).
. Doc. No. 40.
. Doc. No. 58.
. Doc. Nos. 40 and 58.
. Doc. No. 40.
. Doc. No. 58. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497430/ | OPINION
EDWARD J. COLEMAN, III, Bankruptcy Judge.
In 2008, a group of investors formed Sterling Bluff Investors, LLC (“SBI” or “Debtor ”) to purchase the last unsold lots and the right to receive the proceeds from the sale of numerous club memberships in a luxury residential development called The Ford Plantation. These investors hoped that these assets could be sold over time at a profit. In its entire history, SBI never sold a single lot, employed a single person, or erected a single building. The Debtor’s proposed plan reveals its intent for the future: the Debtor’s business model as a passive real estate investment will not change; old equity will be eliminated; and a subset of the Debtor’s current ownership will cover cash shortfalls as the assets are liquidated over an eight-year period. In exchange for this capital infusion, this subset of investors would receive new equity interests and an injunction stopping the Debtor’s secured lenders from collecting against them personally on their guaranties of the Debtor’s loans. After balancing the equities, the Court concludes that the Debtor filed this bankruptcy case in bad faith; the purpose of Chapter 11 is not to hinder and delay creditors’ ability to collect against the guarantors of a failed land speculation investment. Accordingly, this case will be dismissed for cause as a bad faith filing as well as for cause within the meaning of 11 U.S.C. § 1112(b)(4)(A) because the Court finds there is a “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.”
The following motions are ready for decision: the Motion of The Coastal Bank for Dismissal of Case, or in the Alternative for Grant of Stay Relief (“Motion to Dismiss ” or “Motion for Stay Relief”) (dckt. 12) and The Ford Plantation Club, Inc.’s (“Club”) “Joinder” (dckt. 31) to the Motion to Dismiss but only with respect to The Coastal Bank’s (“TCB ”) “request for entry *905of an order dismissing the Debtor’s bankruptcy case.” The Motion for Allowance and Payment of Administrative Expense and Motion to Require Debtor to Maintain Property (dckt. 105) filed by the Ford Plantation Association, Inc. {“POA ”) (the homeowners’ association), and the Motion of Debtor to Extend Exclusive Periods Within Which to File a Plan and Obtain Acceptances Thereof (dckt. 183) are also pending before the Court.
The Court held hearings on these matters on May 12, 2014, July 14, 2014, and July 15, 2014.1 The Court took the matters under advisement at the conclusion of the July 15, 2014 hearing. Because the Court grants TCB’s Motion to Dismiss and Motion for Stay Relief, the remaining matters will be denied as moot.
I. JURISDICTION
This Court has jurisdiction pursuant to the following sources: sections 151, 157(a), and 1334(b) of Title 28 of the United States Code and the United States District Court for the Southern District of Georgia’s Order dated July 13, 1984, which refers all cases under Title 11 of the United States Code to the bankruptcy judges in the District. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(G). Furthermore, venue is proper. See 28 U.S.C. §§ 1408-1409. In accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure, I make the following Findings of Fact and Conclusions of Law.
II. FINDINGS OF FACT
The Court held evidentiary hearings on May 12, 2014, July 14, 2014, and July 15, 2014. At the May 12, 2014 hearing, Nick Cassala, the CEO and General Manager of both the Club and the POA, testified about the background of the Club and the Debt- or’s participation in the development. The Court also heard testimony from David Mandel, a representative of TCB; Andrew DeWitt, who appraised the Debtor’s real estate; Kethesparan Srikanthan, a former manager of SBI and currently the exclusive listing broker of the Debtor’s lots; Keith Hellmann, the CFO of the Club and POA as well as the Treasurer of the POA; David Lane, TCB’s appraiser of the Debt- or’s lots and memberships; and Michael Greene, the manager of the Debtor. The following facts were either proven or are the proper subject of judicial notice. See Fed.R.Evid. 201.
A. Introduction
The Ford Plantation is a real estate development along the mouth of the Ogee-chee River, which is located just south of Savannah, Georgia. Originally the site of Henry Ford’s private retreat, this 1,800-acre tract has been developed over the years into an exclusive residential development consisting of 400 residential lots. (Hr’g Tr. May 12, 2014, dckt. 206, at 125:1-3.) The Ford Plantation has many features designed to appeal to wealthy individuals who can afford second homes. There is a Pete Dye-designed championship golf course, tennis courts, a fitness center, a deep water marina, equestrian facilities, a clubhouse for dining, six lakes, six miles of fenced acreage, and thirteen miles of paved roads that are illuminated by gas lights. The original Ford mansion, which is used for lodging and as a gathering space, serves as a center piece to this *906pristine coastal property. (Dckt. 206, at 120:4-12.)
B. Structure of the Club at The Ford Plantation
After the Ford family relinquished control of the property, it became a real estate development with a succession of entities involved in its growth. More specifically, The Ford Plantation was developed in the late 1990s by The Ford Plantation, LLC (“Original Developer”). (Dckt. 206, at 121:10-11.) The Ford Plantation’s original plans call for 400 residential lots that are owned by the Club’s resident members. (Stip. 2.)2 These resident members have access to all of the above-described amenities and facilities. Indeed, as a condition to owning a residential lot, purchasers must apply to become a member of the Club. To formalize this requirement, on October 20, 1998, the Original Developer recorded the Club Declaration for The Ford Plantation Club, Inc. (“Club Declaration ”) in Deed Book 45, Page 282, of the real property records of Bryan County, Georgia. (Club Ex. 6.) The Club Declaration governs the rights, privileges, terms, and conditions associated with resident memberships in the Club (“Resident Memberships ”) and provides that:
In order to ensure that membership in the Club remains predominantly with the homeowners in the Plantation, the Declarant is requiring that all purchasers of residences and/or residential lots in the Plantation apply for membership in the Club, and if approved, become members of the Club. Declarant hereby declares that all of the real property [in The Ford Plantation] shall be held, sold, transferred, conveyed, used, occupied, mortgaged or otherwise encumbered subject to this Club Declaration. This Club Declaration shall run with title to and shall be binding on all Persons having any right, title, or interest in all or any portion of such real property, their respective heirs, legal representatives, successors, successors-in-title, and assigns, and shall inure to the benefit of each and every owner of all or any portion thereof....
(Club Ex. 6, at 1.) Additionally, Article 2.7 of the Club Declaration provides that when a lot is resold, the Resident Membership associated with the lot does not pass with title. Instead, “the [Resident Membership] interest shall be deemed reassigned to the Club.” (Club Ex. 6, at 3; Stip. 4.)
In addition to Resident Memberships, the Club offers for sale another type of membership to individuals who do not own property in the development (“Sporting Memberships ”). Although the Club Declaration does not address Sporting Memberships, the development’s original plans contemplated up to ninety-five “Equity Sporting Members,” who would be entitled to use the Club’s facilities. (Stip. 6.) Presently, a Resident Membership holder has an equity interest in the Club’s assets whereas a Sporting Membership holder does not. There is one equity Sporting Membership still in effect, but this type of membership is no longer issued. (Dckt. 206, at 121:18-21.)
Currently, yearly Club dues are $21,000.00, and POA assessments are $3,100.00. (Dckt. 206, at 131:1-25.) Annual membership dues were originally set at *907$25,000.00 per year. The initial cost of a Resident Membership was $125,000.00. The Club recently lowered the initiation fee for a Resident Membership from $125,000.00 to $50,000.00 and created a temporary Club credit of $3,800.00 for the yearly dues. (Dckt. 206, at 184:6-9.) Those changes took effect on March 29, 2014.3 (Dckt. 206, at 187:4-10.)
The various club facilities are owned by the Club, and certain common areas are titled in the POA. The Club is governed by a nine-member board of directors, and the POA is governed by a three-member board of directors. (Dckt. 206, at 128:4-18.) To become a member of the Club, a lot purchaser must first submit an application to the Club. Then, the Club conducts a background check, a financial check, and a membership committee interview. Next, the membership committee makes a recommendation to the Club board regarding whether the prospective member should be approved. The Club board makes the final decision about whether to approve a prospective member. (Dckt. 206, at 129:5-15.)
C. SBI’s Acquisition of Assets
Under circumstances that are not fully developed in the record, the Original Developer was unable to fulfill all of its financial commitments and reorganization of The Ford Plantation was undertaken by the various stakeholders. It was at this juncture that the investors of SBI became involved in the development.
In July 2008, the Original Developer sold its remaining sixty-three lots in The Ford Plantation to SBI. (Dckt. 206, at 122:6-8.) As part of this transaction, SBI, the Original Developer, the Club, and the POA entered into the Turnover Agreement (dated June 4, 2008 and effective July 18, 2008) through which the Original Developer turned over its assets to the other parties and exited the operation. (Club Ex. 1; dckt. 206, at 123:23 to 124:6.) At the time of the Turnover Agreement, there were about 300 Resident Members and two Sporting Members. (Dckt. 206, at 123:2-6.)
Pursuant to the Turnover Agreement, SBI acquired, as a single investment, a group of assets for approximately $12 million.4 These assets consisted of sixty-three residential lots, ninety-six Resident Memberships, and ninety-two Sporting Memberships. The initial investors of SBI believed they had acquired the assets at a discount, hoping that the assets might have a value of more than $20 million. The investors’ plan was to sell the lots over time and to collect the proceeds from the sale of Resident Memberships and Sporting Memberships, thereby recouping their investment and earning a substantial profit.
The investment was financed largely by the participation of members of SBI and bank loans from TCB. On July 18, 2008 SBI executed a promissory note in the principal amount of $6,250,000.00 in favor of TCB (“2008 Note ”). (TCB Ex. 1; Stip. 8.) Contemporaneously with the execution *908of the 2008 Note, SBI executed and delivered to TCB the Real Estate Deed to Secure Debt, which described the original sixty-three lots and the fifty Resident Memberships pledged as collateral to TCB. (TCB Ex. 2; Stip. 10.) Also, SBI executed and delivered to TCB the Security Agreement and Assignment of Ford Plantation Club Resident Memberships. (TCB Ex. 3; Stip. 11.)
On September 30, 2010, the Debtor pledged three additional lots that it had subsequently acquired to TCB in connection with the Note Modification Agreement and Modification of the Deed to Secure Debt (TCB Exs. 4-5; Stip. 12.) With the addition of these three lots to the original sixty-three lots, the total number of lots held by TCB as collateral increased to sixty-six lots, together with the right to receive proceeds with respect to the corresponding fifty memberships pledged as collateral to TCB. (Stip. 13.)
TCB’s 2008 Note matured by its terms on June 18, 2011. On that date, SBI executed a renewal Commercial Promissory Note (“2011 Note”) in the principal amount of $5,625,000.00. (TCB Ex. 8; Stip. 18.)
In 2012, SBI purchased an additional six lots in The Ford Plantation to bring its total real estate holdings to seventy-two lots. (Stip. 15.) SBI purchased three of the lots from banks who had foreclosed on the properties. SBI acquired the other three lots by initiating foreclosure proceedings itself. (Dckt. 206, at 136:14-25.)
The Debtor has several other secured creditors. South Carolina Bank and Trust, as successor by merger with Bryan Bank & Trust, asserts a $393,757.81 claim secured by thirteen Resident Memberships. (Claim 3-1.) The Club asserts a $2,240,000.00 claim secured by ninety-one Sporting Memberships, 24 Resident Memberships, and six lots. (Claim 8-1.) The Club also asserts a $1,827,126.14 claim secured by all seventy-two of the Debtor’s lots for unpaid dues, maintenance charges, late fees, and interest.5 (Claim 9-1.) The POA asserts a $163,944.34 claim secured by all seventy-two of the Debtor’s lots for prepetition homeowners’ association dues. (Claim 6-1.)
D. SBI’s Financial Troubles
The SBI acquisition in July 2008 occurred on the eve of what has proven to be a prolonged recession that severely impacted the marketability of these luxury residential lots and club memberships. According to Mr. Cassala, lots have sold for as little as $1 and for nearly $1 million during his tenure. (Dckt. 206, at 138:16-21.) Since 2008, SBI has not sold a single lot.
In short, SBI’s business plan never came to fruition. As the lots remained unsold, expenses and debt service continued apace. Notwithstanding the lack of revenue, until 2013, SBI continued to service the debt on the property, to pay POA assessments, and to pay property taxes, all through additional capital contributions from its members. The ownership of SBI changed over the years as some members became unwilling to invest further in the project.6
*909The continued failure to sell any lots created mounting financial pressure for SBI. Around March 2012, select members of the Club and SBI formed a committee that met several times to consider restructuring of the financial arrangements. By August 2012, the Debtor had negotiated certain changes to the Turnover Agreement (“Turnover Amendment ”) in an effort to promote sales and restructure its prospects for the future. (Club Ex. 3; dckt. 206 at 148-49.) SBI, the Club, and the POA entered into the Turnover Amendment, which had an effective date of October 19, 2012. (Club Ex. 3.)
The Turnover Amendment modified the payment schedule to the Club. Under the Turnover Agreement, SBI was obligated to pay $4.45 million to the Club but only made $2.45 million in payments before the Turnover Amendment was entered into. At the time of the Turnover Amendment, two $1 million payments remained due in July 2012 and July 2013, respectively. Under the Turnover Amendment, $250,000 was due on the effective date; $250,000 was due on July 18, 2013; $250,000 was due on July 18, 2014; $750,000 was due on July 18, 2015; and $500,000 was due on December 31, 2015. (Club Ex. 3, at 5.)
Mr. Srikanthan, the original manager of SBI, is the sole proprietor and manager of Ford Plantation Properties, LLC, an independent real estate brokerage firm that is located just outside the Ford Plantation. (Dckt. 206, at 134:7-19.) SBI markets its lots through Mr. Srikanthan’s brokerage firm. In contrast, the Club engaged Sea-bolt Brokers in July 2013 to sell lots owned by the Club. Since then, Seabolt Brokers has sold one vacant lot for $985,000.00. (Dckt. 206, at 195:17 to 196:11.) Of the 400 lots, only about 155 have completed homes. (Dckt. 206, at 120:18-24.)
E. SBI’s Defaults
By December 2012, SBI was also seeking to restructure its loan with TCB. No agreement was reached. In March 2013, SBI defaulted on its quarterly payment to TCB and has not made a payment to the bank since. Mr. Cassala testified that Mr. Greene told him that SBI was not going to make the required payment to TCB in the first quarter of 2013 as a part of a strategy to make TCB renegotiate with SBI. (Dckt. 206, at 164:18-23.)
Under the Turnover Amendment, SBI made the first new payment of $250,000.00 to the Club but did not make the next payment that was due on July 18, 2013. After SBI defaulted under the terms of the Turnover Amendment, the Club claims to have terminated the amendment and reinstated the Turnover Agreement.7 (Club. Ex. 5.) SBI never made the last two yearly payments of $1 million each, which were due in 2012 and 2013, under the terms of the Turnover Agreement. (Dckt. 206, at 137-39.) On July 22, 2013, the Club sent a notice of default and reservation of rights to SBI. (Club Ex. 4; dckt. 206, at 165:24-25.) On October 28, 2013, the Club and the POA sent another notice of default and reservation of rights to SBI. This notice contained the following paragraph:
Notwithstanding the Club’s and the Association’s demand for payment, SBI has failed to pay the amounts due. Accordingly, the Club and the Association hereby terminate all rights and privileges of SBI and Ford Plantation Properties LLC arising under and related to the Turnover Agreement and the other Turnover Documents.
(Club Ex. 4, at 2.)
After its default in March 2013, SBI continued to make proposals to TCB re*910garding a restructuring of its debt. In December 2013, TCB notified SBI, who has a right of first refusal in the event that TCB sells its note, that it was engaged in negotiations with a third party. Mr. Man-del testified that this third party was only willing to buy the note if it could receive title to the collateral immediately. (Dckt. 206, at 219:7-17.) Therefore, SBI’s cooperation was essential to the consummation of a deal. TCB proposed that it would release the guarantors from any further liability under the note if SBI would execute a deed in lieu of foreclosure for the collateral and make a cash payment. Although TCB believed it had made a fair offer to SBI, SBI responded by demanding to know the content of TCB’s conversations leading up to the deal. (Dckt. 206, at 221:8-18.) After SBI made a counteroffer that was unacceptable to the third party, the hoped-for deal fell apart and was never revived. (Dckt. 206, at 221:19-25.)
In January 2014, TCB began running a notice of sale in the Bryan County News advertising the foreclosure sale of the sixty-six lots and the fifty Resident Memberships that served as its collateral. The foreclosure sale was to be held on the first Tuesday of February 2014, which was February 4, 2014. Some last minute overtures were made by SBI to TCB to reach an accord, but those efforts likewise failed. On February 3, 2014, the Debtor filed a Chapter 11 petition. Consequently, the automatic stay went into effect stopping the foreclosure sale.
F. The Motion to Dismiss and Motion for Stay Relief
On February 7, 2014, TCB filed the Motion to Dismiss and Motion for Stay Relief, seeking relief from the automatic stay in the alternative. (Dckt. 12). The Club joined TCB’s Motion to Dismiss. (Dckt. 31.) Motions for Rule 2004 exams were filed and opposed. After each party retained valuation experts and exchanged reports, the parties filed motions in limine to exclude the testimony of the respective experts. (Dckt. 145.)
The matters came on for hearing on May 12, 2014. At that hearing, counsel for the POA announced the POA’s support of the Motion to Dismiss. As a preliminary matter, TCB was asserting in the Motion for Stay Relief that this case involved single asset real estate (“SARE ”) within the meaning of 11 U.S.C. § 101(51B). Because questions of fact existed regarding the “single asset real estate” determination, the alleged lack of equity in TCB’s collateral, and other matters relevant to the Motion to Dismiss and Motion for Stay Relief, the Court issued a scheduling order (dckt. 162) to allow the parties to pursue discovery.
At the May 12, 2014 hearing, Kirk M. McAlpin Jr., special litigation counsel for the Debtor, argued that the Debtor may have three potential causes of action against the Club. First, he argues, the Club breached the Turnover Agreement and Turnover Amendment. (Dckt. 206, at 15:10-15.) Second, the Club fraudulently induced SBI to entering into the Turnover Agreement. (Dckt. 206, at 30:20-23.) Third, the Club tortiously interfered with SBI’s contract with TCB, especially SBI’s right of first refusal.8 (Dckt. 206, at 42:3-18.)
*911The continued hearing was scheduled for July 14, 2014 and July 15, 2014. On Friday, July 11, 2014, the Debtor filed its disclosure statement (dckt. 212) and plan of reorganization {“Plan ”) (dckt. 213).
The parties were able to agree on the value of TCB’s collateral,9 which rendered moot the motions in limine as to the respective experts. Mr. Lane was allowed to testify about his appraisal, and the Court received into evidence his reports dated July 2018 and May 2014.
III. SARE DETERMINATION
As a preliminary matter, the Court will address an issue raised by TCB that may or may not have been rendered moot by the Debtor’s filing of a plan and disclosure statement on July 11, 2014. See 11 U.S.C. § 362(d)(3)(A) (requiring that the filed plan have “a reasonable possibility of being confirmed within a reasonable time”). In its Motion for Stay Relief, TCB alleges that “the single asset real estate case requirements for continuance of the stay” apply in this case. (Dckt. 12, at 3.) In its response to the Motion for Stay Relief, the Debtor disputes that the elements of SARE as defined in 11 U.S.C. § 101(51B) are met in this case.10 (Dckt. 143, ¶ 32). At the May 12, 2014 hearing, the Court indicated its intention to rule on the SARE issue at the July 14 and 15 hearings and invited the parties to pursue any necessary discovery and to file stipulations of fact on that issue. For the reasons explained below, the Court finds that the Debtor’s seventy-two lots are SARE and, therefore, the additional case requirements of § 362(d)(3) apply.
As explained above, the Debtor’s assets consist of seventy-two residential lots in The Ford Plantation, along with the right to receive proceeds from the issuance of ninety-six Resident Memberships and ninety-one Sporting Memberships. (Stip. 7.) The Debtor does not own or lease any real property other than the seventy-two lots. (Stip. 24.) All of the seventy-two lots are pledged as collateral to secured creditors. Sixty-six of the lots are pledged to TCB. The other six lots are pledged to the Club. (Stip. 28.)
The Debtor’s business consists of marketing the seventy-two lots, with their corresponding Resident Membership, and marketing the Sporting Memberships. (Stip. 27.) Nevertheless, since its formation, the Debtor has been unable to sell any of the seventy-two lots. (Stip. 30.) The Debtor’s gross income from the operation of its business from January 1, 2012 to date is as follows:
2012 $103,966.00
2013 $3,000.00
2014 $0.00
(Stip. 30.) The 2013 income came from interest, and the 2012 income was generated by the sale of a Resident Membership. Mr. Srikanthan testified that the Debtor has received proceeds from the sale of eight to ten Resident Memberships since 2008. These Resident Memberships were not sold in connection with a lot owned by the Debtor. The Debtor anticipates that its primary source of cash flow during the first year of bankruptcy will be from loans made by SBI Loan, LLC (an entity owned by a subset of the members of the Debtor) *912unless a lot or a membership is sold. (Stip. 32.)
Section 362(d)(3) provides:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—
(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later—
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that—
(i) may, in the debtor’s sole discretion, notwithstanding section 363(c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nonde-fault contract rate of interest on the value of the creditor’s interest in the real estate[.]
11 U.S.C. § 362(d)(3). The Bankruptcy Code defines “single asset real estate” as follows:
The term “single asset real estate” means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.
11 U.S.C. § 101(51B). When these two statutes are read together, they make clear that stay relief under § 362(d)(3) only applies to real property. Therefore, the focus of stay relief under this provision is the seventy-two lots owned by the Debt- or and not the Resident Memberships and Sporting Memberships, which are personal property. Nevertheless, as a practical matter, granting stay relief with respect to the real estate would lead to grounds for stay relief as to the Debtor’s other assets. As of the date of this Order, only TCB, who holds a security interest in sixty-six of the lots, has requested stay relief.
For the additional case requirements of § 362(d)(3) to apply, the Court must first find the following:
(1) the seventy-two lots are real property constituting a single property or project;
(2) the seventy-two lots are not residential real property with fewer than four residential units;
(3) the seventy-two lots generate substantially all of the gross income of the Debtor;
(4) the Debtor is not a family farmer; and
*913(5) on the seventy-two lots,11 no substantial business is being conducted other than the business of operating the real property and activities incidental thereto. See 11 U.S.C. § 101(51B).
Three of these elements (the first, second, and fourth) are easily met. There is no serious dispute that the seventy-two lots comprise a single project. See Whitfield Co. v. Tad’s Real Estate Co., Inc. (In re Tad’s Real Estate Co., Inc.), No. 97-11999, 1998 WL 34066143, at * 2 (Bankr.S.D.Ga. Mar. 23, 1998) (Dalis, J.) (finding that the debtor’s fifty-nine vacant lots and five rented lots with houses built on them constituted “a single project with a common intended use, plan or scheme” because the debtor’s intent was to develop a residential subdivision); In re Philmont Dev. Co., 181 B.R. 220, 223-24 (Bankr.E.D.Pa.1995) (finding that a series of semidetached houses with separate mailing addresses within the same development constituted a single project). Indeed, all of the lots are vacant, located in the same residential development, and were generally acquired as part of a single transaction. (Stips. 1, 7.) Next, although all of lots are residential real estate (Stip. 25), there are seventy-two such lots and, therefore, the real property does not consist of fewer than four residential units. Lastly, the Debtor is clearly not a family farmer because it is not engaged in a farming operation. See 11 U.S.C. § 101(18).
As to the third element, the Court must determine whether the seventy-two lots generate substantially all of the gross income of the Debtor. TCB argues that such is the case because the Debtor has no substantial business (other than incidental activities) aside from the business of attempting to sell the seventy-two lots and “past sales have indicated an utter lack of market appetite for Sporting Memberships.” (Dckt. 186, ¶ 8.) In response, the Debtor argues that this element is not met because its gross income from the past few years has been “from the sale of memberships, and not due to the passive operation of real property.” (Dckt. 185, ¶ 9.)
Under the facts and circumstances of this case, I conclude that it is appropriate to look at the Debtor’s business model (as originally conceived and as proposed in the Plan) rather than to just look at the past few years to determine whether the seventy-two lots generate substantially all of the gross income of the Debtor. Over this longer time period, I find that the lots would generate (in the event that any were sold) substantially all of the Debtor’s gross income. Admittedly, this is a close call. On one hand, as the Debtor sells all seventy-two lots (potentially within the next seven to ten years) the sale of each lot may generate additional income because the purchaser of the lot will be required to purchase a Resident Membership, which will in turn be a “sale” of that membership by the Debtor. Therefore, the sale of the lots would generate not only the lot price but also income from the *914sale of a Resident Membership. As TCB’s expert suggested, the Resident Memberships may not have a value separate from the lots from the perspective of a lot purchaser. Both the benefit of access to Club membership and the burden of having to pay the initiation fee are inseparably tied to the purchase of a lot. On the other hand, the Debtor owns more Resident Memberships than lots. However, I find that as a relative matter, the sale of these unconnected Resident Memberships in the future will generate an unsubstantial percentage of the Debtor’s income.12 Furthermore, I find that the sale of the Debt- or’s Sporting Memberships will generate an unsubstantial percentage of the Debt- or’s income based on their price and marketability. Even where no actual revenue has yet been generated, other courts have found that the SARE definition was satisfied. See In re Mountain Edge LLC, No. 12-10835, 2012 WL 4839784, at *3 (Bankr.D.N.M. Oct. 10, 2012) (citing In re Kkemko, Inc., 181 B.R. 47, 51 (Bankr.S.D.Ohio 1995)) (“It is generally accepted that raw land or real property acquired and/or held for development falls within the definition of SARE.”).
As to the fifth element, the Court has no difficulty concluding that no substantial business is being conducted on the seventy-two lots other than the business of operating the real property and activities incidental thereto. Essentially, the Debtor holds passive investments in real estate and personal property. Although the Debtor’s business “consists of marketing the 72 Lots, with their corresponding Resident Membership, and marketing the Sporting Memberships” (Stip. 27), this work is largely conducted off-site by third-parties due to the fact that the Debtor has no employees. Furthermore, these activities are not “substantial” within the meaning of § 101(51B). Cf. In re Prairie Hills Golf & Ski Club, Inc., 255 B.R. 228, 230 (Bankr.D.Neb.2000) (finding that the SARE definition did not apply to a debtor that “develops and sells residential lots; constructs and maintains roads to the golf, ski, and residential areas; mows and removes snow from the golf course and residential areas; continues to develop the golf and ski areas; sells liquor in the clubhouse; operates the farmland; and leases the golf and ski facilities to [another entity]”). Furthermore, these sales and marketing efforts are simply part of the Debtor’s business of operating the real property, if it can even be said that such minimal activities constitute “operating,” and do not qualify as a separate business.
In its brief, the Debtor argues that it cannot be subject to the additional case requirements of § 362(d)(3) because the Resident Memberships and Sporting Memberships are significant assets. {See dckt. 185, ¶ 7.) This argument has already been considered and rejected by one of my colleagues in the Southern District of Georgia. In Suntrust Bank v. Global One, L.L.C. (In re Global One, L.L.C.), Judge Davis stated the following:
Debtor argues that [§ 362](d)(3) does not apply because it has a counterclaim against Portrait Homes in Superior Court, which “is clearly not real property nor is it an attachment or appurtenance to the property.” This fact does not change this Court’s finding. The focus of the definition is not whether the case involves a “single asset” but rather whether the stay applies to “single asset real estate” held by a bankruptcy estate.
*915411 B.R. at 528 (citation omitted). I agree with that reasoning and find that the Debt- or’s ownership of the right to receive proceeds from the sale of the memberships does not preclude me from finding that § 362(d)(3) applies to the seventy-two lots.
As of the date of this Order, the Court determines that the Debtor is subject to 11 U.S.C. § 362(d)(3) because the seventy-two lots owned by the Debtor are SAKE within the meaning of 11 U.S.C. § 101(51B). This finding impacts the Court’s consideration of the Motion for Stay Relief and the Motion to Dismiss; however, this finding is not essential to the Court’s determination that it is appropriate to grant those motions.
IV. MOTION TO DISMISS
Upon motion of a party in interest after notice and hearing, a court must, for cause, convert or dismiss a Chapter 11 case, whichever is in the best interest of creditors and the estate, unless the court determines that the appointment of a trustee is in the best interest of creditors and the estate. 11 U.S.C. § 1112(b)(1). TCB and the Club, as the movants, must show that cause exists by a preponderance of the evidence. See Bal Harbour Club, Inc. v. AVA Dev., Inc. (In re Bal Harbour Club, Inc.), 316 F.3d 1192, 1195 (11th Cir.2003); Canpartners Realty Holding Co. IV, L.L.C. v. Vallambrosa Holdings, LLC (In re Vallambrosa Holdings, L.L.C.), 419 B.R. 81, 88 (Bankr.S.D.Ga.2009) (Davis, J.). If cause is shown, the court must dismiss or convert the case unless the court finds that “unusual circumstances” within the meaning of § 1112(b)(2) are present.
A. Bad Faith as Cause
The enumerated bases of cause in § 1112 are not exhaustive; lack of good faith in filing a Chapter 11 petition may also constitute cause for dismissal. In re Pegasus Wireless Corp. v. Tsao (In re Pegasus Wireless Corp.), 391 Fed.Appx. 802, 803 (11th Cir.2010); Albany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 F.2d 670, 674 (11th Cir.1984) (“In finding a lack of good faith, courts have emphasized an intent to abuse the judicial process and the purposes of the reorganization provisions. Particularly when there is no realistic possibility of an effective reorganization and it is evident that the Debtor seeks merely to delay or frustrate the legitimate efforts of secured creditors to enforce their rights, dismissal of the petition for lack of good faith is appropriate.”); First Bank of Ga. v. Lamb (In re Lamb), No. 11-11522, 2012 WL 1944527 (S.D.Ga. May 29, 2012). “Furthermore, possible equity in the property or a potential for a successful reorganization does not preclude a finding of a bad faith filing.” Canpartners Realty, 419 B.R. at 86 (citing Phoenix Piccadilly, Ltd. v. Life Ins. Co. of Va. (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1395 (11th Cir.1988)). The United States Court of Appeals for the Eleventh Circuit established a bad faith standard in Albany Partners and Phoenix Piccadilly. Although the test for a bad faith filing requires a totality of the circumstances analysis, the following factors tend to show that a single asset case has been filed in bad faith:
(1) the debtor has only one asset, the property at issue; (2) the debtor has few unsecured creditors whose claims are relatively small compared to the claims of the secured creditors; (3) the debtor has few employees; (4) the property is subject to a foreclosure action as a result of arrearages on the debt; (5) the debtor’s financial problems essentially are a dispute between the debtor and the secured creditors which can be resolved in the pending state court action; *916and (6) the timing of the debtor’s filing evidences an intent to delay or frustrate the legitimate efforts of the debtor’s secured creditors to enforce their rights.
State St. Houses, Inc. v. N.Y. State Urban Dev. Corp. (In re State St. Houses, Inc.), 356 F.3d 1345, 1346-47 (11th Cir.2004) (citing Phoenix Piccadilly, 849 F.2d at 1394-95). The Court will now analyze each of these factors in turn.
1. Phoenix Piccadilly Factors
i.The Debtor Has Only One Asset, the Property at Issue
Although the Debtor technically owns several assets, in essence, the Debtor owns a single investment, which is similar to the situation where the Debtor owns a single asset such as an office building. The Debtor’s assets comprise a single investment because all of the lots are within the same development and revenue from the sale of Resident Memberships, in large part, can only be realized through the sale of the Debtor’s lots.13 Likewise, the market for Sporting Memberships will largely depend on the success of The Ford Plantation as a whole and, therefore, is inextricably linked to the Debtor’s lots and Resident Memberships. This factor weighs in favor of finding the petition was filed in bad faith.
ii.The Debtor Has New Unsecured Creditors Whose Claims Are Relatively Small Compared to the Claims of Secured Creditors
According to the Debtor’s schedules, it has creditors holding secured claims totaling $7,413,318.29, creditors holding unsecured priority claims totaling $57,492.50, and creditors holding unsecured nonpriority claims of $8,262,875.24. (Dckt. 32, at 1.) Yet, non-affiliated entities hold a relatively small portion of the unsecured claims. With a claim of $5,918,117.24, SBI Loan, LLC, which is a vehicle through which a subset of the Debtor’s investors continued to fund the Debtor, is the Debtor’s largest unsecured creditor. “Courts applying this second Phoenix Piccadilly factor typically disregard unsecured debts owed to insiders, and instead consider only the amounts owed to non-insider, unsecured creditors.” In re State St. Houses, Inc., 305 B.R. 726, 735 (Bankr.S.D.Fla.2002), aff'd, 305 B.R. 738 (S.D.Fla.2003), aff'd, 356 F.3d 1345 (11th Cir.2004). Because the Debtor has “few unsecured creditors whose claims are small in relation to the claims of the secured creditors,” this factor weighs in favor of finding the petition was filed in bad faith. Id. at 736.
iii.The Debtor Has New Employees
The Debtor has never had any employees and has no plans to employ anyone in the future. Consequently, this factor weighs in favor of a finding of bad faith. See Canpartners Realty, 419 B.R. at 86.
iv.The Property is Subject to a Foreclosure Action as a Result of Arrearages on the Debt
The Debtor filed its Chapter 11 Petition the day before the nonjudicial foreclosure sale was to take place. The Debtor was then in default under its obligation to its secured lenders including TCB and the *917Club. The Debtor had made no payments to TCB for nearly a year. TCB’s note would have matured by its terms on May 18, 2014; however, the Debtor defaulted on its payments about a year before then. Therefore, this factor weighs in favor of a finding of bad faith. See Canpartners Realty, 419 B.R. at 86.
v. The Debtor’s Financial Problems Essentially Are a Dispute Between the Debtor and its Secured Creditors Which Can Be Resolved in the Pending State Court Action
When the Debtor filed its bankruptcy petition, it was in default on its secured debts. Although the Debtor asserts that it may have causes of action against the Club, the Debtor has not filed suit. The evidence shows that the only major dispute between the Debtor and its creditors is that the Debtor wishes to avoid foreclosure without making the payments it promised to them. See Humble Place Joint Venture v. Fory (In re Humble Place Joint Venture), 936 F.2d 814, 818 (5th Cir.1991); Canpartners Realty, 419 B.R. at 86. On the other hand, this case does not present the typical two-party dispute found in other cases (where the court dismisses a bad faith filing) because the Debtor has several different secured creditors that hold first-lien positions on its assets. On balance, I find that this factor is neutral regarding a finding of bad faith.
vi. The Timing of the Debtor’s Filing Evidences an Intent to Delay or Frustrate the Legitimate Efforts of the Debtor’s Secured Creditors to Enforce Their Rights
The Debtor filed its Chapter 11 Petition the day before the nonjudicial foreclosure sale was scheduled to take place. Normally, the Court would give little weight to this fact for purposes of assessing good faith because filing a bankruptcy petition before a foreclosure sale occurs is essential to preserving a debtor’s rights in the collateral. However, in this case, I find that this timing is circumstantial evidence of bad faith because the defaults leading to the foreclosure were longstanding and the secured creditors gave the Debtor a significant amount of time to cure these defaults. The evidence showed that, to a large extent, the Debtor’s defaults were strategic, meaning that they were used to try to force a renegotiation of terms with its creditors. As Mr. Greene testified, he did not even attempt to make a capital call among the Debtor’s investors before the March 2013 default. In sum, this factor weighs in favor of the Court finding that this case is a bad faith filing.
Additionally, the protection of guarantors is an improper purpose for filing a Chapter 11 petition. See Humble Place, 936 F.2d at 818 (“Personal guaranties of non-debtors are not ordinarily, and are certainly not here, a legitimate concern of Chapter 11.” (footnote omitted)); In re N. Vermont Assocs., L.P., 165 B.R. 340, 342 (Bankr.D.D.C.1994). Section 8.3 of the Debtor’s proposed plan provides for an injunction prohibiting collection activities against any guarantor that provides new equity. In exchange for this protection, these non-debtors must merely agree to “fund any cash shortfalls occurring under the Reorganized Debtor’s business plan.” (Dckt. 213, § 8.4.) This plan provision reflects an intent to delay or frustrate the legitimate efforts of the Debtor’s secured creditors to enforce their rights. In addition to being filed for an improper purpose, the presence of the Phoenix Piccadilly factors demonstrates that the petition was filed in bad faith.
2. Analysis of Exculpatory Factors
Because finding bad faith in filing a Chapter 11 petition is “a finding of fact not subject to any per se approach,” the fact *918that a single asset debtor fits neatly within the Phoenix Piccadilly factors is not the end of the Court’s analysis. In re Clinton Fields, Inc., 168 B.R. 265, 269 (Bankr.M.D.Ga.1994) (citing Home Fed. Sav. v. Club Candlewood Assoc., L.P. (In re Club Candlewood Assoc., L.P.), 106 B.R. 752, 756 (Bankr.N.D.Ga.1989)). Next, the Court examines whether there are any exculpatory factors that lead the Court to conclude that the Debtor filed its petition in good faith. See Canpartners Realty, 419 B.R. at 87. In In re Clinton Fields, the court found that the following factors tended to show that the filing did not lack good faith:
1. The secured creditor seeking relief is the seller of the property to the debt- or;
2. The secured creditor has been the recipient of significant cash proceeds from the debtor’s efforts to sell a portion of the property;
3. The principals of the debtor have made a substantial capital investment into the property;
4. The debtor has formulated a specific plan for the development of the property prior to filing the Chapter 11 case;
5. The plan for development has been substantially implemented prior to filing the Chapter 11 case;
6. The cause of debtor’s financial distress was unforeseen at the time of the financing and was beyond the debtor’s immediate control;
7. The plan for development does not require substantial additional financing;
8. The plan for development does not depend upon additional speculative investment on the part of a subsequent developer/owner (the project is an “end use” development).
9. The debtor’s failed efforts to reorganize may result in a windfall to the secured creditor.
10. The plan does not significantly extend the time for repayment of the debt beyond the original term.
In re Clinton Fields, 168 B.R. at 270-71.
A review of these factors reinforces the Court’s view that this case presents a bad faith filing. It is true that the original equity investors made substantial capital contributions in this investment, especially in the form of equity-like loans. These equity interest holders, however, are being eliminated by the Debtor’s plan. The postconfirmation owners of the Debtor are proposed to be a subset of the Debtor’s investors.14 The majority of these mitigating factors are not present in this case. TCB did not sell the property to the Debt- or, and is instead the lender. The Debt- or’s plan is likely to require substantial ongoing financing/equity infusions over the life of the Plan. It is unclear why any party would make these financial contributions unless they were already a guarantor of the Debtor’s debt. TCB’s note was set to mature by its terms on May 18, 2014. Under the Debtor’s plan, the balance of the secured portion of TCB’s loan will not be due and payable until the last day of the ninety-six month following the plan’s effective date. No meaningful development plans were formulated either before or after filing the bankruptcy case.
3. The Debtor’s Arguments
In its response to TCB’s Motion to Dismiss and the Club’s Joinder, the Debtor contends that it filed its Chapter 11 petition in good faith for the following reasons: (1) one of its goals is to maximize the value of its assets for the benefit of unsecured *919creditors; (2) it harbors no “sinister motives” like the debtors in Phoenix Piccadilly, and (3) because of the case’s complexity, it should be given time to develop and put forth a plan of reorganization in this case. (Dckt. 143, ¶ 21.)
The Court is not persuaded by these arguments. Under the Debtor’s proposed plan, the class of non-insider general unsecured creditors will receive a dividend of only about 7.5 percent.15 TCB’s deficiency claim of $1,639,331.30 represents over half of the total amount of claims in this class, and TCB has strenuously argued that this case’s dismissal is in its best interest. It is true that the Debtor did not engage in forum shopping like the debtors in Phoenix Piccadilly; however, as discussed above, other circumstantial factors showed the Debtor’s “petition was filed ‘to delay or frustrate the legitimate efforts of secured creditors to enforce their rights.’ ” Phoenix Piccadilly, 849 F.2d at 1394 (quoting In re Albany Partners, 749 F.2d at 674). Lastly, the Debtor has now had the opportunity to file a plan of reorganization. After review of the Plan, the Court now has the facts necessary to make the totality of the circumstances determination that this case is a bad faith filing. See In re Clinton Fields, 168 B.R. at 269 (“It is the entire context of the circumstances which compel the inference of abuse of the court’s jurisdiction.” (internal quotation marks omitted)).
B. Cause Under Section 1112(b)(1)(A)
Pursuant to § 1112, cause for dismissal of a Chapter 11 case includes “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” 11 U.S.C. § 1112(b)(4)(A). “The purpose of this ground is to prevent the debtor-in-possession from gambling on the enterprise at the creditors’ expense when there is no hope of rehabilitation.” In re Ad-Brite Corp., 290 B.R. 209, 215 (Bankr.S.D.N.Y.2003) (internal quotation marks omitted). Bankruptcy courts have consistently held that postpetition negative cash flow coupled with an inability to pay current expenses qualifies as a continuing loss to or diminution of the estate. See In re Tri-Chek Seeds, Inc., No. 12-11409, 2013 WL 636031, at *3 (Bankr.S.D.Ga. Feb. 3, 2013) (Barrett, J.) (finding a substantial or continuing loss or diminution of the estate and the absence of a reasonable likelihood of rehabilitation where “the testimony and operating reports show[ed] negative cash flow but for the cash infusions from [the debtor’s sole shareholder]); Mission Oaks Nat’l Bank v. Youngwoo Moon (In re Youngwoo Moon), No. 12-20731, 2012 WL 6727186, at *2 (Bankr.S.D.Ga. Dec. 13, 2012) (Dalis, J.) (finding a loss or diminution of the estate where the debtor had ongoing negative cash flow and would not have been able to meet current expenses without loans from family members); In re Motel Props., Inc., 314 B.R. 889, 894-95 (Bankr.S.D.Ga.2004) (Davis, J.) (finding that the debtor was experiencing a continuing loss to or diminution of the estate where it continued to lose money postpetition and failed to make various postpetition tax payments and payments to its secured lender).
TCB argues that there has been a substantial loss or diminution of the estate because, since filing the case, the Debtor has not paid ad valorem taxes, made any payments to the Club or POA, or put aside funds for these expenses in escrow, all while continuing to incur debt to pay administrative expenses to its attorneys and *920experts. Importantly, interest continues to accrue on certain debts. Since filing its petition, the Debtor has not sold any assets and or collected any of its accounts receivable. The Debtor’s manager testified that he is not actively trying to collect receivables. The fact that debtor-in-possession financing has been approved and is currently covering some of the current expenses of the Debtor’s professionals does not alter the Court’s finding. See Mission Oaks, 2012 WL 6727186, at *2. Consequently, I find that there is a continuing loss and diminution of the Debtor’s estate that is very substantial in nature.
Because § 1112(b)(1) is written in the conjunctive, the Court must now determine whether there is an absence of a reasonable likelihood of rehabilitation. See In re Motel Props., 314 B.R. at 895. “Rehabilitation means that the ‘debtor will be reestablished on a secured financial basis, which implies establishing a cash flow from which its current obligations can be met.’ ” Id. (quoting In re AdBrite Corp., 290 B.R. 209, 216 (Bankr.S.D.N.Y.200S)). Rehabilitation “contemplates the successful maintenance or reestablishment of the debtor’s business operations.” Canpartners Realty, 419 B.R. at 89 (internal quotation marks omitted).
There is not a reasonable likelihood of the Debtor’s rehabilitation. See 11 U.S.C. § 1112(b)(4)(A). In essence, the Debtor’s Plan provides that the lots that are TCB’s collateral will be sold over the next eight years at prices at least equal to a “release price” set by Plan. The Debtor reserves the right to abandon (meaning return), at any time, a piece of collateral in full satisfaction of an apportioned amount of TCB’s secured claim. South Carolina Bank and Trust’s secured claim is to be satisfied by the Debtor surrendering eight of the thirteen Resident Memberships that serve as its collateral on the effective date of the Plan. As a surrender value, the Debtor uses the current price of a Resident Membership ($50,000) despite the fact that the Debtor recognizes that proceeds from the sale of these memberships will come at a future date and that a dollar today is worth more than a dollar received many years later. Likewise, the Debtor intends to surrender, on the effective date of the Plan, most of the Club’s collateral in full satisfaction of its debt. The Debtor plans to surrender six lots, thirty-three Resident Memberships, and ten Sporting Memberships, but the Debtor also plans to retain eighty-one Sporting Memberships. Five of the Debtor’s Resident Memberships, represented in the Plan as unencumbered, would be sold to provide a small recovery to “Allowed Subordinated Insider Claims in Class 7.” (See dckt. 213, at 5-6 (providing that Class 7 claims total about $6,235,875).)
The Debtor hopes that, after an initial investment of $870,000.00 from the new equity owners, it will be able to sell enough lots and receive enough proceeds from the sale of memberships to cover its obligations and maybe even earn a profit. Even assuming that the Plan could be amended to be confirmable in substantially its current form,16 the rehabilitation of the Debtor is unlikely for two main reasons. First, regarding the property that the Debtor does not surrender, interest will continue to accrue and POA assessments will be incurred.17 Second, over the last *921six years, the Debtor sold none of its lots. In order to have positive cash flows over the next eight years, the reorganized debt- or will need to sell lots at prices sufficiently over the release prices to cover all of its other expenses, which will be significant. This is unlikely because the release prices would represent the fair market value set for those assets by this Court. To be sure, the fact that the price of Resident Memberships have recently decreased should increase their marketability; however, this positive factor is more than offset by the fact that the Debtor will be surrendering lots, Resident Memberships, and Sporting Memberships to its secured creditors. These parties will in turn be offering these assets for sale, further reducing the marketability of the assets that the Debtor retains. The alleged fact that the new equity owners have the financial wherewithal and incentive to fund the Debtor’s postconfirmation cash shortfalls does not compel a different result; what matters is that it is likely that the Debtor will experience long-term postpetition losses. See In re AdBrite Corp., 290 B.R. at 216.
C. Conclusion
I find that dismissal, rather than conversion, is in the best interest of creditors and the estate. The Debtor has not shown and the Court has not found any “unusual circumstances” within the meaning of § 1112(b)(2) that would justify this Court not dismissing the Debtor’s case for cause. Therefore, I will order that this Chapter 11 case be dismissed.
V. MOTION FOR RELIEF FROM STAY
TCB seeks, in the alternative, for relief from the automatic stay with respect to the sixty-six lots and fifty Resident Memberships in which it holds a security interest. TCB argues that it is entitled to stay relief “(i) for ‘cause,’ including lack of adequate protection and bad faith by the Debtor, (ii) because the Debtor does not have any equity in the Property and an effective reorganization of the Debtor’s business affairs is not possible, and (iii) because relief from the stay is inevitable due to the Debtor’s inability to meet the single asset real estate case requirements for continuance of the stay.” (Dckt. 12, ¶ 11.)
TCB bears the burden to prove that the Debtor has no equity in the property to which it seeks stay relief. 11 U.S.C. § 362(g)(1). The Debtor bears the burden on all other issues. 11 U.S.C. § 362(g)(2).
A. Bad Faith as Cause under Section 362(d)(1)
“An automatic stay may be terminated for ‘cause’ pursuant to section 362(d)(1) of the Bankruptcy Code if a petition was filed in bad faith.” Phoenix Piccadilly, 849 F.2d at 1394 (citing Natural Land Corp. v. Baker Farms, Inc. (In re Natural Land Corp.), 825 F.2d 296 (11th Cir.1987)). Because the Court finds that the Debtor filed its petition in bad faith sufficient to warrant dismissal, the Court also necessarily finds that the Debtor filed its petition in bad faith sufficient to warrant stay relief. See Phoenix Piccadilly, 849 F.2d at 1394 (finding that what amounts to bad faith is the same for both proceedings).
B. Stay Relief Under Section 362(d)(2)
Bankruptcy courts must grant stay relief “with respect to an act against property” if two conditions are met. 11 U.S.C. § 362(d)(2). First, the debtor must not have equity in the property at issue. 11 U.S.C. § 362(d)(2)(A). Second, the property must not be necessary to an effective reorganization. 11 U.S.C. § 362(d)(2)(B).
The Debtor has accepted TCB’s valuation of $3.8 million and concedes that it has *922no equity in TCB’s collateral. Therefore, the burden is on the Debtor to prove that those assets are necessary to an effective reorganization. As the Supreme Court stated in United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd.:
Once the movant under § 862(d)(2) establishes that he is an undersecured creditor, it is the burden of the debtor to establish that the collateral at issue is “necessary to 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.” The cases are numerous in which § 362(d)(2) relief has been provided within less than a year from the filing of the bankruptcy petition. And while the bankruptcy courts demand less detailed showings during the four months in which the debtor is given the exclusive right to put together a plan, even within that period lack of any realistic prospect of effective reorganization will require § 362(d)(2) relief.
484 U.S. 365, 375-76, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (footnotes omitted) (citations omitted).
If the Debtor is to have a successful reorganization, the property serving as TCB’s collateral will be essential to it. Nevertheless, the Court finds that there is not “a reasonable possibility of a successful reorganization within a reasonable time.” Id. In addition to the problems discussed in Part IV.B above, the Debtor will need an impaired class of non-insiders to vote to accept its plan of reorganization. That is very unlikely to occur because the Debt- or’s secured creditors will control the vote of the unsecured class due to the size of their deficiency claims.
C. Stay Relief Under Section 362(d) (3)
Now that the Court has determined that § 362(d)(3) applies in this case, the Debtor must take one of two alternative actions to remain entitled to the automatic stay with respect to its real estate: the Debtor must either file a plan that has a reasonable possibility of being confirmed within a reasonable time or start making monthly payments. Although the Debtor has filed a plan of reorganization, the Court entertains serious doubts about whether that plan has a reasonable possibility of being confirmed within a reasonable time as required by § 362(d)(3)(A). However, to make that determination now would be premature because the relevant time of inquiry is “30 days after the court determines that the debtor is subject to [the SARE case requirements].” 11 U.S.C. § 362(d)(3).
D. Conclusion
TCB is entitled to stay relief under § 362(d)(2) and for cause pursuant to § 362(d)(1). Because this stay relief relates to the majority of the Debtor’s assets, this is yet another reason that cause exists for the dismissal of the Debtor’s case.
VI. REQUEST FOR ADMINISTRATIVE EXPENSE
Because I find in Part IV that this case must be dismissed, I decline to rule on the Motion for Allowance and Payment of Administrative Expense and Motion to Require Debtor to Maintain Property (dckt. 105) filed by the POA on the grounds that the issues presented are now moot.
*923VII. MOTION TO EXTEND EXCLUSIVITY PERIODS
Because I find in Part IV that this case must be dismissed, I decline to rule on the Motion of Debtor to Extend Exclusive Periods Within Which to File a Plan and Obtain Acceptances Thereof (dckt. 183) on the grounds that the issues presented are now moot.
VIII. CONCLUSION
The Court will grant TCB’s Motion to Dismiss and Motion for Stay Relief in their entirety. In closing, the Court notes that its finding that this case was filed in bad faith does not mean that the Court has made a finding that the Debtor or its investors have acted unscrupulously in a business sense. To the contrary, the Debtor appears to be managed by and comprised of sophisticated and professional businesspeople. Under the facts and circumstances of this case, however, the Bankruptcy Code’s protections do not extend to this Debtor. See Cedar Shore Resort, Inc. v. Mueller (In re Cedar Shore Resort, Inc.), 235 F.3d 375, 379 (8th Cir.2000) (“The purpose of Chapter 11 reorganization ‘is to restructure a business’s finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders.’ ” (quoting H.R.Rep. No. 595 (1975), reprinted in 1978 U.S.C.C.A.N. 6179)); Humble Place, 936 F.2d at 818; c.f. 15375 Memorial Corp. v. BEPCO (In re 15375 Memorial Corp), 589 F.3d 605, 619 (3d Cir.2009). The Court will enter a separate order consistent with these Findings of Fact and Conclusions of Law.
. Two other matters on the Court's calendar were withdrawn by agreement, namely the Debtor's Motion in Limine to Exclude Certain Testimony of Expert David E. Lane and F. Andrew DeWitt (dckt. 145) and The Coastal Bank’s Motion in Limine, Pursuant to FRE 702, to Exclude Certain Testimony Proffered by Debtor’s Expert Ralph Stewart Bowden Relating to the Price or Value of any Club Membership (dckt. 155).
. On May 30, 2014, the Debtor and TCB agreed to certain stipulations of fact for purposes of the Court's SARE determination, which the Court now incorporates by reference into this Order. (Dckt. 184.) The stipulations were also largely proven by the evidence presented at the hearings. For this Order, citations to these stipulations will appear as "(Stip.)''.
. These changes were made to stimulate lot sales and attract new members to The Ford Plantation. The Club also recommended that the membership vote to eliminate the 50-mile radius restriction for Sporting Members. (If approved, this would allow, for the first time, individuals who live within 50 miles of The Ford Plantation to become Sporting Members.) (Stip. 29.)
. SBI is a Georgia Limited Liability Company formed for the purpose of acquiring for resale lots in The Ford Plantation along with corresponding Resident Memberships and to sell Sporting Memberships. (Stip. 5.)
. Under the Turnover Agreement, SBI was exempt from paying membership dues. (Dckt. 206, at 133:12-17.) However, the Club now asserts that the Debtor is no longer exempt because the Club terminated the Debt- or’s rights under that agreement after it defaulted on its payment obligations.
. SBI Loan, LLC, an entity through which a subset of investors continued to invest in the Debtor, filed a proof of claim in the case asserting a $5,917,809.17 claim. (Claim 5-1.)
. The Court declines to comment on whether the Club had the legal right to do so.
. The Debtor's disclosure statement for its reorganization plan provides that its claims against the Club include "(i) a breach of the Turnover Agreement with respect to the Club’s duties as to the marketing of the Debt- or’s lots and memberships and the creation of a sales incentive program; (ii) the turnover of certain funds by the Club received from the sale of at least two memberships, which sale proceeds rightfully belong to the Debtor; and (iii) a claim for fraudulent inducement with *911respect to a 2012 Amendment to the Turnover Agreement.” (Dckt. 212, at 8.)
. The Debtor and TCB stipulated that the value of TCB’s collateral, namely sixty-six lots and fifty Resident Memberships, is $3.8 million.
. In its Chapter 11 petition, the Debtor did not indicate that the nature of its business was "Single Asset Real Estate as defined in 11 U.S.C. § 101(51B).” (Dckt. 1, at 1.)
. In a case cited by the Debtor, In re Philmont Development, Co., 181 B.R. 220, 223 (Bankr.E.D.Pa.1995), the court stated this element differently: "the debtor must not be involved in any substantial business other than the operation of its real property and the activities incidental thereto.” Id. at 223. This formulation, however, writes the phrase "on which” out of the definition of SARE. The phrase "on which” clearly refers to "real property”; therefore, the proper inquiry is whether any substantial business other than operating the real property and activities incidental thereto is conducted on the real property, which is the seventy-two lots in this case. See Suntrust Bank v. Global One, L.L.C. (In re Global One, L.L.C.), 411 B.R. 524, 528 (Bankr.S.D.Ga.2009) (Davis, J.) ("There is no doubt that the property meets the definition [of SARE]. It constitutes a single project ... and no business is being conducted on the property.” (Emphasis added)).
. For example, the Club recently sold a lot for $975,000 compared to the initial cost of a Resident Membership of $50,000.
. The Debtor's Schedule B also lists five notes as accounts receivable and discloses three legal claims. No lawsuit has been filed. Those potential causes of action are a breach of contract claim against the Club with an unknown value, a turnover claim against the Club for proceeds from the sale of a Resident Membership to Richard Levy with an alleged value of $25,000.00, and another turnover claim against the Club for proceeds from the sale of Sporting Memberships to Chad and Kim Gracy with an unknown value. (Dckt. 32, at 12.) These listed assets all relate to the Debtor's acquisition of the lots and memberships.
. The Debtor’s disclosure statement provides that these individuals will include Michael Greene, David Rowe, Arthur Scanlan, and G. Glen Martin. (Dckt. 212, at 25.)
. The Plan proposes that total claims for this class will be about $2,658,331.00. This class is proposed to receive $200,000 pro rata within fourteen days of the Plan's effective Date.
. At the July 14, 2014 and July 15, 2014 hearings, the Debtor acknowledged that the Plan would need to be amended in several respects, which is not uncommon for Chapter 11 reorganization cases that have been pending for about the same period as the Debtor's case.
. It is unclear whether the Debtor would incur Club dues as well. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497431/ | Memorandum-Decision and Order
MARGARET CANGILOS-RUIZ, Bankruptcy Judge.
C. Channing Redfield (“Plaintiff’) objects in this adversary proceeding to the discharge of Debtor Jennifer M. Waite (“Debtor” or “Defendant”) pursuant to 11 U.S.C. §§ 727(a)(2)(A), (a)(2)(B) and (a)(4)(A). Plaintiff alternatively requests that the Debtor’s underlying bankruptcy case be dismissed “for cause” as a bad faith filing pursuant to 11 U.S.C. § 707(a). Debtor answered in general denial and asserted several affirmative defenses. The court conducted a trial on the complaint on May 13, 2014.
As announced on the record of the hearing, in addition to the exhibits introduced into evidence at trial, the court takes judicial notice of the filings made in this adversary proceeding, as well as both those filed in the underlying bankruptcy case and in Debtor’s prior bankruptcy (Case No. 12-30988). For the reasons which follow, the court sustains Plaintiffs objections and denies Debtor a discharge.
*4
Jurisdiction
The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) and §§ 157(b)(2)(A) and (J). This memorandum-decision and order incorporates the court’s findings of fact and conclusions of law as permitted by Fed. R. Bankr.P. 7052.
Background Facts
Plaintiff is a secured creditor of Debtor by virtue of a judgment in the amount of $58,469.07, obtained in New York State Supreme Court and recorded with the Jefferson County Clerk on May 2, 2012 (“Judgment”). The Judgment, entered against Debtor individually and Waite Enterprises, Inc., represents the unpaid balance owing on Debtor’s purchase of a construction business from Plaintiff.1 Joint Stipulation (“Stip.”) ¶ 1; Plaintiffs Ex. 1; Answer ¶ 1.
On May 18, 2012, Debtor filed an individual chapter 13 petition under the name Jennifer M. Waite (the “Prior Case”). In her petition, Debtor did not identify her use within the prior 8 years of the name Jennifer Fuller. Case No. 12-30988, Doc. # 1. Debtor did not disclose on schedule A her remainder interest in a parcel of real property located at 440 S. Clinton Street, Carthage, N.Y. (“Clinton Street Property”).2 Id.; Plaintiffs Ex. 4. On schedule B line #2, Debtor listed (i) a checking account, (ii) a savings account, (iii) a business checking account, and (iv) a certificate of deposit, all held at Carthage Savings and Loan. The aggregate value of these deposit accounts, which were not claimed as exempt, was $28,000. Case No. 12-30988, Doc.# 1. Debtor scheduled Plaintiff as one of three unsecured creditors on her schedule F. Plaintiffs claim, which represented 98.9% of the unsecured debts, was scheduled as contingent, unliq-uidated and disputed. Although married, Debtor did not list any income attributable to her husband, Craig Waite, on either schedule I or Official Form 22C. Id.
The Prior Case was dismissed pursuant to a conditional order of dismissal without a plan having been confirmed. Case No. 12-30988, Doc. #22. Within a matter of days, the chapter 13 trustee moved to vacate the dismissal, asserting that Debtor had “substantially complied” with the conditional order. Case No. 12-30988, Doc. # 25. Plaintiff opposed the trustee’s motion. On the return date of the hearing on the motion, the trustee withdrew it. Neither Debtor nor her counsel, Mr. Antonuc-ci, appeared at the hearing nor filed a written response to the trustee’s motion. Instead, approximately two and a half weeks later, Debtor filed the instant case.
The instant case was initiated again under the name Jennifer M. Waite. As in the Prior Case, Debtor did not disclose (i) her prior use of the name Jennifer Fuller, (ii) her remainder interest in the Clinton Street Property or (iii) income attributable to her husband on either schedule I or Official Form 22C. Plaintiffs Ex. 2. In contrast to the Prior Case, Debtor did not schedule any bank accounts or certificates of deposit on schedule B. Although Plaintiffs claim was again scheduled as contingent, unliquidated and disputed, Plaintiff is the only unsecured creditor scheduled.3 Id.
*5Debtor proposed a plan, virtually identical to that proposed in the Prior Case, which prompted objections by both Plaintiff and the chapter 13 trustee. Case No. 12-31815, Docs. #20, 22. The court denied confirmation of Debtor’s proposed plan, after which Debtor converted the case to chapter 7.
At the section 341 meeting, Debtor disclosed, inter alia, her remainder interest in the Clinton Street Property to the chapter 7 trustee.4 Approximately two months later, Debtor amended her schedule A to list her remainder interest. Debtor scheduled the Clinton Street Property as having a value of $90,000, subject to a secured claim of $69,233.45. Plaintiffs Ex. 3. Debtor made no other amendments to her petition or schedules.
Testimony at Trial
Debtor testified that she married Craig Waite in July 2008, almost four years prior to her filing the Prior Case. Before her marriage to Mr. Waite, Debtor used the last name Fuller, a prior married name. Fuller is the name that Debtor was using at the time she received the remainder interest in the Clinton Street Property. Debtor is identified as “Jennifer Fuller” in the warranty deed that created her remainder interest. Plaintiffs Ex. 4.
Debtor’s mother and step-father reside at the Clinton Street Property. Both are in their early to mid-sixties. Debtor’s parents have a home equity loan secured by the property. Debtor knows of no other encumbrances against the property. At the request of the chapter 7 trustee, Debt- or had an appraisal performed on the Clinton Street Property, which yielded a value of approximately $100,000. Contrary to the amended schedule A, at the time of the instant filing, the balance on the home equity loan was approximately $8,000-$10,000. Debtor testified that she mistakenly believed that the figure listed on amended schedule A ($69,233.45) indicated the equity in the house and not the amount of the claim secured against the property. Debtor has never had a valuation performed of her remainder interest in the property. Debtor testified that she received her interest in the property at her mother’s request, in the event that her mother required placement in a nursing home.
Debtor has been employed as a real estate broker/agent for nine years. Stip. ¶ 18. For the past three years, she had been employed as an associate broker by TLC Real Estate. As part of her duties, she assists clients in the purchase and sale of real estate. Debtor is compensated solely by commission. Between July 2012 and July 2013, Debtor was paid $51,328.08 in commissions for sales that she brokered on behalf of TLC Real Estate. Plaintiffs Ex. 7.
Before filing the Prior Case, Debtor’s regular practice was to cash her commission checks or deposit them into her accounts at Carthage Savings and Loan. Around the time of the prior filing, however, Debtor changed her normal practice and began, almost exclusively, cashing her commission checks. She would deposit only those funds necessary to cover her bills. Debtor avoided permitting her account balance to rise above $1,500 because, as she understood the matter, once the balance rose above that threshold, Plaintiff would be able to levy against the account.5 *6Debtor placed the excess cash in her husband’s gun safe that he kept at their residence. Debtor began keeping cash in the gun safe in May 2012, around the time “all this started.” Although she could not recall the exact amount, Debtor admits that she failed to disclose that she had cash on hand in the safe as of the date of filing.6
Waite Enterprises, Inc. (“Waite”) was formed approximately four years ago to run the contracting business that was purchased from Plaintiff. The corporation’s formation was coincident with the purchase. Although Debtor was the sole shareholder, director and officer of Waite, Debtor’s husband ran the business. Answer ¶ 1. The business ceased operating in May 2012, when the business and Debtor’s personal bank accounts were frozen as a result of Plaintiffs enforcement of the Judgment.7 Debtor filed the Prior Case, in part, to unfreeze her personal and business accounts. The $6,000 balance in the business account, which was scheduled in the Prior Case, ultimately was remitted to Plaintiff. After the freeze was released on her personal accounts, Debtor paid off certain business debts using her personal funds. Debtor paid some creditors more than $600, but did not disclose any such payments on her statement of financial affairs filed with the petition.
Since filing the Prior Case and the unfreezing of her accounts, Debtor has used only one bank account. Plaintiffs Ex. 6. That account, ending in 4005, is a joint account held by Debtor and her husband. Of the deposits made into the account between July 2012 and July 2013, Debtor attributed amounts that exceeded Debtor’s real estate commissions to income received by her husband.
Debtor admitted that she did not “thoroughly” review the schedules in the instant case. In addition to the above non-disclosures, Debtor did not disclose ownership of a diamond ring and gold wedding band. Stip. ¶¶ 14-16. Nor did Debtor disclose that she was in possession of certain equipment owned by Waite Enterprises, Inc. Plaintiffs Ex. 10, pp. 60-61.
Arguments of the Parties
Plaintiff asserts that both in the year prior to filing and in the period since the filing, Debtor improperly concealed the following property: (i) her remainder interest in the Clinton Street Property, (ii) accounts maintained at Carthage Savings and Loan, (iii) certain accounts receivable consisting of real estate commissions earned and owed as of the filing date and (iv) cash contained in her husband’s gun safe. Plaintiff contends that Debtor’s pattern of conduct demonstrates that she concealed these assets with the intent to hinder, delay or defraud her creditors. For that matter, Plaintiff notes that Debtor admits that certain acts were undertaken specifically to frustrate Plaintiff in his attempts to collect on the Judgment.
Plaintiff also asserts that debtor knowingly and fraudulently made false oaths on *7her petition, schedules and statement of financial affairs by deliberately omitting the above property as well as failing to disclose certain relevant information and financial transactions. Plaintiff contends that Debtor is unable to explain her omissions as carelessness or inadvertence. Plaintiff contends that Debtor’s amendment of her schedule A is tainted not only because the amendment was inaccurate but also because Debtor did not amend her other schedules or statement of financial affairs.
Had the Debtor properly disclosed these assets, Plaintiff posits that it is likely that the chapter 7 trustee would have liquidated certain non-exempt assets,8 thus allowing Plaintiff to be paid something on his claim. Furthermore, had Debtor confirmed a proper chapter 13 plan, Plaintiff would have been paid in full.
Alternatively, Plaintiff asserts that the case should be dismissed because the case was filed in bad faith. Acknowledging that the Second Circuit has yet to decide the issue, Plaintiff cites several decisions of courts in this circuit that have dismissed cases where a petition was not filed in good faith. Plaintiff asserts that several of the factors examined by those courts are present in the instant case.
Debtor does not dispute the factual basis for Plaintiffs complaint insofar as she acknowledges the various omissions from her petition, schedules and statement of financial affairs. Debtor asserts, however, that the omissions and non-disclosures were inadvertent, unintended or innocent. Thus, she argues that she lacked the requisite culpable intent necessary to deny her the benefit of the discharge under either §§ 727(a)(2) or (a)(4)(A). Additionally, as to the § 727(a)(4)(A) claim, Debtor asserts that the omissions were immaterial to the case. Debtor denies that her petition was filed in bad faith.
DISCUSSION
Objections to Discharge
The privilege of a discharge and the promise of a fresh start for the “honest but unfortunate debtor” is one of the central tenets underlying bankruptcy. D.A.N. Joint Venture v. Cacioli (In re Cacioli), 463 F.3d 229, 234 (2d Cir.2006) (quoting Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). Where a party objects to a debtor’s discharge, the court must construe section 727(a) “strictly against those who object ... and liberally in favor of the [debtor].” Pisculli v. T.S. Haulers, Inc. (In re Pisculli), 408 Fed.Appx. 477, 479 (2d Cir.2011) (quoting State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1310 (2d Cir.1996)). The objecting party must prove the elements of the asserted § 727(a) cause of action by a preponderance of the evidence. Fed. R. Bankr.P. 4005.
Section 727(a)(2) — Concealment of Assets
Pursuant to § 727(a)(2), a debtor may be denied a discharge if the debtor transferred, destroyed or concealed property with the intent to hinder, delay or defraud creditors. Section 727(a)(2)(A) focuses upon the debtor’s prepetition conduct, barring a discharge if the debtor— with improper intent — transferred, de*8stroyed or concealed property within one year prior to filing. Section 727(a)(2)(B) denies a discharge to a debtor who fraudulently transfers, destroys or conceals property of the estate after the filing of the petition.
Establishing a claim under section 727(a)(2) “requires a showing of actual intent to hinder, delay or defraud; a showing of constructive intent is insufficient.” Pisculli v. T.S. Haulers, Inc. (In re Pisculli), 426 B.R. 52, 66 (E.D.N.Y.2010), aff'd, 408 Fed.Appx. 477. As it is rare for a debtor to freely admit the intent to hinder, delay or defraud creditors, the party objecting to discharge generally must rely upon circumstantial evidence or inferences drawn from a debtor’s conduct. See Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1582-88 (2d Cir.1983); Pisculli, 426 B.R. at 66. As Debtor concedes, the determination regarding a debtor’s intent often will turn on the court’s assessment of the debtor’s credibility.9
Here, it is not disputed that Debtor concealed property by failing to disclose certain assets and information on her petition and schedules and, thereafter, failing to amend the same. Among others, Debt- or freely acknowledges that she failed to disclose her remainder interest in the Clinton Street Property, the deposit accounts at Carthage Savings and Loan and cash held in her husband’s gun safe. Although Debtor amended her schedules to disclose her interest in the Clinton Street Property, her disclosure proved inaccurate. Further, this inaccurate disclosure was the only amendment to her schedules and petition. Accordingly, the sole issue is whether Debtor’s acts and omissions were made with the intent to hinder, delay or defraud creditors.
It is not necessary for a complaining party to prove a fraudulent intent for discharge to be denied under §• 727(a)(2). Instead, “it is sufficient if the debtor’s intent is to hinder or delay a creditor.” Retz v. Samson (In re Retz), 606 F.3d 1189, 1200 (9th Cir.2010); see Cadle Co. v. Marra (In re Marra), 308 B.R. 628, 630 (D.Conn.2004). But see Los Alamos Nat’l Bank v. Wreyford (In re Wreyford), 505 B.R. 47, 55-58 (Bankr.D.N.M.2014). Debt- or admits that her actions related to the cashing of her commission checks and sequestering funds in excess of $1,500 in the gun safe were taken specifically to prevent Plaintiff from levying upon her bank accounts and, thereby, frustrate his attempts to enforce the Judgment. Debtor also admits that in the brief period between the two bankruptcies, she used personal funds to pay other creditors of Waite Enterprises, Inc. — some in excess of $600 — and failed to disclose these transactions. By Debtor’s admissions alone, the court could find that Debtor had the requisite improper intent to deny her discharge under § 727(a)(2). See Locke v. Schafer (In re Schafer), 294 B.R. 126, 130-31 (N.D.Cal. 2003). However, the court does not rest solely upon Debtor’s admissions.
Based upon the totality of the evidence, including Debtor’s admissions, the court finds that Debtor engaged in a pattern of conduct that demonstrates an actual intent to hinder, delay or defraud creditors. See Structured Asset Servs., L.L.C. v. Self (In re Self), 325 B.R. 224, 239 (Bankr.N.D.Ill. 2005); see generally Kaiser, 722 F.2d at 1582-83 (discussing the “badges of fraud”). Among other things, Plaintiff is Debtor’s sole unsecured creditor,10 and although the *9claim has been reduced to judgment by the state court, Plaintiffs claim is inexplicably scheduled as contingent, unliquidated and disputed. Debtor could not adequately explain her failure to carefully review the instant petition and schedules, which not only perpetuated omissions from the prior schedules but also included new omissions — most notably the failure to schedule the bank accounts. Notwithstanding deficiencies identified in both the Plaintiffs and the chapter 13 trustee’s objections to confirmation, Debtor failed to amend her petition and schedules until four months after the case was converted to chapter 7, and then did so in an incomplete and inaccurate manner.
Debtor defends her behavior by claiming that the omissions and non-disclosures were inadvertent, unintended or innocent. Although the court accepts the possibility that the failure to disclose Debtor’s prior use of the name Fuller may have been an oversight, it otherwise rejects Debtor’s asserted defenses. The court does not credit Debtor’s explanation regarding her failure to disclose her remainder interest in the Clinton Street Property. Debtor has been employed as a real estate broker for almost a decade and has participated in numerous real estate transactions representing both buyers and sellers. As such, her assertion that she did not disclose her remainder interest because she did not think of the Clinton Street Property as hers is unconvincing. Further, Debtor failed to provide a credible, explanation for her failures to disclose the bank accounts or the cash kept on hand in the gun safe. Upon review of the evidence, including Debtor’s trial testimony, the court finds that Debtor’s non-disclosures and secreting of assets demonstrate a clear and actual intention to hinder, delay or defraud a creditor, specifically, the Plaintiff.
Accordingly, the court sustains the Plaintiffs objections under §§ 727(a)(2)(A) and (B).
Section 727(a) (k) (A)- — False Oath or Statement
A debtor who knowingly and fraudulently makes a false oath or account may be denied a discharge under section 727(a)(4)(A). The party objecting to the discharge must establish five elements: “(1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew that the statement was false; (4) the debtor made the statement with intent to deceive; and (5) the statement related materially to the bankruptcy case.” Moreo v. Rossi (In re Moreo), 437 B.R. 40, 59 (E.D.N.Y.2010) (internal quotation omitted). “Deliberate omissions from a debtor’s schedules or statement of financial affairs may represent false oaths or accounts that warrant the denial of the debtor’s discharge.” Fangio v. Russell (In re Russell), 507 B.R. 786, 796 (Bankr. N.D.N.Y.2014); see Self, 325 B.R. at 245-47. Provided the objecting party establishes these five elements, the burden shifts to the debtor to proffer a credible explanation for the false statement or to demonstrate that the error resulted from an honest mistake. E.g., Russell, 507 B.R. at 796.
There is no dispute that the first and second elements have been met. Plaintiff challenges Debtor’s statements and omissions contained in her petition, schedules and statement of financial affairs, all of which are statements under oath for purposes of section 727(a)(4)(A). And, Debtor admits that the challenged statements are false. Debtor asserts, however, that the challenged statements and omissions were not made knowingly or *10with the intent to deceive, nor were they material to the case.11 The court disagrees.
The knowledge requirement of section § 727(a)(4)(A) is met when the debtor — knowing what is true — intentionally swears to what is false. See, e.g., Moreo, 437 B.R. at 62. Based upon Debt- or’s testimony, there is little doubt that Debtor knew of her interest in the Clinton Street Property, the bank accounts and the funds held in the gun safe at the time of the filing. “To find the requisite degree of fraudulent intent, a court must find that the debtor knowingly intended to defraud or engaged in behavior that displayed a reckless disregard for the truth.” Self, 325 B.R. at 248; see also Moreo, 437 B.R. at 62 (citing cases). A debtor’s intent to deceive may be inferred “from a series of incorrect statements and omissions contained in the schedules.” Moreo, 437 B.R. at 62. Debtor’s many omissions were either the subject of stipulation or admitted in her testimony. Thus, based upon the totality of the evidence, including consideration of Debtor’s testimony, the court finds that the false statements and omissions were made by Debtor with knowledge and the intent to deceive. See James v. Tipler (In re Tipler), 360 B.R. 333, 354-55 (Bankr.N.D.Fla.2005). The court’s conclusion is bolstered by Debtor’s admissions that she (i) made undisclosed, preferential payments to other creditors of Waite Enterprises, Inc., and (ii) changed her normal practice regarding the depositing of her commission checks — specifically to prevent Plaintiff from levying on her accounts. Cf. Moreo, 437 B.R. at 64 (finding that the determination of debtors’ fraudulent intent was bolstered by debtors’ other fraudulent conduct).
Further, the court finds that the challenged statements and omissions are materially related to the case. “An item is material if it is related to the debtor’s ‘business transactions or estate which would lead to the discovery of assets, business dealings, or existence or disposition of property.’ ” Moreo, 437 B.R. at 65 (quoting Carlucci & Legum v. Murray (In re Murray), 249 B.R. 223, 228 (E.D.N.Y.2000)). Materiality does not require that the creditor is either prejudiced by or suffers detriment as a result of the false oath or omission. See Carlucci & Legum v. Murray (In re Murray), 249 B.R. 223, 228-32 (E.D.N.Y.2000); Self, 325 B.R. at 249. Debtor’s statements and omissions involved, among other things, undisclosed assets and certain preferential payments. Thus, Plaintiff has demonstrated that the false statements and omissions related materially to the case. See Russell, 507 B.R. at 796; Murray, 249 B.R. at 230; Town of Skaneateles v. Scott (In re Scott), 233 B.R. 32, 45 (Bankr.N.D.N.Y. 1998) (“It is well-settled that the failure to disclose an asset’s existence is almost always material, given the need for creditors to accurately identify and inventory the debtor’s property.”).
Plaintiff having established each of the requite elements, the burden shifted to Debtor to offer a credible explanation for the omissions or demonstrate that the errors were the result of an honest mistake or misunderstanding. Upon review of the evidence, the court finds that the Debtor has failed to meet her burden. As discussed above, the court rejects Debtor’s explanation for the failure to schedule the *11Clinton Street Property. Her subsequent amendment of schedule A, which proved inaccurate, does not remedy the defect. See Moreo, 437 B.R. at 62 (“[W]hile subsequent disclosure before an objection to discharge is filed may be some evidence of innocent intent, ... the effect of a false statement is not cured by correction in a subsequently filed schedule.” (citation omitted)). In any event, Debtor failed to offer a credible explanation for her failure to disclose the bank accounts and cash-on-hand held in the gun safe. Moreover, she offered no explanation as to why these assets were not themselves the subject of additional amendments to the schedules.
The Plaintiffs objection under § 727(a)(4)(A) is, therefore, sustained.
Dismissal for Bad Faith Filing
Plaintiff seeks alternative relief in the form of the dismissal of the case “for cause” pursuant to § 707(a) for Debtor’s failure to file in good faith. In light of the court determination that Debtor’s discharge be denied and the chapter 7 trustee’s report of full administration of the estate, the court need not address the alternative relief requested.
CONCLUSION
For the foregoing reasons, the court finds that the Debtor’s discharge be denied pursuant to §§ 727(a)(2)(A) and (B) as well as (a)(4)(A). A separate judgment will be entered in accordance with Fed. R. BankrJP. 9021.
. Debtor is the sole director, officer and shareholder of Waite Enterprises, Inc. Answer ¶1.
. Debtor’s parents hold a life estate in the Clinton Street Property. Debtor acquired her interest in the property by Warranty Deed, recorded June 6, 2006. Plaintiff’s Ex. 4.
.Debtor notated the listing on schedule F of Plaintiff’s claim at $59,010.63 as follows: “less $6,000.00 that was taken from the business account.” Plaintiff's Ex. 2.
. According to Plaintiff-counsel's affirmation in support of an order for a 2004 examination of the Debtor the § 341 meeting was adjourned from June 10, 2013 to July 8, to permit Debtor to amend her schedules. Case No. 12-31815, Doc. #34.
. Debtor testified at her 2004 Exam:
*6[T]o be honest, I cashed my commission checks.... I don't put them in there because from what I understand, Channing can put a hold on my accounts if there’s anything over, like 12 to 1500 at a time in there. So I’m not chancing that again.
Plaintiff’s Ex. 10, p. 49.
. Debtor stated that the amount in the safe was likely around $1,500, but it could have been more.
. After the business ceased operations, Debt- or’s husband performed odd jobs and, by the fall of 2012, had gone back to school to become a home inspector. Mr. Waite completed his training and began working as a home inspector in January 2013. Sometime thereafter, Mr. Waite received $6,000 for work performed on his uncle’s home during the fall of 2012.
. Plaintiff identifies Debtor's interest in the Clinton Street Property and certain real estate commissions allegedly due and payable to Debtor as of the date of the filing. In light of the other admitted, non-disclosed assets, the court declines to address the allegations regarding the real estate commissions, which were the subject of some disagreement on the issue of whether the commissions were, in fact, due and payable.
. Defendant's Post-Trial Memorandum of Law, pp. 3, 5. Doc. # 19.
. Although Debtor scheduled two additional unsecured creditors in the Prior Case, those claims, which represented just over 1% of the *9unsecured claims, were paid prior to the instant filing. Plaintiff’s Ex. 10, pp. 15-17.
. Debtor's counsel does not elaborate upon these contentions in his post-trial memorandum. Instead, counsel’s argument focuses upon the record-keeping practices of the Debtor, which are not at issue here as Plaintiff has not objected to discharge under § 727(a)(3). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497432/ | MEMORANDUM-DECISION & ORDER
ROBERT E. LITTLEFIELD, JR., Chief Judge.
Currently before the court is an adversary proceeding filed by Emma Cottini (“Plaintiff” or “Creditor”) against Robert G. Blanchard (“Debtor” or “Defendant”) requesting denial of the Debtor’s discharge pursuant to 11 U.S.C. § 727(a)(3) or, in the alternative, a determination of the dis-chargeability of a certain debt pursuant to 11 U.S.C. § 523(a)(2)(A) and (4).
The court has jurisdiction pursuant to 28 U.S.C. §§ 157(a), (b)(1), (b)(2)(I) and (J), and 1334(b).
FACTS
The Debtor filed a voluntary petition seeking relief under Chapter 7 on April 24, 2012. The only non-exempt assets scheduled in the Debtor’s petition are a bank account with a balance of less than one dollar and a 1991 truck worth $150.00 because of high mileage and its condition. (PL’s Ex. 1.) The Plaintiff is listed on Schedule D of the petition and on the Statement of Financial Affairs as holding an unsecured claim in connection with a contract dispute. (Pl.’s Ex. 1.) Schedule I indicates the Debtor’s monthly net income is $1,620.00 consisting of rent ($500.00) and social security income for himself ($1,013.00) and his daughter ($607.00). On September 23, 2013, the Chapter 7 trustee filed a Report of No Distribution indicating that he determined that there were no non-exempt assets to be administered on behalf of creditors. (Bankr.Case No. 12-11086, Report of No Distribution, Sept. 23, 2013.)
On February 06, 2013, the Plaintiff filed the instant complaint. The complaint alleges, inter alia that, the Defendant failed to keep or preserve records pursuant to § 727(a)(3) regarding the home he constructed for the Plaintiff (the “House”); the Defendant made false statements to Ms. Cottini in connection with the construction of the House; and the Defendant *14breached his fiduciary duties under N.Y. Lien Law § 71. The Defendant filed an answer on March 8, 2018, denying the material allegations of the complaint and asserting a counterclaim for attorney’s fees. The Plaintiff filed a motion for summary judgment on both her § 727 and § 528 causes of action. After oral argument on May 8, 2013, the court denied the motion, and the parties proceeded to trial.
The trial was held on August 13, 2013. The Debtor was the only witness called to testify by the Plaintiff. Although now retired, the Debtor testified that he was previously a “designer of buildings.” (Trial Tr. 10, Sept. 27, 2013, ECF No. 34.) The Debtor holds no certifications or licenses; his formal training is limited to three and a half years at the Boston Architectural Center. (Trial Tr. 9-10.) According to the Defendant, as a designer of buildings, he would “work with clients to determine what their desires and needs are and try to translate that into a design of the building that they are trying to build.” (Trial Tr. 10.) He testified that he has designed “roughly” 400 homes. (Trial Tr. 10.)
In recent years the Defendant decided to specialize in the design of “healthy and efficient solar houses.” (Trial Tr. 11.) The Defendant testified that he had only completed drawings of five such houses, with the House being one of the five. (Trial Tr. 11.) The Defendant intended to showcase the House as a healthy, green, solar home. (Trial Tr. 12.) The Plaintiff paid the Debtor $16,000.00 to draw up the plans for the House. Based on the plans, the Defendant was employed by the Plaintiff as the general contractor for the construction of the House. When asked if he was qualified to act as the general contractor based on his design experience he answered, “I thought so.” (Trial Tr. 13.) The Debtor explained that he had constructed three homes during his career, two for himself and the third for the Plaintiff. (Trial Tr. 13.) The Debtor commenced work on the House in December 2009. The Debtor’s services were terminated in October 2010 because the Plaintiff was frustrated with the pace at which the House was being built.1 (Trial Tr. 20-21.) When the Debtor was removed from the project, the House was ninety percent complete. (Trial Tr. 22.) It is undisputed that the House was the only construction project that the Debtor worked on in 2009 and 2010.
According to the construction contract between the parties, the Defendant was to build the House, with certain environmental specifications, for the price of $215,000.00. (Trial Tr. 18; Pl.’s Ex. 7.) Of the original $215,000.00 contract price, $201,879.39 was actually advanced to the Defendant. (Trial Tr. 27-28; Pl.’s Ex. 9.) Some of the funds received from the Plaintiff were deposited in a checking account at the Bank of Greene County. (Trial Tr. 25; Pl.’s Exs. 9 and 11.) However, not all of the checks the Defendant received from Plaintiff were deposited with a bank, many were simply cashed. The Defendant stated that he cashed Plaintiffs checks at multiple banks. (Trial Tr. 27-28.) The cash was then used to pay invoices and purchase materials associated with the construction of the House. (Trial Tr. 29, 34.)
The only records retained by the Defendant in connection with the construction of the House were some of the invoices and receipts, bank records, and tax returns, all of which were introduced into evidence by Plaintiff. (Trial Tr. 42, 43; PL’s Ex. 9, 11, *1512, and 13.) The Debtor produced seventy invoices related to the construction of the House. (PL’s Exs. 12 and 14.) Some of the invoices appear to be duplicates. (Pl.’s Exs. 12 and 14.) The Debtor admits there are holes in his bookkeeping. (Trial Tr. 13.) Of the over $200,000.00 advanced to the Debtor by the Plaintiff, he only had receipts and invoices totaling about $40,000.00. (Trial Tr. 41.) The Defendant testified that he did not keep many of the subcontractors’ invoices once they were paid. (Trial Tr. 29.) He explained that “when people would either give me an invoice or verbally tell me how much I owed them it was a pre-agreed amount and I would give them cash usually.” (Trial Tr. 29.) The Debtor also indicated that he rarely received receipts from his subcontractors and, when he did, he typically did not retain them. (Trial Tr. 29, 34.)
On direct examination, the Defendant was asked if it was his practice to keep any other records or paperwork when he constructed a house. The Debtor answered, “No. You have to remember that two of those were for me. So I didn’t have a need for the paperwork. When I built Cottini’s then I should have kept paperwork but I didn’t because I wasn’t used to it.” (Trial Tr. 13.)
While the House was under construction, the Debtor allocated nearly all his time to the project. (Trial Tr. 23.) The Debtor’s tax returns for 2009 and 2010 reveal that his gross income for that two year period was $250,000.00. (Trial Tr. 25; Pl.’s Ex. 13.) Approximately $200,000.00 of that income came from construction of the House. The Debtor testified at trial that he prepared his tax returns himself and, despite not having all of the receipts to verify his transactions, he was confident in his calculations of gross income and any business deductions. (Trial Tr. 56.) The Plaintiff did not offer anything to refute this testimony.
Four mechanics liens were filed against the House. (Trial Tr. 34-36.) The Defendant testified that the $13,000.00 Mrs. Cot-tini refused to advance to him would have paid off these liens. (Trial Tr. 35-36.) However, the Debtor’s bank records for the House indicate that the Debtor received notice of an overdraft in 2009; the Debtor could not recall the circumstances surrounding the overdraft. (Trial Tr. 40.)
On cross examination, the Debtor was asked why he did not provide all the documents that had been requested by the Plaintiff in discovery. The Debtor replied that “[m]y life has been in turmoil. I went through a divorce I think two years ago.” (Trial Tr. 50.) He further stated that it was his custom to pay in cash. (Trial Tr. 51.) Additionally, he testified that, to his knowledge, he did not have any other documents requested by. Plaintiff that had not been turned over. (Trial Tr. 53.)
ARGUMENTS
The Plaintiff argues that the Debtor kept inadequate records for her to be able to reconstruct what happened with the money she advanced to him for the construction of the House. Without this information, Plaintiff asserts she cannot ascertain what work the Debtor failed to pay for and who may hold mechanics liens against the House. She further contends that the Debtor has given no reasonable justification for his failure to keep these records and, accordingly, this court must deny his discharge.
The Debtor argues that the Plaintiff cannot demonstrate that he intended to destroy or hide any records related to the construction of the House. He also submits that he complied with the Plaintiffs discovery requests to the best of his ability. Ultimately, he posits that the best *16record of his dealings with the Plaintiff is the constructed House itself.
DISCUSSION
Consistent with the fresh start policy under the Bankruptcy Code, the extreme penalty for wrongdoing in § 727 must be construed strictly against those who object to the debtor’s discharge and liberally in favor of the debtor. D.A.N. Joint Venture v. Cacioli (In re Cacioli), 463 F.3d 229, 234 (2d Cir.2006) (quoting In re Chalasani, 92 F.3d 1300, 1310 (2d Cir.1996) (internal quotations omitted)). Under § 727(a)(3) the court shall grant a debtor that files under Chapter 7 of the Bankruptcy Code a discharge unless:
[T]he debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.
11 U.S.C. § 727(a)(3).
A creditor objecting to a debtor’s discharge under § 723(a)(3) has the initial burden to show that the debtor failed to keep adequate books or records from which the debtor’s financial condition or business transactions might be ascertained. In re Cacioli, 463 F.3d at 235 (citing White v. Schoenfeld, 117 F.2d 131, 132 (2d Cir.1941)). It must be demonstrated that the missing records are necessary to ascertain the debtor’s financial condition during the pendency of the bankruptcy proceeding and a reasonable time before the filing of the bankruptcy petition. Berger & Assocs. Attorneys, P.C. v. Kran (In re Kran), No. 13-1931, 2014 WL 3685939, at *2 (2d Cir. July 25, 2014). Additionally, a creditor must show that the debtor failed to create, maintain and/or preserve the complement of business and personal records that would be expected of a reasonably prudent person in the [debt- or’s position. See In re Cacioli 463 F.3d 229, 235. Whether adequate records have been kept is a case-by case determination, and the sufficiency of a debtor’s record keeping is a matter of judicial discretion. Geltzer v. Cohen (In re Cohen), Case No. 01-11748, Adv. No. 01-03570, 2007 WL 710199, at *5 (Bankr.S.D.N.Y. Mar. 6, 2007) (citing In re Joseph, Case No 91-CV-1114, 1992 WL 96324, at *3 (N.D.N.Y. Apr. 22, 1992)). The more sophisticated debtor will be held to a higher standard of accountability; a debtor that engages in a series of complex business transactions will be expected to produce a greater number of and more detailed financial records. In re Sethi 250 B.R. 831, 839 (E.D.N.Y. 2000). There is no requirement that a plaintiff demonstrate intent under § 727(a)(3); they simply must show that the debtor’s records are not reasonable under the circumstances. In re Jacobow-itz, 309 B.R. 429, 440 (S.D.N.Y.2004).
If the creditor shows an absence of records, the burden falls upon the debt- or to satisfy the court that his failure to produce them was justified. Id. In determining whether a debtor has a reasonable justification for his incomplete records courts use several factors:
(1) Whether a debtor was engaged in business and, if so, the complexity and volume of the business; (2) the amount of the debtor’s obligations; (3) whether the debtor’s failure to keep or preserve books and records was due to the debt- or’s fault; (4) the debtor’s education, business experience and sophistication; (5) the customary business practices for record keeping in the debtor’s type of business; (6) the degree of accuracy disclosed by the debtor’s existing books and records; (7) the extent of any egre*17gious conduct on the debtor’s part; and (8) the debtor’s courtroom demeanor.
In re Sethi, 250 B.R. at 838 (citing In re Frommann, 153 B.R. 113, 117 (Bankr. E.D.N.Y.1993)). However, the court need only enter into an analysis of these factors to the extent that they are relevant to the debtor’s stated justification. In re Cacioli, 463 F.3d at 237.
The Second Circuit recently clarified the scope of § 727(a)(3). In Kran, the debtor, an attorney, filed for Chapter 7 relief. In re Kran, 2014 WL 3685939, at *1. A creditor, another attorney, brought an adversary complaint objecting to discharge under § 727(a)(3). The adversary proceeding was premised on the theory that the debtor’s failure to keep documents related to a referral agreement made it impossible for the creditor to ascertain the debtor’s business transactions and, thus, the amount of fees owed to the creditor. The Second Circuit agreed with the District Court and Bankruptcy Court’s granting of summary judgment for the debtor. The Second Circuit reasoned that § 727(a)(3), like other paragraphs of § 727(a), is meant to “punish actions that hamper the Trustee’s ability to collect and distribute non-exempt assets on behalf of creditors.” Id. at *4 n. 2. Section 727(a) “bars from relief a debtor whose misconduct threatens to undermine the just and orderly administration of his bankruptcy ... it does not exist to police the debtor’s legal and ethical obligations more generally.” Id. at *4. Even if a debtor has an independent legal obligation to keep eer-tain documentation or records, the absence of such records, standing alone, is insufficient to invoke § 727(a)(3). Id. at *3. The importance of the records under § 727(a)(3) lies in their necessity to ascertain the Debtor’s financial condition. In no case shall the “extreme penalty” of denying a discharge be invoked when the debtor’s failings are clearly unconnected with the bankruptcy proceeding. Id. at *3.
The collection and distribution of non-exempt assets by a liquidating trustee is the sine qua non of a Chapter 7 bankruptcy. When a debtor interferes with a case trustee’s administration of the estate, § 727(a) provides multiple grounds to deny the debtor a discharge. The evidence produced by Plaintiff does not implicate the Debtor’s bankruptcy estate; rather it encompasses a two party dispute between the Debtor and Plaintiff. Cottini has not provided evidence to establish that either the Debtor failed to keep records such that his financial condition or business transaction could not be ascertained during the pendency of the proceedings or for a reasonable time before; or that she or the Chapter 7 trustee were impeded in determining whether the Debtor had other assets that could be used to pay creditors.2 Id. Under Kran, without making this showing the Plaintiff cannot meet her burden.
Cottini alleges that she cannot create a complete accounting of the Debt- or’s payments to subcontractors. As the Second Circuit has explained, however, difficulty in tracing cash payments, in and of *18itself, does not bring a two party dispute within § 727(a)(3). In re Kran, at *3. The Plaintiff also alleges that the Debtor’s failure to keep records of his payments to subcontractors is a violation of New York Lien Law. See N.Y. Lien Law Art. 3-a, §§ 70 and 75 (McKinney 2013). On the present facts, there is no reason for this court to take up the Lien Law analysis. The scope of liability under state law does not define a debtor’s obligations and responsibilities vis-a-via disclosures in bankruptcy. Section 727(a)(3) does not exist to police a debtor’s legal obligations generally. Section 727 is directed toward protecting the integrity of the bankruptcy system. While the Plaintiff has demonstrated that the Debtor’s record keeping is less than stellar, there is nothing about the Debtor’s poor recording keeping that implicates his bankruptcy estate. The presence or absence of records related to the House has no bearing on the Debtor’s bankruptcy estate.
Here, there is no bankruptcy purpose in understanding the relationship between the Debtor and his subcontractors on a construction project which ended more than eighteen months before the Debtor sought bankruptcy relief. Stated another way, the Plaintiff cannot explain how any records that were not produced pertain to whether the Debtor currently has assets or funds to pay his creditors. In fact, the Chapter 7 Trustee filed a Report of No Distribution in the Debtor’s bankruptcy case.
The Plaintiff presented proof only on her § 727(a)(3) cause of action at trial and limited her post-trial submissions to her § 727(a)(3) cause of action. Thus, the Plaintiffs § 523 causes of action are deemed withdrawn or abandoned. Similarly, no proof was offered on the Debtor’s counterclaim and it is therefore deemed withdrawn or abandoned.
CONCLUSION
For the reasons stated above, judgment is granted in favor the Defendant, and the complaint is dismissed.
It is SO ORDERED.
. The Plaintiff filed an action in the New York State Supreme Court for Columbia County entitled Emma Cottini v. Robert Blanchard alklal Robert Blancha, Index No. 3527/2011. This action was stayed by the Debtor’s bankruptcy filing.
. The Creditor suggests in her post-trial submissions that the Debtor may have absconded with $160,000.00 of the $200,000.00 originally advanced to him. There are no allegations in the complaint and no evidence in the record to suggest that the Debtor took for himself any such sum of money. The Debtor lists his income and expenses, including the costs of goods and labor, on Schedule C of his income tax returns for 2009 and 2010. The Creditor introduced the tax returns into evidence and never challenged the accuracy or veracity of any of the numbers on the returns. If the Debtor accurately reported all of his business income on his tax returns, and based upon the record the court must reason that he did, then the court cannot conclude that the Debt- or absconded with funds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497433/ | CHAPTER 7
ORDER
Randy D. Doub, United States Bankruptcy Judge
Pending before the Court is the pro se complaint initiating this adversary proceeding filed by Deborah J. Coble and Scottie A. Coble (the “Plaintiffs”) on June 24, 2013 and the Motion to Dismiss this adversary proceeding for failure to state a claim pursuant to Rule 12(b)(6) filed by Ronald Earl Lawrence (the “Defendant”) on August 1, 2013. The Court conducted a hearing on August 28, 2014, in Greenville, North Carolina to consider this adversary proceeding.
FINDINGS OF FACT
On April 18, 2009, Scottie A. Coble, individually, and the Defendant, as Managing *61Member of NC Golf Group, LLC 1 executed a document entitled “Agreement for Lifetime Membership to Mill Run Golf Club” (the “Agreement”) whereby Mr. Coble purchased a lifetime membership to Mill Run Golf Club for the sum of $15,000.00. Mr. Coble purchased the lifetime membership after attending a community presentation put on by the Defendant where the Defendant offered to sell lifetime memberships ranging in price from $10,000.00 to $15,000.00 based on the purchaser’s age. The Agreement provides that the payment of $15,000.00 shall entitle a “[m]ember to a lifetime membership in Mill Run Golf Club together with the privileges as hereinafter set out.” The lifetime membership allowed the Plaintiffs unlimited play at the Mill Run Golf Course, use of golf carts, USGA handicap and unlimited use of the driving range. The Agreement further provides the member may transfer his membership one time provided that said transfer must occur within ten years of the date stated on the certificate. Pursuant to the Agreement, Mr. Coble was issued a Certificate of Lifetime Membership signed by the Defendant on behalf of NC Golf Group, LLC, on March 24, 2010, evidencing the lifetime membership and providing “[t]his Certificate of Lifetime Membership shall entitle the above Member, the Member’s spouse and any child or step-child of Member under the age of twenty-one (21) to receive golf privileges at Mill Run Golf Club during the life of said Member at no cost other than the price stated herein.”
The Defendant sold approximately eleven lifetime memberships pursuant to the same terms as set forth above ranging in prices from $5,000.00 to $15,000.00. NC Golf Group, LLC subsequently encountered financial difficulties resulting in the foreclosure of the Mill Run Golf Club. The foreclosure sale took place on March 4, 2013. The new owner, Eagle Creek Golf, discovered that the lifetime memberships were never attached to the golf course’s deed. Eagle Creek Golf refused to honor the lifetime golf memberships, but did offer the Plaintiffs three years of free golf with use of a golf cart and three years with free golf fees only.
On April 4, 2013, the Defendant filed a voluntary petition under Chapter 7 of the Bankruptcy Code. The Plaintiffs were not scheduled as creditors within the Defendant’s bankruptcy petition and did not receive notice of the bankruptcy filing. On June 18, 2013, Mr. Coble filed a document requesting to receive notices in the case.2
The Plaintiffs are pro se and commenced this adversary proceeding on June 24, 2013 with the filing of a letter form complaint3 *62(the “Complaint”) against the Defendant. The Plaintiffs attached five documents to the Complaint as follows: (1) a letter Mrs. Coble sent to the Chapter 7 Trustee; (2) a letter Mr. Coble sent to The PGA of America; (3) a news article published on April 6, 2013 by the Daily Advance; (4) the Agreement; and (5) the Certificate of Lifetime Membership. Pursuant to the Complaint, the Plaintiffs request that the Court dismiss the Defendant’s bankruptcy case based on allegations of fraud. The Plaintiffs allege that: (1) at the Defendant’s community presentation he orally represented to prospective buyers that the lifetime memberships would be passed along with the golf course’s deed; and (2) that the Defendant misrepresented his financial condition during the presentation. The Plaintiffs contend they would have never purchased the lifetime golf memberships if the would have known their memberships would not be passed along with the golf course’s deed. On August 1, 2013, the Defendant filed the Answer, Motions and Affirmative Defenses. The Defendant requests that the Complaint be dismissed for failure to state a claim upon which relief may be issued pursuant to Federal Rule of Civil Procedure 12(b)(6), made applicable to this adversary proceeding by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure. The Defendant contends that the Plaintiffs have not alleged sufficient clear and concise facts in order to give notice to the Defendant of the claim or claims against him. Defendant contends that the Plaintiffs’ claim is based on a lifetime interest in real property and falls within North Carolina’s Statute of Frauds (G.S. § 22-2). Defendant notes that an agreement that falls within the statute of frauds can only be modified in writing and the Agreement does not mention the lifetime membership attaching to the deed of the golf course. The Defendant contends that the Plaintiffs’ allegation that the Defendant orally represented the lifetime membership interest would transfer with the deed, was not reduced to writing and then signed by the parties. In addition, the Defendant contends he never deceived the Plaintiffs as to their lifetime membership and never promised them that they would be recorded on the deed to the golf course. The Defendant points out that the Mill Run Golf Course was secured by a deed of trust and the creditor sold the *63land upon which the golf course exists at a foreclosure sale. Accordingly, the Defendant contends he had no power or ability to transfer lifetime membership rights through the foreclosure sale.
The parties knowingly and willfully consented on the record and authorized the bankruptcy court to hear all matters raised in the pleadings and enter a final judgment.
DISCUSSION
A pleading that states a claim for relief must contain “a short and plain statement of the claim showing that the pleader is entitled to relief....” Fed.R.Civ.P. 8(a)(2). The complaint must include “enough facts to state a claim to relief that is plausible on its face.” Angell v. Ber Care, Inc. (In re Caremerica, Inc.) 409 B.R. 787, 745 (Bankr.E.D.N.C. July 23, 2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007)). There are “two working principles” upon which the heightened pleading standard rests:
First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.... Second, only a complaint that states a plausible claim for relief survives a motion to dismiss. Id. at 747 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678-79, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)).
The Plaintiffs are pro se. “A pro se complaint however, inartfully pleaded, must be held to less stringent standards than formal pleadings drafted by lawyers.” Estelle v. Gamble, 429 U.S. 97, 106, 97 S.Ct. 285, 50 L.Ed.2d 251 (1976) (internal quotations and citations omitted); Fed. Rule Civ. Proc. 8(e) (“pleadings shall be so construed as to do justice”). There are, however, limits to these standards. Beaudett v. City of Hampton, 775 F.2d 1274, 1278 (4th Cir.1985), cert. denied, 475 U.S. 1088, 106 S.Ct. 1475, 89 L.Ed.2d 729 (1986). The Court does not have to “conjure up questions never squarely presented to [it].” Id. Discharge provisions will be strictly construed against the objector and liberally construed in favor of the debtor. Ferguson v. Joyce (In re Joyce), 2009 WL 1606424 at *2 (Bankr.M.D.N.C. 2009) (citations omitted).
The Plaintiffs allege that prior to entering into the Agreement, the Defendant falsely represented to the Plaintiffs that the lifetime membership would be attached to the deed of the golf course and that they would have a lifetime golf membership 4. The Plaintiffs contend these remarks constitute fraud as the Plaintiffs paid $15,000.00 to the Defendant for the lifetime golf membership and the Defendant failed to deliver free lifetime golf. The Court will treat this claim as an action pursuant to 11 U.S.C. § 523(a)(2)(A).
*64Section 523(a)(2)(A) of the Code provides:
A discharge ... of this title does not discharge an individual debtor from any debt— '
(2) for money, property, services ..., 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).
Proof of actual fraud under subsection (2)(A) requires satisfaction of the elements of common law fraud “(1) false representation, (2) knowledge that the representation was false, (3) intent to deceive, (4) justifiable reliance on the representation, and (5) proximate cause of damages”. In re Hill, 425 B.R. 766, 777 (Bankr. W.D.N.C.2010) (citing Colombo Bank v. Sharp (In re Sharp), 340 Fed.Appx. 899, 901 (4th Cir.2009)). Proof of fraudulent misrepresentation under subsection (2)(A) requires the Plaintiffs to establish that the debt was incurred through “(1) a fraudulent misrepresentation; (2) which induced the Plaintiffs to act or refrain from acting; (3) which caused harm to the Plaintiffs; and (4) upon which the Plaintiffs justifiably relied.” In re Hill, 425 B.R. 766, 775 (Bankr. W.D.N.C.2010)
The Supreme Court has held that “[a]lthough the plaintiffs reliance on the misrepresentation must be justifiable ... this does mean that his conduct must confirm to the standard of the reasonable man.” Field v. Mans, 516 U.S. 59, 73, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (internal quotations omitted). While justifiable reliance “does not typically give rise to a duty to investigate, a creditor is not entitled to ‘blindly rel[y] 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. (Citation omitted). Accordingly a plaintiff cannot ignore “red flags” and satisfy the justifiable reliance standard. Id. (Citation omitted). “To prove justifiable reliance, a creditor must have shown some degree of diligence.... ” In re Robinson, 340 B.R. 316, 348 (Bankr.E.D.Va.2006) (citing Guar. Residential Lending, Inc. v. Koep (In re Koep), 334 B.R. 364, 372 (Bankr.D.Md.2005) (quoting Boyd v. Loignon (In re Loignon), 308 B.R. 243, 249 (Bankr.M.D.N.C.2004))).
The Plaintiffs seek to establish that they justifiably relied on the Defendant’s oral representation that their lifetime membership interest would be added to the deed of the golf course, when this representation was not incorporated into the later written contract. The Court finds that the Plaintiffs’ claim for fraud fails. The complaint does not allege that the Plaintiffs actually or justifiably relied on the representations allegedly made by the Defendant. As to this allegation, the Complaint states the Defendant “sold approximately 11 lifetime memberships on the basis that we were attached to the property of Mill Run and we would have “lifetime” golf ... We never knew that he never attached us to the deed as agreed upon the paperwork he gave all of us.” The Agreement is not lengthy and consists of only four pages and eleven sections. No where in the Agreement does it state the Plaintiffs’ lifetime membership would be transferred with the future sale of the golf course. Any reliance on the Defendant’s representations made during the community presentation would not have been justified in light of the latter written Agreement. The Agreement was sufficient to put the Plaintiffs on notice that the lifetime membership would not be passed along with the golf course’s deed. Even construing the facts in the light most favorable to the Plaintiffs, the complaint fails *65to establish that they justifiably relied on any representations made by the Defendant, because the terms of the lifetime membership were unambiguously expressed in the Agreement, which the Plaintiffs had a duty to read. Baggett v. Summerlin Ins. & Realty, Inc., 143 N.C.App. 43, 545 S.E.2d 462, 468 (Tyson, J., dissenting), rev’d for reasons stated in the dissent, 354 N.C. 347, 554 S.E.2d 336 (2001) (noting that “Persons entering contracts ... have a duty to read them and ordinarily are charged with knowledge of their contents.”)
Here, the Court finds the facts clearly support that the Plaintiffs did not justifiably rely on the Defendant’s representations. Accordingly, the Defendant’s motion to dismiss the above claim is granted.
As to the Plaintiffs’ claim that the Defendant misrepresented his financial condition during the presentation, the Court denies the Defendant’s motion to dismiss as the Plaintiffs did sufficiently allege for purposes of surviving the motion to dismiss that there were misrepresentations as to the Defendant’s financial condition and but for these misrepresentations, the Plaintiffs would not have entered into the Agreement. As to this claim, the Plaintiffs presented testimony on August 28, 2014, of Mr. Coble. Mr. Coble testified that at the community presentation the Defendant stated the payments he received for the lifetime memberships were going to be used to improve the golf course. Mr. Coble further stated the Defendant did not make any representation as to the financial condition of the golf course or as to the Defendant. According to Plaintiffs, the Defendant was hiding his financial troubles at the community presentation in 2009, because the Defendant later filed for bankruptcy in 2013.
At the conclusion of Plaintiffs’ evidence, the Defendant made an oral motion for directed verdict, claiming there was no evidence for misrepresentation or fraud as to the Plaintiffs’ claim that the Defendant misrepresented his financial condition to the Plaintiffs. In considering a motion for a directed verdict, the court must construe the evidence in the light most favorable to the nonmoving party. Parker v. Prudential Ins. Co. of America, 900 F.2d 772, 776 (4th Cir.1990). Defendant’s motion for a directed verdict in a bench trial is treated as a motion for a judgment on partial findings under Rule 52(c) of the Federal Rules of Civil Procedure. In re Vidro, 497 B.R. 678, 685 (Bankr.E.D.N.Y.2013) (citing Fed.R.Civ.P. 52(c)). A judgment pursuant to Fed.R.Civ.P. 52(c) “operates as a decision on the merits in favor of the moving party.” In re Earle, 307 B.R. 276, 289 (Bankr.S.D.Ala.2002) (citation omitted).
Based on the Plaintiffs’ evidence, it does not appear any representation was made as to the Defendants’ financial ability at the community meeting. Likewise, no community members posed any question to the Defendant regarding his financial condition. Additionally, the community meeting was held approximately four years prior to the Defendant filing bankruptcy and one year prior to the foreclosure of the golf course. Based on this and the evidence received at the hearing, the Defendant’s oral motion for a directed verdict is GRANTED.
CONCLUSION
Based on the record and the evidence received at the hearing, judgment is entered in favor of the Defendant. The Plaintiffs shall have and recover nothing of the Defendant by way of their complaint. The Clerk is directed to close this adversary proceeding.
SO ORDERED.
. Pursuant to the Schedules filed in the Defendant's bankruptcy case, the Defendant served as an officer of Mill Run Golf Course, LLC and formerly did business as NC Golf Group, LLC and as Mill Run Golf Club.
. As stated in the Complaint, the Plaintiffs sent a complaint to the Professional Golf Association of America setting forth their concerns and also sought criminal charges against the Defendant through the "NC State ‘white collar' crime unit.” Plaintiffs state they were not informed that the Defendant had filed bankruptcy until they were contacted by the County of Currituck Sheriff Department. Plaintiffs allege they have since been informed by the "NC State ‘white collar’ crime unit” that it was unable to continue any investigation into the matter because of the bankruptcy filing.
.The Complaint states as follows:
I am writing asking that the Bankruptcy Case that Ronald Lawrence filed #13-02187 be dismissed/set aside due to fraud based on the following:
Mr. Ronald Lawrence sold approximately II lifetime memberships on the basis that we were attached to the property of Mill Run and we would have "lifetime” golf. We along with approximately 11 other people paid Mr. Ronald Lawrence for lifetime *62memberships ranging from $15,000 to $5,000. We paid combined more than $100,000 to him. There is even 1 person who paid him a lifetime membership 3 days before he closed on the golf course.
We never knew that he never attached us to the deed as agreed upon in the paperwork he gave all of us.
We found this us [sic ] when the property was sold and the new owners had a meeting with us and informed us of that.
We filed a formal complaint with the PGA and the Currituck Sheriff’s Dept along with the other lifetime members.
Currently the NC State "white collar” crime unit is investigating this case.
Through the County of Currituck Sherriff [sic ] Dept we were informed that Mr. Ronald Lawrence filed for bankruptcy protection on April 4, 2013 and a creditor meeting was held on April 30, 2013. None of us were ever informed of this so that we could file creditor paperwork, object etc.
Mr. Ronald Lawrence knew we were seeking relief/criminal charges as he had been contacted by the Sherriff's [sic ] Dept, And [sic] the Daily Advance newspaper before he filed for bankruptcy.
I sent a certified letter to the court on June 14, 2013 and also a letter to Mr. Steven L. Beaman, PLLC at Fax # 252 243 5174 stating we wanted to be added as a creditor. I am enclosing all the documents that I have along with the newspaper article that ran in the daily advance on Sunday April 6, 2013. The Currituck County Sherriff’s
[sic ] Dept has an open case
I am asking the court to dismiss or set aside Mr. Ronald Lawrence application for bankruptcy based on he did not list any of us on as a creditor on his bankruptcy case.
. The Defendant alleges the Statute of Frauds as a defense. A motion to dismiss filed under Federal Rule of Procedure 12(b)(6), which tests the sufficiency of the complaint, generally cannot reach the merits of an affirmative defense. Goodman v. Praxair, Inc., 494 F.3d 458, 464 (4th Cir.2007). “But in the relatively rare circumstances where facts sufficient to rule on an affirmative defense are alleged in the complaint, the defense may be reached by a motion to dismiss filed under Rule 12(b)(6). This principle only applies, however, if all facts necessary to the affirmative defense 'clearly appear[] on the face of the complaint.' " Id. (citing Richmond, Fredericks-burg & Potomac R.R. v. Forst, 4 F.3d 244, 250 (4th Cir.1993) (emphasis added)); accord Des-ser v. Woods, 266 Md. 696, 296 A.2d 586, 591 (1972). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497435/ | MEMORANDUM OPINION AND ORDER DENYING MOTION TO ENFORCE FOR LACK OF SUBJECT MATTER JURISDICTION
BARBARA J. HOUSER, Bankruptcy Judge.
Before the Court is the Motion to Enforce [Dkt. No. 684] (the “Motion”) filed by Superior Air Parts, Inc. (“Superior”). By the Motion, Superior claims to seek to enforce the terms of the Third Amended Plan of Reorganization of Superior Air Parts, Inc. and the Official Committee of Unsecured Creditors [Dkt. No. 322] (the “Plan”). The Court heard the Motion on July 22-23, 2014 and August 11, 2014.1 This Memorandum Opinion and Order contains the Court’s findings of fact and conclusions of law with respect to the Motion.
*88I. FACTUAL AND PROCEDURAL BACKGROUND
Superior filed its voluntary petition under Chapter 11 of the Bankruptcy Code in this Court on December 31, 2008, commencing the above referenced bankruptcy case (the “Case”). After some usual and unusual twists and turns in a Chapter 11 case, Superior and the Official Committee of Unsecured Creditors filed the Plan on July 23, 2009. The Plan generally provided for the resumption and continuation of Superior’s business (as described briefly below), but the prepetition equity interests 2 in Superior were cancelled and ownership of Superior was transferred to the Brantley Group (or its designee), who paid a cash contribution of $7 million (subject to adjustment) for all of the equity interests in Superior, as reorganized pursuant to the Plan. Certain prepetition creditors were to be repaid by Superior, as reorganized pursuant to the Plan, while other prepetition creditors were to be paid by the Trustee of a Creditor’s Trust to be created pursuant to the Plan.
On August 27, 2009, this Court confirmed the Plan. Order Confirming Third Amended Plan of Reorganization [Dkt. No. 404] (the “Confirmation Order”). Thereafter, the Plan went effective on September 28, 2009. Notice of Effective Date [Dkt. No. 432], On August 20, 2010, Marla Reynolds, as Trustee of the Superior Creditor’s Trust (the “Plan Trustee”), filed her Application for Final Decree Pursuant to Section 350 of the United States Bankruptcy Code [Dkt. No. 650] (the “Application for Final Decree”). In the Application for Final Decree, the Plan Trustee represented to the Court that she had fully performed her obligations under the Plan and had made a final distribution to creditors. Application for Final Decree at 3. The Case was closed on October 8, 2010.
On March 15, 2012, Superior moved to reopen the Case in response to a lawsuit (the “Lawsuit”) filed against it in the 236th Judicial District Court of Texas by Lycom-ing Engines, a division of Avco Corporation (“Lycoming”), and Textron Innovations, Inc. (collectively, the “Plaintiffs”). Motion to Reopen Case [Dkt. No. 662] (“Motion to Reopen”) at 4. In the Lawsuit, the Plaintiffs sought to prevent Superior from manufacturing, distributing, or selling parts that incorporated the Plaintiffs’ proprietary information. Id. at 4-5. Superior filed its Notice of Removal [AP Dkt.3 No. 1] on March 14, 2012, commencing an adversary proceeding in this Court (the “AP”). Superior argued that this Court should grant the Motion to Reopen because determination of the Lawsuit turned, inter alia, on whether the Plaintiffs’ claims were barred by the Plan and whether the Plaintiffs’ claims violated the Confirmation Order. In the Motion to Reopen, Superior asked that this Court reopen the Case so the Court could “hear and determine the relief requested in the adversary proceeding, enter orders necessary to interpret and implement the Third Amended Plan and Confirmation Order, *89correct any defects or omissions therein, and carry out the purpose and intent of the Third Amended Plan and Confirmation Order.” Motion to Reopen ¶ 25. This Court entered an order granting the Motion to Reopen on May 23, 2012. [Dkt. No. 670],
As for the AP, Superior moved to dismiss it, arguing that: (i) the Plaintiffs claims were barred by the Plan, the Confirmation Order, and the Bankruptcy Code; (ii) the Plaintiffs failed to adequately plead their breach of fiduciary duty claim; (iii) the Plaintiffs failed to adequately plead their misappropriation of trade secrets claim; and (iv) the Plaintiffs failed to adequately plead their fraudulent concealment claims. Defendant’s Motion to Dismiss [AP Dkt. No. 7]. On December 14, 2012, this Court entered its Final Judgment [AP Dkt. No. 72], dismissing all of the Plaintiffs’ claims. On appeal, the District Court affirmed and dismissed the Plaintiffs’ appeal. [AP Dkt. No. 90]. The Plaintiffs then appealed to the Fifth Circuit, but the Fifth Circuit dismissed the appeal on July 11, 2014 pursuant to the Plaintiffs’ motion. [AP Dkt. No. 93]. This Court kept the Case open during the pen-dency of the appeal.
More than a year after the Case was reopened (and while the appeal in the AP was pending), Superior filed its Motion to Show Cause [Dkt. No. 673], pursuant to which it sought an order to show cause why, as relevant here, TAE 4 should not be held in contempt for failing to comply with the terms of the Plan. The Motion to Show Cause was subsequently denied on November 14, 2013 for want of prosecution. [Dkt. No. 682], The next day, Superior filed the Motion. In the Motion, Superior explained why the Motion to Show Cause had not been prosecuted — i. e., that it had entered into a tolling agreement with Dr. Kübler, the German insolvency administrator of TAE, which provided that Superior would not ask this Court to hear the Motion to Show Cause before October 15, 2013. Motion ¶ 26. According to Superi- or, the purpose of the tolling agreement was to give the parties an opportunity to settle their dispute. Id. However, Superi- or stated that during the tolling period, no settlement discussion occurred and, at the conclusion of such period, Superior again made a demand on Dr. Kübler for the return of certain property. Id. ¶¶ 26-27. But the Court, unaware of the parties’ tolling agreement, dismissed the Motion to Show Cause for want of prosecution, precipitating the filing of the Motion.
To put the current dispute into context, some information about Superior’s business will be helpful. Prior to its bankruptcy filing, Superior was a manufacturer of replacement parts for various reciprocating aircraft engines, including engines originally manufactured by Lycoming and Teledyne Technologies a/k/a Teledyne Continental Motors (“TMC”). Superior also manufactured its own aviation gas powered reciprocating aircraft engines known as Vantage Engines and XP-Series Engines. Superior was one of the largest competitors of Lycoming and TMC for the sale of replacement parts for reciprocating aircraft engines.
' The Federal Aviation Administration (“FAA”) had issued Parts Manufacturer Approval (“PMA”) certificates to Superior authorizing Superior to manufacture such replacement aircraft parts. Each PMA was issued by the FAA after a review of an application and supporting data, typically including specifications, designs, test results, drawings, and other technical data *90for each proposed part. Superior’s assets included the intellectual property underlying the PMAs.
As part of its parts business, Superior contracted with various suppliers to manufacture or fabricate its replacement parts to its specifications. One of those suppliers was TAE.5 The prepetition contract underlying the relationship between Superior and TAE, Supplier Agreement between Thielert Aircraft Engines GmbH and Superior Air Parts, Inc. dated December 15, 2001 and Amendments Thereto (“Supplier Agreement”), was admitted into evidence as Exhibit 18 at the hearing on the Motion. Pursuant to the Supplier Agreement, TAE agreed to manufacture certain parts to Superior’s specifications, and Superior agreed to purchase those parts. Supplier Agreement § 1.01. According to Superior, two provisions of the Supplier Agreement are relevant to the current dispute:
3.02. Title. Superior shall retain title to all Superior furnished drawings, related data (whether or not maintained or stored on computer) and information supplied to TAE under this Agreement. TAE will maintain the confidentiality of all drawings, data and information supplied by Superior and will return such drawings, data and information to Superior upon the termination of this Agreement.
3.03. Proprietary Rights Data. Superior’s drawings, related data and information shall be used by TAE only for the performance of its obligations under this Agreement, unless otherwise provided in this Agreement or expressly approved by Superior in writing.
Supplier Agreement §§ 3.02, .03
The Plan addressed the Supplier Agreement. Pursuant to § 7.4 of the Plan, “[a]ll Executory Contracts and Unexpired Leases that have not been specifically assumed by the Debtor under the Plan shall be rejected as of the Effective Date.” Superior did not move to assume the Supplier Agreement, so pursuant to the Plan, Superior rejected6 the Supplier Agreement.
After the Plan was confirmed and consummated, Superior, now operating under the direction of its new owner, made the decision to resume its business relationship with TAE. Specifically, TAE apparently agreed to resume the manufacture/fabrication of aircraft parts to Superior’s specifications and Superior apparently agreed to resume purchasing such parts from TAE. Motion ¶ 23. However, according to Superior, it “ceased purchasing parts from [TAE] for *91pricing reasons and received the last shipment of parts on or about Spring, 2018,” Motion ¶24, approximately three and a half years after the Plan went effective and the new owner assumed control over Superior. Again, according to Superior, on April 24, 2018, it requested that TAE return to Superior all of its property as set forth in the Plan and Confirmation Order. Id. In the Motion, Superior claims that TAE has failed to return Superior’s property as required by the Plan and Confirmation Order.
TAE, through Dr. Kübler, filed its Preliminary Response of Insolvency Administrator to Motion to Enforce [Dkt. No. 688] (the “Response”) on December 9, 2013. In the Response, Dr. Kübler noted:
During the nearly four years after the [Confirmation Order] was entered, TAE and Superior continued to do business together without any assertion by Superior that TAE was in violation of, or obligated to return property to Superior pursuant to, the Confirmation Order. Notwithstanding Superior’s recognition that those dealings continued for years after the entry of the Confirmation Order, and that during that time Superior did not ask for or desire for TAE to return any information to it, Superior now alleges that TAE is obligated to return property pursuant to the [Confirmation Order],
Response ¶2. Dr. Kübler further stated that “[t]he issue between the Insolvency Administrator and Superior is not an issue of failing to comply with a 2009 order; instead, it is an issue of determining what, if any, property Superior owns that is in TAE’s possession. The Insolvency Administrator will return to Superior any property in his control that Superior owns.” Response ¶ 3. However, according to Dr. Kübler, as the Insolvency Administrator for TAE, he did not have sufficient information to determine what property was Superior’s (that should be returned to Superior) and what property was TAE’s (that he had a fiduciary duty to administer for the benefit of TAE’s creditors). According to Dr. Kübler, Superior requested the return of its property shortly before he was to close on the sale of substantially all of TAE’s assets; but, because Superior had requested a return of its property, he “directed that any property Superior could conceivably own be segregated and carved out from the asset sale.” Id. Finally, Dr. Kübler stated that he has safeguarded this segregated property and will not transfer or dispose of it until the Motion is decided. Id.
Given the difficulties in determining what property Superior was demanding that TAE return, among other difficulties, the parties asked for, and received, numerous agreed continuances of the hearing on the Motion to see if they could eonsensually resolve this dispute. However, those efforts failed and the Motion is now ripe for this Court’s determination, assuming it has jurisdiction to decide the Motion, to which we now turn.
II. POST CONFIRMATION JURISDICTION
This Court has an “independent obligation to determine whether subject-matter jurisdiction exists.” Hertz Corp. v. Friend, 559 U.S. 77, 94, 130 S.Ct. 1181, 175 L.Ed.2d 1029 (2010). Accordingly, after the evidence had closed and before closing arguments, this Court raised the issue of its subject matter jurisdiction and asked the parties to address that issue in their closing arguments. Both parties argued that this Court has subject matter jurisdiction. Superior argued that, consistent with the Supreme Court’s decision in Travelers Indemnity Co. v. Bailey, 557 U.S. 137, 151, 129 S.Ct. 2195, 174 L.Ed.2d *9299 (2009), this Court “plainly had jurisdiction to interpret and enforce its own prior orders.” In a letter brief filed on August 12, 2014, Letter Regarding Subject Matter Jurisdiction [Dkt. No. 744], Dr. Kubler argued that there is subject matter jurisdiction because “Superior’s Motion effectively asks the Court to issue a ruling related to the execution of the Plan through enforcement of the Confirmation Order.” Id. at 2.
However, for the reasons explained below, this Court concludes that it does not have subject matter jurisdiction because this dispute goes well beyond enforcing the Plan and Confirmation Order. Under 28 U.S.C. § 1334, a federal district court has original jurisdiction over “all civil proceedings arising under title 11, or arising in or related to cases under title 11.” The district court is authorized under 28 U.S.C. § 157 to refer to the bankruptcy court “any or all proceedings arising under title 11 or arising in or related to a case under title 11.” By virtue of the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc adopted in this district on August 3, 1984, this Court has jurisdiction over any or all proceedings arising under title 11 or arising in or related to a case under title 11.
From this Court’s perspective, the evolution of the relief sought by Superior here is relevant to analyzing whether this Court has subject matter jurisdiction over the Motion. After filing the Motion, and in an effort to narrow the issues in dispute between the parties, Superior sent its Executive Vice President, Keith Chatten (“Chat-ten”), to Germany to review the property that Dr. Kübler had segregated from the TAE asset sale in order to determine what property Superior believed it owned. During that review, Chatten found a number of documents and technical drawings that contained a legend clearly identifying them as Superior drawings. Dr. Kübler has agreed that (i) these documents belong to Superior, and (ii) he will return them to Superior.
However, during this document review in Germany, Chatten also found TAE-labeled drawings and three-dimensional models that TAE had created, which Superior alleges contain its data and other information that came from the Superior drawings (the “TAE-Created Materials”). Superior now demands that the TAE-Created Materials be returned to it — allegedly pursuant to the terms of the Plan and Confirmation Order. Specifically, Superi- or seeks the return of the TAE-Created Materials pursuant to § 6.12 of the Plan, which provides:
The Confirmation Order will include a requirement that all persons, including but not limited to Corporate Finance Partners, TAG, TAE, Engine Components, Inc., Avco Corporation and Tele-dyne Technologies Incorporated, and their respective parents, sister and subsidiary companies, and all other companies or persons in their control, and each of them, shall be directed to return to the Reorganized Debtor all documents and other information owned by the Debtor related to the Debtor’s business and operations (the “Proprietary Information”). For the avoidance of doubt, the Reorganized Debtor retains all of the Debtor’s rights pursuant to any confidentiality agreement executed in connection with the exchange of such information
In its reply brief (filed before the issue of subject matter jurisdiction was raised by the Court), Dr. Kübler argued that Superior is essentially seeking injunctive relief (as the issues have evolved since the filing of the Motion) when it asks this Court to preclude Dr. Kübler from selling the TAE-Created Material to anyone, in-*93eluding any competitor of Superior. Reply Brief of Insolvency Administrator Relating to Motion to Enforce Confirmation Order Pursuant to Court’s July 23, 201k Ruling Regarding Briefing [Dkt. No. 740] (the “Reply Brief’) at 5. Dr. Kübler makes a good point as further explained below.
Based on Superior’s post-hearing brief, it has become apparent to the Court that Superior is seeking relief beyond that which the Motion purported to address— i.e., simply enforcing the Plan and Confirmation Order. Superior Air Parts, Inc. ’s Supplemental Brief [Dkt. No. 738] (“Superior Brief’). For example, Superior argues that because it owns the information underlying the TAE-Created Materials, Dr. Kübler cannot sell the TAE-Created Materials to a third party. Id. at 7. Further, the Superior Brief states:
If Dr. Kübler wants to remove or redact any TAE manufacturing processes or know-how from the TAE-labeled drawings and CAD models of Superior’s parts prior to returning Superior’s information,7 he may do so. Dr. Kübler should not, however, be permitted to retain Superior’s information (whether in the form of the original Superior drawings, TAE-labeled drawings, or CAD models) and monetize Superior’s information by sale to one of Superior’s competitors in breach of TAE’s confidential relationship with Superior.
Id. at 9.
And, as the relief sought by Superior evolved, so did the Court’s thinking on its subject matter jurisdiction over this dispute. In short, in addition to seeking a return of its property, Superior is seeking what amounts to an injunction against TAE, preventing TAE from using or selling what Superior alleges to be its proprietary information — whether contained in a Superior drawing or in the TAE-Created Materials — which is also procedurally improper because it was brought by a motion (commencing a contested matter under Federal Rule of Bankruptcy Procedure 9014), instead of through an adversary proceeding as required by Federal Rule of Bankruptcy Procedure 7001(7). But, the procedural deficiency here pales by comparison to the subject matter jurisdictional deficiency, to which we now return.
As noted previously, this Court only has subject matter jurisdiction over this dispute if it arises under title 11, arises in a case under title 11, or is related to a case under title 11. 28 U.S.C. § 1334. But, as will be discussed below, this Court’s jurisdiction is further narrowed because this is a post-confirmation dispute. The Court will examine each of these bases for jurisdiction in turn.
“Arising under” jurisdiction encompasses those causes of action that are “created or determined by a statutory provision of title 11.” Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir.1987). Courts have specifically addressed arising under jurisdiction in the post-confirmation context. In Insurance Co. of North America v. NGC Settlement Trust & Asbestos Claims Management Corp. (In re *94National Gypsum Co.), 118 F.3d 1056, 1061 (5th Cir.1997), one of the issues before the Fifth Circuit was whether a bankruptcy court had subject matter jurisdiction over an action brought by the successor to the debtor seeking a declaration that a creditor’s collection actions violated the discharge injunction in the debt- or’s plan. The court concluded that “a declaratory judgment action seeking merely a declaration that collection of an asserted preconfirmation liability is barred by a bankruptcy court’s confirmation of a debtor’s reorganization plan (and the attendant discharge injunctions under section 524 and 1141 of the Bankruptcy Code) is a core proceeding arising under title 11.” Id. at 1064. Another Fifth Circuit case, Mackey v. M.C. Investments (In re Martinez), No. 00-40412, 2000 WL 34508398, at *1 (5th Cir. Oct. 5, 2000), held that the bankruptcy court had subject matter jurisdiction over a lawsuit filed against a creditor for allegedly breaching notice provisions in the Chapter 11 plan. There, the Fifth Circuit concluded there was jurisdiction because “[w]hether the plan required such notice requires interpretation of the plan, which is a matter ‘arising under title 11.’” Id.
The Ninth Circuit addressed post-confirmation arising under jurisdiction in Battle Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124 (9th Cir.2010). In that case, the bankruptcy court reopened a debtor’s case to determine a dispute between the debtor and a party claiming to hold a right of first refusal on a piece of real estate that the debtor had sold. Id. at 1129. The debtor’s plan referenced the debtor’s intention to sell the property at issue, as well as the right of first refusal. Id. at 1128. The Ninth Circuit stated that arising under jurisdiction covers actions where the Bankruptcy Code created the cause of action or determines the cause of action. Id. at 1131. In the case before it, the Ninth Circuit concluded that the bankruptcy court did not have arising under jurisdiction because the party claiming to hold the right of first refusal had a state law contract claim that was independent of the bankruptcy case. Id.
Applying these cases here, this Court concludes that it is does not have arising under jurisdiction. While the facts in National Gypsum appear similar — i.e., a pre-petition relationship and a plan provision affects that relationship post-confirmation — National Gypsum involved the discharge injunction, which is a substantive right created under the Bankruptcy Code. Here, the Plan provision that affected the relationship between Superior and TAE did not involve any substantive right created under the Bankruptcy Code. Moreover, the Plan provision upon which Superior purports to rely for the return of its information is not even implicated here because Superior voluntarily resumed its business relationship with TAE after the Plan was confirmed and consummated. In fact, some forty-two (42) months after resuming its business relationship with TAE post-confirmation, Superior decided to terminate that relationship for “pricing” reasons. Motion ¶24. So, TAE’s alleged obligation to return Superior’s information and property did not arise from the Plan or Confirmation Order (as alleged in the Motion), but instead from the termination of a post-confirmation business relationship and whatever agreement — whether it be the rejected Supplier Agreement or some new post-confirmation agreement— that governed the parties’ relationship post-confirmation. The facts here are more like those in Battle Ground Plaza because the dispute here is also independent of any provision of the Bankruptcy Code.
“Arising in” jurisdiction covers those actions “not based on a right ex*95pressly created by title 11, but [instead] based on claims that have no existence outside of bankruptcy.” Faulkner v. Eagle View Capital Mgmt. (In re Heritage Org., LLC), 454 B.R. 353, 360 (Bankr. N.D.Tex.2011) (citing Wood, 825 F.2d at 97). Various courts have addressed arising in jurisdiction post-confirmation, including the Third and Fourth Circuits. In United States Trustee v. Gryphon at Stone Mansion, Inc., 166 F.3d 552, 553 (3d Cir.1999), the issue before the Third Circuit was whether the bankruptcy court had post-confirmation jurisdiction to compel a debtor to pay U.S. Trustee fees. The court concluded that the bankruptcy court did have jurisdiction because the matter arose in bankruptcy, as the requirement to pay U.S. Trustee fees applies only in bankruptcy cases. Id. at 556.
In Valley Historic Limited Partnership v. Bank of New York, 486 F.3d 831, 835 (4th Cir.2007), the Fourth Circuit held that the bankruptcy court did not have subject matter jurisdiction over a post-confirmation dispute between the debtor and one of its creditors. In that case, the debtor brought an adversary proceeding after its plan was confirmed, alleging breach of a loan agreement and a tortious interference claim. Id. at 834. The debtor argued that there was arising in jurisdiction because “the breach of contract caused its bankruptcy and the tortious interference complicated the administration of the bankruptcy case.” Id. at 835-36. However, the Fourth Circuit rejected this argument, concluding that “the Debtor’s breach of contract claim and tortious interference claim would have existence outside of the bankruptcy, [so] they were not within the bankruptcy court’s ‘arising in’ jurisdiction.” Id. at 836.
Applying the Gryphon and Valley Historic cases here, there is no “arising in” jurisdiction. Unlike the claim for U.S. Trustee fees in Gryphon, which would not be owed but for the bankruptcy, TAE’s alleged obligation to use Superior’s property only for Superior’s benefit and to return the property at the conclusion of the manufacturing relationship would have arisen regardless of Superior’s bankruptcy filing. Further, the Court finds the conclusion in Valley Historic instructive. While the claim there arose prepetition and the claim here arose post-confirmation, the similarity is that both claims did not arise during or in relation to the bankruptcy case. Just as the debtor in Valley Historic would have had that claim even if there was no bankruptcy filing, Superior would have claims against TAE for the return of its property regardless of its bankruptcy filing.
So, the only jurisdictional “hook” to bring this dispute properly before this Court would be under “related to” jurisdiction. A court has “related to” jurisdiction “if the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Randall & Blake, Inc. v. Evans (In re Canion), 196 F.3d 579, 585 (5th Cir.1999) (internal quotation marks omitted). In the post-confirmation context, however, a court’s related to jurisdiction is significantly less than it is in the pre-confirmation context because there is no longer a bankruptcy estate to administer. For example, in Bank of Louisiana v. Craig’s Stores of Texas, Inc. (In re Craig’s Stores), 266 F.3d 388, 391 (5th Cir.2001), the Fifth Circuit held that a bankruptcy court did not have jurisdiction over a post-confirmation business dispute, even though the dispute involved a contract that was assumed as part of a bankruptcy plan. In that case, the debtor had a contractual relationship with a bank for the debtor’s credit card processing. Id. at 389. That relationship predated the bankruptcy filing, and contin*96ued after the debtor’s plan was confirmed. Id. Eighteen months after the debtor’s plan was confirmed, it sued the bank in bankruptcy ■ court alleging a state-law based contract claim. Id. at 389-90. While the debtor attempted to argue that the bankruptcy court had subject matter jurisdiction for a variety of reasons, including that the contract between the parties existed prepetition and was assumed during the bankruptcy case, the Fifth Circuit rejected the debtor’s arguments. Id. at 390. The Fifth Circuit stated that “[ajfter a debtor’s reorganization plan has been confirmed, the debtor’s estate, and thus bankruptcy jurisdiction, ceases to exist, other than for matters pertaining to the implementation or execution of the plan.” Id. So, in Craig’s Stores, the bankruptcy court did not have jurisdiction because the state law contract claims arose out of a post-confirmation business relationship between the parties and “no facts or law deriving from the reorganization or the plan was necessary to the claim asserted” by the debtor. Id. at 391.
The Fifth Circuit again looked at post-confirmation related to jurisdiction in Newby v. Enron Corp. (In re Enron Corp. Securities), 535 F.3d 325 (5th Cir.2008). In that case, one of the issues before the Fifth Circuit was whether a district court is divested of related to jurisdiction over pre-confirmation claims after the plan is confirmed. Id. at 334-35. In its analysis, the Fifth Circuit revisited the Craig’s Stores decision, and stated that there were three factors present there which led to the decision that the bankruptcy court lacked subject matter jurisdiction:
[Fjirst, the claims at issue “principally dealt with post-confirmation relations between the parties;” second, “[t]here was no antagonism or claim pending between the parties as of the date of the reorganization;” and third, “no facts or law deriving from the reorganization or the plan [were] necessary to the claim.” Craig’s Stores, 266 F.3d at 391. Notwithstanding its statement that bankruptcy jurisdiction exists after plan confirmation only “for matters pertaining to the implementation or execution of the plan,” the facts in Craig’s Stores were narrow; they involved post-confirmation claims based on post-confirmation activities.
Id. at 335 (quoting Craig’s Stores, 266 F.3d at 389-91) (second and third alteration in original). The court ultimately concluded that Craig’s Stores dealt with a different type of claim — ie., post-confirmation claims, so it was not dispositive of the issue presently before the court. Id. at 336. Accordingly, the court held that the district court retained jurisdiction despite plan confirmation. Id.
The Third Circuit has also examined the issue of post-confirmation related to jurisdiction. In Resorts International Financing, Inc. v. Price Waterhouse & Co. (In re Resorts International, Inc.), 372 F.3d 154, 168-69 (3d Cir.2004), the Third Circuit articulated the following test for post-confirmation related to jurisdiction:
[T]he jurisdiction of the non-Article III bankruptcy courts is limited after confirmation of a plan. But where there is a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement, retention of post-confirmation bankruptcy court jurisdiction is normally appropriate.
Other courts, including the Fourth and Ninth Circuits, have adopted the Third Circuit’s “close nexus” test. In Valley Historic, 486 F.3d at 836, the Fourth Circuit chose to adopt the “close nexus” test because “it insures that the proceeding *97serves a bankruptcy administration purpose on the date the bankruptcy court exercises that jurisdiction.” Applying that test to the facts before it, the Fourth Circuit concluded there was not a close nexus in a post-confirmation adversary filed by the debtor against its lender for breach of contract based on pre-confirmation activities. Id.
In Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1194 (9th Cir.2005), the Ninth Circuit adopted the close nexus test because it “recognizes the limited nature of post-confirmation jurisdiction but retains a certain flexibility.” Applying that test, the Ninth Circuit concluded that the bankruptcy court had post-confirmation jurisdiction over claims that “could affect the implementation and the execution of the Plan itself.” Id.
Superior has certainly tried to craft the Motion in a way that suggests that post-confirmation, related to jurisdiction exists — i.e., as a motion to enforce a speeific provision of the Plan and Confirmation Order. However, upon a closer examination of the facts (as discussed above), it is apparent to this Court that Superior is attempting to litigate a post-confirmation business dispute with TAE in a bankruptcy court that no longer has jurisdiction to hear that dispute. If Superior truly sought the return of its property pursuant to the Plan and Confirmation Order, the Motion could and should have been brought many months, if not years, earlier than it was — ie., within a reasonable time after the Plan became effective.8 Instead, Superior voluntarily resumed its business relationship with TAE post-confirmation and now asks for the return of its information and property not pursuant to the Plan and Confirmation Order, but because it voluntarily terminated its post-confirmation business relationship with TAE a few months before it filed the Motion and years after its Plan was confirmed, consummated and fully implemented.9
*98This Court notes the important factual similarities between this dispute and Craig’s Stores. First, both involved post-confirmation disputes based on obligations that did not arise from the plan. In Craig’s Stores, the allegedly breached obligations arose from the assumed contract between the debtor and its bank, and here the obligation to return material to Superi- or arises from whatever agreement governs the post-confirmation relationship between Superior and TAE. Because the Plan is irrelevant to that determination, this dispute, like the dispute in Craig’s Stores, cannot be heard by a bankruptcy court because the bankruptcy court lacks jurisdiction over a post-confirmation dispute that goes beyond simply enforcing or implementing a confirmed plan.
Applying the factors .from Enron also demonstrates that there is no subject matter jurisdiction to hear this dispute. As for the first factor, whether the claim deals with post-confirmation relations, the dispute here clearly deals with the post-confirmation relationship between Superior and TAE. As for the second factor, whether there was a claim pending as of the date of reorganization, Superior did not demand a return of its alleged property until late April 2013, some forty-two (42) months after confirmation. Clearly, this claim was not pending at the time of the reorganization proceeding. As for the third factor, this dispute does not involve implementation or execution of the Plan, but instead involves whatever agreement governed the parties’ business relationship post-confirmation.
While the “close nexus” test is broader than the Fifth Circuit’s standards in Craig’s Stores and Enron for post-confirmation related to jurisdiction, even that test is not met based on these facts. Whether TAE has an obligation to return materials to Superior based on its post-confirmation dealings with Superior has nothing to do with the Plan. Unlike the facts in Pegasus Gold, this adversary will have no effect on the implementation and execution of the Plan, as all Superior creditors were paid pursuant to the Plan years ago. Put another way, there is no close nexus here because this post-confirmation business dispute is too far removed from confirmation.
III. CONCLUSION
Simply because a debtor was once in bankruptcy does not mean that the bankruptcy court is an appropriate forum in which to litigate post-confirmation disputes between a reorganized debtor and its post-confirmation suppliers. For the reasons explained herein, this Court lacks subject matter jurisdiction over this dispute. Accordingly, the Motion shall be, and hereby is, denied without prejudice to: (i) Superior seeking whatever relief it believes appropriate against TAE in a court of competent jurisdiction, and (ii) TAE asserting whatever defenses and/or claims it believes appropriate against Superior.
Because this Court’s decision in the AP (which prompted the reopening of the Case in the first place) is now final (given the Plaintiffs’ voluntary dismissal of the *99appeal pending in the Fifth Circuit), there is no reason for the Case to remain open on this Court’s docket. The Clerk of the Court is directed to reclose the Case as soon as practicable following the entry of this Memorandum Opinion and Order on the docket.
SO ORDERED.
. The parties substantially underestimated the amount of time necessary to hear the Motion. Due to scheduling conflicts with witnesses and counsel, the hearing was continued to August 11. Given the delay in concluding the hearing, the Court requested that further briefing from the parties be filed on issues not addressed in the pre-hearing briefs on an agreed schedule prior to the resumption of the hearing on August 11. Those further briefs were timely filed and the Court has carefully reviewed them.
. At the time the Case was filed, Thielert, AG, a German company (“TAG”) owned 100% of the equity interests, having acquired them in 2006. In April 2008, TAG and another wholly owned subsidiary of TAG, Thielert Aircraft Engines GmbH ("TAE”), were placed into insolvency proceedings in Germany. Dr. Kü-bler was appointed as the insolvency administrator over TAE. A separate insolvency administrator was appointed over TAG. Like a bankruptcy trustee under the Bankruptcy Code, Dr. Kübler, as insolvency administrator for TAE, owes fiduciary duties to TAE’s creditors under the German Insolvency Code, and TAE can only act through its insolvency administrator.
. “AP Dkt.” refers to the docket in adversary proceeding number 12-3035, styled Lycoming Engines v. Superior Air Parts, Inc.
. As noted previously, TAE was an affiliate of Superior at the time the Case was filed, as TAG owned 100% of the stock of both Superi- or and TAE.
. When the Supplier Agreement was entered into in 2001, Superior and TAE were not affiliates. They became affiliates — i.e., sister subsidiaries of TAG — when TAG acquired Superior in 2006.
. Rejection of an executory contract under § 365(g) of the Bankruptcy Code does not terminate that contract. Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077, 1082 (5th Cir.1994). Rather, a debtor’s rejection of an executory contract constitutes a breach of that contract by the debtor immediately before the date of the filing of its bankruptcy case. 11 U.S.C. § 365(g)(1); see also Austin at 1082; Meredith Corp. v. Home Interiors & Gifts, Inc. (In re Home Interiors & Gifts, Inc.), No. 08-3125, 2008 WL 4772102, at *8 (Bankr.N.D.Tex. Oct. 9, 2008). Thus, as relevant here, upon Superior’s rejection of the Supplier Agreement, TAE had the right to file a prepetition unsecured claim against Superior for any damages flowing from Superior’s breach of the Supplier Agreement. Moreover, TAE had the right to terminate the Supplier Agreement in accordance with Section IX of the Supplier Agreement. On this record it is unclear if TAE terminated the Supplier Agreement or whether it elected not to terminate the Supplier Agreement based upon Superior’s breach of that agreement.
. During closing argument, counsel for Superior was unable to answer the question of how it was that TAE was to return Superior's information and data imbedded into the TAE-Created Materials pursuant to the Plan and Confirmation Order. While the evidence is clear that data and information from Superi- or’s drawings, which drawings Dr. Kübler has agreed to return to Superior, is now imbedded in the TAE-Created Materials, Superior could not explain how that imbedded information could be removed from the TAE-Created Materials and returned to Superior. This presents a bit of a metaphysical dilemma for the Court, which it need not decide for the reasons explained in this Memorandum Opinion and Order.
. By making this finding, this Court is not attempting to suggest that there is a specific time limit on the exercise of post-confirmation, related to jurisdiction. Rather, the finding is made to demonstrate that this dispute is not over a return of property pursuant to the Plan and Confirmation Order, but is rather a dispute over the return of property following the termination of a post-confirmation business relationship voluntarily resumed by a reorganized debtor. Ironically, if TAE had complied with the Plan and Confirmation Order, and had returned Superior’s property to it, it seems likely that Superior would have given its drawings, information and data back to TAE so that TAE could resume manufacturing parts for Superior post-confirmation, further demonstrating that this dispute stems from the terminated post-confirmation relationship, not the prepetition relationship, between the parties.
. Superior's reliance on Travelers Indemnity Co. v. Bailey, 557 U.S. 137, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009) during closing argument is misplaced for similar reasons. In that case, Travelers sought to enjoin various actions against it arising out of its relationship with Johns-Manville Corporation ("Man-ville”). Id. at 141-42, 129 S.Ct. 2195. Man-ville was a company that produced asbestos and products that contained asbestos. Id. at 140, 129 S.Ct. 2195. Manville filed for bankruptcy in 1982 as a result of its potential liability for asbestos-related claims. Id. Travelers was one of Manville’s insurers. Id. The bankruptcy court issued an order in the Man-ville case that provided that “all persons are permanently restrained and enjoined from commencing and/or continuing any suit, arbitration or other proceeding of any type or nature for Policy Claims against any or all members of the Settling Insurer Group,” which included Travelers. Id. at 141-42, 129 S.Ct. 2195. Despite that language, Travelers was sued on various theories, including consumer protection statutes for colluding with asbestos manufacturers and failing to warn of the dangers of asbestos. Id. at 143, 129 S.Ct. 2195. Accordingly, Travelers sought to enforce the bankruptcy court's order to enjoin the suits against it arising out of its relation*98ship with Manville. Id. at 144, 129 S.Ct. 2195. The bankruptcy court issued a clarifying order, which provided that its previous order enjoining suits against the insurers included the suits currently pending against Travelers. Id. at 145, 129 S.Ct. 2195. The Supreme Court concluded that the bankruptcy court had subject matter jurisdiction to determine this because it was simply interpreting and enforcing its own order. Id. at 151, 129 S.Ct. 2195. Here, however, and as explained above, Superior is attempting to litigate a post-confirmation business dispute with TAE as opposed to having the Court enforce its own Confirmation Order or issue a clarifying order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497436/ | MEMORANDUM OPINION AND ORDER REGARDING MOTION TO WAIVE APPEARANCE BY DEBTOR AT THE SECTION 341 MEETING OF CREDITORS [DE #21]
STACEY G.C. JERNIGAN, Bankruptcy Judge.
I. INTRODUCTION: THE QUANDARY PRESENTED WHEN A DEBTOR ASKS NOT TO APPEAR AT THE SECTION 341 FIRST MEETING OF CREDITORS.
Came on for consideration the Motion to Waive Appearance by Debtor at the Section 341 Meeting of Creditors (the “Motion”) [DE #21], This Motion presents a request that is not terribly uncommon. Specifically, from time to time, a request to excuse a debtor from appearing at his or her Section 341 first meeting of creditors is made — most typically because there are joint debtors and one is ill, disabled, incapacitated, perhaps overseas engaged in military service, or even incarcerated. In many cases, this court authorizes the trustee to conduct the section 341 meeting with only one spouse testifying on behalf of both, or with one spouse appearing telephonically.1 But the Motion now *101before the court is somewhat different and warrants further scrutiny.
The Motion was filed on June 26, 2014, after the Debtor, Mary Kay Matthews (the “Debtor”) failed to appear at the Section 341 Meeting of Creditors. Specifically, the Debtor’s adult niece, Kimberly C. Allen (the “Niece”), appeared at the meeting with a “Limited Power of Attorney,” purportedly signed by the Debtor on February 25, 2014 (two days before the bankruptcy filing), that stated that the Niece was “specifically and solely authorized to perform all acts including but not limited to the signing of my signature and do all things that Agent may deem necessary of [sic] desirable to consummate the reorganization of Mary Kay Matthews under Chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”).” The Niece claims to have full and sole authority to act for the Debtor in this bankruptcy case. The Niece wanted to appear on the Debtor’s behalf and testify for the Debtor.
By way of further background, this issue arises in the context of a Chapter 7 case that was filed on February 27, 2014. The Debtor is 86-years-old, unmarried, has no children, and lives in a nursing home. A doctor’s note was submitted at the Section 341 Meeting stating that the Debtor has “cognitive deficits and physical impairments” as a result of a stroke that occurred in June of 2012. The Chapter 7 Trustee told the Niece that a court order was needed to excuse the Debtor from appearing at the Section 341 Meeting. Thus, the Debtor’s attorney filed the Motion asking that the Debtor be excused from appearing, and that the Niece’s testimony be accepted in the Debtor’s stead. The Debtor’s Schedules reflect that she has no nonexempt assets. The Debtor owns a $200,000 house, with no mortgage, that she claims as an exempt homestead (although she now lives in a nursing home and her Niece and the Niece’s daughter currently reside in the home). The Debtor has minimal personal property. The Debt- or lists $82,499 of unsecured debt, about $49,000 of which relates to rental/debt that she incurred while living at two different assisted living facilities (before moving into her current nursing home), while apparently waiting for “aid and assistance” Veteran’s Benefits to be approved and paid to her. The remainder of the unsecured debt appears to be credit card debt.
It is not clear to the court who actually signed all of the bankruptcy paperwork (ie., the Voluntary Petition, Schedules, and Statement of Financial Affairs). All of the documents contain at the signature lines a typed, electronic 7s/ Mary Kay Matthews.” However, the Limited Power of Attorney is also attached to each document, and the “Declaration for Electronic Filing of Bankruptcy Petition and Master Mailing List (the “Matrix”)” on file with the court [DE # 8] is signed in handwriting by “Kim Allen [the Niece] for Mary Kay Matthews.”
II. USE OF POWERS OF ATTORNEY BY INDIVIDUAL DEBTORS IN BANKRUPTCY.
The Motion now before the court requires, first, a legal inquiry into the appropriateness of powers of attorney in bank*102ruptcy — at least where individual debtor duties are implicated. Specifically, as a matter of law, is a power of attorney (general or specific) acceptable to allow one human being to act for another in filing and prosecuting a bankruptcy case? Additionally, if legally acceptable, are there factual circumstances that might sometimes make it problematic?
A. Fifth Circuit Authority.
With regard to the legal question, while there have been conflicting bankruptcy court opinions in the past on this issue,2 the Fifth Circuit answered this legal question, in December 2011, in an opinion that has received very little attention, stating “that a general power of attorney may be used to file a bankruptcy on another’s behalf.”3 However, the Fifth Circuit went on to suggest that there needs to be a “failsafe to prevent abuse” and that there needs to be some evidence that the debtor was informed and believed that the bankruptcy filing was proper.4
The Spurlin case involved a married couple who were each convicted of various bankruptcy crimes under 18 U.S.C. § 152(1) & (3) (concealing assets and making false oaths in a prior bankruptcy case). While the Fifth Circuit’s opinion deals with the couple’s appeal of their criminal convictions, the factual recitations reveal *103that only the husband had met with the couple’s bankruptcy counsel to file the couple’s joint bankruptcy case, and the husband had presented the bankruptcy counsel with a general power of attorney executed between the spouses that purported to give Mr. Spurlin authority to act for Mrs. Spurlin. The opinion also mentions that both Mr. and Mrs. Spurlin had nevertheless appeared at the Section 341 meeting for questioning. In the appeal of the conviction, Mrs. Spurlin argued that she could not be convicted of bankruptcy fraud “because the joint bankruptcy petition was filed on her behalf using a power of attorney and because she did not supply any information for the petition.”5 The Fifth Circuit examined the conflicting authority (mentioning four bankruptcy court opinions — two of which accepted powers of attorney and two of which did not), and determined that the better view was “that a general power of attorney may be used to file for bankruptcy on another’s behalf.”6 However, the court very clearly acknowledged that there needs to b,e a “failsafe to prevent abuse” — suggesting that there needs to be some evidence in each case that the debtor was “informed” and “dismissing if the debtor feels bankruptcy is improper.”7 The Fifth Circuit ultimately determined that Mrs. Spurlin’s bankruptcy petition was “valid, because there is enough evidence for a jury to infer ratification” and, thus, there was sufficient grounds to uphold her conviction for bankruptcy fraud.8 Id. at 960.
B. Various Other Relevant Legal Authority.
The Fifth Circuit in Spurlin did not mention the relevance of state law with regard to the use of powers of attorney in bankruptcy. However, certain courts have opined that state law governs a determination of who has the authority to file a bankruptcy petition on behalf of another.9 Spurlin involved Louisiana debtors and, again, no mention was made of whether Louisiana state law empowers the agent or attorney-in-fact under a general power of attorney to file and prosecute a bankruptcy case on the principal’s behalf. The case at bar involves a Texas Debtor. Under Texas law, a durable power of attorney may be drafted broadly enough to include the power on the part of the agent to bring claims and litigation for the principal, including empowering the agent to bring a voluntary bankruptcy case on the principal’s behalf.10
Two Bankruptcy Rules are worth mentioning as well. First, Bankruptcy Rule 1004.1 is entitled “Petition for an Infant or Incompetent Person” and it states that if such a person “has a representative, including a general guardian, committee, conservator, or similar fiduciary, the representative may file a voluntary petition on behalf of the infant or incompetent person.” The rule adds that if an infant and incompetent person does not have a duly appointed representative, the debtor may file a petition “by next friend *104or guardian ad litem” and that the bankruptcy court “shall appoint or shall make any other order to protect the infant or incompetent person.” Another rule, Bankruptcy Rule 1016, entitled “Death or Incompetency of Debtor” addresses, among other things, the situation of when a debt- or might become incompetent during a case and provides that the case may continue on, so far as possible, as though the incompetency had not occurred. Together, these bankruptcy rules make clear that a bankruptcy case may be filed and prosecuted in situations in which a debtor is incompetent. And, significantly, Rule 1004.1 suggests that the bankruptcy court has authority and shall be proactive in making sure an incompetent debtor has a representative to act for him or her and is protected.
C. Is this the End of the Inquiry? Is this Much Ado About Nothing?
Judge Paskay (when confronted with a Chapter 13 bankruptcy case that had been filed by proxy by one for another, by the holder of a power of attorney) described better than this court possibly could some of the concerns presented when, through a power of attorney, one person files bankruptcy for another. After referencing the various documents required by Bankruptcy Rules 1007(b)(1) & (2) to be filed under penalty of perjury, and further referencing the provisions of Bankruptcy Rule 9011 (the “certification rule”), Judge Paskay stated:
It takes no elaborate discussion to point out the obvious that no one can grant authority to verify under oath the truthfulness of statements contained in the documents and to verify facts that they are true when the veracity of these facts are unique and only within the ken of the declarant which in this instance is the Debtor and not [the agent/attorney-in-fact] who signed the verification. While she [the agent/attorney-in-fact] may have personal knowledge of how much the Debtor owes to her since she is listed as a creditor, she would not possibly have personal knowledge as to the precise amounts owed by the Debtor to each of the creditors. She certainly could not possibly have any personal knowledge of the truthfulness of the answers stated in the Statement of Financial Affairs which she verified under oath to be true.11
As noted earlier, the Fifth Circuit stated in the Spurlin case, with little fanfare, that a bankruptcy case may, indeed, be filed by one for another, through a general power of attorney. In that case, one spouse (a co-debtor) filed a joint case for both spouses, and supplied all of the information to their attorney for the Schedules and Statement of Financial Affairs and signed the documents for both parties, pursuant to a power of attorney. Clearly, in Spurlin, the co-debtor spouse was fully knowledgeable about their joint debts and affairs. More importantly, the spouse who did not sign the bankruptcy documents showed up at the Section 341 meeting for questioning and it was clear from the record that she was informed as to the bankruptcy filing and consented to it. The Fifth Circuit considered it significant that there was evidence in the record indicating that the debtor who had been put into a bankruptcy case with a power of attorney was informed and consented (even participated to some extent — at the Section 341 meeting) during the case.
Here, or in any case where there is use of a power of attorney by one to *105purportedly act for an individual debtor, this court believes there must be some meaningful scrutiny regarding the facts and circumstances surrounding the power of attorney — especially if it is not a spouse that possesses the power of attorney. This court has concerns about setting precedent or endorsing a protocol that allows a family member (here a niece) — who happens to be living in the Debtor’s house with her own daughter — to file a bankruptcy case by proxy for another family member, such that the court, the trustee, and the creditors (to the extent they participate) never see the Debtor, never get to hear the Debtor answer questions under oath, never see the Debtor’s signature on crucial documents, and may not be completely convinced of the veracity and integrity of the whole process. There needs to be a “failsafe to prevent abuse.” There also needs to be some evidence that the Debtor was informed and believed that the bankruptcy filing was proper.12
The record is deficient in the ease at bar. The court heard testimony from the Niece and heard representations from Debtor’s counsel at the hearing on the Motion. Still, the court has many questions and concerns. Among other things, this court has posed the question of why a person who is elderly and incapacitated, in a nursing home, with apparently no nonexempt assets, might need to file a bankruptcy case. The court has not gotten satisfactory answers. The Debtor has approximately $82,000 of unsecured debt (mostly incurred since her stroke). Again, the Debtor appears to have no nonexempt assets. The court has some concerns that extended family members may have goals here that predominate.
Clearly, this would all seem more palatable if there were a guardian ad litem. See In re Kirschner, 46 B.R. 583 (Bankr. E.D.N.Y.1985) (Judge Duberstein noted that a guardian may file a voluntary petition in bankruptcy where a court order authorizes such filing; in the Kirschner case, a wife who had been appointed guardian ad litem for her husband filed a joint bankruptcy case for both spouses); In re Myers, 350 B.R. 760 (Bankr. N.D.Ohio 2006) (in Chapter 13 case where debtor-wife, who held a power of attorney for her joint-debtor husband of 63 years, who was suffering from dementia, asked to become the “next friend” of him, citing Bankruptcy Rule 1004.1, Judge Woods appointed her to act for her incapacitated husband). See also In re Murray, 199 B.R. 165 (Bankr.M.D.Tenn.1996) (Judge Lundin, after an exhaustive review of what appears to be every published case and article dealing with guardians or other representatives filing cases for incompetents or infants,13 allowed a mother of a seven-year-old to file a Chapter 13 as “next friend,” custodian and guardian for her daughter; daughter had inherited from her deceased father a house that had a mortgage on it and also received -social security benefits and there were arrearag-es that the debtor/guardian wanted to cure through a plan using the social security benefits).
Why does a guardian ad litem seem more palatable? Here, as mentioned, the court merely has a “Limited Power of Attorney” in the record — that solely purports to give the Niece power to file and act in a bankruptcy case. The power of attorney situation puts the bankruptcy court in a bit of an awkward situation that *106probably is better suited for a probate or family court. The court is left wondering whether the Debtor had the requisite mental capacity to appoint an attorney-in-fact at the time of the execution of the Limited Power of Attorney? Where and under what circumstances was it signed? Did the Debtor receive an explanation of its meaning by an attorney prior to its execution? Is the Niece well suited to act as the Debtor’s fiduciary? Is the Niece really competent to testify under oath as to all of the Debtor’s financial affairs (the court notes that the Niece seemed to have some shaky answers concerning some of the scheduled debt). Presumably, probate or family courts do an exhaustive review of the facts and law before deciding whether to appoint a guardian ad litem to act for another. Hopefully, they have applied the correct standards to determine that it is in the best interests under the circumstances to allow one person to act for another. With a power of attorney, there are less protections. The bankruptcy process contemplates a debtor swearing under oath as to various important facts. How does the bankruptcy court know that the holder of the power of attorney is really the appropriate person to be swearing to important information and, for that matter, worthy of being the debtor’s representative? The court has other parties-in-interest to consider here — namely the creditors. Having noted all of this, the court can, if it deems appropriate, appoint a next friend or guardian ad litem pursuant to Bankruptcy Rule 1004.1, where necessary. No such request is pending before the court.
III. CONCLUSION AND RULING.
In light of these concerns, the court rules as follows:
A.The Motion shall be DENIED unless a Supplement to the Motion is filed, within five (5) days, that includes or attaches the following: (I) evidence or testimony in the form of an Affidavit indicating whether the Debtor had the requisite mental capacity to appoint an attorney-in-fact at the time of her signing of the Limited Power of Attorney or when any other power of attorney was signed by her, whether Debtor received an explanation prior to its/their execution of its/their meaning by an attorney, and generally where and under what circumstances the Debtor signed such document(s); (II) a declaration from Debtor’s counsel regarding what he has done to confirm the Debtor is informed and consents to the bankruptcy filing; and (III) a statement clarifying who signed the bankruptcy paperwork (ie., the Debtor or the Niece).
B. The court will make a further ruling (or set this for further hearing) after the Supplement is filed.
C. If the Supplement is not filed within five (5) days, this case will be dismissed with prejudice to filing another bankruptcy case for 180 days.
IT IS SO ORDERED.
. As this court has ruled many times, the court lacks the authority to outright excuse a debtor from attending the § 341 Meeting of Creditors. The meeting is mandatory. Section 341(a) of the Bankruptcy Code provides that a creditors’ meeting "shall” be held within a reasonable time following the entry of the order for relief. Bankruptcy Rule 2003(a) sets the time frame for the meeting. The debt- or "shall” appear at the § 341 Meeting and undergo an examination, under oath, by the trustee and creditors. 11 U.S.C. § 343. The debtor’s presence at the § 341 Meeting is not merely ceremonial. It plays a pivotal role in providing the trustee and creditors with valuable information regarding the debtor’s financial situation. However, a trustee has discretion regarding the manner of 'conducting the § 341 Meeting of Creditors, including the manner in which the debtor appears. This *101court has held that trustees may, in appropriate cases, in their discretion, allow debtors to appear at the meeting of creditors by telephone or video, if a trustee determines, upon a credible showing by a debtor, that there is some obstacle hampering physical attendance, such as the debtor’s own medical condition. And as alluded to above, in certain circumstances, one person’s attendance on behalf of another will suffice, depending on the peculiarities of a particular situation (and most often, this involves one spouse appearing for another who is not physically able).
.See, e.g., In re Curtis, 262 B.R. 619 (Bankr. D.Vt.2001) (court addressed the question whether a general power of attorney is sufficient to authorize the attorney-in-fact to file a petition on behalf of a debtor who subsequently opposes being in bankruptcy; court held no and dismissed the chapter 7 case of a man whose daughter filed the case on his behalf via a general power of attorney; court stated that, in some circumstances, a power of attorney will be acceptable but, here, the document was not sufficient and it was also significant that the debtor was unwilling to go forward); In re Buda, 252 B.R. 125 (Bankr. E.D.Tenn.2000) (in case where two co-conservators had been named over Mr. and Mrs. Buda, who were both disabled and suffering from dementia, court held that the two state court-appointed co-conservators did not have the power to file a Chapter 11 case for the Budas and case should be dismissed; court held that state law governs the determination of who has authority to file a bankruptcy petition on behalf of another and looked to the terms of the conservator order which, in the bankruptcy court's view, was not worded broadly enough to encompass a Chapter 11 case); In re Brown, 163 B.R. 596 (Bankr. N.D.Fla. 1993) (court dismissed bankruptcy case as a nullity, where wife of debtor had filed the case shortly before the debtor died, through a general power of attorney that did not expressly authorize the filing of a bankruptcy case); In re Harrison, 158 B.R. 246 (Bankr.M.D.Fla.1993) (Judge Paskay held that Chapter 13 petition filed by one for another, who later produced a power of attorney, was a nullity and should be dismissed and, in so doing, pondered how one can grant authority to another to verify under oath the truthfulness of statements contained in documents and veracity of facts that are unique to the debtor); In re Sullivan, 30 B.R. 781 (Bankr. E.D.Pa.1983) (the debtor was a Monk and, while assigned to serve in a foreign country, had given his brother a power of attorney that included the right to file a bankruptcy case on his behalf; held that the power of attorney would be accepted to allow the Monk-debtor's brother to appear in his stead); In re Raymond, 12 B.R. 906, 907 (Bankr.E.D.Va.1981) (court held that wife could not file a bankruptcy case for her husband who was at sea aboard a naval vessel, through the use of a power of attorney; "Bankruptcy is a personal exercise of a privilege and due to the seriousness of it, it may not be exercised by another.”); In re Ballard, No. 1-87-00718, 1987 WL 191320 (Bankr.N.D.Cal. April 30, 1987) (court allowed joint bankruptcy petition filing by couple, where wife signed bankruptcy petition on behalf of herself and husband, using a "standard power of attorney” for the husband, where husband was overseas serving in the United States Army and a foreclosure on the couple’s residence was imminent).
. United States v. Spurlin, 664 F.3d 954, 959 (5th Cir.2011).
. Id. at 960.
. Id. at 958.
. Id. at 959.
. Id.
. Id. at 960.
. See Hager v. Gibson, 108 F.3d 35, 38 (4th Cir.1997); In re Buda, 252 B.R. 125, 128 (Bankr.E.D.Tenn.2000).
. See Tex. Estates Code Ann. §§ 751.002 (West 2014) (formerly cited as Tex. Prob.Code Ann. § 490(a) (West 2013)); 751.057 (formerly cited as Tex. Prob.Code Ann. § 487A (West 2013)); 752.051 (formerly cited as Tex. Prob. Code Ann. § 490(a) (West 2013)); 752.110 (formerly cited as Tex. Prob.Code Ann. § 500 (West 2013)).
. In re Harrison, 158 B.R. 246, 248-249 (Bankr.M.D.Fla.1993) (ultimately finding that the Chapter 13 filing should be dismissed as a nullity).
. Spurlin, 664 F.3d at 960.
. One such article cited collects English and American cases regarding "married women, infants, and lunatics.” Carl Zollmann, Persons of Abnormal Status as Bankrupts, 10 Col. L. Rev. 221 (1910). Murray, 199 B.R. at 169. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497437/ | MEMORANDUM OPINION REGARDING: (1) PETITIONING CREDITOR’S CHAPTER 7 INVOLUNTARY PETITION; AND (2) DEBTOR’S MOTION TO DISMISS
JEFF BOHM, Chief Judge.
I. Introduction
The Court writes this Memorandum Opinion to underscore that: (1) there is split case law on how to satisfy certain elements required to obtain an order granting an involuntary petition; and (2) the drafting of a joint venture agreement should take into account the rights of the joint venture itself to oppose an involuntary bankruptcy petition.
*112The Tagos Group, LLC (Tagos) filed an involuntary Chapter 7 bankruptcy petition against CorrLine International, LLC (CorrLine); Tagos is both a creditor and a minority shareholder of CorrLine. TriGe-nex of Texas, Inc. (TriGenex), a majority shareholder of CorrLine, owns intellectual property rights over a novel anti-corrosion formula, known as CorrX. Tagos and TriGenex created CorrLine to produce, market, and sell the CorrX product. In order to accomplish this objective, Tagos agreed to provide CorrLine with certain business support services for a monthly fee. Tagos also loaned funds to CorrLine under a working capital facility. Tagos contends that CorrLine refused to repay the loaned funds and service fees. Furthermore, Ta-gos asserts that due to a falling out between the Tagos board members and the TriGenex board members, management of CorrLine has become “hopelessly deadlocked,” which has impeded CorrLine’s ability to operate as a viable entity. Thus, Tagos seeks an involuntary Chapter 7 liquidation of CorrLine to recover the amounts owed by CorrLine.
CorrLine filed a motion to dismiss the involuntary petition. [Doc. No. 13]. CorrLine contends that this Court should dismiss the petition for any one of the following reasons: (1) CorrLine has at least twelve creditors and therefore Tagos file the involuntary petition alone; (2) Ta-gos is an insider and the recipient of an avoidable transfer; (3) Tagos’ claims are the subject of a bona fide dispute; (4) CorrLine is generally paying its debts as they become due; or (5) Tagos filed the petition in bad faith. Alternatively, CorrLine urges this Court to abstain from hearing the case because it is a two-party dispute and bankruptcy is not in the best interest of all the company’s creditors.
This Court held a simultaneous hearing on Tagos’ petition and CorrLine’s motion to dismiss between June 27, 2014 and July 3, 2014. The parties adduced extensive testimony from several witnesses and introduced multiple exhibits. The Court then heard closing arguments from the parties’ respective counsel on July 29, 2014. Having now considered the evidence, the oral arguments of counsel, and the applicable law, this Court finds that Tagos does have standing to bring its involuntary petition and that granting the petition is warranted. Moreover, the Court declines to abstain from adjudicating this dispute. ■ The Court now makes the following Findings of Fact and Conclusions of Law1 pursuant to Federal Rule of Civil Procedure 52, as incorporated by Federal Rules of Bankruptcy Procedure 7052 and 9014.2
II. Findings of Fact A. History of the Debtor from its Inception to the Trial in this Court
1. On September 20, 2012, TriGenex and Tagos executed that one certain Limited Liability Company Agreement of CorrLine International, LLC. [Tagos Ex. No. 1].
2. TriGenex and Tagos entered into the Limited Liability Company Agreement of CorrLine (the JV Agreement) in order to develop and market a groundbreaking *113product that prevents or prohibits corrosion. [June 27, 2014 Tr. 28:4-28:15].
3. Section 6.01(a) of the JV Agreement provides that “the powers of the [CorrL-ine] shall be exercised by or under the authority of, and the business and affairs of [CorrLine] shall be managed under the direction of, the Managers.” [Tagos Ex. No. 1 at 22].
4. Section 6.02(a) of the JV Agreement allows the board of managers to delegate authority to officers. [Id. at 23].
5. Section 6.12(a) of the JV Agreement provides that each officer shall be designated with the “authority and duties that are normally associated with that office.” [Id. at 26].
6. Section 6.14 of the JV Agreement requires the consent of a majority of managers to: “(c) ... permit the commencement of a proceeding for bankruptcy, insolvency, receivership or similar action against [CorrLine] ... (j) enter into any employment, service or consultancy agreement or any other material cont[r]acts ... or (n) enter into any agreement to do any of the foregoing.” [Id. at 28-29] (emphasis added).
7. Section 6.07(a) of the JV Agreement requires that a majority vote must consist of at least one minority member vote— e.g., a Tagos member vote. [Id. at 24].
8. Section 10.01 of the JV Agreement also provides that CorrLine must “keep books and records of accounts and shall keep minutes of the proceedings of its Members and its Managers.” [Id. at 34],
9. Section 12.01 of the JV Agreement states that CorrLine “shall dissolve and its affairs shall be wound up on the first to occur of the following: (a) the prior written consent of a majority of the Managers; or (b) entry of a decree of judicial dissolution of [CorrLine] under Section 11.314 of the TBOC [i.e., Texas Business Organizations Code].” [Id. at 38].
10. Section 13.01 of the JV Agreement states that “[w]henever [CorrLine] is to pay any sum to a Member, any amounts that such member owes to [CorrLine] may be deducted from that sum before payment.” [Id. at 40] (emphasis added).
11. Section 13.09 of the JV Agreement provides that “[b]y executing this [JV] Agreement, each Member acknowledges that it has actual notice of (a) all of the provisions of this [JV] Agreement, and (b) all of the provisions of the Certificate.” [Id. at 41]. The JV Agreement is signed by Loren Hatle (Hatle), on behalf of TriGe-nex, and Milton L. Scott (Scott), on behalf of Tagos. [Id. at 43].
12. Exhibit C of the JV Agreement lists Majority Managers as Christopher R. “Kip” Knowles (Knowles), Hatle, and Kirk Chrisman (Chrisman). It also lists Minority Managers as Scott and Rodney G. Ellis (Ellis). [Id. at 47],
13. The JV Agreement allows for capital contributions to be made by issuing Common Units “to such Persons, for such consideration and on such terms as the Managers may from time to time determine.” [Id. at 16]. “Capital contributed in connection with the Common Units may consist of money paid, labor performed, or property received by [CorrLine], as well as any other consideration permitted under the TBOC [i.e., Texas Business Organizations Code] and any such amounts received by [CorrLine] therefore will be treated as a Capital Contribution.” [Id.\
14. Section 4.05 of the JV Agreement discusses withdrawal of contributions. “No Member shall have the right to withdraw all or any part of such Member’s Capital Contribution or to be paid interest in respect of its Capital Contributions. An unrepaid Capital Contribution is not a lia*114bility of [CorrLine] or of any Member.” [Id. at 18].
15. Exhibit B of the JV Agreement lists an amount of “45,000” from CorrLine to Tagos under the heading “Common Units Issued.” [Id. at 46]. Exhibit B also lists “55,000” from CorrLine to TriGenex under the heading “Common Units Issued” for a grand total of 100,000 units. [Id.]. There are no amounts listed under the heading “Initial Capital Contribution.” [Id.].
16. On September 20, 2012, TriGenex and Tagos entered into that one certain Asset Contribution Agreement (the AC Agreement) whereby TriGenex would receive 55,000 common units in CorrLine, representing a 55% interest in CorrLine [Tagos Ex. No. 3 at 5], and preferred distributions totaling $1,500,000.00 in exchange for the assignment to CorrLine of intellectual property rights owned by TriGenex. [CorrLine Ex. No. 2 at 30]. The preferred distributions represent $300,000.00 of consideration for the intellectual property and $1,200,000.00 of consideration for services provided by TriGe-nex. [Id.]. Under the AC Agreement, Tagos would receive 45,000 common units in CorrLine, representing a 45% interest in CorrLine. [CorrLine Ex. No. 4 at 6, ¶ 2]. It is unclear from the AC Agreement what Tagos exchanged for its 45% interest.
17. On September 20, 2012, pursuant to the AC Agreement, TriGenex assigned its intellectual property rights to CorrX to CorrLine. [CorrLine Ex. No. 5].
18. On September 20, 2012, Tagos and CorrLine entered into a Services Agreement (the Services Agreement) whereby Tagos became obligated to provide certain services to CorrLine, including providing facilities, equipment and certain general business support services. [Tagos Ex. No. 9 at 1]. These general business support services include the following: (1) finance and accounting; (2) compliance and regulatory affairs; (3) risk management; (4) human resources; (5) information technology; (6) marketing, sales and business development; (7) supply chain management; (8) clerical and administrative functions; (9) office space and equipment; (10) computer and telecommunication equipment; and (11) business software solutions. [Id. at 8, ¶¶ 1-11]. Chrisman testified that the Services Agreement was understood to include working capital funding to CorrLine, infrastructure, financial support, and relationships at executive levels that TriGenex did not have. [July 1, 2014 Tr. 112:1-112:10 & 175:4-175:7]. However, the plain language of the Services Agreement does not support his testimony. [See Tagos Ex. No. 9]. Moreover, this Court gives little weight to Chrisman’s testimony. [See infra Credibility of Witnesses — Kirk Chrisman], In exchange for the business support services, CorrLine became obligated to pay Tagos a monthly amount of $25,000.00 (the Monthly Services Fee), plus reimbursement of reasonable out-of-pocket expenses incurred by Tagos in rendering the services. [Tagos Ex. No. 9 at 1].
19. The Services Agreement expressly provides that CorrLine must pay each invoice no later than ten business days after it receives the invoice. [Id. at 2]. Any invoice not paid within this time period “shall be recorded on the books of [CorrL-ine] as an account payable to [Tagos] and shall accrue, without interest, until such account payable is satisfied by [CorrL-ine].” [M]. However, upon termination of the Services Agreement, all accrued fees through the date of termination become due and payable to Tagos. [Id. at 1].
20. The Services Agreement further states that CorrLine has the right to request at any time “that the Monthly Ser*115vices Fee be adjusted to the prevailing current market rate for any of the Services that are priced in excess of what [CorrLine] can reasonably pay to a third party to perform a substantially similar service or function.” [Id. at 2].
21. From September 20, 2012 to November 18, 2013, Scott served as Chairman of the Board and Chief Executive Officer of CorrLine. [Tagos Ex. No. 44 at 2, ¶ 6 and 5, ¶ 17]. Scott is also the founder, CEO, and Chairman of the Board of Ta-gos. [June 27, 2014 Tr. 24:15-24:17 & 26:18-26:20].
22. Hatle served as Chief Operating and Technical Officer of CorrLine until November 18, 2013, when he replaced Scott as CEO and Chairman of the Board of CorrLine. [Tagos Ex. No. 44 at 2, ¶ 6 and 5, ¶ 17]. Hatle is also the founder, the CEO, and a Board Member of TriGenex. [Id. at 1, ¶ 2],
23. On September 20, 2012, Chrisman began serving as Secretary of CorrLine; however, he no longer holds this position on the board. [Findings of Fact Nos. 12 & 31],
24. On September 21, 2012, CorrLine held its first Managers Meeting. The minutes of this meeting are signed by Patel, Scott, Ellis, and Knowles. [Tagos Ex. No. 20 at 2-3]. Hatle and Chrisman did not sign the minutes, but were present. [Id. at 1-3]. Scott requested, and the Board approved, the opening of a bank account with Amegy Bank. [Id. at 2-3].
25. On December 12, 2012, Tagos entered into a Master Revolving Note and Term Note Agreement with Comerica Bank, under which Tagos’ 45% interest in CorrLine was pledged as collateral pursuant to a blanket hen on all of Tagos’ assets to secure the loans. [CorrLine Ex. No. 7 at 4, ¶8; CorrLine Ex. No. 8 at 5, ¶7; CorrLine Ex. No. 9 at 1-2],
26. On December 13, 2012, CorrLine held its second Managers Meeting. The minutes of this meeting are signed by Patel, Scott, Ellis, and Knowles. Hatle and Chrisman did not sign the minutes, but were present. Scott moved, and the Board approved, moving CorrLine’s banking relationship to Comerica. [Tagos Ex. No. 20 at 5, 7].
27. In April of 2013, Tagos and CorrL-ine entered into an “Intercompany Senior Secured Working Capital Credit Facility” (the Credit Agreement). [CorrLine Ex. No. 27 at 1]. The Credit Agreement uses terms such as “Lender” and “Borrower” and describes an aggregate amount of $400,000.00 available to CorrLine as “revolving loans.” [Id. at 2-3] (emphasis added). The Credit Agreement expressly provides that the $400,000.00 revolving loan facility to CorrLine “shall bear interest on the unpaid principal amount from the date borrowed through repayment.” [Id. at 3] (emphasis added). The Credit Agreement also provides that the interest rate will be the same rate that Tagos pays under its Comerica line of credit, which was 4.25% at the time of the agreement. [Id. at 4]. Both CorrLine and Tagos agreed that CorrLine would use the revolving loan for “working capital purposes including but not limited to payment towards (a) payroll, (b) capital expenditures, (c) business development expenses such as travel and hotel expenses.” [Id. at 3]. The Court notes that this exhibit is an unexe-cuted copy of the agreement. [Id. at 5]. However, this facility was specifically referred to and approved at CorrLine’s Board of Managers Meeting on October 22, 2013. [Finding of Fact No. 30].
28. On June 25, 2013, CorrLine executed a promissory note in favor of Scott for $100,000.00 payable on demand and bearing interest at the Prime Reference Rate *116plus 1% per annum. [CorrLine Ex. No. 29 at 2, ¶ 1],
29. On September 20, 2013, CorrLine executed a promissory note in favor of Ellis for $50,000.00 payable on demand and bearing interest at the Prime Reference Rate plus 1% per annum. [CorrLine Ex. No. 28 at 2, ¶ 1].
30. On October 22, 2013, CorrLine held another board meeting. Prior to the meeting, Nick Doskey (Doskey) — Controller and Treasurer of CorrLine — emailed Hatle, Ellis, Sean Muller (Muller) — a tax partner at Weaver, LLP — and Scott a copy of the meeting agenda. [Tagos Ex. No. 15]. Item V is titled “Adoption/Approval of Working Capital Facilities” and lists “Milton L Scott ($100,000.00)” and “Rodney Ellis ($50,000.00).” [Tagos Ex. No. 16 at 2],
31. At this October 22, 2013 meeting, Hatle made a motion and the Board unanimously approved the following working capital facilities for CorrLine: (1) $400,000.00 from Tagos; (2) $100,000.00 from Scott; and (3) $50,000.00 from Ellis. [Tagos Ex. No. 21 at 3]. Prior to the meeting, Hatle notified Chrisman and Knowles “that they would not be serving another term [as board members] after their first year term” expired. [Id. at 2]. Scott and Hatle were to “review a list of potential candidates” to replace the vacancies created by Chrisman and Knowles. [Id. at 1]. The minutes are unsigned. [Id. at 5].
32. On November 11, 2013, Tagos initially notified CorrLine and TriGenex that it would no longer provide funding, including working capital and payroll. [Tagos. Ex. No. 44 at 4, ¶ 15]. However, on November 15, 2013, Tagos funded CorrLine’s payroll, but provided no subsequent funding. [Tagos Ex. No. 58 at 3]. Thus, on November 15, 2013, Tagos terminated future funding to CorrLine. [Tagos Ex. No. 44 at 4, ¶ 15],
33. On November 18, 2013, the CorrL-ine Board of Directors convened, and Scott discussed with Hatle, Chrisman, and Santiago Hernandez (Hernandez) Tagos’ decision “not [to] accrue nor bill for revenues related to the management services agreement” while CorrLine employees were going without pay starting on November 1, 2013. [Tagos Ex. No. 47 at 2], Tagos agreed to continue providing other agreed upon services during this time. [Id.].
34. On November 18, 2013, Scott resigned as the Chairman and CEO of CorrLine. [CorrLine Ex. No. 21].
35. This Court heard testimony from Hatle that just prior to Scott’s resignation, and this Board Meeting, Scott transferred $325,999.00 out of CorrLine’s bank account. [Tagos Ex. No. 48 at 2, ¶ 5; Tagos Ex. No. 44 at 5, ¶ 17; June 30, 2014 Tr. 111:1-111:3]. However, the only evidence presented showed that on November 18, 2013, the day of his resignation, Scott wired $90,932.66 to himself and $145,000.00 to Tagos from CorrLine’s Bank of America account. [CorrLine Ex. No. 30]. The Court finds that Hatle’s testimony is inaccurate and that Scott did in fact wire $90,932.66 to himself and $145,000.00 to Tagos from CorrLine’s Bank of America account.
36. On November 18, 2013, Hatle was unanimously elected as the new Chairman and CEO of CorrLine. [CorrLine Ex. No. 65 at 2, ¶ 3].
37. On December 14, 2013, Chrisman sent an email to Doskey acknowledging that he “now understands the math ... and that [he has] no further questions or concerns about the interest calculation or Tagos Loan amount.” [Tagos Ex. No. 13 at 1] (emphasis added).
*11738. On December 23, 2013, Hatle, in his capacity as Chairman and CEO of CorrLine, signed a promissory note to pay Peter Bock, the Vice President of Technical Development for CorrLine [July 2, 2014 Tr. 105:10-105:22], $25,000.00 “or the unpaid principal balance outstanding from all advances made hereunder from time to time.” [Tagos Ex. No. 41 at 1]. Hatle agreed that the promissory note “shall bear interest to accrue at the Prime Reference Rate plus 1% per annum.” [M],
39. On January 9, 2014, Hernandez sent Doskey an email notifying him that “[a]s of today you are relieved of your responsibility to CorrLine. This includes bookkeeping, AR, AP, cash management, and risk management.” [Tagos Ex. No. 86 at 1]. According to Hernandez, the only responsibility Doskey still had was to “focus on closing out the year of end [sic] financial records” and to send Hernandez all invoices so Hernandez “can schedule proper payment.” [Id.].
40. On February 1, 2014, Chrisman sent an email to Ron Rodd (Rodd) stating that the $400,000.00 from Tagos was a “debt” and that Chrisman and Rodd had previously discussed “the accelerated percentage of 10% — the suggested percentage that [CorrLine] originally made to pay the entire debt amount [$400,000.00].” [Tagos Ex. No. 65-12]. Chrisman, on behalf of CorrLine, also stated that CorrLine needed to repay the balance owed under the Credit Agreement to Tagos. [Id.].
41. On February 8, 2014, Hatle called a Special Managers Meeting to consider approval of the following resolution: “(a) $200,000 from pending EcoPetrol payments to be applied to Tagos Debt....” [Tagos Ex. No. 60]. The meeting agenda prepared by Hatle expressly characterizes the debt owed to Tagos as an “interest bearing debt owed to Tagos.” [Id.]. The agenda also proposed capping the amount owed to Tagos at $400,000.00 effective November 1, 2013, and to “retain [the] current Services Agreement.” Hatle signed the agenda for this Special Managers Meeting. [Id.].
42. The Special Managers Meeting called for by Hatle in February 2014, was never held and no further board meetings have been held since because the three TriGenex majority managers have intenr tionally boycotted these meetings. [July 1, 2014 Tr. 237:7-238:6].
43. As of March 5, 2014, CorrLine’s Accounts Payable showed a total amount outstanding of $48,343.93. [Tagos Ex. No. 24 at 1]. Over $13,000.00 was more than 30 days past due. [Id.]. Only two of the 32 vendor invoices, totaling $213.66, were current. [Id.].
44. On March 6, 2014, CorrLine made a $50,000.00 payment to Tagos from its Frost Bank account in which the payee name was labeled “Tagos Loan.” [Tagos Ex. No. 84].
45. On March 18, 2014, Tagos filed a state court action in the District Court of Harris County against CorrLine, TriGe-nex, Hatle, Chrisman, and Hernandez (the State Court Action) seeking the judicial dissolution of CorrLine, the appointment of a liquidating receiver, repayment of loans made by Tagos to CorrLine, and damages from an alleged breach of the Services Agreement for CorrLine’s failure to pay the outstanding service fees due. [CorrLine Ex. No. 11]. Additionally, Ta-gos brought a derivative claim on behalf of CorrLine agáinst Hatle, Chrisman, and Hernandez for breach of their fiduciary duties to CorrLine and Tagos, misappropriation of CorrLine assets, and violations of the Texas Business Organizations Code. [Id.].
46. On April 15, 2014, Hatle informed Scott and Tagos by letter that CorrLine *118would no longer require Tagos’ general support services pursuant to the Services Agreement, citing concerns that Tagos’ fee was not in line with the market rate for similar services and that Tagos was not in fact providing bookkeeping or information technology services as provided for by the Services Agreement. Hatle contended that these services could be obtained by other third-party vendors for significantly iess than Tagos’ $25,000.00 monthly fee and that Tagos was overcharging CorrLine for these services. [CorrLine Ex. No. 26].
47. On April 24, 2014, counsel for Ta-gos, Eric Fryar, sent a letter to CorrLine demanding payment of the outstanding loan amount owed to Tagos. Tagos demanded “immediate payment of all amounts due on working capital loans, plus the agreed interest rate, as set forth in Schedule 1.” Schedule 1 lists the different debts owed to Tagos as of April 24, 2014:
• Debt for Tagos’ working capital loan: $154,147.84
• Debt due under the Services Agreement: $524,708.49
• TOTAL debt owed to Tagos: $678,856.33
Schedule 2 lists debts for the $25,000.00 monthly payments to Tagos plus reasonable out-of-pocket expenses pursuant to the Services Agreement. According to Schedule 2, this total is $524,708.00. [Ta-gos Ex. No. 14 at 1-4].
a.However, Tagos’ reply in opposition to CorrLine’s motion to dismiss asserts that only $890,606.58 is owed under the Services Agreement and $149,980.51 under the Credit Agreement. [Doc. No. 23 at 7-8]. This Court also heard testimony that the amount owed under the Services Agreement is $890,606.58. [July 1, 2014 Tr. 37:18-38:1]. This amount reflects the fees due for services provided by Tagos under the Services Agreement from September 2012 through October 2013. [Tagos Ex. No. 10 at 2], This Court also heard testimony that the original interest calculation for the Tagos loan was incorrect. [June 30, 2014 Tr. 209:8-209:14]. The amount owed under the loan was actually $140,000.00 in principal and $9,980.51 in interest, for a total amount due of $149,980.51. [Id.;
Tagos Ex. No. 14 at 3]. After considering all the evidence, this Court finds that Tagos is owed a total of $540,587.09 under the Services Agreement and the Credit Agreement, representing the sum of $390,606.58 (owed under the Services Agreement) and $149,980.51 (owed under the Credit Agreement).
48. On May 1, 2014, Doskey emailed Hatle, Chrisman, and Hernandez with concerns over the number of vendors whose balances were past due or not being paid timely. In Doskey’s opinion, “AP [was] not being handled the way in [sic] it should in any properly run company and certainly not under the management services agreement.” [Tagos Ex. No. 150]. Doskey identified the following specific concerns:
a. Buskop Law Firm. January 2014 invoices were still unpaid as of the date of the email.
b. Barbara Tompkins Brown. The March 19, 2014, invoice from Barbara Brown was still unpaid as of the date of the email.
c. Lincoln Insurance. Notice of a past due amount was sent on March 11, 2014, and April 15, 2014. Notice of the policies cancellation was received at the end of April 2014. The policy remained unpaid as of the date of the email.
*119d. Humana. Past due as of the date of the email.
e. Blue Cross Blue Shield. Past due amounts were paid on March 21, 2014 and April 16, 2014.
f. Sea Tex Ltd. Invoice remains past due as of the email date.
g. Timeledger. Invoice remains past due as of the email date, even though invoice was sent in early March.
Ud.].
49. On June 2, 2014, CorrLine filed a first amended answer in the State Court Action submitting a general denial of all allegations in the original petition and asserting counterclaims against Tagos and Scott for breach of the Services Agreement, money had and received, breach of fiduciary duty for an alleged misappropriation of assets and for a pledge of Tagos’ ownership interest in CorrLine to secure a loan, and violations of the Texas Theft Liability Act. [CorrLine Ex. No. 12 at 12-15]. Specifically, CorrLine alleges that Tagos breached the Services agreement by cancelling all funding to CorrLine, including payroll. [Id. at 12]. CorrLine also alleges that Scott breached his fiduciary duty when he made payments to Tagos the day before his resignation as CEO of CorrLine to satisfy a portion of the outstanding loan to Tagos. [Id. at 13]. Additionally, CorrLine alleges that Scott breached his duty when he pledged Tagos’ interest in CorrLine to obtain a line of credit with Comerica Bank. [Id. at 14].
50. On May 7, 2014, the District Court of Harris County issued an order setting a two-week trial for September 15, 2014. [CorrLine Ex. No. 108].
51. On May 14, 2014 (the Petition Date), Tagos filed a Chapter 7 Involuntary Petition for Bankruptcy against CorrLine. [Doc. No. 1]. Scott, as CEO of Tagos, filed this pleading. [Doc. No. 1]. Subsequently, Tagos filed an amended Involuntary Petition (the Petition or the Involuntary Petition). [Doc. No. 25].
52. On June 4, 2014, CorrLine filed a motion to dismiss the Involuntary Petition (the Motion to Dismiss). [Doc. No. 13]. In the Motion to Dismiss, CorrLine mounts several attacks against Tagos’ standing to bring the action. CorrLine also challenges Tagos’ standing to file the Involuntary Petition as an insider. [Id. at 12]. CorrLine alleges that it had more than twelve creditors as of the Petition Date, and thus, Tagos cannot file the Involuntary Petition without at least two more creditors joining it. [Id.]. Finally, CorrLine alleges that Tagos cannot bring the Involuntary Petition because it is the holder of a claim subject to a bona fide dispute. [Id.]. CorrLine also urges dismissal of the Involuntary Petition because it has been paying its debts as they became due, and also because Tagos filed the Petition in bad faith. [Id. at 22-23]. Finally, in the alternative, CorrLine urges the Court to abstain under § 305(a) from adjudicating this dispute. [Id. at 26]. The Motion to Dismiss was signed and filed by Trey A. Monsour of the law firm K & L Gates LLP. [Id. at 29]. Underneath Mr. Monsour’s signature, it is set forth that K & L Gates LLP is “counsel for CorrLine International, LLC.” [Id.].
53. On June 16, 2014, Tagos filed a Reply in Opposition to the Motion to Dismiss (the Reply). [Doc. No. 23]. In the Reply, Tagos makes clear it is seeking liquidation of CorrLine’s assets by a court-appointed trustee in order to satisfy the outstanding service fees owed under the Services Agreement and the outstanding loan balance under the Credit Agreement. [Id. at 1, ¶¶ 1-2].
54. On June 18, 2014, pursuant to Bankruptcy Rule 1003(b), CorrLine filed *120the Answer to the Involuntary Petition and attached a list of fifty-two alleged creditors owed a total of $145,838.69 (the Answer). [Doc. No. 27 at 9-10].
55. Beginning June 27, 2014 through July 3, 2014, this Court held a simultaneous hearing on the Involuntary Petition and the Motion to Dismiss (the Hearing). At the Hearing, this Court heard testimony regarding, among other issues, the qualification of these creditors for numer-osity purposes under Bankruptcy Rule 1003(b) and whether CorrLine is generally paying its debts as they become due. Regarding each of the alleged creditors, this Court finds the following:
B. CorrLine’s Creditors with Unknown or Uncertain Amounts
56. The Court finds that the following creditors carried unknown or uncertain amounts pursuant to the list attached to CorrLine’s Answer and the list of creditors it submitted at the close of the Hearing (CorrLine’s List of Creditors).3 [Doc. No. 27 at 9-10; CorrLine’s List of Creditors].
a.Blue Cross Blue Shield: CorrLine originally alleged that Blue Cross Blue Shield was a qualified creditor with an unknown amount due as of the Petition Date. [Doc. No. 27 at 9]. At the Hearing, this Court heard evidence that Blue Cross Blue Shield had been paid as of the Petition Date. [Tagos Ex. No. 32]. Chrisman also testified that CorrL-ine no longer claims that Blue Cross Blue Shield is a qualified creditor. [July 1, 2014 Tr. 123:21-124:1]. Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims Blue Cross Blue Shield is a creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that Blue Cross Blue Shield is not a creditor.
b. Calcasieu, Louisiana: CorrLine alleges that it owes sales tax to Calca-sieu Parish for a sale made to a customer in Louisiana prior to the Petition Date. [Doc. No. 27 at 9]. However, CorrLine offered no evidence during the Hearing to support the alleged sale or to establish that it had any amount owing to Calca-sieu Parish. Therefore, this Court finds that Calcasieu Parish is not a creditor.
c. ChemTel: CorrLine originally alleged that ChemTel was a qualified creditor with an unknown amount due as of the Petition Date. [Doc. No. 27 at 9]. ChemTel provides certain services related to cleanup of chemical spills and hazardous releases. [June 30, 2014 Tr. 220:24-221:4]. This service is paid for yearly and in advance. [Id. at 221:5-221:11]. CorrLine paid the annual fee of $400.00 out of the Frost Account on February 19, 2014. [Tagos Ex. No. 124], Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims ChemTel is a creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that ChemTel is not a creditor.
d. Code Jp2 Software: CorrLine originally alleged that Code 42 Software was a qualified creditor with an unknown amount due as of the Petition Date. [Doc. No. 27 at 9]. During the Hearing, this Court heard credible testimony that Code 42 Software confirmed to Doskey on the phone *121that, as of the Petition Date, it was not a creditor of CorrLine. [June 30, 2014 Tr. 221:24-222:10], Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims Code 42 Software is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that Code 42 is not a creditor.
e. EAH Spray Equipment: CorrLine originally alleged that EAH Spray Equipment was a qualified creditor with an unknown amount due as of the Petition Date. [Doc. No. 27 at 9]. At the Hearing, this Court heard evidence that EAH Spray Equipment had been paid as of the Petition Date. [June 30, 2014 Tr. 223:6-223:14]. Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims EAH Spray Equipment is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that EAH Spay Equipment is not a creditor.
f. Humana: CorrLine originally alleged that Humana was a qualified creditor with an unknown amount due as of the Petition Date. [Doc. No. 27 at 9]. Humana is one of CorrLine’s health insurance providers. [June 30, 2014 Tr. 223:18-223:20]. Doskey testified that CorrLine’s arrangement with Huma-na is such that CorrLine pays for the coming month’s insurance premium in advance. [Id. at 223:21-224:19]. As of May 5, 2014, CorrLine had no outstanding balance with Humana, meaning that CorrLine had paid through the upcoming month. [Id. at 224:3-224:6; Tagos Ex. No. 31]. Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims Humana is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that Humana is not a creditor.
g. J2 My Fax: CorrLine originally alleged that J2 My Fax was a qualified creditor with an unknown amount due as of the Petition Date. [Doc. No. 27 at 9]. J2 My Fax provides telecommunication services to CorrLine. [June 30, 2014 Tr. 224:20-224:21], CorrLine pays this bill monthly, and the monthly price is $10.00. [Id. at 224:22-225:8], Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims J2 My Fax is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that J2 My Fax is not a creditor.
h. Media Temple: CorrLine originally alleged that Media Temple was a qualified creditor with an unknown amount due as of the Petition Date. [Doc. No. 27 at 9], Media Temple is a technology service company that CorrLine pays in advance annually. [June 30, 2014 Tr. 225:10-226:7]. The 2014-2015 payment to Media Temple was not due on the Petition Date; it was due on July 5, 2014. [Tagos Ex. No. 142]. Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims Media Temple is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that Media Temple is not a creditor.
i. Mike Reynolds: CorrLine alleges that Mike Reynolds was a qualified creditor with “$6,000-$10,000” due as of the Petition Date. [CorrLine’s List of Creditors]. At the Hearing, the only evidence produced in support of this alleged debt was an email from Mike Reynolds to Hatle in which he claims, “CorrLine owes [him] in ex*122cess of $6,000.00 not including expenses.” [Tagos Ex. No. 121]. Mr. Reynolds also listed nine events [Id.], for which CorrLine claims it owes Mr. Reynolds an appearance fee of $1,000.00 each. [July 1, 2014 Tr. 138:10-138:15]. The same email also states that Mr. Reynolds “sent an invoice for Hercules last year that was not paid.” [Tagos Ex. No. 121]. The referenced invoice was not produced in support of CorrLine’s claim. Therefore, this Court finds that Mike Reynolds is not a creditor.
j. River Oaks Courier: CorrLine originally alleged that River Oaks Courier was a qualified creditor with an unknown amount due on the Petition Date. [Doe. No. 27 at 10]. Tagos disputed that River Oaks Courier was a qualified creditor because the service was provided after the Petition Date. [June 30, 2014 Tr. 226:8-227:4]. On direct examination, Chrisman testified that he no longer believed River Oaks Carrier to be a qualified creditor. [July 1, 2013 Tr. 142:4-142:6]. Additionally, CorrL-ine’s List of Creditors indicates that CorrLine no longer claims Rivers Oaks Courier is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that River Oaks Courier is not a creditor.
k. State of Illinois: CorrLine originally alleged that the State of Illinois was a qualified creditor with an unknown amount due as of the Petition Date. [Doc. No. 27 at 10]. CorrLine must pay state sales tax when retail sales are realized in a particular state. [June 30, 2014 Tr. 227:5-227:10]. On the date a sale is realized, it creates a liability for CorrL-ine to the taxing authority. Doskey testified that no records could be found of recent sales in the State of Illinois. [Id.]. Additionally, CorrL-ine’s List of Creditors indicates that CorrLine no longer claims the State of Illinois is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that the State of Illinois is not a creditor.
l. State of Texas: CorrLine alleges that it owes sales tax to the State of Texas for sales made to customers within Texas prior to the Petition Date. [CorrLine’s List of Creditors]. However, CorrLine offered no evidence during the Hearing to support the alleged sales or to establish that it has any amount owing to the State of Texas. In fact, Chrisman indicated during his testimony that the State of Texas should not be counted in the numerosity calculation. [July 1, 2014 Tr. 144:7-144:11], Therefore, this Court finds that the State of Texas is not a creditor.
m. Terrebonne, Louisiana: CorrLine alleges that it owes sales tax to Terrebonne Parish for a sale made to a customer in Louisiana prior to the Petition Date. [CorrLine’s List of Creditors]. However, CorrLine offered no evidence during the Hearing to support the alleged sale or to establish that it has any amount owing to Terrebonne Parish. Therefore, this Court finds that Terrebonne, Louisiana is not a creditor.
n. Texas Workforce Commission: CorrLine asserts that the Texas Workforce Commission was a qualified creditor with an unknown amount due as of the Petition Date. [CorrLine’s List of Creditors]. The Texas Workforce Commission collects unemployment insurance fees from employees as a percentage of employee payroll. [July 1, 2014 Tr. *12335:17-36:10]. At the Hearing, no evidence was produced to support a specific claim amount. Doskey and Chrisman each testified that CorrL-ine probably owed the Texas Workforce Commission some amount as of the Petition Date, but the amount is not known with any reasonable ■ degree of precision. [July 1, 2014 Tr. 36:4-36:10 & 145:12-145:17]. Therefore, this Court finds that there is no credible evidence of any amount due to the Texas Workforce Commission as of the Petition Date.
C. CorrLine’s Creditors with Disputed Amounts Owed
57. The parties dispute the amounts owed to the following creditors:
a. 8x8, Inc.: CorrLine originally alleged that $91.03 was owed to 8x8, Inc. for providing office phone services. [Doc. No. 27 at 9]. Doskey testified that 8x8, Inc. had already been paid on May 5, 2014. [July 1, 2014 Tr. 8:19-9:25]. The May 2014 Frost Bank Statement indicates a payment to 8x8, Inc. on May 5, 2014 for exactly $91.03. [Tagos Ex. No. 121 at 1]. CorrLine then revised its list of creditors to show an amount owed of $1.00. [CorrLine’s List of Creditors], This amount refers to the $0.96 usage charge from May 2014 on the June 2014 Statement. [Tagos Ex. No. 96 at 7]. This “usage charge” shows up on both the May 2014 and June 2014 statements; thus, it is a monthly recurring charge. [Tagos Ex. No. 96 at 1, 7]. Therefore, this Court finds that CorrLine owed 8x8 Inc. $0.96 as of the Petition Date.
b. AFCO: CorrLine alleges in the Answer to the Involuntary Petition that AFCO is owed $20,346.00, while Tagos contends that it is not a debt. Compare [Doc. No. 27 at 9] with [Doc. No. 23 at 9]. Doskey testified that AFCO provides financing for CorrLine’s insurance premiums. [July 1, 2014 Tr. 31:23-32:17]. The Commercial Premium Finance Agreement (the AFCO Agreement) between CorrLine and AFCO shows a total amount owed by CorrLine of $20,345.80. [CorrLine Ex. No. 64 at 1]. The debt is to be paid off in ten monthly installments, with the first installment of $2,034.58 due on July 5th, 2014. [Id]. The AFCO Agreement also sets forth that the insurance coverage being financed is effective as of May 5, 2014, and covers a term of twelve months. [M]. The Court notes the AFCO Agreement is not signed by either party. [Id.']. However, based upon the testimony, this Court finds that CorrLine owed AFCO $20,345.80 as of the Petition Date.
c. Cognetic: CorrLine alleges in the Answer that Cognetic is owed $102.84 for website services performed prior to the Petition Date, while Tagos contends that it is not a debt. Compare [Doc. No. 27 at 9] with [Doc. No. 23 at 9], Cognetic invoiced CorrLine on May 7, 2014, for $102.84. [CorrLine Ex. No. 58]. The service description indicates the bill is 'for work performed on CorrLine’s website during March of 2014. [Id.]. Doskey testified that the Cognetic bill was paid after the Petition Date, and CorrLine’s List of Creditors indicates the bill was been paid after the Petition Date. [July 1, 2014 Tr. 22:15-23:16; CorrL-ine’s List of Creditors]. Therefore, this Court finds that Cognetic was owed $102.84 as of the Petition Date.
d. Collier Group: CorrLine estimates that approximately $500.00-$600.00 in sales commission is owed to Collier Group for sales made prior to the *124Petition Date. [Doc. No. 27 at 9]. Dos-key testified that about $450.00 is owed based on the commission schedules in the Manufacturer’s Representation Agreement and the sales originated by Collier prior to the Petition Date. [July 1, 2014 Tr. 32:18-33:25; Tagos Ex. No. 115]. Based on the manufacturer’s agreement and invoice support underlying the originated sales, this Court finds that at least $450.00 was owed to Collier Group as of the Petition Date.
e. ConCur: CorrLine alleges in the Answer that it owes ConCur $110.00 for providing expense management software. [Doc. No. 27 at 9]. ConCur invoiced CorrLine for $110.01 on April 30, 2014, for software services to be provided during May 2014. [CorrL-ine Ex. No. 57]. The invoice is due on May 30, 2014. [Id.]. However, Hatle cancelled the service in February 2014 via letter to ConCur. [Tagos Ex. No. 73]. Despite cancellation, ConCur continued to charge CorrLine, which CorrLine adamantly disputed by emailing the vendor a copy of the cancellation letter on May 13, 2014. [Tagos Ex. No. 72-A]. The e-mail read: “We cancelled our service three months ago. When are you going to refund our'money and stop billing us fraudulently.” [Id.]. Therefore, this Court finds that no amount was due to ConCur as of the Petition Date because credible evidence of the services cancellation was provided.
f. Frost Bank: CorrLine contends that it owes Frost Bank a one-time $5.00 fee because its account dropped below the required balance prior to the Petition Date. [Doc. No. 27 at 9]. Doskey testified that the Frost Bank fee was paid prior to the Petition Date. [July 1, 2014 Tr. 14:3-14:14], The May 2014 Frost Bank statement provided in support of this charge indicates that it is a “monthly service charge” debited against CorrLine’s account on May 31, 2014. [CorrLine Ex. No. 56 at 5]. A review of the March 2014 and April 2014 Frost Bank statements does not reveal similar “monthly” charges. [Tagos Ex. Nos. 122 & 123]. Therefore, this Court finds that CorrLine did in fact owe Frost Bank a one-time $5.00 fee as of the Petition Date.
g. Green Solutions: CorrLine alleges that it owes Green Solutions $600.00 in sales commissions for a sale procured prior to the Petition Date. [Doc. No. 27 at 9]. Chrisman testified that Green Solutions is CorrLine’s manufacturer representative in Columbia. [July 1, 2013 Tr. 130:17-130:20], Chrisman also testified that Green Solutions had sourced a deal for CorrL-ine prior to the Petition Date. [Id. at 130:21-131:2]. Section 4(a) of the Manufacturer’s Representation Agreement between CorrLine and Green Solutions provides that Green Solutions will receive a commission of “twenty (20%) percent of the net sales margin of the Technology Process sold to customers or end-users” within the approved territory of Columbia, and which, has been directly originated by Green Solutions. [CorrLine Ex. No. 45 at 2]. CorrLine also produced evidence of the sale generating the commission, which reflected a sale to L.O. Trading in Miami, FL, for $3,075.00 on April 23, 2014. [Id. at 15]. Thus, simple arithmetic would dictate that CorrLine owes Green Solutions $615.00 in sales commission from the April 2014 sale to L.O. Trading. However, CorrLine has offered no credible evidence that Green Solutions has asserted a claim for the al*125leged sales commission owed. Further, the invoice indicates the sale was made to a company based in Florida, which is not a sale to an end-user in the approved territory of Columbia. Additionally, this Court has found reason to doubt the veracity of Chris-man’s testimony. [See infra Credibility of Witnesses — Kirk Chrisman]. Therefore, this Court finds that CorrLine owed no amount to Green Solutions as of the Petition Date,
h. M Test: CorrLine alleges that $150.00 is owed to M Test for equipment Hatle allegedly picked up for CorrLine prior to the Petition Date. [Doc. No. 27 at 9]. At the Hearing, Tagos presented evidence of three different versions of the same M Test invoice. [Tagos Ex. Nos. 119, 134 & 135].
i. On June 3, 2014, Hatle emailed Thomas Swan (Swan), an employee of the alleged creditor M Test, requesting that he send an invoice for the conductivity meter. [Tagos Ex. 133 at 2]. Swan responded to the e-mail with an invoice attached, commenting that Hatle had picked the equipment up and “[was] in a hurry.” [Tagos Ex. No. 133 at 1],
ii. This original invoice indicates the amount owed is $150.14, the invoice date is June 4, 2014, the due date is July 4, 2014, the method of delivery is “Pick Up,” and there is no ship date. [Ta-gos Ex. No. 134],
iii.Then, on June 4, 2014, Hatle sent another email to Swan requesting that he change the invoice date. [Tagos Ex. No. 133]. Hatle requested that “for some technical reasons would [Swan] change the invoice date to May 1, 2014,” which would reflect a date thirteen days before the filing of the involuntary bankruptcy petition on May 14, 2014. [Id.].
iv.Swan responded to Hatle’s email with “try this” and an invoice attached. [Id,.]. The attached invoice is identical to the original invoice except that the new invoice now includes a ship date of May 1, 2014 in a font that appears several times larger than all other font on the invoice, and the due date has been changed to May 1,2014. [Id.].
v.Tagos also produced evidence of a third version of the M Test invoice which was identical to the original in every aspect except that a ship date of May 14, 2014, had been added, which again appeared in a font several times larger than any other font on the invoice. [Tagos Ex. No. 135], When asked about the third invoice, Hatle had no explanation for its existence. [June 30, 2014 Tr. 100:3-100:7].
vi.Because Tagos presented evidence of three different versions of the same invoice, some of which had clearly been altered, and given that this Court has found reason to doubt the credibility of both Chrisman and Ha-tle’s testimony, this Court finds that the only credible evidence of this transaction is the original invoice, which indicates an invoice date of June 4, 2014, a due date of July 4, 2014, and an amount due of $150.14. Therefore, this Court concludes that no amount was due to M Test as of the Petition Date.
*126i. NACE: CorrLine alleges that $2,900.00 is owed to NACE for a booth that CorrLine reserved at a 2015 tradeshow, while Tagos contends that it is not a debt. Compare [Doc. No. 27 at 9] with [Doc. No. 23 at 9]. The March 22, 2014, invoice from NACE indicates a total of $2,900.00 is due for a trade show booth. [CorrL-ine Ex. No. 52]. The invoice is to be paid in two 50% installments due on June 4, 2014 and October 1, 2014, respectively. [Id.]. Therefore, this Court finds that CorrLine owed NACE $2,900.00 as of the Petition Date.
j. Pro Guard: CorrLine alleges that it owes Pro Guard $109.00 in storage fees; however, Tagos contends the amount owed was paid prior to the Petition Date. Compare [Doc. No. 27 at 9] with [Doc. No. 23 at 9]. Both Doskey and Chrisman acknowledged that the charge is a recurring monthly fee for storage space. [July 1, 2014 15:9-15:19 & 141:5-141:17]. CorrLine provided a payment receipt showing Proguard had been paid $109.00 on June 1, 2014 for June’s rent. [CorrL-ine Ex. No. 43] (emphasis added). CorrLine’s May 2014 bank statement shows a payment to Pro Guard on May 1st for $109.00. [Tagos Ex. No. 121 at 1]. Therefore, this Court finds that no amount was due to Proguard as of the Petition Date because CorrLine had prepaid for the services.
k. Salesforce.com: CorrLine alleges that $600.00 is owed to Salesforce.com for use of sales management software, while Tagos contends that no amount is due. Compare [Doc. No. 27 at 10] with [Doc. No. 23 at 10]. Doskey testified that Salesforce.com’s services are prepaid on a quarterly basis, and that the last payment was made in April of 2014. [July 1, 2014 Tr. 17:13-17:20]. Section 6.2 of the Master Subscription Agreement between Sales-force.com and CorrLine provides that “charges shall be made in advance” for the services provided. [CorrLine Ex. No. 49]. CorrLine’s April 2014 Frost Bank statement shows a payment to Salesforee.com of $703.56 on April 16. [Tagos Ex. No. 122 at 2]. Therefore, this Court finds that no amount was due to Salesforce.com as of the Petition Date because CorrLine had prepaid for the services.
D. Creditors Paid by Nick Doskey
58. At a meeting of CorrLine’s managers on October 22, 2013, the CorrLine Board of Managers appointed Doskey as the Controller and Treasurer of CorrLine. [Tagos Ex. No. 21 at 3].
59. Hernandez has never been installed as an officer of CorrLine. Hernandez claimed that his name appeared on an organizational chart presented to the board at the meeting on September 21, 2012, but the chart is not included in the minutes and has not been produced. [Ta-gos Ex. No. 20 at 1],
60. On January 9, 2014, Hernandez told Doskey in an email: “As of today you are relieved of your responsibility to CorrLine. This includes bookkeeping, AR, AP, cash management, and risk management.” [CorrLine Ex. No. 98 at 1],
61. On January 16, 2014, Doskey forwarded Hernandez’s email of January 9, 2014, to Hatle and stated:
As I communicated to Santiago, I plan to continue to fulfill my role under the management services agreement, which includes AP. To do so, I need funds transferred to an account I have access to. Please confirm if you do not plan to do this as communicated by Santiago below. While I do not agree with this *127nor is it in accordance with the Mgmt Services Agreement, leaving these bills unpaid could be detrimental to the company. If you choose to proceed with handling the payment of these bills, please advise me and I will send the invoices to allow you/Santiago to do so.... Please let me know what your decision is on this so I can act accordingly-
[CorrLine Ex. No. 98 at 1].
62. Hatle never replied to Doskey’s email of January 16, 2014. [CorrLine Ex. No. 98 at 1].
a. Because Hernandez was, at most, an officer of CorrLine with authority equal to Doskey’s, he did not have the power to remove Doskey as Treasurer or adjust Doskey’s roles and responsibilities.
b. Because Hatle, the CEO of CorrL-ine, never responded confirming Hernandez’s decision to relieve Dos-key of his duties under the Services Agreement, and because the CorrL-ine Board of Managers never approved this action, Doskey still had authority, if not an obligation, to pay CorrLine’s accounts payable under the Services Agreement.
63. In the days leading up to the filing of the Involuntary Petition by Tagos, Dos-key made certain payments to CorrLine’s vendors. [June 30, 2014 Tr. 206:21-207:3; July 1, 2014 Tr. 70:4-71:11]. These payments were made with CorrLine funds. [July 1, 2014 Tr. 71:12-71:17],
64. Set forth below are seven alleged creditors. Doskey paid six of these alleged creditors with funds of CorrLine prior to the Petition Date. Doskey paid the seventh creditor on the date of the filing of the Involuntary Petition, either right before or right after it was filed. Doskey used CorrLine’s funds to pay each of these seven creditors.
a. D.I. Pure: This alleged debt was $214.00 [CorrLine’s List of Creditors] and was paid by Doskey one day prior to the Petition Date using a CorrLine credit card. [CorrLine Ex. No. 100]. Therefore, this Court finds that no amount was owed to D.I. Pure as of the Petition Date.
b. First Continental Diversified: This alleged debt was not greater than $150.00 [Tagos’ List of Creditors] and was paid by Doskey one day prior to the Petition Date using a cashier’s check withdrawn on May 13, 2014, from CorrLine’s Comeriea checking account. [CorrLine Ex. Nos. 33 & 36]. Therefore, this Court finds that no amount was owed to First Continental Diversified as of the Petition Date.
c. Comeriea Credit Cards: The alleged debt due as of the Petition Date was $2,425.00. [Tagos Ex. No. 138]. Doskey paid this bill on the Petition Date with CorrLine funds. [Id.]. Therefore, this Court finds that no amount was due on the Comeriea Credit Cards as of the Petition Date.
d. Myrmidon: This alleged debt was $2,165.00 [CorrLine’s List of Creditors] and was paid by Doskey one day prior to the Petition Date using a CorrLine credit card. [CorrLine Ex. No. 100]. Therefore, this Court finds that no amount was due to Myrmidon as of the Petition Date.
e. State Tax Advisors: This alleged debt was not greater than $225.00 [Tagos’ List of Creditors] and was paid by Doskey one day prior to the Petition Date using a cashier’s check withdrawn on May 13, 2014, from CorrLine’s Comeriea checking account. [CorrLine Ex. Nos. 33 & 36]. Therefore, this Court finds that no *128amount was owed to State Tax Ad-visors as of the Petition Date.
f. Time Ledger: This alleged debt was $46.02 and was paid by Doskey one day prior to the Petition Date using a CorrLine credit card. [CorrLine Ex. No. 100]. Therefore, this Court finds that no amount was owed to Time Ledger as of the Petition Date.
g. Wortham & Sons: This alleged debt was $4,070.00. Doskey paid it one day prior to the Petition Date using a cashier’s check withdrawn on May 13, 2014, from CorrLine’s Comerica checking account [CorrLine Ex. Nos. 33, 36]. Therefore, this Court finds that no amount was owed to Wortham & Sons as of the Petition Date.
E. Insider Creditors
65. The Court notes that either CorrL-ine or Tagos alleges that the following creditors are insiders or employees of CorrLine, the putative Debtor. The Court finds the following with regard to their relationships with CorrLine:
a. Kirk Chrisman: Chrisman is owed $5,000.00. [CorrLine’s List of Creditors]. Chrisman is a former member-manager and the former Secretary of CorrLine. [Findings of Fact Nos. 12, 23 & 31]. He is currently an employee of CorrLine, and holds the title of Vice President. [July 1, 2014 Tr. 106:14-106:23]. He is also a member of TriGenex, the majority shareholder of CorrLine. [Id. at 107:21-107:25]. Further, CorrLine concedes that Chrisman is an insider. [CorrLine’s List of Creditors]. Therefore, this Court finds that Chrisman is an insider.
b. Loren Hatle: Hatle is owed $6,000.00. [CorrLine’s List of Creditors]. Hatle is currently the Chief Executive Officer and Chairman of the Board for CorrLine. [Findings of Fact Nos. 22 & 36]. Hatle is also the founding member, Chief Executive Officer, and Chairman of the Board for TriGenex, the majority shareholder of CorrLine. [Finding of Fact No. 22]. Further, CorrLine concedes that Hatle is an insider. [CorrLine’s List of Creditors]. Therefore, this Court finds that Ha-tle is an insider.
c. McFall, Breitbeil & Eidman: McFall, Breitbeil & Eidman is owed $58,133.80. [CorrLine’s List of Creditors]. Doskey testified that McFall, Breitbeil & Eidman was retained to represent Chrisman and Hernandez in the State Court Action against Tagos. [July 1, 2014 Tr. 27:14-28:5]. Doskey’s testimony is supported by the fact that McFall, Breitbeil & Eidman is listed as counsel for Chrisman and Hernandez in CorrLine’s answer to the State Court Action. [Tagos Ex. No. 7 at 4], Therefore, this Court finds that McFall, Breitbeil & Eidman was retained to represent Chrisman and Hernandez in the State Court Action. For the reasons subsequently set forth in the Conclusions of Law, this Court finds that McFall, Breit-beil & Eidman is not an insider.
d. Santiago Hernandez: Hernandez is owed $4,000.00. [CorrLine’s List of Creditors]. Hernandez testified that he is currently and has been the “Vice President of Operations” for CorrLine since October 2012. [July 2, 2014 Tr. 90:9-90:16], Hernandez also testified that he is a member of TriGenex, the majority shareholder of CorrLine. [Id. at 90:17-90:20], Further, CorrLine concedes that Hernandez is an insid*129er. [CorrLine’s List of Creditors]. Therefore, this Court finds that Hernandez is an insider.
e. Berkley Research Group: Berkley Research Group is owed $12,500.00. [CorrLine’s List of Creditors]. Chrisman testified that Berkley Research Group was providing consulting services only. [July 2, 2014 Tr. 34:18-35:5]. However, he testified that they were retained around the same time the State Court Action was filed. [Id. at 34:15-34:17]. He also testified that the Berkley Research Group employees met with the attorneys representing CorrLine in the State Court Action, but would not participate in detailed discussions of the litigation with attorneys. [Id. at 34:25-35:5]. Yet, Doskey testified that Berkley Research Group was in fact providing litigation support for the State Court Action — not just business consulting services. [July 1, 2014 Tr. 27:14-27:25], The Court has found Doskey to be a credible witness, and gives significant weight to his testimony. [See infra Credibility of Witnesses — Nick Doskey], Conversely, the Court has found Chrisman to be a less credible witness, and does not accord his testimony great weight. [See infra Credibility of Witnesses — Kirk Chrisman], Furthermore, Berkley Research Group’s invoice indicates the time billed was for “[r]eview[ing] case materials” and a “[mjeeting or call with Client and/or Counsel” [CorrLine Ex. No. 59 at 3] (emphasis added). Because this Court gives greater weight to Doskey’s testimony and because the invoice in evidence indicates that litigation support services were provided, this Court finds that Berkley Research Group was in fact used in preparation for litigation of the State Court Action against Tagos. For the reasons subsequently set forth in the Conclusions of Law, this Court finds that Berkley Research Group is not an insider.
f. Law Office of Scott Link: Scott Link is owed $9,100.00. [CorrLine’s List of Creditors]. Doskey testified that Scott Link was retained as counsel for Hatle in the State Court Action. [July 1, 2014 Tr. 28:1-28:5]. Dos-key’s testimony is supported by the fact that Scott Link is listed as counsel for Hatle in CorrLine’s answer to the State Court Action. [Tagos Ex. No. 7 at 4]. Therefore, the Court finds that Scott Link was retained as counsel for Hatle in the State Court Action. For the reasons subsequently set forth in the Conclusions of Law, this Court finds that the Law Office of Scott Link is not an insider.
g. Peter Bock: Mr. Bock is owed $6,000.00. [CorrLine’s List of Creditors]. Bock is currently the Executive Vice President of Technical Service for CorrLine. [July 1, 2014 Tr. 140:24-140:25], Further, CorrL-ine’s List of Creditors indicates that the amount owed to Bock is for employee payroll. [CorrLine’s List of Creditors]. Therefore, the Court finds that Mr. Bock is a current employee of CorrLine. Under these circumstances, the Court finds that Bock is an insider.
F. Factually Uncontested Creditors of CorrLine
66. This Court finds the following with regard to the uncontested creditors:
a. Abby Office: Both parties agree that $75.00 is owed to Abby Office for monthly phone- services as of the *130Petition Date. [Doc. No. 27 at 9; Tagos’ List of Creditors]. Both parties further agree that the amount due to Abby Office was paid out as of June 16, 2014. [CorrLine’s List of Creditors; Tagos’ List of Creditors; Tagos Ex. No. 126 at 1]. The “Virtual Services Agreement” between Abby Office and CorrLine indicates fixed monthly charges of $70.86 will be billed to CorrLine over the twelve-month period from April 15, 2014, to April 80, 2015. [Tagos Ex. No. 106 at 1-2]. Therefore, this Court finds that Abby Office was owed $75.00 as of the Petition Date.
b. Barbara Tompkins Brown: CorrL-ine alleges that $4,810.00 was owed to Barbara Tompkins Brown (Brown) for consulting services provided. [Doc. No. 27 at 9]. Brown invoiced CorrLine $4,810.00 on March 19, 2014, for “consulting services rendered” during the month. [CorrLine Ex. No. 60 at 1]. CorrL-ine attempted to pay Brown on May 2, 2014; however, an error occurred during transmission, and the payment was not received. [Tagos Ex. No. 81]. CorrLine eventually paid Brown by check on May 16, 2014, which was over 45 days after receiving the invoice. [Tagos Ex. No. 121 at 5]. Therefore, this Court finds that Barbara Tompkins Brown was owed $4,810.00 as of the Petition Date.
c. Iberia Parish: CorrLine contends that $96.93 was owed to Iberia Parish in Louisiana for a sale made to a Louisiana customer prior to the Petition Date. [Doc. No. 27 at 9]. CorrLine produced an invoice dated March 7, 2014, for a sale to Advanced Marine Coating in Schriever, Louisiana with a total amount due of $6,717.03. [CorrLine Ex. No. 95]. Doskey testified that the amount due to Iberia Parish was paid on May 22, 2014. [July 1, 2014 Tr. 23:17-23:21], CorrLine’s May 2014 Frost Bank statement confirms that Iberia Parish was paid $96.93 on May 22. [Tagos Ex. No. 121 at 3], Therefore, this Court finds that $96.93 was owed to Iberia Parish as of the Petition Date.
d. IRS: CorrLine contends that it owes the IRS $1,799.00 in late payment penalties as of the Petition Date. [Doc. No. 27 at 9], Tagos does not contest this creditor or the amount owed. [Tagos’ List of Creditors]. CorrLine received a notice that it owes $1,799.91 for “failure to make a proper federal tax deposit” for two payroll periods in March and April of 2014. [Tagos Ex. No. 27 at 3]. Therefore, this Court finds that the IRS was owed $1,799.91 as of the Petition Date.
e. Just Real Media: CorrLine alleges that it owes Just Real Media $173.00 for graphic design services performed prior to the Petition Date. [Doc. No. 27 at 9]. CorrLine produced an invoice from Just Real Media dated May 6, 2014, showing an amount of $173.20 owed. [CorrLine Ex. No. 54], CorrLine’s May 2014 Frost Bank statement shows that Just Real Media was paid exactly $173.20 on May 22. [Tagos Ex. No. 121 at 3]. Therefore, this Court finds that $173.20 was owed to Just Real Media as of the Petition Date.
f. LO Trading: CorrLine alleges that it owes LO Trading $3,075.00 to refund a duplicate payment received for a single order. [Doc. No. 27 at 9]. CorrLine provided an invoice for the sale in question, showing a total *131balance of $3,075.00, and email communications from the customer indicating that they had sent duplicate payments on May 5, 2014. [CorrL-ine Ex. No. 44 at 4-5]. Doskey testified that LO Trading had been refunded as of June 12, 2014. [July 1, 2014 Tr. 23:24-23:2], CorrLine’s June 16, 2014, Account Activity Statement shows a payment made by check to LO Trading for $3,075.00. [Tagos Ex. No. 127]. Therefore, this Court finds that $3,075.00 was owed to LO Trading as of the Petition Date.
g. Proledge: CorrLine alleges that it owes Proledge $396.00 for bookkeeping services provided prior to the Petition Date. [Doc. No. 27 at 9]. Tagos does not contest the existence of the creditor or the amount owed; however, Tagos notes that the debt was paid on May 15, 2014. [Tagos’ List of Creditors]. CorrLine’s May 2014 Frost Bank statement shows a payment to Proledge for exactly $396.00 on May 15th. [Tagos Ex. No. 121 at 2]. Therefore, this Court finds that $396.00 was owed to Pro-ledge as of the Petition Date.
h. Quickbooks: CorrLine originally alleged that QuickBooks was a qualified creditor with $39.66 due as of the Petition Date. [Doc. No. 27 at 9]. However, CorrLine’s List of Creditors and Tagos’ List of Creditors both indicate that the alleged debt was paid prior to the Petition Date. [CorrLine’s List of Creditors; Ta-gos’ List of Creditors]. Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims QuickBooks is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that CorrLine owed no amount to Quick-books as of the Petition Date.
i. Rackspace: CorrLine originally alleged that Rackspace was a qualified creditor with $52.00 due as of the Petition Date. [Doc. No. 27 at 9]. Rackspace is an e-mail server provider. [July 1, 2014 Tr. 25:9-25:10]. Payment to Rackspace was made on May 8, 2014. [Id. at 25:11-25:17; Tagos Ex. No. 121], Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims Rackspace is a qualified creditor. [CorrLine’s List of Creditors]. Therefore, this Court finds that no amount was owed to Rackspace as of the Petition Date.
j. Seatex Ltd.: CorrLine alleges that Seatex Ltd. (Seatex) is owed $285.43 for manufacturing services provided prior to the Petition Date. [Doc. No. 27 at 10]. The Seatex invoice is dated May 13, 2014, showing an amount owed of $285.43. [Tagos Ex. No. 112], CorrLine’s June 16, 2014 Frost Bank Account Activity report shows a pending payment to Seatex for $285.43. [Tagos Ex. No. 127 at 1]. Therefore, this Court finds that CorrLine owed Seatex $285.43 as of the Petition Date.
k. State of Louisiana: CorrLine alleges that it owes $74.00 in sales tax to the State of Louisiana as of the Petition Date. [Doc. No. 27 at 10]. Ta-gos does not contest the existence of the creditor nor the amount owed; however, Doskey testified that the amount had been paid as of the end of May 2014. [Tagos’ List of Creditors]. CorrLine’s May 2014 Frost Bank Statement shows a payment to the State of Louisiana for $74.00 on May 22. [Tagos Ex. No. 122]. Therefore, this Court finds that CorrLine owed the State of Louisiana $74.00 as of the Petition Date.
*132l. U.S. Postal Service: CorrLine originally alleged that the U.S. Postal Service was a qualified creditor with $92.00 due as of the Petition Date. [Doc. No. 27 at 10]. Doskey testified that this alleged debt was for a P.O. Box that CorrLine used to receive mail. [July 1, 2014 Tr. 18:13-18:20]. The Court heard evidence that all of CorrLine’s payment options for P.O. Boxes involved paying in advance. [Id. at 18:21-19:9; Tagos Ex. No. 145]. Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims the U.S. Postal Service is a qualified creditor and acknowledges that the alleged debt was paid prior to the Petition Date. [CorrLine’s List of Creditors]. Therefore, this Court finds CorrLine owed no amount to U.S. Postal Service as of the Petition Date.
m. Vimeo: CorrLine originally alleged that Vimeo was a qualified creditor with $199.00 due as of the Petition Date. [Doc. No. 27 at 10]. Doskey testified that this is a prepaid service [July 1, 2014 Tr. 19:10-19:24], and Chrisman did not dispute that testimony. [Id. at 145:25-146:2], Additionally, CorrLine’s List of Creditors indicates that CorrLine no longer claims Vimeo is a qualified creditor and acknowledges that the $199.00 alleged debt was paid prior to the Petition Date. [CorrL-ine’s List of Creditors]. Therefore, this Court finds that no amount was owed to Vimeo as of the Petition Date.
67. Based on the above findings, this Court has determined that no amount was due as of the Petition Date to the following sixteen (16) creditors: Comerica Credit Cards; ConCur; D.I. Pure; First Continental Diversified; Green Solutions; M Test; Myrmidon; ProGuard; Quickbooks; Rackspace; Salesforce.com; State Tax Ad-visors; Time Ledger; U.S. Postal Service; Vimeo; and Wortham & Sons. Therefore, the number of potentially qualified creditors currently stands at thirty-six (36).4
III. Credibility of Witnesses
1. Milton L. Scott: Scott answered the questions posed to him forthrightly, and he also did the best that he could in responding to questions that were somewhat confusing. The Court finds that Scott is a credible witness and gives substantial weight to his testimony.
2. Loren L. Hatle: Hatle is not a credible witness. He frequently responded to clear questions by giving non-responsive answers that attempted to cast aspersions on Scott’s honesty and implored how honest he (Hatle) is.
Even more compelling, counsel for Ta-gos managed to adduce testimony revealing Hatle’s willingness to make false statements under oath. For example, at the Hearing, Hatle admitted that he had signed a document agreeing that CorrL-ine’s funds would be used to pay the attorneys who are representing him, individually, in the State Court Action. [June 80, 2014 Tr. 114:7-114:15]. Yet, at his 2004 examination of June 13, 2014, the following exchange took place between counsel for Tagos and Hatle:
Q: Okay. Had you anywhere signed a written undertaking to repay to the Company any of the monies that they are advancing to your attorneys on your behalf if you lose the lawsuit?
A: I have not signed anything.
[Hatle 2004 Exam Tr. 15:16-15:20; June 30, 2014 Tr. 115:20-115:25],
*133After being impeached on this issue, Ha-tle conceded in court that his testimony at the 2004 examination was inaccurate, and attempted to explain away his deposition testimony by stating that he did not understand the question at that time. [June 30, 2014 Tr. 116:1-116:4]. The Court does not accept his explanation. Rather, the Court finds that Hatle fully understood the question when it was posed to him at the 2014 examination, but chose to answer inaccurately.
There is more. At the Hearing, Hatle testified that the funds Tagos infused into CorrLine were an investment, not a loan. Yet, at his 2004 examination on June 13, 2014, the following exchange took place between counsel for Tagos and Hatle:
Q: Okay. At the time at inception, first time that Tagos put money into CorrL-ine for working capital and payroll, did you at that time consider the money to be a loan as you’ve just defined it.
A: I guess I’d have to characterize it as a — non-interest bearing repayment.
Q: A non-interest bearing repayment. Okay. And if we were to flesh that out just a little bit, is what you mean by that is that Tagos was obligated to put money into CorrLine’s bank accounts for CorrLine’s payroll and working capital, it would not bear interest but ultimately CorrLine would be expected to pay that money back when it was able to?
A: Uh-huh (Affirmative).
Q: “Yes”?
A: Yes.
[Hatle 2004 Exam Tr. 30:11-31:1; June 30, 2014 Tr. 124:20-125:1 & 126:16-126:23]
Thus, Hatle found himself in court backpedaling on his statement that CorrLine was not liable to Tagos for funds which Tagos had in fact loaned to CorrLine.
Counsel for Tagos then reviewed with Hatle the minutes of the meeting of CorrLine’s managers on September 21, 2012. [Tagos Ex. No. 20]. At that meeting, which Hatle attended as a member-manager, there was a motion made, seconded, and approved that CorrLine “would work on assessing banking and financing relationships for working capital line of credit opportunities.” [Id.]. When asked to reconcile his position that CorrLine never had the intention to obtain loans with the board minutes reflecting that CorrLine had every intention of borrowing money, Hatle glibly responded that “[i]t all depends on the context that you are looking at.” [June 30, 2014 Tr. 107:11-108:9]. When pushed further, he responded that “I look at a line of credit different than a loan.” [Id. at 109:8]. Then, finally, when pushed further, Hatle stated that “I am not a sophisticated person” [Id. at 113:7-113:8] — thereby attempting to convince this Court that he really had no idea that CorrLine’s business plan included borrowing money from a financial institution for working capital purposes. The Court finds Hatle’s testimony to be disingenuous at best and outright perjurous at worst.
Tagos’ Exhibit No. 44 is an affidavit that Hatle executed on June 2, 2014. In paragraph 18 of this affidavit, Hatle made the following statement under oath: “Moreover, although Tagos had caused CorrLine to obtain a $400,000.00 credit facility, it refused to grant CorrLine access to these funds to aid operations.” [Tagos Ex. No. 44 at 5, ¶ 18]. When asked how he reconciled this statement in his affidavit with his testimony at the Hearing that CorrLine had no loans, Hatle responded that “I have my thought process confused by a different bunch of language than what’s in a document that I swore to.” [June 30, 2014 Tr. 132:21-132:23]. The Court declines to accept such a shallow explanation. Hatle’s affidavit testimony directly conflicts with *134his testimony in open court and, accordingly, undermines his credibility.
Counsel for Tagos spent time examining Hatle about Tagos’ Exhibit No. 58, which is a document entitled “Workable Agreement” — which concerned a meeting in December of 2013 that Hatle attended with Chrisman and Hernandez. In this document, it is set forth that: “The cessation of funding, specifically the manner in which it was implemented and communicated and then used as a bargaining tool to solicit a desired result is egregious.” [Tagos Ex. No. 58 at 5, ¶ 11]. This document also sets forth that “CorrLine appears to be ... a debtor (money has been lent and is now owed) ... to Tagos.” [Id. at ¶ 12], When counsel for Tagos asked Hatle how he could reconcile this language — which clearly states that CorrLine was receiving funding in the form of a loan — with his position that CorrLine has no loans, Hatle’s response was “[y]ou’ll have to ask someone who is more acquainted with the language than I am.” [June 30, 2014 Tr. 128:25-129:8],
Then there is the blunderbuss explanation that Hatle gave to a question that counsel for Tagos posed to him about Ta-gos’ Exhibit No. 60. This one-page document reflects the agenda of a special manager’s meeting that Hatle sent out on February 8, 2014, by which time Hatle had become Chief Executive Officer and Chairman of the Board of CorrLine. [Ta-gos Ex. No. 60]. Paragraph 5 reflects that the Board and Hatle were poised to consider the following: “Approval of Resolution to retain current Services Agreement, cap total past due owed to $400,000.00 effective 11/1/13, amend compensation mechanism, and adopt Technical Services Agreement.” [Id. at 1, ¶ 5]. Thus, Hatle intended to approve CorrL-ine’s retention of the Services Agreement with Tagos. And yet, throughout the Hearing, Hatle had railed against Tagos and Scott and attempted to convince this Court that Tagos had misled and committed fraud upon CorrLine in 2012 and 2013. When asked by counsel for Tagos to explain how he could reconcile these allegations with his intent in February of this year to retain the Services Agreement with Tagos, Hatle responded: “I don’t want to be boxed in by language I’m not familiar with.” [June 30, 2014 Tr. 147:17-147:18] (referring to the exhibit’s language). To suggest that such an explanation is disingenuous is an understatement. It is clear to this Court that Hatle will say anything in an effort to convince this Court that Tagos in general, and Scott in particular, are entirely responsible for any problems with CorrLine and that Hatle himself is as honest as the sky is blue. His efforts are completely unavailing.
Finally, in an effort to convince this Court that CorrLine is in a sound financial condition at present, Hatle testified that the Company would have $1.0 million in sales by the end of July of this year. [Id. at 158:5-158:7]. However, when asked whether CorrLine has any purchase orders from any of the alleged customers, Hatle conceded that no such purchase orders exist. [Id. at 170:5-173:15].
In sum, the Court finds Hatle to be an extremely unjustifiably indignant individual who has difficulty telling the truth. The Court gives very little weight to his testimony.
3. Nick Doskey: Doskey answered the questions posed to him forthrightly. The Court finds that Doskey is a credible witness and gives substantial weight to his testimony.
4. Kirk Chrisman: Chrisman is not a particularly credible witness. His testimony was often self-serving and, at times, confusing and inconsistent. For example, at the Hearing, Chrisman claimed to sit on *135the CorrLine Board of Managers. [July 1, 2014 Tr. 155:10-155:11]. However, when confronted with the fact that the October 22, 2013, board meeting minutes revealed that he was removed as a manager, Chris-man claimed that Scott had manipulated Hatle and that the removal was invalid, despite Hatle and a majority of the board having voted for his removal. [Id. at 165:11-168:5]. He further claimed that Scott intentionally isolated Hatle at the meeting in order to remove him (i.e., Chrisman). [M]. Yet, separate counsel was present at the meeting representing the interests of both TriGenex and Hatle. [Tagos Ex. No. 21 at 1]. It is clear that Chrisman is unwilling to accept the fact that he was removed from the Board with Hatle’s support. Instead, Chrisman would rather claim a “conspiracy” against him and cast aspersions upon Scott’s integrity.
Additionally, Chrisman testified that he was in charge of preparing the qualified creditor listing that was filed in this Court pursuant to Bankruptcy Rule 1003(b) on June 18, 2014. [July 1, 2014 Tr. 107:13-107:17]. Included in this listing was an amount owed to ConCur as of the Petition Date. [Doc. No. 27 at 9]. Yet, Chrisman himself was sending emails to ConCur the day before the Petition Date claiming that nothing was owed, and that CorrLine had cancelled the service. [Tagos Ex. No. 72-A], Thus, Chrisman has represented to this Court in the written creditor listing that ConCur was a creditor as of the Petition Date; yet, his own emails one day before the Petition Date reflect the exact opposite position. This contradiction seriously undermines his credibility.
Particularly confusing was Chrisman’s explanation as to why the funding provided by Tagos was not to be characterized as a loan, but rather a capital contribution. First, Chrisman asserted that the records were a “mess,” and that therefore CorrL-ine did not actually know what was owed to Tagos. [July 1, 2014 Tr. 157:3-153:16]. However, Chrisman sent an email to Dos-key on December 14, 2013 explaining that he “understands the math” and has no “further questions or concerns about the interest calculation or the Tagos Loan amount.” [Finding of Fact No. 37] (emphasis added). Clearly Chrisman had no issue with the accuracy of the amounts Tagos claimed were owed on the loan in December 2013. Further, Chrisman testified that the money provided by Tagos was “never characterized as a loan.” [July 1, 2014 Tr. 169:6]. Yet, Chrisman himself characterized the funds as such in the December 14, 2013 email to Doskey. [Finding of Fact No. 37].
Instead, Chrisman now contends that Tagos’ funding obligation actually stemmed not from the Credit Agreement, but rather from the terms of the Services Agreement. [July 1, 2014 Tr. 157:3-157:16]. However, a reading of the Services Agreement does not indicate any obligation of Tagos to provide funding for CorrLine. [Findings of Fact Nos. 18, 19 & 20]. When pressed further on the issue, Chrisman admitted that the funding obligation was not specifically set forth in the Services Agreement, but that it was “reflected” in the terms of this Agreement. [July 1, 2014 Tr. 206:13-206:21]. Again, Chrisman shows his willingness to shape his testimony to serve his own purposes— as well as those of CorrLine — despite being presented with hard evidence that contradicts his position.
Further, at the Hearing, Chrisman referred to his extensive experience in the financial services industry in an attempt to bolster his credibility regarding his opinion as to the loan dispute and other issues. [July 1, 2014 Tr. 167:12-167:17; July 2, 2014 Tr. 53:13]. However, subsequent testimony revealed that his experience *136amounts to what could only be described as brief tenures in a multitude of customer service positions at financial institutions. [July 1, 2014 Tr. 261:20-263:17],
In sum, the Court finds Chrisman’s testimony to be self-serving and unreliable, at best. The Court gives little weight to his testimony.
5. Santiago Hernandez: Hernandez answered the questions posed to him forthrightly. The Court finds that Hernandez is a credible witness and gives substantial weight to his testimony, however, his testimony was brief and limited in scope.
IV. Conclusions of Law
A. Jurisdiction
This Court has jurisdiction over this dispute pursuant to 28 U.S.C. § 1334(a) and 28 U.S.C. § 157(a). This dispute is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O). This dispute is also a core proceeding pursuant to the general “catch-all” language of 28 U.S.C. § 157(b)(2). See In re Southmark Corp., 163 F.3d 925, 930 (5th Cir.1999) (“[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”); In re Ginther Trusts, No. 06-3556, 2006 WL 3805670, at *19 (Bankr.S.D.Tex. Dec. 22, 2006) (holding that a matter may constitute a core proceeding under 28 U.S.C. § 157(b)(2) “even though the laundry list of core proceedings under § 157(b)(2) does not specifically name this particular circumstance”).
B. Venue
Venue is proper pursuant to- 28 U.S.C. § 1408(1).
C.Constitutional Authority to Enter a Final Order Regarding This Dispute
The 2011 Supreme Court decision in Stern v. Marshall sets forth certain limitations on the constitutional authority of bankruptcy courts to enter final orders. — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). This Court must therefore determine whether it has constitutional authority to enter a final order in the dispute at bar. This Court concludes that it does for the following reasons.
First, Stem involved a core proceeding brought under 28 U.S.C. § 157(b)(2)(C); whereas, the dispute at bar is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O). Because the Supreme Court, in Stem, expressly set forth that its holding was a very narrow one, this Court concludes that Stem’s holding is not of concern in the dispute at bar because 28 U.S.C. § 157(b)(2)(C) is not in play. See 131 S.Ct. at 2620 (“[W]e agree with the United States that the question presented here is a narrow one.”) (internal quotation marks omitted).
Assuming, however, that a Stem analysis must be done for any type of core proceeding, this Court, for the reasons set forth below, nevertheless concludes that it has the constitutional authority to enter a final order in this dispute. In Stem, the debtor, pursuant to 28 U.S.C. § 157(b)(2)(C), filed a counterclaim based solely on state law, and the resolution of this counterclaim did not necessarily resolve the question of the validity of the defendant’s claim. 131 S.Ct. at 2601. Under those circumstances, the Supreme Court held that the bankruptcy court lacked constitutional authority to enter a final order on the debtor’s counterclaim. Id. at 2608. Unlike the facts in Stem, in the dispute at bar, Tagos, a creditor, filed the Involuntary Petition against CorrLine *137pursuant to § 303(b), a cause of action unique to the Code, and requests that this Court grant the Petition. The relief requested is therefore based solely on a Code provision.
While the dispute at bar requires the Court to consider certain state law, the Court is also required to analyze Code provisions and judicially-created bankruptcy law interpreting those provisions. In other words, the Court’s final determination on the Involuntary Petition and the Motion to Dismiss does not turn on solely state law, but rather on both state law and bankruptcy law. Stem involved solely state law, and is therefore distinguishable from the dispute at bar. For these reasons, this Court concludes that Stem is of no concern here. Thus, this Court has the constitutional authority to enter a final order in this dispute.
D. Standing of CorrLine to Defend Against the Involuntary Petition
Tagos challenges CorrLine’s ability to defend itself against the Involuntary Petition because there was no manager vote to approve CorrLine’s hiring legal counsel to oppose the Involuntary Petition as required by the JV Agreement. Section 6.01 of the JV Agreement instills CorrLine managers with the power to make business decisions involving the company: “the powers of [CorrLine] shall be exercised by or under the authority of, and the business and affairs of [CorrLine] shall be managed under the direction of, the Managers.” [Finding of Fact No. 3]. The JV Agreement specifies that CorrLine managers must consent to: “(j) enter into any employment, service or consultancy agreement or any other material cont[r]acts.” [Finding of Fact No. 6]. Further, proper manager consent requires a majority vote consisting of at least one minority member vote — e.g., a Tagos member — under § 6.07(a) of the JV Agreement. [Finding of Fact No. 7].
By its own terms, the JV Agreement requires a majority of CorrLine managers — and at least one Tagos member — to authorize CorrLine to enter into an employment contract. In violation of the JV Agreement, CorrLine entered into a retention agreement by hiring K & L Gates LLP (K & L Gates) to oppose the Involuntary Petition without proper manager consensus. Tagos points out that CorrLine has not held a board meeting since at least March of 2014 because the three TriGenex majority managers have boycotted these meetings. [Finding of Fact No. 42]. Thus, there was never a manager vote to approve CorrLine’s hiring of counsel to oppose the Involuntary Petition. Without proper manager approval, CorrLine lacks the authority to retain counsel and oppose the Petition pursuant to the plain terms of the JV Agreement; and therefore the Answer, which was signed and filed by K & L Gates [Finding of Fact No. 54], is of no import and should be stricken. See In re Salazar, 315 S.W.3d 279, 286 (Tex.App.Fort Worth 2010, orig. proceeding) (“Thus, a lawyer may not be hired to represent a corporation by one of two factions in the organization against the other faction.”).
Despite the lack of CorrLine manager approval, CorrLine argues that Hatle’s position as CEO of CorrLine vests him with authority to hire counsel to oppose the Involuntary Petition. CorrLine construes Hatle’s alleged authority to hire counsel from the behavior of former CorrLine CEO, Scott. CorrLine asserts that Scott, during his tenure as CEO, routinely ignored corporate formalities and exercised power without the requisite board approval, including hiring consultants and counsel. CorrLine cites to Texas law that allows a course of dealing in which the board has previously acquiesced to establish an *138officer’s authority. See Ennis Bus. Forms, Inc. v. Todd, 523 S.W.2d 83, 86 (Tex.Civ.App.-Waco 1975, no writ); Houston Oil Co. v. Payne, 164 S.W. 886, 889 (Tex.Civ.App.-Galveston 1914, writ ref'd). This Court finds CorrLine’s argument unpersuasive. Each of the cases CorrLine cites is easily distinguished from the case at bar. In all three cases, it was the officer’s own course of dealings that established his apparent authority, not the course of dealings of a predecessor officer. Counsel for CorrLine cites no case law supporting the proposition that a prior officer’s course of dealings should establish a basis of authority for a successor officer.
In another attempt to substantiate its authority to hire counsel to oppose the Petition without complying with § 6.07(a) of the JV Agreement, CorrLine points to § 6.02(a) of the JV Agreement, which allows the Board of Managers to delegate authority to officers and to § 6.12(a), which provides that each officer shall be designated with the “authority and duties that- are normally associated with that office.” [Findings of Fact Nos. 4 & 5]. In addition, CorrLine cites § 101.254 of the Texas Business Organizations Code, which provides that “each officer of [a LLC] vested with actual or apparent authority by the governing authority of the company is an agent of the company for purposes of carrying out the company’s business ... [and][a]n act committed by [such an agent] for the purpose of apparently carrying out the ordinary course of business of the company ... binds the company....” Tex. Bus. Orgs.Code § 101.254(a) & (b) (emphasis added).
CorrLine’s reliance on these provisions is misplaced. Interpreting these provisions, Texas courts have held that “the settled rule in Texas is that an [officer], merely by virtue of his office, has no inherent power to bind the corporation except as to routine matters arising in the ordinary course of business.” Templeton v. Nocona Hills Owners Ass’n., Inc., 555 S.W.2d 534, 538 (Tex.Civ.App.-Texarkana 1977, no writ) (citing cases) (emphasis added). Texas courts and other courts interpreting Texas law have consistently held that defending a lawsuit and hiring counsel to pursue or defend litigation is not within the “ordinary course of business.” See Kaspar v. Thorne, 755 S.W.2d 151, 154 (Tex.Civ.App.-Dallas 1988, no writ); St. Star Designs, LLC v. Gregory, No. H-11-0915, 2011 WL 3925070, at *3 (S.D.Tex. Sept. 7, 2011); Square 67 Dev. Corp. v. Red Oak State Bank, 559 S.W.2d 136, 138 (Tex.Civ.App.-Waco 1977, writ ref'd). Because retention of counsel to oppose an involuntary bankruptcy petition is not considered to be within the ordinary course of business as a matter of Texas law, the Court concludes that CorrLine’s officers do not have the unilateral authority to hire K & L Gates (or any other law firm, for that matter) to file pleadings in order to defeat the Involuntary Petition.
Under the express terms of the Bankruptcy Code, a debtor may oppose an involuntary petition by filing an answer to the petition. Section 303(d) of the Code expressly sets forth that “the debtor, or a general partner in a partnership debtor that did not join in the petition, may file an answer to a petition under this section.” 11 U.S.C. § 303(d) (emphasis added). Notwithstanding this provision, the well-established legal principle that “a corporation can appear in a court of record only by an attorney at law” requires a corporate debtor to retain legal counsel to answer an involuntary petition. Sw. Express Co. v. Interstate Commerce Comm’n, 670 F.2d 53, 55 (5th Cir.1982).
Here, CorrLine, the putative debt- or, retained legal counsel to answer the Petition—indeed, the Answer is signed by *139an attorney from K & L Gates representing CorrLine. [Finding of Fact No. 54]. CorrLine, however, lacked authority under the JV Agreement to hire legal counsel to represent the company in this dispute, as the Board of Managers did not vote to approve the retention. Under Texas law, a joint venture agreement governs the rights of parties to the agreement. See Dobson v. Dobson, 594 S.W.2d 177, 180 (Tex.Civ.App.1980) (“As interpreted under the law of contracts, [a partnership agreement] governs the rights of the partners.”); see also Burton-Lingo Co. v. Fed. Glass & Paint Co., 54 S.W.2d 170, 172 (Tex.Civ.App.1982) (“The rights of the parties engaged in [a joint] enterprise ... are settled on practically the same basis as if they had been partners.”). Because CorrLine, under the terms of the JV Agreement, lacked authority to hire K & L Gates, and because CorrLine, a corporation, may not represent itself pro se, CorrLine lacks standing to answer the Petition as a matter of law, and the Answer must therefore be stricken. In re Salazar, 315 S.W.3d 279, 287 (Tex.App.-Fort Worth 2010, orig. proceeding) (granting writ of mandamus and directing the trial court to strike the pleadings filed by two attorneys purporting to represent the corporation involved in the litigation); see also Flores v. Koster, No. 3:11-CV-0726-M-BH, 2012 WL 6633907, at *1 (N.D.Tex. April 5, 2012) (“When a corporation declines to hire counsel to represent it, the court may dismiss its claims if it is a plaintiff, or strike its defenses if it is a defendant.”). Therefore, in the first instance, the Court strikes the Answer.5
For the same reasons in striking the Answer, the Court denies the Motion to Dismiss. This Motion is signed by an attorney representing CorrLine [Finding of Fact No. 52] — and, as already noted above, CorrLine lacks authority to hire legal counsel without the proper and requisite manager approval under the JV Agreement. One court has broadened § 303(d) to allow a shareholder of the putative debtor to file a motion to dismiss an involuntary petition when there is a management deadlock because the company’s only two shareholders are on either side of the case and believe that they do not have authority to file an answer for the corporation. See In re Westerleigh Dev. Corp., 141 B.R. 38 (Bankr.S.D.N.Y.1992). In Westerleigh, the court let stand a 50% shareholder’s motion to dismiss an involuntary bankruptcy petition filed by the other 50% shareholder because the debtor-entity was in a management deadlock and could not properly defend itself without a board resolution. Id. at 41. The shareholder exception in Westerleigh should not be stretched to allow CorrLine, as putative debtor, to oppose the Petition in a motion separate and distinct from an answer when CorrLine lacks authority under the JV Agreement to retain counsel to represent the company in this dispute. If TriGenex, the 55% shareholder of CorrLine [Finding of Fact No. 16], had filed the Motion to Dismiss — instead of CorrLine — then, under Westerleigh, the shareholder exception would allow the Motion to Dismiss to stand.6 But, it was CorrLine — not TriGe-nex — that filed the Motion to Dismiss. *140[Finding of Fact No. 52]. This Court is unwilling to reinterpret Westerleigh’s holding to allow the Motion to Dismiss to stand where doing so would directly contravene the terms of the JV Agreement and applicable Texas law requiring their enforcement. For these reasons, the Court, in the first instance, will deny the Motion to Dismiss due to CorrLine’s lack of proper authority to file this pleading.
E. This Court Will Not Abstain Under § 305(a)(1)
However, assuming this Court is incorrect and CorrLine does, in fact, have authority to file the Motion to Dismiss in addition to the Answer, this Court nevertheless declines to abstain from this case for the following reasons. Section 305(a)(1) of the Code allows a court to dismiss a bankruptcy case if “the interests of creditors and the debtor would be better served by such dismissal....” 11 U.S.C. § 305(a)(1). Abstention is an extraordinary remedy. In re Xacur, 216 B.R. 187, 195 (Bankr.S.D.Tex.1997). Accordingly, a court should dismiss a case under § 305(a)(1) only when the interests of “both creditors and the debtor would be better served by dismissal.” Id. (emphasis added). This decision must be made on a case-by-case basis. In re TPG Troy LLC, 492 B.R. 150, 160 (Bankr.S.D.N.Y.2013).
The decision to abstain is a “fact-sensitive” determination. In re Int’l Zinc Coatings & Chem. Corp., 355 B.R. 76, 82 (Bankr.N.D.Ill.2006). Thus, courts may “consider a wide variety of factors relevant to the facts of [a] particular case in determining whether to abstain under § 305.” In re Spade, 258 B.R. 221, 231 (Bankr.D.Colo.2001). Courts have found the following factors relevant to the decision of whether to abstain:
(1) economy and efficiency of administration; (2) whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court; (3) whether federal proceedings are necessary to reach a just and equitable solution; (4) whether there is an alternative means of achieving an equitable distribution of assets; (5) whether the debtor and the creditors are able to work out a less expensive out-of-court arrangement which better serves all interests in the case; (6) whether a non-federal insolvency has proceeded so far in those proceedings that it would be costly and time consuming to start afresh with the federal bankruptcy process; and (7) the purpose for which bankruptcy jurisdiction has been sought.
In re Euro-Am. Lodging Corp., 357 B.R. 700, 729 (Bankr.S.D.N.Y.2007) (citations omitted). While each of these factors is considered, “not all are given equal weight in every case.” TPG Troy, 492 B.R. at 160.
Given the current deadlock in CorrLine’s board, which impedes its ability to continue as a viable entity, this Court gives great weight to the need for an immediate resolution that benefits both CorrLine and its creditors. Scott testified that Tagos seeks appointment of a trustee and an order for Chapter 7 liquidation in an effort to find an expedient remedy similar to that which Tagos is currently seeking in state court. ^ [June 27, 2014 Tr. 167:19-168:22]. This Court has already spent substantial time trying this dispute and hearing oral arguments and is prepared to issue its order now, unlike the state court, which has set a two-week trial that is not to begin — at the earliest — until September 15, 2014. [Finding of Fact No. 50]. This Court’s resolution of the dispute before the State Court Action has begun in earnest favors judicial economy and efficiency. Moreover, granting the Involun*141tary Petition will not result in wasted resources between the parties because the State Court Action has yet to move beyond the pleading stages, while this Court is prepared to immediately issue a final ruling. Therefore, in granting the Petition, this Court enables CorrLine and Tagos— and perhaps other creditors — to avoid costly, prolonged litigation in the State Court Action.
As set forth in this Memorandum Opinion, the Court concludes that CorrLine is generally not paying its debts as they come due. [See infra Part IV.G.4.f.]. Current management has shown its inability to effectively manage the payment of its outstanding debts. Indeed, having heard the less than credible testimony of Hatle and Chrisman, this Court is very skeptical about their business acumen and ability to manage a company. Hatle has a degree, but not in finance [July 2, 2014 Tr. 71:14— 71:18]; Chrisman has no degree and his employment history in finance is spotty and superficial at best [July 1, 2014 Tr. 262:9-268:17]. CorrLine cannot survive under the leadership of Hatle and/or Chrisman. Further, without funding from Tagos and no verifiable future sales commitments [see June 30, 2014 Tr. 170:5-173:15], CorrLine will continue to struggle to pay its debts — to the detriment of its creditors. For the forgoing reasons, it is in the interest of CorrLine and all creditors — not just Tagos — that a proper resolution is secured immediately.
Additionally, this Court is compelled to grant the Involuntary Petition because it is highly doubtful that CorrLine will be able to settle its debts without court supervision. Given the State Court Action, the Involuntary Petition, and CorrLine’s numerous failed attempts to negotiate a repayment of the Tagos debt, it is clear that CorrLine has been unable to reach a settlement outside of court with its largest creditor, Tagos. Since CorrLine will be unable to settle its dispute with Tagos outside of court, it is in the best interest of CorrLine and its creditors not to dismiss the Petition but rather to issue a final order granting the Petition and adjudicate this dispute now.
F. Presumption of Good Faith
When an involuntary petition is filed, there is a presumption that it is filed in good faith. See In re Tichy Elec. Co., 332 B.R. 364, 373 (Bankr.N.D.Iowa 2005) (citing cases). Courts have also noted that the Code does not explicitly require a “good faith” filing, nor does it define what a “bad faith” filing is. Id. The Fifth Circuit, in a case involving the filing of an involuntary Chapter 11 petition, held that “[g]ood faith’ implies an honest intent and genuine desire on the part of the petitioner to use the statutory process to effect a plan of reorganization and not merely as a device to serve some sinister or unworthy purpose.” In re Metro. Realty Corp., 433 F.2d 676, 678 (5th Cir.1970).
There is thus a presumption that Tagos filed the Involuntary Petition in good faith. CorrLine has not offered credible evidence to overcome this presumption and demonstrate Tagos’ bad faith. CorrL-ine argues that Doskey’s payments to seven creditors the day before Tagos’ filing of the Involuntary Petition is evidence of bad faith. [Findings of Fact Nos. 58-64], The Court is not persuaded by CorrLine’s argument because Doskey, in disbursing those funds, was acting within the scope of his authority as the Controller of CorrLine and as an employee of Tagos pursuant to the Services Agreement. Additionally, Ta-gos’ reasons for filing the Involuntary Petition are reasonable, thereby indicating good faith. There is no indication that Tagos’ desire to have its own debts repaid as quickly and efficiently as possible quali-*142fíes as a “sinister or unworthy purpose” amounting to a bad faith filing of the Involuntary Petition. Therefore, the Court concludes that Tagos filed the Petition in good faith.
G. Involuntary Petition Filed by Fewer Than Three Creditors
The Bankruptcy Code allows an individual creditor to force a debtor into bankruptcy if certain criteria are met. Section 303 of the Code governs this particular remedy, and states, in relevant part, that:
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontin-gent, undisputed claims aggregate at least $15,825 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $15,325 of such claims....
(h) ... the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed, only if
(1) the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount.
11 U.S.C. § 303(b) & (h) (emphasis added).
Courts have interpreted this section of the Code as requiring a four-part analysis to determine if a single creditor has standing to bring an involuntary bankruptcy petition. Accordingly, a court must determine whether: (i) the petitioning creditor’s claim is not contingent or the subject of a bona fide dispute as to liability or amount; (ii) the petitioning creditor’s claim is undersecured by at least $15,325.00; (iii) the debtor has fewer than twelve creditors (excluding employees and insiders, transferees of voidable transfers, and holders of contingent or disputed claims); and (iv) the debtor is generally not paying its debts as they become due. In re Euro-Am. Lodging Corp., 357 B.R. 700, 712 (Bankr.S.D.N.Y.2007). The Court addresses each element below in addition to CorrLine’s challenge to Tagos’ standing to bring the Involuntary Petition as an “insider” under § 303(b)(2). [See Doc. No. 13 at 19, ¶ 46],
1. Involuntary Petition by Only One Creditor
As noted above, § 303 allows a single creditor to file an involuntary bankruptcy petition to place an entity into bankruptcy. 11 U.S.C. § 303(b); See also In re DemirCo Holdings, Inc., No. 06-70122, 2006 WL 1663237, at *4 (Bankr. C.D.Ill.2006). However, when a single creditor files an involuntary petition, some courts scrutinize it “closely to make sure it is not filed unfairly or abusively by a creditor to put [the debtor] into bankruptcy in order to gain leverage in resolving legitimate disputes.” Id. These courts elevate the level of scrutiny when a single-creditor involuntary case involves a two-party dispute. Id. This heightened scrutiny has resulted in an “almost per se rule” that *143courts have used to deny granting involuntary petitions. Euro-Am. Lodging Corp., 357 B.R. at 728. In contrast, other courts have recognized that per se denial is inconsistent with the plain meaning of § 303. Id. Thus, an involuntary petition filed by a single creditor is permissible even when it involves a two-party dispute. Id. This Court does not believe that any heightened scrutiny is warranted when a single creditor files an involuntary petition because the Code does not state such a rule— rather, the plain language of the Code requires only that where a single creditor files the petition, there be fewer than twelve creditors. 11 U.S.C. § 303(b).
The case at bar is, at present, a two-party dispute between Tagos and CorrLine. This Court discerns no persuasive evidence that Tagos filed the Involuntary Petition unfairly or abusively in order to gain improper leverage over CorrLine. It is undisputed that CorrLine agreed to pay Tagos a monthly $25,000.00 fee, plus reasonable out-of-pocket costs, for providing general business support services under the Services Agreement. [Findings of Fact Nos. 18 & 19]. Tagos demanded payment of these amounts, and CorrLine refused to pay. [Finding of Fact No. 47]. Additionally, Tagos requested that CorrL-ine repay the working capital loan, and CorrLine refused, contending that the funds were a capital injection and not a loan. [Finding of Fact No. 47; Doc. No. 13 at 16, ¶ 35]. Tagos’ reason for filing the Involuntary Petition is to ensure the $140,000.00 loaned to CorrLine under the Credit Agreement, plus interest, and the amounts due under the Services Agreement are repaid as quickly as possible because “it is very expensive on both sides to litigate this and have this dragged out.” [June 30, 2014 Tr. 31:23-31:24], Under these circumstances, the Court finds that Tagos is not unfairly or abusively filing the Petition in order to gain leverage over CorrLine in resolving their dispute.
2. Standing of an Insider and Recipient of a Voidable Transfer to File an Involuntary Petition
CorrLine contends that Scott and Tagos are insiders and recipients of voidable transfers, and thus Tagos lacks standing to bring the Involuntary Petition under § 303(b) of the Bankruptcy Code. This Court disagrees.
Section 303(b) states that:
An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount ...
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $10,000 of such claims.
11 U.S.C. § 303(b).
Some courts have interpreted § 303(b)(2) to prohibit insiders and recipients of voidable transfers from bringing involuntary petitions. See In re Gills Creek Parkway Assocs. LP, 194 B.R. 59, 62 (Bankr.D.S.C.1995) (holding that employees, insiders, and transferees cannot be single petitioning creditor); accord In re Runaway II, Inc., 168 B.R. 193, 196 (Bankr.W.D.Mo.1994). This interpretation turns on the “such holders” language found in §§ 303(b)(1) and (2). The Bankruptcy Court for the Western District of *144Missouri in Runaway II, Inc. summarized the interpretation of § 303(b) upon which various other courts rely to bar insiders and recipients of voidable transfers from bringing an involuntary petition:
Section 303(b)(2) permits a petition to be filed by “one or more of such holders”. The phrase “such holders”, is used twice in § 303(b)(2). The first use of “such holders” refers back to § 303(b)(1) where a holder is “a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute”. However, the first use of “such holders” is immediately followed by language excluding employees, insiders and creditors holding avoidable transfers. These exclusions modify the phrase “such holders” as it is used in subsection (b)(2). The second use of “such holders” refers to the first use of the phrase in subsection (b)(2) and its exclusions. The second use of the phrase ‘such holders’ directly modifies the ‘one or more’ creditor language. Thus, to file a petition under (b)(2), a creditor must hold a claim that is not contingent, subject to a bona fide dispute, nor be the claim of an employee, insider or transferee of an avoidable transfer.
In re Runaway II, 168 B.R. at 196.
In sharp contrast, other courts allow insiders, employees, and recipients of voidable transfers to file an involuntary petition under § 303(b)(2). See, e.g., In re Green, Nos. 06-11761-FM, 06-11762-FM, 2007 WL 1093791, at *4 (Bankr.W.D.Tex. April 9, 2007) (“The better reasoned reading of the statute is that it does not exclude employees, insiders, etc. from being petitioning creditors under section 303(b)(2).”); see also Sipple v. Atwood (In re Atwood), 124 B.R. 402, 405 n. 2 (S.D.Ga.1991) (holding that a petitioning creditor and holder of a voidable claim may bring involuntary bankruptcy petition); In re United Kitchen Assocs. Inc., 33 B.R. 214, 215 (Bankr.W.D.La.1983) (holding that employees of the debtor may bring involuntary bankruptcy petition); 2 Collier on Bankruptcy ¶ 303.12[3] at 303-39 (16th ed. 2013) (advising that the better reading of § 303(b)(2) is to allow creditor employees, insiders, and transferees to file involuntary petitions).
This Court is persuaded that § 303(b) permits an insider or recipient of a voidable transfer to file an involuntary petition, as it is consistent with the legislative intent behind § 303(b). Congress excluded insiders and recipients of voidable transfers from the creditor numerosity calculation under § 303(b)(2) to alleviate its concern that an insolvent debtor and friendly creditors would collude to defeat an involuntary petition. If insiders or recipients of voidable transfers (i.e. those without incentive to file an involuntary bankruptcy as they are receiving payment) collude with a debtor to artificially increase the total number of creditors to more than twelve, it could block an involuntary petition. In re Green, 2007 WL 1093791, at *4 (citing In re Skye Mktg. Corp., 11 B.R. 891, 897 (Bankr.E.D.N.Y.1981)). Congress decided that “[tjhose who would be deterred from joining the effort to petition a debtor into bankruptcy by their status as preferred creditors are not to be counted” in the numerosity calculation. Id. at *5. As the legislative history indicates, Congress included the insider language in § 303(b) to remove barriers to bringing an involuntary petition. If the insider exclusion found within § 303(b) is construed to prevent insiders from filing an involuntary petition, it would erect a barrier to filing— a result directly in conflict with congressional intent. In keeping with legislative intent, § 303(b) should not be interpreted to bar insiders or recipients of voidable transfers from bringing involuntary peti*145tions, but should only keep such creditors from defeating an involuntary petition through collusion with the debtor.
This Court is bound by Fifth Circuit precedent. The Fifth Circuit is silent on the issue. This Court finds the reasoning and conclusions preventing an insider and recipient of a voidable transfer from filing an involuntary petition unpersuasive. Rather, the Court is convinced the better reasoned reading of § 303(b) does not preclude insiders or recipients of voidable transfers from bringing an involuntary bankruptcy petition.
There is no question that Tagos is an insider of CorrLine; it owns 45% of this company, and Scott, the CEO of Tagos, is also a manager of CorrLine. [Findings of Fact Nos. 12, 15, 16 & 21]. While Tagos and Scott are both insiders, there is no policy rationale for finding Tagos ineligible to file the Petition. It is in Tagos’ best interest to pursue bankruptcy, given that it is the single largest creditor of CorrL-ine — with $540,587.09 outstanding [Finding of Fact No. 47(a) ] — and CorrLine has no intention to repay the amounts due to Ta-gos. Further, collusion between debtor and creditor is unlikely due to the acrimony between CorrLine and Tagos. Moreover, collusion is incompatible with Tagos’ ultimate goal of Chapter 7 dissolution through the Involuntary Petition. Therefore, this Court concludes that Tagos is not barred from filing an involuntary bankruptcy petition against CorrLine, despite Tagos’ insider status.
CorrLine also asserts that § 502(d) of the Code, which prohibits claims of transferees of avoidable transfers under § 547, bars Scott and Tagos from filing the Involuntary Petition. 11 U.S.C. § 502(d). Section 547 certainly allows preferential transfers to be avoided if the transfer is made to an insider between 90 days and one year from the petition date. 11 U.S.C. § 547(b)(4)(B). However, the two cases interpreting § 502(d), upon which CorrL-ine relies, concerned the standing of a creditor to bring a claim, vote on a plan confirmation, or bring an adversary action — not to bring an involuntary petition. See In re Enron Corp., 340 B.R. 180 (Bankr.S.D.N.Y.2006); In re Coral Petrol., Inc., 60 B.R. 377, 382 (Bankr.S.D.Tex.1986). CorrLine offers no case law supporting its assertion that § 502(d) applies to an involuntary petition dispute, nor does this Court find any good reason why it should. Indeed, at this point, there is no trustee to whom Tagos could remit any preferential payments that it has received. Once this Court enters an order granting the Involuntary Petition, thereby triggering the appointment of Chapter 7 trustee, then Tagos will have to remit any such payment if it wants to have an allowable claim against the estate. For all of these reasons, the Court rejects the argument that § 502(d) prohibits creditors that have received preferential payments from filing an involuntary petition.
CorrLine also argues that Tagos waived the right to dissolve CorrLine through federal bankruptcy proceedings because § 12.01(b) of the JV Agreement limits dissolution of CorrLine to a state court venue. This section states, in relevant part, that:
12.01 Dissolution. The Company shall dissolve and its affairs shall be wound up on the first to occur of the following:
(a) the prior written consent of a majority of the Managers; or
(b) entry of a decree of judicial dissolution of the Company under Section 11.314 of the TBOC [i.e., Texas Business Organizations Code].
[Finding of Fact No. 9].
This argument holds no weight. Without exception, “courts have uniformly held *146that a waiver of the right to file a bankruptcy case is unenforceable.” In re Shady Grove Tech Ctr. Assocs. Ltd. P’ship, 216 B.R. 386, 389 (Bankr.D.Md.1998) (citing eases). This Court reads § 12.01 of the JV Agreement in the same light. Despite the JV Agreement provision, Tagos is well within its rights as a creditor of CorrLine to file the Involuntary Petition.
3. Bona Fide Dispute
Where there is a bona fide dispute, a bankruptcy court cannot hear or resolve the dispute. 11 U.S.C. § 303(b). In considering this prohibition, “[t]he court’s objective is to ascertain whether a dispute that is bona fide exists; the court is not to actually resolve the dispute.” See Subway Equip. Leasing Corp. v. Sims (In re Sims), 994 F.2d 210, 221 (5th Cir.1993) (quoting Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363, 1365 (8th Cir.1991)) (internal quotation marks omitted). A bankruptcy court, however, may be required “to conduct a limited analysis of the legal issues in order to ascertain whether an objective legal basis for the dispute exists.” Id. This is a factual finding based, in part, on the credibility of witnesses “and other factual considerations.” Id.
A bona fide dispute can be established by a dispute as to the amount owed or to liability. See In re TPG Troy LLC, 492 B.R. 150, 159 (Bankr.S.D.N.Y.2013). The Fifth Circuit adopts an “objective standard” when determining whether a bona fide dispute exists. Id. The burden of proving that no bona fide dispute exists rests with the petitioning creditor. Id. (“[T]he petitioning creditor must establish a prima facie case that no bona fide dispute exists.”). The petitioning creditor must “satisfy the requirements of § 303 by a preponderance of the evidence.” In re Moss, 249 B.R. 411, 418 (Bankr.N.D.Tex.2000). If satisfied, the burden then shifts to the debtor “to present evidence demonstrating that a bona fide dispute does exist.” In re Sims, 994 F.2d at 221 (quoting In re Rimell, 946 F.2d at 1365). Importantly, the Fifth Circuit holds that under the “objective standard” test, “neither the debtor’s subjective intent nor his subjective belief is sufficient to meet [his] burden” of proving a bona fide dispute exists. Id. (quoting In re Rimell, 946 F.2d at 1365). Simply put, a debtor’s subjective belief that the amount in controversy owed to the petitioning creditor is uncertain or unknown is insufficient for a court to find that a bona fide dispute exists. This Court must therefore objectively determine whether a bona fide dispute exists as to both amount and liability.
Here, there is no bona fide dispute as to either amount or liability. CorrLine owes Tagos $540,587.09. [Finding of Fact No. 47(a) ]. Tagos produced numerous documents and testimony sufficient to prove that the amount owed is $540,587.09. [See Findings of Fact Nos. 18, 19, 27, 31, 37, 40, 41, 44, 46 & 47]. While Hatle and Chris-man, on behalf of CorrLine, contend that there is a bona fide dispute as to its liability and the amount owed, this Court gives very little weight to their testimony. [See supra Credibility of Witnesses — Loren Hatle and Kirk Chrisman]. Instead, there is overwhelming evidence that: (1) Tagos provided $140,000.00 under the Credit Agreement to CorrLine as a loan — not as a capital contribution — and that Tagos expected and CorrLine agreed to repay Ta-gos this amount, plus interest; and (2) Tagos performed under the Services Agreement and that CorrLine failed to pay the monthly fee of $25,000.00, plus reimbursable expenses. [Findings of Fact Nos. 18, 19, 27, 30, 31, 32, 33, 37, 40, 41, 44, 46 & 47].
CorrLine attempts to create a dispute as to liability by alleging that the loan documents were not executed, and thus the *147obligation is invalid. [July 1, 2014 Tr. 157:3-157:17], However, the fact that the documents are not signed does not automatically nullify the existence of a lender/borrower relationship between Tagos and CorrLine. Hatle does not dispute the existence of the loan as he readily acknowledged its existence in both an affidavit filed with the Harris County District Court in the State Court Action and during his testimony in front of this Court. [Tagos Ex. No. 44 at 4, ¶ 12; June 30, 2014 Tr. 144:11-144:20]. Further, CorrLine and its officers have continuously acknowledged the existence of the loan throughout their course of dealings. [Findings of Fact Nos. 27, 30, 31, 37, 40, 41 & 44]. In sum, CorrLine’s first attempt at creating a dispute is unavailing.
CorrLine next contends that there is a bona fide dispute as to liability because the Credit Agreement is invalid due to lack of managerial approval. , [July 1, 2014 Tr. 157:3-157:17]. This assertion is patently false. Minutes from the board meeting held on October 22, 2013 indicate that the Credit Agreement was in fact unanimously approved, including an affirmative vote by Hatle.7 [Findings of Fact Nos. 27, 30 & 31],
CorrLine also refutes the existence of the Credit Agreement because Tagos was allegedly already obligated to provide funding under the terms of the Services Agreement. [July 1, 2014 Tr. 157:3-157:17]. However, the plain language of the Services Agreement does not contemplate a working capital loan from Tagos. [Finding of Fact No. 18]. Moreover, there is abundant documentary evidence indicating that CorrLine is liable to Tagos for a loan. First, the Credit Agreement lists Tagos as the “Lender” and lists CorrLine as the “Borrower.”8 [Finding of Fact No. 27]. These labels clearly indicate a loan from Tagos to CorrLine. The Credit Agreement also lists the funds to be given to CorrLine from Tagos as “revolving loans,” signifying that the funds were not a capital injection, as CorrLine claims, but rather a loan that Tagos expected to be repaid with a “variable interest rate of 4.25%.” [Id.] (emphasis added). Moreover, CorrLine made a $50,000.00 payment to Tagos on March 6, 2014, in which the payee was labeled “Tagos Loan.” [Finding of Fact No. 44].
Further, the agenda from the Special Managers Meeting held on February 8, 2014, which proposed that $200,000.00 of proceeds from sales to EcoPetrol (a CorrLine customer) would “be applied to Tagos Debt” reveals the lender/borrower relationship between CorrLine and Tagos. [Finding of Fact No. 41] (emphasis added). The agenda describes CorrLine’s debt to Tagos as an “interest bearing debt.” [Id.] (emphasis added). Hatle’s testimony that he was unaware or did not understand that the funds from Tagos constituted an interest-bearing loan is wholly unconvincing — if not completely disingenuous — given that Hatle himself signed and sent the agenda of this Special Managers meeting. [M]. Under these circumstances, the Court finds that CorrLine and Hatle were fully *148aware that CorrLine’s receipt of the funds from Tagos constituted a loan with an annual interest rate of 4.25%. In sum, CorrLine’s attempts to create a dispute as to liability are futile.
Just as there is no bona fide dispute as to CorrLine’s liability to Tagos, there is no bona fide dispute as to the amount CorrL-ine owes Tagos under the Credit Agreement. CorrLine owes Tagos $140,000.00, plus $9,980.51 in interest, which amounts to a total debt of $149,980.51. [Finding of Fact No. 47(a) ]. From October 5, 2012, through March 13, 2014, Tagos provided CorrLine with funds of $420,000.00, of which CorrLine has only repaid $280,000.00, leaving an outstanding principal balance of $140,000.00 — plus interest of $9,980.51. [Id.]. CorrLine contends that the amount due is in dispute because the records “[were] a mess” and therefore it does not know what it owes under the Credit Agreement. [July 1, 2014 Tr. 157:3-157:17]. Yet, in an email sent to Doskey in December of 2013, Chrisman, the Vice President of CorrLine [Finding of Fact No. 65(a) ], himself acknowledged the existence of the loan and stated that he “understood the math,” conveying that he did not dispute the amounts that Tagos claimed were owed to it under the Credit Agreement as of December 2013. [Finding of Fact No. 37]. This Court has already found that CorrLine, and Hatle in particular, knew that the funds received under the Credit Agreement were interest-bearing loans to be repaid to Tagos. [See Findings of Fact Nos. 27, 31, 41 & 44]. It is clear that CorrLine has simply manufactured these “disputes” in order to defeat the Involuntary Petition. Further, it is well established that the previous recognition of a debt is evidence that no bona fide dispute exists, and that self-serving testimony is insufficient to prove the existence of a bona fide dispute. See Wishgard, LLC v. Se. Land Servs., LLC (In re Wishgard, LLC), No. 13-20613-CMB, 2013 WL 1774707, at *6 (Bankr.W.D.Pa. Apr. 25, 2013); In re Faberge Rest. of Florida, Inc., 222 B.R. 385, 389 (Bankr.S.D.Fla.1997). Therefore, this Court finds that the outstanding balance of $149,980.51 under the Credit Agreement is not the subject of a bona fide dispute.
There is also no bona fide dispute as to CorrLine’s liability or the amount CorrL-ine owes to Tagos under the Services Agreement. [Findings of Fact Nos. 18, 19 & 20]. The Services Agreement provides that in exchange for certain business support services, CorrLine would pay Tagos $25,000.00 each month, plus reasonable out-of-pocket expenses incurred by Tagos in rendering these services. [Finding of Fact No. 18]. In essence, the Services Agreement provided CorrLine with Tagos’ business, marketing, and management experience. The evidence reflects that Ta-gos performed under the Services Agreement by providing the following services: (1) finance and accounting, (2) compliance and regulatory affairs, (3) risk management, (4) human resources, (5) information technology, (6) marketing, sales and business development, (7) supply chain management, (8) clerical and administrative functions, (9) office space and equipment, (10) computer and telecommunication equipment, and (11) business software solutions. [Id.]. The evidence is also conclusive that CorrLine failed to pay the monthly $25,000.00 fee and the out-of-pocket expenses billed to it. [Findings of Fact Nos. 47 & 47(a) ].
A schedule of the outstanding Services Agreement fees owed to Tagos and related invoices indicate a total amount owed of $390,606.58 as of October 2013. [Finding of Fact No. 47(a) ]. Furthermore, the Special Managers Meeting agenda that Hatle sent on February 8, 2014, *149proposed approving $400,000.00 to be paid to Tagos in order to abide by the terms of the Services Agreement. [Finding of Fact No. 41]. Hatle signed the meeting agenda himself. [Id.]. While CorrLine alleges that Tagos breached the Services Agreement because it outsourced some of the services it was contracted to supply [July 1, 2014 Tr. 182:1-182:22], the Services Agreement has no provision that would prohibit Tagos from outsourcing the general support services under this agreement. [See Findings of Fact Nos. 18, 19 & 20]. Furthermore, Tagos has provided a valuable service by performing the due diligence associated with finding qualified business service-providers. Again, the past recognition of a debt is proof that no bona fide dispute exists, and self-serving testimony is insufficient to defeat this proof. See In re Wishgard, LLC, 2013 WL 1774707 at *6; In re Faberge Rest. of Florida, Inc., 222 B.R. at 389.
Simple arithmetic dictates that the total amount due to Tagos under the Credit Agreement and the Services Agreement is $540,587.09 ($149,980.51 + $390,606.58). There is no bona fide dispute as to this debt. For the reasons already stated, this Court finds that: (1) CorrLine agreed to and had notice of the amount due to Ta-gos; and (2) CorrLine failed to pay Tagos. Hatle’s contention that he believed the funds received under the Credit Agreement were not loans from Tagos to CorrL-ine is completely unbelievable. Additionally, the Services Agreement expressly provides that CorrLine will pay Tagos $25,000.00 monthly, plus out-of-pocket expenses, and there is no question CorrLine agreed to pay this obligation. [Findings of Fact Nos. 18 & 19].
In the alternative, CorrLine argues that the presence of the State Court Action is proof of a bona fide dispute. The pending litigation in the District Court of Harris County does not automatically prove a bona fide dispute exists. See In re Norriss Bros. Lumber Co., 133 B.R. 599, 604 (Bankr.N.D.Tex.1991) (“The mere existence of State Court litigation and the assertion by an alleged debtor of various defenses or counterclaims is not per se a bona fide dispute.”); In re TLC Med. Grp., Inc., No. 04-15739, 2005 WL 4677807, at *2 (E.D.La.2005) (“Generally, the existence of pending litigation between the debtor and creditor does not make the claim subject per se a bona fide dispute.”); but see Credit Union Liquidity Servs. v. Greenhills Dev. Co. (In re Green Hills Dev. Co.), 741 F.3d 651, 659 (5th Cir.2014) (finding that “[b]ankruptcy courts routinely consider the existence and character of pending but unresolved litigation as evidence of a bona fide dispute”). Thus, pending litigation “suggests, but does not establish, the existence of a bona fide dispute.” In re TPG Troy LLC, 492 B.R. 150, 159 (Bankr.S.D.N.Y.2013) (emphasis added).
Additionally, CorrLine argues that the existence of its counterclaims against Tagos in the State Court Action bolsters the existence of bona fide dispute. See Focus Media, Inc. v. Nat’l Broad. Co. (In re Focus Media, Inc.), 378 F.3d 916, 926 (9th Cir.2004) (holding that a counterclaim “gives rise to a bona fide dispute only when (1) it does not arise from a wholly separate transaction and (2) netting out the claims of debtors could take the petitioning creditors below the amount threshold of § 303”); see also In re Green Hills Dev. Co., 741 F.3d at 660 (holding that “a creditor whose claim is the object of unresolved, multiyear litigation should not be permitted to short-circuit [the state court process] by forcing the debtor into bankruptcy”); In re Ferri, 59 B.R. 656, 657 (Bankr.E.D.N.Y.1986) (holding that because debtor “asserted ‘substantiable’ *150defenses and counterclaims she [had] carried her burden of proof to establish a dispute”). However, the counterclaims must be “bona fide.” In other words, while the existence of counterclaims establishes that a dispute exists, it does not establish that a “bona fide ” dispute exists. See Liberty Tool, & Mfr. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 277 F.3d 1057, 1066 (9th Cir.2007) (finding that the existence of a counterclaim does not automatically render the claim subject to a bona fide dispute); accord In re Onyx Telecomms., Ltd., 60 B.R. 492, 495-96 (Bankr.S.D.N.Y.1985); In re Norriss Bros. Lumber Co., Inc., 133 B.R. 599, 604 (Bankr.N.D.Tex.1991); In re High Plains Inv., Inc., No. 12-00829-als7, 2012 WL 7635889, at *2 (Bankr.S.D.Iowa Sept. 13, 2012).
CorrLine has asserted counterclaims against Tagos in the State Court Action arising out of the same Services Agreement and Credit Agreement transactions. [Finding of Fact No. 49]. The Court has considered each of the counterclaims related to either the Services Agreement or the Credit Agreement in the State Court Action and does not believe the claims are legitimate — or “bona fide.” In its one of its counterclaims, CorrLine asserts that Tagos breached the Services Agreement because it cancelled all funding to CorrL-ine, including payroll. [Id.]. Yet, there is no such funding obligation in the plain language of the Services Agreement. [Finding of Fact No. 18]. Thus, the counterclaim fails to assert a legitimate dispute. Next, CorrLine alleges that, the day preceding his resignation as CEO of CorrLine, Scott breached his fiduciary duty when he oversaw payments from CorrLine to Tagos to satisfy a portion of the outstanding loan to Tagos. [Finding of Fact No. 49]. CorrLine asserts a claim under the Texas Theft Liability Act for the these alleged misappropriations. [Id.]. However, as CEO at the time of the withdrawal, Scott had the authority to make payments on behalf of CorrLine. [See Findings of Fact Nos. 4, 5 & 21], Furthermore, Tagos has already credited the partial payment in calculating the amount that CorrLine still owes. [Finding of Fact No. 47]. Therefore, no legitimate dispute is presented by these two counterclaims.
CorrLine also asserts that Scott breached his fiduciary duty when Tagos pledged its 45% interest in CorrLine as collateral for a line of credit with Comerica. [Finding of Fact No. 49]. However, this allegation has no bearing on CorrLine’s liability or amounts due to Tagos under either the Services Agreement or the Credit Agreement. As a result, this Court finds that the counterclaims asserted in the State Court Action are insufficient to prove a bona fide dispute exists as to amount or liability for both the service fees and the Tagos loan.
Furthermore, even if this Court were to find that there is some dispute as to a portion of Tagos’ claim, it does not disqualify Tagos from filing the Involuntary Petition. See In re TLC Med. Grp., Inc., No. 04-15739, 2005 WL 4677807, at *2 (E.D.La.2005) (“A dispute as to a portion of a claim does not disqualify a creditor from filing an involuntary petition.”) (emphasis added) (citation omitted). For example, if this Court were to find that a bona fide dispute exists over the amount of Tagos’ loan to CorrLine, the disputed amount would be only a portion of the debt owed Tagos. The other portion of the debt — $390,606.58 owed under the Services Agreement — would be undisputed, thereby leaving the obligation without a bona fide dispute.
Finally, CorrLine contends that a bona fide dispute exists as to the loan amount because Tagos amended its original invol*151untary petition after the discovery process revealed an error in the interest calculation on the loan. [Doc No. 48 at 35, ¶ 56; see Finding of Fact No. 47(a) ]. CorrLine relies on a single case from the Southern District of New York, In re Mountain Diaries, Inc., to support its position. 372 B.R. 623 (Bankr.S.D.N.Y.2007). In Mountain Dairies, the petitioning creditor expressed its willingness to continually amend its involuntary petition to assert only those claims that were not disputed by the debtor. Id. at 634. The court found that such concessions were evidence of a bona fide dispute and raised concerns over the legitimacy of the entire claim. Id. Unlike the facts in Mountain Diaries, Tagos’ amendment was the result of one honest mistake in the interest calculation, as opposed to a desire to only assert the portion of claims that were allegedly not the subject of a dispute to artificially circumvent the requirements of § 303(b). Accordingly, the holding from Mountain Dairies is inapplicable. Further, the amendment related only to Tagos’ loan claim and would not have any effect on the legitimacy of its claim for fees due under the Services Agreement. Thus, as this Court has previously noted, as long as a portion of the claim is not the subject of a bona fide dispute, a petitioning creditor may still bring an involuntary action on the undisputed portion of the claim. [-See supra Part IV.G.3.]. Tagos’ amendment has no bearing on whether a bona fide dispute exists.
For all of the reasons set forth above, this Court concludes that Tagos has met its burden under § 303(h)(1) of establishing that the debts owed to it by CorrLine are not the subject of a bona fide dispute as to liability or amount.
4. Qualified Creditor Analysis
a. Bankruptcy Rule 1003(b)
When a single petitioning creditor alleges that there are fewer than twelve creditors, Bankruptcy Rule 1003(b) allows the putative debtor to prove the existence of twelve or more creditors:
If the answer to an involuntary petition filed by fewer than three creditors avers the existence of 12 or more creditors, the debtor shall file with the answer a list of all creditors with their addresses, a brief statement of the nature of their claims, and the amounts thereof. If it appears that there are 12 or more creditors as provided in § 303(b) of the Code, the court shall afford a reasonable opportunity for other creditors to join in the petition before a hearing is held thereon.
Fed. R. BaNKrP. 1003(b).
When the putative debtor pleads that there are twelve or more creditors and also files a list of these creditors, “it then becomes the petitioning creditor[’s] burden to put the debtor to the test.” In re Euro-Am. Lodging Corp., 357 B.R. 700, 714 (Bankr.S.D.N.Y.2007); see also In re Smith, 415 B.R. 222, 229 (Bankr.N.D.Tex.2009) (if debtor’s creditor list is filed, burden shifts to the petitioning creditor); In re Sadler, No. 6-10091-FRM, 2006 Bankr.LEXIS 4464, at *8-9 (Bankr.W.D.Tex.2006). If the putative debtor fails to file a list of twelve or more creditors in accordance with Bankruptcy Rule 1003(b), then the debtor has not met his burden of proof. See id. at *9 (holding that a putative debtor’s non-compliance with Rule 1003(b) estops the debtor from including creditors in the numerosity calculation). Compliance with Bankruptcy Rule 1003(b) “requires, at a minimum, that a debtor, provide a list of all creditors with their names and addresses, a brief statement of the nature of the claims, and the amounts thereof.” Id. (emphasis added).
On June 18, 2014, CorrLine filed the Answer to the Involuntary Petition and *152provided a list of fifty-two alleged creditors. [Finding of Fact No. 54]. This Court has already concluded that no amount was due to sixteen of these creditors as of the Petition Date. [Finding of Fact No. 67]. Thus, the analysis at this point begins with the number of creditors standing at thirty-six.
The Court concludes that CorrLine has not met its burden of proof with regard to thirteen of the fifty-two listed creditors because it failed to disclose an amount due to these creditors. [Findings of Fact Nos. 56(a) — (h) & 56(j)-(n) ]. Rather, CorrLine set forth the amount owed as “unknown.” [/&]. Therefore, this Court will exclude the following thirteen (IB) alleged creditors due to CorrLine’s failure to disclose or offer credible evidence of a specific amount due: Blue Cross Blue Shield; Calcasieu, Louisiana; ChemTel; Code 42 Software; EAH Spray Equipment; Humana; J2 My Fax; Media Temple; River Oaks Courier; State of Illinois; State of Texas; Terre-bonne, Louisiana; and the Texas Workforce Commission.
CorrLine’s List of Creditors also alleges that Mike Reynolds is a qualified creditor with an amount due between “$6,000-$10,000.” [Finding of Fact No. 56(1) ]. The only evidence produced of the amount due to Mr. Reynolds was an email between Hatle and him, in which Mr. Reynolds claims that “CorrLine owes [him] in excess of $6,000.00.” [Id.]. The email from Mr. Reynolds to Hatle is not credible evidence because the number of appearances listed is not consistent with the amount requested by Mr. Reynolds (nine appearances at approximately $1,000/appearance versus “in excess of $6,000”). Thus, to the extent that a request of $9,000.00 is inconsistent with a request for “more than $6,000.00,” this claim is fatally imprecise. In re Sadler, 2006 Bankr.LEXIS 4464 at *9. Because CorrLine has not provided this Court with a verifiable specific amount of this alleged debt, the Court finds that Mike Reynolds should also not be counted as a qualified creditor for purposes of nu-merosity under Bankruptcy Rule 1003(b). Thus, the total number of qualified creditors currently stands at twenty-two (22).9
b. De Minimis Claims
When determining the number of qualified creditors, this Court must abide by Fifth Circuit precedent and exclude de minimis claims. See Denham v. Shellman Grain Elevator, Inc. (In re Denham), 444 F.2d 1376, 1378 (5th Cir.1971) (excluding claims of $5.00 to $25.00). In In re Denham, the Fifth Circuit held that “small insignificant debts” of less than $25.00 are to be considered de minimis and should be excluded from the court’s determination of the number of creditors. Id. Conversely, the Fifth Circuit has also decided that claims between $600.00 and $800.00 are not de minimis and should be counted as creditors. See Blackmon v. Runyan (In re Runyan), 832 F.2d 58, 60 (5th Cir.1987). More recently, the Bankruptcy Court for the Middle District of Florida — citing Denham — recognized claims of up to $275.00 as de minimis. In re Smith, 123 B.R. 423, 425 (Bankr.M.D.Fla.1990). But see In re Moss, 249 B.R. 411, 419 (Bankr.N.D.Tex.2000) (refusing to recognize $275.00 claims as de minimis, but finding claims amounting to $20.99, $58.00, $10.62, and $25.00 were de minimis). Other courts have come to conclusions similar to the Florida bankruptcy court. See In re Smith, 415 B.R. 222, 232 (Bankr.N.D.Tex.2009) (finding claims up to $187.39 to be de minim-is).
*153Tagos contends that the threshold amount should now be $500.00, and it justifies this figure by pointing to the significant inflation that has occurred since the Fifth Circuit issued it ruling in Denham in 1971. [Tagos Ex. No. 92 at 4]. First, Tagos interprets Denham to hold that amounts of $100.00 or less are de minimis. [June 30, 2014 Tr. 215:14-215:15], Tagos then calculated the change in the Consumer Price Index from 1971 (the time of the Denham decision) to 2014 (the present year); the increase was approximately 586%. [Tagos Ex. No. 92 at 4; June 30, 2014 Tr. 215:14-15]. Based on a $100.00 de minimis threshold amount from Den-ham and the 586% inflation that has occurred since that decision, Tagos determined that $586.00 is the appropriate de minimis figure in 2014 dollars.10 However, to be conservative (at least in its view), Tagos rounded the amount down to $500.00. [June 30, 2014 Tr. 215:18],
In support of its approach, Tagos also points out that § 104(a)(1) expressly authorizes Consumer Price Index adjustments to the dollar values used throughout the Code, such as the minimum unsecured claim that a petitioning creditor must have under § 303(b)(2) to be eligible to file an involuntary petition. See 11 U.S.C. §§ 104(a)(1) & 303(b). This Court finds that Tagos’ “inflation” argument has merit; however, this Court believes that $500.00 is too high. Instead, relying on the most recent decisions of courts on this issue, this Court finds that $275.00 should be the threshold amount. See In re Smith, 123 B.R. at 425; In re Smith, 415 B.R. at 232. Therefore, the Court excludes the following debts in determining the number of qualified creditors:
i. 8x8, Inc.: The amount owed is $0.96. [Finding of Fact No. 57(a) ]. This amount is less than $275.00 and is therefore de minimis.
ii. Abby Office: The amount owed is $75.00. [Finding of Fact No. 66(a)]. This amount is less than $275.00 and is therefore de minim-is.
iii. Frost Bank: The amount owed is $5.00. [Finding of Fact No. 57(f) ]. This amount is less than $275.00 and is therefore de minimis.
iv. Iberia Parish: The amount owed is $96.93. [Finding of Fact No. 66(c) ]. This amount is less than $275.00 and is therefore de minim-is.
v.State of Louisiana: The amount owed is $74.00. [Finding of Fact No. 66(k) ]. This amount is less than $275.00 and is therefore de minimis.
After removing de minimis claims, the list of qualified creditors now stands at seventeen (17).11
*154c. Small and Recurring Claims
Although this Court reads Denham to exclude de minimis claims, other courts have read Denham to exclude only amounts that are both small and recurring. See Sipple v. Atwood (In re Atwood), 124 B.R. 402, 406 (S.D.Ga.1991) (holding that “even small claims may be counted unless they are also recurring”). In Denham, the Fifth Circuit noted, in dicta, that it does not consider claims that are small and recurring for purposes of numerosity. See Denham, 444 F.2d at 1379 (“[I]t was not the intent of Congress to allow recurring bills such as utility bills and the like to create a situation which, by refusal of these small creditors to join in an involuntary petition, can defeat the use of the Bankruptcy Act by a large creditor.... ”).12 Other jurisdictions have followed this interpretation of the Fifth Circuit’s decision in Denham, although they have noted that “[t]he Code has no specific exception for small, recurring claims, and a literal reading of the Code suggests that all creditors with claims that are not excluded by section 303(b)(2) should be counted to determine whether the debtor has fewer than twelve creditors.” In re Atwood, 124 B.R. at 406. Although the Denham ruling has been criticized, it is nevertheless still controlling law in the Fifth Circuit, and this precedent binds the Court. See Gonzalez v. Bayer Healthcare Pharm., Inc., 930 F.Supp.2d 808, 816 n. 6 (S.D.Tex.2013) (“This Court is bound by the Fifth Circuit’s ruling ... ”); see also United States v. Zimmerman, 529 F.Supp.2d 778, 783 (S.D.Tex.2007) (“This Court is bound by the Fifth Circuit’s opinion ... ”); see also Valladolid v. U.S. Bank Nat’l Ass’n, Civil Action No. 3:13-CV-0965-K, 2014 WL 1303003, at *3 (N.D.Tex. Apr. 1, 2014) (“Merely because Plaintiffs do not agree with the Fifth Circuit’s holding or analysis does not relieve this Court from its duty to follow binding authority.”). Accordingly, this Court will also analyze the number of qualified creditor claims under the “small and recurring” interpretation of Denham to ensure a different result in this case would not occur if this Court’s original understanding of Denham as barring only de minimis claims is incorrect.
Small, recurring debts have been understood to include “small, recurring debts, such as a monthly utility bill or rental payment.” In re Atwood, 124 B.R. at 406 (emphasis added). However, Merriam-Webster’s Dictionary defines “recurring” as “occurring or appearing at intervals.” This understanding of the term “recurring” does not require monthly billings; rather, it only requires that the bills be periodic in nature (Merriam-Webster’s lists “periodic” as a synonym of “recurring”). Therefore, this Court construes the term “small and recurring” to mean small in amount and recurring over time, but not necessarily in one-month intervals. This Court previously concluded that small claims are those with an amount owed of $275.00 or less. [See supra Part IV. G.4.b.]. The Court will consider whether *155the following debts count towards determining CorrLine’s total creditors under a “small and recurring” interpretation of Denham:
i. 8x8, Inc.: This Court found that 8x8, Inc. was owed a “usage charge” of $0.96 as of the Petition Date. [Finding of Fact No. 57(a) ]. This Court also found that the usage charge is a monthly recurring fee. [Id.]. Therefore, this Court concludes that 8x8 Inc.’s claim is both small and recurring, and should not be counted for numerosity purposes.
ii. Abby Office: This Court found that Abby Office was owed $75.00 as of the Petition Date. [Finding of Fact No. 66(a)]. This Court also concluded that Abby Office bills CorrLine on a monthly basis for phone services. [Id.]. Therefore, this Court concludes that Abby Office’s claim is both small and recurring, and should not be counted for numerosity purposes.
iii. Frost Bank: This Court found that Frost Bank was owed $5.00 as of the Petition Date. [Finding of Fact No. 57(f)]. However, this Court also concluded the Frost charge was a one-time fee. [Id.]. Therefore, this Court concludes that Frost’s claim is small, but not recurring, and should be counted for numerosity purposes.
iv. Iberia Parish: This Court found that Iberia Parish was owed $96.93 in sales tax as of the Petition Date. [Finding of Fact No. 66(c)]. Because CorrLine does business in Louisiana, sales tax would be a recurring charge under this Court’s understanding of that term. Therefore, this Court concludes that Iberia Parish’s claim is both small and recurring, and should not be counted for numerosity purposes,
v.State of Louisiana: This Court found that Iberia Parish was owed $74.00 in state sales taxes as of the Petition Date. [Finding of Fact No. 66(k) ]. Because CorrLine does business in Louisiana, sales tax would be a recurring charge under this Court’s understanding of that term. Therefore, this Court concludes that Iberia Parish’s claim is both small and recurring, and should not be counted for numerosity purposes.
Thus, assuming this Court’s original interpretation ’ of Denham is incorrect and based on this Court’s understanding of what constitutes “small and recurring” claims, the number of qualified creditors now stands at eighteen (18).13
d. Voidable Transfers — Payment of Claims After Filing
The filing of an involuntary petition commences a case and creates an estate. 11 U.S.C. §§ 303(b) & 541(a). Property of the estate consists of “all legal and equitable interests of the debtor in property as of commencement of the case” and “[proceeds, product, offspring, rents, or profits of or from property of the estate ... after the commencement of the case.” 11 U.S.C. § 541(a)(1), (a)(6). Section 303(b) of the Code provides that creditors who receive a voidable transfer of the estate are not to be counted in determining if the debtor has twelve or more creditors as of the Petition Date. See 11 U.S.C. § 303(b)(2). Of particular concern in this *156case are voidable transfers under § 549 of the Code. Section 549 provides that “a debtor may not, after the filing of the involuntary petition, pay pre-petition debts with money that was earned prepetition.” In re Rimell, 111 B.R. 250, 255 (Bankr.E.D.Mo.1990), aff'd, 946 F.2d 1863 (8th Cir.1991). Thus, when property of the estate is used to satisfy pre-petition creditor claims after the filing of the involuntary bankruptcy, those creditors may not be considered in the numerosity calculation. In re Beacon Reef Ltd. P’ship, 43 B.R. 644, 646 (Bankr.S.D.Fla.1984).
One court has even construed §§ 303(b) and 549 to exclude creditors who have been paid in full “shortly after” the filing of an involuntary petition. See In re Crain, 194 B.R. 663, 666 (Bankr.S.D.Ala.1996) (holding that the creditors “were paid in full or on account shortly after the petitions were filed and [could not] be counted”) (emphasis added). At the same time, courts have recognized that the “post-petition payment of a petitioning creditor does not disqualify it from being such.” Id. at 667; see also In re All Media Props., Inc., 5 B.R. 126, 137 (Bankr.S.D.Tex.1980), aff'd, 646 F.2d 193 (5th Cir.1981); In re Braten, 99 B.R. 579, 582 (Bankr.S.D.N.Y.1989); In re Carvalho Indus., Inc., 68 B.R. 254, 256 (Bankr.D.Or.1986); In re Sjostedt, 57 B.R. 117, 120 (Bankr.M.D.Fla.1986).
Tagos, the petitioning creditor, contends that several creditors received voidable transfers from the CorrLine bankruptcy estate under § 549 and should be excluded from the numerosity calculation. It is important to note that whether the funds used to pay these creditors was from a post-petition sale or collection of pre-petition accounts receivable, either would have necessarily been drawn from property of the estate. To illustrate, CorrLine is in the business of selling an anti-corrosion coating — a tangible product. [Finding of Fact No. 2], This product would have been held in inventory as of the Petition Date and, thus, was an asset of the estate. Therefore, any cash received from the sale of inventory after the Petition Date would necessarily be generated from the assets of the estate. See Moratzka v. Visa U.S.A. (In re Calstar, Inc.), 159 B.R. 247, 252 (Bankr.D.Minn.1993) (holding that post-petition credit card sales of inventory were assets of the estate). The same logic applies for cash receipts from accounts receivable balances generated from these post-petition sales. Id. Likewise, post-petition collections of accounts receivable that existed as of the Petition Date also constitute cash generated from the assets of the estate. Thunderbird Motor Freight Lines, Inc. v. Penn-Dixie Steel Corp. (In re Penn-Dixie Steel Corp.), 6 B.R. 817, 827 (Bankr.S.D.N.Y.1980) (holding that monies collected from “accounts receivable owing to [the debtor] are ‘proceeds’ from property of the estate, and, thus, are likewise property of the estate”).
The examples of this concept are numerous; however, it is enough to say that any cash used to pay creditors following the Petition Date was necessarily an asset of the CorrLine bankruptcy estate or constituted proceeds from the disposition of an asset of the CorrLine estate. See Towers v. Wu (In re Wu), 173 B.R. 411, 414 (9th Cir. BAP 1994) (holding that earnings attributable to invested capital, goodwill, accounts receivable, employee contracts and client relationships predating the petition are the property of the estate, not property of the debtor); West v. Hsu (In re Advanced Modular Power Sys., Inc.), 413 B.R. 643, 672 (Bankr.S.D.Tex.2009) (cash generated from continued post-petition operation of the bankrupt entity constituted an asset of the estate); accord Johnson v. *157Cottonport Bank, 259 B.R. 125, 129 (W.D.La.2000). Therefore, this Court finds that all creditors paid by CorrLine following the Petition Date are excluded from the numerosity calculation because they were paid with assets of the CorrLine Bankruptcy Estate. Thus, the following six (6) creditors are excluded because CorrLine paid them after the Petition Date: Barbara Tompkins Brown; Cognetic; Just Real Media; L.O. Trading, Pro-Ledge; and SeaTex Ltd. [Findings of Fact Nos. 66(b), 57(c), 66(e)-66(g), and 66(j)]. Thus, the list of qualified creditors now stands at eleven (11) under the Court’s de minimis analysis and twelve (12) under the Court’s “small & recurring” analysis.14
e. Claims of Insiders
Section 303(b) of the Code also excludes “employee[s] and insider[s]” from the nu-merosity calculation. 11 U.S.C. § 303(b)(2). The Code defines an insider of a corporation15 as a director, officer, person in control, or general partner of the debtor, or a partnership in which the debt- or is a general partner. § 101(31)(B). The Fifth Circuit has further construed an insider as an entity or person with “a sufficiently close relationship with the debtor that his conduct is made subject to closer scrutiny than those dealing at arm’s length with the debtor.” Wilson v. Huffman (In re Missionary Baptist Found, of Am., Inc.), 712 F.2d 206, 210 (5th Cir.1983). Courts have also noted “the definition of [an] insider ‘must be flexibly applied on a case-by-case basis.’ ” In re Premiere Network Servs., Inc., 333 B.R. 126, 128-29 (Bankr.N.D.Tex.2005).
The term “insider” may also include attorneys; however, this is not an ironclad rule. Kepler v. Schmalbach (In re Lemanski), 56 B.R. 981, 983 (Bankr.W.D.Wis.1986). An attorney is an insider if “he exercises such control or influence over the debtor as to render their transactions not arms-length.” Id. One court has pointed out that “an attorney, who invariably acquires confidential client information and whose relationship is governed by rules of professional conduct, may come under this categorization.” In re Rimell, 111 B.R. 250, 254 (holding that an attorney representing the debtor in an involuntary petition could not be counted as a creditor). However, aside from Rimell, this Court is not aware of any case law that has characterized attorneys as insiders. See In re Premiere Network Servs., Inc., No. 04-33402-HD H-11, 2005 WL 6452038, at *3 (Bankr.N.D.Tex. July 1, 2005) (holding that the existence of attorney-client relationship between creditor and debtor did not cause creditor to be considered an insider).
Therefore, this Court rejects Tagos’ argument that all of CorrLine’s attorneys and other professionals are insiders whose claims must be excluded. Accordingly, this Court declines to exclude from the numerosity calculation the following professionals, who are creditors of CorrLine, *158who are providing services to CorrLine in the State Court Action:
i. Berkley Research Group: Providing litigation support for CorrLine in the State Court Action against Tagos. [Finding of Fact No. 65(e) ].
ii. Law Office of Scott Link: Representing CorrLine’s CEO, Loren Ha-tle, in the State Court Action. [Finding of Fact No. 65(f) ].
iii. McFall, Breitbeil & Eidman: Representing Chrisman and Hernandez in the State Court Action. [Finding of Fact No. 65(c)].
However, this Court finds that the following creditors should be excluded from the numerosity calculation because they are currently officers of CorrLine and therefore insiders:
i. Loren Hatle: Chief Executive Officer and Chairman of CorrLine. [Finding of Fact No. 65(b) ].
ii. Kirk Chrisman: Vice President of CorrLine. [Finding of Fact No. 65(a) ].
iii. Santiago Hernandez: Vice President of Operations at CorrLine. [Finding of Fact No. 65(d) ].
iv. Peter Bock: Executive Vice President of Technical Service at CorrL-ine. [Finding of Fact No. 65(g)],
Therefore, the number of qualified creditors now stands at seven (7)16 under this Court’s de minimis analysis and eight (8)17 under this Court’s “small and recurring” analysis. Thus, under either interpretation of Denham, CorrLine has fewer than twelve creditors and Tagos is qualified to file the Involuntary Petition as the sole petitioning creditor under § 303(b).
f. Generally Not Paying Such Debts as They Become Due
In order for a court to enter an order granting an involuntary petition, the petitioning creditor must show that the putative debtor is generally not paying its debts as they become due. 11 U.S.C. § 303(h)(1). The burden is on the petitioning creditor to prove this element by a preponderance of the evidence. See Norris v. Johnson (In re Norris), No. 96-30146, 1997 WL 256808, at *3 (5th Cir. Apr. 11,1997). The determination is made as of the filing date. In re Sims, 994 F.2d 210, 222 (5th Cir.1993). Thus, the fact that debts may have been paid post-petition does not have any bearing on the determination. Id.; see also In re Edwards, 501 B.R. 666, 683 (Bankr.N.D.Tex.2013) (holding that “the fact that [the] debts may have been paid post-petition cannot be considered in deciding whether [the debtor] was generally paying his debts as they became due on the Involuntary Petition Date”).
The Code has not explicitly defined what “generally not paying debts” means; however, courts have offered various guidance on the issue. In fact, this Court previously stated that:
Generally not paying debts includes regularly missing a significant number of payments to creditors or regularly missing payments, which are significant in amount in relation to the size of the debtor’s operation. Where the debtor has few creditors the number which will be significant will be fewer than where the debtor has a large number of creditors. Also, the amount of the debts not being paid is important. If the amounts *159of missed payments are not substantial in comparison to the magnitude of the debtor’s operation, involuntary relief would be improper.
In re All Media Props., Inc., 5 B.R. 126, 143 (Bankr.S.D.Tex.1980), aff'd, 646 F.2d 193 (5th Cir.1981).
Other courts have taken a similar approach. For example, the Bankruptcy Court for the Northern District of Texas considered the following factors: “(1) the number of unpaid claims; (2) the amount of such claims; (3) the materiality of the non-payments; and (4) [the debtor’s] overall conduct in [its] financial affairs.” In re Edwards, 501 B.R. at 682.
Tagos contends that CorrLine is generally not paying its debts as they come due. This Court agrees. First, CorrLine’s March 2014 accounts payable (AP) aging— the most recent available at the time of trial — shows a total of $48,343.93 outstanding with over $13,000.00 more than 30 days past due. [Finding of Fact No. 43]. Even more telling, only two of the 32 vendor invoices were not past due as of the AP report date. [Id.]. Yet, when Tagos, through Doskey, was managing the accounts payable pursuant to the Services Agreement, CorrLine only had $9,731.19 outstanding, of which only about $600.00 was over 30 days past due. [Tagos Ex. No. 23]. Additionally, Tagos provided an email from Doskey in which he expressed his concern over accounts payable management. [Finding of Fact No. 48]. In the email, Doskey pointed out seven specific vendors that have continuously been paid late. [Id.]. This evidence proves that CorrLine’s current management team experienced difficulty in properly managing its accounts payable and paying the company’s debts as they become due.
This Court also notes several instances of late payments that are particularly disturbing. First, CorrLine was delinquent in paying its payroll taxes to the IRS for two pay periods during 2014. [Finding of Fact No. 66(d) ]. The late payments resulted in a penalty of $1,799.91, which remained unpaid as of the Petition Date. [Id.]. Also, Tagos introduced evidence that Seatex, Ltd., CorrLine’s primary blender and shipping agent of the CorrX product, was consistently paid late during 2014. [Tagos Ex. No. 25 at 16; Tagos Ex. No. 61 at 1]. Doskey credibly testified that CorrL-ine’s untimely payments to Seatex were particularly troubling because CorrLine’s relationship with Seatex is critical to its operational well-being and its ability to sell the CorrX product. [July 1, 2014 Tr. 42:6-42:23], The late payments to both the IRS and Seatex are clearly material because poor relationships with both entities would have a seriously detrimental impact on CorrLine’s ability to operate and remain a going concern.
Moreover, the two debts owed to Tagos amount to $540,587.09, which clearly were not paid as of the Petition Date (nor have they been paid since the Petition Date). [Finding of Fact No. 47(a) ]. There is no question that: (1) on September 20, 2012, the Debtor and Tagos executed the Services Agreement, whereby Tagos would provide various services to the Debtor; (2) the Debtor is required to pay Tagos a monthly fee for services in the amount of $25,000.00; (3) under the Services Agreement, the Debtor is required each month to reimburse Tagos for its reasonable out-of-pocket costs incurred by Tagos while rendering its services; (4) Tagos rendered services for several months; (5) the Debt- or has failed to pay for everything that is owed; and (6) the amount owed is $390,608.58. [Findings of Fact Nos. 18, 19 & 47(a)]. Additionally, a total of $149,980.51 is owed to Tagos for money loaned to CorrLine under the Credit Agreement. [Finding of Fact No. 47(a) ]. *160In the Answer, CorrLine submitted a list of 52 creditors who were owed a total of $145, 838.69 as of the Petition Date. [Finding of Fact No. 54]. This list did not include the two amounts owed to Tagos. [Id.]. When Tagos’ debts are included with the other creditor balances — and they assuredly should be included — Tagos’ portion makes up approximately 79% of CorrLine’s total outstanding amounts due.18 Not only is the amount due to Tagos clearly material, but it also was unpaid as of the Petition Date.
While CorrLine argues that the amounts under the Services Agreement and Credit Agreement were not due as of the Petition Date and should not be considered in the “paying debts as they become due” analysis, this argument is unpersuasive. In support of its argument, CorrLine points to Note F of the financial statements, which states that the Services Agreement fees and Tagos Loan balances would be paid as cash becomes available. [CorrLine Ex. Nos. 102-107]. However, all amounts owed under the Services Agreement became immediately payable when Hatle terminated this agreement, pursuant to the acceleration clause contained therein. [Findings of Fact Nos. 19 & 46]. Therefore, even if CorrLine is correct that the loan amount is not yet due because of insufficient funds — and CorrLine is wrong on this point — the Services Agreement fees are definitely due based on the unambiguous acceleration clause: “[P]rovided, however, that in the event of a termination ..., [CorrLine] shall be obligated to [Ta-gos], in full, all current and accrued fees and expenses owing and payable hereunder through the effective date of such termination.” [Tagos Ex. No. 9 at 1]. Even if the amounts due to Tagos are considered to be limited to those owed under the Services Agreement, the total of those amounts still comprise over 72% of CorrL-ine’s outstanding debts.19
Additionally, CorrLine’s employees have been forced to defer payment of their salaries so that CorrLine can pay off its other creditors. [See Finding of Fact No. 33]. CorrLine’s list of creditors included a total of $21,000.00 owed to its employees Hernandez, Chrisman, Hatle, and Bock. [Findings of Fact Nos. 65(a), 65(b), 65(d) & 65(g) ]. Not only has CorrLine been unable to timely pay its creditors; it has also been unable to pay its own employees on a timely basis.
In sum, CorrLine has consistently demonstrated an inability to pay its debts as they come due, particularly since Chris-man, Hatle, and Hernandez took over the AP process from Tagos and Doskey. Further, CorrLine has adamantly expressed its unwillingness to pay off its largest outstanding debt: the $540,587.09 owed to Tagos. CorrLine’s management has shown a complete disregard for the timely payment of even its most important creditors: the IRS and SeaTex Ltd. — as well as its own employees. Applying the holdings from All-Media and Edwards, this Court concludes that CorrLine is generally not paying its debts as they become due. As such, Tagos has satisfied this element of § 303(h)(1).
*161H. “Special Circumstances” Exception
Some courts have recognized an exception to the three-creditor requirement when there is evidence of fraud, trick or scam. In re Norriss Bros. Lumber Co., 133 B.R. 599, 609 (Bankr.N.D.Tex.1991) (citing cases). These courts have found that “arguable fraudulent conveyances and arguable preferential transfers to [the debtor’s] attorneys and others constitute special circumstances ...” which justify waiving the three-creditor requirement in an involuntary bankruptcy petition. Id.; See also In re Smith, 415 B.R. 222, 238 (Bankr.N.D.Tex.2009) (recognizing a “ ‘special circumstances’ exception to the three creditor requirement when [an] alleged debtor [has] participated in fraudulent transfers and prepetition payments,” but, finding that the special circumstances exception does not apply when there are four creditors).
Here, this Court has found evidence that Hatle intentionally manipulated invoice information from the M Test to artificially increase the creditor count. [Finding of Fact No. 57(h)], Specifically, on June 3, 2014 — 19 days after the Petition Date— Hatle emailed a Mr. Swan, an employee of M Test, requesting that M Test send an invoice for the conductivity meter that it had sold to CorrLine. [M]. Swan obliged Hatle and sent him an original invoice dated June 4, 2014, with a due date for the invoice of July 4, 2014. [Id.]. Once Hatle received this original invoice, he immediately emailed Swan and requested him to change the invoice date to May 1, 2014— i.e., 13 days prior to the petition date. [Id.]. Hatle informed Swan that he needed to change the invoice date from June 4, 2014 to May 1, 2014 for “some technical reasons.” [Id.]. Once again, Swan obliged Hatle and sent another invoice showing the invoice date to be May 1, 2014. [M]. There is no doubt in this Court’s view that Hatle requested Swan to send this second invoice in order to manufacture evidence to convince this Court that M Test was a creditor as of Petition Date and therefore should be included in this Court’s numer-osity analysis. Stated differently, Hatle manufactured this evidence in an effort to reduce the risk that this Court would find that CorrLine has fewer than twelve (12) creditors, thereby allowing solely Tagos to prosecute the Involuntary Petition.
Moreover, in discovery, Tagos managed to unearth a third invoice allegedly from M Test. This invoice reflects a shipment date for the conductivity meter of May 14, 2014. [Jet]. When confronted with the fact that there were three different versions of the same M Test invoice, Hatle could not offer an explanation for the existence of the third invoice. [Id.]. Indeed, Hatle could not explain what the “technical reasons” were for his requesting Swan to send a second invoice. [Id.]. Rather, Hatle testified that he had never seen any of these invoices, despite the fact that he was the recipient of the email from M Test that contained the invoices and had sent the email requesting the second invoice himself. [June 30, 2014 Tr. 104:11-106:11]. Considering that this Court has already found reason to question Hatle’s credibility [see supra Credibility of Witnesses — Loren Hatle] and considering the evidence of invoice manipulation, this Court finds that a “special circumstances” exception to the three-creditor requirement is warranted in this case. See In re Norriss Bros., 133 B.R. at 608-09 (holding that “the three creditor requirement may not be applicable in the event of trick, artifice, scam, or fraud”) (citing cases). Therefore, even if this Court found that CorrLine has twelve or more qualifying creditors, Tagos would nevertheless have standing to bring the Involuntary Petition as a single creditor *162under the “special circumstances” exception.
V. Conclusion
In sum, this Court concludes that Tagos has standing to file the Involuntary Petition against CorrLine pursuant to § 303 of the Bankruptcy Code. Tagos’ status as an insider and recipient of certain voidable transfers does not preclude it from filing the Involuntary Petition. Furthermore, Tagos’ claims for amounts owed under the Services Agreement and the Credit Agreement are not the subject of a bona fide dispute. There is no question that CorrL-ine agreed to pay Tagos $25,000.00 a month, plus reasonable pass through expenses, for providing general business support services, and it is abundantly clear that CorrLine has refused to pay these fees. There is also no question that CorrLine owes Tagos the sum $149,980.51 under the Credit Agreement and that CorrLine has refused to pay this amount. Further, CorrLine has failed to provide any credible evidence that Tagos filed the Involuntary Petition in bad faith, and therefore, the Court must presume it was filed in good faith. Moreover, the Court has reviewed the evidence provided for all fifty-two (52) alleged creditors of CorrL-ine, and finds that, at most, eight creditors are qualified.20 Therefore, CorrLine’s argument that Tagos lacks standing because it does not have at least three petitioning creditors must also fail. Furthermore, even if CorrLine did have at least twelve (12) qualified creditors, this Court has found evidence of CorrLine’s invoice manipulation, which defeats the three-creditor requirement under the “special circumstances” exception. Additionally, as of the Petition Date, CorrLine was generally not paying its debts as they came due. In fact, this Court finds that CorrLine, as of the Petition Date, was having significant problems with accounts payable management and that CorrLine was continuously paying several key vendors late. For all of these reasons, this Court concludes that it should grant the Involuntary Petition filed by Tagos.
The Court also concludes that CorrLine does not have authority to retain K & L Gates to file and prosecute the Answer and the Motion to Dismiss. Such retention requires the consent of a majority of managers of CorrLine with at least one affirmative vote coming from a minority member; these conditions have never been met. Alternatively, even if CorrLine has authority to retain K & L Gates to file and prosecute the Answer and the Motion to Dismiss, because this Court grants the Involuntary Petition, it necessarily denies the requests in the Answer and the Motion to Dismiss for a dismissal of the Petition. Finally, this Court denies the alternative relief requested in the Motion to Dismiss — namely, to abstain from adjudicating this dispute. Rather, this Court finds ample reason and need to immediately issue a final order and thereby maximize the chances that all claims — including those of Tagos — will be paid in the Chapter 7 process.
For the foregoing reasons, the Court grants the Involuntary Petition and denies the Motion to Dismiss. An order granting the Involuntary Petition and denying the Motion to Dismiss will be entered on the docket simultaneously herewith.
. To the extent that any finding of fact is construed as a conclusion of law, it is adopted as such. Moreover, to the extent that any conclusion of law is construed as a finding of fact, it is adopted as such. The Court reserves its right to make additional findings and conclusions as it deems appropriate or as may be requested by any of the parties.
. Any reference to "the Code” refers to the United States Bankruptcy Code, and reference to any section (i.e., §) refers to a section in 11 U.S.C., which is the United States Bankruptcy Code, unless otherwise noted. Further, any reference to "the Bankruptcy Rules” refers to the Federal Rules of Bankruptcy Procedure.
. This Court requested both CorrLine and Ta-gos to submit their respective list of creditors setting forth which creditors they respectively believe should be counted for numerosity purposes.
. i.e. 52 - 16 = 36.
. Assuming, arguendo, that this Court is incorrect and that CorrLine is properly authorized to file the Answer opposing the Involuntary Petition, this Court will address the merits of CorrLine's arguments set forth therein in the ensuing sections of this Memorandum Opinion.
. This Opinion neither adopts nor supports the holding in Westerleigh. Rather, this Court emphasizes the factual distinction between this dispute and that in Westerleigh to conclude that Westerleigh's holding is not applicable here.
. While the minutes are unsigned, they are still a valid record of the Board’s activity that day. See Cameron & Willacy Counties Cmty. Projects, Inc. v. Gonzalez, 614 S.W.2d 585, 589 (Tex.Civ.App.-Corpus Christi 1981, writ ref'd n.r.e.).
. Although the Credit Agreement is unexecut-ed, this Court finds the document and its terms to be persuasive evidence of a lending relationship because of the detailed nature of the agreement and the fact that it is consistent with the lending relationship between Tagos and CorrLine contemplated and approved at the October 22, 2013 Board Meeting. [See Finding of Fact Nos. 27 & 31].
. Prior to the analysis in this subsection, the number of creditors stood at 36. The Court has now concluded that CorrLine has not met its burden as to 14 creditors. Therefore, the current number of potentially qualified creditors stands at 22 (i.e., 36 — 14 = 22).
. i.e., $100.00 x 5.86 = $586.00.
. The number of creditors previously stood at twenty-two (22). See supra note 9. Removal of the five (5) de minimis claims leaves the current number of qualified creditors at seventeen (17). The Court also finds that even if it completely rejected Tagos’ CPI approach— such that the analysis was done using the debt figures from 1971 that the Fifth Circuit excluded in Denham — this Court would still hold that the five (5) specific debts listed above are de minimis. In Denham, the Fifth Circuit noted that only one of the eighteen debts exceeded $100.00: "Of the eighteen (18) creditors listed in the answer of the alleged bankruptcy, all but one were creditors holding small insignificant debts ... the only exception being the debt to Forshee Gin and Warehouse, Inc., in the amount of $121.04.” In re Denham, 444 F.2d at 1378 (5th Cir.1971). This language suggests that the Fifth Circuit views any debt under $100.00 to be de minimis; and all five of the debts here are under $100.00. Finally, in Runyan, the Fifth Circuit expressly held that "the $600 to $800 claims appellants seek to exclude are much too large to constitute 'small’ claims under *154Denham’s rationale. Typically, the creditors excluded for § 303(b) purposes are those with claims of less than $25.” In re Runyan, 832 F.2d 58, 60 (5th Cir.1987). Here, the amounts of all five of the debts are much closer to $25.00 than $600.00.
. The specific debts which the Fifth Circuit actually excluded in Denham were not both small and recurring — rather, they were simply small. Of the eighteen (18) creditors listed by the debtor in his answer, six (6) debts were less than $25.00 while seven (7) debts were less than $10.00 each. In re Denham, 444 F.2d at 1378 (5th Cir.1971). The Fifth Circuit excluded these debts because they were “small insignificant debts” and did not specifically hold that these debts were both small and recurring. See id.
. The number of creditors previously stood at 22. See supra note 9. Removal of the four (4) de minimis claims under this Court’s "small and recurring" interpretation of Den-ham leaves the current number of qualified creditors at eighteen (18).
. The number of creditors previously stood at seventeen (17) under this Court’s “de min-imis ” analysis and eighteen (18) under this Court’s "small and recurring” analysis. See supra notes 11 & 13. Removal of the six (6) creditors who received post-petition payments from assets of the estate leaves the qualified creditor count at eleven (11) under this Court’s "de minimis ” analysis and twelve (12) under this Court’s “small and recurring” analysis.
. The Code defines a "corporation”, in relevant part, to include an "association having a power or privilege that private corporation possesses” or an "unincorporated association.” 11 U.S.C. § 101(9)(a). The Court construes this definition to include limited liability companies formed under Texas law, such as CorrLine.
. AFCO; Collier Group; NACE; Berkley Research Group; Law Office of Scott Link; McFall Breitbeil & Eidman; and the IRS.
. AFCO; Collier Group; NACE; Berkley Research Group; Law Office of Scott Link; McFall Breitbeil & Eidman; the IRS; and Frost Bank.
. [Total Amount CorrLine Owes to Tagos] [CorrLine Creditor Balance at Petition Date + Total Amount CorrLine Owes to Tagos] = [$540,587.09] -4- [$145,838.69 + $540,587.09] = [$540,587.09] -4- [$686,-435.78] = 78.75%, ~ 79%.
. [Total Amount CorrLine Owes to Tagos under the Services Agreement] -4- [CorrLine Creditor Balance at Petition Date + Total Amount CorrLine Owes to Tagos under the Services Agreement] = [$390,606.58] -4-[$145,838.69 + $390,606.58] = [$390,-606.58] -4- [$536,445.27] = 72.81% = 73%.
. AFCO; Collier Group; NACE; Berkley Research Group; Law Office of Scott Link; McFall Breitbeil & Eidman, the IRS; and Frost Bank. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497438/ | MEMORANDUM OPINION
GREGORY R. SCHAAF, Bankruptcy Judge.
This matter is before the Bankruptcy Court on the Defendant Beads and Steeds, LLC’s Motion for Judgment on the Pleadings [Doc. 9], The Plaintiff Trustee filed her Objection [Doc. 11] and the Defendant filed its response [Doc. 13]. On July 24, 2014, the Bankruptcy Court heard oral argument and took the matter under submission. It is now ripe for determination.
The issue is whether the Trustee failed to state a claim upon which relief may be granted pursuant to 11 U.S.C. § 548(a)(1)(B) and K.R.S. § 378.020 through 11 U.S.C. § 544(b). The resolution of this issue turns on whether the *165Trustee can prove that the Debtors made a transfer of their interest in property by utilizing a “reverse veil piercing” theory that would allow the Trustee to treat the Debtors and their wholly owned limited liability company as the same. Because Kentucky has not adopted reverse veil piercing, the Trustee may not proceed under the theory and the Trustee’s Complaint fails to state a claim. But resolution of the Motion is premature as the Trustee has moved to amend the Complaint and the Defendant deserves an opportunity to oppose this relief.
I. FACTS.
The following facts alleged in the Trustee’s Complaint are taken as true for the purpose of this decision. On or about June 19, 2007, the Debtors formed Meadow Lake Horse Park, LLC (“Meadow Lake”). On July 20, 2007, Meadow Lake purchased 133 acres of real estate in Gar-rard County known as 9863 Lexington Road, Lancaster, Kentucky (“Farm”) for $1,600,000.00 with the proceeds of a mortgage loan from United Bank and Trust Company (“United Bank”). In late November 2010, the Debtors made a $760,000.00 payment on the mortgage loan to United Bank out of their personal income tax returns. The Trustee asserts this payment was without consideration.
On December 28, 2010, Meadow Lake sold the farm for $800,000.00 to the Defendant Beads and Steeds, LLC, which is wholly owned by Robert and Susan Hale (“2010 Transfer”). The Defendant was formed shortly before the 2010 Transfer for the sole purpose of purchasing the Farm. The Defendant financed the full purchase price with a mortgage loan from United Bank in the amount of $800,000.00.
Subsequent to the sale of the Farm, Meadow Lake leased the Farm to the Defendant for $1,000.00 per month. Meadow Lake also agreed to pay all insurance and real property taxes. The Debtors operated the Farm as a horse boarding and training facility and a bed and breakfast and event facility both before and after the 2010 Transfer.
The Debtors filed chapter 7 bankruptcy on May 8, 2012. The Debtors scheduled their interest in Meadow Lake on Schedule B and listed the value as $0. Phaedra Spradlin was appointed Chapter 7 Trustee.
On May 6, 2014, the Trustee filed the underlying adversary proceeding seeking to avoid the 2010 Transfer as a fraudulent conveyance pursuant to § 548(a)(1)(B). The Trustee also seeks to avoid the 2010 Transfer pursuant to K.R.S. § 378.020 through § 544(b). The Trustee further requests that the Bankruptcy Court disallow any claims by the Defendant pursuant to § 502(d).
The Defendant answered the Complaint [Doc. 8] generally denying the allegations. The Defendant has now moved for judgment on the pleadings for failure to state a claim upon which relief may be granted because the Trustee has only alleged a transfer by Meadow Lake, not the Debtors [Doc. 9].
II. STANDARD FOR JUDGMENT ON THE PLEADINGS.
The Defendant moved for judgment on the pleadings pursuant to Fed. R. BanKR.P. 7012, which incorporates Fed.R.Civ.P. 12(c). A Rule 12(c) motion for judgment on the pleadings is granted when no material issue of fact exists and the party making the motion is entitled to judgment as a matter of law. JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 581-582 (6th Cir.2007). While a court does not have to accept the truth of legal conclusions or unwarranted factual inferences, a court must otherwise treat the opposing party’s *166well-pled material allegations in the pleadings as true. Id.
III. ANALYSIS.
A. The Trustee Relies on a “Reverse Veil Piercing” Theory to Meet Her Burden of Proof.
The crux of the Defendant’s Motion is its argument that the Trustee fails to allege that the Debtors participated in the 2010 Transfer as required by § 548(a)(1)(B), § 544(b) and K.R.S. § 378.020.1 See 11 U.S.C. § 548(a)(1) (“transfer ... of an interest of the debtor in property ... ”); § 544(b)(1) (“transfer of an interest of the debtor in property”); K.R.S. § 378.020 (“transfer ... made by a debtor ... ”). The Trustee counters that she has alleged facts that would support her causes of action under a reverse veil piercing theory. She argues that there is a unity of interest and ownership between the Debtors and Meadow Lake such that the identities of the Debtors and Meadow Lake were not, and are not, separate. The Trustee contends that if the Bankruptcy Court finds that the Debtors and Meadow Lake are one and the same under a reverse veil piercing theory, then she has demonstrated that her right to relief rises above the speculative level and she has given the Defendant fair notice of her causes of action.
1. Reverse Veil Piercing is Characterized Two Ways.
Courts characterize reverse veil piercing two different ways. “Outsider” reverse veil piercing involves a third party creditor piercing the corporate veil in the reverse to reach the assets of the corporation to satisfy the debt of a corporate insider. Grimmett v. McCloskey (In re Wardle), No. NV-05-1000-KMoB, 2006 WL 6811026, *6 n. 4, 2006 Bankr.LEXIS 4817, *16-17 n. 4 (9th Cir. BAP Jan. 31, 2006). “Insider” reverse veil piercing involves an insider of the corporation seeking to disregard the corporate form of his own corporation for his own benefit. Id. See also Halverson, et al. v. Schuster (In re Schuster), 132 B.R. 604, 607 (Bankr.D.Minn.1991). It is not clear under which theory the Trustee proceeds.
The Trustee is in a unique position. As Trustee of the Debtors’ bankruptcy estate, she stands in the shoes of the Debtors and assumes causes of actions that belong to the Debtors. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (holding a bankruptcy estate’s rights and assets are determined by state law and not by federal rule of equity). Thus, if state law allows the Debtors to pierce the veil of their limited liability company pursuant to an “insider” reverse veil piercing theory, then the Trustee may pursue that remedy. A trustee in bankruptcy may also assert causes of action that belong to the bankruptcy estate, ie., fraudulent transfer claims pursuant to § 548 and § 544. Therefore, she may use the powers provided to her by the Bankruptcy Code to obtain the relief provided by these statutory provisions. See, generally, 11 U.S.C. § 548; 11 U.S.C. § 544. Further, by virtue of § 544, the Trustee also stands in the shoes of the Debtors’ judgment creditors. Thus, if state law allows the Debtors’ judgment creditors to pierce the veil of the Debtors’ limited liability company pursuant to an “outsider” *167reverse veil piercing theory, then the Trustee may utilize that theory as well. See, generally, 11 U.S.C. § 544.
Ultimately, it is not necessary to resolve whether the Trustee seeks to pierce the veil of Meadow Lake pursuant to an “insider” or “outsider” reverse veil piercing theory as this decision is the same under either theory.
2. Kentucky Has Not Adopted or Rejected Reverse Veil Piercing.
Kentucky courts have not accepted or rejected the reverse veil piercing doctrine. See Turner v. Andrew, 413 S.W.3d 272, 277 n. 4 (Ky.2013); see also Williams v. Oates, No. 2012-CA-000327-MR, 2014 WL 2937773 (Ky.App. June 27, 2014). In Turner, the Kentucky Supreme Court recognized in dicta that a limited number of jurisdictions have adopted insider reverse veil piercing based on strong public policy considerations. Turner, 413 S.W.3d at 277. The Supreme Court also mentioned that at least one commentator does not believe that Kentucky would recognize reverse veil piercing. Id. at 277 n. 4. But, the Supreme Court did not adopt or reject the theory.
The Kentucky Court of Appeals later acknowledged the discussion of veil piercing in Turner, but like the Kentucky Supreme Court, failed to rule for or against the doctrine. Williams, 2014 WL 2937773 at *4. The Court of Appeals also noted that there is “speculation that Kentucky would probably not recognize reverse veil piercing.” Id.
3. Current Kentucky Law Does Not Support Adopting the Trustee’s Theory of Reverse Veil Piercing.
The Trustee contends that, although Kentucky courts have not explicitly adopted reverse veil piercing, Kentucky would adopt the theory based on its acceptance of the traditional veil piercing remedy. See Trustee’s Response [Doc. 11] at 7. Even if this statement is true, the Trustee may not use reverse veil piercing to avoid judgment on the pleadings.
i. Traditional Veil Piercing is Available as an Equitable Remedy in Kentucky.
In Kentucky, traditional veil piercing2 is an equitable remedy that allows a court to impose personal liability on otherwise immune corporate officers, directors, and shareholders for the corporation’s wrongful acts. See Inter-Tel Tech., Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152, 155 (Ky.2012) (“Piercing the corporate veil is an equitable doctrine invoked by courts to allow a creditor recourse against the shareholders of a corporation.”); White v. Winchester Land Development Corp., 584 S.W.2d 56, 61 (Ky.App.1979) (“Three basic ‘theories’ have been utilized to hold the shareholders of a corporation responsible for corporate liabilities.”). Piercing the corporate veil is not treated as a separate cause of action. Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 211 (Ky.App.2009) (citing William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations, § 41.29 (2006)).
*168Kentucky courts pierce the corporate veil sparingly and only where it is necessary to prevent injustice. Schultz v. General Electric Healthcare Financial Services, Inc., 360 S.W.3d 171, 174 (Ky.2012) (citing Morgan v. O’Neil, 652 S.W.2d 83, 85 (Ky.1983)). To successfully pierce the corporate veil, a plaintiff must prove “a loss of separate entity existence” and an injustice “beyond the mere inability to collect a debt from the corporation.” Inter-Tel Tech., 360 S.W.3d at 164-165. Proof of actual fraud is not required. Id.
The result of piercing the veil in Kentucky is that “the limited liability which is the hallmark of a corporation is disregarded and the debt of the pierced entity becomes enforceable against those who have exercised dominion over the corporation to the point that it has no real separate existence.” Id. at 155. The remedy allows an injured party, who has prevailed in establishing a corporation owes it a debt, to reach beyond the corporate form to collect the debt from the shareholders, officers or directors.
ii. Kentucky Courts Might Accept Reverse Veil Piercing as an Equitable Remedy.
Kentucky has adopted traditional veil piercing, so it is not unreasonable to conclude that Kentucky may ultimately adopt reverse veil piercing in the right circumstances. Kentucky courts have historically shown a willingness to overlook the general rule of limited liability for equitable reasons:
This court in harmony with the trend of thought and opinion in recent years has not hesitated to make an exception to the general rule when necessary to circumvent fraud, but has looked beyond the form or shadow of the pretended corporation to those in whose individual interest it was organized and is operated.
Lowry Watkins Mfg. Co. v. Turley-Bullington Mortgage Co., 248 Ky. 285, 58 S.W.2d 591, 592 (1933). It is therefore possible to conclude that a Kentucky court would apply reverse veil piercing when necessary to prevent fraud, illegality, or injustice. See Inter-Tel Tech., 360 S.W.3d at 168 (“Courts should not pierce corporate veils lightly but neither should they hesitate in those cases where the circumstances are extreme enough to justify disregard of an allegedly separate corporate entity.”)
This possibility is not assured, however. See supra at Section III.A.2 (discussing Kentucky cases that have discussed, but not decided, the issue and some speculation Kentucky would not adopt reverse veil piercing). Further, it is likely Kentucky courts would more readily accept outsider reverse veil piercing than insider reverse veil piercing. See Turner, 413 S.W.3d at 277 (“There is an ‘insider reverse’ piercing theory, adopted by a very few states, but it is employed in that rare instance where equity is perceived to require disregard of the entity.”); see also Boggs v. Blue Diamond Coal Co., 590 F.2d 655 (6th Cir.1979) (declining to allow a corporate entity to use veil piercing to undo what the entity itself created); Spartan Tube & Steel v. Himmelspach (In re RCS Engineered Pros. Co.), 102 F.3d 223 (6th Cir.1996) (holding a subsidiary does not have standing to raise an alter ego claim against its parent as veil piercing is only for the benefit of third parties).
But the Trustee cannot prevail even if this Court is willing to decide that Kentucky courts will accept either form of reverse veil piercing. This Court could only predict use of reverse veil piercing as a remedy; not as a basis for an independent cause of action.
*169iii. The Trustee’s Reverse Veil Piercing Theory is Not Consistent with Kentucky’s Treatment of Veil Piercing as a Remedy.
Kentucky’s approach to traditional veil piercing is as a remedy, rather than a cause of action in its own right. The “doctrine of piercing the corporate veil is recognized as being an equitable remedy, not a cause of action unto itself, which is used as a means of imposing liability.” Daniels, 300 S.W.3d at 211; see also Hodak v. Madison Capital Management, LLC, 348 Fed.Appx. 83, 94-95 (6th Cir.2009).3 But the Trustee needs more from reverse veil piercing than merely the right to pursue Meadow Lake’s assets. The Trustee needs to consolidate the Debtors and Meadow Lake to pursue the federal and state fraudulent conveyance claims in the Complaint.
The Trustee argues that disregard of the corporate form of Meadow Lake would mean the 2010 Transfer is treated as if it were made by the Debtors directly. See Trustee’s Response [Doc. 11], at 6. Under this theory, it does not matter whether the Debtors or Meadow Lake committed the alleged wrongdoing. The assets and liabilities of both parties are treated as merged both prospectively and retroactively. This logic is not consistent with veil piercing as a remedy in Kentucky.
Only two Kentucky cases were found that might suggest Kentucky courts would treat veil piercing as a way to consolidate separate entities like the Debtor and Meadow Lake, either prospectively or retroactively. See Dare To Be Great, Inc. v. Com. ex rel. Hancock, 511 S.W.2d 224, 227 (Ky.1974) (“Generally a corporation will be looked upon as a separate legal entity but when the idea of separate legal entity is used to justify wrong, protect fraud or defend crime the law will regard the corporation as an association of persons.”); Louisville & N.R. Co. v. Carter, 226 Ky. 561, 10 S.W.2d 1064, 1068 (Ky.1927) (piercing results in recognition of the shareholders and company as “united in one body.”). The language in these cases is not enough to justify adoption of reverse veil piercing in the manner proposed by this Trustee.
Both cases were decided well before the seminal case of White v. Winchester Land Development Corp. Kentucky courts have since had many opportunities to address veil piercing, most recently in Inter-Tel Tech., and the Kentucky Supreme Court continues to treat veil piercing as an equitable remedy that allows a creditor of the corporation to recover the corporate debt from the shareholders, officers or directors. See Inter-Tel Tech., Inc., 360 S.W.3d at 155. There is no mention in any cases beyond these two early decisions of consolidating the business entity and its insiders as a result.
Traditional veil piercing in Kentucky requires a finding that the corporation committed the wrongdoing before allowing the injured party to recover for that harm from the shareholders, officers, or directors. If Kentucky were to adopt a reverse veil piercing theory, it is reasonable to conclude that Kentucky would treat the doctrine as an equitable remedy that requires wrongdoing by a corporation’s shareholders, officers, or directors before considering whether justice requires piercing the veil to allow the injured party to recover from the corporation’s assets. There is no indication that Kentucky would *170go one step further and treat the business entity and its insiders as one in the same.
iv. The Cases Relied on by the Trustee are Inconsistent with Kentucky Law and the Bankruptcy Code.
The Trustee cites cases from three other jurisdictions that have allowed a bankruptcy trustee to use reverse veil piercing to avoid a fraudulent transfer and urges a similar result here. See, e.g., Rodriguez v. Four Dominion Drive, LLC (In re Boyd), No. 11-51797, 2012 WL 5199141, 2012 Bankr.LEXIS 4968 (Bankr.W.D.Tex. Oct. 22, 2012); Searcy v. Knight (In re American Int’l Refinery), 402 B.R. 728 (Bankr.W.D.La.2008); Hovis v. United Screen Printers, Inc. (In re Elkay Indus., Inc.), 167 B.R. 404 (D.S.C.1994). These cases are unpersuasive and distinguishable.
In Boyd, the court looked to several Fifth Circuit cases construing Texas law and concluded that reverse veil piercing is an accepted common law doctrine in Texas that allows a trustee, using an alter ego theory, to “exercise control over the assets of the non-debtor entity, and to administer those assets for distribution to creditors of the bankruptcy estate.” Boyd, 2011 WL 722384, at *5, 2012 Bankr.LEXIS at *14 (citing In re Bass, 2011 Bankr.LEXIS 555, 2011 WL 722384, at *6 (Bankr.W.D.Tex.2011)). Similarly, the American Int’l Refinery court looked to Nevada law, which accepts reverse veil piercing based on an alter ego doctrine. American Int’l Refinery, 402 B.R. at 743-744. The American Int’l Refinery court noted that “Nevada’s alter ego doctrine does not merely shift liability from one entity to another, but expands the debtor’s estate to include the property of its alter ego.” Id. at 744. Both courts relied on state law that expressly treated veil piercing as more than just a remedy.
The approach in Elkay Indus, is different. The court in Elkay Indus, allowed the reverse veil piercing doctrine despite no guidance from the South Carolina state courts. Elkay Indus., 167 B.R. at 411. See also Smith v. Richels (In re Richels), 163 B.R. 760, 763-764 (Bankr.E.D.Va.1994) (recognizing reverse veil piercing as a cognizable legal theory despite no reported cases applying Virginia state law in support). The Trustee argues the Bankruptcy Court should do the same and use its “broad equity powers” to acknowledge the doctrine so the Trustee’s case can proceed to discovery. See Trustee’s Response [Doc. 11] at 6-9.
As the prior discussion points out, however, Kentucky law cannot support this change. In addition, bankruptcy courts cannot create substantive rights that are otherwise unavailable under applicable law:
While the bankruptcy courts have fashioned relief under section 105(a) in a variety of situations, the powers granted by that statute may be exercised only in a manner consistent with the provisions of the Bankruptcy Code. That statute does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law, or constitute a roving commission to do equity.
United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir.1986); see also Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 423 n. 1 (6th Cir.2000) (same).
B. The Trustee May Seek to Amend the Complaint.
Kentucky law does not recognize reverse veil piercing as a means of consolidation of owners and their company to allow pursuit of federal and state fraudulent transfer claims. This would justify a decision for the Defendant on its motion *171for judgment on the pleadings, but the Trustee suggests there is another way to get to the same result. During oral argument on the Defendant’s Motion, the Trustee sought leave to add a count to the Complaint addressing substantive consolidation. The Trustee also indicated she would add Meadow Lake as a party and possibly the Debtors as well.
Pursuant to Fed. R. Banke.P. 7015(a)(2), a party may amend its pleading with the Bankruptcy Court’s consent and the Bankruptcy Court “should freely give leave when justice so requires.” Justice does not require a court grant leave to amend a pleading if to do so would be futile. Shapiro v. Harajli (In re Harajli), 469 B.R. 274, 286 (Bankr.E.D.Mich.2012). Further, a court should not grant leave to amend if it would result in prejudice to the other party. Id. at 285.
The Defendant opposes the relief requested, arguing it is prejudicial and it has not had adequate time to respond to the request. This argument is justified. Therefore, the Trustee is entitled to memorialize the request to amend the Complaint and the Defendant will have an opportunity to oppose such relief.
IY. CONCLUSION
Based on the foregoing, the Trustee may not proceed on a reverse veil piercing theory. But it is premature to grant judgment on the pleadings pending a decision on the Trustee’s request for leave to amend. Thus, the Trustee shall have 14 days to move to amend the Complaint and the Defendant will have 14 days to object. If no objection to a motion to amend the Complaint is filed, the motion to amend shall be granted and the motion for judgment on the pleadings overruled. If an objection is filed, the motion for judgment on the pleadings and request for leave to amend will be submitted. A separate order will set out the relief required by this Memorandum Opinion.
. The Defendant makes additional assertions that the Trustee's allegations do not support a federal or state fraudulent transfer cause of action. For example, the Defendant argues the Complaint does not sufficiently allege the lack of reasonably equivalent value or insolvency. The allegations in the Complaint are sufficient to overcome these additional arguments.
. The Defendant argues that veil piercing is limited to corporations and does not apply to limited liability companies. See, e.g., Pannell v. Shannon, 425 S.W.3d 58, 75 n. 15 (Ky.2014). This argument is not persuasive. Turner, 413 S.W.3d at 277 ("The doctrine [of veil piercing] can apply to limited liability companies.”); see also Tayloe v. Sellco Two Corp., No.2012-CA-001445-MR, 2014 WL 3674252, at *4 (Ky.App. July 25, 2014) (“We agree ... that Kentucky law does not distinguish between corporations and LLCs when discussing liability or piercing the corporate veil.”).
. A movant may seek to pierce the veil as part of the initial complaint or after a judgment has been obtained and the movant discovers that the corporate shield may be vulnerable. This difference only affects the procedure of obtaining the relief and not the nature of the remedy. See Inter-Tel Tech., Inc., 360 S.W.3d at 168-169. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497439/ | OPINION REGARDING THE CHAPTER 7 TRUSTEE’S SECOND MOTION FOR APPROVAL OF SETTLEMENT
THOMAS J. TUCKER, Bankruptcy Judge.
I. Introduction
This case is before the Court on the Chapter 7 Trustee’s motion entitled “Chapter 7 Trustee’s Second Motion Pursuant to Fed. R. Bankr.P. 9019 to Authorize and Approve Settlement Agreement By and Between Chapter 7 Trustee and Charles E. Becker, Charles E. Becker as Trustee under Trust Agreement of Charles E. Becker Dated September 16, 1997, as Amended, and Becker Ventures, LLC.”1 The Motion seeks to compromise, for $1 million, claims that Debtor asserted against Charles E. Becker and Becker Ventures, LLC in a lawsuit Debtor filed prepetition, seeking in excess of $9 million in damages. The Debtor and certain creditors object to the Motion. The objecting creditors are Alan Ackerman; Ackerman Ackerman & Dynkowski; Mark W. Meln-erney (the Debtor’s brother); James Dales; Stephen Wheeler; and Bush Seyferth & Paige, PLLC.
The Court held a hearing on the Motion, and then took it under advisement. For the reasons stated in this opinion, the Court will grant the Motion.
II. Discussion
The present Motion seeks approval of a settlement that, except for the amount, is the same as a settlement that the Court previously refused to approve, in the Court’s opinion and order filed on October 17, 2013.2 The Court’s opinion is reported at 499 B.R. 574.
The amount of the settlement that the Court disapproved was $250,000.00. The current proposed settlement amount, by contrast, is $1 million.
In its prior opinion, the Court concluded, after a lengthy discussion, that the proposed $250,000.00 settlement was “not fair and equitable, [was] unreasonably low, [was] not in the best interests of creditors and the estate, and should not be approved.” 499 B.R. at 598-99. The question now before the Court, in effect, is whether the same things are true of the current proposed settlement. Or are things different this time?
The Court concludes that things are indeed materially different this time, and that the current proposed settlement meets the standards for approval, and should be approved.
To begin with, the Court incorporates by reference, and adopts as part of this opinion, everything the Court stated in *173its earlier opinion in the following parts of that opinion, all of which, the Court concludes, apply to the present (second) settlement Motion as well: Parts I (Background);3 II (Jurisdiction);4 III.A (Discussion: Standards for approval or disapproval of a settlement agreement);5 and IU.C.l.a (probability of success in the pending state court appeals).6 And except to the extent that it is inconsistent with what the Court says in this opinion, below, the Court also incorporates by reference, and adopts as part of this opinion, what it said in Part IU.C.l.b (probability of success at a trial in the state court on remand, after likely success on appeal, including probability of Debtor persuading the fact finder that the alleged 15% Oral Agreement actually existed).7
Next, the Court adopts and incorporates by reference into this opinion what it said in Part III.C.2 of its earlier opinion (the amount of damages and the collectibility factor),8 and supplements that with the following. The Trustee on the one hand, and the Debtor and objecting creditors on the other hand, continue to dispute how much in damages can be proven at any state court trial of the claim against Becker. In his Motion and at the hearing on the second settlement Motion, the Trustee argued that the provable damages would be $5.324 million, at most. The Debtor, on the other hand, argued at the hearing that the provable damages would be as high as $14.393 million. It is not necessary for the Court to decide who is right about this, however, because even if the Court assumes that the Debtor is right, the Court would still approve the presently-proposed settlement.
Next, the Court concludes that the following things are materially different at this time, and with respect to the current proposed settlement, compared to at the time of the Court’s earlier opinion disapproving the earlier, $250,000.00 settlement:
1. The $1 million settlement amount proposed now is quadruple the amount proposed before, and is obviously a very substantial “bird in the hand”9 for the bankruptcy estate, if the settlement is approved. And the $1 million amount, if approved, would result in the payment in full of Chapter 7 and Chapter 11 administrative expenses, priority claims, and a substantial distribution to non-priority, unsecured creditors other than Becker (who has agreed as part of the settlement to subordinate his claim against the estate in favor of the other unsecured creditors).
2. At this time, the Court finds that the Debtor is unlikely to be a credible witness in any trial of the claim against Becker. The Debtor is unlikely to be believed by the state court fact-finder on his claim, which is based entirely on the alleged 15% Oral Agreement that Debtor says he made with Becker, but which Becker denies. This greatly diminishes the likelihood that the claim against Becker would prevail at trial, if the proposed settlement of that claim is not approved.
The Court bases its assessment of Debt- or’s credibility on the following. Several months after this Court issued its October 17, 2013 opinion denying approval of the *174earlier proposed settlement, the Court entered judgment, in two related adversary-proceedings, denying the Debtor’s discharge under 11 U.S.C. § 727(a)(4)(A). Those judgments were entered after the Court made written factual findings that the Debtor was not a credible witness; that he intentionally had been dishonest; that he had made several false oaths, with fraudulent intent, in connection with this bankruptcy case; and that he lied in his testimony at trial of the adversary proceedings.
The Court made these findings after conducting a bench trial on December 3 and 17, 2013, in two consolidated adversary proceedings brought by the Chapter 7 Trustee and the Becker parties, objecting to the Debtor’s discharge.10 In the Court’s written Trial Opinion, filed April 11, 2014,11 which is reported at 509 B.R. 109, the Court found that “the Debtor [made] several false statements material to his bankruptcy case under oath, both knowingly and with fraudulent intent.” 509 B.R. at 117. The Court’s Trial Opinion discussed those false statements in detail, and the Court incorporates that discussion into this opinion, by reference. See id. at 117-123. And the Court found that the Debtor had testified falsely under oath in several ways during the trial. See id. at 119 (“Debtor’s testimony at trial [regarding a particular point] was simply false.”); 120 (finding that the Debtor’s explanation of another point, in his trial testimony, was “false”); 121 (“And Debtor made another false oath under § 727(a)(4)(A), in his testimony at trial, when he knowingly gave a false explanation of his failure to list this property in his initial Schedule B.”)
One of the creditors objecting to the Trustee’s second settlement motion, the law firm Bush Seyferth & Paige, PLLC, represented the Debtor for a time in his state court litigation against Becker. But that objecting creditor, in the past, has accused the Debtor of fraud and dishonesty, and even obtained a consent judgment against the Debtor in which the Debtor admitted to having committed fraud. The Court described this in detail in its Trial Opinion in the adversary proceedings, 509 B.R. at 122-23:
The Court notes that although it would make the same findings and conclusions that it has made in this opinion, above, without the following, the following evidence seriously damaged Debtor’s credibility during the trial of these cases. And the following further supports the Court’s findings and conclusions above.
Before Debtor filed this bankruptcy case, he was sued in the Oakland County Circuit Court by the law firm Bush Sey-ferth & Paige, for fraud. Debtor consented to a judgment for $300,000 in favor of the Bush Seyferth firm, and a consent judgment was entered on or about May 23, 2011. In connection with that consent judgment, Debtor signed a settlement agreement with the Bush Seyferth firm dated April 26, 2011, in which the Debtor specifically admitted “that he committed fraud in the manner alleged by [Bush Seyferth in its complaint]” and specifically admitted “the truth of the allegations set forth in paragraphs 35 through 67 [of the Bush Sey-*175ferth complaint].” Thus, Debtor admitted in writing the following allegations: that the Debtor induced Bush Seyferth to agree to represent him, and to continue representing him, in Debtor’s litigation against the Becker Parties, by knowingly making false representations to Bush Seyferth that Debtor had set aside funds to pay Bush Seyferth for the litigation, but Debtor knew these statements were false when he made them. Debtor further admitted, as the complaint alleges, that Debtor induced Bush Seyferth to represent him in the Becker litigation by promising to pay their fees, estimated to be in the range of $800,000 to $500,000 or more, but Debtor did not intend to keep that promise when he made it.
(footnotes omitted).
The Court recognizes that in a trial of the claim against Becker in the Michigan Circuit Court, this Court’s written findings of the Debtor’s dishonesty and lack of credibility might not be admissible in evidence. Under Rule 608 of the Michigan Rules of Evidence, Becker could attack Debtor’s credibility as a witness with opinion testimony, and testimony about Debt- or’s reputation, as to his character for untruthfulness. And, if allowed in the trial court’s discretion, Becker could cross-examine Debtor about specific instances of dishonesty to try to show Debtor’s character for untruthfulness. But such specific instances of dishonesty, such as those found by this Court, could not be proved by extrinsic evidence. See Mich.R.Evid. 608(a) and 608(b).12 For this reason, and possibly other reasons, at a trial in state court, Becker probably could not attack Debtor’s credibility as a witness with evidence of this Court’s findings regarding the Debtor’s specific acts of dishonesty. If, on cross-examination by Becker in the state court, Debtor denied having committed the specific acts of dishonesty found by this Court, it may be that such denial could not be challenged by any extrinsic evidence. See, e.g., 2 Hon. Barry Russell, Bankruptcy Evidence Manual, § 608.4, at 734 (West 2013-2014 ed.) (discussing Fed. R.Evid. 608(b) in this context as meaning that “[t]he cross-examiner thus must take the answer given by the witness.”)
But even if Becker could not use this Court’s findings to attack the Debtor’s credibility at a trial in state court, it is likely that the state court fact-finder would find the Debtor not credible. This Court’s experience with the Debtor, which led to the findings described above, persuades *176the Court that the Debtor likely would not be viewed as a credible witness in a state court trial of the claim against Becker. The Debtor’s testimony about the existence of the alleged 15% Oral Agreement with Charles Becker, therefore, is not likely to be believed.13
Obviously, the proposed $1 million settlement is much smaller than the $14,393 million in damages that the Debtor claims are provable on the claim against Becker, and also is considerably smaller than the $5,324 million in damages that the Trustee says is the maximum provable. But there is a substantial risk that if the Court does not approve the $1 million settlement, litigation of the claim against Becker ultimately could fail entirely, leaving the bankruptcy estate with nothing. Under the circumstances, the Court concludes that the proposed settlement is fair and equitable, is not unreasonably low, is in the best interests of creditors and the estate, and should be approved.
III. Conclusion
For the reasons stated in this opinion, the Court will enter an order granting the Trustee’s second settlement Motion, and approving the $1 million settlement. The Court has revised the proposed order that the Trustee filed with his Motion, and will enter that revised order.
. Docket # 557 (the "Motion”).
. Docket ## 545, 546.
. 499 B.R. at 576-580.
. Mat 580-81.
. Id. at 581-83.
. Id. at 584-594.
.Id. at 594-96.
. Id. at 596-97.
. This, of course, is a reference to the saying that "a bird in the hand is worth two in the bush.”
. Becker, et al. v. McInerney, Adv. No. 12-5386; Kohut, Trustee v. McInerney, Adv. No. 13-4342.
. The same Trial Opinion was filed at Docket # 82 in Adv. No. 13-4342, and at Docket # 65 in Adv. No. 12-5386. The Judgments in these adversary proceedings were filed on April 11, 2014, at Docket # 83 in Adv. No. 13-4342, and at Docket # 66 in Adv. No. 12-5386. There was no appeal taken from either judgment.
. Mich.R.Evid. 608 states:
RULE 608. EVIDENCE OF CHARACTER AND CONDUCT OF WITNESS
(a) Opinion and Reputation Evidence of Character. The credibility of a witness may be attacked or supported by evidence in the form of opinion or reputation, but subject to these limitations: (1) the evidence may refer only to character for truthfulness or untruthfulness, and (2) evidence of truthful character is admissible only after the character of the witness for truthfulness has been attacked by opinion or reputation evidence or otherwise.
(b) Specific Instances of Conduct. Specific instances of the conduct of a witness, for the purpose of attacking or supporting the witness’ credibility, other than conviction of crime as provided in Rule 609, may not be proved by extrinsic evidence. They may, however, in the discretion of the court, if probative of truthfulness or untruthfulness, be inquired into on cross-examination of the witness (1) concerning the witness’ character for truthfulness or untruthfulness, or (2) concerning the character for truthfulness or untruthfulness of another witness as to which character the witness being cross-examined has testified.
The giving of testimony, whether by an accused or by any other witness, does not operate as a waiver of the accused’s or the witness’ privilege against self-incrimination when examined with respect to matters which relate only to credibility.
. On the other side of the coin, objecting creditors, particularly Alan Ackerman and his law firm, argue that Charles Becker will not be a credible witness at a state court trial, and will be less credible than the Debtor. (See [Ackerman Objection] (Docket # 585) at 3-5.) The Court finds these arguments unpersuasive. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497440/ | HOFFMAN, Bankruptcy Judge.
Luis Alberto Rodriguez Rodriguez and Ada Alicia Rodriguez Rodriguez (the “Debtors”) appeal from the following orders of the bankruptcy court: (1) a November 15, 2013, order granting Banco Popular de Puerto Rico’s (“BPPR”) motion *179for reconsideration and request for dismissal with bar to refiling; (2) a November 15, 2013, order denying the Debtors’ motion to vacate an order dismissing their case; and (3) a January 8, 2014, order denying the Debtors’ motion to vacate the order referred to in Item 1. For the reasons set forth below, we DISMISS the appeal as to the first two orders and we AFFIRM as to the third.
BACKGROUND
Prior to the filing of the bankruptcy case from which this appeal arises, the Debtors had undertaken three previous chapter 13 case filings (Case Nos. 10-05998, 11-01236, and 12-00842), all of which ended in dismissal. The bankruptcy court dismissed the Debtors’ first chapter 13 case on October 4, 2010, due to their failure to comply with an order to show cause, and closed the case on January 31, 2011. Eighteen days later, on February 18, 2011, the Debtors filed their second chapter 13 case. The court dismissed that case on August 12, 2011, for failure to comply with certain court orders, and closed the case on March 28, 2012. The Debtors filed their third chapter 13 case on February 6, 2012, before the second case was even closed. The bankruptcy court dismissed that case for failure to file certain information required by § 1308 of the Bankruptcy Code,1 and closed the case on July 31, 2013.
On July 30, 2013, the Debtors filed their fourth chapter 13 petition commencing the case from which this appeal emanates. On Schedule D of the schedule of assets and liabilities filed in support of their chapter 13 petition, the Debtors listed BPPR as a secured creditor with a claim in the amount of $345,832.38. According to BPPR, as of August 13, 2013, the Debtors owed BPPR $362,623.65.
On August 15, 2013, BPPR filed two motions (the “August Motions”). It filed a motion for in rem2 relief from the automatic stay to permit it to proceed with a foreclosure of its mortgage on the Debtors’ property, and a motion to dismiss the Debtors’ chapter 13 case pursuant to Bankruptcy Code § 1307(c). The motion *180to dismiss contained a request that the Debtors be barred for two years from filing a bankruptcy petition on the ground that the Debtors were serial filers with no real intention of reorganizing and filed their chapter IB petition in bad faith. After a hearing on September 13, 2013, the bankruptcy court entered an order granting the parties 30 days in which to negotiate a resolution of the August Motions and file a stipulation, and stating that if they failed to do so, the court would enter an order lifting the automatic stay. The order also stated that the motion to dismiss would be held in abeyance pending a decision on the stay relief motion. The parties did not file a stipulation.
Meanwhile, on September 10, 2013, three days before the hearing on the August Motions, the clerk of the bankruptcy court filed a motion to dismiss the case due to the Debtors’ failure to pay the chapter 13 filing fee. Then, on September 27, 2013, the chapter 13 trustee filed a motion to dismiss the case due to the Debtors’ failure to appear at the meeting of creditors required by § 341.
On October 21, 2013, the bankruptcy court entered an order dismissing the Debtors’ case due to their failure to pay the filing fee, as requested in the motion filed by the clerk of the bankruptcy court (the “October 21, 2013 Dismissal Order”). On October 25, 2013, BPPR filed a Motion for Reconsideration and Request for Dismissal With Bar to Refile (“Motion for Reconsideration”), effectively repeating its request for the relief sought in the August Motions, namely, an order for in rem stay relief and an order dismissing the case with a two-year bar to refiling.
The Debtors did not oppose BPPR’s Motion for Reconsideration. Instead, on October 28, 2013, they filed their own motion to vacate the October 21, 2013 Dismissal Order (“Debtors’ Motion to Vacate October 21, 2013 Dismissal Order”), stating, simply, that “[t] he remaining filing fee is being paid today.” The Debtors also filed a motion to convert their case from chapter 13 to chapter 7. BPPR objected to both motions, raising the same arguments presented in its Motion for Reconsideration.
On November 15, 2013, the bankruptcy court entered an order denying the Debtors’ Motion to Vacate October 21, 2013 Dismissal Order “for the reasons stated in the opposition filed by [BPPR] (docket # 40), which the court adopts as its own” (the “November 15, 2013 Order Denying Debtors’ Motion to Vacate October 21, 2013 Dismissal Order”). On the same day, the bankruptcy court entered an order granting BPPR’s Motion for Reconsideration (the “November 15, 2013 Order Granting Reconsideration and Dismissing Case With Bar to Refile”), ruling as follows:
Due notice having been given, there being no opposition, and good cause appearing thereof, the motion is hereby granted. The court grants in rem Relief from Stay in favor of Movant, so that the automatic stay in any future bankruptcy is inapplicable to BPPR’s foreclosure procedure against the properties described [as] # 21,948 and # 21,060, regardless of who owns the properties or files the case; and the case is hereby dismissed with bar to refile for two (2) years.
On December 16, 2013, the Debtors filed a motion asking the court to reconsider and vacate the November 15, 2013 Order Denying Debtors’ Motion to Vacate October 21, 2013 Dismissal Order (“Motion to Reconsider Denial of Debtors’ Motion to Vacate October 21, 2013 Dismissal Order”). As grounds, the Debtors asserted that the bankruptcy court had dismissed their case due to their failure to pay the filing fee, which failure they had since cured, and that there had been a change in *181circumstances due to their filing of a motion to convert to chapter 7. Also on December 16, 2013, the Debtors filed a motion requesting the court to vacate the November 15, 2018 Order Granting Reconsideration And Dismissing Case With Bar To Refile (“Motion to Vacate November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile”). In this motion, the Debtors again asserted that there had been a change in circumstances due to their filing of a motion to convert to chapter 7. BPPR opposed both motions, incorporating their prior arguments alleging the Debtors’ bad faith filing, and arguing that the Debtors had failed to show good cause for the relief requested.
On January 8, 2014, the bankruptcy court entered an order denying the Debtors’ Motion to Vacate November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar To Refile (the “January 8, 2014 Order Denying Motion to Vacate November 15, 2013 Order Granting Reconsideration and Dismissing Case With Bar to Refile”) stating, simply, that “[t]he Motion to Vacate the Order Dismissing Case With Bar to Refile, filed by the Debtors (docket # 47), is hereby denied.”
On January 21, 2014, the Debtors filed a notice of appeal with respect to: (1) the January 8, 2014 Order Denying Motion to Vacate November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile; (2) the November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile; and (3) the November 15, 2013 Order Denying Debtors’ Motion to Vacate October 21, 2013 Dismissal Order.3
JURISDICTION
A. Finality
Before addressing the merits of an appeal, we must determine that we have jurisdiction, even if the litigants do not raise the issue. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724, 725-26 (1st Cir. BAP 1998). We have *182jurisdiction to hear appeals from final judgments, orders, and decrees. 28 U.S.C. § 158(a)(1). All of the orders in this appeal are orders granting or denying reconsideration. An order denying a motion for reconsideration is final if the underlying order is final and together the orders end the litigation on the merits. Garcia Matos v. Oliveras Rivera (In re Garcia Matos), 478 B.R. 506, 511 (1st Cir. BAP 2012) (citations omitted). The October 21, 2013 Dismissal Order was a final order, it ended the case, and, therefore, the November 15, 2013 Order Denying Debtors’ Motion to Vacate October 21, 2013 Dismissal Order and the January 8, 2014 Order Denying Motion to Vacate November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile are also final orders. In addition, the November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile is final because it too resulted in dismissal of the case.
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. (In re Perry Hollow Mgmt. Co.), 297 F.3d 34, 38 (1st Cir.2002) (citations and internal quotations omitted); Balzotti v. RAD Invs., LLC (In re Shepherds Hill Dev. Co., LLC), 316 B.R. 406, 414 (1st Cir. BAP 2004). If a notice of appeal is not timely filed, we .do not have jurisdiction over the appeal, and the appeal will fail. See Abboud v. The Ground Round, Inc. (The Ground Round, Inc.), 335 B.R. 253, 258 (1st Cir. BAP 2005), aff'd, 482 F.3d 15 (1st Cir.2007) (citation omitted); In re Shepherds Hill, 316 B.R. at 414.
Pursuant to Bankruptcy Rules 8001(a) and 8002(a), an appellant must file a notice of appeal within 14 days after the entry of the judgment, order, or decree of the bankruptcy court. Under Bankruptcy Rule 8002(b), however, certain motions will toll the appeal period if timely filed. See Fed. R. Bankr.P. 8002(b).4 To be timely for purposes of Bankruptcy Rule 8002(b), a motion to alter or amend the judgment under Bankruptcy Rule 9023, or a motion for relief under Bankruptcy Rule 9024, must be filed “no later than 14 days after entry of judgment.” See Fed. R. Bankr.P. 8002(b), 9023 and 9024.
The bankruptcy court entered the Dismissal Order on October 21, 2013. Four days later, on October 25, 2013, BPPR filed its Motion for Reconsideration, and on October 28, 2013, the Debtors filed their Motion to Vacate October 21, 2013 Dismissal Order. Both motions were filed within 14 days of the entry of the October 21, 2013 Dismissal Order, and, therefore, they tolled the appeal period for that order until the bankruptcy court disposed of the motions. On November 15, 2013, the bankruptcy court issued both the Order Granting Reconsideration And Dismissing Case With Bar To Refile, and the Order Denying Debtor’s Motion to Vacate Octo*183ber 21, 2013 Dismissal Order (collectively, the “November 15, 2013 Orders”), and thus the appeal period began to run for all three orders, the November 15, 2013 Orders as well as the October 21, 2013 Dismissal Order, expiring 14 days later on November 29, 2013. See Fed. R. Bankr.P. 8002(b) (“If any party makes a timely motion of the type specified ..., the time for appeal for all parties runs from the entry of the order disposing of the last such motion outstanding”). The Debtors did not file a notice of appeal with respect to any of these orders before the expiration of the appeal period on November 29, 2013.
On December 16, 2013, the Debtors filed both their motions to vacate and reconsider the November 15, 2013 Orders. Since these motions were filed more than 14 days after entry of the November 15, 2013 Orders, they did not toll the appeal period as to the November 15, 2013 Orders.5 As the Debtors did not file their notice of appeal until January 21, 2014, their appeal with respect to the November 15, 2013 Orders was untimely and we do not have jurisdiction as to the appeal of those orders.
Consequently, only one order remains subject to a timely appeal. The bankruptcy court entered the Order Denying Motion to Vacate Order Granting Reconsideration And Dismissing Case With Bar to Refile on January 8, 2014. Therefore, the Debtors’ notice of appeal, filed on January 21, 2014, was timely as to that order and we have jurisdiction to consider it.
STANDARD OF REVIEW
Appellate courts apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. See Lessard v. Wilton-Lyndeborough Coop. Sch. Dist., 592 F.3d 267, 269 (1st Cir.2010). We review a bankruptcy court’s order denying a motion for reconsideration of a previous judgment for manifest abuse of discretion. See Aguiar v. Interbay Funding, LLC (In re Aguiar), 311 B.R. 129, 132 (1st Cir. BAP 2004) (citing Appeal of Sun Pipe Line Co., 831 F.2d 22, 25 (1st Cir.1987); Salem Five Cents Sav. Bank v. Tardugno (In re Tardugno), 241 B.R. 777, 779 (1st Cir. BAP 1999); Neal Mitchell Assocs. v. Braunstein (In re Lambeth Corp.), 227 B.R. 1, 7 (1st Cir. BAP 1998)). “A court abuses its discretion if it does not apply the correct law or if it rests its decision on a clearly erroneous finding of material fact.” De Jounghe v. Lugo Mender (In re De Jounghe), 334 B.R. 760, 765 (1st Cir. BAP 2005) (citation omitted). “When, as in this instance, the court below has not disclosed the findings and conclusions upon which relief was denied, we will sustain ‘on any independently sufficient ground made manifest by the record.’ ” In re Aguiar, 311 B.R. at 132 (citations omitted).
DISCUSSION
I. The Applicable Standard
A motion to reconsider or vacate may be treated either as a motion to alter *184or amend the judgment under Fed. R.Civ.P. 59(e) (“Rule 59(e)”), made applicable by Bankruptcy Rule 9023, or as a motion for relief from judgment under Fed.R.Civ.P. 60(b) (“Rule 60(b)”), made applicable by Bankruptcy Rule 9024. The Debtors did not specify in their Motion to Vacate November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar To Refile under which rule they were proceeding. However, because the Debtors did not file their Motion to Vacate November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile within 14 days of entry of that order, the motion is properly treated as one brought under Rule 60(b). See Fed. R. Bankr.P. 9023.
Rule 60(b) provides in pertinent part:
On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
(6) any other reason that justifies relief.
Fed.R.Civ.P. 60(b).
Bankruptcy courts have broad discretion in deciding motions for relief under Rule 60(b). See Roman v. Carrion (In re Rodriguez Gonzalez), 396 B.R. 790, 802 (1st Cir. BAP 2008) (citing Davila-Alvarez v. Escuela de Medicina Universidad Central del Caribe, 257 F.3d 58, 63 (1st Cir.2001)). “The denial of a Rule 60(b) motion should be reviewed with ‘the understanding that relief under Rule 60(b) is extraordinary in nature and that motions invoking that rule should be granted sparingly.’ ” Id. (quoting Karak v. Bursaw Oil Corp., 288 F.3d 15, 19 (1st Cir.2002)); see also U.S. Steel v. M. DeMatteo Constr. Co., 315 F.3d 43, 51 (1st Cir.2002).
II. Analysis
The Debtors’ argument on appeal, in its entirety, is as follows:
The Bankruptcy Code at 11 U.S.Code §§ 1307 — Conversion or dismissal, states as follows:
(a) The debtor may convert a case under this chapter to a case under chapter 7 of this title at any time. Any waiver of the right to convert under this subsection is unenforceable.
Had the case been allowed to continue as a chapter 7 there is an extremely high likelihood that appellants would have been granted a discharge, 11 U.S.Code §§ 727. The Court should have considered the notice of conversion as a de facto opposition to BPPR’s motions. Also, to consider BPPR’s motion for reconsideration, Docket Number 33 ..., could not have happened without an event vacating the dismissal.
Independently of the arguments of BPPR allowing a chapter 7 trustee to perform an orderly liquidation of appellants’ bankruptcy estate would have been in the best interests of all creditors.
*185The Debtors do not invoke the standards for relief set forth in Rule 60(b) or explain how the bankruptcy court abused its discretion when applying those standards. They do not argue the existence of mistake, inadvertence or excusable neglect. They offer no newly discovered evidence and point to no fraud or manifest error of law. Rather, the Debtors argue that the bankruptcy court should have vacated the November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar' to Refile in light of their motion to convert to chapter 7, which they assert was a “change in circumstance.” The only subsection of Rule 60(b) which could conceivably provide a ground for relief based on changed circumstances is Rule 60(b)(6), a catch-all provision that requires the mov-ant to demonstrate “any other reason which justifies relief.” However, even if we consider their “change in circumstance” argument under Rule 60(b)(6), the argument must fail.
“ ‘[I]t is the invariable rule, and thus, the rule in th[e First Circuit], that a litigant, as a precondition to relief under Rule 60(b), must give the trial court reason to believe that vacating the judgment will not be an empty exercise.’ ” RBSF, LLC v. Franklin (In re Franklin), 445 B.R. 84, 45 (Bankr.D.Mass.2011) (quoting Teamsters, Chauffeurs, Warehousemen & Helpers Union, Local No. 59 v. Superline Transp. Co., 953 F.2d 17, 20 (1st Cir.1992)). The Debtors cannot meet this precondition. First, the Debtors did not file their motion to convert from chapter 13 to chapter 7 until after the bankruptcy court had entered its October 21, 2013 Dismissal Order, at which point conversion was no longer possible. See In re Garcia, 434 B.R. 638, 643-44 (Bankr.D.N.M.2010) (citations omitted) (concluding that although § 1307(a) allows a debtor to convert to chapter 7 “at any time,” “[a] dismissal order takes effect immediately” and, therefore, “conversion after dismissal is not possible”). Second, “[c]hapter 7 cases are subject to the same requirement of good faith as Chapter 13 cases.” In re Myers, 491 F.3d 120, 127 (3d Cir.2007) (citation omitted). By granting BPPR’s Motion for Reconsideration, the bankruptcy court implicitly found that the Debtors had filed their chapter 13 petition in bad faith, thus warranting dismissal with a two-year bar to refiling. Id. The very same factors that led the bankruptcy court to conclude that the Debtors had filed their chapter 13 petition in bad faith would apply with equal force in a chapter 7 case. See id. Thus, vacating the November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile so that the Debtors could attempt to convert their chapter 13 case to chapter 7 would have been an exercise in futility.
CONCLUSION
The Debtors’ appeal of the November 15, 2013 Orders was untimely and, therefore, we DISMISS the appeal as to those two orders. As to the January 8, 2014 Order Denying Motion to Vacate November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile, the appeal of which was timely, the Debtors have failed to demonstrate that the bankruptcy court abused its discretion by declining to vacate its order under the applicable Rules. Therefore, we AFFIRM the January 8, 2014 Order Denying Motion to Vacate November 15, 2013 Order Granting Reconsideration And Dismissing Case With Bar to Refile.
. 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 Rule” shall be to the Federal Rules of Bankruptcy Procedure.
. Section 362(d)(4) allows a bankruptcy court to grant in rem relief to a secured creditor with an interest in real property if the court finds that the bankruptcy filing was. part of a scheme to delay, hinder, or defraud creditors. 11 U.S.C. § 362(d)(4). In addition, § 105(a) of the Bankruptcy Code authorizes a bankruptcy court to grant in rem relief in connection with granting relief from the stay under § 362(d) in circumstances where an ordinary stay relief order will not be effective to protect a secured lender's rights, as demonstrated by the prior history of the parties and the property. See Gonzalez-Ruiz v. Doral Fin. Corp. (In re Gonzalez-Ruiz), 341 B.R. 371, 384 (1st Cir. BAP 2006) (citing Aurora Loan Servs. Inc. v. Amey (In re Amey), 314 B.R. 864, 866-67 (Bankr.N.D.Ga.2004); 11 U.S.C. § 105(a)). An order granting in rem relief from stay is an appropriate remedy when a debtor serially files bankruptcy petitions solely to invoke the automatic stay. Id. In rem relief renders the automatic stay in any future bankruptcy cases inapplicable to the lender’s foreclosure of a particular res, regardless of who owns the property or files the case. Id. (citing In re Lord, 325 B.R. 121, 129 (Bankr.S.D.N.Y.2005)). “In rem relief thus addresses circumstances when the debtor is likely to invoke the automatic stay to frustrate foreclosure efforts through repeated filings, whether by the same or different persons.” Id. "Rather than barring the debtor from filing a bankruptcy case in the future, the in rem remedy directly addresses abuse of the automatic stay by prospectively eliminating it with regard to the lender’s collateral even if there are future bankruptcy cases." Id. (citing In re Amey, 314 B.R. at 866-67).
. The procedural history leading up to this appeal is labyrinthine, involving a maze of motions to reconsider or vacate prior orders. To help the reader visualize the flow and relationship of the multiple motions and orders implicated in this appeal we offer the following diagram.
October 21, 2013 Dismissal Order
[[Image here]]
. Fed. R. Bankr.P. 8002(b) provides, in pertinent part:
If any party makes a timely motion of a type specified immediately below, the time for appeal for all parties runs from the entry of the order disposing of the last such motion outstanding. This provision applies to a timely motion:
(1) to amend or make additional findings of fact under Rule 7052, whether or not granting the motion would alter the judgment;
(2) to alter or amend the judgment under Rule 9023;
(3) for a new trial under Rule 9023; or
(4) for relief under Rule 9024 if the motion is filed no later than 14 days after the entry of judgment.
Fed. R. Bankr.P. 8002(b).
. Even if the November 15, 2013 Order Granting Reconsideration and Dismissing Case With Bar to Refile constituted an order vacating the October 21, 2013 Dismissal Order and entering a new order dismissing the case on alternative grounds with a bar to refiling (rather than an order modifying the October 21, 2013 Dismissal Order), we would still lack jurisdiction over the appeal of the November 15, 2013 Orders. The appeal of the November 15, 2013 Order Granting Reconsideration and Dismissing Case With Bar to Refile is untimely as the Debtors failed to file within 14 days either a notice of appeal or a motion for reconsideration which would have tolled the appeal period. The appeal of the November 15, 2013 Order Denying Debt- or’s Motion to Vacate October 21, 2013 Dismissal Order would be moot as that order would have been vacated by the November 15, 2013 Order Granting Reconsideration and Dismissing Case With Bar to Refile. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497441/ | MEMORANDUM OF DECISION
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. INTRODUCTION
Warren E. Agin, the Chapter 7 trustee (the “Trustee”) of the bankruptcy estate of William O. Huitín (the “Debtor”), filed a complaint seeking to avoid a transfer of the Debtor’s interest in real property, alleging that the transfer had not been recorded in due course pursuant to Mass. Gen. Laws ch. 184, § 25 (“Section 25”). Wells Fargo Bank (“Wells Fargo”) filed a motion to dismiss the complaint for failure to state a claim under the statute (the “Motion to Dismiss”), which the Trustee opposed. For the reasons set forth below, I will grant the Motion to Dismiss.
II. BACKGROUND
For the purposes of a motion to dismiss, I assume the truth of all well-pleaded facts set forth in the complaint.1
*192The Debtor acquired real property located at 841 River Street in Boston, Massachusetts (the “Property”) in 1986. On July 14, 2008, the Debtor executed a deed (the “Deed”) transferring the Property to Ro-bindranath Dookhan. The Deed accurately identified the grantor as “William O. Huitín.” When the Deed was recorded in the Suffolk County Registry of Deeds (the “Registry”), however, the Registry entered the conveyance in the grantor index under the name “William Hiltin.”
Subsequent to Dookhan’s acquisition of the Property, the following deeds were recorded at the Registry and indexed in the chain of title: (1) a deed recorded on December 7, 2005, which transferred Dookhan’s interest in the Property to Ivan Henriquez; (2) a foreclosure deed recorded on April 9, 2008, which transferred Henriquez’s interest in the Property to LaSalle Bank National Association; and (3) a warranty deed recorded on October 24, 2008, which transferred LaSalle’s interest in the Property to Temu-Ra Dias. On April 24, 2009, Dias entered into a financing transaction whereby Dias executed a mortgage in favor of Mortgage Electronic Registration Systems, Inc. (“MERS”), which was also recorded at the Registry. By an assignment recorded on December 6, 2011, MERS assigned the mortgage to Wells Fargo.
On September 13, 2013, the debtor filed a voluntary Chapter 7 petition. As of that date, the Deed was indexed in the Registry’s grantor index under the name “William Hiltin.” On February 18, 2014, the Trustee commenced the present adversary proceeding against Dookhan, Dias, and Wells Fargo. The Trustee seeks to (i) avoid the defendants’ interests in the Property, (ii) recover the Property and (Hi) preserve the Property or its value for the benefit of the estate pursuant to 11 U.S.C. §§ 544, 550 and 551. The Trustee asserts that, due to the indexing error, the Deed was not properly recorded and, as such, the transfer evidenced by the Deed and all subsequent transfers are invalid against third parties.
On May 20, 2014, Wells Fargo filed the Motion to Dismiss. The Trustee filed an opposition on June 3, 2014, to which Wells Fargo filed a reply. On June 19, 2014, Dias filed a motion to join the Motion to Dismiss. I conducted a hearing on the matters on July 9, 2014, at which I granted Dias’s motion to join and took the Motion to Dismiss under advisement.
III. POSITIONS OF THE PARTIES
A. Wells Fargo and Dias
Wells Fargo argues that the adversary proceeding ought to be dismissed because there is no dispute that the Deed was properly acknowledged and recorded with the Registry. Wells Fargo contends that Section 25’s provision that a deed must be “so recorded ... as to be indexed in the grantor index” only requires a party to present the registry with a deed that can be properly indexed in the grantor index, and does not require the party to ensure that the Registry properly indexes the deed. Thus, Wells Fargo asserts that it complied with the statute, and that the common law rule then controls whether the Trustee had constructive notice of the transfers at issue. Wells Fargo points to a number of Massachusetts cases for the proposition that an indexing error by a registry does not destroy the constructive notice provided by an otherwise properly recorded deed.
Further, Wells Fargo urges that the “accessibility” of the Deed through a search of the grantor index is not the proper test for whether there was constructive notice. In any event, Wells Fargo asserts that the Deed remained acces*193sible through a search the grantee or property address indices. Finally, Wells Fargo notes that the Trustee has not cited to any Massachusetts cases which support his interpretation of the relevant statute.
While Dias did not file a memorandum of law, his counsel indicated at the hearing that he joins Wells Fargo’s arguments. Additionally, he separately argued that it would be inequitable to remove him and his family from the Property due to a mistake made by the Registry.
B. The Trustee
The Trustee argues that Section 25’s requirement that a deed be “so recorded ... as to be indexed in the grantor index” mandates that a deed be properly indexed in the grantor index to be effective against third parties. The Trustee contends that the purpose of the statute was to ensure third parties had constructive notice of an interest in property by requiring the interest to appear in the grantor index. The Trustee asserts that the enactment of Section 25 in 1959 abrogated any older cases on which Wells Fargo relies. The Trustee also stresses that in many of the cases relied on by Wells Fargo, the records at issue were accessible to the public despite indexing errors. The Trustee argues that the Deed, indexed under the name “Hil-tin,” was not accessible because at the time of the bankruptcy filing, a third party searching the Registry to determine whether the Debtor owned the Property would not have found it.
IY. DISCUSSION
Pursuant to Fed.R.Civ.P. 12(b)(6)2, “a court must dismiss a complaint if it fails to state a claim upon which relief can be granted.”3 “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.’ ”4 In this ease, Wells Fargo asserts that the complaint fails to state a claim upon which relief can be granted because, even taking the facts in the complaint as true, the Deed was recorded in due course under Massachusetts law.
Pursuant to Mass. Gen. Laws ch. 183 § 4, a conveyance of real estate “shall not be valid as against any person, except the grantor ... and persons having actual notice of it” unless it is “recorded in the registry of deeds for the county or district in which the land to which it relates lies.” Section 25 further provides, in relevant part, that:
No instrument shall be deemed recorded in due course unless so recorded in the registry of deeds for the county or district in which the real estate affected lies as to be indexed in the grantor index under the name of the owner of record of the real estate affected at the time of the recording.5
The parties dispute the import of the requirement that that a deed be “so recorded in the registry of deeds ... as to be indexed in the grantor index under the name of the owner of record.”6 The Trustee asserts that this language requires a deed to be indexed under the name of the *194grantor to be recorded in due course. Wells Fargo, on the other hand, contends that “as to be indexed” simply requires a party to present the Registry with a deed containing the grantor’s name, such that the Registry may properly index it.
There do not appear to be any Massachusetts cases addressing the precise issue presented by the parties — that is, whether an instrument is “recorded in due course” under Section 25 when the instrument contains the information necessary to be properly indexed, but the registry fails to index it under the grantor’s name. In addressing an issue of Massachusetts law not yet decided by the state courts, I must attempt to predict how the Massachusetts Supreme Judicial Court would interpret the statute.7 Under the Massachusetts principles of statutory construction, “when the statute’s language is plain and unambiguous,” the court affords it “its ordinary meaning.”8 “Where the draftsmanship of a statute is faulty or lacks precision, it is [the court’s] duty to give the statute a reasonable construction.” 9 The court “must construe the statute in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished, to the end that the purpose of its framers may be effectuated.”10 The legislature’s intent is found “most obviously in the words of the law itself.”11 Yet, in determining legislative intent, the court “consider[s] the statute in light of the common law,” and Massachusetts courts “do not construe a statute ‘as effecting a material change in or a repeal of the common law unless the intent to do so is clearly expressed.’ ”12
In this case, the language of the statute lacks precision. I find the requirement that a deed be “so recorded ... as to be indexed in the grantor index under the name of the owner of record” is susceptible to either of the parties’ interpretations.13 Thus, I will turn to the Massachusetts common law to inform my interpretation of the statute.
Massachusetts cases have held that a registry’s mistake in indexing does not destroy constructive notice of an otherwise properly recorded deed. For example, in Nickels v. Scholl, the Supreme Judicial Court found that the plaintiff had constructive notice of a conditional sales contract for plumbing materials, even though the town registry indexed the contract under the name of only one party to it, failing to index it under the name of the property owner.14 The court explained:
While the statute, R.L.c. 25, § 64, requires a city or town clerk to make and keep an index of instruments entered with him which are required by law to be recorded, still the index ordinarily is no part of the record, and a mistake made in it by the clerk does not invali*195date the notice afforded by a record otherwise in proper form.15
In a 2008 superior court case, Hudson v. Plante, a creditor filed an attachment in the Worcester County Registry of Deeds, attaching property held in the name of “Applerock Revocable Trust.”16 The proper name of the trust, however, was the Applerock Realty Trust.17 The creditor later obtained a court order amending its filings to substitute the proper name of the trust and recorded the order in the registry.18 Nevertheless, the registry failed to update its index so that the attachment would appear under the name Applerock Realty Trust.19 The superior court found that the registry’s mistake did not cause the creditor to lose its priority position in regard to the attachment.20 Likewise, in Trager v. Hiebert Contracting Co., a registry clerk mistakenly indexed an attachment as an execution and added that the “execution” related only to land in Marble-head, Massachusetts.21 The defendant in the case claimed that he thus did not have constructive notice of the attachment of land in Peabody, Massachusetts.22 The United States Court of Appeals for the First Circuit rejected this argument, noting that, “under Massachusetts law an error in indexing at the registry, if the proper filing has been made by the officer, does not invalidate the attachment. The loss falls on the subsequent purchaser.”23
Section 25 does not express a clear legislative intent to overturn the common law rule concerning where the burden should fall when a registry makes an indexing mistake. It was enacted in 1959 to protect purchasers from “indefinite references” in recorded instruments.24 It defines an “indefinite reference” to include any restriction, easement, mortgage, encumbrance, or other interest in property unless it was created by an instrument which was “recorded in due course.”25 As is relevant here, Section 25 then goes on to define the phrase “recorded in due course.”26 Thus, taking the relevant language in context, the requirement that a deed be “so recorded ... as to be indexed” in the grantor index is aimed at eliminating indefinite references in recorded instruments.27 It does not clearly place the burden on the recording party to ensure that the instrument is in fact indexed properly.
In this case, the Deed correctly identified the grantor of the Property and *196was recorded in the appropriate registry of deeds. The Registry, not the recording party, was the source of the indexing error. Absent a clearer legislative directive to the contrary, I predict that in this case the Supreme Judicial Court would uphold the common law rule concerning mistakes by a registry and “[hold] in favor of a person who has done all he could do to have a transaction recorded, as against a subsequent creditor or purchaser who has relied on an erroneous record.”28
Finally, I note that the test for whether a recorded deed gives constructive notice of a transfer of property is not whether the deed is accessible through a search of the grantor index. The Trustee attempts to distinguish several of the cases on which Wells Fargo relies on the basis that the instruments at issue remained “accessible” to third-party searchers.29 On the contrary, Massachusetts courts have recognized that:
Instances are not rare in which the constructive notice provided for by statutes requiring the registration of instruments proves insufficient to protect the interests of those for whose benefit they are intended, but who do not, for that reason, have a right to priority.30
Again, the language of Section 25 does not evidence a clear intent by the legislature to overturn the common law rule and impose an “accessibility” requirement.
V. CONCLUSION
In light of the foregoing, I will enter an order granting the Motion to Dismiss.
. See Banco Santander de Puerto Rico v. Lopez-Stubbe (In re Colonial Mortg. Bankers Corp.), 324 F.3d 12, 15 (1st Cir.2003).
. Made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7012.
. Hunnicutt v. Green (In re Green), BAP MB 13-061, 2014 WL 3953470, at *5 (1st Cir. BAP Aug. 6, 2014).
. 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)).
. Mass. Gen. Laws ch. 184, § 25.
. Id. (emphasis added).
. Garran v. SMS Financial V, LLC (In re Garran), 338 F.3d 1, 6 (1st Cir.2003) (citing Caron v. Farmington Nat’l Bank (In re Caron), 82 F.3d 7, 9 (1st Cir.1996)).
. Com. v. Pagan, 445 Mass. 315, 319, 837 N.E.2d 252 (2005) (internal quotations omitted).
. Id. (internal quotations omitted).
. Id. (internal quotations omitted).
. Suffolk Const. Co., Inc. v. Div. of Capital Asset Mgmt., 449 Mass. 444, 454, 870 N.E.2d 33 (2007).
. Id. (quoting Riley v. Davison Constr. Co., 381 Mass. 432, 438, 409 N.E.2d 1279 (1980)).
. Mass. Gen. Laws ch. 184, § 25 (emphasis added).
. Nickels v. Scholl, 228 Mass. 205, 207-10, 117 N.E. 34 (1917).
. Id. at 210, 117 N.E. 34.
. Hudson Sav. Bank v. Plante, No. 061956A, 2008 WL 442582, at *2 (Mass.Super.Ct.2008).
. Id.
. Id.
. Id.
. Id. (citing Higgins v. Savoie, 288 Mass. 463, 467, 193 N.E. 238 (1934) ("this court has uniformly held in favor of a person who has done all he could do to have a transaction recorded, as against a subsequent creditor or purchaser who has relied on an erroneous record.”)).
. Trager v. Hiebert Contracting Co., 339 F.2d 530, 532 (1st Cir.1964).
. Id.
. Id. (citing Sykes v. Keating, 118 Mass. 517 (1875)).
. 28 Mass. Prac., Real Estate Law § 2.16 (4th ed.).
. Mass. Gen. Laws ch. 184, § 25.
. Id. The Supreme Judicial Court has held that the “recorded in due course” requirement applies to all recorded instruments, regardless of whether they contain an indefinite reference. See Devine v. Town of Nantucket, 449 Mass. 499, 507-08, 870 N.E.2d 591 (2007).
. Mass. Gen. Laws ch. 184, § 25.
. Higgins v. Savoie, 288 Mass. at 467, 193 N.E. 238.
. See Docket No. 30 at 5-6.
. Norris v. Anderson, 181 Mass. 308, 313, 64 N.E. 71 (1902); see also Gillespie v. Rogers, 146 Mass. 610, 612, 16 N.E. 711 (1888) ("It makes no difference if the constructive notice provided for by law proves insufficient. A deed is considered to be recorded when it is noted by the recording officer as having been received for record ... It is obvious that under this rule one searching the records may fail to find all that is necessary for his protection; but, nevertheless, he will be bound.”) (internal citations omitted); MacGray Servs., Inc. v. Bay Macy, LLC, CA984237F, 2000 WL 1273853 (Mass.Super. Mar. 23, 2000) (citing Norris v. Anderson and Gillespie v. Rogers with approval). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497442/ | MEMORANDUM OF DECISION
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the request of Warren E. Agin, the plaintiff and Chapter 7 Trustee, (the “Trustee”) for entry of a money judgment against the defendant, PNC Mortgage (“PNC”), and PNC’s opposition thereto. The Trustee filed the present adversary proceeding seeking to avoid the debtor’s grant of a mortgage to PNC as a preferential transfer. A default previously entered against PNC, and the Trustee now seeks a monetary judgment for the value of the property interest preferentially transferred. For the reasons set forth below, I will deny the Trustee’s request.
II. BACKGROUND
The facts are not in dispute. Kelley J. Spodris (the “Debtor”) purchased real property located in Marston Mills, Massachusetts (the “Property”) on September 24, 2002. On June 5, 2007, the Debtor transferred the Property to herself and her mother, Donna M. Kelley, (“Kelley”) as joint tenants with rights of survivorship. On September 6, 2007, the Debtor and Kelley granted a mortgage on the Property to National City Mortgage. On February 13, 2011, they refinanced the 2007 mortgage with PNC. As part of that transaction, the Debtor and Kelley executed a note in the principal amount of $282,000.00 (the “Note”) and granted PNC a mortgage on the Property to secure the obligation (the “Mortgage”). PNC, however, did not record the Mortgage in the Barnstable County Registry of Deeds until April 5, 2011. Pursuant to the Note and Mortgage, both the Debtor and Kelley were jointly and severally liable for the underlying debt.
On June 21, 2011, the Debtor filed a voluntary Chapter 7 petition. On October 17, 2011 the Court entered an order of discharge, discharging the Debtor’s personal liability on the Note. Nevertheless, throughout the bankruptcy proceedings and up to the present date the Debtor and Kelley have remained current with their obligation to PNC.
On October 20, 2011, the Trustee commenced the present adversary proceeding against PNC, seeking to avoid the Mortgage as a preferential transfer pursuant to 11 U.S.C. §§ 547 and recover either the Mortgage or the value of the Mortgage for the benefit of the estate pursuant to 550.1 PNC failed to respond to the complaint, and on November 29, 2011, the Trustee filed an application for entry of default and a motion for a default judgment. The Trustee requested a money judgment against PNC in the amount of $243,000.00, the value of the Property the Debtor had listed on her bankruptcy schedules. PNC did not respond to either motion. On December 14, 2011,1 granted the Trustee’s application for entry of default. Fourteen days later, on December 28, 2011, I granted the Trustee’s motion for a default judgment by *199endorsement order which stated: “Granted. The Court enters a default judgment in favor of the Plaintiff against the Defendant.” A separate judgment, however, did not enter.
When the Trustee attempted to enforce the default judgment against PNC in the United States District Court for the Southern District of Ohio, PNC successfully challenged his attempt the basis that there was no money judgment to enforce. On April 26, 2013, the Trustee filed a motion for judgment in a separate document, seeking entry of a judgment which expressly awarded him monetary recovery in the amount of $234,000.00, with interest accruing from December 28, 2012. PNC filed an opposition on May 10, 2013. After a hearing June 10, 2013, I granted the Trustee’s motion over PNC’s objection. The Trustee subsequently sought to amend the judgment to correct a typographical error such that the reference to December 28, 2012 should have been December 28, 2011. I held another hearing on August 14, 2013, before entering the amended judgment (the “Monetary Judgment”).
PNC timely appealed the entry of the Monetary Judgment to the United States District Court for the District of Massachusetts (the “District Court”). In an opinion dated March 31, 2014, the District Court found that I erroneously entered a money judgment under Fed.R.Civ.P. 55(b) without compelling the Trustee to prove his damages, as the claim was not for a “sum certain.”2 The District Court vacated the Monetary Judgment and remanded the matter for consideration of the “proper remedy.”3 It further directed that if I conclude that an award of the value of the property is appropriate in this case, I must conduct an evidentiary hearing to determine that value. The District Court, however, was clearly dubious of such a result.4
On remand, I conducted a status conference on May 2, 2014, at which the Trustee renewed his request for entry of a money judgment, which PNC opposed. I took the matter under advisement, and the parties subsequently filed briefs in support of their positions.
III. POSITIONS OF THE PARTIES
A. The Trustee
The Trustee argues that a money judgment is necessary to make the estate whole, as there is no way for him to realize the full value of the avoided mortgage interest (the “Avoided Interest”). The Trustee points out that he can only avoid and preserve the Mortgage for the benefit of the estate as to the Debtor’s interest in the Property. Because the Property will remain subject to the Mortgage to the extent of Kelley’s interest in the Property, the Trustee asserts that any attempt to sell the Avoided Interest will not obtain its true value. Moreover, the Trustee contends that the expenses and difficulty involved in such a sale are such that preservation of the Avoided Interest would not restore the Debtor’s bankruptcy estate to the position it would have been in had the transfer not taken place. The Trustee also asserts that a money judgment is appropriate because the value of the Debtor’s interest in the Mortgage is readily ascertainable — through either a valuation hear*200ing or by reference to the amount of debt remaining on PNC’s fully-secured claim.
The Trustee argues that a money judgment would not unfairly penalize PNC or result in a windfall to the estate, because the money judgment would replace avoidance of the Mortgage as the remedy. Thus, if monetary relief is granted, PNC would then hold the Mortgage as to both the Debtor’s and Kelley’s interest in the property. The Trustee contends that PNC would additionally share with the Debtor’s other creditors in a distribution of whatever amount is recovered.
In fact, the Trustee asserts that it is PNC that has received a windfall, because PNC has continued to receive mortgage payments from the Debtor, notwithstanding the Trustee’s avoidance of the Mortgage as to the Debtor. The Trustee asserts that the estate is entitled to such payments and contends that any determination of damages should include the payments made to PNC on account of the Avoided Interest.
Finally, the Trustee asserts that the “dilatory” manner in which PNC addressed the present litigation should weigh in favor of granting the Trustee a money recovery, and that the administrative expenses which the Trustee has incurred throughout these proceedings ought to be taken into account in the assessment of damages.
B. PNC
PNC asserts that a money judgment is not necessary in this case, as avoidance of the Mortgage as to the Debtor restores the parties to the position they were in prior to the preferential transfer. PNC points out that the property interest that the Debtor preferentially transferred was the right to look to the Property for satisfaction if the Debtor defaulted on its loan. PNC argues that avoidance deprives it of this right, renders PNC’s loan unsecured as to the Debtor, and further allows the Trustee to recover on behalf of the estate the interest the Debtor had in the Property pre-transfer. PNC contends that requiring it to pay money damages would unfairly penalize it for having lent the Debtor money shortly prior to her bankruptcy filing.
Moreover, PNC argues that the Trustee is not entitled to money damages simply because avoidance of the Mortgage as to the Debtor will not eliminate the Mortgage as to Kelley’s interest in the Property. PNC contends that if it had never recorded the mortgage against the Debtor, or the Debtor had never granted it the Mortgage, there would have been no preference; yet the Trustee would still face the difficulty of administering an asset encumbered by a valid mortgage on Kelley’s interest in it. Thus, PNC asserts that avoidance of the mortgage as to the Debtor’s interest in the Property constitutes a complete recovery for the bankruptcy estate.
Additionally, PNC asserts that the Trustee is not entitled to a money judgment simply because he is dissatisfied with the potential market for the Avoided Interest. PNC further argues that even if money damages were appropriate, the correct measure would be the market value of the avoided interest, not the value of the real property or the remaining mortgage debt. Moreover, PNC contends that any payments it has received from the Debtor are not proceeds of the Avoided Interest, because Kelley is jointly and severally liable for the full amount of the debt.
Finally, PNC asserts that it has not engaged in any dilatory conduct in these proceedings. PNC contends that it had no reason to oppose the entry of a non-monetary default judgment against it because it does not dispute the avoidability of the *201Mortgage as to the Debtor. PNC points out that it promptly responded when the Trustee attempted to collect on the judgment in the Ohio proceedings and timely appeared in the present proceeding to object to the entry of a money judgment.
IV. DISCUSSION
Pursuant to § 547(b), the Trustee may avoid as a preference “any transfer of an interest of the debtor in property” made: (1) to a creditor; (2) on account of an antecedent debt; (3) while the debtor was insolvent; (4) on or within 90 days of the petition date; and (5) that enables the creditor to receive more than the creditor would have in a Chapter 7 case if the transfer had not been made.5 The parties agree that because the Mortgage was recorded within 90 days of the petition date, the Debtor’s grant of the Mortgage to PNC constituted a preference.6 As the United States Court of Appeals for the First Circuit held in In re Lazarus, a debtor’s grant of a mortgage as to his or her interest in jointly-owned property may constitute a preferential transfer.7 Nevertheless, the First Circuit left open the questions of what the appropriate remedy was in such cases and what effect the non-debtor co-mortgagor’s interest would have on the avoidance of the transfer.8 The parties disagree as to these precise issues.
As is relevant here, two Bankruptcy Code sections provide remedies in the case of a preferential transfer. First, pursuant to § 551, “[a]ny transfer avoided under [§ 547] of this title ... is preserved for the benefit of the estate.”9 In the case of an avoided lien, this means that the lien itself is automatically preserved for the benefit of the estate, and the trustee steps into the shoes of the lienholder.10 Second, pursuant to § 550(a), “to the extent a transfer is avoided under [§ 547], the trustee may recover, for the benefit of the estate, the property transferred, or if the court so orders, the value of such property.” 11 Unlike preservation, recovery under § 550 is not automatic, and the trustee must take action to recover the property or its value.12 Moreover, the language of § 550 is permissive, giving the court the discretion over whether to award any recovery under that section and, if recovery is indeed appropriate, whether recovery of the property itself or a monetary recovery is the appropriate remedy.13
The purpose of § 550 is to “to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred.”14 Thus, recovery under that section is only necessary if presérva*202tion of the transfer is insufficient to return the estate to its pre-transfer position.15 If the court determines that recovery under § 550 is appropriate, the factors the court considers in deciding whether to award the trustee recovery of the property or its value include: (1) “the presence of conflicting evidence with respect to the value of the transferred property;” (2) “whether the property has been converted and is thus no longer recoverable;” (3) “whether the property has depreciated in value subsequent to the transfer;” and (4) “whether the value is readily determinable and awarding the value would realize a savings for the estate.”16
In the case of a non-possessory security interest or lien, avoidance and preservation of the lien is generally sufficient to return the bankruptcy estate to its pre-transfer condition.17 Because preservation in essence returns the property transferred — the lien — to the estate, there is no longer any property to recover, rendering resort to § 550 unnecessary.18 Nevertheless, in some cases, preservation of a lien for the benefit of the estate is insufficient to make the estate whole. As the United States Court of Appeals for the Eighth Circuit explained in In re Willaert, “when preferentially transferred property cannot be recovered, the court must order its value returned to the bankruptcy estate.” 19 For example, in In re Schwartz, the debtor granted two mortgages to lenders during the preference period.20 The debtor later refinanced the mortgages, resulting in the lenders being paid in full, while the property remained encumbered by the new mortgages.21 In that case, the court found that since the lenders no longer held the avoided mortgages, they could not be returned to the estate, and a money judgment for their value was appropriate.22 Similarly, in In re Blackburn, the court awarded the trustee the value of an avoided lien when the collateral securing the lien had been transferred to a third party.23
In this case, preservation of the Avoided Interest for the benefit of the estate is sufficient to return the “property transferred” to the estate. Neither the Mortgage not the Property were transferred to third parties, and thus this case is unlike other cases in which courts have found a monetary recovery necessary. Nevertheless, the Trustee asserts that there are special circumstances warranting a monetary recovery in this case and requests that I award him the value of the *203property transferred instead of preserving the Avoided Interest for the benefit of the estate.24
The Trustee relies on the recent decision by the First Circuit, In re Traverse, in which the court described the effect of preservation as follows:
[Preservation of a hen entitles a bankruptcy estate to the full value of the preserved lien — no more and no less. Where this lien is an undefaulted mortgage on otherwise exempted property, the trustee may for the benefit of the estate enjoy the liquid market value of that mortgage, claim the first proceeds from a voluntary sale, or wait to exercise the rights of a mortgagee in the event of a default.25
Here, as in Traverse, the Debtor has not defaulted on the Mortgage. Thus, the Trustee is not entitled to sell the Property itself to realize the value of the Avoided Interest. Moreover, the Trustee asserts that none of the options discussed in Traverse will realize the “full value” of the mortgage, rendering preservation an insufficient remedy. He contends that a voluntary sale is not in prospect and the maturation date of the mortgage is in 2041, making it unfeasible to keep the case open for a potential default. Primarily, however, the Trustee argues that the “liquid market value” of the avoided interest is not equal to its “full value,” given the difficulty of selling a partial interest in a mortgage.
The Trustee relies on a decision by the bankruptcy court in In re Early as support for this view.26 In that case, the debtor owned property with his non-debtor wife as tenants by the entirety.27 The debtor and his wife both executed a reverse mortgage in favor of a lender.28 After the debtor filed bankruptcy, the trustee avoided the mortgage as a preference with respect to the debtor’s interest in the property and requested a monetary recovery for the value of the lien.29 Recognizing the issue as one of first impression, the court noted that money damages under § 550(a) “may be appropriate” in such a situation, given the difficulty of selling a one-half in the mortgage.30 Ultimately, however, the mortgagee agreed to allow the Trustee to sell the entire mortgage, and the court withdrew its opinion “without deciding whether those observations were correct or in error.”31
Unlike the court in Early, I do not find the difficulty of administering the Avoided Interest a special circumstance entitling the Trustee to a monetary recovery. First, I note that if the Debtor had never granted PNC a mortgage in the property, and only Kelley had mortgaged her interest in the property, there would have been no preference. Nevertheless, the Trustee would be faced with a similar difficulty of disposing of property in which a non-debtor holds an interest. Second, the court in Early emphasized that in attempting to sell one half of a lien, the Trustee would “not be able to realize one half of the value of the entire lien.”32 The *204court found that one half of the value of the entire lien was the appropriate measure of damages in part because the property was held by the debtor and his wife as tenants by the entirety, and thus both parties’ consent was necessary to create a lien on the property.33 In this case, however, the Debtor and Kelley hold the Property as joint tenants. Under Massachusetts law, a joint tenant may convey his or her interest in property without the consent of the co-owner.34 Thus, this case is distinguishable from Early.
Furthermore, the approach taken by the court in Early mischaracterizes the nature of the property interest at issue. The proper measure of value in this case is the market value of the Avoided Interest itself, not the value of half of the entire Mortgage.35 The Trustee is not entitled to monetary damages simply because the Avoided Interest is a partial interest that may not be worth very much. In fact, the difficulty of valuing such an interest militates against awarding the Trustee the value of the property under § 550.36
Accordingly, I find that preservation of the Avoided Interest for the benefit of the estate is sufficient to put the estate in its pre-transfer position, and thus constitutes a complete recovery in this case. As PNC points out, the “interest of the debtor in property” that was preferentially transferred was PNC’s right to enforce its claim against the property in the event of default.37 Avoidance of the Mortgage as to the Debtor’s interest in the property deprives PNC of this right, putting PNC in the same position as the Debtor’s other creditors. Preservation of the Avoided Interest for the benefit of the estate grants the Trustee whatever rights PNC would have had against the Debtor’s interest in the Property on account of the Mortgage. Just as PNC would have no immediate recourse against the Property absent a default, neither does the Trustee.38 Thus, the Trustee is limited to enjoying the “liquid market value” of the Avoided Interest.39 Any difficulty the Trustee may encounter in administering the Avoided Interest stems from the fact that it is a partial interest. I do not find this a special circumstance entitling the Trustee to a monetary recovery, when preservation of the Avoided Interest in all other respects puts the parties in their pre-transfer positions.40
*205Finally, I address the Trustee’s contention that he is entitled to the post-petition payments that have been made on account of the promissory note, as they are proceeds of the Avoided Interest. I first note that the case on which the Trustee relies holds a minority view,41 and one that the First Circuit has rejected, albeit in dicta.42 The majority of cases hold that when a trustee avoids a lien, he or she steps into the shoes of the lienholder only as to the lienholder’s in rem rights, and does not gain the right under the contract to receive payments.43 In any event, the payments received by PNC in this case are not properly considered proceeds of the Avoided Interest. Kelley remains liable for the entire debt, which is secured by her interest in the Property. Thus, even if I were to take the minority view, this case is distinguishable because PNC is entitled to the payments independently of the Debtor’s former obligations under the promissory note and Mortgage.
Y. CONCLUSION
In light of the foregoing, I will enter an order denying the Trustee’s request for entry of a money judgment.
. Unless expressly staled otherwise, all references to the "Bankruptcy Code" or to specific sections shall be to the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23, 11 U.S.C. § 101, et seq.
. PNC Mortgage v. Agin, 508 B.R. 252, 257 (D.Mass.2014).
. Id.
. Id. ("I note, however, that given that PNC had lent debtor the sum of $282,000, it is unclear why it should pay an additional amount simply because the loan transaction occurred during the preference period.”).
. 11 U.S.C. § 547(b).
. Because the Mortgage was recorded more than 30 days after the loan was made, the transfer is deemed to occur at the time of recording, and could not qualify for the contemporaneous exchange defense. See §§ 547(c)(1) and 547(e)(2)(B); Collins v. Greater Atl. Mortg. Corp. (In re Lazarus), 478 F.3d 12, 15 (1st Cir.2007).
. See In re Lazarus, 478 F.3d at 15.
. See id. at 19 n. 9.
. 11 U.S.C. § 551.
. DeGiacomo v. Traverse (In re Traverse), 753 F.3d 19, 26 (1st Cir.2014).
. 11 U.S.C. § 550(a).
. Rodriguez v. Daimlerchrysler Fin. Servs. Americas LLC (In re Bremer), 408 B.R. 355, 359 (10th Cir. BAP 2009), aff'd Rodriguez v. Drive Fin. Servs. (In re Trout), 609 F.3d 1106 (10th Cir.2010).
. Id.
. Aero-Fastener, Inc. v. Sierracin Corp. (In re Aero-Fastener, Inc.), 177 B.R. 120, 139 (Bankr.D.Mass.1994).
. In re Bremer, 408 B.R. at 359-360.
. McCarthy v. Fin. Freedom Senior Funding Corp. (In re Early), 05-01354, 2008 WL 2073917, at *6 (Bankr.D.D.C. May 12, 2008) (citing Gennrich v. Mont. Sport U.S.A. (In re Int’l Ski Serv., Inc.), 119 B.R. 654 (Bankr.W.D.Wis.1990)), order amended and supplemented, 05-01354, 2008 WL 2569408 (Bankr.D.D.C. June 23, 2008); see also In re Aero-Fastener, Inc., 177 B.R. at 139.
. In re Bremer, 408 B.R. at 359-360 (citing 4 Norton Bankr.L. & Prac.3d § 70.3); Schnittjer v. Linn Area Credit Union (In re Sickels), 392 B.R. 423, 426 (Bankr.N.D.Iowa 2008).
. In re Bremer, 408 B.R. at 359-360; In re Sickels, 392 B.R. at 426-27; Suhar v. Burns (In re Burns), 322 F.3d 421, 428 (6th Cir.2003).
. Halverson v. Le Sueur State Bank (In re Willaert), 944 F.2d 463, 464 (8th Cir.1991).
. Seaver v. Mortg. Elec. Registration Sys., Inc. (In re Schwartz), 383 B.R. 119, 122 (8th Cir. BAP 2008).
. Id.
. Id. at 126.
. See Tidwell v. Chrysler Credit Corp. (In re Blackburn), 90 B.R. 569 (Bankr.M.D.Ga.1987).
. See In re Early, 2008 WL 2073917, at *3 (noting that the remedies under §§551 and 550 are "mutually exclusive”).
. In re Traverse, 753 F.3d at 31.
. See In re Early, 2008 WL 2073917.
. Id. at*l.
.Id.
. Id.
. Id. at *7.
. See In re Early, 2008 WL 2569408, at *3.
. See In re Early, 2008 WL 2073917, at *7.
. Id. at *10.
. See Attorney Gen. v. Clark, 222 Mass. 291, 293, 110 N.E. 299 (1915); see also Coraccio v. Lowell Five Cents Sav. Bank, 415 Mass. 145, 152, 612 N.E.2d 650 (1993) (finding that under Massachusetts law even tenants by the entirety may encumber or convey their interests in property without consent of the other tenant).
. See In re Traverse, 753 F.3d at 31. I note that the court in Early did not dispute that market value was the appropriate measure of damages, but looked to the value of the entire lien, rather than the avoided portion of it. In re Early, 2008 WL 2073917, at *10.
. See In re Aero-Fastener, Inc., 177 B.R. at 139. Because Kelley is jointly and severally liable for the entire debt, and her interest in the Property remains encumbered, valuing the Avoided Interest is not simply a matter of looking to the remaining amount of debt or the value of the collateral on the petition date, which the Trustee proposes as the method of valuation.
. 11 U.S.C. § 547(b).
. In re Traverse, 753 F.3d at 31 ("[I]n some cases a mortgagee will have no immediate means for claiming the value of its collateral.”).
. In re Traverse, 753 F.3d at 31.
. Moreover, in this case, the Debtor and Kelley executed the Mortgage as a part of a refinancing of the Property. Due to the delay in recording, the grant of the Mortgage constituted a preference; however, there was *205likely no prejudice to the Debtor’s other creditors from the transaction. See In re Lazarus, 478 F.3d at 17-18 (noting that although the § 547(b) test for preferences must be mechanically applied, there was likely no prejudice to other creditors when the debtor granted the lender a mortgage in a refinancing transaction.) The lack of prejudice weighs further against requiring PNC to pay money damages in this case.
. See White v. Wachovia Dealer Servs., Inc. (In re Wyatt), 440 B.R. 204 (Bankr.D.D.C.2010).
. See In re Traverse, 753 F.3d at 31 n. 9.
. See Morris v. St. John Nat’l Bank (In re Haberman), 516 F.3d 1207, 1211-12 (10th Cir.2008); Morris v. Vulcan Chem. Credit Union (In re Rubia), 257 B.R. 324, 327 (10th Cir. BAP 2001), aff'd, 23 Fed.Appx. 968 (10th Cir.2001); Morris v. Citifinancial (In re Trible), 290 B.R. 838, 845 (Bankr.D.Kan,2003). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497443/ | MemoRAndum of Decision and OkdeR On Trustee’s Motion for Default Judgment
ALAN H. W. SHIFF, Bankruptcy Judge.
I. Introduction
The chapter 7 trustee (“Trustee”) seeks a default judgment, pursuant to Federal Rule of Bankruptcy Procedure 7055(b)(2), *207which if granted would deny Friedberg a discharge. See 11 U.S.C. § 727. (See ECF No. 133, “Default Judgment Motion”.) Friedberg, pro se, objects. (See ECF No. 141.) For the reasons that follow, the Trustee’s motion is granted.
II. Background
The Court has provided detailed background of Friedberg’s case in prior decisions. See, e.g., In re Friedberg, Case No. 08-51245, 2012 WL 966940, slip op. (Bankr.D.Conn. Mar. 21, 2012) (sustaining the Trustee’s objection to the proof of claim of alleged creditors Pradella and Olich); In re Friedberg, 502 B.R. 8 (Bankr.D.Conn.2013) (approving the Trustee’s Rule 9019 compromise over the objections of Friedberg, and Pradella and Olich). Familiarity with those decisions is assumed. The Court provides the following background as context to this decision.
On December 18, 2008, Friedberg filed a chapter 11 petition. On April 30, 2010, the Court approved the appointment of Attorney Melissa Z. Neier to serve as the chapter 11 trustee, based on Friedberg’s co-mingling of funds between limited liability companies (“LLCs”) of which he was the sole member. (See Main Case, ECF No. 75.) Friedberg did not object to that appointment. (See Main Case, Apr. 27, 2010 Docket Entry notation (“No objection to the entry of an order appointing a chapter 11 trustee.”).) On June 23, 2010, this case was converted to chapter 7 (“First Conversion Order”). (See Main Case, ECF No. 446.) Friedberg appealed, claiming that he was denied a right to be heard. Significantly, he neither sought nor received a stay pending appeal.
On September 7, 2011, the District Court vacated and remanded the First Conversion Order, directing this Court to determine whether Friedberg, as a chapter 11 debtor, had a right to be heard. See 11 U.S.C. § 1109(b). See also Friedberg v. Neier (In re Friedberg), No. 3:10-cv-1239 (AWT), Order at 3-4 (D.Conn. Sept. 7, 2011) (“Remand Order”). On April 26, 2012, after a hearing in which Friedberg appeared and participated, the Court entered a second order converting the case to chapter 7 (“Second Conversion Order”). (See Main Case, ECF No. 1058.) Fried-berg appealed, and the Order was affirmed. See Friedberg v. Neier, Trustee (In re Friedberg), Case No. 3:12-cv-940 (JCH), 2013 WL 869937 (D.Conn. Mar. 5, 2013).
On January 10, 2011, during the pen-dency of the appeal of the First Conversion Order, the Trustee commenced this adversary proceeding (“Discharge Action”) based primarily on Friedberg’s failure to provide requested books and records pertaining to him individually and to his various LLCs,2 and his failure to disclose bank accounts in which he had an interest. See 11 U.S.C. § 727(a)(2), (3), and (4); see also Complaint at ¶¶ 24-31 (ECF No. 1). On February 9, 2011, Friedberg, pro se, filed an answer denying the Trustee’s allegations. (See Answer, ECF No. 8.)
Attorney Ressler, as Friedberg’s attorney in the Main Case, stated on several occasions in open court that he was only authorized to appear in this Discharge Action for the purpose of prosecuting Fried-berg’s various motions for continuances. The single exception was that Attorney Ressler also represented Friedberg on November 20, 2013, during the trial on instant Default Judgment Motion.
Because Friedberg failed to comply with her discovery requests for economic data *208so she could perform her statutory duties, see 11 U.S.C. § 704(a)(4),3 the Trustee sought and obtained three continuances of the trial of her Discharge Action (see ECF Nos. 9, 32, 72). A Third Amended Pretrial Order, dated September 18, 2012, rescheduled the Discharge Action for January 16, 2013. (See ECF No. 89.) Under that order, the discovery bar date was November 9, 2012. (See id. at ¶ 1.) Notably, one week after that Order, ie., September 25, 2012, Friedberg moved to Florida. Since that date, Friedberg has resided in that state, and, as noted infra, has not attended any hearings in this Court.
On January 2, 2013, Friedberg filed his first motion for a continuance of the trial (see ECF No. 93) asserting, among other reasons, that he needed time to save money to travel to Connecticut. He sought an open-ended continuance until he could save enough money to travel to Connecticut to conduct discovery and then, at a later unspecified date, attend the trial. (See id.) While she objected to an open-ended continuance, the Trustee agreed to a 90-day extension of the trial date. (See ECF No. 97; see also Nov. 6, 2013 Hr’g Tr. 8:9-19 (ECF No. 181).) The parties were directed to attempt to agree on a proposed amended pretrial order. No such proposed pretrial order followed, which prompted the Court on March 20, 2013, to enter a Fourth Amended Pretrial Order re-scheduling the trial for June 19, 2013. (See Nov. 6, 2013 Hr’g Tr. 8:13-19; see also Fourth Amended Pretrial Order, ECF No. 102; ECF No. 110 at ¶¶ 2-3.)
On June 6, 2013, Friedberg filed a second motion which requested essentially the same relief sought in his first motion, i.e., a continuance of 180 days or until such time when he could save sufficient funds to travel to Connecticut to conduct discovery and then return for the trial. (See ECF No. 104 at 3-4.) The Trustee objected on June 14, 2013, arguing, inter alia, that the discovery bar date had long passed. (See ECF No. 107.) Concurrently, she filed a preemptive motion for a default under Federal Rule of Bankruptcy Procedure 7055(a) in the event Friedberg failed to defend the Discharge Action trial re-scheduled for June 19, 2013. (See id.) On June 17, 2013, the Trustee filed a separate Motion for Default for failure to defend (“Motion for Default”, ECF No. 110). See Fed. R.Civ.P. 55(a), made applicable in bankruptcy by Fed. R. Bankr.P. 7055.
On June 17, 2013, Friedberg filed a third motion for a continuance, this time relying on a “To whom it may concern” letter from a Florida-based doctor. It stated that Friedberg had “been instructed not to drive and refrain from streneous [sic] activity ...” (ECF No. 112 at 5.) On June 19, 2013, Friedberg did not appear either to prosecute his motion for a continuance *209or participate in the trial. (See June 19, 2013 Audio File, ECF No. 116 (Attorney Ressler noting that Friedberg asked him to observe the proceedings but not represent Friedberg)). The Trustee objected to Friedberg’s motion and then argued her Motion for Default. (See id.) On June 20, 2013, the Court denied Friedberg’s motion for a continuance and granted the Trustee’s Motion for Default (“Deniai/Default Order”). (See ECF No. 117.) On June 28, 2013, Friedberg filed a notice of appeal of the Denial/Default Order. (See ECF No. 120.) He did not seek a stay pending appeal.4
On August 6, 2013, the Trustee filed the instant Default Judgment Motion. (See ECF No. 133.) Friedberg objected. (See ECF No. 141.) Initially scheduled for a August 27, 2013 hearing (see ECF No. 136), the Default Judgment Motion was rescheduled twice before a third re-scheduling to October 8, 2013. Notably, the last continuance was permitted after Attorney Ressler assured the Court that Friedberg was “prepared to be here in the month of October”.5 (See Main Case, Audio File of Aug. 20, 2013 Hr’g, ECF No. 1455.) The October 8, 2013 hearing was further continued to November 6, 2013, and then to November 20, 2013.6,7
*210Friedberg did not appear for the November 20th hearing. The Trustee did and testified in support of her Default Judgment Motion. {See id. at 18:3-35:1) While Friedberg’s attorney, Mr. Ressler, cross-examined the Trustee, he did not present any evidence. {See id. at 35:4-39:4, 39:8-11).
III. Discussion8
Rule 55(b)(2) of the Federal Rules of Civil Procedure, made applicable in bank*211ruptcy by Bankruptcy Rule 7055, provides in relevant part:
(2) By the Court.... [T]he party must apply to the court for a default judgment. ... If the party against whom a default judgment is sought appeared personally or by a representative, that party or its representative must be served with written notice of the application at least 7 days before the hearing. The court may conduct hearings ... to enter or effectuate judgment, it needs to:
(C) establish the truth of any allegation by evidence.
Fed. R. Bankr.P. 7055(b)(2)(C) (emphasis added).
As noted, supra at 3, Friedberg initially appeared in this adversary proceeding and answered the Trustee’s Complaint. (See Answer, ECF No. 8.) There is no dispute that this is a core proceeding over which the Court has jurisdiction and in which venue is proper.9 (See Complaint at ¶¶ 1-3; Answer at ¶¶ 1-3.) The pleadings also establish that Friedberg is a self-employed real estate developer who is the 100% owner of various LLCs. (See Complaint at ¶ 10; Answer at ¶ 10.)
The law in this Circuit holds that since § 727(a) imposes “an extreme penalty for wrongdoing,” it “must be strictly construed against those who object to the debtor’s discharge and liberally in favor of the bankrupt.” State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1310 (2d Cir.1996) (internal quotation *212marks omitted; further citation omitted). In her three-count complaint, the Trustee challenges Friedberg’s discharge under §§ 727(a)(2), (B), and (4). She needs only to successfully prove one of those counts by a fair preponderance of the evidence. See Fed. R. Bankr.P. 4005; see also Chemical Bank v. Hecht (In re Hecht), 237 B.R. 7, 9 (Bankr.D.Conn.1999); Pereira v. Young (In re Young), 346 B.R. 597, 606 (Bankr.E.D.N.Y.2006) (citing Grogan v. Garner, 498 U.S. 279, 289-91, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).) As this Court has observed, “A discharge of dis-chargeable debts is not a right but rather a privilege accorded an honest debtor, who, among other things, satisfies bankruptcy statutory obligations.” Hecht, 237 B.R. at 9. “If the objecting party sufficiently establishes its prima facie ease, the burden shifts to the debtor to set forth credible evidence to rebut the prima facie case.” Katz v. Deedon (In re Deedon), 419 B.R. 1, 5 (Bankr.D.Conn.2009). A prima facie case is made “once sufficient evidence is presented by the plaintiff to satisfy the burden of going forward with evidence.” In re Bodenstein, 168 B.R. 23, 28 (Bankr.E.D.N.Y.1994).
Section 727(a)(4)(D) provides that the court shall grant the debtor a discharge, unless—
(4) the debtor knowingly and fraudulently, in or in connection with the case—
* * *
(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.
11 U.S.C. § 727(a)(4)(D); see also Pereira v. Gardner (In re Gardner), 384 B.R. 654, 668 (Bankr.S.D.N.Y.2008). “Courts have interpreted this provision as imposing an affirmative duty on the [d]ebtor to cooperate with the trustee ‘by providing all requested documents to the trustee for [her] review, and failure to do so constitutes grounds for denial of discharge.’” Id. (quoting In re Erdheim, 197 B.R. 23, 28 (Bankr.E.D.N.Y.1996) (emphasis added)). This subsection requires a finding of intent, which can be established with circumstantial evidence such as when a debtor’s conduct is evasive or persistently uncooperative or a debtor fails to explain his noncompliance with an order directing him to produce documents. See id.; see also In re Young, 346 B.R. 597, 615-16 (collecting cases regarding circumstantial evidence supporting the requisite intent to act “knowingly and fraudulently”).
Here, the Trustee credibly testified:
She was appointed as the chapter 11 trustee of the Friedberg estate on April 30, 2010. (See Nov. 20, 2013 Hr’g Tr. at 22:19-21, ECF No. 182.) On that date, she sent a letter requesting “books and records from [Friedberg] with respect to him personally, as well as over 30 LLCs in which he claimed an interest.” (Id. at 22:24-23:12.) Friedberg failed to produce any of those documents. (See id. at 22:13-21.) The Trustee sent Friedberg a second letter requesting the documents, but again, Friedberg declined to respond (See id. at 24: 2:17.)
The Trustee attempted to secure possession of documents from an accountant and an attorney who had worked for Fried-berg, utilizing Rule 2004 subpoenas, but with limited success, “receiving] very minimal documentation with regard to some, but not all of the LLCs. And no records or books or records at all for several of them.” (Id. 25:12-16.).
The Trustee served a first set of interrogatories and requests for production on *213Friedberg, to which he failed to provide any response or objections. {See id. at 25:24-26:7.) As a result, the Trustee moved to compel production of documents and records. {See id. at 26:8-10; see also ECF No. 42.) At an April 3, 2012 hearing on the motion to compel, the Court “ordered Mr. Friedberg to appear for a deposition to testify regarding the missing books and records and/or to produce the same.” {Id. at 26: 11-15; see also Apr. 3, 2010 Hr’g Tr. at 9:24-11:22, ECF No. 55.) In conjunction with the scheduled deposition, the Trustee served Friedberg with a subpoena identifying the financial and business documents she sought. {See Nov. 20, 2013 Hr’g Tr. at 26:16-22.) The deposition was conducted as scheduled, but Friedberg did not produce any of the identified documents. {See id. at 27:1-4; see also id. at 27:8-28:4 (regarding the absence of any records for at least six LLCs and scant production of records for the remaining ones); ECF No. 110 at 3, ¶ 7; ECF No. 110-4 at 7 (Apr. 25, 2012 Dep. Tr. 6:3-15).)
Friedberg failed to respond to the Trustee’s inquires or to produce any documents or records regarding New York State tax liabilities assessed against him personally as a responsible person for many of his LLCs. {See id. at 28:5-25.) The Trustee further testified that Friedberg failed to disclose a bank account of one of his 100%-owned LLCs, over which he was the sole signatory and in which funds were deposited, despite his having valued that LLC as having zero value to the estate. {See id. at 29:6-30:2.)
Attorney Ressler’s cross examination of the Trustee did not succeed in undermining her testimony that Friedberg was persistently uncooperative by failing and refusing to provide the “recorded information, including books, documents, records, and papers ... ”, see § 727(a)(4)(D), which she repeatedly requested; Thus, the Court finds that the Trustee has established a prima facie case on her Third Cause of Action, and
Friedberg did not offer any evidence to rebut the Trustee’s case.10
IV. Conclusion
Accordingly, IT IS ORDERED that the Trustee’s Default Judgment Motion is granted.
. The Trustee named 17 LLCs, all of which Friedberg is alleged to be the 100% owner.
(See Complaint at ¶ 10.)
. On March 15, 2012, pursuant to Bankruptcy Rule 7037, the Trustee filed a motion to compel production and to preclude Friedberg from offering certain evidence ("Motion to Compel”). (See ECF No. 42.) Specifically, the Trustee sought an order compelling Fried-berg to respond to outstanding discovery requests and, due to his failure to produce books, records and other information as statutorily mandated, precluding him from offering exculpatory evidence at trial (See id.) The Trustee's discovery requests were a continuing effort to obtain not only Friedberg’s personal financial information, but also that of his various 100%-owned LLCs. On March 29, 2012, Friedberg filed an objection to the Motion to Compel, styled as an "Answer”, asserting he was cooperative with the Trustee. (See ECF No. 47.) At the April 3, 2012 hearing on the Motion to Compel, Friedberg was directed to attend an April 25, 2012 deposition to be conducted in the courthouse. (See Apr. 3, 2012 Docket Entry.) He attended that deposition, but did not bring any of the subpoenaed documents. (See ECF No. 110 at 3, ¶ 7; see also Apr. 25, 2012 Dep. Tr. 6:3-15, ECF No. 110-4 at 7.)
. After filing an appeal, on August 29, 2013, Friedberg also filed a motion to have the Deniai/Default Order vacated. (See ECF No. 140.) That motion was denied for his failure to prosecute it. (See ECF No. 170; see also Nov. 6, 2013 Hr'g Tr. ECF No. 181 at 4-6.)
On November 15, 2013, the District Court granted the Trustee’s motion to dismiss Fried-berg’s appeal of the Denial/Default Order, ruling it lacked jurisdiction over the matter since it was not a final order. See Friedberg v. Neier, Trustee (In re Friedberg), Case No. 3:13— cv-1084 (DJS), slip op. (D.Conn. Nov. 15, 2013).
. On August 20, 2013, at hearings in the Main Case, Attorney Ressler made that representation. As a result, all open matters in the Main Case and in this adversary proceeding were continued to October 8, 2013, with the Court stating that all the continued matters would be heard at that time regardless whether or not Friedberg personally appeared. (See Main Case, Audio File of Aug. 20, 2013 Hr'g, ECF No. 1455.)
. As a consequence of the 2013 federal sequestration, Assistant U.S. Attorney Ann M. Nevins, on behalf of the Internal Revenue Service, did not appear at the October 8th hearing. To ensure that the Government would have an opportunity to participate, all matters in the Main Case and this adversary proceeding were continued to November 6, 2013. (See Main Case, Audio File of Oct. 8, 2013 Hr'g, ECF No. 1484.)
The November 6th hearing on the Trustee’s Default Judgment Motion was continued to November 20, 2013 to provide the Trustee the opportunity to present evidence in support of her Default Judgment Motion. See Fed. R. Bankr.P. 7055(b)(2)(C). (See Audio File of Nov. 6, 2013 Hr’g, ECF No. 166.)
.The Court notes that Friedberg repeated his pattern of requesting continuances of hearings as to the Trustee’s Default Judgment Motion:
First Request: Notwithstanding Attorney Ressler’s assurances of Friedberg's October appearance in court, on September 27, 2013, Friedberg sought a continuance of all matters scheduled for October 8th, including the hearing on the Default Judgment Motion. (See ECF No. 145.) The basis for the requested continuance was a reiteration of the reasons previously raised by Friedberg when seeking a continuance of the trial and rejected by the Court, to wit: his move to Florida; his lack of funds; his refusal to fly because of the possibility of being in a "life threatening accident” which, in conjunction with no money to fund a life insurance policy, could leave his two young children and partner without financial means; and his poor health. (See id.) As with his prior continuance motions, Friedberg requested a 180-day continuance to first take discovery and then an open-ended continuance of the trial. (See id.) He supplemented his motion with copies of medical records dated June 25, 2013, a one-page screen-shot, entitled “Financial Information” regarding billing, a copy of a September 24, 2013 prescription, an appointment confirmation letter for an October 11, 2013 appointment, infor*210mation regarding a dental CT Scan scheduled for October 7, 2013, and an e-mail confirming an oral surgery appointment for October 8, 2013. {See Supplement, ECF No. 147.) The Trustee initially objected for the same reasons she objected to Friedberg’s prior continuance requests: the discovery bar date had long since passed and Friedberg's request was too open-ended. {See ECF No. 148.) She then raised a new basis for objecting: that despite his repeated representations of serious illness, Friedberg was “actively pursuing business opportunities in Florida” and was "neither incapacitated nor in the state of declining health that he has portrayed himself to be.” {See id. at 2; see also id., Exh. A (news article discussing Friedberg's new business venture).)
At the October 8, 2013 hearing, Friedberg failed to appear, but Attorney Ressler appeared on his behalf to prosecute the motions for continuances in the Main Case and in this adversary proceeding. The Court denied those motions, noting it was akin to a fraud on the Court given Attorney Ressler’s August 2013 representation that Friedberg would be in attendance at the October 8th hearings, and that the proffered medical documentation was unpersuasive. However, as noted supra, note 6, all matters in the Main Case and the Discharge Action were, nonetheless continued to November 6, 2013 {See Main Case, Audio File, ECF No. 1484.)
Second Continuance: On October 23, 2013, Friedberg filed a motion to continue all matters scheduled for November 6, 2013 (“October 23rd Motion”), including the Default Judgment Motion. {See ECF No. 159.) In addition to attaching his prior motion to continue the October 8, 2013 hearings, Friedberg attached a second "To Whome [sic] It May Concern” letter, dated October 21, 2013, and stated that Friedberg was "unable to do any long distance traveling due to his neurological problem for the next 3-4 months.”
This time the letter substituted a restriction from "strenuous activity” to a restriction on "long distance travel”. "Long distance” was not defined, but this Court is not persuaded that a flight of approximately three hours fits that criteria, and the letter does not support any such claim. There was no specific diagnosis, only a generic reference to "neurological problems”. It is not even clear who was Friedberg’s doctor because while the signature block on the October 21, 2013 letter referenced "William V. Kane MD”, the signature was that of Matthew D. Hepler. {See id. at 5; cf. id. at 33.) Moreover, a suspicion is warranted that, given Friedberg’s active engagement in business activities in Florida, see supra, which he has not denied, his "neurological problems” might affect him on a selective basis.
At the November 6th hearing, the Court denied the October 23rd Motion. However, it continued the hearing on the Default Judgment Motion to November 20, 2013. See supra, note 6. The Court also specifically provided notice to Friedberg, through Attorney Ressler, that no further continuance would be granted unless Friedberg could present a new basis upon which granting a continuance was warranted. {See Nov. 6, 2013 Hr’gTr. 12:16— 23, ECF No. 181.)
Third Continuance: On November 19, 2013, through Attorney Ressler, Friedberg filed a motion to continue the November 20th hearing (“November 19th Motion”). {See ECF No. 176.) In support of that motion, Fried-berg attached another "To whom it may concern” letter, dated November 19, 2013, and signed by Dr. Hepler.
On November 20, 2013, Friedberg did not appear, but Attorney Ressler did to prosecute the November 19 th Motion, which he argued was based on new medical information. {See Nov. 20, 2013 Hr'g Tr. 3:24-4:3, ECF No. 182.) Attorney Ressler's argument is inexpli-citly unavailing since Dr. Hepler’s November 19 th letter repeated verbatim the text of the October 21, 2013 letter that Friedberg submitted in support of his October 23rd Motion. Reciting the history of "medical reports” filed by Friedberg, all of which the Court found inadequate {see id. at 7:18-13:6), the Court denied the November 19th Motion and continued with the hearing on the Default Judgment Motion. {See id. at 13:7.)
. Parenthetically, the Court addresses the effect of Judge Thompson's September 7, 2011 *211Remand Order of the First Conversion Order on the continuation of this Discharge Action. As noted, while the First Conversion Order was on appeal, there was no corresponding stay pending appeal. Therefore, during the period when the matter was on appeal, the Trustee administered Friedberg’s estate as the chapter 7 trustee, including commencing this Discharge Action.
The Court directed the Trustee to file a memorandum "stating the relevant facts and applicable law that support her apparent claim that the Remand Order did not have the effect of dismissing [this adversary proceeding], but rather held it in abeyance, pending the Court’s compliance with the Remand Order.” (April 10, 2014 Scheduling Order, ECF No. 185.) Friedberg was directed to file a responsive memorandum. (See id. at 2.) (See Trustee’s Brief in Accordance with Scheduling Order, ECF No. 187; Friedberg's Reply Brief, ECF No 189.)
As the Trustee persuasively argues, a debt- or’s discharge is subject to challenge for certain defined acts whether the case is administered under chapter 7 or chapter 11. See 11 U.S.C. §§ 727(c)(1), 1141(d)(2) and (3)(C); see also Trustee’s Brief at 7-8 (ECF No. 187). Thus, the conversion of the case would have no effect on such a challenge. If Judge Thompson had intended to extinguish the Discharge Action, he would have reversed this Court’s First Conversion Order. Instead he entered a remand order that directed this Court to give Friedberg an opportunity to be heard. See § 1109(b). The Remand Order did not foreclose the Trustee’s right to challenge Friedberg’s discharge if, on remand, this Court determined, after Friedberg was given an opportunity to be heard, that the case should be converted to chapter 7.
Therefore, the Remand Order had the effect of holding the Discharge Action in abeyance, and Friedberg’s argument that the Trustee needed to file a new § 727 action when the case was reconverted is without merit. (See Friedberg's Reply Brief at 4 (ECF No. 189).) To conclude otherwise would elevate form over substance and allow a potentially bad actor to escape the consequences of his actions. That result is antithetical to the Bankruptcy Code and the public policy it serves. It is, thus, rejected.
. The Court notes that the Discharge Action was served on Friedberg at his then Connecticut residence, and he has not challenged this Court’s jurisdiction. (See Answer generally and at 5 (signature block providing a West-port, Connecticut address).) See also generally City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 133-34 (2d Cir.2011).
. Since the Trastee has met her prima facie burden of establishing her Third Cause of Action and Friedberg has not rebutted it, it is not necessary for the Court to address her First or Second Causes of Action (seeking denial of discharge under §§ 727(a)(2) and (a)(3), respectively). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497445/ | Chapter 11
MEMORANDUM DECISION
Robert E. Grossman, United States Bankruptcy Judge
Before the Court is the Debtors’ motion objecting to the proofs of claim filed by ACE Investors, LLC (“ACE”), and seeking to disallow any claim by ACE for attorneys’ fees and costs incurred post-petition.1 The parties have stipulated that ACE is entitled to an allowed pre-petition claim in the amount of $3,464,365.13, less certain costs incurred by ACE attributable to expert witness fees.2 They also have stipulated that ACE’s collateral “has a value greater than the ACE Claim ... [and] [i]n accordance with section 506(a)(1) of the Bankruptcy Code, and for all purposes in the Debtors’ chapter 11 cases, the ACE Claim is secured in an amount equal to the amount of the ACE Claim.” [Dkt. # 294, ¶ 3, 4]. On August 8, 2014, ACE filed a Supplemental Proof of Secured Claim amending its proofs of claim and asserting that it is entitled to a fully secured claim in the amount of $5,170,953.83, which includes post-petition attorneys’ fees, expenses and interest through and including September 8,2014. [Dkt. #281],
The question for this Court to decide is whether, under sections 502 and 506 of the Bankruptcy Code, an oversecured3 credi*223tor in a chapter 11 case can assert a claim, as that term is defined in section 101(5) of the Code, for post-petition attorneys fees’ and costs where the right to such fees and costs is set forth, not in a contract or statute, but in an otherwise enforceable and final pre-petition judgment; and if that claim is allowable under section 502, whether it is entitled to secured status under section 506(b). The distinction between the secured or unsecured status of the claim, if it is even allowable in the bankruptcy, makes a difference if the Debtors propose less than a 100% distribution to all creditors. Although the Debtors’ proposed plan of reorganization, as drafted, and as indicated by the Debtors since the inception of this case, proposes to pay creditors 100%, the Debtors’ counsel explained for the first time at a hearing on September 8, 2014, that the plan might not pay 100% if the amount of the ACE claim exceeds a certain amount. Thus, the determination of secured or unsecured status is necessary.
On September 8, 2014, the Court gave a preliminary ruling on the Debtors’ objection to ACE’s claim and indicated that a written decision would follow. The Court finds that the April 23, 2013 and May 8, 2013 Orders and Judgments of the District Court for the Southern District of New York, together created a liquidated judgment against the Debtors’4 in the amount of $3,464,365.13, and established an unliq-uidated liability for “all attorneys’ fees and costs of [ACE’s counsel] to collect the Augmented Judgment ... until the judgment has been fully satisfied.” These orders are final, non-appealable and fully enforceable against the Debtors5 and are entitled to res judicata effect in this Court. Section 502 provides the basis for this Court to disallow a validly and timely filed proof of claim, and there is no basis in section 502 to disallow ACE’s claim for post-petition attorneys’ fees and costs to collect the judgment based upon the prior District Court orders. As such ACE’s claim shall include attorneys’ fees and costs “to collect the Augmented Judgment”. This does not answer the secondary question of whether ACE is entitled to assert secured status with respect to the post-petition attorneys’ fees and costs allowed under section 502. Under section 506(b) an oversecured creditor is entitled to a secured claim for “any reasonable fees, costs or charges provided for under the agreement or State statute under which such claim arose.” 11 U.S.C. § 506(b) (emphasis added). This Court finds that because ACE’s entitlement to post-petition attorneys’ fees and costs is premised upon the existence of a judgment, as opposed to an agreement or State statute, the claim for post-petition attorneys’ fees and costs should not be given secured status under section 506(b). Be*224cause the Court will not be examining ACE’s post-petition attorneys’ fees and costs under the lens of section 506(b), the “reasonableness” of the fees and costs is not an issue; rather, the standard to be applied to determine the allowance or dis-allowance of the claim under section 502 is that which is delineated in the Judgment, i.e., this Court will allow only those attorneys’ fees and costs which it finds were incurred to “collect the Augmented Judgment.”
ACE shall have a secured claim in these cases for at least the stipulated amount of $3,464,365.13, less expert witness fees, and will be entitled to an unsecured claim for the amount of post-petition attorneys’ fees and costs it incurred to “collect the Augmented Judgment.”
Facts
On May 17, 2010, a stipulated judgment was entered against one of the debtors, Rubin Family Irrevocable Stock Trust (“Stock Trust”), in the District Court for the District of Utah in the original amount of $1,174,426.46, plus $392,805.94 in interest, plus $164,418.97 in attorneys’ fees and costs, for a total judgment amount of $1,731,651.37 (“Utah Judgment”). The Utah Judgment also awarded, prospectively, “attorneys fees to collect the judgment.” The Utah Judgment is final and non-appealable.
ACE subsequently domesticated the Utah Judgment in the Southern District of New York and pursued enforcement proceedings against the Stock Trust and related entities and individuals. In an Order and Judgment, dated April 23, 2013, the District Court for the Southern District of New York (“Southern District Court”) added interest to the Utah Judgment, from May 1, 2010 to April 22, 2013, in the amount of $628,472.01. The District Court also augmented the Utah Judgment “to add all attorneys’ fees and costs related to collection of the Judgment through the present proceedings.... [and] further augmented [the Utah Judgment] to add all attorneys’ fees and costs related to the action in the United States District Court for the District of Utah contingent on any order or determination issued by that Court....”6 (the “Augmented Judgment”).
In the April 23, 2013 Order and Judgment, the Southern District Court also found the following related entities to be jointly and severally liable for the Augmented Judgment: the Stock Trust, Rubin Family Irrevocable Marital Trust (“Marital Trust”)7, the Rubin Family Irrevocable Realty Trust (“Realty Trust”), Robert Michael Rubin, individually (“Robert”), and Margery Rubin, individually (“Margery”). Finally, the Southern District Court held, “[sjubject to an appeal, the Augmented Judgment shall be further augmented by adding interest from April 22, 2013 onwards at a rate of 12% interest and for all attorneys’ fees and costs of Windels Marx and Parsons Behle to collect the Augmented Judgment (the “Final Augmented Judgment”) until the judgment has been fully satisfied.” In addition to adding the $628,472.01 in interest to the Utah Judgment, the April 23rd Order and Judgment also created a yet unliquidated liability for ACE’s attorneys’ fees and costs to collect the Augmented Judgment and specifically contemplated the entry of a subsequent “Augmented Judgment” and “Final Augmented Judgment.”
*225On April 27, 2013, before the Augmented Judgment or Final Augmented Judgment could be entered liquidating the amount of attorneys’ fees and costs to be awarded under the April 23rd Order and Judgment, the Stock Trust, the Realty Trust and Margery filed for protection under chapter 11 of the Bankruptcy Code.
On May 8, 2013, the Southern District Court, recognizing that the bankruptcy filings by the Stock Trust, Realty Trust and Margery stayed the entry of judgment against those entities, entered the Augmented Judgment only as against Robert Rubin, individually, in the amount of $3,464,365.13, “together with 12% compound interest, until paid.” The Southern District Court further stated that, “[ACE] may petition this Court in the future for further augmentation of the Augmented Judgment for interest, costs and attorneys fees to collect the Judgment.” (emphasis added).
Robert Rubin filed a chapter 11 petition on June 16, 2013.
The Debtors appealed the April 23rd and May 8th Orders and Judgments to the Second Circuit Court of Appeals. On the Debtors’ motion, this Court lifted the stay imposed by section 362(a) of the Bankruptcy Code and allowed the parties to proceed with the appeal. On April 17, 2014, the Second Circuit affirmed the April 23rd and May 8th Orders and Judgments. The Circuit affirmed the finding of joint and several liability contained in the April 23rd Order, and affirmed the District Court’s award of attorneys’ fees. The Circuit vacated the Augmented Judgment only to the extent it improperly awarded ACE its expert witness fees, and remanded “so that the district court may correspondingly revise the Augmented Judgment.”
On February 13, 2014, ACE filed two proofs of claim in each of these cases — one secured and one unsecured — asserting a claim against each Debtor in the amount of $3,464,365.13 — the amount of the liability determined up to and including the May 8th Augmented Judgment. Although not included within the claims as originally filed, ACE also argues that it is entitled to be paid post-petition interest, post-petition attorneys’ fees and post-petition costs— which are laid out in ACE’s supplement to its proof of claim, filed on August 8, 2014. According to ACE, its claim as so augmented would amount to $5,170,953.838 through and including September 8, 2014, with interest, attorneys’ fees and costs continuing to accrue until final payment has been made.
On May 15, 2014, the Debtors objected to ACE’s claim, but solely to the extent that the claim seeks post-petition attorneys’ fees and costs to collect the pre-petition judgment. The Debtors’ primary argument in the original objection was that the New York Debtor and Creditor Law section 276-a, upon which the Southern District Court based its award of attorney fees’ and costs, only allows such fees and costs to accrue up to the point of judgment. The Debtors also argue that even if fees and costs were allowable past the point of the judgment, the filing of the bankruptcy prohibits ACE’s collection of such fees and costs. Although the Debtors argue that post-judgment fees are improper under the statute, their moving papers conclude by asking this Court to “exclude all post-petition date attorneys’ fees and costs ...” [Dkt # 237-1 at 10]. It was *226subsequently clarified at a hearing held on June 16, 2014, that the Debtors are objecting only to the inclusion of post-petition attorneys’ fees and costs, rather than post-judgment. The Sixth Amended Joint Plan of Reorganization, filed by the Debtors on June 80, 2014 concedes that ACE has a claim in the amount of $8,464,365.13 (less expert witness fees disallowed by the Circuit) plus interest at 12% per annum from the date of the ACE judgment to the payment date, and the only open issue is “such additional amounts, if any, that the Bankruptcy Court allows on account of legal fees incurred by ACE subsequent to the date of the ACE Judgment.” [Dkt # 265, ¶ 1.3].
ACE responds to the Debtors’ objection to claim arguing primarily that the Southern District Court’s orders awarding them attorneys’ fees and costs through the date of collection are res judicata and any finding by this Court that ACE is not entitled to assert a claim for attorneys’ fees and costs up through the point of collection would be an improper collateral attack on valid and enforceable orders of the Southern District Court. ACE also argues that the Debtors’ interpretation of the N.Y. DCL 276-a is wrong, but in any event, is irrelevant because the Southern District Court’s order is final and non-appealable and must be upheld by this Court. Absent any basis for finding ACE’s claim unenforceable outside of bankruptcy, ACE argues that there must be some basis under the Bankruptcy Code to disallow a claim for post-petition attorneys’ fees and costs — and, they argue, there is none. See Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007); Ogle v. Fid. & Deposit Co. of Maryland, 586 F.3d 143 (2d Cir.2009); 11 U.S.C. § 502(b).
Analysis
The allowance and disallowance of claims against a bankruptcy estate are governed by section 502 of the Bankruptcy Code. Section 502 provides that:
(a) a claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, ... objects.
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim... as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that—
... (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured; [or]
... (2) such claim is for unmatured interest; ....
11 U.S.C. § 502(a) and (b)(1), (2) (emphasis added).
A “claim” means “a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured ...” 11 U.S.C. § 101(5).
Consistent with section 502, it is a well-excepted principal that claims enforceable under applicable non-bankruptcy law will be allowed in bankruptcy unless they are expressly disallowed under section 502. . Travelers Casualty & Surety v. Pacific Gas & Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007). With respect to the specific issue of an unsecured creditor’s right to assert a claim in bankruptcy for post-petition attorneys’ fees and costs, the Supreme Court in *227Travelers v. PG & E, held that a creditor was not precluded from asserting an unsecured claim for post-petition attorneys’ fees, as long as that creditor has an enforceable basis — under a contract in that case — to assert such a claim. The Travelers decision was based on the Court’s interpretation of section 502(a) and (b), as well as the definition of claim in section 101 of the Bankruptcy Code, and relied in part on the general presumption “that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.” Travelers, 549 U.S. at 452-53, 127 S.Ct. 1199 (citing 11 U.S.C. § 502(b)).
Subsequent to the Travelers decision, the Second Circuit in 2009 held that an unsecured creditor was entitled to recover post-petition attorneys’ fees that were authorized by an otherwise enforceable prepetition contract of indemnity but which were contingent on post-petition events. Ogle v. Fidelity & Deposit Co., 586 F.3d 143 (2d Cir.2009). In Ogle, the Circuit held that “an unsecured claim for post-petition fees, authorized by a valid pre-petition contract, is allowable under section 502(b) and is deemed to have arisen pre-petition.” Ogle, 586 F.3d at 147. In Ogle, the Court of Appeals addressed one argument that the Supreme Court failed to address in Travelers-, that is, whether section 506(b) which allows post-petition fees and costs to the oversecured creditor dictates the conclusion that unless a creditor qualifies under section 506(b), that creditor cannot be entitled to post-petition fees and costs. The Second Circuit concluded that it did not. Ogle, 586 F.3d at 148 (“... [W]e hold that section 506(b) does not implicate unsecured claims for post-petition attorneys’ fees, and therefore interposes no bar to recovery.”). See also In re SNTL Corp., 380 B.R. 204 (9th Cir. BAP 2007) (finding section 506 to be “irrelevant to determining the allowability of an unsecured claim”, and relying solely on section 502 to determine allowance of post-petition attorney fees and costs).
Although the Second Circuit appears to hold the minority view on this issue, it is nonetheless precedent which is binding on this Court. See, e.g., In re Seda France, Inc., No. 10-12948, 2011 WL 3022563, slip op. at 1 (Bankr.W.D.Tex. July 22, 2011) (stating that a majority of courts hold that an “unsecured creditor is not entitled to collect post-petition attorneys’ fees, costs, and other similar charges — even if there is an underlying contractual right to do so.”) (citing In re Electric Machinery, 371 B.R. 549 (Bankr.M.D.Fla.2007)).
Although the facts of both Ogle and Travelers involved pre-petition contracts upon which the claim to attorneys’ fees was based, the holdings of those cases also extend to claims for attorney fees’ and costs which are based upon statute. See Travelers, 549 U.S. at 448, 127 S.Ct. 1199 (explaining that the “American Rule” can be overcome by statute or enforceable contract). As conceded by ACE, its claim for post-petition attorneys’ fees and costs is not based upon a pre-petition contract, nor is it based upon any statute allowing for the recovery of same. Rather, ACE’s claim for post-petition attorneys’ fees and costs is based upon the pre-petition orders and judgments of both the Utah District Court and the Southern District Court, as subsequently affirmed by the Court of Appeals for the Second Circuit. Both Travelers and Ogle contain language which seems to limit the unsecured creditor’s claim for post-petition attorneys’ fees and costs to those which are based upon a valid pre-petition contract or statute. The decisions are silent as to valid and enforceable pre-petition judgments. However the very logic of the opinions, and the plain language of sections 101(5) and 502(b)(1), *228seems to make clear that a creditor’s claim predicated on a final and enforceable pre-petition judgment must be treated the same way.
The Utah Judgment imposed liability, albeit an unliquidated liability, against the Stock Trust for “attorneys fees to collect the judgment.” Neither party disputes that the Utah Judgment is final and non-appealable. Therefore, the Utah Judgment is res judicata on the issue of the Stock Trust’s unliquidated liability to ACE for “attorneys fees to collect the judgment.” Most importantly, the Utah Judgment is, except for the stay imposed by these bankruptcy filings, enforceable. Section 101(5) defines a “claim” as any right to payment, including a right to payment that is unliquidated on the petition date. Section 502(b)(1) requires this Court to disallow any claim which is unenforceable against the debtor. Although this Court could find no caselaw authority to extend the rule of Travelers and Ogle to claims based upon an enforceable pre-petition judgment as opposed a contract or statute, the language of section 502(b)(1) and the reasoning supporting both Travelers and Ogle, lead this Court to conclude that the rule should be so extended. This Court cannot find that ACE’s claim for “attorneys fees to collect the [Utah] judgment” is “unenforceable ... under any agreement or applicable law,” 11 U.S.C. § 502(b)(1), nor is there otherwise any basis to disallow such claim under another subsection of 502(b).
Similarly, the April 23rd Order and Judgment imposed an unliquidated liability against the Stock Trust, Realty Trust, Robert and Margery, for “all attorneys fees and costs related to collection of the Judgment through the present proceedings ... [plus] all attorneys’ fees and costs related to the [Utah action] contingent on any order or determination issued by that Court.” The dollar amount of the liability established by the April 23rd Order and Judgment was liquidated in the May 8th Augmented Judgment, but only as against Robert.9 Nonetheless, the Debtors have stipulated that the $3,464,365.13 liability established against Robert only in the May 8th Augmented Judgment, will be allowed against all of the Debtors. This agreement is reflected in the latest iteration of the Debtors’ plan of reorganization.
The April 23rd Order and Judgment also established further liability as against the Stock Trust, Realty Trust, Margery and Robert “for all attorneys’ fees and costs of Windels Marx and Parsons Behle to collect the Augmented Judgment (“The Final Augmented Judgment”) until the judgment has been fully satisfied.” The April 23rd Order and Judgment, affirmed by the Second Circuit, is final and therefore is res judicata on the issue of the Stock Trust, Realty Trust, Margery and Robert’s liability for the attorneys’ fees and costs of Windels Marx and Parsons Behle to collect the Augmented Judgment “until the judgment has been fully satisfied”. Although the attorneys’ fees and costs of Windels Marx and Parsons Behle through April 22, 2013 were included in the Augmented Judgment, such fees and costs remain unliquidated beyond April 22, 2013. Although the liability remains unliq-uidated it is nonetheless a valid pre-petition liability for which ACE may assert a *229claim in this bankruptcy case. ACE’s supplemental proof of claim filed on August 8, 2014 would liquidate and further augment the judgment in the total amount of $5,170,704.67. The sole issue to be determined in this case going forward is whether and to what extent the attorneys’ fees and costs sought by ACE in its supplemental proof of claim, dated August 8, 2014 [Dkt # 282] constitute fees and costs of the named counsel “to collect the Augmented Judgment ...” The Debtors have retained their right to argue that certain of ACE’s fees and costs in connection with this bankruptcy ease do not qualify as costs of “collection”.
ACE’s argument that it is entitled to secured status for the amount of its post-petition attorneys’ fees and costs under section 506, fails. Section 506(b) specifically grants secured status to the ov-ersecured creditor for “any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.” (emphasis added). As this Court found, ACE’s claim in this case arises from the April 23rd and May 8th Orders and Judgments of the Southern District Court, not from an agreement or State statute. Thus section 506(b) does not apply.
Conclusion
Having determined that ACE is entitled to assert a claim in this case which includes post-petition attorneys’ fees and costs associated with collecting the Augmented Judgment, this matter will be adjourned for further proceedings to finally determine the amount of ACE’s claim; specifically to determine to what extent ACE’s post-petition attorneys’ fees and costs were incurred to “collect the Augmented Judgment.” In this regard, the Debtors have retained the right to dispute certain, or all, of ACE’s post-petition attorneys’ fees and costs on the basis that some or all of those fees and costs were not incurred to “collect the judgment.”
.Also pending is ACE’s related motion for relief from stay to permit it to return to the District Court for the Southern District of New York in order to augment its pre-petition judgment against the Debtors to seek post-judgment attorneys’ fees and costs. The Debtor opposed the motion and argued that the Bankruptcy Court is the appropriate forum to liquidate ACE's claim. The parties have now resolved this dispute and consent to this Court's liquidation of the amount of ACE's claim which would negate any need to return to the District Court.
. ACE claims that the expert witness fee reduction should be $33,762.50, thus reducing the stipulated amount of ACE's claim to $3,430,602.63. [Dkt #281],
. The Court presumes for purposes of this Decision that ACE is oversecured, but recognizes that the parties might not concede this *223point. The parties' stipulation is inconsistent on this point. The stipulation provides both that the collateral value is greater than $3,464,365.13, and that ACE is secured “in an amount equal to” $3,464,365.13. However, as will be seen later in this Decision, the distinction between secured and oversecured does not matter in this case because the Court finds that section 506(b) does not apply where, as here, the claim to post-petition attorneys' fees and costs does not arise from contract or statute as required by section 506(b).
. As discussed later in this Decision, the Court recognizes that the judgment is not against all Debtors. However, the Debtors have proposed a joint plan which proposes to pay the amounts due under the Orders and Judgments jointly.
. Again, the Court recognizes that the Orders and Judgments were not entered as against all Debtors. However, the Debtors at all times in this case have proposed to treat these Debtors as jointly liable, assuming that the finding of joint and several liability was upheld by the Second Circuit, which it was.
. The Utah Court subsequently declined to consider any further proceedings in that case, and marked the matter closed.
. The Marital Trust is not a debtor before this Court.
. This number includes a $33,762.50 reduction in the claim amount for expert witness fees which were disallowed by the Circuit Court. To the extent the Debtors disagree with the amount of ACE’s allowance for expert witness fees, that will be the subject of further proceedings before this Court to finally liquidate the amount of the claim.
. The Debtors argue that the language in the May 8th Augmented Judgment giving permission to ACE to petition that Court for further augmentation of the Augmented Judgment for attorneys’ fees and costs to collect the Judgment means that the future fees and costs were not actually awarded, but rather was subject to further application, and the right to seek further application was cut off by the bankruptcy. This argument ignores the prior finding of liability for same contained in the April 23rd Order and Judgment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497446/ | Chapter 13
DECISION
CARLA E. CRAIG, Chief United States Bankruptcy Judge
This matter comes before the Court on the motion of the debtor, Eric H. Richmond, to reconsider and reargue the Court’s decision and order granting the motion of P.B. # 7 LLC (“P.B.”) to lift the automatic stay, pursuant to § 362(d)(4).1 Because the motions to reconsider and reargue fail to set forth grounds for relief under Federal Rule of Civil Procedure 59(e), and because they raise arguments already considered and rejected, the motions are denied.
JURISDICTION
This Court has jurisdiction of this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (G), 28 U.S.C. § 1334, 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
This chapter 13 case was filed shortly after the automatic stay was vacated in the single asset real estate chapter 11 case of 231 Fourth Avenue Lyceum (“Lyceum”) (13-42125-CEC), to permit P.B. to pursue foreclosure on real property located at 227-231 4th Avenue, Brooklyn, New York (the “Property”).2 Eric Richmond, the debtor in this chapter 13 case (the “Debt- *232or”), is the principal and sole shareholder of Lyceum, and is a defendant in P.B.’s foreclosure action. P.B. is the holder of a judgment of foreclosure and sale against both Lyceum and the Debtor (the “Foreclosure Judgment”). The Debtor’s and Lyceum’s bankruptcy cases were each filed to stay P.B.’s foreclosure of the Property.
In Lyceum’s bankruptcy case, the Court granted a motion by P.B. to lift the automatic stay with respect to the Property. In re 231 Fourth Ave. Lyceum, LLC, 506 B.R. 196, 203 (Bankr.E.D.N.Y.2014). The decision to lift the automatic stay was based upon the fact that Lyceum’s proposed plan of reorganization was not feasible and that Lyceum was barred from attacking the Foreclosure Judgment in bankruptcy court by reason of the Rooker-Feldman doctrine and principles of res judicata. Id. at 206-208. Lyceum filed a motion seeking reconsideration of the decision to lift the stay, which was denied by decision and order dated July 17, 2014. In re 231 Fourth Ave. Lyceum, LLC, 513 B.R. 25 (Bankr.E.D.N.Y.2014); (Mot. to Rear-gue or Renew, 13-42125-CEC, ECF No. 92; Decision, 13-42125-CEC, ECF No. 101; Order, 13-42125-CEC, ECF No. 102.)
After the stay was lifted, P.B. sought permission from the state court to file a notice of sale. (Affirmation in Supp., 14-41678-CEC, ECF No. 9 at ¶ 6.) One day before the return date of P.B.’s motion in state court, the Debtor commenced this bankruptcy case.
On April 15, 2014, P.B. filed a motion in this case seeking relief from the automatic stay pursuant to § 364(d)(4) and an affirmation in support (respectively, the “Motion for Relief’ and the “Affirmation”). (Mot. for Relief from Stay, 14 — 41678-CEC, ECF No. 8; Affirmation in Supp., 14-41678-CEC, ECF No. 9.) On May 13, 2014, the Debtor filed an affirmation in opposition to the Motion for Relief (the “Opposition”). (Affirmation in Opp’n, 14-41678-CEC, ECF No. 15.) On May 16, P.B. filed an affirmation in reply and further support (the “Reply Affirmation”). (Affirmation in Reply and Further Supp., 14-41678-CEC, ECF No. 16.)
On July 17, 2014, the Court entered a decision and order granting the Motion for Relief (respectively, the “Decision” and the “Order”). In re Richmond, 513 B.R. 34 (Bankr.E.D.N.Y.2014); (Decision, 14-41678-CEC, ECF No. 55; Order, 14-41678-CEC, ECF No. 57.) In the Decision, the Court found that the Debtor’s and Lyceum’s bankruptcy were each filed on the eve of significant events in the foreclosure action and that the timing of the filings permitted an inference that the Debtor was attempting to hinder or delay P.B.’s efforts to enforce the Foreclosure Judgment. In re Richmond, 513 B.R. at 38-39. The Court rejected the Debtor’s argument that the Rooker-Feldman doctrine and principles of res judicata did not apply to the Foreclosure Judgment. Id. at 39-40. The Court also rejected the Debt- or’s argument that the Foreclosure Judgment was void because the Kings County Supreme Court entered the Foreclosure Judgment in violation of New York Civil Practice Law and Rules § 3215(c). Id. at 39. Finally, the Court determined that the Debtor had no ability to restructure the debt secured by the Property in his chapter 13 bankruptcy case, as the Property was not property of the Debtor’s estate. Id. at 39-41.
On July 28, 2014, the Debtor filed a Motion to Reconsider Lifting of the Stay, and on July 31, 2014, he filed a Motion to Reargue Lifting of the Stay (respectively, the “Motion to Reconsider” and the “Motion to Reargue”; collectively, the “Motions”). (Mot. to Reconsider Lifting of the *233Stay, 14-41678-CEC, ECF No. 61; Mot. to Reargue Lifting of the Stay, 14-41678-CEC, ECF No. 62.) On August 6, 2014, P.B. filed affirmations in opposition to the Motions (respectively, the “Reconsideration Opposition” and the “Reargument Opposition”). (Affirmation in Opp’n, 14-41678-CEC, ECF No. 63; Affirmation in Opp’n, 14-41678-CEC, ECF No. 65.) On August 11, 2014, the Debtor filed affirmation in further support of the Motions (respectively, the “Reconsideration Affirmation” and the “Reargument Affirmation”). (Affirmation in Further Supp., 14-41678-CEC, ECF No. 67; Affirmation in Further Supp., 14-41678-CEC, ECF No. 68.)
On August 14, 2014, an amended order granting the Motion for Relief was entered, which amended the Order by identifying the block and lot number and legal description of the Property and by including a direction to the New York City Department of Finance Office of the City Register to accept a certified copy of that order for recordation. (Amended Order, 14-41678-CEC, ECF No. 71.) On August 25, 2014, the Debtor filed a motion to reconsider that amended order, and, on August 27, 2014, the Debtor filed a motion to reargue the amended order. (Mot. to Reconsider Decision and Order dated August 13, 2014, 14-41678-CEC, ECF No. 77; Mot. To Reargue Lifting of Automatic Stay, 14-41678-CEC, ECF No. 80.) These motions raise the same factual and legal arguments as the Motion to Reconsider and the Motion Reargue and are also disposed of by this decision.
ARGUMENTS
The Debtor raises four arguments in the Motions: (1) that the Court erred when it determined that the Debtor was a serial filer; (2) that the Court erred when it determined that the Debtor’s attempt to collaterally attack the Foreclosure Judgment was barred by res judicata, because the fraud which the Debtor claims was committed by a lawyer in the foreclosure action falls within the extrinsic fraud exception to the doctrine of res judicata; (3) that the Court erred when it determined that the Rooker-Feldman doctrine barred collateral attack of the Foreclosure Judgment, because the entry of the Foreclosure Judgment pursuant to New York Civil Practice Law and Rules § 3215(c) a ministerial, not judicial act; and (4) that the Court erred when it determined that the Rooker-Feldman doctrine barred collateral attack of the Foreclosure Judgment, because, according to the Debtor, he is complaining of injuries not caused by the Foreclosure Judgment.
LEGAL STANDARD
1. Motion to Reconsider
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. A motion to reconsider must be filed within 14 days of the entry of the judgment. Fed. R. Bankr.P. 9023. The Order was entered on July 17, 2014 and the Motion to Reconsider was filed on July 28, 2014, within the time allowed under Bankruptcy Rule 9023.
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 *234need 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). 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)). “[Reconsideration 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).
2. Motion to Reargue
The Bankruptcy Rules and the Federal Rules do not provide for a motion to rear-gue; nor do the Local Bankruptcy Rules for the Eastern District of New York. Although the Local Rules of the United States District Courts for the Southern and Eastern Districts of New York Rule 6.3 provides for “Motions for Reconsideration or Reargument”, these rules are not applicable in matters before this Court. For this reason, the Motion to Reargue is denied, and this decision will treat any argument raised in the Motion to Reargue as through it had been made in the Motion to Reconsider.
DISCUSSION
1. Section 362(d)(1) is Applicable in this Case
The Debtor argues that the Court abused its discretion when it determined that the Debtor is a serial filer based on his own bankruptcy filing and Lyceum’s filing. (Mot. to Reconsider Lifting of the Stay, 14-41678-CEC, ECF No. 61 at ¶¶2-10.) The Debtor contends that “serial is meant to include filings subsequent to a dismissal and without an intervening cause” and that “[sjerial implies sequential, completed acts.” Id. at ¶¶ 4, 6.
The Court granted relief from the automatic stay pursuant to § 362(d)(4), which provides for stay relief:
[W]ith respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an *235interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved either—
(A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting such real property.
11 U.S.C. § 362(d)(4). Section 362(d)(4) does not require any finding that the Debt- or is a serial filer, but rather that “the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved ... multiple bankruptcy filings affecting such real property.” Id. A bankruptcy court can “infer an intent to hinder, delay, and defraud creditors from the fact of serial filings alone.” In re Procel, 467 B.R. 297, 308 (S.D.N.Y.2012) (quoting In re Blair, No. 09-76150, 2009 WL 5203738, at *4-5 (Bankr.E.D.N.Y. Dec. 21, 2009)). The Debtor argues, without citing any authority, that “serial filings” means filings subsequent to a dismissal and that it implies completed acts. (Mot. to Reconsider Lifting of the Stay, 14-41678-CEC, ECF No. 61 at ¶¶ 4, 6.) The Court declines to accept the Debtor’s definition of “serial filings”. The number of filings is only one factor that the court must weigh in determining whether relief under § 362(d)(4) is warranted. See In re Montalvo, 416 B.R. 381, 387 (Bankr.E.D.N.Y.2009). “The timing and sequencing of the filings is also significant.” Id.
In the Decision, the Court found that Lyceum’s chapter 11 filing was timed to stop P.B.’s foreclosure sale and that it was followed by the Debtor’s chapter 13 filing, shortly after the stay was lifted in Lyceum’s case. In re Richmond, 513 B.R. at 38. Both the Debtor’s and Lyceum’s filings were on the eve of significant events in the foreclosure action. Id. Lyceum filed its case on the eve of a foreclosure sale and the Debtor’s case was filed on the eve of the return date of P.B.’s motion in state court to file a notice of foreclosure sale. Id. The timing of both filings permitted an inference that the Debtor is attempting to hinder or delay P.B.’s efforts to enforce the Foreclosure Judgment. Id.
The Court found that the Debtor’s conduct in prosecuting his bankruptcy case and Lyceum’s case also weighed in favor of granting relief under § 362(d)(4). Id. In Lyceum’s case, the Court determined that Lyceum’s proposed plan of reorganization was not feasible, as Lyceum failed to show that it could meet its obligations under the proposed plan. Id. (citing Lyceum, 506 B.R. at 203). In the Debtor’s case, the Court determined that the Debtor was using this bankruptcy case “as a vehicle to attack the Foreclosure Judgment, when this Court has already determined that he may not do so.” In re Richmond, 513 B.R. at 40. The Decision was the Court’s third decision rejecting the Debtor and Lyceum’s arguments that the Foreclosure Judgment may be collaterally attacked in this Court. See In re 231 Fourth Ave. Lyceum, LLC, 506 B.R. 196; In re 231 Fourth Ave. Lyceum, LLC, 513 B.R. 25; In re Richmond, 513 B.R. 34.
The “timing and sequence” of the Debt- or’s and Lyceum’s filings carry significant weight demonstrating a “scheme to delay, hinder, or defraud creditors”. The evidence of a “scheme to delay, hinder, or defraud creditors” is further supported by the Debtor’s continued efforts to use the bankruptcy filings to collaterally attack the Foreclosure Judgment, notwithstanding repeated rulings that such a collateral attack is precluded by res judicata and Rooker-Feldman.
2. Extrinsic v. Intrinsic Fraud
The Debtor contends that the doctrine of red judicata does not preclude a *236collateral attack on the Foreclosure Judgment because, the Debtor claims, P.B. moved for a default judgment that action at a time when it lacked standing to do so. (Mot. to Reconsider Lifting of the Stay, 14-41678-CEC, ECF No. 61 at ¶¶ 13-22; Affirmation in Opposition, 14-41678-CEC, ECF No. 30 at ¶¶ 23-26.) The Debtor contends that this constituted extrinsic fraud, and that for this reason this Court erred in holding that the Debtor’s efforts to collaterally attack the Foreclosure Judgment based on these allegations is barred by red judicata. Id.
Some courts have held that New York’s doctrine of res judicata does not preclude collateral attack upon judgments obtained by extrinsic, as opposed to intrinsic fraud. In re Slater, 200 B.R. 491, 496 (E.D.N.Y.1996) (citing Altman v. Altman, 150 A.D.2d 304, 542 N.Y.S.2d 7, 9 (1989)). Extrinsic fraud involves the parties’ “opportunity to have a full and fair hearing,” while intrinsic fraud involves an “underlying issue in the original lawsuit.” In re Slater, 200 B.R. at 496 (citing Altman, 542 N.Y.S.2d at 9). No extrinsic fraud is alleged in connection with the Foreclosure Judgment, such as, for example, threats of physical harm or the misrepresentation that the action would be discontinued. Compare Slater, 200 B.R. at 496 (“[T]he [d]ebtor’s allegations that her brother physically assaulted her and threatened her life before and during the trial ... does constitute extrinsic fraud sufficient to attack the state court judgment.”); Tamimi v. Tamimi, 38 A.D.2d 197, 328 N.Y.S.2d 477, 484 (1972) (“Upon the undisputed testimony in this case the [party] was ‘robbed’ of her opportunity to make her defense in the Thai court by reason of the [other party]’s fraud and misrepresentation that he would discontinue the action which he had instituted against her.”). The Debtor’s assertions that P.B. lacked standing or that P.B.’s counsel misled the state court do not constitute allegations of extrinsic fraud. Altman, 542 N.Y.S.2d at 9; St. Clement v. Londa, 8 A.D.3d 89, 779 N.Y.S.2d 460, 461 (2004). (“The remedy for fraud allegedly committed during the course of a legal proceeding must be exercised in that lawsuit by moving to vacate the civil judgment (CPLR 5015(a)(3)), and not by another plenary action collaterally attacking that judgment.”).
3. Entry of the Foreclosure Judgment was Judicial
The Debtor contends that entry of the Foreclosure Judgment was a ministerial act, and that as such, the Rooker-Feldman doctrine does not preclude the Debtor’s attack on the Foreclosure Judgment in this Court. (Mot. to Reconsider Lifting of the Stay, 14-41678-CEC, ECF No. 61 at ¶ 23.) The Debtor cites no authority for the proposition that entry of a judgment is ministerial in nature. The Court addressed this argument in connection with Lyceum’s motion to reconsider and found the argument to be entirely meritless. See In re 231 Fourth Ave. Lyceum, LLC, 513 B.R. at 32. As stated in that decision, the Second Circuit has held that judicial proceedings continue to the moment the judge directs entry of judgment. Rexnord Holdings v. Bidermann, 21 F.3d 522, 528 (2d Cir.1994) (“The judicial proceedings were concluded at the moment the judge directed entry of judgment, a decision on the merits having then been rendered.”). The Kings County Supreme Court’s determination to grant a default judgment in the foreclosure action was clearly judicial in nature. Any collateral attack on the Foreclosure Judgment in this Court is therefore precluded by the Rooker-Feldman doctrine.
The Debtor cites several New York state court cases which denied entry of a default judgment when the application was made more than one year after the default. (Mot. to Reconsider Lifting of the Stay, 14-41678-CEC, ECF No. 61 at ¶25.) *237New York Civil Practice Law and Rules § 3215(c) provides that a court “shall dismiss the complaint as abandoned ... unless sufficient cause is shown why the complaint should not be dismissed.” N.Y. C.P.L.R. § 3215(c). P.B., in the Reconsideration Opposition, provided the decision and order of the Kings County Supreme Court which denied the Debtor’s motion to dismiss the foreclosure action pursuant to New York Civil Practice Law and Rules § 3215(c). (Affirmation in Opp’n, Ex. A, 14-41678-CEC, ECF No. 63-1.) In that decision, Judge Kurtz found that P.B. “offers a sufficient excuse for not moving for a default judgment within the year prescribed by CPLR § 3215(c).” Id. at 2. The Debtor failed to disclose Judge Kurtz’s decision and once again raises arguments that have been considered and rejected not only by this Court, but also by the Kings County Supreme Court.
The Debtor further argues that the King County Supreme Court did not have jurisdiction over a “statutorily abandoned claim.” (Mot. to Reargue Lifting of the Stay, 14^1678-CEC, ECF No. 62 at ¶¶ 12-13.) The Court has already rejected this argument twice. See In re Richmond, 513 B.R. at 39; In re 231 Fourth Ave. Lyceum, LLC, 506 B.R. at 206. Even if the Kings County Supreme Court erred in entering the Foreclosure Judgment, it clearly had jurisdiction to do so. See generally N.Y. Const, art. VI, § 7 (providing that the supreme courts of the State of New York have “general jurisdiction in law and equity”); Condon v. Associated Hospital Service, 287 N.Y. 411, N.E.2d 230 (1942) (holding that the supreme court is presumed to have jurisdiction of a cause of action unless the contrary plainly appears).
4. The Debtor is Complaining of Injuries Caused by the Foreclosure Judgment
The Rooker-Feldman doctrine applies to cases satisfying a four part test: (1) the federal-court plaintiff lost in state court; (2) the plaintiff “must complain of injuries caused by a state-court judgment”; (3) the plaintiff “must invite district court review and rejection of that judgment”; and (4) “the state-court judgment must have been rendered before the district court proceedings commenced.” Hoblock v. Albany County Bd. of Elections, 422 F.3d 77, 85 (2d Cir.2005). The Debtor contends that he is complaining of fraud on the court by officer of the court that occurred prior to the issuance of Foreclosure Judgment. (Mot. to Reconsider Lifting of the Stay, 14-41678-CEC, ECF No. 61 at ¶ 26.) The Debtor’s argument is without merit, as the injury the Debtor complains of was caused by the issuance of the Foreclosure Judgment, not by the purported fraud. The alleged fraud itself caused no injury from which the Debtor seeks redress in this Court. The Debtor wishes to void the Foreclosure Judgment, which this Court may not do under Rooker-Feldman. See In re Richmond, 513 B.R. at 39-40. The Debtor’s claim of fraud is also barred by principles of res judicata. See id. at 40 (“Under New York law, ‘a final judgment on the merits of an action precludes the parties or their privies from relitigating claims that were or could have been raised in that action.’ Marvel Characters, Inc. v. Simon, 310 F.3d 280, 286-87 (2d Cir.2002).”).
CONCLUSION
For the foregoing reasons, the Debtor’s motions for reconsideration and motions to reargue are denied. A separate order will issue.
. Unless otherwise indicated, statutory citations are to provisions of Title 11, U.S.C.; citations to "Rules” are to the Federal Rules of Civil Procedure and to "Bankruptcy Rules” are to the Federal Rules of Bankruptcy Procedure.
. Familiarity with the facts in Lyceum’s case is assumed. See In re 231 Fourth Ave. Lyceum, LLC, 506 B.R. 196, 200-201 (Bankr.E.D.N.Y.2014) (providing a history of Lyceum’s case). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497447/ | Chapter 7
DECISION
CARLA E. CRAIG, Chief United States Bankruptcy Judge
This matter comes before the Court on the motion of Gerritsen Beach Investments Ltd. (“Gerritsen Beach Investments”) and SSST Riviera Investments I, Ltd. (“SSST Riviera,” and together with Gerritsen Beach Investments, the “Plaintiffs”) for summary judgment declaring a money judgment which they obtained against Stephen Jemal (“Stephen”) and Sharon Jemal (“Sharon,” and together with Stephen, the “Debtors” or “Defendants”) nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B) and (a)(6). The Plaintiffs allege that they were induced by the Debtors’ false financial statement to' transfer their equity interests in certain real estate projects to the Debtors in exchange for an unsecured promissory note. The Debtors argue that questions of material fact concerning whether the Plaintiffs reasonably relied on the financial statement, or were damaged as a result, preclude summary judgment under § 523(a)(2)(B).1 Because there is no question of material fact that the Plaintiffs reasonably relied on the Debtors’ falsified financial statement in accepting the their note in exchange for their interests, summary judgment is awarded, declaring the debt owed by Stephen to the Plaintiffs nondischargeable pursuant to § 523(a)(2)(B). However, material questions of fact concerning the nature and extent of Sharon’s role in the fraud preclude the entry of summary judgment against her.
JURISDICTION
This Court has jurisdiction of this core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I), 28 U.S.C. § 1334, 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 Rule 7052.
BACKGROUND
The following facts are undisputed, or are matters of which judicial notice may be taken, unless otherwise indicated.
In 2005, the Debtors sought financing for real estate development projects in Mill Basin, Sheepshead Bay, and Gerritsen Beach, all located in Brooklyn, New York. (PI. Local Rule 7056-1 Stmt. ¶ 1, ECF No. 20; Def. Local Rule 7056-1 Counter-stmt. ¶ 1, ECF No. 24.)2
*242In December 2005, SSST Riviera contributed $1,550,000 in exchange for a 28% equity interest in SSJ of Mill Basin I Group, LLC (the “Mill Basin Project”), and in February 2006, contributed $1,040,670 in exchange for a 28% equity interest in SSJ Development of Sheeps-head Bay I, LLC (the “Sheepshead Bay Project”). (Pl. Local Rule 7056-1 Stmt. ¶¶ 3, 4, 6, 7, ECF No. 20; Def. Local Rule 7056-1 Counter-stmt. ¶¶3, 4, 6, 7, ECF No. 24.) Later, in March 2006, Gerritsen Beach Investments contributed $2.9 million in exchange for a 28% equity interest in SSJ of Gerritsen Beach I, LLC (the “Gerritsen Beach Project,” and together with the Mill Basin Project and the Sheepshead Bay Project, the “Real Estate Projects”). (Pl. Local Rule 7056-1 Stmt. ¶¶ 9, 10, ECF No. 20; Def. Local Rule 7056-1 Counter-stmt. ¶¶ 9, 10, ECF No. 24.)
In 2007, Stephen sought to obtain a construction loan, which he said was essential to the success of the Real Estate Projects. (Pl. Local Rule 7056-1 Stmt. ¶ 12, ECF No. 20; Def. Local Rule 7056-1 Counter-stmt. ¶ 12, ECF No. 24.) Stephen represented to the Plaintiffs that the potential lender would not extend the loan, and the projects would become worthless, unless the Plaintiffs waived their contractual rights or agreed to sell their 28% interests in each of the Real Estate Projects. (Pl. Local Rule 7056-1 Stmt. ¶¶ 13, 14, ECF No. 20; Def. Local Rule 7056-1 Counter-stmt. ¶¶ 13, 14, ECF No. 24.) The Plaintiffs allege that the Debtors offered to purchase the Plaintiffs’ equity interests in the Real Estate Projects in exchange for a promissory note and pledge agreement. (Pl. Local Rule 7056-1 Stmt. ¶ 15, ECF No. 20.) The Plaintiffs allege that before agreeing to sell their equity interests under those conditions, they requested the Debtors’ personal financial statement. (Pl. Local Rule 7056-1 Stmt. ¶ 16, ECF No. 20.)
The Plaintiffs allege that on September 18, 2007, Stephen emailed the Debtors’ personal financial statement to the Plaintiffs, which reflected that the Debtors’ net worth was in excess of $90 million. (Pl. Local Rule 7056-1 Stmt. ¶¶ 16, 17, ECF No. 20.) The personal financial statement and attached account statements from Southwest Securities reflected that the value of Debtors’ “readily marketable securities” was over $31 million. (Pl. Local Rule 7056-1 Stmt. ¶ 18, ECF No. 20.) The Plaintiffs allege that, in reliance on that financial statement, they sold their 28% equity interests in the Real Estate Projects to the Debtors in exchange for the unsecured promissory note, resulting in the Debtors’ sole ownership of those developments. (Pl. Local Rule 7056-1 Stmt. ¶¶ 20, 21, ECF No. 20.)
The Debtors defaulted on the promissory note, and, on April 9, 2010, the Plaintiffs obtained a money judgment against them in the amount of $7,887,325.70. (Pl. Local Rule 7056-1 Stmt. ¶22, ECF No. 20.) The Plaintiffs allege that, when they attempted to collect on the judgment, they discovered that the Debtors’ personal financial statement falsely reflected that they owned “tens of millions of dollars in stocks such as Google, Halliburton, Microsoft and Intel,” whereas in reality, the Debtors owned assets of nominal value only. (Pl. Local Rule 7056-1 Stmt. ¶¶ 19, 23, ECF No. 20.)
On May 25, 2012, the Debtors filed a voluntary petition under chapter 7 of the Bankruptcy Code. (Voluntary Petition, Case No. 12-43825, ECF No. 1.) Schedule A lists three real properties, valued at $3.52 million, all of which are listed a fully *243encumbered. (Schedule A, Case No. 12-43825, ECF No. 23.) Schedule B lists personal property valued at $17,119.34, including a total of $2,350.32 held in brokerage accounts, custodial brokerage accounts, and a joint savings account with the Debtors’ son. (Schedule B, Case No. 12-43825, ECF No. 23.) Schedule B also lists the Debtors’ equity interest in 41 limited liability companies, including the three real estate developments, and values those interests at $0. (Schedule B, Case No. 12-43825, ECF No. 23.)
On August 31, 2012, the Plaintiffs commenced this adversary proceeding to obtain a determination that the debt owed to them is nondischargeable, and on February 7, 2014, the Plaintiffs moved for summary judgment pursuant to Rule 7056 seeking a determination that the debt owed to them is nondischargeable under §§ 523(a)(2)(B) and (a)(6).
LEGAL STANDARD
I. Summary Judgment
Summary judgment is appropriate “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); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is considered material if it “might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). No genuine issue exists “unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted.” Id. at 249-50, 106 S.Ct. 2505 (citations omitted). “More specifically, [the opposing party] must do more than simply show that there is some metaphysical doubt as to the material facts, and may not rely on conclusory allegations or unsubstantiated speculation.” Brown v. Eli Lilly & Co., 654 F.3d 347, 358 (2d Cir.2011) (citations omitted).
II. Nondischargeability under § 523(a)(2)
The Plaintiffs seek summary judgment determining that the debt owed to them is nondischargeable pursuant to § 523(a)(2)(B), which provides:
A discharge under section 727 ... does not discharge an individual debtor from any debt — for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ...
(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 deceive.
11 U.S.C. § 523(a)(2)(B).
A creditor may be granted summary judgment on a determination of non-dischargeability by establishing the absence of any genuine issue of material fact as to each of the elements of its claim. In re Kelley, 163 B.R. 27, 34 (Bankr.E.D.N.Y. 1993). • Because the nondischargeability of a debt may have “harsh consequences” for a debtor, “exceptions to discharge are to be narrowly construed and genuine doubts should be resolved in favor of the debtor.” Denton v. Hyman (In re Hyman), 502 F.3d 61, 66 (2d Cir.2007).
*244
DISCUSSION
The Plaintiffs argue that they are entitled to relief under § 523(a)(2)(B) because, in reliance on the falsified financial statements, they sold their interests in the Real Estate Projects in exchange for the Debtors’ promissory note. The Plaintiffs argue that the financial statements, which were intentionally falsified and provided by Stephen, were materially false because they represented that the Debtors’ net worth was over $90 million, and that the value of their “readily marketable securities” was over $31 million, when, in reality, the Debtors did not own assets close to that value. (PL Mem. of Law in Supp., at 9, ECF No. 21.)
Documentary evidence establishes that Stephen transmitted the falsified financial statement to the Plaintiffs to induce them to sell their interests in the Real Estate Projects to the Debtors. (Aff. of Douglas A. Tatum dated February 5, 2014 (“Tatum Aff.”), Ex. G, ECF No. 19.) Although the Defendants generally deny “knowledge or information sufficient to form a belief’ as to these allegations, they do not specifically dispute either that the financial statements were falsified or that they were provided by Stephen to the Plaintiffs to induce the Plaintiffs to transfer their interests in the Real Estate Projects. See PI. Local Rule 7056-1 Stmt. ¶¶ 16-19, ECF No. 20; Def. Local Rule 7056-1 Counter-stmt. ¶¶ 16-19, ECF No. 24. Nor have the Defendants come forward with evidence which raises a genuine question of material fact on these points. Accordingly, the Plaintiffs have satisfied the elements of § 523(a)(2)(B)(i), (ii), and (iv). However, the Defendants contend that whether the Plaintiffs actually and reasonably relied on the financial statements is a factual question that precludes summary judgment.
I. Actual Reliance
The Plaintiffs allege that “[i]n reliance on the Defendants’ falsified Southwest Securities statements and their fraudulent personal financial statements, Plaintiffs sold their respective secured equity interests ... in exchange for an unsecured promissory note signed by the Defendants.” (PI. Local Rule 7056-1 Stmt. ¶ 20, ECF No. 20) This assertion is supported by the affidavit of Douglas A. Tatum (“Tatum”), a limited partner of the Plaintiffs, stating that:
[I]n order for [the Plaintiffs] to consider exchanging our secured equity interests for an unsecured personal promissory note, we needed to be certain that the Defendants had the financial strength to pay on the promissory note, and that the Defendants had more than sufficient assets to guaranty recovery in the event that the Defendants were to default. Consequently, my partners and I requested that the Defendants provide a personal financial statement and evidence of their assets.
(Tatum Aff. ¶ 20, ECF No. 19.) Additionally, in an email to Stephen on September 18, 2007, Tatum asked for the Defendants’ financial statements “before we give you an answer on changing the deal.” (Tatum Aff., Ex. G, ECF No. 19.) In reply to this email, Stephen sent Tatum the falsified financial statements. (Tatum Aff., Ex. G, ECF No. 19.) Further evidence of the Plaintiffs’ actual reliance is contained in a “Unanimous Consent” that was executed by Tatum and the other partners of the Plaintiff entities. The Unanimous Consent contains the following recital:
WHEREAS, ... [Stephen and Sharon] Jemal has agreed to personally execute a promissory note ... payable to the [Plaintiffs] in the amount of their investments plus some return thereon and [Stephen and Sharon] Jemal ha[ve] *245previously provided financial statements to the Partners reflecting the ability to pay this Note;
(Def. Opp’n, Ex. F, ECF No. 26.).
The Defendants generally deny that the Plaintiffs relied on the fraudulent personal financial statement in connection with the transaction. (Def. Local Rule 7056-1 Counter-stmt. ¶20, ECF No. 24.) As evidentiary support, the Defendants cite Stephen’s affidavit, which describes the negotiation of the sale terms but does not mention that the Plaintiffs requested the Defendants’ financial statement. (Aff. of Stephen S. Jemal dated February 25, 2014 (“Stephen Aff.”), ¶ 5-9, ECF No. 22.) Stephen’s affidavit further states, in a con-clusory manner, that the Plaintiffs “never relied on my representations,” and instead relied on the representations of Patrick Morris, a Senior Vice President of Republic First Bank, a friend of one ' of the Plaintiffs’ principals, who introduced the Plaintiffs’ principals to the Defendants. (Stephen Aff., ¶¶2-3, 10, ECF No. 22.) The Defendants’ conclusory, unsupported assertion that Plaintiffs did not actually rely on the fraudulent financial statement is not sufficient to raise a genuine question of material fact concerning the Plaintiffs’ reliance on the Defendants’ personal financial statements as shown by Tatum’s affidavit, the emails of September 18, 2007, and the Unanimous Consent. That the Plaintiffs may have also relied upon representations made by Patrick Morris at Republic First Bank is irrelevant; a creditor need not rely solely on a debtor’s falsified financial statement in order to satisfy § 523(a)(2)(B)(iii). Barristers Abstract Corp. v. Caulfield (In re Caulfield), 192 B.R. 808, 821 (Bankr.E.D.N.Y.1996) (“It is sufficient that the creditor’s reliance on the Debtors’ representations was a contributing factor in causing the loss even though such reliance was partial.”); In re Salzman, 61 B.R. 878, 888 (Bankr.S.D.N.Y.1986) (finding debt nondischargeable because creditor relied on statements “even though such reliance was partial and not solely motivated by the debtor’s false representations”); In re Ebbin, 32 B.R. 936, 941 (Bankr.S.D.N.Y.1983) (Creditor “need not show that it relied solely on the financial statement to prevail; partial reliance would suffice.”). The evidence shows that the Plaintiffs relied on the Defendants’ personal financial statement as part of the overall transaction, and such reliance is sufficient.
II. Reasonable Reliance
The Defendants also argue that the Plaintiffs’ reliance on the fraudulent personal financial statement was not reasonable. While it is true that reasonable reliance under § 523(a)(2)(B)(Hi) is a question of fact, In re Bonnanzio, 91 F.3d 296, 305 (2d Cir.1996), it is also well established that, to defeat a motion for summary judgment, the nonmovant must raise a genuine issue of material fact supported by evidence, as required by Federal Rule of Civil Procedure 56(c)(1), made applicable to this proceeding by Rule 7056. JP Morgan Chase Bank v. Tamis, No. 05-CV-737-JLL, 2005 WL 6794655, at *3 (D.N.J. Nov. 16, 2005) (stating, in the context of a § 523(a)(2)(B) summary judgment motion, that “[o]nce the moving party files a properly supported motion, the burden shifts to the nonmoving party to demonstrate the existence of a genuine dispute of material fact.”).
“Once it has been established that a debtor has furnished a lender a materially false financial statement, the reasonableness requirement of § 523(a)(2)(B) ‘cannot be said to be a rigorous requirement, but rather is directed at creditors acting in bad faith.’” Bonnanzio, 91 F.3d at 305 (quoting Bank One, *246Lexington, N.A., v. Woolum (In re Woolum), 979 F.2d 71, 76 (6th Cir.1992)). A creditor is not obligated to conduct a thorough investigation of the representations a debtor makes in the course of extending credit. In re Wong, 291 B.R. 266, 275-76 (Bankr.S.D.N.Y.2003) (“[C]reditors are not required to conduct an investigation outside of ordinary business practices before entering into agreements with prospective debtors.”); In re Erdheim, 180 B.R. 42, 46 (Bankr.E.D.N.Y.1995) (stating that “reliance on a debtor’s financial statement [may] be reasonable, even where the creditor failed to take steps to verify the information”). “Reasonableness is therefore ‘a low hurdle for the creditor to meet, and is intended as an obstacle only for creditors acting in bad faith.’ ” Bonnanzio, 91 F.3d at 305 (quoting In re Shaheen, 111 B.R. 48, 53 (S.D.N.Y.1990)).
There is no suggestion here that the Plaintiffs acted in bad faith to induce the Defendants into submitting a false personal financial statement. See In re Reis-man, 149 B.R. 31, 39 (Bankr.S.D.N.Y.1993) (noting that the purpose of the reasonable reliance requirement is to prevent creditors from inducing debtors to submit false statements to subsequently use to challenge discharge of the debt). The record shows that the Plaintiffs cleared the “low hurdle” of showing that they acted reasonably in relying on the personal financial statements in transferring their interests in the Real Estate Projects in exchange for Debtors’ promissory note. Bonnanzio, 91 F.3d at 305. See In re Smith, No. 10-73228-REG, 2012 WL 1605245, at *4 (Bankr.E.D.N.Y. May 8, 2012) (“Courts reviewing the reasonableness of a creditor’s decision to lend should be deferential to that creditor’s business judgment.”); Reis-man, 149 B.R. at 39 (applying “the degree of care that a reasonably prudent person would exercise in an average business transaction under similar circumstances” as the standard in determining reasonable reliance). The parties’ pre-existing business relationship further supports the conclusion that the Plaintiffs were justified in accepting the personal financial statements as truthful without conducting an independent investigation. In re Lavender, 399 Fed.Appx. 649, 654 (2d Cir.2010) (affirming nondischargeability decision that cited four year business relationship as a factor in finding reasonable reliance). See In re Shaheen, 111 B.R. 48, 53 (S.D.N.Y.1990) (holding that plaintiffs reliance on debtor’s misrepresentation was reasonable in part because debtor was an owner, director, and manager of plaintiff corporate entity).
The Defendants argue that the low threshold for showing reasonable reliance set in Bonnanzio is inapplicable to the Plaintiffs, who “did not advance or loan any monies to or on behalf of the Debtors, much less in connection with the Note.” (Def. Mem. of Law in Opp’n, at 20, EOF No. 25.) The Plaintiffs surrendered equity interests in exchange for the Defendants’ note. Bonnanzio does not prescribe a different analysis of reasonable reliance for a creditor who parts with property, other than money, in exchange for a promissory note. See generally Bonnanzio, 91 F.3d 296. The Defendants have cited no authority that supports applying different standards to lenders of money than to other creditors, and have provided no logical rationale to create such a distinction.
The Defendants argue that the Plaintiffs relied on Mr. Morris’s representations that the Defendants had sufficient finances and assets to guarantee the promissory note. The Defendants have not produced any evidence to rebut Mr. Tatum’s sworn statement that the Plaintiffs relied on the requested financial statements in agreeing to sell the equity interests in exchange for a promissory note, and, as noted above, *247partial reliance is sufficient under § 523(a)(2)(B). Salzman, 61 B.R. at 888; Caulfield, 192 B.R. at 821. If, as the Defendants contend, the Plaintiffs also relied in part on representations made by Mr. Morris, this fact bolsters the Plaintiffs’ claim that their reliance was reasonable. See In re Rodriguez, 29 B.R. 537, 540 (Bankr.E.D.N.Y.1983) (finding that the fact that the lender sought credit reports on the debtor supported the reasonableness of the lender’s reliance); In re Hambley, 329 B.R. 382, 400 (Bankr.E.D.N.Y.2005) (finding that the creditor’s visit to the debtor’s business and interviews with employees strengthened the creditor’s reasonable rebanee, since the third-party information corroborated the debtor’s misrepresentation).
The Defendants contend that the Plaintiffs’ reliance on their personal financial statements was unreasonable because they ignored “glaring red flags,” such as the delay in moving forward with the Real Estate Projects, and evidence that Stephen violated the operating agreements governing the Real Estate Projects, by, among other things, commingling funds, placing unauthorized debt on one of the projects, transferring money to himself from the Gerritsen Beach Project without authorization, failing to timely submit a budget for approval, and allowing the Real Estate Projects to default on interim loans. (Def. Mem. of Law in Opp’n, at 16-18, ECF No. 25.) These issues may suggest problems with the Real Estate Projects, but are wholly unrelated to whether the Defendants possessed the financial wherewithal portrayed in the personal financial statement. The Defendants also allege that the Plaintiffs’ knowledge of their interest in Nobody Beats the Wiz, a business entity that filed for bankruptcy in 1998, should have caused the Plaintiffs to conduct research that would have revealed that Stephen “had failed at other business ventures as well.” (Def. Mem. of Law in Opp’n, at 20, ECF No. 25.) The information about the bankruptcy of Nobody Beats the Wiz and other failed business ventures, which occurred years prior to this transaction, also bears little, if any, relationship to the Defendants’ 2007 personal financial statement, and is therefore not the sort of information that should have prompted the Plaintiffs to challenge the veracity of the representations contained in that statement. See In re Gertsch, 237 B.R. 160, 170 (9th Cir. BAP 1999) (“Lenders do not have to hire detectives before relying on borrowers’ financial statements.”).
The Defendants also identify two purported “red flags” that relate to' the preparation of the personal financial statement: it was unsigned, and it was dated February 28, 2007, almost seven months before it was provided.
A personal financial statement need not be signed to be relied upon, as “[i]t is sufficient that [djebtors either wrote, signed, or adopted such statement” for purposes of § 523(a)(2)(B). . In re Boice, 149 B.R. 40, 45 (Bankr.S.D.N.Y.1992); see Hambley, 329 B.R. at 399 (finding letters, emails, and other documents satisfied “writing” requirement of § 523(a)(2)(B)). Here, it is undisputed that Stephen emailed the fraudulent personal financial statement and the annexed falsified account statements to Mr. Tatum. (PL Reply Mem. of Law in Supp. at 4-5, ECF No. 31).
The Defendants allege that it was unreasonable to rely on the fraudulent personal financial statement because it was “stale” when transmitted to the Plaintiffs on September 18, 2007. (Def. Mem. of Law in Opp’n, at 17, ECF No. 25.) However, the Plaintiffs do not contend that the documents were inaccurate because they *248provided a false picture of the Defendants’ financial condition due to the passage of time. The Plaintiffs contend, and it is not disputed, that the personal financial statement described a financial condition that never existed. Furthermore, on the same day he emailed the personal financial statement to the Plaintiffs, Stephen stated in a subsequent email, also dated September 18, 2007, that “nothing has changed” with respect to the financial statement. (Reply Aff. of Douglas A. Tatum dated March 10, 2014 (“Tatum Reply Aff.”), Ex. B, ECF No. 30.) Given Stephen’s email, the statement’s printed date did not make it unreasonable for the Plaintiffs to rely on the personal financial statement as a description of the Defendants’ present financial condition. See In re Robinson, 192 B.R. 569, 577 (Bankr.N.D.Ala.1996) (“[The debtor’s] oral representation that his financial condition had not changed since that set forth in the January 15, 1991 statement defeats this argument, ... brought the financial statement current and cured any staleness.”).
Last, the Defendants assert that the personal financial statement itself contains discrepancies that should have prompted the Plaintiffs to investigate further. The Defendants note that the Southwest Securities account statements attached to the personal financial statements reflected that $14,930,080 of the securities were held in custodial accounts owned by the Defendants’ children. It is not disputed that the brokerage statements attached to the personal financial statement showed Sharon as the named custodian on the custodial accounts for certain “marketable securities” listed on the personal financial statement. (Tatum Aff., Ex. G, ECF No. 19.) However, the disclosure of Sharon’s custodial interest in these accounts does not make the Plaintiffs’ reliance on the personal financial statement unreasonable. The Plaintiffs could have reasonably relied on other written representations in the financial statement, including that the Defendants held approximately $17 million in equity securities in their own names. (Tatum Aff., Ex. G, ECF No. 19.)
The Defendants also note that dividend income from the “readily marketable securities” was not reflected on the personal financial statement. The Defendants point out that
(12) the unsigned February 2007 PFS shows no annual “Dividend Income” (GB001963), even though the Jemals purportedly owned $31,960,760 in marketable securities (GB001964);
(13) all of the Southwest account statements contain only “0.00” amounts for the “Estimated Annual Income” for all of the securities (GB001968, GB001970-GB001973 & GB001983-
GB001984), even though there should be substantial dividend income;
(Def. Mem. of Law in Opp’n, at 8, ECF No. 25.) Rather than undermining the reasonableness of Plaintiffs’ reliance, these facts show that the personal financial statement and the brokerage account statements corroborate one another. See In re Hough, 111 B.R. 445, 450 (Bankr.S.D.N.Y.1990) (finding that creditor satisfied the reasonable reliance element of § 523(a)(2)(B) where the document on its face reveals the debtor’s personal financial condition, so no affirmative duty to investigate arises). In sum, the personal financial statements, including the supposed inconsistencies identified by defendants, did not give the Plaintiffs “reason to know that the financial statement is false.” In re Boice, 149 B.R. 40, 47 (Bankr.S.D.N.Y.1992). See also Reisman, 149 B.R. at 39 (holding that lender need not verify all of the information in debtor’s financial statements, because the reasonable reliance re*249quirement is intended to prevent “unscrupulous creditors from inducing debtors to submit false statements so that they can be later used to object to the debtor’s discharge”).
III. Causation
The Defendants also contend that the Plaintiffs failed to prove that the Defendants’ fraud caused them any actual losses. They argue that the Plaintiffs are required to prove that the interests in the Real Estate Projects transferred in exchange for the Defendants’ promissory note were in fact worth more than the $620,000 partial payment made by the Defendants on the note. (Def. Mem. of Law in Opp’n, at 21, ECF No. 25.) The Defendants also argue that the terms of the transaction provided that the transfer of the Plaintiffs’ 28% interest was contingent on the Defendants’ full payment of $6.2 million on the note, which never occurred. Id. at 23. As a result, the Defendants argue, the Plaintiffs did not assign their 28% membership interest, so they were not damaged.
The Defendants’ contention that no assignment of the Plaintiffs’ membership interest occurred is easily dealt with. This argument appears to be based upon a statement in the recitals of the agreements entitled Assignment of LLC Membership Interest (“Assignments”), which the Plaintiffs executed with respect to their interests in each of the Real Estate Projects, that “[t]his Assignment is made subject to the full performance by Assignee and others of their respective obligations under the Note.” (Def. Opp’n, Ex. G, ECF No. 26.) However, the operative language of the Assignments is unconditional, and clearly states that the Assignments are effective as of September 12, 2007. Id. at ¶¶ 1, 3.3 Language appearing in a recital will not be construed to vary the terms of an agreement that is otherwise unambiguous. Country Cmty. Timberlake Vill., L.P. v. HMW Special Util. Dist. of Harris, No. 12-00825, 2014 WL 1478009, at *6 (Tex.App. Apr. 15, 2014) (“Recitals in a contract do not control the operative clauses of the contract unless the latter are ambiguous.”); accord, Musman v. Modern Deb, Inc., 56 A.D.2d 752, 392 N.Y.S.2d 24, 26 (1st Dept.1977) ( “Where a recital clause and an operative clause are inconsistent, the operative clause if unambiguous, should prevail.”) (citing Williams v. Barkley, 165 N.Y. 48, 58 N.E. 765, 767 (1900)).
The Defendants’ second argument is that the Plaintiffs, in addition to demonstrating reliance on the false financial statements, must prove the value of their interests in the Real Estate Projects in order to show damages caused by their reliance. This argument is equally merit-less; it is “inconsistent with the express language of the Code,” which sets forth the elements which must be shown to obtain a determination of nondischargeability under § 523(a)(2)(B), and contains no such requirement. In re Priestley, 201 B.R. *250875, 885 (Bankr.D.Del.1996). As the Priestley court noted, “[a]ny required element under Code § 528(a)(2)(B), which is a creature of statute rather than of the common law, must be included in the statutory language.” Id. (citing Field v. Mans, 516 U.S. 59, 69, 116 S.Ct. 487, 133 L.Ed.2d 351 (1995)).
Here, the statutory language is clear. Section 523(a)(2)(B) excepts from discharge “any debt ... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ...” use of a false financial statement. “Debt” is defined as “liability on a claim”; “claim,” in turn, is defined as “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.” § 101(12), (5A). The Plaintiffs transferred their interests in the Real Estate Projects in exchange for the Defendants’ promissory note, and this transfer of property was induced by the Defendants’ false financial statement. The Debtors’ obligation to the Plaintiffs pursuant to the promissory note (which has been reduced to judgment) therefore is clearly a “debt [liability on a claim] for money [or] property” obtained by use of the Debtors’ false financial statement, and as such is excepted from discharge.
The Defendants’ argument that the Plaintiffs must fulfill an additional requirement, not contained in the statute, of proving the value of the interests they transferred to the Defendants, is based on language quoted from three cases: In re Khafaga, 419 B.R. 539, 548 (Bankr.E.D.N.Y.2009); In re Caulfield, 192 B.R. 808, 821 (Bankr.E.D.N.Y.1996); and In re Park, 492 B.R. 668, 683-84 (Bankr.S.D.N.Y.2013). The Defendants misrepresent the holdings of Khafaga and Caul-field, and Park is inapplicable to the facts of this case. In Khafaga, because the plaintiff received false financial reports after it entered into a franchise agreement with the defendant, the court found that the plaintiff could not “allege that the allegedly false reports provided by the Defendant induced it to enter into the” agreement. Khafaga, 419 B.R. at 548. The “requisite causal connection” lacking in Khafaga was rebanee, as required by § 523(a)(2)(B)(ni). Similarly, in Caulfield, the court did not hold that causation, beyond a showing of rebanee, is required under § 523(a)(2)(B); it held that there was “absolutely no evidence that [the plaintiff] relied on [the false] statement in any manner, that the statement was material to [the plaintiff] ... or that it caused any loss to [the plaintiff].” Caulfield, 192 B.R. at 821. Given that the plaintiff in Caulfield faded to meet its statutory burden to show reliance and materiality, the court’s reference to causation is, at most, dictum.
Park involved a challenge to discharge-ability by a casino that provided gambling chips to the debtor in exchange for two “counter checks,” drawn on the debtor’s checking account, on which was imprinted the statement that the debtor had funds “on deposit” in the account to cover the checks. Park, 492 B.R. at 672. The “counter checks” were essentially promissory notes which could be presented by the casino for collection 45 days after issuance by the debtor. Id. at 687. The court found that, although the Debtor’s checking account did not contain funds to cover the checks at the time he signed them, the debtor had other funds available in an amount sufficient to cover the checks, and therefore concluded that the debtor’s misrepresentation was not material. Id. at 687. The court also found that the plain*251tiff did not rely on the misrepresentation. Id. at 690.
The Park court also found causation to be lacking on the facts before it, concluding that the casino’s losses were caused, not by the debtor’s misrepresentation concerning the funds in his checking account, but by the fact that, during the 45 days between the debtor’s issuance of the counter checks and the casino’s presentation of them for collection, the debtor dissipated the funds which he had available to cover the counter checks at the time that they were signed. This could equally be found to preclude any claim of reliance by the casino, and indeed the Park court found that the casino could not claim justifiable reliance on representations concerning “a state of facts 45 days before the date those facts would matter.” Id. at 689. This delay could also be found to rebut any assertion that the debtor’s misrepresentation was material, and the Park court found that, for this reason, among others, it was not. Id. at 687. In any event, the Park court’s analysis of the facts before it in terms of causation is neither necessary to the result in that case nor applicable to the instant case.
The circuit court cases cited by Park in discussing the applicability of a causation requirement in an action under § 523(a)(2)(B) provide no support for the Defendants’ position that the Plaintiffs are required to prove the value of the interests that they transferred in exchange for the Defendants’ promissory note. Siriani v. Northwestern Nat’l Ins. Co. (In re Siriani), 967 F.2d 302 (9th Cir.1992), involved a claim that a debtor had presented false financial statements in order to obtain the renewal of a bond. The court found that the creditor was required to provide evidence that it had “valuable collection remedies” at the time that it renewed credit to the debtor.4 In Collins v. Palm Beach Savings & Loan (In re Collins), 946 F.2d 815 (11th Cir.1991), the court rejected the debtor’s contention that the creditor’s damages were proximately caused by the failure to perfect a security interest in the debtor’s assets, holding that “[although [the creditor] could have prevented its own injury by perfecting its security interest in [the debtor’s] collateral property, the Bankruptcy Code does not require such diligence on the part of a creditor induced by fraudulent means in extending credit to a debtor.” Id. at 816.
Here, the Debtors do not argue that an intervening event, such as failure to perfect a security interest, actually caused the Plaintiffs’ losses (the argument rejected by the Collins court), or that the falsified financial statements related to the forbearance, renewal, extension, or refinancing of debt. Rather, the Debtors are attempting to collaterally attack the Plaintiffs’ judgment against them, by arguing that the property they received in exchange for the promissory note — the Plaintiffs’ interest in the Real Estate Projects — was not worth what the Defendants agreed to pay for it. Whether labeled an argument concerning causation or damages, the Defendants’ contention that the Plaintiffs must demonstrate the value of the interests that they transferred in exchange for the Defen*252dants’ promissory note must be rejected, as it is inconsistent with the terms of the statute and unsupported by case law.
IV. Judgment as to Sharon
Although Stephen sent the Debtors’ fraudulent personal financial statement to the Plaintiffs, the Plaintiffs assert that Sharon’s debt to them should also be non-dischargeable pursuant to § 523(a)(2)(B). The Debtors assert that Sharon is “merely a homemaker and a mother,” and that the Plaintiffs have failed to prove that Sharon had actual knowledge of Stephen’s fraudulent acts, which would be required to except her debt from discharge. (Def. Opp’n, at 25-27, ECF No. 25.) The Plaintiffs respond that Sharon’s liability to them should be nondischargeable because of her ownership interest in the Real Estate Projects. (Tatum Reply Aff. ¶ 21, ECF No. 30.)
In opposition to the Plaintiffs’ contention that Sharon’s debt should be excepted from discharge, the Debtors rely upon In re Hill, 425 B.R. 766 (Bankr.W.D.N.C.2010), in which a law firm sued co-debtor spouses under § 523(a)(2)(A) and (B), seeking a judgment that their prepetition legal bills were nondischargeable. The firm’s case rested on statements of the co-debtor husband promising to make future payments on his and his wife’s debt to the firm. The firm argued that the debtors’ legal bill should be nondischargeable because the co-debtor husband repeatedly made promises of future payment with knowledge that future payment was impossible, and such promises induced the firm to continue its representation. As to the co-debtor wife, court found that the firm “offered no proof that [she] had any involvement with the [promises] made by [the husband],” or that she “had any knowledge of these statements before or even after their dissemination.” Hill, 425 B.R. at 774. As a result, the court granted the co-debtor wife’s motion for a directed verdict and held that her debt to the law firm was dischargeable. Id.
Hill stands for the proposition that a spousal relationship alone is not a basis for imputing the fraudulent acts of one spouse to the other spouse. The Hill court noted that the appropriate analysis is under the law of agency, and that “[w]ithin the confines of agency theory, the Fourth Circuit has affirmed that a wife is not the agent of her husband strictly by force of the marital relationship.” Hill, 425 B.R. at 773. Other courts are in accord. See In re Tsurukawa, 287 B.R. 515, 527 (9th Cir. BAP 2002) (holding that “in order to impute fraud to a spouse, there must be a partnership or other agency relationship.”) (internal quotations omitted); Matter of Luce, 960 F.2d 1277, 1284 n.10 (5th Cir.1992) (“It is irrelevant to the determination of the dischargeability of [a co-debtor spouse’s] debts under section 523(a)(2) that the business partners also enjoyed a marital relationship.”).
However, in the Second Circuit, where a debtor’s right to a discharge is challenged, the fraudulent intent of an agent of the debtor will be imputed to the debtor only when the debtor either knew of or recklessly disregarded the agent’s fraud. In re Lovich, 117 F.2d 612 (2d Cir.1941), involved a challenge to the discharge of two debtors engaged in business as partners, under § 32(c)(3) of the Bankruptcy Act, which denied discharge to a “bankrupt who has ‘obtained money or property on credit, or obtained an extension or renewal of credit, by making or publishing or causing to be made or published in any manner whatsoever, a materially false statement in writing respecting his financial condition.’ ” Id. at 614. The manager of the debtors’ business, who was “the husband of one partner and brother *253of the other,” acting within his authority as agent, provided a false financial statement to Dun & Bradstreet, which was relied on by a creditor in extending credit to the business. Id. at 613. The Second Circuit held that “[o]n principle we think that more should be shown to justify withholding a discharge that [sic] an agent made a fraudulent statement within the scope of a general authority to transact the bankrupt’s business.” Id. at 615. The court concluded that, for this reason, when a debtor’s discharge is challenged based upon a false statement by an agent, “some additional facts must exist justifying an inference that the bankrupt knew of the statement and in some way acquiesced in it or failed to investigate its accuracy.” Id.5 At least one court has found that reckless disregard of an agent’s fraud may justify its imputation to the principal in an action to deny dischargeability. See In re Salzman, 61 B.R. 878, 890 (Bankr.S.D.N.Y.1986) (“When a principal of a corporation signs false documents without examining them and either knows or should have known of the fraud, the requisite intent to defraud may be inferred from such reckless disregard of the accuracy of the facts, because had the principal paid minimal attention, he would have been alerted to the fraud.”).
Here, the record is insufficient to conclude that circumstances exist justifying the imputation of Stephen’s fraud to Sharon. It is clear that Stephen acted in his capacity as manager of SSJ Holdings, which was 96% owned by Sharon, and of which she was a member-manager, when negotiating the transaction that resulted in the transfer of the Plaintiffs’ interest in the Real Estate Projects to the Debtors. (Tatum Reply Aff., Ex. F, ECF No. 30.) As such, Stephen was acting as Sharon’s agent when he submitted the falsified financial statements. It is equally clear that Sharon benefited from Stephen’s actions as her agent in negotiating the transaction. When Stephen fraudulently induced the Plaintiffs to accept the Defendants’ note in exchange for their equity in the Real Estate Projects, Sharon’s ownership interest was increased; moreover, the stated purpose of the transaction was to increase the value of the Real Estate Projects by securing a new construction loan, and the Real Estate Projects were 72% owned by SSJ Holdings, which was, in turn, 96% owned by Sharon.
However, Sharon’s affidavit in opposition to the Plaintiffs’ motion states that she did not have any knowledge of the financial statements that were sent by her husband, that she did not discuss the falsified financial statements with her husband, and that she did not communicate with the Plaintiffs during the course of negotiating the transaction. (Aff. of Sharon Jemal dated February 25, 2014 (“Sharon Aff.”), ¶ 3, ECF No. 23.) Whether Sharon actually knew of the fraudulent financial statements, or otherwise engaged in conduct that would justify a conclusion that she acquiesced in or recklessly disregarded Stephen’s fraud, is an issue of material fact that must be determined at trial.
Y. Nondischargeability under § 523(a)(6)
The Plaintiffs also seek summary judgment on the basis of their § 523(a)(6) cause of action. Under § 523(a)(6), a debt for “willful and malicious injury by the debtor to another entity or to the property of another entity” is nondischargeable. 11 U.S.C. § 523(a)(6). “ ‘The terms willful *254and malicious are separate elements, and both elements must be satisfied’ by a preponderance of the evidence.” Khafaga, 419 B.R. at 548-49 (quoting Rupert v. Krautheimer (In re Krautheimer), 241 B.R. 330, 340 (Bankr.S.D.N.Y.1999)).
With respect to Stephen, a judgment pursuant to § 523(a)(6) yields the same remedy as a judgment pursuant to § 523(a)(2)(B): the underlying debt is declared nondischargeable. Because there is sufficient basis to grant Plaintiffs summary judgment against Stephen pursuant to § 523(a)(2)(B), the Plaintiffs’ § 523(a)(6) claim against Stephen will not be addressed.
With respect to Sharon, as discussed above, the Plaintiffs have not met their burden of showing that there is no genuine dispute as to any material fact regarding Sharon’s actual knowledge of the fraudulent financial statements, or that she engaged in conduct that would justify a conclusion that she acquiesced in or recklessly disregarded Stephen’s fraud. The issues of material fact concerning Sharon’s knowledge of and participation in the fraud also preclude entry of summary judgment on the Plaintiffs’ claims against her under § 523(a)(6).
Conclusion
For the reasons above, the Plaintiffs’ motion for summary judgment is granted in part and denied in part. Stephen’s debt owed to the Plaintiffs is nondischargeable pursuant to § 523(a)(2)(B). The Plaintiffs’ motion for summary judgment as to Sharon is denied. A separate order shall issue herewith.
. Unless otherwise indicated, “Section” or "§" refers to a section under title 11 of the United States Code (the "Bankruptcy Code”), and “Rule” refers to the Federal Rules of Bankruptcy Procedure.
. Unless otherwise indicated, "ECF No.” refers to the docket number of a document filed *242in Adversary Proceeding Number 12-1260-CEC.
. Each of the Assignments provides that "1. Assignment. Assignor does hereby assign, transfer and convey unto Assignee all of the Assignor’s Interest, including, without limitation, all of Assignor's economic interest in the Company, its interests in the Company’s capital, profits and losses and its interests or right to participate in or to receive any economic benefits by reason of Assignor’s position as a member in the Company under or pursuant to the Agreement_ 3. Effect of Assignment. This Assignment is effective as of the Effective Date [September 7, 2007] hereof set forth herein above, and after that date, all profits, losses, distributions, allocations, liabilities, obligations, income and gains of the Company allocable to the Assignor’s Interest shall be credited, charged, allocated or distributed, as the case may be, to Assignee, and not to Assignor_” (Def. Opp’n, Ex. G, ECF No. 26.)
. Other courts of appeals have disagreed with Siriani. Wolf v. Campbell (In re Campbell), 159 F.3d 963, 967 (6th Cir.1998) (holding that creditors were not required to show that the debtor’s fraud in obtaining their forbearance to collect caused them additional injury such as loss of a collection remedy); In re McFarland, 84 F.3d 943, 947 (7th Cir.1996) (holding that “the text of § 523(a)(2)(B) contains no damage or detriment requirement, and the courts are not empowered to add one”); Norris v. First Nat’l Bank (In re Norris), 70 F.3d 27, 29 n. 6 (5th Cir.1995) (same); Shawmut Bank v. Goodrich (In re Goodrich), 999 F.2d 22, 25-26 (1st Cir.1993) (same).
. Although Lovich involved a challenge to the debtor’s right to a discharge, not an objection to the dischargeability of a particular debt, given the similarity of the statutory language there at issue to § 523(a)(2)(B), the standard set in Lovich is appropriately applied here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497448/ | Chapter 11
Related to Adv. Docket Nos. 10, 19, 21,35, 39, 40, 47, 52, 54, 58.
OPINION2
Brendan Linehan Shannon, Chief United States Bankruptcy Judge
Before the Court is Defendant First American Title Insurance Company’s *286(“First American”) Motion to Dismiss the First Amended Complaint, or in the Alternative, to Abstain (the “Motion”) [Adv. Docket No. 39]. Longview Power Company, LLC (“Longview”) initiated this adversary proceeding against First American with the filing of a Complaint [Adv. Docket No. 1] on May 23, 2014. The First Amended Complaint (the “Amended Complaint”) [Adv. Docket No. 19] was filed July 3, 2014, to add MUFG Union Bank, N.A. as a nominal Plaintiff, solely in its capacity as first-lien asset collateral agent under the Longview Credit Agreement (in such capacity, the “Collateral Agent”). For the following reasons, the Motion will be denied, and the Court will neither dismiss this action nor abstain in favor of a proceeding in California state court.
I. BACKGROUND
The Debtors operate an integrated power generation enterprise, through two distinct business units: (1) Longview, which was formed for the purpose of constructing and operating a 700 net megawatt super-critical coal-fired power plant in Maids-ville, West Virginia (the “Power Plant”), and (2) Mepco, which is a vertically integrated coal miner and processor with facilities located in southwestern Pennsylvania and northern West Virginia.
Construction on the Power Plant began in 2007 and was funded, in part, by debt totaling approximately $1.2 billion. The Debtors obtained the funds pursuant to a credit agreement, dated as of February 28, 2007 (the “Longview Credit Agreement”). The lenders under the Longview Credit Agreement (the “Longview Lenders”) obtained liens on substantially all of the Debtors’ assets, including the Power Plant, to secure their loans. In connection with the Debtors’ entry into the Longview Credit Agreement, on March 9, 2007, First American issued a policy of title insurance (the “Policy”) to the Collateral Agent for the benefit of the Longview Lenders in the amount of $825 million. None of the Debtors are parties to the Policy.
Longview entered into contracts with Siemens Energy, Inc. (“Siemens”), Kvaer-ner North American Construction, Inc. (“Kvaerner”), and Foster Wheeler North America Corporation (“Foster Wheeler”) (collectively, the “Contractors”) for the design, supply, construction, and commissioning of the Power Plant. The Debtors took over the Power Plant in December 2011, and shortly thereafter the Contractors asserted mechanics’ liens on the Power Plant and related properties (the “Mechanics’ Liens”). On February 8, 2012, Kvaerner asserted mechanics’ liens in the aggregate amount of $242.2 million; on February 17, 2012, Siemens asserted mechanics’ liens in the aggregate amount of $93.5 million; and Foster Wheeler asserted mechanics’ hens in the aggregate amounts of $8.8 million on February 23, 2012, and $14.9 million on May 10, 2012. The Contractors contend that the Mechanics’ Liens are senior to any liens securing claims arising under the Longview Credit Agreement with respect to the Power Plant and related properties; the Longview Lenders dispute this contention.
The Debtors have asserted their own substantial claims against the Contractors. The Debtors allege that the Power Plant has suffered from extended planned outages, additional unscheduled outages, generation derating, and the need for material repairs. As a result, the Debtors state that they have been unable to operate the Power Plant at full capacity and have been limited to selling electricity on a day-ahead basis. The Debtors blame the Contractors for these shortcomings in the operation *287and performance of the Power Plant. In order to resolve the issues between them, in 2011 the Debtors and the Contractors entered into an arbitration proceeding, Kvaerner North American Construction, Inc., and Siemens Energy, Inc. v. Longview Power LLC and Foster Wheeler North America Corp., AAA Case No. 50 158 T 00411 11 (the “Arbitration”).
In addition to the operational challenges described above, the Debtors also face significant market pressures: there has been a drop in both wholesale electricity prices and demand for electricity since construction on the Power Plant commenced in 2007, and a drop in wholesale coal prices. Each of these factors has adversely affected the Debtors’ business plan and strategic optionality. The Debtors began considering restructuring options in 2012, and ultimately filed voluntary Chapter 11 petitions on August 30, 2013 (the “Petition Date”).
In conjunction with their bankruptcy petitions, the Debtors filed a cash collateral motion [Docket No. 25], in which they indicated an intent to promptly draw on $59 million of letters of credit, which were posted by Foster Wheeler in favor of Longview Power, LLC (the “Foster Wheeler LCs”). The Contractors vigorously disputed the Debtors’ right to draw on the LCs. On November 15, 2013, the Court entered an agreed order [Docket No. 463] lifting the automatic stay to allow the Arbitration to proceed with respect to all issues except the Foster Wheeler LCs, extending the expiration date of the Foster Wheeler LCs, and prohibiting the Debtors from drawing on the Foster Wheeler LCs until further order of the Court.
A. The Original Plan
Meanwhile, throughout the fall of 2013, the Debtors and holders of approximately sixty (60) percent of the debt outstanding under the Longview Credit Agreement (the “Backstoppers”) engaged in negotiations for a consensual chapter 11 process. The Debtors and the Backstoppers agreed on the terms of the Debtors’ first proposed plan of reorganization (the “Original Plan”), which contemplated a debt-for-equity transaction by which the holders of claims arising under the Longview Credit Agreement would exchange their debt for the majority of the equity in the reorganized Debtors. The plan required that the Debtors obtain entry of an order from the Court estimating the Mechanics’ Liens at $0.00 for all purposes (including distribution). The Debtors filed a motion to estimate the Mechanics’ Lien claims [Docket No. 582] on December 11, 2013, and the Contractors filed objections to the estimation motion [Docket Nos. 721, 724 & 728].
On December 18, 2013, the Court entered an order [Docket No. 663] approving, inter alia, the Debtors’ disclosure statement [Docket No. 672] and authorizing the Debtors to solicit votes on the Original Plan. The Debtors initially set a hearing to confirm the Original Plan for February 11, 2014. Since February 2014, the Debtors, in consultation with the Back-stoppers, have elected to adjourn the claims estimation process and the confirmation process for the Original Plan.
The Debtors have continued to engage in negotiations with the Backstoppers and the Contractors regarding a consensual resolution to these Chapter 11 cases, including participating in a mediation ordered by the Court on March 6, 2014 [Docket No. 1012], The Debtors reached a significant settlement with Foster Wheeler, whereby Foster Wheeler agreed to release its Mechanics’ Lien claims and perform certain work on the Power Plant. That settlement was approved by the Court on March 7, 2014 [Docket No. 1018] over the objections of Kvaerner and Siemens.
*288B. The Amended Plan
Following the settlement with Foster Wheeler, the Debtors proposed a first amended plan of reorganization (the “Amended Plan”) [Docket No. 1139]. The Amended Plan takes a different tack with respect to the Contractors’ Mechanics’ Lien claims, and instead of estimation contemplates that the remaining Mechanics’ Lien claims of Kvaerner and Siemens will be covered by proceeds from the Policy. To achieve this, the Amended Plan provides for an agreement with the Collateral Agent for an assignment of certain cash proceeds from the Policy (but not the Policy or the claim itself) by the Collateral Agent to a trust formed by the Debtors for the benefit of Kvaerner and Siemens. The Amended Plan further requires that the Debtors obtain a determination that coverage exists under the Policy for the losses the Longview Lenders will incur if the Mechanics’ Liens are determined to be valid and senior to the liens securing the claims arising under the Longview Credit Agreement. By Order dated July 15, 2014, the Court authorized an assignment of the proceeds from the Collateral Agent to the Debtors [Docket No. 1379].
The Assignment of Proceeds Agreement (the “Assignment”) contemplates that the Debtors and the Collateral Agent each possesses rights or interests relating to the Policy. Specifically, at paragraph one the Assignment states:
The Assignor retains all rights to continue administration of the Title Insurance Policy and to assert and prosecute any and all claims thereunder, other than any claims or assertions which may be made by the Assignee in connection with this Agreement that relate to the Title Insurance Proceeds Assigned to the As-signee hereunder.
However, the Assignment also provides that the Debtors have no claims to ownership in the Policy, and that the Collateral Agent reserves all of its rights under the Policy other than claims relating to proceeds. Specifically, the Agreement provides:
For the avoidance of doubt, the Assignment is an assignment of only the cash proceeds from the Title Insurance Policy as set forth above, and is in no respect, in whole or in part, an assignment of the Title Insurance Policy or any claims of the Collateral Agent thereunder.
On May 16, 2014, First American filed a complaint against the Collateral Agent in the Superior Court of Orange County, California (the “California Action”) to determine coverage under the Policy and asserting certain bars or defenses to coverage. On May 23, 2014, the Debtors filed a motion in this Court to enforce the automatic stay, or in the alternative, for preliminary and permanent injunctive relief (the “Stay Motion”) [Docket No. 1187] in order to halt the California Action. As mentioned above, the Complaint in this adversary proceeding was filed the same day.
At a hearing on June 10, 2014, the Court granted the relief requested by the Plaintiffs in the Stay Motion. On June 19, 2014, the Court entered an order (the “Stay Order”) [Docket No. 1296] pursuant to which the Court found that the California Action was subject to the automatic stay under section 362 of the Bankruptcy Code, or alternatively, that the facts and circumstances warranted the extension of the stay to the California Action.
Following entry of the Stay Order, First American filed motions in this adversary proceeding seeking to (a) withdraw the reference to the bankruptcy court with respect to this adversary proceeding [Adv. Docket No. 5], (b) determine the proceeding’s core/non-core status [Adv. Docket *289No. 10], and (c) dismiss or in the alternative asking the Court to abstain from hearing this proceeding (the instant Motion). The hearing on the core/non-core issue was held on July 31, 2014.
The Court ruled on the proceeding’s core/non-core status by Memorandum Order on August 13, 2014 [Adv. Docket No. 58] (the “Core/Non-Core Order”). That Order found and determined that the claim for declaratory judgment regarding whether the applicable proceeds of the Policy are property of the Debtors’ bankruptcy estates pursuant to 11 U.S.C. § 541 is a core claim. The Court found that the claim for declaratory judgment regarding the availability of coverage under the Policy is a non-core claim.
The Opening Brief [Adv. Docket No. 40] addressing dismissal and abstention was filed by First American July 17, 2014. Plaintiffs filed their response [Adv. Docket 40] on July 31, 2014. First American filed its reply [Adv. Docket No. 52] on August 7, 2014, and a hearing to consider the Motion was held on August 25, 2014. The matter has been fully briefed and well argued, and is ripe for decision.
II. THE PARTIES’ POSITIONS
A. First American’s Position
First American makes four arguments in support of the Motion to Dismiss. First, it argues that the Court lacks subject matter over the coverage claim because it is a state law claim between two non-debtors, and that the Debtors have no rights under the Policy. Second, First American claims that Plaintiffs lack standing because Plaintiffs are not a party to the insurance policy, and only the proceeds of the insurance policy are being assigned — not the policy itself. Thus, First American believes Plaintiffs have no right to demand a declaration of coverage under the Policy. Next, First American contends that the determination of whether the proceeds are property of the estate is not ripe for adjudication because there has not been a loss and the underlying lenders have not yet failed to recover on their debt on account of the senior mechanics’ liens. Fourth, First American states that 28 U.S.C. § 1359 bars jurisdiction because the Debtors colluded with the Collateral Agent and other parties to manufacture jurisdiction in this Court. Alternatively, in the event that this Court concludes that it has jurisdiction over this matter, First American argues that the Court should abstain because the standards for permissive and mandatory abstention are satisfied.
B. The Plaintiffs’ Position
With respect to dismissal, Plaintiffs stress that the Court has previously ruled (in the Core/Non-Core Order) that it possesses jurisdiction over this matter. Plaintiffs also assert that neither applicable law nor sound policy require the Court to refrain from addressing the coverage question prior to a final ruling in the underlying fight over the mechanics’ liens. Second, Plaintiffs maintain that the debtors have standing because they are real parties in interest in the Collateral Agent’s claims to proceeds or payment under the Policy by virtue of the assignment. Third, Plaintiffs contend that 28 U.S.C. § 1359 does not affect jurisdiction in this action because that statute only applies to federal diversity jurisdiction, not bankruptcy jurisdiction. Plaintiffs also deny that they have behaved collusively. With respect to abstention, Plaintiffs argue that neither mandatory nor permissive abstention is proper because the California Action was not properly filed, and because the California Court cannot timely adjudicate the claim.
*290III. JURISDICTION & VENUE
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), (b)(1), and 1334(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this matter constitutes a “core proceeding” under 28 U.S.C. §§ 157(b)(2)(A), (K), and (0).
IV. LEGAL ANALYSIS
A. Motion to Dismiss
1. The Court has Jurisdiction Over the Adversary Proceeding.
Under 28 U.S.C. § 1334(b), the Court has original jurisdiction over “all civil proceedings arising under title 11, or arising in or related to cases under title 11.” “In enacting the Bankruptcy Reform Act of 1978, Congress intended to grant bankruptcy courts broad jurisdiction to bring together all civil proceedings concerning the bankruptcy estate.” In re Conference of African Union First Colored Methodist Protestant Church, 184 B.R. 207, 221 (Bankr.D.Del.1995). The seminal case in this Circuit on the subject is Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984 (3d Cir.1984) (overruled on other grounds). Prior to conformation of a plan of reorganization, under the Pacor “conceivable effect” test, “related-to” jurisdiction exists if “the outcome of [a] proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Id. at 994. This includes a proceeding “whose outcome could alter the debt- or’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.” Id. The Third Circuit has clarified, however, that “[b]roadly worded as [the Pacor test] is ... related-to jurisdiction ‘is not without limitation.’ ” W.R. Grace & Co. v. Chakarian (In re W.R. Grace & Co.), 591 F.3d 164, 171 (3d Cir.2009).
First American argues that there is no subject matter jurisdiction over the coverage claim because the outcome of the proceeding cannot conceivably have any effect on the estate being administered in bankruptcy. Citing In re Combustion Engineering, 391 F.3d 190, 201-02, 228-29 (3d Cir.2004) to support its position, First American notes that the Third Circuit held in that case that the bankruptcy court did not have subject matter jurisdiction over a channeling injunction in favor of non-debtors, allowing those non-debtors to make necessary contributions to the plan. Additionally, First American argues that the coverage claim is a state law claim between two non-debtors, and that the Debtors have no rights under the Policy. Finally, First American believes the Debtors’ approach to the “related to” jurisdiction argument would result in limitless jurisdiction for any relief a debtor chose to include in its plan.
First American’s reliance on In re Combustion Engineering is misplaced. The release in Combustion Engineering was to benefit a third party in exchange for a contribution to the plan, and is both procedurally and substantially distinguishable from the case at bar. Here, the Policy was issued in connection with a credit agreement financing the Debtors’ primary asset and insuring against loss to the Debtors’ secured lenders. Additionally, as noted, by way of the Core/Non-Core Order this Court previously held that there is “related to” jurisdiction over the coverage claim. In its Memorandum Order of August 13, 2014 [Adv. Docket No. 57] at ¶28, the Court stated:
The Court is cognizant of the significance to the Debtors of the dispute over the Title Insurance Policy. The Debtors have formulated the Amended Plan in *291hopes of successfully concluding a very complex operational and financial restructuring involving billions of dollars in claims and assets. Nevertheless, the immediate question is whether an insurance coverage dispute between an insurer and a non-debtor invokes this Court’s core jurisdiction. While it is clearly “related to” these bankruptcy proceedings, the Court concludes that the coverage dispute is a non-core matter.
There is nothing in the record to compel the Court to change or revisit its prior ruling. A determination that coverage is available under the Policy would result in an increase to the assets available to the Debtors and their stakeholders under the Amended Plan. Conversely, a determination that the coverage is not available would result in a reduction in assets available to the Debtors. Regardless of the ruling, the coverage dispute will affect the Debtors’ pending plan of reorganization. Accordingly, the Court finds it has “related to” jurisdiction to hear this dispute.
2. Plaintiffs have Standing to Bring the Coverage Claim.
The three required elements of constitutional standing are that a plaintiff must have suffered an injury in fact, the injury is fairly traceable to the challenged action of the Defendant, and it must be likely that the injury can be redressed by a favorable decision. Coastal Outdoor Advertising Group, LLC v. Township of East Hanover, New Jersey, 397 Fed.Appx. 794, 795 (3d Cir.2010). “The injury-in-fact element is often determinative.” Id. Additionally, a plaintiff may not have prudential standing where it tries to assert the rights of third parties. Deutsche Bank National Trust Co. v. FDIC, 717 F.3d 189, 194 (D.C.Cir.2013).
First American argues that the Debtors lack both constitutional and prudential standing because they are not a party to the Policy. Only the proceeds of the Policy are being assigned — not the Policy itself nor any of the claims of the Collateral Agent. Because of this, First American states that the Debtors have no rights under the Policy, and thus cannot bring this action.
Plaintiffs respond that they are real parties in interest in the Collateral Agent’s economic claims under the Policy, due to the provisions of the Amended Plan and the Assignment. Additionally, the Debtors were specifically assigned the right to assert and prosecute any and all claims relating to the Policy proceeds that were assigned. Plaintiffs disagree with First American that the claims under the Policy were not assigned, stating that while the Collateral Agent may have retained its right to bring some claims under the Policy, the Debtors have the right to bring the claim for the proceeds that were assigned to them. Plaintiffs also argue that the Debtors will suffer an imminent injury if coverage is not available because their interest in the insurance proceeds will be worthless.
Both parties cite Shamrock Bank of Florida v. First American Title Insurance Co., 2014 WL 1304694 (S.D. Ill. Mar. 28, 2014). There, the court held that a bank had standing to bring a breach of contract claim on the title policy because Shamrock was an assignee of the policy, and thus an “insured” under the policy. Id. at *9. Plaintiffs cite Shamrock to support the proposition that an assignee of a title insurance policy has standing to enforce the policy. First American attempts to distinguish Shamrock on the grounds that the assignors did not retain any claims under the policy, and the Collateral Agent here did not assign the Policy itself.
*292The Court finds that Longview is a partial assignee of the Policy, and thus, has standing. The Policy provides that the insured is the Collateral Agent and “its successors and assigns, as their interests may appear.” Assignment at p. 6. The Assignment states that Longview was assigned “all of the [Collateral Agent’s] rights, benefits, privileges, and interest in ... the Title Insurance Proceeds.” Id. at ¶ 1. In addition, the Assignment states that the Debtors have the right to protect their interest in the Policy proceeds. Nothing in Shamrock or in the Policy provides that all rights must be assigned before a party can assert any rights. There is no reason a partial assignment must fail. Because the claims at issue relate to Policy proceeds in which the Debtors have a stake, the Debtors have standing to assert these claims.
3. The Complaint Pleads a Ripe Controversy Between the Parties
Ripeness is one of the jurisprudential foundations of jurisdiction, and without a ripe case or controversy a court is unable to render anything other than an advisory opinion. In re Walton, 340 B.R. 892, 893 (Bankr.S.D.Ind.2006). “[DJeclara-tory judgments are, of necessity, rendered before an ‘accomplished’ injury has been suffered.” Travelers Ins. Co. v. Obusek, 72 F.3d 1148, 1154 (3d Cir.1995). A declaratory judgment satisfies standing and ripeness requirements if “there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” St. Thomas-St. John Hotel & Tourism Ass’n v. Virgin Islands, 218 F.3d 232, 240 (3d Cir.2000) (quoting Step-Saver Data Sys. Inc. v. Wyse Tech., 912 F.2d 643, 647 (3d Cir.2006) (internal quotations omitted)).
First American argues that there has been no loss because the underlying lenders have not yet failed to recover on their debt due to senior mechanics’ liens. Before proceeds can become available for an assignment, certain conditions precedent must occur, including: (1) there must be a determination that coverage exists; (2) a loss must occur; and (3) First American must determine that it will pay the Collateral Agent as opposed to purchasing the indebtedness, paying, or directly settling with the parties asserting the senior claim. The Amended Plan does not require a determination that the proceeds are property of the estate, and the relevant dispute is the coverage claim. The coverage and proceeds claims are separate and distinct. As to these two claims, First American contends that the proceeds claim is not ripe.
Plaintiffs respond by arguing that First American cannot bifurcate the Debtors’ claim for declaratory judgment, that the proceeds are property of the estate under Section 541 of the Bankruptcy Code and that coverage is available, into two separate claims. It is a single cause of action by which the Debtors are seeking a determination of the scope and extent of their interest in an estate asset. First American has effectively conceded that the coverage claim is ripe by filing the California Action against the Collateral Agent. The parties’ interests are clearly adverse. This is an action for declaratory relief, and courts routinely grant declaratory relief regarding the scope of insurance coverage before the underlying claims have matured or finally adjudicated. A declaratory judgment would conclusively establish the parties’ rights and obligations. In the bankruptcy context, declaratory relief is warranted when necessary to achieve a successful reorganization.
*293Property of the estate includes contingent claims. As stated above, if coverage is found, the assets of the Debtors’ estate could potentially increase, affecting a plan of reorganization. As required for a declaratory judgment, the interests of the parties as to the Policy Coverage are adverse. First American seeks a determination that Longview is not entitled to coverage, whereas Plaintiffs seek a determination that coverage exists. A declaratory judgment would be conclusive on the issue of coverage, and would resolve the dispute between First American and Plaintiffs. Therefore, the Court finds that this case is ripe for adjudication.
4. 28 U.S.C. § 1359 Does not Affect Jurisdiction
First American next contends that the Debtors and the Collateral Agent have improperly colluded, via the Assignment, to create a basis for this Court to assert jurisdiction over matters relating to the Policy. Under 28 U.S.C. § 1359, “[a] district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court.” Generally, courts consider a number of factors to determine whether parties have colluded to manufacture jurisdiction, including:
The assignee’s lack of a pervious connection with the claim assigned; the remittance by the assignee to the assignor of any recovery; whether the assignor actually controls the conduct of the litigation; the timing of the assignment; the lack of any meaningful consideration for the assignment; and the underlying purpose of the assignment.
Federal Realty Inv. Trust v. Juniper Props. Group, 2000 WL 424287, at *4 (E.D.Pa. Apr. 18, 2000).
First American argues that § 1359’s prohibition on collusive assignments applies to this case. In a nutshell, First American accurately observes that there would be no doubt that this Court would lack jurisdiction in the absence of the Assignment; hence, it deems the assignment to be nothing more than a tool to manufacture jurisdiction and wrongly bring this dispute to a forum selected by the Debtors. The Plaintiffs respond first that § 1359 does not apply to bankruptcy cases. Second, and more importantly, the Plaintiffs contend that the assignment was not the product of wrongful collusion and that the question of collusion raises disputed issues of fact not suitable for disposition under Rule 12.
It is an interesting question whether 28 U.S.C. § 1359 applies to bankruptcy proceedings. E.g., Belcufine v. Aloe, 112 F.3d 633, 637 (3d Cir.1984) (“The district court pointed out that it was unclear whether Section 1359 even applied to federal question cases, i.e., non-diversity cases.”) but see In re Maislin Indus., 66 B.R. 614, 617 (E.D.Mich.1986) (holding that 28 U.S.C. § 1359 applies in the context of a bankruptcy proceeding). Even assuming that Section 1359 applied, a motion to dismiss is an inappropriate basis for ruling today because a significant factual question remains. At this stage, there is no evidence of collusion in the record, as required under Section § 1359. For a motion to dismiss, all factual allegations of the plaintiffs must be taken as true. The record before the Court is thus not sufficient to permit disposition of the collusive jurisdiction argument at this stage.
B. Abstention
Mandatory abstention under 28 U.S.C. § 1334(c)(2) requires that each of six separate elements must be satisfied: (1) the motion to abstain must be timely *294filed; (2) the underlying action must be based on a state law claim or cause of action; (3) an action must have already been commenced in state court; (4) the action must be able to be timely adjudicated in the non-bankruptcy court venue; (5) there must be no independent basis for federal jurisdiction that would have permitted the action to be commenced in federal court absent bankruptcy and (6) the matter must be non-core under 28 U.S.C. § 157. In Re Mobile Tool Int’l, 320 B.R. 552, 556 (Bankr.D.Del.2005). The moving party carries the burden to establish each of these six requirements; where all six requirements are met, a bankruptcy court must abstain in favor of having the litigation proceed in another forum. Id.
Permissive abstention under 28 U.S.C. § 1334(c)(1) provides that “in the interest of justice, or in the interest of comity with State courts or respect for State law,” a court may “abstain[] from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.” In determining whether to permissively abstain from hearing a matter, courts consider twelve factors, including the presence of a related proceeding commenced in state court or other non-bankruptcy court, and the need for timely and efficient administration of the estate. In re Direct Response Media, Inc., 466 B.R. 626, 659 (Bankr.D.Del.2012).
The Court’s decision to deny the request for both mandatory and permissive abstention turns on (i) the lack of a properly filed related proceeding previously commenced in the California Action and (ii) the need for timely and efficient resolution of the issue, which are factors of both mandatory and permissive abstention. The Court’s discussion below of whether the California Action was properly commenced and whether the California Action can be timely and efficiently adjudicated thus applies to both mandatory and permissive abstention.
1. The California Action was not Properly Commenced Before the Filing of the Adversary Proceeding
First American argues that the coverage claim in the California Action was filed prior to this adversary proceeding. Abstention may be proper even where the state court action is filed on the same day as the bankruptcy proceeding. Trans World Airlines, Inc. v. Icahn (In re Trans World Airlines, Inc.), 278 B.R. 42, 50 (Bankr.D.Del.2002). Once commenced, the state court action does not need to be pending in order to satisfy this requirement. Stoe v. Flaherty, 436 F.3d 209, 214 (3d Cir.2006) (“ ‘Is commenced’ simply cannot reasonably be read to require both commencement and ongoing pendency in state court. In that regard, § 1334(c)(2) stands in sharp contrast to § 1334(e), which refers to the ‘district court in which a case under title 11 is commenced or is pending....’. Congress could have likewise required that there exist a “pending” case in state court as a prerequisite to mandatory abstention, but it opted not to do so.” (internal citation omitted)).
Plaintiffs respond by observing that the California Action was not commenced before the filing of the Debtors’ Chapter 11 petitions. Plaintiffs further note that even if it was timely filed, the California Action does not cover each of the issues raised in this adversary proceeding and does not include the debtors as parties to the proceeding. The Amended Complaint seeks a judgment declaring that the applicable proceeds of the Policy are property of the Debtors’ bankruptcy estate pursuant to Section 541(a) of the Bankruptcy Code. Finally, abstaining in favor of the California Action, which does not include the *295Debtors, would harm the Debtors because they would be unable to protect their interests in assets of these chapter 11 estates, and could be collaterally estopped to the detriment of these estates.
The Court finds that the California Action was not properly commenced prior to the filing of this bankruptcy proceeding. The majority of courts have found that a state court proceeding must be pending prior to the commencement of the bankruptcy in order to warrant abstention. In re Freeway Foods of Greensboro, Inc., 449 B.R. 860, 878 (Bankr.M.D.N.C.2011) (“The clear majority of cases supports the position that the cause of action must be pending in state court prior to the bankruptcy for mandatory abstention to apply.”); 1 Collier on Bankruptcy, ¶ 3:05[2] (“[M]any courts have held that for [mandatory abstention] to be applicable, the cause of action must have been commenced prior to the filing of the petition commencing the title 11 cases”). See also Houston Baseball Partners LLC v. Comcast Corp. (In re Houston Regional Sports Network, L.P.), 514 B.R. 211, 214 (Bankr.S.D.Tex.2014) (“Section 1334(c)(2) requires that a state court action must be commenced prior to the bankruptcy proceeding.... Because the state-court action was filed post-petition, mandatory abstention is not warranted.”); In re Jefferson County, Ala., 484 B.R. 427, 445-46 (Bankr.N.D.Ala.2012) (“[A]n action must be pending in state court prior to the bankruptcy for mandatory abstention to apply.”); In re Ferretti Constr. Inc., 208 B.R. 396, 398 (Bankr.S.D.Tex.1995) (“Mandatory abstention does not apply ... [because] [a]nother proceeding has not been commenced in a State forum of appropriate jurisdiction. Such a proceeding against the Debtor could not have been commenced without the movant first obtaining relief from the automatic stay.”). To recognize the California Action here as a legitimate predicate for abstention could create flawed incentives, encouraging parties to take the risk of commencing post-petition litigation, in hopes of convincing a bankruptcy court to defer to that other forum. The undisputed record is that the California Action was filed over nine months after the August 30, 2013 petition date in these cases. The Court finds that the California Action was therefore not properly commenced prior to the bankruptcy proceeding; mandatory and permissive abstention are not required here.
2. First American has not Carried its Burden to Prove the California Action can be Timely Adjudicated
First American contends that the California Action can be timely adjudicated in the state court in California. The record before this Court reflects that the Debtors and First American are moving forward here with discovery and briefing in anticipation of a scheduled trial on the merits of the coverage dispute (in the context of the confirmation hearing) in mid-November of this year. The California Action, by contrast, remains at its earliest stages (with no answer yet filed) and is currently subject to this Court’s June 19, 2014 Order staying that litigation.
These Chapter 11 cases have been pending for over a year, and the Debtors have already stated that their reorganization strategy cannot move forward absent a ruling on the issues relating to the Policy. It seems highly improbable that the litigation in California could be re-started and prosecuted on a timeline comparable to what the parties have already established in this Court. Accordingly, the Court finds and concludes that First American has not carried its burden to demonstrate that the coverage dispute can be timely adjudicated in the state court in California. The request for abstention is denied.
*296V. CONCLUSION
For the foregoing reasons, the Court finds that there is no basis to dismiss the Amended Complaint and there is no basis to abstain under either mandatory or permissive abstention. Therefore, First American’s Motion will be denied. An appropriate Order follows.
. This Opinion constitutes the Court’s findings of fact and conclusions of law, as required by the Federal Rules of Bankruptcy *286Procedure. See Fed. R. Bankr.P. 7052, 9014(c). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497449/ | Opinion
STEPHEN RASLAVICH, Bankruptcy Judge.
Introduction
Before the Court are the Requests of Sunrise Furniture Co. Ltd. (Sunrise) and Weisheng Zhangzhou Industrial (Weish-eng) for Payment of Administrative Expenses. Both the Debtor and the Official Committee for the Unsecured Creditors oppose the Requests. For the reasons set forth below, the request of Sunrise will be denied in its entirety. The request of Weisheng for the same relief will be granted in part and denied in part.1
Administrative Claim For the Sale of Goods
Sunrise and Weisheng base their entitlement to administrative priority upon their having sold goods to the Debtor within a short period of time prior to its bankruptcy filing. The Bankruptcy Code provides that “[a]fter notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including — the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debt- or’s business.” 11 U.S.C. § 503(b)(9). The language of the statute provides for the allowance of an administrative claim provided the claimant establishes: (1) the claimant sold “goods” to the debtor; (2) the goods were received by the debtor within twenty days prior to filing; and (3) the goods were sold to the debtor in the ordinary course of business. In re Goody’s Family Clothing, Inc., 401 B.R. 131, 133 (Bkrtcy.D.Del.2009) (emphasis added).
This section is an exception to the treatment of unsecured creditors who supply goods or services prepetition. In re Pilgrim’s Pride Corp., 421 B.R. 231, 240 (Bkrtcy.N.D.Tex.2009). It is intended to work in conjunction with § 546(c) for sellers who have valid reclamation claims. Ningbo Chenglu Paper Products Mfg. Co., Ltd. v. Momenta, Inc. (In re Momenta, Inc.), 11-cv-479, 2012 WL 3765171, at *4 (D.N.H. Aug. 29, 2012). Section 503(b)(9) “provides a supplemental remedy for those sellers who would be preferred reclamation sellers, but for a minor disqualification under section 546(a).” Id. Not being intended to create a new class of creditors, § 503(b)(9) is to be strictly construed. See Howard Delivery Serv. Inc. v. Zurich Am. Insur. Co., 547 U.S. 651, 655, 126 S.Ct. *2982105, 2106, 165 L.Ed.2d 110 (2006) (noting discrete exceptions to the general equality principle must be “clearly authorized by Congress”). A claimant seeking allowance of an administrative claim bears the initial burden of proof. Goody’s, 401 B.R. at 137 n. 27.
Record
The matters have been submitted to the Court on a stipulated evidentiary record and there are no facts in dispute. The parties agree on two of the three elements required for priority under § 503(b)(9): (1) that the claimants sold goods to the Debt- or and (2) that such sales occurred in the ordinary course of the Debtor’s business. That leaves only the question of whether the Debtor received the goods within the 20 days prior to bankruptcy. In this regard, the operative dates, in particular, are not in dispute and are found in the supporting documents attached to both claims. Each claim is comprised of more than one order for the purchase of goods. For each such order, there is a set of four documents: Purchase Order, Packing List, Commercial Invoice, and Bill of Lading. As to the Sunrise claim, two shipments of goods originated from China and were shipped from Shenzhen on June 19 and June 23, 2013. Both of the Sunrise shipments were delivered directly to customers of the Debtor (i.e., “drop-shipped”) on July 13 and July 18, 2013. As to the Weisheng claim, three shipments of goods likewise originated from China and were shipped from Xiamen on June 13 and June 17, 2013. Two of the three Weisheng shipments were “drop-shipped” and the third shipment was delivered directly to the Debtor. These deliveries occurred on July 13 and July 17, 2013, respectively.
Issue
There are two issues for the Court to address, the first is legal and the second factual. The legal issue arises because four of the five shipments were delivered directly to the Debtor’s customers. Just one shipment went directly to the Debtor. It is the Debtor’s position that a drop-shipment is not received by the retail merchant and so it can never qualify for administrative priority status under § 503(b)(9).
The factual issue pertains to the one Weisheng shipment which did go directly to the Debtor. For that shipment to attain priority, the record must reflect that it was received by the Debtor within 20 days prior to bankruptcy.
Drop Shipments and Receipt
On the question of whether a retail merchant ever “receives” drop-shipped goods the Debtor maintains that every case to consider the question has held that § 503(b)(9) applies only if the debtor physically received goods and not merely the value of the goods with in the requisite time period. Debtor’s Objection, 4. The claimants respond that the Uniform Commercial Code recognizes that receipt of goods by a buyer includes receipt by the buyer’s representative or subpurchaser. Sunrise/Weisheng Letter Brief, 5. Other than that statutory authority, the claimants rely on an article in a trade journal wherein the author opines that drop-shipped goods should be deemed to have been received by the debtor for purposes of § 503(b)(9). Id.
Of the four cases cited by the Debtor for the proposition that drop shipments are never received by a debtor, the Court finds two of the four cases particularly helpful to its analysis.2 In In re Plastech Engi*299neered Products, Inc., 394 B.R. 147 (Bkrtcy.E.D.Mich.2008), the seller of goods argued that although the goods were delivered directly to a customer of the debtor, the debtor need not receive the goods in order to claim administrative priority. Id. at 158 Instead, argued the seller, the debt- or’s receipt of the value of the goods should suffice. The Bankruptcy Court rejected the reasoning based on the express language of § 503(b)(9). Id. at 161
The case which is most useful for present purposes is the District Court of New Hampshire’s decision in Ningbo, supra. In that case, the Court undertook a thorough analysis of the history of section 503(b)(9) to determine the meaning of “receipt”
Congress did not define the term “received” as it is used in Section 503(b)(9). Nor is that term defined elsewhere in the Bankruptcy Code. But it appears that Congress intended that the term, as used in Section 503(b)(9), should be construed consistently with the reclamation section of the Code, Section 546(c). As the bankruptcy court correctly noted, changes made to the Bankruptcy Code in 2005 suggest an intent to create a priority administrative expense as a supplemental remedy for reclamation sellers, and not, as Ning-bo argues, a priority remedy for all sellers who deliver goods pursuant to a contract with the debtor and within twenty days preceding bankruptcy.
Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Section 546(c)(2) allowed a “ ‘court [to] deny reclamation to a seller with such right of reclamation that has made such a demand,’ but ‘only if the court’ ” awarded an administrative expense claim or secured the seller’s “ ‘claim by a lien.’ ” Dana Corp., 367 B.R. at 414 (quoting 11 U.S.C. Sec. 546(c)(2) prior to BAPCPA). In other words, before BAPCPA, an administrative expense priority served as an alternative remedy to reclamation, but only if the seller met Section 546(c)’s notice requirement. [citations omitted]
In 2005, BAPCPA modified the reclamation rules under an amendatory provision titled “Reclamation.” See Sec. 1227 “Reclamation,” Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, § 1227(b), 119 Stat. 23, 119-200. The provision deleted language in Section 546(c)(2) authorizing courts to allow an administrative expense claim (ie., allow a cash payment in lieu of reclamation) where a seller had otherwise made a proper reclamation demand. See In re TI Acquisition, LLC, 410 B.R. 742, 745-46 (Bankr.N.D.Ga.2009) (detailing legislative changes). It also added new language to Section 546(c) specifying that, even if “a seller of goods fails to provide notice in the manner described [in Section 546(c)(1), it] still may assert the rights contained in Section 503(b)(9).” 11 U.S.C. Sec. 546(c)(2). Finally, it added Section 503(b)(9), providing an administrative priority claim for goods the debtor received within twenty *300days before bankruptcy. See In re TI Acquisition, 410 B.R. at 746.
Ningbo, supra, 2012 WL 3765171, at **4-5. While “Congress meant to expand and clarify the rights of reclamation sellers, [it] did not intend to quietly create a new and expansive creditor class entitled to a unique priority.” Id. at *5 The Ningbo Court also observed that such an intent comported with the policy behind Chapter 11 reorganizations:
[A] narrow reading of Section 503(b)(9), that reserves its remedy for would-be reclamation sellers, would likely enhance prospects for successful reorganization, while respecting creditor equality principles. Because the debtor must set aside cash to pay priority administrative expenses, the larger the class of creditors entitled to 503(b)(9) relief, the larger the potential cash reserve needed, and the less likely a debtor will successfully reorganize. That is not an insignificant consideration. See In re Plastech Engineered Prods., Inc., 394 B.R. 147, 151 (Bankr.E.D.Mich.2008) (Section 503(b)(9) “creat[es] a large and potentially insurmountable cash hurdle for a debtor to confirm a plan”).
Id. at *6 The District Court construed the phrase “received by the debtor” in this context to mean “possessed by the debtor, either actually or constructively.” Id. It therefore affirmed the Bankruptcy Court’s holding that a drop-shipment to a debtor’s customer does not constitute even constructive possession for purposes of § 503(b)(9). Id. at *7 The Court finds the District Court of New Hampshire’s reasoning to be persuasive and will be guided by it. As the goods delivered under drop-shipment arrangements were not “received” by the Debtor for purposes of § 503(b)(9), the Sunrise and Weisheng drop-shipments are not entitled to administrative priority.
Direct Shipment
That leaves the remaining portion of the Weisheng claim, which is based on goods shipped directly to the Debtor. In its Certification in support of its claim, Weisheng lists that shipment as having been placed on board a vessel in China on June 13, 2013. As matters are, that fact is dispositive in favor of Weisheng’s right to administrative priority for this portion of its claim. The parties will recall that this Court’s June 18 Opinion ruled adversely to a virtually identical request made by two other claimants.3 See In re World Imports, Ltd., 511 B.R. 738 (Bkrtcy.E.D.Pa.2014). There the claimants argued that although the goods in question were placed onboard the vessel more than 20 days pri- or to bankruptcy, the Debtor “received” them within 20 days prior to bankruptcy when it took actual physical possession of the goods. The Court rejected this premise. Based on international trade terms, the Court held that the receipt of goods occurred when the goods were placed on the ships in China. That date was more than 20 days prior to bankruptcy. Based on that finding, the request for priority was denied.
In support of the instant claims, Weish-eng and Sunrise essentially ask the Court to reconsider its holding that receipt for purposes of international sales of goods *301occurs when goods are placed on the ship for transport. This is a bit puzzling — as to at least Weisheng — given that such a holding supports Weisheng’s claim that its direct shipment is entitled to priority. In any event, the Court declines to reconsider its prior ruling, as it sees no basis to depart from the legal conclusions reached in the June 18 ruling. The Court will, however, address the arguments raised by the claimants that alteration or amendment is warranted.
Sunrise and Weisheng offered two grounds for reconsideration. First, while they concede that the contract is governed by a treaty (the CISG (Contract of Goods) which incorporates international trade terms (i.e., “Incoterms”); they maintain that those legal sources fail to define the term “receipt.” Sunrise/Weisheng Letter Brief, 3. That, they say, requires the Court to look elsewhere for a definition. Id. Second, they argue, in the alternative, that the trade terms incorporated by the CISG (the Incoterms) in fact provide a ready definition from which the meaning of the term “receipt” can be found. Id., 4-5
The Court dismisses these arguments. As to the first, the Court sees no disposi-tive omission in the Incoterms® 2010. As previously noted, among the Incoterms is a definition of the shipping term “FOB.” That was the term under which the shipment in the June 18 Opinion was shipped. The Court held the definition of FOB to mean that the buyer took delivery of the goods when they were placed on board the ship in China, and that, in turn, was when “receipt” occurred. Its opinion has not changed in this regard. There is, then, no reason to look to sources outside the Inco-terms for a definition of “receipt.”
As to the second argument; to wit, that the Court failed to properly note in the Incoterms® 2010 Introduction an explanation of the term FOB that would indicate that “receipt” occurs after the goods are physically delivered to the buyer, the Court finds the argument to misconstrue the terms. In support of its claim that receipt also occurs when the goods are offloaded at the end of the shipment the claimants rely on the following language:
In the second class of Incoterms® 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both points, hence the label “sea and inland waterway” rules.
Incoterms® 2010 Introduction, 7. According to the claimants, “[t]his passage distinguishes the point of delivery (i.e., where the goods are handed over to the common carrier) from the place where the buyer takes possession of them through physical receipt.” Sunrise/Weisheng Letter Brief, 4. In other words, say the claimants, under an FOB shipment the goods are delivered to the Chinese port but are not received until the buyer takes physical possession of the goods.
Before parsing the language of this excerpt, a preliminary point is in order. This excerpt does not come from a specific definition of an Incoterm. It appears in the Introduction to the Incoterms® 2010. The Introduction serves to generally explain the amendments to the previous edition.4 The Introduction is akin to dicta. That alone should caution against assigning emphasis to it.
But more importantly, the claimants have taken this excerpt from the Introduction out of context. The entirety of the excerpt states as follows.
Main features of the Incoterms® 2010 rules
*3022. Classification of the 11 Inco-terms® 2010 rules
The 11 Incoterms® 2010 rules are presented in two distinct classes:
RULES FOR ANY MODE OR MODES OF TRANSPORT
EXW EX WORKS FCA FREE CARRIER
CPT CARRIAGE PAID TO
CIP CARRIAGE AND INSURANCE PAID TO
DAT DELIVERED AT TERMINAL DAP DELIVERED AT PLACE DDP DELIVERED DUTY PAID
RULES FOR SEA AND INLAND WATERWAY TRANSPORT
FAS FREE ALONSIDE SHIP FOB FREE ON BOARD
CFR COST AND FREIGHT
CIF COST INSURANCE AND FREIGHT
The first class includes the seven Inco-terms® 2010 rules than can be used irrespective of the mode of transport selected and irrespective whether one or more than one mode of transport is employed. EXW, FCA, CPT, CIP, CAT, DAP and DDP belong to this class. They can be used even when there is no maritime transport at all. It is important to remember, however, that these rules can be used in cases where a ship is used for part of the carriage.
In the second class of Incoterms® 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both points, hence the label “sea and inland waterway” rules. FAS, FOB, CFR, and CIF belong to this class. Under the last three Incoterms rules, all mention of the ship’s rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel. This more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.
Incoterms® 2010, 6-7 (emphasis added)
Viewed in context, this excerpt from the Introduction serves not to define a term but to differentiate some terms from others. Specifically, it distinguishes the shipping terms that involve maritime transport. In such cases two ports are necessarily involved: the port of origination and the port of arrival. The first port is where the delivery of the goods occurs. The second port is the port to which they are carried. This cannot reasonably be construed to imply that receipt of goods by the buyer occurs either over some continuum or at the end of the journey. Rather, the excerpt explains that the 4 Incoterms for sea and inland waterway transport — among which is FOB — define delivery to occur the moment the goods are placed on board. It simply eliminates the antiquated notion that cargo crossing the ship’s rail marks the point of its delivery.
The body of the text of the Incoterms® 2010 contains the definition of “receipt” pertinent to the Court’s June 18 Opinion. The text devotes a chapter to the definition of FOB, which is the shipping term relevant to both the present transaction and, the sale at issue in the Court’s prior ruling. Again, under an FOB shipment, delivery occurs when the goods are placed on board at the port of origin. Inco-terms® 2010, FOB, 88 ¶ A4 That is when the buyer must take delivery of the goods. Id., ¶ B4. That is why the Court previously determined that receipt of the goods occurred in China when they were placed on board. The Court reaches the same conclusion in this case.
*303
Conclusion
The entirety of the Sunrise claims and the drop-shipment portion of the Weisheng claim will be denied administrative priority. The portion of the Weisheng claims represented by Bill of Lading OERT203702C00591 will be allowed as an administrative expense.5
An appropriate order follows.
. As this matter involves allowance or disal-lowance of claims against the estate it is within this court’s core jurisdiction. See 28 U.S.C. § 157(b)(2)(B).
. The other cases, which are somewhat on point, are In re Circuit City Stores, Inc., 432 B.R. 225 (Bkrtcy.E.D.Va.2010) and In re Pridgen, 2008 WL 1836950 (Bankrtcy.E.D.N.C. *299April 22, 2008). These involved goods delivered to the debtor on a consignment basis. The debtor in Circuit City housed goods from Panasonic in its warehouses until the goods were sold to consumers. Panasonic's request for administrative priority for unpaid goods was denied because the debtor did not receive title to the goods until the sale of the goods to customers. Likewise the debtor in Pridgen, a grocer, never obtained title to the gasoline which it sold to its consumers from its store. The gasoline supplier was denied administrative priority for the same reason.
. Counsel for Sunrise and Weisheng was in attendance at the hearing where the Court heard the similar claimants’ request for administrative priority. Because the Sunrise and Weisheng claims were not technically before the Court on that date, those claimants were given the opportunity to decide whether to press their claims depending on the court's ruling in the prior matter. They have done so, but their claims largely fail for the same reasons.
. The Incoterms® 2010 is the current version and amends the Incoterms® 2000.
. As to this sale, the shipping documents relative to it reflect that the goods in question were placed onboard ship in China within 20 days of the Debtor’s bankruptcy filing; they were therefore received by the Debtor within the requisite time period and thus qualify for administrative priority. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497452/ | Chapter 13
MEMORANDUM OPINION
Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE
Before the Court is a Motion to Dismiss the Debtor’s chapter 13 case, submitted by HSBC Bank, USA (“HSBC”). For the reasons set forth below, the Court finds that 11 U.S.C. § 1127(e) does not prevent the Debtor from filing a subsequent chapter 13 case after substantial consummation of the Debtor’s prior chapter 11 plan (the “Chapter 11 Plan”). The Debtor experienced a substantial and unanticipated change in her financial condition and her chapter 13 bankruptcy ease was filed in good faith. Therefore, the Court denies HSBC’s Motion to Dismiss.
Factual Background
HSBC is a creditor of Diana Elizabeth Lemus (the “Debtor”). The claim held by HSBC is evidenced by a promissory note (the “Note”) dated October 15, 2001, in the original principal amount of $450,800.00. The Note is secured by a Deed of Trust on real and personal property held by the Debtor. On April 20, 2010 (the “Chapter 11 Petition Date”), the Debtor filed a Voluntary Petition under chapter 11 of the Bankruptcy Code1 (the “Chapter 11 Bankruptcy Case”). As of the Chapter 11 Petition Date, the total amount of the arrear-age due under the Note was $20,787.39. On September 23, 2010, the Court entered a consent order (the “Consent Order”) in the Chapter 11 Bankruptcy Case modifying the terms of the automatic stay in order to permit and require the Debtor to resume making payments to HSBC on the Note. The terms of the Consent Order were subsequently incorporated into the Debtor’s Chapter 11 Plan, which was confirmed and substantially consummated.2 On August 30, 2013 a Final Decree was entered in the Debtor’s Chapter 11 Bankruptcy Case. On October 7, 2013 the case was closed.
*336The Debtor defaulted under her Chapter 11 Plan by failing to make the required payments on the Note. HSBC eventually scheduled a foreclosure sale for the property secured by the Note. When HSBC sent Notice of Default to the Debtor on June 27, 2013, the total arrearage due under the Note had ballooned to $53,406.70.
The Debtor filed a Voluntary Petition under chapter 13 of the Bankruptcy Code3 (the “Chapter 13 Bankruptcy Case”) on March 18, 2014 (the “Chapter 13 Petition Date”), in order to stop the foreclosure. The outstanding balance of the Note including all accrued interest and expenses for which the Debtor remained indebted as of the Chapter 13 Petition Date was $308,071.72. On April 10, 2014, HSBC filed its Motion to Dismiss the Debtor’s Chapter 13 Bankruptcy Case (the “Motion to Dismiss”) contending that the Debtor’s new Chapter 13 Bankruptcy Case was an impermissible attempt to modify the Plan that had been confirmed in the prior Chapter 11 Bankruptcy Case. The Court held a hearing (the “Hearing”) on the Motion to Dismiss on June 25, 2014. At the conclusion of the Hearing, the Court ordered the parties to submit supplemental briefs addressing the issue whether 11 U.S.C. § 1127(e) authorized an individual debtor to modify a confirmed and substantially consummated chapter 11 plan. This memorandum opinion sets forth the Court’s findings of fact and conclusions of law under Rule 7052 of the Federal Rules of Bankruptcy Procedure.4
Jurisdiction and Venue
The Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334, and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2). Venue is appropriate in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
Analysis
HSBC contends in its Motion to Dismiss that the Debtor cannot modify her Chapter 11 Plan once it has been substantially consummated.5 HSBC contends that the filing of the Debtor’s subsequent Chapter 13 Bankruptcy Case is nothing more than an attempt to modify her prior confirmed Chapter 11 Plan. HSBC relies on section 1127(b) of the Bankruptcy Code, which provides that “[t]he proponent of a plan or the reorganized debtor may modify [a] plan at any time ... before substantial consummation of such plan.” 11 U.S.C § 1127(b). HSBC argues that a modification of a chapter 11 plan by filing a subsequent chapter 13 case is prohibited by § 1127(b) of the Bankruptcy Code unless a *337substantial and unanticipated change in financial condition has occurred.
HSBC is correct that modification of a chapter 11 plan following substantial consummation of the plan is generally prohibited by Bankruptcy Code § 1127(b). However, an exception exists in Bankruptcy Code § 1127(e) when the debtor is an individual. Congress added subsection (e) to § 1127 through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub.L. No. 109-8, 119 Stat. 23 (2005). That subsection reads as follows:
(e) If the debtor is an individual, the plan may be modified at any time after confirmation of the plan but before the completion of payments under the plan, whether or not the plan has been substantially consummated, upon request of the debtor, the trustee, the United States 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 period for such payments; or
(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim made other than under the plan.
11 U.S.C. 1127(e).
There is a relatively small amount of case law interpreting § 1127(e) of the Bankruptcy Code. Additionally, the legislative history pertaining to § 1127(e) is sparse. The few courts that have considered the amendment have looked to Bank-ruptey Code §§ 1229(a) and 1329(a) for guidance. These sections are substantially analogous to § 1127(e). In fact, “[sjection 1127(e) was added to the Bankruptcy Code in 2005 for the purpose of making the provisions for postconfirmation of chapter 11 plans when the debtor is an individual similar (but not identical) to the provisions for postconfirmation modifications of chapter 12 or chapter 13 plans.” 7 Collier on Bankruptcy ¶ 1127.04 (16th ed. 2014) (internal footnote omitted).
The United States Court of Appeals for the Fourth Circuit has held that res judicata6 bars the modification of a confirmed chapter 13 plan unless the debt- or has experienced a substantial and unanticipated post-confirmation change in financial condition. Murphy v. O’Donnell (In re Murphy), 474 F.3d 143 (4th Cir.2007). HSBC primarily relies on this case and the case of In re Mercer, Case No. 09-04088-8-ATS, 2013 WL 6507585 (Bankr.E.D.N.C. Dec. 12, 2013) to advance its argument. Both of these decisions are distinguishable from the case at bar.
In Murphy, the Fourth Circuit considered whether a Chapter 13 Trustee could modify the plans in two separate unrelated chapter 13 cases in order to increase the dividend paid to unsecured creditors. Discussing the modification standard in the Fourth Circuit, the court held that “the bankruptcy court must first determine if the debtor experienced a substantial and unanticipated change in his post-confirmation financial condition.” Murphy, 474 F.3d at 150. This initial inquiry is necessary to determine if res judicata prevents modification of the plan. “If the change in the debtor’s financial condition was either insubstantial or anticipated, or both, the *338doctrine of res judicata will prevent the modification of the confirmed plan.” Id.
In Mercer, an unsecured creditor sought to modify the debtor’s confirmed chapter 11 plan pursuant to § 1127(e). The United States Bankruptcy Court for the Eastern District of North Carolina, relying on the Fourth Circuit’s analysis in Murphy, found that the unsecured creditor could not modify the debtor’s plan post-confirmation. Mercer, 2013 WL 6507585 at *4-5. Reciting the post-confirmation modification standard in chapter 13 cases, the court in Mercer stated “[t]he right of the trustee or the holder of an unsecured claim should be limited to situations in which there has been an unanticipated substantial change in the debtor’s income or expenses that was not anticipated at the time of the confirmation hearing.” Id. at *4 (quoting 8 Collier on Bankruptcy ¶ 1329.03 (16th ed. 2013)).
HSBC’s contention is that under Mercer and Murphy the Debtor cannot use Bankruptcy Code § 1127(e) to modify her confirmed Chapter 11 Plan by filing a subsequent chapter 13 case absent a substantial and unanticipated change in circumstances. What has occurred here, however, is not a modification of the Debt- or’s confirmed Chapter 11 Plan in the context of the prior Chapter 11 Bankruptcy Case, but rather a subsequent filing of an entirely new bankruptcy case. Further financial reorganization in a subsequent bankruptcy case does not constitute a plan modification in the prior case. New parties, new debt, new assets, and new circumstances may be present in this subsequent case that were entirely absent in the first. A new order for relief has been issued. Section 1129(a)(ll) of the Bankruptcy Code contemplates the possibility that an unlikely need for further reorganization or liquidation could possibly arise. The res judicata standard that was applicable to a plan modification initiated by the Chapter 13 Trustee in Murphy is not applicable here. This is simply a new case. Nothing in the Bankruptcy Code prohibits a debtor from having successive chapter 11 and chapter 13 cases. The case law does require, however, that the subsequent chapter 13 case be filed by the debtor in good faith.
The United States Bankruptcy Court for the Southern District of Texas considered whether the Bankruptcy Code would permit a debtor to file a new chapter 13 case before the debtor had received a discharge in a prior chapter 11 case.7 In re McMahan, 481 B.R. 901 (Bankr.S.D.Tex.2012). In McMahan, the debtor filed a chapter 13 plan following his confirmed chapter 11 plan with the primary purpose being to change the payment schedule that the debtor had negotiated with his bank in the chapter 11 case. Id. at 904. In analyzing whether the Bankruptcy Code permitted this subsequent filing, the court stated that “inherent in any bankruptcy case is a fundamental prerequisite: a debtor must file his petition in good faith.” Id. at 915 (citing Elmwood Dev. Co. v. Gen. Elec. Pension Trust (In re Elmwood), 964 F.2d 508, 510 (5th Cir. *3391992)). The purpose of this requirement is twofold, first to protect the rights of creditors and second to maintain the integrity of the bankruptcy system. Id. The court went on to find that the good faith requirement is applicable to a chapter 13 case filed while the debtor is still involved in an active chapter 11 case. Id.
The appropriate issue for the Court to address in the case at bar is whether the Debtor has filed her subsequent Chapter 13 Bankruptcy Case in good faith. This Court has previously addressed the issue of good faith, applying a totality of the circumstances approach to its consideration of the confirmation requirements for a chapter 13 plan.8 In re Chaney, 362 B.R. 690 (Bankr.E.D.Va.2007). The Court noted that the Fourth Circuit Court of Appeals has instructed that:
While no precise definition can be sculpted to fit the term “good faith” for every Chapter 13 case, we think the generally accepted definition of “good faith” as used in Chapter 11 of the old Bankruptcy Act, 11 U.S.C. § 766(4) (1976) (repealed), provides the general parameters: “A comprehensive definition of good faith is not practical. Broadly speaking, the basic inquiry should be whether or not under the circumstances of the case there has been an abuse of the provisions, purpose, or spirit of [the Chapter] in the proposal or plan.”
Deans v. O’Donnell, 692 F.2d 968, 972 (4th Cir.1982) (quoting 9 Collier on Bankruptcy ¶ 9.20 at 319 (14th ed. 1978)). The Court must examine and determine in this context whether the Debtor’s new Chapter 13 Bankruptcy Case violates the spirit of the Bankruptcy Code, is a ploy to frustrate creditors, or is a “sincere effort on the part of the debtor to advance the goals and purposes of chapter 13.” Chaney, 362 B.R. at 694. The court may consider in this context whether the debtor has experienced a substantial change in his or her financial affairs. Id. There is no precise, enumerated test the Court must employ for determining whether the Debtor has engaged in good faith. In fact, “courts may consider any factors that evidence ‘intent to abuse the judicial process’ or factors that show ‘a petition was filed to delay or frustrate legitimate efforts of a secured creditor to enforce his rights.’ ” McMahan, 481 B.R. at 915 (quoting MacElvain v. I.R.S., 180 B.R. 670, 673 (M.D.Ala.1995)).
Here, the Court finds that the Debtor is making a good faith effort to repay creditors and has not filed this subsequent Chapter 13 Bankruptcy Case with the intent to delay or frustrate the efforts of secured creditors to enforce their rights. The facts in this case are distinguishable from those in McMahan, where the court found the debtor was not proceeding in good faith. In McMahan, the debtor filed the subsequent chapter 13 case with essentially the sole purpose of frustrating the efforts of a creditor pursuing foreclosure. See id. at 920-21. That is not the Debtor’s purpose for filing her chapter 13 in this case.
The evidence before the Court in this case comes from the testimony of the Debtor at the Hearing, as well as from documents filed with the Court. The first factor that supports a finding that the Debtor is proceeding in good faith is that she has, in fact, experienced a substantial and unanticipated change in her financial condition. While debtors generally experience a negative change in their financial condition prior to modifying their existing *340plan or filing a new plan, the Debtor in this case has experienced a positive change in her financial condition. The Debtor’s monthly income has increased from the time she filed her Chapter 11 Bankruptcy Case. The Debtor testified that this increase in her income resulted from her ability to lease the majority of the space available in her commercial real estate and from her ability to realize increased commissions from the distribution of Herbalife nutritional products. In contrast, the debtor in McMahan had not experienced any substantial and unanticipated change in his financial condition. See id. at 919 (“[T]his Court concludes that there are no unforeseen changed circumstances.”). As the McMahan court advised, “unanticipated changed circumstances could justify a Chapter 24 petition”9 and “a second petition would not necessarily contradict the original proceedings because a legitimately varied and previously unknown factual scenario might require a different plan to accomplish the goal of bankruptcy.” Id. (quoting In re Elmwood, 964 F.2d at 511-12) (internal quotation marks omitted). As a result of the Debtor’s change in financial circumstances in the case at bar, the Debtor is now capable of paying her secured, priority, and unsecured creditors in her proposed Chapter 13 Plan, something she was incapable of doing in her Chapter 11 Bankruptcy Case. The Debt- or’s changed circumstances and efforts to repay creditors support a finding that the Debtor is proceeding in good faith.
In addition to payment of the Note held by HSBC, the Debtor’s Second Amended Chapter 13 Plan provides for the payment of numerous secured debts including debts owed to the City of Richmond for delinquent rental property taxes. The Second Amended Chapter 13 Plan provides for the payment of tax claims filed by the Internal Revenue Service. It also provides for payment of a portion of the Debtor’s unsecured debt such as that owing for unpaid utility bills. The Debtor’s Second Amended Plan proposes to pay a total of $419,825.00 to creditors over sixty months. The Court is persuaded by the evidence that the Debtor is not proceeding with the intent to either frustrate the legitimate efforts of secured creditors or to impinge upon the goals and purposes of chapter 13. Rather, the Debtor’s proposed plan is indi-cia of the Debtor filing her Chapter 13 Bankruptcy Case in good faith.
The Court holds that Bankruptcy Code § 1127 does not prevent the Debtor from filing a subsequent chapter 13 case after substantial consummation of her Chapter 11 Plan. The Court finds that the Debtor has experienced a substantial and unanticipated change in her financial condition and that she is proceeding in her Chapter 13 Bankruptcy Case with a good faith effort to repay her creditors. Thus, HSBC’s Motion to Dismiss will be denied.
A separate order shall issue.
. 11 U.S.C. §§ 1101-1174. All further references to the Bankruptcy Code are to the Bankruptcy Code as codified at 11 U.S.C. §§ 101 et seq.
. Substantial Consummation is a defined term in chapter 11 of the Bankruptcy Code. It is defined as follows:
*336(2) "substantial consummation” means— (A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan.
11 U.S.C. § 1101(2).
. 11 U.S.C. §§ 1301-1330.
. Rule 9014(c) of the Federal Rules of Bankruptcy Procedure makes Rule 7052 applicable to this contested matter. Findings of fact shall be construed as conclusions of law and conclusions of law shall be construed as findings of fact when appropriate. See Fed. R. Bankr.P. 7052, 9014.
.Whether a chapter 11 plan has been substantially consummated is a question of fact to be determined by the bankruptcy court on a case-by-case basis. In re United States Brass Corp., 255 B.R. 189 (Bankr.E.D.Tex.2000). There is no dispute in this case that substantial consummation of the Debtor’s Chapter 11 Plan has occurred.
. Res Judicata, which is also known as claim preclusion, is the legal principle under which "a final judgment on the merits bars further claims by parties or their privies based on the same cause of action.” Montana v. U.S., 440 U.S. 147, 153, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979).
. An individual debtor in chapter 11 generally does not receive a discharge until all plan payments are completed, unless one of the exceptions contained in the subsection are satisfied. 11 U.S.C. § 1141(d)(5) ("(d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan — ... (5) In a case in which the debtor is an individual' — (A) unless after notice and a hearing the court orders otherwise for cause, confirmation of the plan does not discharge any debt provided for in the plan until the court grants a discharge on completion of all payments under the plan.”). Congress added subsection (d) to § 1141 in 2005 through the BAPCPA amendments.
. Bankruptcy Code § 1325(a)(3) requires that the chapter 13 plan be proposed in good faith.
. A "Chapter 24 petition," in bankruptcy parlance, is a chapter 11 case followed by a chapter 13 case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497453/ | MEMORANDUM OPINION
PAUL M. BLACK, Bankruptcy Judge.
This matter comes before the Court on the Motion for Rule 9011 Sanctions (the “Motion”) filed by Doris W. Tucker (the “Debtor”) against Beneficial Mortgage Co. of Va. a/k/a Beneficial Financial, Inc. (“Beneficial”),1 John T. Arnold, Esquire, and Moss & Rocovich, P.C. (collectively “the Respondents”). A Response to the Motion was filed on August 14, 2014 by Matthew D. Huebschman, Esquire, counsel for the Respondents. A hearing was held on August 19, 2014, where the Debtor was sworn and testified. Mr. Huebschman also appeared. On August 19, 2014, the matter was taken under advisement. For the reasons stated herein, the Motion is denied.
STATEMENT OF THE CASE
On October 19, 2014, the Debtor filed a pro se bankruptcy petition for relief under Chapter 7 of the Bankruptcy Code. On February 12, 2013, the Debtor received a discharge in her bankruptcy case, and her case was closed on the same date. On July 31, 2014, this Court granted the Debt- or’s Motion to Reopen her bankruptcy case. The Debtor filed the Motion on July 29, 2014, alleging that Beneficial and its counsel violated the automatic stay and requested sanctions, and Beneficial, by its counsel, filed a Response, attaching a copy of a State Court Complaint (“Complaint”) pending in the Circuit Court of the City of Roanoke, Virginia (the “State Court”). A hearing on the Motion and the Response was held on August 19, 2014.
In her Motion, the Debtor alleges that she filed a Suggestion of Bankruptcy in the State Court on February 27, 2013, and that Beneficial’s refusal to dismiss the pending case in State Court violates the automatic stay of 11 U.S.C. § 362. The Response and the Complaint tell a somewhat different story. The Response reflects that on September 25, 2012, Beneficial and Surety Trustees, LLC, filed a complaint against the Debtor, Theodore Tucker (“Tucker”), Freedom First Federal Credit Union, and Paul Phillips, Trustee in the State Court.2 The Complaint asserts, among other things, that Beneficial loaned $117,493.40 to the Debtor and Tucker on September 25, 2002, that the loan was evidenced by a Note secured by a deed of trust on the Debtor’s residence located at 116 Beech Street, N.W., Roanoke, Virginia (the “Residence”), and that the Debtor and Tucker defaulted on the debt in 2008. The Complaint also alleges that the Debtor and Tucker tendered a fraudulent check in the amount of $195,000.00 to Beneficial to pay off the Note, and conspired with D. Scott Heineman (“Heineman”) and Kurt F. *343Johnson (“Johnson”) to commit the fraud. An excess of $47,274.46 was remitted to the Debtor and Tucker after the note was paid off and the deed of trust released.
The Complaint further alleges that the following documents were placed of record pertaining to the Residence: (1) a Quitclaim Deed dated August 3, 2004 from Nance and the Debtor to Heineman and Johnson, Trustees of the Tucker Family Trust, (2) Notice of Intent to Correct Title dated August 18, 2004, (3) Substitution of Trustee dated November 2, 2004 under which Heineman purported to act as attorney-in-fact on behalf of Beneficial to substitute Heineman as the Trustee under the Beneficial Deed of Trust, (4) document of “Full Conveyance” dated September 7, 2004 executed by Heineman purportedly as substitute Trustee under the Beneficial Deed of Trust, (5) Quitclaim Deed dated in the year 2005 from Heineman and Johnson, Trustees of the Tucker Family Trust to Nance and Tucker, purporting to recover the Residence, and (6) Common Law Lien dated January 9, 2009, executed by Nance which purported, among other things, to assert a $150,000.00 lien against the Residence in reliance upon the Magna Carta and Declaration of Independence, among other authorities. The Complaint further alleges that in 2008, Heineman and Johnson were convicted on 35 counts of operating a conspiracy to defraud mortgage lenders and were sentenced to federal prison sentences of 21 and 25 years, respectively.
According to the Complaint, pursuant to Va.Code § 55-66.10, Beneficial executed and recorded multiple Documents of Rescission to rescind the releases of its deed of trust. After demanding payments due and receiving no payments, but before the Debtor filed for bankruptcy, Beneficial commenced the action in State Court seeking a declaratory judgment that Beneficial holds a first Deed of Trust on the property, a constructive trust on the property, and judgment against the Debtor and Tucker for all amounts due under the Note at that time, totaling $176,797.07, plus the recovery of the overpayment refund. The Response also admitted that the Debtor filed a Notice of Suggestion of Bankruptcy in the State Court on February 27, 2013, and it is undisputed that Beneficial and its counsel received notice of her bankruptcy case.
The Response alleges that the State Court granted Beneficial’s demurrer to various counterclaims the Debtor filed against it, along with its motion for entry of default against Tucker, but required evidence before setting damages against him. Beneficial asked for a pre-trial hearing in State Court, which was set for July 30, 2014, and on July 29, 2014, the day before the pre-trial hearing, the Debtor filed her motion to reopen her bankruptcy case, which was followed by the pending Motion for sanctions.
At the hearing on the Motion, the Debt- or testified that in addition to the pending State Court foreclosure proceedings, letters sent from Beneficial requesting payment on her discharged debt also provide grounds for Rule 9011 sanctions. A letter dated June 17, 2014 by Beneficial to the Debtor was admitted as Plaintiffs Exhibit 1. The Debtor also testified that she and Tucker did not conspire with Heineman or Johnson, and stated that Heineman and Johnson were imprisoned in 2007, while the check at issue was written in 2009. Further, the Debtor testified that Beneficial has not produced the original check and has not produced any evidence in their State Court case. In response to a question from the Court, the Debtor testified that although she had spoken to three different legal aid attorneys about the pending matter, she did not receive any *344assistance in drafting the Motion she filed and that she conducted her own research on Rule 9011.3
At the hearing, counsel for the Respondents reiterated Beneficial’s position that although it did obtain a default judgment against Tucker, Beneficial has not tried to collect from the Debtor personally since she filed her bankruptcy petition. Counsel also argued that Beneficial’s State Court proceeding is purely in rem in nature and that the letter admitted as Exhibit 1 contains a notification that it is not applicable to a debtor that is currently protected by the automatic stay or a debtor that has received a discharge in bankruptcy. Consequently, the Respondents contend that neither the State Court proceeding nor the letter violate the discharge injunction of 11 U.S.C. § 524.
CONCLUSIONS OF LAW
This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on July 24, 1984 and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. This Court further concludes that consideration of a motion for sanctions for a violation of the automatic stay is a “core” bankruptcy proceeding within the meaning of 28 U.S.C. § 157(b)(2)(G).4
Fed. R. Bankr.P. 9011 provides in part:
(a) Signature. Every petition, pleading, written motion, and other paper, except a list, schedule, or statement, or amendments thereto, shall be signed by at least one attorney of record in the attorney’s individual name. A party who is not represented by an attorney shall sign all papers. Each paper shall state the signer’s address and telephone number, if any. An unsigned paper shall be stricken unless omission of the signature is corrected promptly after being called to the attention of the attorney or party.
(b) Representations to the Court. 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 *345or 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;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.
(c) Sanctions. If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.
Fed. R. BaNkrJP. 9011(a)-(c).
Rule 9011 conforms to Fed. R.Civ.P. 11, and accordingly, “[c]ourts may look to case law interpreting Rule 11 when deciding cases under Bankruptcy Rule 9011.” In re Babcock, 258 B.R. 646, 651 (Bankr.E.D.Va.2001) (citing McGahren v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1170 (4th Cir.1997)); In re Atlas Mach. & Iron Works, Inc., 190 B.R. 796, 806 (Bankr.E.D.Va.1995). The primary purpose of Rule 11 is “to deter baseless filings ... and thus, streamline the administration and procedure of the federal courts.” Cooler & Gell v. Hartmarx Corp., 496 U.S. 384, 393, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990). Rule 9011, like Fed.R.Civ.P. 11, “only applies to acts undertaken in a case before the court.” Davant v. Bailey (In re Bailey), No. 09-2564, Adv. No. 10-15, 2010 WL 3277908, at *2, 2010 Bankr.LEXIS 2449, at *4 (Bankr.N.D.W.Va. Aug. 13, 2010) (citing Nationwide Mut. Ins. Co. v. Burke, 897 F.2d 734, 739 (4th Cir.1990)).
As evidence in support of her Motion, the Debtor cites to Beneficial’s failure to dismiss the Circuit Court case and the letter she received from Beneficial. Rule 9011 only applies to documents filed in this Court; therefore, the documents filed in State Court cannot be a basis for granting the Debtor’s Motion. See Nationwide, 897 F.2d at 739 (holding that misrepresentations in documents filed in state court in no way constituted a basis for imposing federal Rule 11 sanctions); In re Bailey, 2010 WL 3277908, at *2-4, 2010 Bankr.LEXIS at *9 (holding that “[r]e-garding Rule 9011, this court is only concerned with documents filed ... in this court” and thus, filings in state court provide no basis to impose sanctions under Rule 9011). In the present case, neither Beneficial nor its counsel signed or filed any documents with this Court that would give rise to the imposition of Rule 9011 sanctions; therefore, Rule 9011 sanctions are not appropriate in this case.
Further, even if Rule 9011 applied here, the actions of Beneficial and its counsel in the State Court proceeding do not provide grounds for sanctions because the actions do not violate the discharge injunction of Section 524. After the Debt- or received her discharge on February 12, 2014, the automatic stay of Section 362 terminated. 11 U.S.C. § 362(c)(2)(C). Nevertheless, the discharge injunction of Section 524 went into effect to protect the Debtor from collection actions on personal liability for pre-petition debts. See, e.g., In *346re Neilsen, 443 B.R. 718, 723 (Bankr.W.D.Va.2011); Rountree v. Nunnery (In re Rountree), 448 B.R. 389, 401 (Bankr.E.D.Va.2011). In order to state a claim for a violation of the discharge injunction, “a debtor must show [by clear and convincing evidence] that a creditor’s actions constitute [ ] an act ... to collect ... [the mortgage loan] as a personal liability of the debtor.” In re Harlan, 402 B.R. 703, 714 (Bankr.W.D.Va.2009) (citation omitted).
In general, a discharge in bankruptcy does not affect any in rem rights that a creditor may have against the debt- or’s property. Rather, a discharge only extinguishes the debtor’s personal liability on a claim. 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.”)-, see also Cen-Pen Corp. v. Hanson, 58 F.3d 89, 92 (4th Cir.1995) (explaining that courts in the Fourth Circuit “have long followed the principle that in rem claims survive the bankruptcy discharge, while in personam claims are extinguished”); In re Rountree, 448 B.R. at 401 (citing 11 U.S.C. § 524(a)(2) (2011)) (“[T]he discharge injunction does not prohibit the creditor from enforcing an in rem claim against the debtor’s property”).
Beneficial’s State Court proceeding seeks an order finding that it holds a valid first priority lien on the Debtor’s Residence. While the pre-bankruptcy request for a judgment is intertwined with the request for in rem relief, Beneficial and its counsel have taken no action to establish any debt as a personal liability of the Debtor post-discharge. It has sought only in rem relief. Given the state of title on the Residence with the many allegedly dubious filings in the land records, and the alleged fraudulently induced release of its deed of trust, Beneficial’s in rem proceeding is not without basis. Therefore, neither Beneficial nor its counsel have violated the discharge injunction through their actions in State Court seeking a declaratory judgment as to its lien position.
In addition, the letter from Beneficial to the Debtor, admitted into evidence as Exhibit 1, does not violate the discharge injunction. The letter does indicate that the Debtor’s “account is currently past due.” Ex. 1. On the back of the letter, and in all capital letters, is a notification that “[t]his statement and any reference in this notice to a personal obligation to make payment do not apply to you if you filed a bankruptcy petition and received a discharge of your personal liability for the obligation identified in this letter or if there is an automatic stay currently in effect. In either case we may not and do not intend to pursue collection of the obligation from you personally and this letter is not intended as a demand from you personally....” Ex. 1.
Harlan, cited above, and Curtis v. LaSalle National Bank (In re Curtis), 322 B.R. 470 (Bankr.D.Mass.2005), both addressed similar letters sent to debtors in the past. However, the present case differs from Harlan and Curtis in that the notification in this case was not hidden in the letter, but set out separately in all capital letters. See Harlan, 402 B.R. at 707 (noting that “[t]he lone indication that [the creditor] was only attempting to enforce its in rem rights is embedded in regular font in the middle of the second paragraph”); Curtis, 322 B.R. at 484 n. 18 (noting that the notification appeared “on the backside of the first page ... and without the capital letters and bold print employed for other sections of the letter”); see also Anderson v. Bank of Am., No. *3476:12-cv-00017, 2012 WL 4458474, at *2-4, 2012 U.S. Dist. LEXIS 95309, at *9-10 (W.D.Va. July 11, 2012) (distinguishing Harlan and Curtis, and finding that a letter sent to the debtor containing a notification similar to the one in the instant case did not violate the discharge injunction of Section 524).
CONCLUSION
For the foregoing reasons, the Debtor’s Motion is denied. An Order to such effect shall be entered contemporaneously herewith.
. Although the Debtor listed "Beneficial Financial, Inc." as the Respondent in her Motion, according to the Respondents, the correct entity is Beneficial Financial I Inc. Beneficial Financial I Inc. is the successor by merger to Beneficial Mortgage Co. of Va.
. Freedom First is the holder of a subordinate deed of trust on the Residence recorded on March 6, 2006. Paul Phillips is the trustee under the deed of trust. Pis.’ Compl. ¶¶ 7-8.
. The Court accepts the Debtor's testimony that she received no undisclosed assistance on the Motion. However, given the nature of the Motion and the manner in which it was drafted, it raised the suspicion of having been "ghost-written.” The Virginia State Bar recently released Legal Ethics Opinion 1874 ("LEO 1874”) on the subject of "ghost-writing” for pro se litigants, finding it to be not objectionable in certain circumstances. To the extent that the practicing bar may intend to rely on LEO 1874 in the future to "ghostwrite” in this Court, all counsel should be aware that this Court takes a different view. This Court agrees with those courts that find, at a minimum, the practice of ghost-writing transgresses counsel's duty of candor to the Court and such practice is expressly disavowed. See, e.g., Chaplin v. DuPont Advance Fiber Sys., 303 F.Supp.2d 766, 773 (E.D.Va.2004) (“[T]he practice of ghost-writing will not be tolerated in this Court.”); In re Mungo, 305 B.R. 762, 767-70 (Bankr.D.S.C.2003).
. Although this Motion concerns a violation of the automatic stay, and not the "termination], annulment], or modification]” of the automatic stay, "the list of core proceedings in § 157(b)(2) is illustrative, not exhaustive.” In re Depew, 51 B.R. 1010, 1014 (Bankr.E.D.Tenn.1985). In addition, "Section 157(b)(2)(G) ... indicates that issues related to the automatic stay are core.” Hughes-Bechtol, Inc. v. Ohio (In re Hughes-Bechtol, Inc.), 141 B.R. 946, 953 (Bankr.S.D.Ohio 1992) (finding that alleged stay violations are "core” bankruptcy proceedings). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497454/ | MEMORANDUM OPINION
JASON D. WOODARD, Bankruptcy Judge.
This adversary proceeding comes before the Court for consideration of the Adversary Complaint to Determine Discharge-ability of Debt (the “Complaint”) (A.P. Dkt. # 1) filed by Custom Recycling Systems, Inc. (the “Plaintiff’) against debtor Charles Nathan Blake (the “Defendant”). Phase one of a bifurcated trial on the adversary proceeding was held on August 7, 2014, at which time a representative of the Plaintiff, Daniel Skinner, counsel for the Plaintiff, Gary Street Goodwin, the Defendant, and counsel for the Defendant, T.K. Moffett, all appeared. Arguments were heard and certain documents were received into evidence by stipulation of the parties. The Court also heard testimony from several witnesses. This Court has jurisdiction pursuant to 28 U.S.C. §§ 151, 157(a) and 1334(b) and the United States District Court for the Northern District of Mississippi’s Order Of Reference Dated August 6, 1984. This is a core proceeding as set forth in 28 U.S.C. § 157(b)(2)(I) and (J).
The Plaintiff seeks a determination that debts owed to the Plaintiff by the Defendant are nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4) and/or (a)(6). As a threshold matter, Plaintiff asserts that collateral estoppel applies and pre-*354eludes further litigation on the issue of nondischargeability.1 The Plaintiffs claim arises from a default judgment (the “District Court Judgment”) entered by the United States District Court for the Northern District of Mississippi (the “District Court”) against the Defendant in the amount of $149,446.35, plus interest thereon. (District Court Case No. 1:07-CV-306). If collateral estoppel applies, further hearing on the merits is unnecessary as the debts would be nondischargeable under § 523(a)(6). Hence, the trial was bifurcated to first allow presentation of evidence related to the collateral estoppel issue, and the Court restricted the parties’ initial presentation of evidence to that issue.2 For the reasons set forth below, the Court finds that collateral estoppel does apply, and the Plaintiff is entitled to a judgment of nondischargeability under 11 U.S.C. § 523(a)(6).
I. FINDINGS OF FACT3
Prior to the litigation, the parties had a business relationship where Defendant performed repairs and service on several pieces of machinery and equipment owned by the Plaintiff. Sometime prior to or around 2007, the business relationship between the parties deteriorated and was eventually terminated. The Plaintiff contends that near the end of the business relationship, Defendant converted five items of equipment belonging to the Plaintiff.4 The Defendant denies the Plaintiffs allegations and asserts that to the extent he retained any of Plaintiffs property, it was essentially a setoff due to Plaintiffs wrongful refusal to pay him for services rendered.
On November 29, 2007, Plaintiff filed suit against Defendant and Blake Equipment Sales, LLC (“BES”) in the District Court alleging conversion of Plaintiffs property (the “District Court Case”). Defendant retained counsel who remained as counsel of record for the duration of the District Court Case.
Defendant filed a Rule 12(b) Motion to Dismiss (the “Motion to Dismiss”) (Ex. P-1C) on February 28, 2008, alleging that the District Court lacked subject matter jurisdiction to hear the suit.5 Defendant also filed a brief in support of the Motion to Dismiss. (Ex. P-1D). Plaintiff filed a file-*355sponse to Defendants’ Rule 12(b) Motion to Dismiss (Ex. P-1H) on April 9, 2008. The District Court entered an order denying the Motion to Dismiss on June 7, 2008. (Ex. P-11). Thereafter, on July 22, 2008, Defendant filed Motion for Time to Respond to Complaint (Ex. P-1J), which was granted by the District Court on July 25, 2008 (Ex. P-1K). Pursuant to that order, the Defendant was given until August 14, 2008 to respond to the Plaintiffs Complaint (the “District Court Complaint”). The Defendant filed no further response to the Complaint.
On September 18, 2008, during the pen-dency of the District Court Case, the Defendant filed a voluntary petition for relief pursuant to Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”) in this Court. (Bankr. Dkt. # l).6 On September 22, 2008, the Defendant filed a Motion to Stay Proceedings in the District Court Case (Ex. P-1L), asserting that pursuant to § 362, any further proceedings in the District Court Case were stayed pending the outcome of the Defendant’s bankruptcy case. The Motion to Stay Proceedings was granted by order of the District Court on September 26, 2008 (Ex. P-1Q).
Around that same time, on September 23, 2008, counsel for the Defendant filed a Motion to Withdraw as Counsel for BES (but not Defendant). (Ex. P-1M). On September 25, 2008, the District Court entered an order denying the Motion to Withdraw as Counsel. The District Court made explicitly clear in its order that it would only allow counsel to withdraw in three circumstances: (1) when the rules of professional responsibility make it untenable for the attorney to continue; (2) when substitute counsel has been obtained by a party; and (3) when a party make clear an unequivocal and intelligent decision to proceed pro se. The Court found that none of the three circumstances applied, and that accordingly the Motion to Withdraw was not well-taken, and counsel was not excused from representing BES. (Ex. P-1P).
In March 2009, Plaintiff filed a Motion to Lift Automatic Stay (the “Motion to Lift Stay”) (Bankr. Dkt. # 42) and a Motion for Extension of Deadline for Filing of Complaint to Determine Dischargeability (the “Motion for Extension”) (Bankr. Dkt. # 47) in the Defendant’s bankruptcy case. The Motion to Lift Stay asserted that the result in the District Court Case could resolve the dischargeability issue in this Court. Accordingly, Plaintiff requested that the automatic stay be lifted for the purpose of proceeding with the District Court Case to reduce that action to judgment. (Bankr. Dkt. # 42). Similarly, the Motion for Extension requested that if the Motion to Lift were granted, that the Plaintiff also be given until thirty days after any District Court judgment became non-appealable to file a complaint to determine dischargeability of certain debts in this Court. (Bankr. Dkt. # 47).7 Both the Motion to Lift Stay and the Motion for Extension were granted by order of this Court on June 18, 2009 (Bankr. Dkt. # 114).
The automatic stay having been lifted by this Court, the parties proceeded with the District Court Case. (Ex. P-1S). Defendant failed to file an answer to the District Court Complaint. Evidence submitted to this Court without objection establishes *356that the Defendant, at all times, received proper service and notice of all motions filed and orders entered in the District Court Case. (Ex. P-1Z). Again, Defendant also had counsel of record throughout the District Court Case.
On April 5, 2010, Plaintiff filed an Application to Clerk for Entry of Default and Supporting Affidavit (Ex. P-1T) in the District Court Case, requesting that, in accordance with Rule 55(a) of the Federal Rules of Civil Procedure, an entry of default be entered against the Defendant for his failure to answer or otherwise defend the District Court Complaint. A clerk’s default was thereafter entered. (Ex. P-1U). On April 6, 2010, Plaintiff also filed an Application to Court for Default Judgment and for Hearing (Ex. P-1V), requesting a default judgment against the Defendant. The Plaintiff requested that the District Court conduct an evidentiary hearing to determine damages and any other matter that the District Court may need to determine. The District Court granted the Application, but ordered the Plaintiff to file affidavits and other supporting evidence in lieu of a hearing. (Ex. P-1W). The District Court indicated that it would hold a hearing if there were substantial issues remaining following its review of the evidentiary submission. (Id.)
On August 27, 2010, the Plaintiff filed a Motion for Determination of Damages and for Entry of Default Judgment Awarding Damages (the “Motion for Default”) (Ex. P-1X), which included the affidavit of Daniel Skinner, president of the Plaintiff (Ex. P-1X, “A”), a copy of the Defendant’s deposition taken April 13, 2010 (Ex. P-1X, “B”), various documents relating to the purchase and sale of the equipment in question (Ex. P-1X, “Collective C”), the attorney’s fee affidavit of Mr. Goodwin (Ex. P-1X, “D”), and a deposition transcript of Justin Hastings, vice president of the Plaintiff (Ex. P-1X, “E”).
On September 24, 2010, the District Court entered the District Court Judgment. (Ex. P-1Y). In the District Court Judgment, the court specifically stated that its decision was made after consideration of the affidavits and documentary exhibits. The Court explained that its findings were based on evidence showing that the Defendant had wrongfully come into possession of, or wrongfully detained, equipment belonging to the Plaintiff. Although one of the five items of equipment in question was returned to the Plaintiff during the pendency of the litigation, the District Court found that the remaining four items “were converted by the defendants in a malicious and willful manner, due to the defendant’s own financial condition.” (Ex. P-1Y) (emphasis added). The District Court further found that the Defendant had converted $26,000.00 in equipment sale proceeds belonging to the Plaintiff. Accordingly, the District Court ordered that Plaintiff recover judgment from Defendant in the total amount of $149,446.35. Of that amount, the District Court awarded $133,200.00 in compensatory damages and $16,246.35 in punitive damages.8 Lastly, it was ordered that interest was to accrue on the judgment amount at a rate of 0.26 percent per an-num from and after the date the Default Judgment was entered. The Plaintiff then returned to this Court to seek determination of the dischargeability of the District Court Judgment.
II. CONCLUSIONS OF LAW
The doctrine of collateral estop-*357pel9 dictates that “once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.” Montana v. U.S., 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979). See also Southern Pacific R. Co. v. United States, 168 U.S. 1, 48-49, 18 S.Ct. 18, 27, 42 L.Ed. 355 (1897) (“a right, question or fact distinctly put in issue and directly determined by a court of competent jurisdiction ... cannot be disputed in a subsequent suit between the same parties or their privies ... ”). As similarly stated by the Fifth Circuit Court of Appeals, “when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot again be litigated between the same parties in any future lawsuit.” RecoverEdge, L.P. v. Pentecost, 44 F.3d 1284, 1290 (5th Cir.1995) (quoting Ashe v. Swenson, 397 U.S. 436, 443, 90 S.Ct. 1189, 1194, 25 L.Ed.2d 469 (1970)). Collateral estoppel has the effect of “establishing conclusively questions of law or fact that have received a final judgment for the purposes of a later lawsuit.” Walker v. Kerr-McGee Chem. Corp., 793 F.Supp. 688, 694 (N.D.Miss. 1992). Collateral estoppel principles apply in nondischargeability proceedings under the Bankruptcy Code. Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991).
In determining whether a federal court judgment has preclusive effect, the federal standard applies.10 Kerr-McGee, 793 F.Supp. at 697. Under the federal standard, there are three elements that must all be satisfied for collateral estoppel to apply:11
(1) that the issue at stake be identical to one involved in the prior litigation;
(2) that the issue have been actually litigated in the prior litigation; and
(3) that the determination of the issue in the prior litigation was a critical and necessary part of the judgment in that earlier action.
See, e.g., Bradberry v. Jefferson Cnty., Tex., 732 F.3d 540, 548 (5th Cir.2013); Kerr-McGee, 793 F.Supp. at 694; Rain Bird Corporation v. Salisbury (In re Salisbury), 331 B.R. 682, 685-86 (Bankr.N.D.Miss.2005). All three elements are satisfied in this case.
*358A. Identical Issues
Plaintiffs claims in both this Court and the District Court are largely the same— the Defendant converted Plaintiffs property and thereby caused injury to the Plaintiff. Upon review of the Motion for Default and the evidence submitted therewith, the District Court found that the Plaintiff had converted four pieces of equipment owned by the Plaintiff, as well as $26,000.00 of equipment sale proceeds also belonging to the Plaintiff.
The tort of conversion involves “a wrongful possession, or the exercise of a dominion in exclusion or defiance of the owner’s right, or of an unauthorized and injurious use, or of a wrongful detention after demand.” Stevens v. Smith, 71 So.3d 1230, 1233 (Miss.Ct.App.2011) (citing Cmty. Bank, Ellisville, Miss. v. Courtney, 884 So.2d 767, 772-73 (¶ 10) (Miss.2004)(quoting Smith v. Franklin Custodian Funds, Inc., 726 So.2d 144, 149 (¶ 20) (Miss.1998))). There is a conversion only when there is “intent to exercise dominion or control over goods which is inconsistent with the true owner’s right.” First Investors Corp. v. Rayner, 738 So.2d 228, 234 (Miss.1999). The intent required does not have to be that of a wrongdoer. Id. That is to say, one may be liable for the tort of conversion even if acting under a good-faith mistake of fact or law. Walker v. Brown, 501 So.2d 358, 361 (Miss.1987). See also Masonite Corp. v. Williamson, 404 So.2d 565, 567-68 (Miss.1981) (“[N]either a mistake of fact on the part of [the defendant] ... nor [his] good faith ... is a defense to this action of conversion.”)
Although the act of conversion can be “intentional” or “unintentional” (for lack of a better term), the Plaintiff has always alleged both before this Court and the District Court that the Defendant’s actions were intentional. Because the District Court specifically found, based on the evidence before it, that the Defendant’s acts of conversion were “willful and malicious,” this Court finds that the issue litigated in the District Court is identical to the issue before this Court.
It also bears noting that the Defendant’s bankruptcy case had already been filed by the time the District Court Judgment was entered. The Order Lifting Stay entered by this Court specifically provided that the facts alleged in the District Court litigation, if proven in that court, could constitute an exception to discharge in this Court. The District Court and all parties were aware of the District Court Case’s connection to the bankruptcy case, and the District Court specifically found that the Defendant’s actions were willful and malicious, not simply that conversion had occurred.
This Court is not left to compare the factors of “willful and malicious” with the specific intent to commit conversion — -the District Court already specifically found that the items were converted in a willful and malicious manner. The District Court’s use of such precise language with regard to intent leads this Court to the conclusion that the District Court knew that it was an important consideration in the bankruptcy case.
B. Issue Actually Litigated in Prior Action
Although the District Court Case resulted in a default judgment, the doctrine of collateral estoppel may still apply. “The failure of a defendant to attend the trial does not prevent issue preclusion in a subsequent action, so long as the prior action was actually litigated in the defendant’s absence.” In re Evans, 252 B.R. 366, 369 (Bankr.N.D.Miss.2000). In Pancake v. Reliance Insurance Co. (In re *359Pancake), 106 F.3d 1242 (5th Cir.1997), the Fifth Circuit explained that
[f]or purposes of collateral estoppel ... the critical inquiry is not directed at the nature of the default judgment, but, rather, one must focus on whether an issue was fully and fairly litigated. Thus, even though [Defendant’s] answer was struck, if [Plaintiff] can produce record evidence that the state court conducted a hearing in which [Plaintiff] was put to its evidentiary burden, collateral estoppel may be found to be appropriate.
Id. at 1244-45.
Hence, Pancake mandates that the analysis to be undertaken by this Court is whether the District Court record supports a finding by this Court that the issue was fully and fairly litigated in the District Court.12 Id. The District Court record in this case was fully developed and leads this Court to the conclusion that the issue was fully and fairly litigated. While the District Court declined to hold a hearing, the District Court Judgment was based on an evidentiary record. In the District Court Judgment, the Court explicitly stated that its decision was made upon consideration of the affidavits and other documentary evidence. (Ex. P-1Y). Such evidence and documentation was requested and relied upon by the District Court prior to entry of the District Court Judgment. The District Court explained that its findings were based on evidence showing that the Defendant had wrongfully come into possession of, or wrongfully detained, equipment belonging to the Plaintiff. The District Court Judgment was not based merely on allegations contained in the pleadings, nor was it based merely on the Defendant’s failure to respond.
At trial before this Court, the parties stipulated to the admission of extensive evidence relied upon by the District Court. (Ex. P-1). By submitting these documents into evidence at trial before this Court, the Plaintiff has satisfied the burden set forth by the Fifth Circuit in Pancake. See Sanders v. Nunley (In re Nunley), 237 B.R. 907 (Bankr.N.D.Miss.1999) (collateral estoppel applied in a discharge-ability action to a federal District Court default judgment when based on an evi-dentiary record). Although the District Court Judgment was a default judgment, that judgment was entered only after consideration of an evidentiary record. The Defendant had notice of all hearings and filings leading up to the District Court Judgment, and actually participated in the District Court Case for some time.
C. Issue in the Prior Litigation was Critical and Necessary
It is true that in Mississippi the act of conversion does not always require a tort-feasor to act willfully and maliciously. As stated above, conversion has been committed when there is “intent to exercise dominion or control over goods which is inconsistent with the true owner’s right.” Rayner, 738 So.2d at 234. The intent required does not have to be that of a wrongdoer. Id. However, § 523(a)(6) requires a creditor to show an injury to person or property by the debtor was both willful and malicious.
*360The District Court could have found that the Defendant intended to exercise control over the equipment owned by the Plaintiff (and therefore inconsistent with the Plaintiffs ownership rights of use and possession), but did not intend to cause injury. However, in the matter before this Court, and the District Court, the Plaintiffs allegation has always been that the Defendant intended to act willfully and maliciously. Because the Plaintiff chose not to travel under the negligence theory, but always and only the specific intent theory, it was critical and necessary that the District Court find that the intent existed in entering the District Court Judgment.
In determining whether or not a debt arises from “willful and malicious injury,” the United States Supreme Court has held that subsection (a)(6) applies to “acts done with the actual intent to cause injury,” and does not except from discharge debts arising only from negligently or recklessly inflicted injuries. Kawaauhau v. Geiger, 523 U.S. 57, 59, 118 S.Ct. 974, 975-76, 140 L.Ed.2d 90 (1998). Following the Supreme Court’s analysis in Kawaauhau, the Fifth Circuit has held that “[ajpplying the Supreme Court’s pronouncement ... for a debt to be nondischargeable, a debt- or must have acted with ‘objective substantial certainty or subjective motive’ to inflict injury.” In re Williams, 337 F.3d 504, 508 (5th Cir.2003) (citing Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 603 (5th Cir.1998)). Furthermore, “Kawaauhau held that a willful injury, in this context, is a ‘deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.’ ” In re Shcolnik, 670 F.3d 624, 629 (5th Cir.2012)(emphasis original). In analyzing this standard, the Fifth Circuit has stressed that the requisite intent may be found where the Defendant acted with “objective substantial certainty or subjective motive” to inflict injury. Williams, 337 F.3d at 508 (citing Miller, 156 F.3d at 603).
In the dispute between these two parties, not only was there objective substantial certainty that the Defendant’s actions would cause injury when Plaintiffs property was converted, but Defendant admitted it was his intent to cause the injury. In the deposition of the Defendant, submitted to the District Court as part of the eviden-tiary basis for the Motion for Default, Defendant explained that money was owed to him by the Plaintiff for work done on the Plaintiffs equipment and for other work done for the Plaintiff. (Ex. P-1X, “B”). Defendant maintained that he kept Plaintiffs equipment in response to Plaintiffs failure to pay him for work done. The equipment was likewise sold by the Defendant to satisfy the debts allegedly owed to him by the Plaintiff.
The facts, allegations, pleadings and evidence have always been exclusively concerned with willful and malicious intent. The Plaintiff has never alleged otherwise and gave the District Court no evidence that the conversion was unintentional. The parties and the District Court were aware that the District Court Case would be a precursor to a nondischargeability suit in this Court. Accordingly, the District Court specifically requested eviden-tiary submissions before rendering the Default Judgment, and then in that Default Judgment specifically chose to include the willful and malicious finding. As such, this Court finds that for purposes of collateral estoppel analysis, the determination of the issue of intent in the prior litigation was a critical and necessary part of the judgment in that earlier action.
III. CONCLUSION
Based on the review of the evidence considered by the District Court in *361rendering the District Court Judgment, and considering the requirements for application of the doctrine of collateral estop-pel, the Court finds that collateral estoppel applies. The doctrine provides that “once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.” Montana v. U.S., 440 U.S. at 153, 99 S.Ct. 970. Following the guidelines established by the Fifth Circuit in Brad-berry and Pancake, the Court finds that (1)the issue at stake in this Court (the Defendant’s willful and malicious conversion of Plaintiffs property) is identical to that involved in the prior District Court case, (2) that despite culminating in a default judgment, the issue was fully and litigated in the prior action wherein the Plaintiff met its evidentiary burden, and (3) that the determination of the issue in the prior litigation was a critical and necessary part of the judgment in that earlier action. Bradberry, 732 F.3d at 548; In re Pancake, 106 F.3d at 1245. As such, the parties are precluded from further litigation on the issue of nondischargeability as it relates to § 523(a)(6) and no further evidentiary presentation with regard to the underlying merits is necessary. Accordingly, it is hereby
ORDERED, ADJUDGED and DECREED that the District Court Judgment is nondischargeable pursuant to 11 U.S.C. § 523(a)(6). The Court will enter a Final Judgment consistent with this Memorandum Opinion.
. If collateral estoppel applies, it applies to the "willful and malicious” discharge exception under § 523(a)(6). The Fifth Circuit has held that § 523(a)(6) encompasses the conversion of property by the debtor. Friendly Finance Service Mid-City, Inc. v. Modicue (In re Modicue), 926 F.2d 452, 453 (5th Cir.1991). See also First Family Financial Services v. Burns (In re Burns), 276 B.R. 441, 443 (Bankr.N.D.Miss.2000) ("willful and malicious 'injury' includes a willful and malicious 'conversion.' ”).
. By tacit agreement of the parties, however, some evidence was admitted on the merits of the nondischargeability claim. Still, the parties expressly confirmed their understanding that the Court was to handle the question of applicability of collateral estoppel first.
. To the extent any of the findings of fact are considered conclusions of law, they are adopted as such. To the extent any of the conclusions of law are considered findings of fact, they are adopted as such.
. One of the items of equipment was ultimately recovered during the pendency of litigation between the parties and was not included in the District Court Judgment, nor is the item at issue here.
. Documents from the District Court Case were admitted into evidence at the trial of this adversary proceeding by stipulation. The trial exhibits will be referenced and cited to by the exhibit numbers given to them at trial, as opposed to the docket numbers assigned to them in District Court. Citations to the docket in the main bankruptcy case will be to "Bankr. Dkt. #-” and citations to the bankruptcy adversary proceeding will be to “A.P. Dkt. #-”.
. Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
. This adversary proceeding was filed within thirty (30) days of the date that the District Court Judgment became final and non-ap-pealable.
. The punitive damages assessed were exactly the amount of attorney’s fees claimed by the Plaintiff. This figure was supported by the affidavit of Mr. Goodwin. (Ex. P-1X, “D”).
. The doctrine of collateral estoppel is also known as "issue preclusion,” and the terms are frequently used interchangeably (as compared to the related doctrine of res judicata, which is also known as "claim preclusion”). Matter of Gober, 100 F.3d 1195, 1200 (5th Cir.1996).
. In deciding whether a state court judgment has preclusive effect, the standards of the forum state apply. Canton v. Trudeau (In re Canton), 157 F.3d 1026, 1028 (5th Cir.1998).
. Some Fifth Circuit cases discussing the applicability of collateral estoppel recognize a fourth factor to be applied: whether there are any special circumstances that make it unfair to apply the doctrine. However, these equitable considerations only apply to situations involving “offensive collateral estoppel.” Bradberry, 732 F.3d at 548. See also Swate v. Hartwell (In re Swate), 99 F.3d 1282, 1290 (5th Cir.1996) (noting that some Fifth Circuit cases suggest the equitable fourth factor applied to all collateral estoppel questions). As explained by the United States Supreme Court, "offensive use of collateral estoppel occurs when the plaintiff seeks to foreclose the defendant from litigating an issue the defendant has previously litigated unsuccessfully in an action with another party.” Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 4, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979) (emphasis added). As the parties in the case before this Court are identical, the issue of "offensive collateral estoppel” does not apply and the Court instead applies the three-factor test.
. This Court obviously does not act as an appellate court to the District Court (in fact, the opposite is true). This Court is not to reweigh or reconsider the District Court Case evidence. If the Defendant contends that there was any error in the District Court Judgment, that issue could only have been raised in an appeal of the District Court Judgment. No appeal was taken, and the District Court Judgment is now final and non-appeal-able. Therefore, the Defendant’s new arguments and evidence that the District Court Judgment is incorrect are of no moment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497456/ | MEMORANDUM OPINION AND ORDER
KATHARINE M. SAMSON, Bankruptcy Judge.
This matter came before the Court for trial on May 5 and 6, 2014, (the “Trial”) on the Amended Complaint Objecting to Dis-chargeability of a Debt, (Adv.Dkt. No. 63), filed by creditor-plaintiff Mariano J. Bar-vié (“Barvié”), and the Answer to Complaint, (Adv.Dkt. No. 65), filed by debtor-defendant Stephen F. Broadus (“Broa-dus”). At Trial, Robert Schwartz represented Barvié and George Healy represented Broadus. The parties introduced 42 exhibits by stipulation.1 Exhibits D-6, D-7, D-8, and D-9 were admitted over objection and the Court sustained Broa-dus’s relevance objections to exhibits P-15 *383and P-16 prior to trial, (Adv.Dkt. No. 160).2 The exhibits and the testimony were the only evidence presented at Trial.3 Having considered the evidence, the Court finds that the obligation is non-dischargea-ble in part for the reasons set forth below.4
I. JURISDICTION
The Court has jurisdiction of the parties to and the subject matter of this Adversary pursuant to 28 U.S.C. § 1384. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) & (I).
II. FINDINGS OF FACT
A. The 2006 Promissory Note and Security Agreement
Broadus filed for relief under Chapter 7 of the Bankruptcy Code5 on December 10, 2012. In June of 2006, Broadus obtained a loan from Barvié — an attorney who was close friends with Broadus at the time — in the amount of $825,000.000, which was to be repaid in full at an interest rate of 8% per year by January 30, 2007. (Exh. P-7).6 Broadus used the loan to purchase a leasehold interest in a gas station located at the corner of Pass Road and Ford Street in Gulfport, Mississippi (the “gas station”). (Id.). He formed Broadus Petroleum to purchase the interest in the gas station, and the promissory note and security agreement name both Broadus Petroleum and Stephen Broadus individually as borrower. (Id.).
Based on the testimony of Broadus and Barvié, it appears the loan was originally intended as a gap loan to cover Broadus until he could obtain a long-term loan from a bank. Broadus testified that he was informed by a local banker that he would need 12-24 months of profit and asset history to qualify for a loan. He also testified that he had about two-thirds of the money he needed to obtain the leasehold interest when he approached Barvié, but he asked to borrow the full purchase price because he had to pay for inventory. To secure the loan, Broadus pledged the “Inventory and Goodwill owned by Broa-dus Petroleum for the [gas station].” (Id.). Barvié testified that he drafted the note and agreement, which he gave to Broadus in person. He also testified that Broadus took the documents with him for a period of time before returning to Barvié’s office to sign them.
After the note and security agreement were executed, Broadus made all of the monthly cash payments in accordance with the terms of the note. But when the balloon payment came due in January of 2007, Broadus asked Barvié for additional time to pay off the note. Barvié agreed to *384extend the maturity date of the note and Broadus continued making monthly payments throughout 2007 and 2008. In 2009, Broadus asked to skip a few payments and Barvié again agreed to accommodate him. Broadus did not make any payments from March through May of 2009, and he made reduced payments from June to December of 2009.7 Broadus resumed full payments in January of 2010. (Exh. D-l).
B. The 2010 Renewal
On August 3, 2010, the parties executed another promissory note and security agreement (the “2010 Renewal”). (Exhs. P-1, P-2). No new money was advanced by Barvié, and the terms of the note and security agreement mirrored the previous documents. (Id.). The loan amount on the 2010 note was $297,628.64. (Exh. P-1). Barvié testified that he and Broadus met at Barvié’s office and went over Broa-dus’s payment history to arrive at the new loan amount. The interest rate remained at 8% per year and the monthly payments were to be $2,656.05 with a balloon payment due on October 1, 2010. (Id.). Broadus was still attempting to secure financing with a bank and was also expecting to receive money from the settlement of a claim he had against BP related to the Deepwater Horizon oil spill (the “BP claim”). Broadus testified that he knew he did not have the assets to get a loan from the bank at the time he signed the renewal, but he signed the renewal because he was afraid Barvié would sue him otherwise.
In addition to the inventory and good will of the gas station, Broadus also pledged three properties located in Gulf-port as security for the 2010 note: 2325 Middlecoff Drive; 344 Cowan Lorraine Rd.; and # 8 Hartford Place. (Exh. P-2). Barvié testified that Broadus represented to him that these properties were unencumbered and that he and Broadus had discussed including Broadus’s home as collateral, but Broadus informed him that only his wife was on the title to their home. Broadus testified that Barvié was aware that the properties were encumbered because he discussed the equity he had in each property with Barvié and Bar-vié knew the Middlecoff property was encumbered because Barvié was living there at the time. He also testified that the mortgages on the three properties were all recorded. Barvié testified that he did not do a title search on any of the three pledged properties because he believed Broadus was being truthful about the lack of encumbrances. Broadus made cash payments in accordance with the terms of the 2010 note, but did not make the balloon payment in October of 2010. (Exh. D-l). He did continue to make monthly payments through July of 2011 and one other payment of $2,000.00 in December of 2011 before his payments ceased altogether. (Id.).
Barvié and Broadus discussed another renewal of the note and security agreement in late 2011 or early 2012. Barvié testified that he and Broadus discussed adding, as additional collateral to secure the renewal, Broadus’s BP claim up to the total amount owed and Broadus’s interest in a home located in Mobile, Alabama. Barvié drafted a new note and security agreement, which would have granted Bar-vié a 50% interest in the compensation Broadus received from his BP claim. (Exhs. D-7, D-8). Broadus never signed the new loan documents and testified that he had been advised by independent counsel not to do so. Barvié testified that he filed suit against Broadus and Broadus *385Petroleum8 in April of 2012 and obtained a judgment in excess of $300,000.00, which has not been collected on.
C. Sale of Broadus’s Leasehold Interest in the Gas Station
Unbeknownst to Barvié, Broadus assigned his leasehold interest in the gas station to Ali Hamid on May 11, 2011.9 Hamid’s testimony and the closing statement prepared by William Whitfield indicate that Hamid paid a total of $115,533.00 for Broadus’s interest in the gas station. (Exhs. P-4; P-17 at 23-24). Whitfield testified that Broadus provided him with the information included in the closing statement. (Exh. P-17 at 24). The closing statement indicates that Hamid was to pay $7,074.60 on Broadus’s behalf to Mississippi Commercial Properties, LLC; $40,533.40 on Broadus’s behalf to Hallmark Petroleum; $20,000.00 to Broadus personally in accordance with a promissory note; $40,000.00 in the form of two cashier’s checks paid to Broadus at the time of the sale; and $7,925.00 to Broadus in cash at the time of the sale. (Exh. P-4). Ham-id testified that he made all of these payments. He also testified that he negotiated the deal with Broadus directly and that Broadus never made him aware of any security interest Barvié may have had in the gas station inventory or good will.
Broadus testified that some of the proceeds from the sale of the gas station were used to make the monthly payments to Barvié, but he did not tell Barvié he sold his interest in the gas station and he did not pay him any of the proceeds from the sale, aside from those proceeds that were used to make his monthly payments. He also testified that he intended to repay Barvié in full; he knew Barvié had an interest in the good will and the inventory of the store; and that he chose to use the proceeds from the sale to pay vendors and a cash advance his wife took out on her credit card instead of using them to pay down his loan from Barvié.
Barvié commenced this proceeding and seeks to have the remaining unpaid balance under the 2010 Renewal — $292,-625.08 — plus all accrued interest and reasonable attorney’s fees declared non-dischargeable. (Adv.Dkt. No. 63).
III. CONCLUSIONS OF LAW
A. Burden of Proof
A debtor is generally granted a discharge of all prepetition debts in a chapter 7 bankruptcy case, with the exception of certain debts described in § 523(a). Bandi v. Becnel (In re Bandi), 683 F.3d 671, 674 (5th Cir.2012) cert. denied, — U.S. -, 133 S.Ct. 845, 184 L.Ed.2d 654 (2013). The Fifth Circuit has stated that “[exceptions to discharge should be construed in favor of debtors in accordance with the principle that provisions dealing with this subject are remedial in nature and are designed to give a fresh start to debtors unhampered by pre-existing financial burdens.” In re Davis, 194 F.3d 570, 573 (5th Cir.1999). In a proceeding under § 523, the party seeking a determination of non-dischargeability bears the burden of proof by a preponderance of the evidence.10 Grogan v. Garner, 498 U.S. 279, *386287-88, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Fed. R. Bankr.P. 4005. Requiring the party objecting to the dischargeability of a debt to “carry the burden of proof comports with the policy behind federal bankruptcy law which favors discharge in an effort to provide the debtor with a fresh start.” Rustin v. Rustin (In re Rustin), No. 04-50890-NPO, 2011 WL 5443067, at *7 (Bankr.S.D.Miss. Nov. 9, 2011) (citing 4 Collier on Bankruptcy ¶ 523.05 (16th ed. 2010)). In his complaint, Barvié seeks to have the remaining balance on the 2010 Renewal — $292,625.08 plus accrued interest at the contractual rate of 8 — in addition to attorney’s fees declared non-dischargea-ble. (Adv. Dkt. No. 63 at 10). At trial, Barvié agreed to reduce the amount of his claim by $1,100.00 because he withdrew the remaining balance in another account, in which he and Broadus each had a 50% interest, and Broadus agreed to let him have his half of the money to apply towards the amount owed on the 2010 Renewal. (see Exh. D-18). Thus, Barvié seeks to have $291,525.08 plus accrued interest and attorney’s fees declared non-dischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), (a)(4), (a)(6), or some combination thereof. Therefore, Barvié bears the burden of proving each of the required elements of 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), (a)(4), or (a)(6) by a preponderance of the evidence.
B. 11 U.S.C. § 523(a)(2)(A)
Section 523(a)(2)(A) excepts from discharge “any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, 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) encompasses three similar grounds for non-dischargeability, all of which apply to ‘debts obtained by frauds involving moral turpitude or intentional wrong.’ ” In re Futch, 2011 WL 576071, at *17 (citing First Nat’l Bank LaGrange v. Martin (In re Martin), 963 F.2d 809, 813 (5th Cir.1992)). The Fifth Circuit has recognized a distinction between the elements of proof required for false pretenses or false representation and those required for actual fraud. AT & T Universal Card Servs. v. Mercer (In re Mercer), 246 F.3d 391, 403 (5th Cir.2001). This distinction “appears to be a chronological one, resting upon whether a debt- or’s representation is made with reference to a future event, as opposed to a representation regarding a past or existing fact.” ETRG Investments, LLC v. Hardee (In re Hardee), No. 11-60242, 2013 WL 1084494, at *12 (Bankr.E.D.Tex. Mar. 14, 2013) (citing Bank of Louisiana v. Bercier (In re Bercier), 934 F.2d 689, 692 (5th Cir.1991) (“[A debtor’s] promise ... related to [a] future action [that does] not purport to depict current or past fact ... therefore cannot be defined as a false representation or a false pretense”)).
1. Actual Fraud
A party objecting to discharge of a debt under § 523(a)(2)(A) for actual fraud must demonstrate that: (1) the debtor made representations; (2) the debtor knew the representations were false at the time they were made; (3) the representations were made with the intention and purpose to deceive the creditor; (4) the creditor actually and justifiably relied on the representations; and (5) the creditor sustained a loss as a proximate result of its reliance. RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th Cir.1995). In this case, the Court finds that Barvié has not met the requirements for showing actual fraud un*387der § 528(a)(2)(A) with respect to the 2010 Renewal.
i. Whether Broadus made representations that he knew were false at the time they were made
Broadus made a false representation concerning his ability to repay. He specifically testified that he knew he would not be able to repay the $297,000.00 in three months — either with new loan proceeds or proceeds from his BP claim — when he signed the 2010 Renewal. Nevertheless, he signed the renewal note and security agreement on August 3, 2010, promising to make the monthly payments as well as the balloon payment due on October 1, 2010.11
ii. Whether the representations were made with the intention and purpose of deceiving Barvié
Broadus testified that he signed the renewal documents specifically to avoid being sued. Thus, he promised to make the monthly payments as well as the balloon payment, knowing this promise was false, for the express purpose of avoiding a lawsuit. The Court finds that this clearly demonstrates an intention and purpose to deceive Barvié.
iii.Whether Barvié relied on Broadus’s representations
Section 523(a)(2)(A) requires justifiable — not reasonable — reliance. Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). This standard “takes into account the knowledge and relationship of the parties themselves.” Eugene Parks Law Corp. Defined Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1459 (9th Cir.1992). But “[t]he justifiable reliance standard imposes no duty to investigate unless the falsity of the representation is readily apparent or obvious or there are ‘red flags’ indicating such reliance is unwarranted.” Third Coast Bank v. Cohen (In re Cohen), No. 12-1004, 2013 WL 4079369, at *12 (Bankr.E.D.Tex. Aug. 13, 2013) (citing Manheim Auto. Fin. Servs, Inc. v. Hurst (In re Hurst), 337 B.R. 125, 133-34 (Bankr.N.D.Tex.2005)). Moreover, “[a] person may be justified in relying on a representation of fact ‘although he might have ascertained the falsity of the representation had he made an investigation.’ ” In re Futch, No. 09-01841-NPO, 2011 WL 576071, at *20 (Bankr.S.D.Miss. Feb. 4, 2011) (citing Field v. Mans, 516 U.S. 59, 70, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (quoting The Restatement (Second) of Torts, § 537 (1976))). But, if “under the circumstances, the facts should be apparent to one of [the promisee’s] knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning he is being deceived,” reliance is not justified without further investigation. In re Mercer, 246 F.3d 391, 418 (5th Cir.2001) (quoting Prosser, Law of Torts § 108, 718 (4th ed. 1971)). “Stated another way, unless the falsity of a misrepresentation is obvious, or unless there are ‘red flags’ that serve as a warning that he is being deceived, a person’s reliance is justifiable.” Id. (citing In re Mercer, 246 F.3d 391, 418 (5th Cir.2001)).
Barvié did not justifiably rely on Broadus’s promise of repayment because the original loan served as a red flag, *388which should have made the falsity of Broadus’s promise to repay the 2010 Renewal within 3 months obvious to Barvié. In Weeber v. Boyd (In re Boyd), 322 B.R. 318 (Bankr.N.D.Ohio 2004), the court found that the creditor did not rely on the debtor’s promise of repayment because the evidence showed that the creditor “had special knowledge of the [djebtor’s financial situation and the possibility of nonpayment due to the fact that on a previous occasion he had loaned her money.”12 Moreover, when the creditor discovered that a lien could not be placed on the car he loaned the debtor money to purchase, instead of terminating the agreement, he continued with the transaction. Id. In finding that the creditor’s reliance was not justifiable, the court quoted Field v. Mans, stating that a person “is required to use his senses and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him.” Id. (quoting Field, 516 U.S. at 71, 116 S.Ct. 437).
Similarly, in this case the original promissory note and security agreement provided that the loan would be paid within six months. (Exh. D-3). Both Broadus and Barvié testified that the loan was to cover Broadus until he could obtain financing from a bank, at which point he would use funds from that loan to make the balloon payment to Barvié. Indeed, the balloon payment was due by January 30, 2007. (Id.). But the renewal was not executed until August of 2010 — more than three years after the original balloon payment was due. (Exh. P-1). And in 2009, Barvié agreed to allow Broadus to skip his March, April, and May payments and accepted a payment reduced by $718.00 for the remainder of 2009. (Exh. D-5). Thus, Bar-vié was well aware of Broadus’s inability to fully repay him without additional financing. And Barvié was further aware that Broadus had been unable to obtain permanent financing for nearly 4 years. Moreover, Barvié knew that nothing in Broa-dus’s financial circumstances had changed when the 2010 Renewal was signed: he still had not obtained outside financing and it was unlikely he could do so or recover on his BP claim within three months. The Court therefore finds that Barvié should have been aware that Broadus’s promise to repay the debt fully within 3 months was false, and therefore he could not have justifiably relied upon it.
Moreover, Barvié failed to establish that he actually relied upon Broadus’s promise to repay the debt by October 2011. Barvié allowed Broadus to continue making monthly payments after executing the 2010 Renewal well after the October deadline for the balloon payment had passed. (Exh. D-l). And he accepted payments reduced by $118.00 from July of 2011 through December of 2011. (Id.). Barvié testified — and Broadus does not dispute— that the payments ceased entirely after December 2011. But Barvié did not attempt to foreclose on the collateral pledged in the 2010 Renewal, which he also never perfected his interest in. Instead, in February of 2012, Barvié was willing to sign yet another renewal, which would have included half of Broadus’s BP *389claim as collateral. (Exh. D-6). Thus, the Court is unconvinced that Barvié actually relied on Broadus’s promise to repay the entire debt within three months as promised in the 2010 Renewal.
2. False Pretense or False Representation
Under § 523(a)(2)(A), a representation made by a debtor is a false pretense or false representation if it was: (1) a knowing and fraudulent falsehood; (2) describing past or current facts; (3) that was relied upon by the other party. In re Mercer, 246 F.3d 391, 403 (5th Cir.2001); RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1292-93 (5th Cir.1995).
i. A Knowing and Fraudulent Falsehood Describing Past or Current Facts
Barvié testified that Broadus represented to him that the three properties he pledged as additional collateral for the 2010 Renewal were unencumbered, which is why those three properties—out of the several owned by Broadus—were chosen as collateral. Broadus testified that Bar-vié knew the properties were encumbered because he told them how much “equity” he had in each and that Barvié specifically knew that the property located at Middle-coif Drive was encumbered because Barvié lived there. Broadus further testified that all of the mortgages on the properties were a matter of public record that Barvié could have easily discovered. Barvié testified that he did not run title searches on the three properties because he believed Broadus was telling him the truth about the lack of encumbrances. The Court is persuaded by Broadus’s testimony, particularly because Barvié lived in one of the properties pledged as collateral, and it is likely he knew of the encumbrance. But,. even assuming Broadus represented to Barvié that these properties were unencumbered, Barvié did not justifiably rely on such a representation.
ii. Reliance
Though the Fifth Circuit recognizes a temporal distinction between actual fraud and false pretenses or false representation, the same justifiable reliance standard applies to any action arising under § 523(a)(2)(A). See generally AT & T Univ. Card Servs. v. Mercer (In re Mercer), 246 F.3d 391 (5th Cir.2001); Field v. Mans, 516 U.S. 59, 73, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Thus, unless the falsity of the representation should have been obvious to Barvié or a red flag was present, his reliance was justifiable. The Court finds that the falsity of Broadus’s representation should have been obvious to Barvié and there was a red flag, triggering a duty to further investigate.
First, Broadus testified—and Barvié did not dispute—that Barvié was residing in one of the properties pledged as collateral. Broadus also testified that Barvié knew that his rent payments were going towards the mortgage on that home. Thus, even assuming Broadus represented that the property was unencumbered, the falsity of that representation should have been obvious to Barvié. Second, Barvié’s prior dealings with Broadus concerning this specific loan served as a red flag, triggering a duty to investigate. And, had Barvié made the barest investigation in the form of a title search on the properties pledged as collateral, he would have discovered the falsity of Broadus’s representation.
Moreover, Barvié failed to show he actually relied on Broadus’s representation. In Cmty. Fed. Credit Union v. Straughter (In re Straughter), 219 B.R. 672 (Bankr.E.D.Pa.1998), the court held that it could not find justifiable reliance where the creditor relied on its prior business dealings *390with the debtor rather than the information in his written request for funding, which stated that his company had more than $400,000.00 in potential clients or contracts, though the company was not operational at the time. Id. at 676. The nonoperational status of the company would have easily been discovered through minimal investigation. Id. Similarly, in this case it appears that Barvié relied on his friendship with Broadus rather than his security interest in the rental homes when he signed the 2010 Renewal.13 And the falsity of Broadus’s statement could have easily been uncovered. Accordingly, the Court finds that Barvié has not met the requirements of § 523(a)(2)(A) and turns now to Barvié’s claims under § 523(a)(2)(B).
C. 11 U.S.C. § 523(a)(2)(B)
Under § 523(a)(2)(B),14 debts obtained by “a materially false and intentionally deceptive written statement of financial condition upon which the creditor reasonably relied are excepted from discharge.” In re Bandi, 683 F.3d at 674-75. This exception to discharge only applies to statements respecting either the debtor’s or an insider’s financial condition. 11 U.S.C. § 523(a)(2)(B); In re Bandi, 683 F.3d at 674. Recently, the Fifth Circuit instructed that the term “financial condition,” as used in § 523(a)(2), must be narrowly interpreted. See In re Bandi, 683 F.3d at 676 (false representation that debtors owned property was not statement respecting their “financial condition,” thus § 523(a)(2)(A) applicable rather than § 523(a)(2)(B)). The Court of Appeals explained that “the term was meant to embody terms commonly understood in commercial usage”—“the general overall financial condition of an entity or individual, that is, the overall value of property and income as compared to debt and liabilities.” Id.
Barvié failed to adduce any evidence at trial indicating he relied on a materially false written statement regarding Broadus’s financial condition. The evidence instead established that, at best, Broadus made oral representations that he owned certain rental properties, which were pledged as collateral for the 2010 Renewal, free and clear of any liens. Section § 523(a)(2)(B) expressly requires “a statement in writing.” 11 U.S.C. § 523(a)(2)(B). Further, the Fifth Circuit explicitly held in Bandi that a misrepresentation regarding property ownership is not a statement respecting the debtor’s financial condition within the meaning of § 523(a)(2)(B). Bandi, 683 F.3d at 676. Accordingly, the Court finds that Barvié failed to establish the elements of § 523(a)(2)(B) and turns now to § 523(a)(4).
D. 11 U.S.C. § 523(a)(4)
Debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” are excepted from *391discharge. 11 U.S.C. § 523(a)(4). “Fiduciary” within the meaning of § 523(a)(4) “is construed narrowly, limited to ‘technical trusts’ and to traditional fiduciary relationships involving ‘trust-type’ obligations imposed by statute or common law.” FNFS, Ltd. & B & W Fin. Co., Inc. v. Harwood (In re Haywood), 637 F.3d 615, 619-20 (5th Cir.2011). Barvié does not appear to allege Broadus was acting in a fiduciary capacity. But the phrase “while acting in a fiduciary capacity does not qualify the words ‘embezzlement’ or ‘larceny,’ ” thus “any debt resulting from embezzlement or larceny falls within the exception of clause (4).” Advanced Recovery Sys. v. Clemons (In re Clemons), No. 1100127E E, 2013 WL 828282, at *12 (Bankr.S.D.Miss. March 6, 2013) (quoting 4 Collier on Bankruptcy ¶ 523.10[1][2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.)).
Embezzlement requires a “showing that [the creditor] entrusted his property to the debtor, the debtor appropriated the property for a use other than that for which it was entrusted, and the circumstances indicate fraud.” Brady v. McAllister (In re Brady), 101 F.3d 1165, 1173 (6th Cir.1996). The creditor must also prove “the debtor’s fraudulent intent in taking the property.” Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598, 602-03 (5th Cir.1998), cert. denied, 526 U.S. 1016, 119 S.Ct. 1249, 143 L.Ed.2d 347 (1999). Larceny is the “fraudulent and wrongful taking and carrying away of the property of another with intent to convert the property to the taker’s use without the consent of the owner. As distinguished from embezzlement, the original taking of the property must be unlawful.” 4 Collier on Bankruptcy at ¶ 523.10[2] (footnote omitted).
Barvié failed to adduce any evidence at trial establishing the elements of either larceny or embezzlement. Both Broadus and Barvié testified that the loan proceeds were used to purchase Broadus’s interest in the gas station, which is the use contemplated in the original note and security agreement. (Exh. P-7). Thus, the loan proceeds were not used for a purpose other than that for which they were intended, which prevents a finding of embezzlement. And both parties agree that Broadus did not take the money from Bar-vié unlawfully, which prohibits a finding of larceny. Accordingly, Barvié failed to meet the requirements of § 523(a)(4) and the Court now turns to his claims under § 523(a)(6).
E. 11 U.S.C. § 523(a)(6)
Section 523(a)(6) excepts from discharge debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). Accordingly, to render a pre-petition debt non-dischargeable under § 523(a)(6), the plaintiff must establish three elements: (1) the debtor caused an injury; (2) the injury was incurred by another (or the property of another); and (3) such injury was willful and malicious. Whitney Nat’l Bank v. Phillips (In re Phillips), No. 09-00033-NPO, 2010 WL 5093388, at *6 (Bankr.S.D.Miss. Dec. 8, 2010). In Kawaauhau v. Geiger, the Supreme Court held that the word “willful” in § 523(a)(6), “modifies the word ‘injury,’ indicating that non-dischargeability 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). And “debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Id. at 64, 118 S.Ct. 974. The Fifth Circuit has held that “an injury is “willful and malicious’ where there is either an objective *392substantial certainty of harm or a subjective motive to cause harm.” Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 606 (5th Cir.1998).15 Stated differently, “for willfulness and malice to prevent discharge under Section 523(a)(6), the debtor must have intended the actual injury that resulted.... Intent to injure may be established by showing that the debtor intentionally took action that necessarily caused, or was substantially certain to cause, the injury.” Texas v. Walker, 142 F.3d 813, 823 (5th Cir.1998) (citing In re Delaney, 97 F.3d 800, 802 (5th Cir.1996)).
In this case, Broadus testified that he understood Barvié had a security interest in both the good will and the inventory of the gas station. Nevertheless, he sold his interest in the gas station without informing Barvié and without turning over the proceeds of the sale that were paid for the good will and inventory to Barvié. Instead, Broadus testified that he elected to use the money he received from the sale to pay off inventory creditors and a credit card cash advance his wife had taken out. The Court finds that these actions either necessarily caused, or were substantially certain to cause, the injury suffered by Barvié. Accordingly, Barvié has met the requirements of § 523(a)(6). To the extent Broadus misapplied the proceeds of the sale of his interest in the good will and inventory of the gas station, which was pledged as collateral and should have gone to Barvié, the misappropriated proceeds constitute a non-dischargeable debt within the meaning of § 523(a)(6). See Westwood Square Ltd. P’ship v. Broome (In re Broome), No. 11-50528, 2014 WL 61235 (Bankr.S.D.Miss. Jan. 8, 2014) (finding that expenses not applied as promised constituted non-dischargeable debt under § 523(a)(2)(A)).
Broadus sold his interest in the gas station for a total of $115,533.00. (Exh. P-3). According to the closing statement, which William Whitfield prepared at Broadus’s request, the inventory was purchased for $24,727.38; the good will was purchased for $50,000.00; and the gas inventory was purchased for $40,805.62. (Id.). Apparently at Broadus’s request, the purchaser — Ali Hamid — paid a total of $67,925.00 directly to Broadus, and he paid Mississippi Commercial Properties $7,074.60 and Hallmark Petroleum $40,533.40 directly on Broadus’s behalf. (Id.).
Hamid testified that it is common for petroleum suppliers to deliver gas on credit, and collect payment within 7-10 days of delivery, which is why he paid Hallmark Petroleum directly for the gas inventory already present in the tanks. Thus, the gas inventory had not yet been paid for when Hamid purchased Broadus’s interest in the gas station. He further testified that Broadus informed him he was behind on rent and Hamid agreed to take on that responsibility as well, which is why he paid Mississippi Commercial Properties directly on Broadus’s behalf. Instead of paying Barvié the proceeds from the sale of the good will and inventory pledged as collateral, Broadus elected to direct those proceeds towards payment elsewhere, including the payment of a cash advance his wife had taken out on her credit card.16 Ac*393cordingly, the Court finds that the amount Hamid paid for the inventory and good will of the gas station — $74,727.38 according to the closing statement — is non-dischargea-ble and turns now to Broadus’s argument under Mississippi Rule of Professional Conduct 1.8.
F. Rule 1.8
Broadus argues that the 2010 note and security agreement should be invalidated because Barvié violated Mississippi Rule of Professional Conduct 1.8 (“Rule 1.8”). (Adv. Dkt. No. 135 at 9). For support, he relies on a Ninth Circuit Bankruptcy Appellate Panel case, Wagner Choi & Evers v. Woo (In re Worldpoint Interactive, Inc.), No. HI-04-1172-MoRB, 2005 WL 6960239, 2005 Bankr.LEXIS 3378 (9th Cir. BAP June 28, 2005). Wagner is not binding precedent. Moreover, Wagner is distinguishable from the current case in several important respects: the attorney in Wagner never explained the terms of the agreement; did not advise the parties to seek independent counsel; did not give the parties the opportunity to seek the advice of independent counsel; and did not give the parties copies of the agreement they signed. Id. at *2, 2005 Bankr.LEXIS 3378 at *7. Here, Broadus testified that he understood the terms of both the original and renewal loans and received copies of both sets of documents. Further, Barvié testified that Broadus took both sets of documents with him for a period of time and then returned with them and signed them at Barvié’s office. He also testified that Broadus mentioned a desire to have professionals, including attorneys and accountants, review the documents before he signed them. Thus, Broadus had ample opportunity to consult outside counsel before signing the loan documents.
Further, even if the Court were to find Wagner persuasive, there has not been a violation of Rule 1.8 in this case. Rule 1.8(a) states:
(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interests are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client consents in writing thereto.
Miss. R. Prof. Cond. 1.8(a). Rule 1.8 is based on Rule 1.8 of the ABA Model Rules of Professional Conduct (“ABA Rule 1.8”). ABA Rule 1.8(a) states:
(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, pos-sessory, security or other pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent le*394gal counsel on the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
ABA Model R. Prof. Cond. 1.8(a). The language of both rules is very similar, but — notably—Rule 1.8 does not require the attorney to advise the client of the desirability of seeking independent counsel “in writing,” as required by ABA Rule 1.8. In fact, Rule 1.8 does not appear to require the attorney to advise the client to seek the advice of independent counsel. Rather, Rule 1.8 simply requires that the attorney give the client the opportunity to do so. And Rule 1.8 merely requires the client to consent to the terms of the agreement in writing while ABA Rule 1.8 requires the client to give informed consent, in writing, to the essential terms of the agreement as well as the attorney’s role in the transaction. In this case, the 2010 Renewal was in writing, Broadus testified that he understood the terms of the agreement, and Broadus took the documents with him for a period of time before returning to Barvié’s office to sign them, indicating he had ample opportunity to confer with independent counsel before signing the agreement. Accordingly, the Court finds that Barvié did not violate Rule 1.8.17
G. Damages
The Court has already found that the proceeds from the sale of the inventory and good will created a non-dischargeable debt pursuant to § 523(a)(6). Barvié also seeks interest at 8% — the contract rate— and an award of reasonable attorney’s fees. In Cohen v. Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), the Supreme Court held that the scope of damages determined non-dischargeable under § 523(a)(2)(A) may extend beyond the value of the funds obtained by fraud to encompass “all liability arising from fraud.” Id. at 215, 118 S.Ct. 1212. Thus, Barvié is entitled to damages beyond the proceeds from the sale of the good will and inventory of the gas station to the extent they arose from Broadus’s fraudulent actions.
First, with respect to Barvié’s request for post-judgment interest at his contract rate, he is entitled to interest at the federal judgment rate pursuant to 28 U.S.C. § 1961 — not his contractual rate of 8 — from the date of entry of this order and opinion until the debt is paid in full.
Next, to the extent Barvié requests pre-judgment interest, it is ultimately within the discretion of the Court to determine whether he is entitled to it. Williams v. Trader Pub. Co., 218 F.3d 481, 488 (5th Cir.2000). And “[t]he determination of whether pre-judgment interest should be awarded requires a two-step analysis: does the federal act creating the cause of action preclude an award of prejudgment interest” and “does an award of pre-judgment interest further the congressional policies of the federal act.” Turbo Aleae Inv., Inc. v. Borschow (In re Borschow), 454 B.R. 374, 403 (Bankr.W.D.Tex.2011) (quoting Carpenters Dist. Council of Section 523(a)(2) does not preclude an award of pre-judgment interest, and the “intent of § 523(a)(2) is to prevent a debt- *395or from discharging a loan obtained by fraud.”) Id. at 404. Thus, it would appear that an award of pre-judgment interest would further the congressional policies of § 528(a)(2). Further, “[rjefusing to award prejudgment interest ignores the time value of money and fails to make the Plaintiff whole.” Thomas v. Tex. Dep’t of Crim. Justice, 297 F.3d 361, 372 (5th Cir.2002). Thus, the Court is persuaded that an award of pre-judgment interest is appropriate in this case. Turning to the appropriate rate to award, where no federal statute governing pre-judgment interest exists, courts should look to state law for guidance as to the appropriate rate. Hansen v. Cont’l Ins. Co., 940 F.2d 971, 984-85 (5th Cir.1991), abrogated on other grounds, 683 F.3d 182 (5th Cir.2012); In re Advanced Modular Power Sys., Inc., 413 B.R. 643, 684-85 (Bankr.S.D.Tex.2009). Mississippi law provides that “[a]ll judgments or decrees founded on any sale or contract shall bear interest at the same rate as the contract evidencing the debt on which the judgment or decree was rendered.” Miss.Code Ann. § 75-17-7. Accordingly, the Court finds that a pre-judgment award of interest at the 8 contract rate accruing as of August 3, 2010 — the date of the 2010 Renewal — is appropriate and necessary to make Barvié whole. And the Court finds that the 8% interest rate should only apply to the $74,727.38 that is non-dischargeable.
Last, with respect to Barvié’s request for attorney’s fees, “ ‘prevailing creditors still have no statutory right to attorney’s fees’ because § 523(d) only gives prevailing debtors a right to attorney’s fees,” but creditors still have “the contractual right to attorney’s fees ... when that right arises from a contract between the creditor and the debtor....” Matter of Luce, 960 F.2d 1277, 1286 (5th Cir.1992) (emphasis in original) (quoting Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163, 1168 (6th Cir.1985)). The 2010 renewal Broadus signed contains an attorney’s fees provision. (Exh. P-1, at ¶ 6(E)). Thus, Barvié is contractually entitled to reasonable attorney’s fees.
TV. CONCLUSION
For the reasons stated above, the Court finds that Broadus’s obligation on the 2010 renewal is non-dischargeable in part in the amount of $74,727.38 plus pre-judgment interest at the contract rate of 8%, accruing from August 3, 2010, and post-judgment interest at the federal judgment rate until paid as well as reasonable attorney’s fees.
THEREFORE IT IS ORDERED AND ADJUDGED that, pursuant to 11 U.S.C. § 523(a)(6), the debt owed to Barvié by Broadus is not dischargeable in the amount of $74,727.38 and Barvié’s request for attorney’s fees and costs is GRANTED.
IT IS FURTHER ORDERED AND ADJUDGED that Robert Schwartz shall file within 14 days of the date of the entry of this opinion a fee itemization for prosecuting the adversary proceeding so that the Court may enter final judgment.
SO ORDERED.
. Those exhibits include P-l-P-14 and P-17, submitted by Barvié and D-l-D-5, D-10-D-21, and D-23-32, submitted by Broadus.
. Barvié filed a Motion to Amend the pre-trial order, seeking admittance of an additional exhibit into evidence. (Adv.Dkt. No. 162). Broadus opposed the admission of the additional exhibit. (Adv.Dkt. No. 164). At the trial, the Court denied Barvié’s motion and accordingly disallowed the admission of the additional exhibit. (Adv.Dkt. No. 169).
. The deposition of William E. Whitfield ("Whitfield”) was admitted into evidence in its entirety by stipulation of the parties in lieu of having Whitfield appear and testify at trial.
. Pursuant to Federal Rule of Civil Procedure 52, made applicable to this Adversary by Federal Rule of Bankruptcy Procedure 7052, the following constitutes the findings of fact and conclusions of law of the Court.
. “Bankruptcy Code” or "Code" refers to the United States Bankruptcy Code located at Title 11 of the United States Code. All Code sections hereinafter will refer to the Bankruptcy Code unless noted otherwise.
. Barvié testified that, prior to the loan, his only business dealings with Broadus involved purchasing a vehicle and leasing a rental home from him.
. (Exh. D-l). The agreed monthly payment was $2,718.00. Broadus made monthly pay-merits of $2,000.00 from June to December. (Id.).
. (Exh. D-26).
. (Exhs. P-9, D-10). Barvié testified that he learned about the transfer when he walked into the store looking for Broadus and was told by an employee that Broadus no longer owned the business.
."A fact is proven by a preponderance of the evidence if the Court finds it more likely than not the fact is true.” Lanier v. Futch (In re Futch), No. 09-00144-NPO, 2011 WL 576071, at *16 (Bankr.S.D.Miss. Feb. 4, 2011) (citing EPA v. Sequa Corp. (In re Bell Petro*386leum Servs., Inc.), 3 F.3d 889, 909-10 (5th Cir.1993)).
. Further, Broadus testified that his initial plan was to borrow the money from Barvié on a short-term basis until he could obtain a longer-term loan from a bank. But, he also testified that he was advised by bank personnel that he would need 12 to 24 months of profit and asset history to qualify for a loan. The balloon payment was due six months after Broadus received the initial loan. (Exh. P-7).Thus, Broadus knew at the time he originally borrowed the money from Barvié that he would not be able to repay the note within six months as promised.
. Id. at 326. See also Winston-Salem City Employees’ Fed. Credit Union v. Casper (In re Casper), 466 B.R. 786, 794-95 (Bankr.M.D.N.C.2012) (reliance was not justifiable where the creditor continued to assign the titles of vehicles to the debtor after the debtor failed to pay for vehicles twice in a row); Stastny v. Sedivec (In re Sedivec), 396 B.R. 31, 34 (Bankr.N.D.Iowa 2008) (reliance was not justifiable where the plaintiff ignored red flags, including not being present at the closing and not being part of the real estate contract though she claimed she was supposed to receive an ownership interest in the home).
. Barvié never obtained a Deed of Trust on any of the properties and was willing to execute a new renewal in 2012.
. Section 523(a)(2)(B) provides:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(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 deceive
11 U.S.C. § 523(a)(2)(B).
. The Miller court specifically rejected the argument that a ''malicious” act is one without just cause or excuse, opting instead to adopt the "implied malice standard,” which defines a “malicious” act as one done with the "actual intent to cause injury.” Id. at 605-06.
. Broadus did testify that part of the money may have gone towards payments he made to Barvié under the 2010 Renewal, but he failed to state what portion of the payments he made, if any, came directly from the proceeds he received for the sale of the collateral, and *393he did testify that he never voluntarily notified Barvié of the sale.
. Moreover, even if Barvié had violated Rule 1.8, his violation "should not give rise to a cause of action.... The Rules are designed to provide guidance to lawyers and to provide a structure for regulating conduct through disciplinary agencies. They are not designed to be a basis for civil liability.” Miss. R. of Prof. Conduct Scope. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497457/ | MEMORANDUM OPINION ON PLAINTIFF’S COMPLAINT TO AVOID LIEN AND OBJECTION TO CLAIM
CRAIG A. GARGOTTA, Bankruptcy Judge.
Came on to be considered the above-numbered adversary proceeding. After a trial held on July 15, 2014, the Court took this case under advisement. The Court considered the parties’ pleadings, the arguments presented at the hearing, and the applicable law. For the reasons stated in this Memorandum Opinion, the Court is of the opinion that Defendant, Gold Star Construction, Inc.’s (“Gold Star”) lien is invalid and of no effect. The Court is further of the opinion that Gold Star’s claim should be allowed as unsecured in the amount of $743,382.29.
As a preliminary matter, venue is proper pursuant to 28 U.S.C. § 1409(a). This matter arises in an adversary proceeding referred to this Court by the Standing Order of Reference entered in this District. This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(E) and (O). This Opinion constitutes this Court’s findings of fact and conclusions of law, pursuant to Fed. R. Bankr.P. 7052. This Court is of the opinion that it has jurisdiction and authority to render a final judgment in this adversary proceeding. In the event that it does not, this Opinion may be treated as proposed findings of fact and conclusions of law subject to de novo review. 28 U.S.C. § 158(c)(1) (2012); Fed. R. Bankr.P. 9033(d).
Factual and Procedural Background
Plaintiff, Cavu/Rock Properties Project I, LLC (Cavu Rock), owns a residential housing development in Bakersfield, California (the “Property”). This adversary proceeding arises from Gold Star’s claim in Cavu Rock’s Chapter 11 Bankruptcy Proceeding and related mechanic’s lien.
In 2005, Charles Krause, John Stevenson, Bradley Leen, and Eugene Winter associated for the purpose of acquiring the Property in order to “flip” it for a profit or *416to develop the Property themselves. Krause and Stevenson formed Cavu Rock to purchase the Property and obtain development funding. On December 15, 2005, Cavu Rock, Leen, and Winter entered into an agreement (the “Agreement to Form”) in which Winter assigned his rights to acquire the Property to Cavu Rock, and Cavu Rock agreed to share profits from its eventual sale. (GS21). Winter formed Gold Star in March of 2006 to facilitate the development of the Property. Winter is Gold Star’s president and sole stockholder. Cavu Rock hired Gold Star to demolish existing structures on the Property so that new homes could be constructed. Gold Star completed the demolition work in 2006 pursuant to a separate Demolition Agreement and was fully compensated for this work.
Cavu Rock purchased the Property using a loan from Wells Fargo. Wells Fargo holds a lien on the Property that exceeds $6,600,000. Cavu Rock was not able to flip the Property, so the parties decided to develop it themselves and sell individual lots to end buyers. Cavu Rock, Gold Star, Winter, Leen, and Stevenson entered into a new agreement (the “Development Agreement”) on March 25, 2008. According to Winter’s testimony at trial, the purpose of the Development Agreement was to attract additional funding to develop the Property.
The Development Agreement states that Cavu Rock would “source and provide equity and debt financing to fund the project lot development. Gold Star will Act as the general contractor to develop the lots, construct homes, and market and sell to buyers.” (GS3 at ¶ 1.1) The parties to the Development Agreement “acknowledge[d] that the project has a critical path but must proceed on a need to spend basis for Phase One and Two. Owner (Cavu Rock) must approve the critical path at its sole discretion and must agree to all expenditures in advance.” (GS3 at ¶ 1.3). Gold Star would “act as general contractor for the land development and will invoice Owner (Cavu Rock) at cost for all land development expenditures.” (GS3 at ¶ 1.4). Gold Star was to oversee sales to end buyers, build homes on the lots, and deposit the proceeds in an escrow fund. (GS3 at ¶ 1.5 — 1.6). Cavu Rock and Gold Star had joint authority to approve disbursements from the escrow fund. Disbursements were to be split between Cavu Rock, Gold Star, and Leen. (GS3 at ¶ 1.11). The Development Agreement contains a provision that “[NJothing in this Agreement shall be construed, deemed or interpreted by the parties or by any third person to create the relationship of principal and agent or of partnership, joint venture or any other association other than that of debtor-creditor between the parties.” (GS3 at ¶ 5.10). A choice of law clause dictates that Texas law governs. (GS3 at ¶ 5.1).
Gold Star commenced construction of curbs, gutters, and streets in 2009 and built homes on the Property. The parties disagree as to whether Gold Star was fully compensated for development costs. As of the trial held on July 15, 2014, the Property contained both completed and uncompleted lots. Some of the completed lots have now been sold.
Gold Star recorded a mechanic’s lien on the Property in Kern County, California Official Records on November 21, 2011, in the amount of $1,084,950.90. The City of Bakersfield filed a Notice of Completion on December 19, 2011. According to Gold Star, it recorded the lien as a last resort after Cavu Rock became seriously delinquent in paying Gold Star’s invoices for *417work on the Property. Cavu Rock claims that it paid all invoices that Gold Star submitted. Gold Star filed suit in the Superior Court of the State of California, County of Kern, Metropolitan Division (Case No. S-1500-CV-275859) for breach of contract, mutual open and current account, book account, quantum meruit, enforcement of mechanic’s lien, and enforcement of payment bond. The parties came to a partial settlement, agreeing that Wells Fargo’s hen is superior to any lien that Gold Star may have.
Cavu Rock filed for Chapter 11 Bankruptcy here in the Western District of Texas on July 19, 2013 (Case No. 13-51905), staying the proceedings in Kern County. Gold Star filed a Proof of Claim for $753,382.29, secured by the mechanic’s lien on the Property. (ECF No. 5 in Case No. 13-51905). Cavu Rock filed this Adversary Proceeding on July 23, 2013, asking this Court to declare Gold Star’s lien void and disallow its claim. The Court confirmed Cavu Rock’s Chapter 11 Plan on January 7, 2014. The Plan provides for Gold Star’s claim should this Court allow it in this adversary proceeding. Cavu Rock filed a Motion for Partial Summary Judgment (ECF No. 31) on March 14, 2014, asking the Court to find that Gold Star’s claim is unsecured pursuant to 11 U.S.C. § 506 because Wells Fargo’s superior lien exceeds the Property’s total value. The Court held a hearing on the Motion for Partial Summary Judgment on April 9, 2014, took the matter under advisement, and granted partial summary judgment in favor of Cavu Rock in an Oral Ruling read on May 21, 2014. The remaining issues proceeded to trial on July 15, 2014, and the Court took them under advisement.
Parties’ Contentions
Cavu Rock urges this Court (1) to declare Gold Star’s lien invalid, (2) disallow its claim in its entirety, and (3) award it reasonable attorney’s fees. According to Cavu Rock, the lien is invalid because Gold Star is a partner in the development of the Property pursuant to the Texas Business Organizations Code, rendering it ineligible to hold a lien on the Property. In the alternative, Cavu Rock argues that the lien is invalid because Gold Star did not record it within the timeframe prescribed by California state law.2 Cavu Rock also contends that Gold Star’s claim should be disallowed because Gold Star failed to provide supporting evidence, Gold Star performed work without Cavu Rock’s authorization, and Cavu Rock actually overpaid Gold Star for the work it did perform.
Gold Star argues that both its conduct and the express terms of the Development Agreement establish that Gold Star is a general contractor rather than a partner. According to Gold Star, it recorded its lien in a timely fashion pursuant to California state law. Gold Star also maintains that its claim should be allowed because Cavu Rock approved all of the work Gold Star performed as a general contractor but has not fully compensated Gold Star.
Findings of Fact and Conclusions of Law
This Court finds that Gold Star’s claim is valid, but its mechanic’s lien is not. Gold Star’s status as a partner does not prevent it from holding a lien on the Property as Cavu Rock argues. Gold Star is not a partner within the meaning of Texas Business Organizations Code, and the Property is not partnership property. The lien is deficient, however, because Gold Star did not record it in accordance with *418California state law. The evidence establishes that Gold Star has a valid, but unsecured, claim in the amount of $743,382.29.
A. Validity of Gold Star’s Mechanic’s Lien
Gold Star’s lien is deficient. Partnership status does not make Gold Star ineligible to hold a lien on the Property. Gold Star did not complete its contract before recording its lien, however, rendering the lien invalid under the California Civil Code.
i. Gold Star and Cavu Rock are not partners, nor would a partnership between them undermine Gold Star’s lien.
Cavu Rock’s argument regarding Gold Star’s status as a partner is unavailing. Reasonable minds could differ as to whether Gold Star and Cavu Rock formed a partnership for the development of the Property. This Court finds that they did not. Regardless, partnership status is not dispositive of Gold Star’s ability to have a lien on the Property because the Property belongs to Cavu Rock rather than the alleged partnership between Gold Star and Cavu Rock.
The parties agree that the Texas Business Organizations Code (“TBOC”) governs the Development Agreement. Per the TBOC, “an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether: (1) the persons intend to create a partnership; or (2) the association is called a ‘partnership,’ ‘joint venture,’ or other name.” Tex. Bus. Orgs. Code Ann. § 152.051 (West 2011). The TBOC sets out the following factors indicating whether a partnership exists:
(1) receipt or right to receive a share of profits of the business; (2) expression of an intent to be partners in the business; (3) participation or right to participate in control of the business; (4) agreement to share or sharing: (A) losses of the business; or (B) liability for claims by third parties against the business; and (5) agreement to contribute or contributing money or property to the business.
Tex. Bus. Orgs. Code Ann. § 152.051(a) (West 2011). However, “the receipt or right to a share of payment of wages or other compensation to an employee or independent contractor” does not alone create a partnership relationship. Tex. Bus. Orgs. Code Ann. § 152.052(b)(1)(B) (West 2011). Nor does “the right to share or sharing gross returns or revenues, regardless of whether the persons sharing the gross returns or revenues have a common or joint interest in the property from which the returns or revenues are derived.” Tex. Bus. Orgs. Code Ann. § 152.052(b)(3) (West 2011). The Supreme Court of Texas has held that no one factor is necessary or dispositive to partnership status. Instead, courts must consider the totality of the circumstances. Ingram v. Deere, 288 S.W.3d 886, 896-99 (Tex.2009).3
There is no easy answer in Gold Star and Cavu Rock’s case. Some of the TBOC factors suggest partnership while others do not. This Court finds that the totality of the circumstances do not indicate that Gold Star and Cavu Rock formed a partnership for the development of the Property.
*419Several of the factors suggest that Gold Star and Cavu Rock formed a partnership. Gold Star has a right to 40% of the distributable net income from the Property. (GS3 at ¶ 1.1). However, “the right to share or sharing gross returns or revenues,” is not alone sufficient to establish a partnership. Tex. Bus. Orgs. Code Ann. § 152.051(b)(3) (West 2011). Cavu Rock claims that Gold Star held itself out to be the Property’s “developer,” but has not provide sufficient evidence to confirm this allegation. The Development Agreement gives Gold Star some control over certain aspects of the business, including marketing and sale of the lots to end buyers. Cavu Rock presented evidence establishing that Gold Star coordinated development of the Property along with Cavu Rock. Gold Star also shared authority to approve disbursements of the proceeds from these sales with Cavu Rock. Certain actions taken by Gold Star and provisions in the Development Agreement indicate that there may be a partnership.
Although some of the TBOC factors favor a finding of partnership, the factors suggesting that there is no partnership are more compelling. Gold Star’s control over development was limited and less extensive than Cavu Rock’s control. The Development Agreement restricts Gold Star’s control by requiring Cavu Rock’s approval of expenditures and the critical path of development “at its sole discretion.” (GS3 at ¶ 1.3). Nothing in the Development Agreement or the conduct of the parties suggests that Gold Star is liable for debts of the business or third party claims that are not related to Gold Star’s own activities. Gold Star does not appear to have contributed capital or property, although it did assign certain rights to acquire the Property to Cavu Rock in the Agreement to Form. There is little evidence indicating that Gold Star ever expressed any intention of being a partner. In fact, the Development Agreement contains an express term stating that “[N]othing in this Agreement shall be construed, deemed or interpreted by the parties or by any third person to create the relationship of principal and agent or of partnership, joint venture or any other association other than that of debtor-creditor between the parties.” (GS3 at ¶ 5.10).4 Instead, Gold Star was to “act as general contractor,” invoicing Cavu Rock for development expenses. It is not clear that Gold Star associated with Cavu Rock “as an owner” as contemplated by § 152.051.5 The Development Agreement specifically notes that Cavu *420Rock is the sole owner of the Property and shall retain title of each lot until it is sold to an end buyer. (GS3 at ¶ 1.1). In light of the totality of the circumstances, this Court finds that Gold Star and Cavu Rock did not form a partnership for the development of the Property.
If this Court did determine Gold Star to be Cavu Rock’s partner, the Court would not invalidate the lien on this basis. Cavu Rock argues that “partners do not have a right to assert a mechanic’s lien against property that is the subject of the partnership in which they are a partner.” (Complaint, ECF No. 1 at ¶ 15). Cavu Rock cites to Stephens v. Clark in support of this contention, a 1980 case from the Georgia Court of Appeals. This is not binding authority on this Court, nor does this Court agree with Cavu Rock’s reading of this case. The Georgia Court of Appeals’ holding was premised on the fact that a party cannot hold a lien on its own property. Consequently, a partner cannot hold a mechanic’s lien on partnership property. Stephens v. Clark, 154 Ga.App. 306, 268 S.E.2d 361, 363 (1980). The case says nothing about property that is “the subject of the partnership,” nor does any other ease of which this Court is aware. Assuming a partnership does exist between Gold Star and Cavu Rock, the Property could be “the subject of’ that partnership. It is not, however, partnership property. The Development Agreement refers to Cavu Rock as “Owner” and holds that “Owner is the owner in fee simple of that certain real property and ... was formed, among other reasons, in order to acquire and develop the Rio Bravo Project.” (GS3 at ¶ A). If Gold Star was Cavu Rock’s partner, this would not impair its ability to place a mechanic’s lien on property that belongs to Cavu Rock rather than the partnership.
ii. Gold Star’s Lien is Invalid Under California State Law.
Gold Star did not record its lien in accordance with California state law. A California mechanic’s lien is only valid if it is recorded within the timeframe dictated by statute. See Howard S. Wright Constr. Co. v. BBIC Investors, LLC, 136 Cal.App.4th 228, 38 Cal.Rptr.3d 769, 776 (2006). At the time Gold Star recorded its lien, the California Civil Code held that an original contractor must record a mechanic’s lien:
after he completes his contract and before the expiration of (a) 90 days after the completion of the work of improvement as defined in Section 3106 if no notice of completion or notice of cessation has been recorded, or (b) 60 days after recordation of a notice of completion or notice of cessation.
Ca. Civ.Code § 3115 (repealed by Stats 2010 ch. 697 J 16 (SB 189), effective January 1, 2011, operative July 1, 2012, now Cal. Civ.Code § 9200). Although Gold Star may have recorded its lien within 90 days after completion of the work of improvement, the lien is not proper because Gold Star recorded it prior to completing its contract.
Gold Star argues that its November 21, 2011, recording was timely because Gold Star ceased work on the Property on November 16, 2011, for a period of more than sixty days. This argument is relevant to Gold Star’s final deadline for recording its lien, but it is of no use in determining whether Gold Star recorded too early. Cessation of work for sixty days can establish completion of a work of improvement under the California Civil Code. Ca. Civ. Code § 3086 (repealed by Stats 2010 ch. 697 J 16 (SB 189), effective January 1, 2011, operative July 1, 2012, now Cal. Civ. Code § 8180). Completion of the work of improvement marks the last date on which *421a mechanic can record his lien, but it has no bearing on when a mechanic can first record his lien. Completion of the contract, rather than the work of improvement, marks the beginning of the statutory-period during which a mechanic can file his lien under § 3115. Wright, 38 Cal.Rptr.3d at 776. A mechanic’s lien that is filed too early is of no more use than one that is filed too late.
For the purpose of § 3115, a contract is complete when all work contemplated by the contract has been performed. Id. at 778-79. The Development Agreement and the testimony of Winters and Paul Krause both establish that work on the Property is not finished.6 California courts have recognized that this standard can be unfair and contrary to legislative intent if the owner stonewalls completion by its own material breach of contract. These courts have held that a contract is also complete when the mechanic’s duties are excused or discharged by some means other than performance. Kaweah Constr. Co. v. Fox Hills Landowners, No. F062860, 2012 WL 6634137, at *3-4 (Cal.Ct.App. December 20, 2012) (citing Wright, 38 Cal.Rptr.3d at 778-79). Gold Star argues that Cavu Rock’s failure to pay invoices excused it from performance, but does not provide any legal support for this contention that nonperformance discharged Gold Star from its own obligations on or before November 21, 2011. The Development Agreement does not set a specific time-frame for payment. The evidence shows that Cavu Rock made significant payments to Gold Star for development costs. Cavu Rock sought to continue development and salvage its relationship with Gold Star even after Gold Star recorded its lien. Cavu Rock eventually rejected the Development Agreement through the bankruptcy proceedings, but not until long after Gold Star recorded its lien. Gold Star has not shown that it was somehow discharged of its duties under the Development Agreement by November 16, 2011. The hen is not valid under California state law because Gold Star did not complete its contract before recording the lien.
The City of Bakersfield’s notice of completion is of no help to Gold Star. The notice applies to only part of the work that Gold Star contracted to perform under the Development Agreement. Even if the notice did signify completion of all work, the city did not file the notice until December 19, 2011 — nearly a month after Gold Star recorded its lien. Additionally, a public entity’s notice of completion is relevant to the end of the statutory period rather than the beginning. Ca. Civ.Code § 3115 (repealed by Stats 2010 ch. 697 J 16 (SB 189), effective January 1, 2011, operative July 1, 2012, now Cal. Civ.Code § 8180). The notice of completion does not bring Gold Star’s lien into compliance with California state law.
Gold Star’s lien is invalid. Cavu Rock and Gold Star did not form a partnership, nor would such a partnership prevent Gold Star from holding a lien on the Property. The lien is deficient regardless, because Gold Star did not file it within the time-frame dictated by California state law.
B. Objection to Gold Star’s Claim
Cavu Rock asks this Court to disallow Gold Star’s claim in its entirety, alleging (1) that Gold Star failed to provide invoices or other documentation to support its Proof of Claim and (2) that Cavu Rock *422fully compensated Gold Star for all work performed. This Court finds that Gold Star proved that it has a valid, but unsecured, claim for $743,882.29.
When a party objects to a claim, the Bankruptcy Court must determine whether and to what extent to allow the claim. 11 U.S.C. § 502(b)(i). A proof of claim filed in accordance with the Federal Rules of Bankruptcy Procedure is prima facie proof of that claim’s validity and dollar value. Fed. R. Bankr.P. 3001(f). If an objecting party brings evidence that calls the claim into question, however, the claimant bears the burden of proving his or her claim. Cal. State Bd. of Equalization v. Official Unsecured Creditors’ Comm. (In re Fid. Holding Co., Ltd.), 837 F.2d 696, 698 (5th Cir.1988). This Court finds that Gold Star met that burden for the majority of its claim.
Cavu Rock and Gold Star provided testimony and financial records to support their opposing views of Gold Star’s claim. Winters testified that Cavu Rock failed to compensate Gold Star fully even though Gold Star completed all work to satisfactory standards and with Cavu Rock’s approval. Paul Krause testified that Cavu Rock paid Gold Star for all work invoiced and that Cavu Rock did not dispute any of the invoices. Cavu Rock alleges that Gold Star’s claim includes work that Cavu Rock did not approve, but does not point to any specific work Gold Star performed without approval. Both parties provided correspondences between them suggesting that Gold Star kept Cavu Rock informed of its work, Cavu Rock encouraged Gold Star to continue work through December 2011, and Cavu Rock fell behind in payments to Gold Star. (GS8-10 and CR9). Cavu Rock provided bank records and copies of checks it wrote. (CR6).7 The parties stipulated to the admission of these documents at trial. The parties also stipulated to the admission of a Summary Cavu Rock prepared of its transactions from 2006 through 2013. (CR15). Gold Star offered its invoices to Cavu Rock and invoices it received from subcontractors it employed to develop the Property, and the Court admitted these documents by stipulation as well. (GS8). The Court also admitted Gold Star’s Construction Ledger as a summary of Gold Star’s transactions and dealings. (GS7). Gold Star qualified this document as a business record at trial. The Construction Ledger credits Cavu Rock for payments to third party vendors. This Court can confirm the Construction Ledger’s accuracy by cross referencing it with the invoices that Gold Star provided and the copies of checks that Cavu Rock provided. Cavu Rock’s summary is broader in scope, and this Court cannot gauge its accuracy with certainty by cross referencing it with other admitted evidence.
According to Gold Star’s Construction Ledger, Cavu Rock owed Gold Star $832,112.29 in unpaid invoices as of April 4, 2012.(GS7). The testimony at trial and Cavu Rock’s Summary establish that Gold Star later received an $88,730 bond payment. (CR15). The evidence does not indicate that Cavu Rock made any other payments to Gold Star after April 4, 2012, nor does the evidence indicate that Gold Star invoiced Cavu Rock for new work after that date. The final balance, adjusted for the bond payment, is $743,382.29. Gold Star’s $753,382.29 Proof of Claim is exactly $10,000 higher than the amount that the evidence indicates Gold Star is owed. This Court allows Gold Star’s claim as unsecured, but only to the extent that Gold Star has proven the claim, which is $743,382.29.
*423Conclusion
As the Court held when granting partial summary judgment to Cavu Rock, Gold Star’s claim is unsecured under 11 U.S.C. § 506 because Wells Fargo’s superior lien exceeds the Property’s value. The claim is also unsecured because Gold Star’s lien is deficient under California state law.
This Court is, therefore, of the opinion that Cavu Rock’s prayer for a declaratory judgment that Gold Star’s lien is invalid and of no effect should be GRANTED.
The Court is also of the opinion that Gold Star’s claim should be ALLOWED, but only as an unsecured claim in the amount of $743,882.29.
Each party shall bear its own costs, and all relief not specifically granted herein should be DENIED. The Court will enter a Judgment on the docket to that effect.
. "GS” denotes Gold Star’s exhibits.
. The parties agree that California state law governs Gold Star’s lien on the Property, which is located in California.
. The TBOC’s predecessor, the Texas Revised Partnership Act ("TRPA”), was still in effect to a limited extent at the time of this ruling. The Supreme Court of Texas made its determination under the TRPA, but noted that the rules for determining partnership status are substantially the same under both statutory schemes. Ingram, 288 S.W.3d at 894 n. 4.
. The Court recognizes that this provision is of limited value. Under Texas common law, the parties’ intent was the most important factor in determining whether a partnership exists. E.g. Federal Sav. & Loan Ins. Corp. v. Griffin, 935 F.2d 691 (5th Cir.1991) (giving particular weight to a provision stating lack of intent to form a partnership); see also Ingram v. Deere, 288 S.W.3d 886, 895-96 (noting that the parties' intent became less pivotal with the introduction of the TBOC’s predecessor, the TRPA). Like the TRPA, the TBOC specifically notes that a partnership is formed "regardless of the persons’ intent to create a partnership.” Tex. Bus. Orgs. Code Ann. § 152.051(b) (West 2011). Expressions of intent are still relevant to the rules for determining if a partnership is created per § 152.052(a)(2). Section 152.052 is silent as to expressions of intent not to form a partnership, but § 152.05 l’s treatment of the parties’ intent suggests that statements denying intent to form a partnership are of limited value in this analysis.
. The TBOC does not provide a definition of "owner” that is helpful to this Court’s analysis under § 152.051(b). In regard to partnerships, the TBOC defines an owner as a partner. Tex. Bus. Orgs. Code Ann. § 1.002(63)(B) (West 2011). This definition applies to Titles 1, 7, and 8, but not Title 4 which governs partnerships. Section 152.051(b) falls within Title 4. Without further guidance from the TBOC or case law, this Court must rely on common sense and the . plain language meaning of the word.
. Paul Krause, managing member of Cavu Rock, testified at a December 16, 2013, hearing in the main bankruptcy case on Gold Star's motion to temporarily allow its claim. The parties stipulated to admission of this testimony at the July 15, 2014, trial on this adversary proceedings.
. "CR” denotes Cavu Rock's exhibits. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497458/ | MEMORANDUM OPINION
MARVIN ISGUR, Bankruptcy Judge.
On March 7, 2014, Humberto Saenz, Jr. filed a motion to dismiss International Bank of Commerce’s (“IBC”) Complaint for Determination of Non-Dischargeable Debt. (Case No. 13-7028, ECF No. 1). IBC fails to state a direct fraud claim for an exception to discharge under § 523(a)(2). IBC also fails to state a derivative fraud claim under § 523(a)(2).
IBC may be given an opportunity to replead its derivative fraud claim under § 523(a)(2). If Gomez attempts to replead his § 523(a)(2) claim, then IBC will be granted leave to amend its equitable sub-rogation claim under § 523(a)(2). IBC’s claims for direct fraud and indemnification under § 523(a)(2) are dismissed. Accordingly, the motion is granted in part and denied in part.
Procedural Background
In December of 2012, Jose Gomez and JMG JMG Ventures, LLC (“Gomez”) filed an amended petition in their state court lawsuit against Saenz, Pizza Patron Inc. (“PPI”), Lone Star National Bank and International Bank of Commerce (“IBC”). The lawsuit arises from a business transaction between Gomez and Saenz. On November 26, 2013, IBC filed a Complaint for Determination of Non-dischargeable Debt under 11 U.S.C. § 523(a)(2)(A). (ECF No. 1). Gomez’s amended state court lawsuit is attached as an Exhibit to the Complaint.
On March 7, 2014, Saenz filed a motion to dismiss IBC’s complaint. (ECF No. 19). On March 28, 2014, IBC filed (i) its First Amended Complaint and (ii) a response to *427Saenz’s motion to dismiss. (ECF No. 21; ECF No. 22). On April 2, 2014, Saenz filed (i) a reply to IBC’s response and (ii) a motion to strike IBC’s First Amended Complaint. (ECF No. 23). On June 20, 2014, IBC filed a response to Saenz’s motion to strike. (ECF No. 24). On June 24, 2014, Saenz filed a reply to IBC’s response. (ECF No. 25). Finally, on July 15, 2014, IBC filed a reply to Saenz’s reply. (ECF No. 26).
Background Facts
On October 15, 2009, Gomez signed a Purchase-Sale Agreement for the purchase of Saenz’s equipment and inventory, and for the Pizza Patron franchise in Rio Grande City. On February 8, 2010, Gomez obtained a $287,200.00 loan from Lone Star Bank in connection with the purchase. Gomez contends that Saenz and IBC Bank created false profit and loss reports for the franchise and presented them to Gomez prior to the sale in order to induce him to buy the franchise and help him secure financing with Lone Star Bank. Specifically, Gomez claims that IBC’s loan officer, Elizabeth Goana, “created Good Will Value along with the Profit and Loss documents that were provided to Plaintiffs in order to induce the Plaintiffs to purchase the franchise and thereby pay off the balance of the loan of the business.” (ECF No. 1-1 at 10).
In IBC’s Original Complaint, it admits that it created Profit and Loss reports for the Pizza Patron franchise, but alleges that it relied on numbers provided to them by Saenz. (ECF No. 1 at 3). In its Amended Complaint, IBC alleges that it simply provided Saenz with blank financial statement forms. (ECF No. 21 at 4). IBC further alleges that “Saenz represented to IBC that he needed a finance statement and IBC may have provided him a blank one. Saenz then presented a filled out Finance Statement which he alleged was filled out by IBC. IBC was injured as a result of this misrepresentation by Saenz to Gomez and IBC.” (ECF No. 21 at 4).
IBC requests a declaration that (i) “the Saenz Defendants, jointly and severally, are liable to IBC for any liability assessed against IBC in favor of the Gomez Plaintiffs” and (ii) that the Court declare “that the judgment debt awarded to IBC as to Saenz, including attorneysf] fees and costs, is non-dischargeable under section 523(a)(2)(A) of the Bankruptcy Code.” (ECF No 1 at 6).
Rule 12(b)(6) Standard
Saenz’s motion to dismiss for failure to state a claim for which relief can be granted is filed under Fed. R. Bankr.P. 7012, which incorporates Fed. R. Civ. P. 12(b)(6). The Court reviews motions under Rule 12(b)(6) by “accepting all well-pleaded facts as true and viewing those facts in the light most favorable to the plaintiffs.” Stokes v. Gann, 498 F.3d 483, 484 (5th Cir.2007) (per curiam). However, the Court “will not strain to find inferences favorable to the plaintiff.” Southland Sec. Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353, 361 (5th Cir.2004) (internal quotations omitted).
To avoid dismissal for failure to state a claim, a plaintiff must meet Fed.R.Civ.P. 8(a)(2)’s pleading requirements. Rule 8(a)(2) requires a plaintiff to plead “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R.Civ.P. 8(a). In Ashcroft v. Iqbal, the Supreme Court held that Rule 8(a)(2) requires that “the well-pleaded facts” must “permit the court to infer more than the mere possibility of misconduct.” 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Rule 8(a)(2)). “Only a complaint that states a plausible claim for relief survives a motion to dismiss.” Id. (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d *428929 (2007)). “[A] complaint does not need detailed factual allegations, but must provide the plaintiffs grounds for entitlement to relief — including factual allegations that when assumed to be true raise a right to relief above the speculative level.” Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 232 (5th Cir.2009) (internal quotation marks removed).
Rule 9
Fraud claims must, in addition, meet Fed.R.Civ.P. 9(b)’s heightened pleading requirements. Under Rule 9(b), fraud claims must be alleged with particularity concerning the circumstances of the fraud. Fed.R.Civ.P. 9(b). See Oppenheimer v. Prudential Sec. Inc., 94 F.3d 189, 195 (5th Cir.1996) (upholding district court’s dismissal of fraud claims where the plaintiff failed to allege when an allegedly fraudulent sales charge was incurred or the extent of her damages); Red Rock v. JAFCO Ltd., 1996 WL 97549, at *3 (5th Cir.1996) (holding that the plaintiffs allegations did not satisfy Rule 9(b) where they failed to allege the time, place, or content of any misrepresentations). “To plead fraud adequately, the plaintiff must ‘specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.’” Sullivan v. Leor Energy, LLC, 600 F.3d 542, 551 (5th Cir.2010) (quoting ABC Arbitrage v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002)).
Saenz’s Motion to Strike
On April 2, 2014, Saenz filed a motion to strike IBC’s First Amended Complaint arguing that (i) the amended complaint was filed after the deadline for complaints to determine the dischargeability of debt and (ii) IBC’s amendment is futile on the basis of judicial estoppel. (ECF No. 23).
The Bankruptcy Rule that establishes the deadline for seeking an exception to a debtor’s discharge (i.e., Federal Rule of Bankruptcy Procedure 4007(c)) operates in conjunction with Bankruptcy Rule 7015, which incorporates Federal Rule 15. In re Huggard, 510 B.R. 668 (Bankr.D.Mass.2014). Bankruptcy Rule 7015 states that Federal Rule 15 applies in adversary proceedings. Id. Under Federal Rule 15(a), leave of court is required to amend a pleading when the amendment is sought beyond 21 days after the filing of a responsive pleading or 21 days after service of a motion under Rule 12(b). Id. The record shows that IBC filed its First Amended Complaint (March 28, 2014) exactly 21 days after Saenz filed his motion to dismiss (March 7, 2014). Accordingly, IBC was not required to seek leave of court to file its amended complaint.
However, Rule 15(a)’s “matter of course” right to amend does not exempt a creditor from complying with Rule 4007(c)’s deadline. See In re Brown, 2013 WL 3353829 (Bankr.N.D.Okla. July 3, 2013) (holding that creditor’s Rule 15(a) “matter of course” right to amend is “relevant only to the issue of whether [creditor] had to request leave of court before filing the Amended Complaint, and has no bearing on whether the claims asserted in the amended pleading are time-barred.”).
Rule 4007(c) requires that complaints to determine exceptions to discharge must be filed no later than 60 days after the first date set for the § 341 creditors’ meeting. Fed. R. Bankr.P. 4007(c). In this case, the first date set for the § 341 creditors’ meeting was September 27, 2013. Accordingly, the deadline to file a complaint seeking an exception to discharge was November 26, 2013.
Courts generally adhere to the strict deadlines for filing discharge complaints. However, some courts, including *429courts in the Fifth Circuit, have allowed a party to amend his complaint from one § 523(a) subsection to another under § 523(a) subsection when the actions involved in both arise out of the same events. When allowed, the new § 523(a) claim must relate back to the date of the original § 523(a) claim. See In re Fondren, 119 B.R. 101, 104 (Bankr.S.D.Miss.1990) (“Under the facts of this case, the allegations upon which the proposed amendment under section 523(a)(6) are based are the very same as those presented in the original complaint which alleged a violation under section 523(a)(2). Therefore, under Rule 15(c) ... the requested amendment here is allowable and will relate back to the date of the original complaint.”). IBC can file an Amended Complaint so long as it establishes relation back under Rule 15(c).
An amendment to a pleading relates back to the date of the original pleading when the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence attempted to be set out in the original proceeding. Fed. R.Civ.P. 15(c)(1)(B). In this case, IBC is not seeking to add any new § 523(a) claims or to change any of its legal theories. IBC’s Original Complaint and Amended Complaint both assert claims under § 523(a)(2), § (a)(4), and § (a)(6).1
In its Amended Complaint, IBC corrects a material fact. IBC initially asserted that it created the Pizza Patron profit and loss reports at Saenz’s request. In its Amended Complaint, IBC alleges that it merely provided Saenz with blank financial statement forms for him to fill out on his own. The exceptions to discharge sought by IBC are based upon the same transaction and events outlined in the Original Complaint. Accordingly, the Amended Complaint relates back to the Original Complaint.
The Court rejects Saenz’s argument that IBC waived its relation back argument by failing to address it in the Amended Complaint. IBC sufficiently established relation back in its reply brief filed on July 15, 2014. (ECFNo.26).
The Court also rejects Saenz’s argument that IBC’s amendment is futile on the basis of judicial estoppel. In order to establish judicial estoppel, four elements must be present: (1) the party to be es-topped must be advancing an assertion that is inconsistent with a position taken during previous litigation; (2) the position must be one of fact, rather than law or legal theory; (3) the prior position must have been accepted by the court in the first proceeding; and (4) the party to be estopped must have acted intentionally, not inadvertently. In re USintenetworking, Inc., 310 B.R. 274 (Bankr.D.Md.2004). Saenz did not allege that a prior inconsistent position was adopted by a court (element 3) or that IBC acted intentionally (element 4). Accordingly, Saenz’s judicial estoppel argument fails.
Saenz’s motion to strike is denied.
Analysis
§ 523(a)(2)
Section 523(a)(2) states:
(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 ...
*430(2) for money, property, services, or an extension, removal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debt — or is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
IBC seeks an exception to discharge under § 523(a)(2) based on two separate theories: (i) a direct fraud claim against Saenz; and (ii) an indemnification/subrogation claim for Saenz’s fraud against Gomez. IBC has failed to sufficiently plead a claim under either of these theories.
IBC’s Direct Fraud Claim
For § 523(a)(2)(A) actions, the Fifth Circuit requires proof of common-law fraud. In re Mercer, 246 F.3d 391, 402 (5th Cir.2001) (“The operative terms in § 523(a)(2)(A), ... ‘false pretenses, a false representation, or actual fraud,’ carry the acquired meaning of terms of art ... [and] are common-law terms.”). For a debt to be non-dischargeable under § 523(a)(2)(A), the creditor must show that (i) the debtor made a representation; (ii) the debtor knew the representation was false; (iii) the representation was made with the intent to deceive the creditor; (iv) the creditor actually and justifiably relied on the representation; and (v) the creditor sustained an injury as a proximate result of its reliance. In re Acosta, 406 F.3d 367, 372 (5th Cir.2005).
In the Original Complaint, the extent of IBC’s direct fraud claim against Saenz is that it “relied on Saenz Defendants in coming up with figures for the profits and loss reports and Good Will Value.” (ECF No. 1 at 4). IBC fails to specify what representation Saenz made to IBC, much less plead that Saenz knowingly made a false representation to IBC that it justifiably relied on. Accordingly, IBC’s original complaint failed to state a direct fraud claim against Saenz.
IBC’s amended complaint also falls short. The Amended Complaint attempts to allege that — merely by requesting a blank financial statement — Saenz made a false representation to IBC. If IBC’s new position proves factually correct (i.e., that it only provided a blank financial statement), it is impossible to understand how IBC relied on any statement by Saenz. According to IBC, Saenz requested a blank form, and IBC gave him one. The Amended Complaint fails to state a claim for fraud if all that Saenz did was to request a blank form.
Indemnification/Subrogation under § 523(a)(2)
IBC also seeks an exception to discharge under § 523(a)(2) based on indemnification and subrogation theories for Saenz’s fraud against Gomez.
Saenz alleges that indemnification and subrogation claims fall outside of the scope of the exception set forth in § 523(a)(2). The Court rejects that argument.
Saenz relies on In re Cox to support his claim that the alleged fraud must be committed against the plaintiff in order to fall under section 523(a)(2). In In re Cox, the court held that “Plaintiffs have failed to establish [that] they can maintain a § 523(a)(2) claim based on alleged misrepresentations made not to them but to a *431third party.” In re Cox, 462 B.R. 746, 757 (Bankr.D.Idaho 2011).
In In re Burton, the court allowed a plaintiff to proceed with a § 523(a)(2) claim even though the alleged fraud was against a third party and plaintiffs claim sounded in vicarious liability and indemnity. In re Burton, 2009 WL 537163 (Bankr.E.D.Tenn.2009). In In re Burton, the court rejected the debtor’s argument that “non-dischargeability under § 523(a)(2)(A) and (6) is limited to a debt held by the claimant who was the direct or immediate target of the debtor’s fraudulent intent or malicious conduct.” Id.
Unlike the court in Menna, this court is not concerned by the fact that Aviva will be unable to establish that it relied upon any misrepresentations by Burton. As long as the evidence establishes that GreenBank relied on the misrepresentations, and that the other elements of fraud are present as between Burton and GreenBank, then Avia’s non-dis-chargeability claim, premised on its vicarious liability, may proceed.
Id.
The Court agrees with In re Burton. Based on the Court’s review of the relevant Supreme Court and Fifth Circuit case law, the Court finds that indemnification and subrogation claims for a debtor’s fraud may fall within § 523(a)(2).
In Winkler, the Fifth Circuit held that there was no “receipt of benefit” requirement under § 523(a)(2). In re M.M. Winkler & Associates, 239 F.3d 746, 749 (5th Cir.2001). The Fifth Circuit held that “if a debt arises from fraud and the debtor is liable for that debt under state partnership law, the debt is non-dischargeable under § 523(a)(2)(A).” In re M.M. Winkler & Associates, 239 F.3d 746, 751 (5th Cir.2001). In that case, the Court held that an innocent partner could not discharge a debt for fraud committed by another partner at his firm. The Court reasoned that even if the innocent partner had not personally benefited, a person with whom the partner was associated had “obtained” a benefit from the fraud. “The statute focuses on the character of the debt, not the culpability of the debtor or whether the debtor benefitted from the fraud ... Thus, the plain meaning of the statute is that debtors cannot discharge any debts that arise from fraud so long as they are liable to the creditor for the fraud.” In re M.M. Winkler & Associates, 239 F.3d 746, 749 (5th Cir.2001).
In Winkler, the Fifth Circuit relied on the Supreme Court decision in Cohen v. de la Cruz. Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). In Cohen, the Supreme Court held that “§ 523(a)(2)(A) prevents the discharge of all liability arising from fraud, and that an award of treble damages therefore falls within the scope of the exception.” Id. at 215, 118 S.Ct. 1212. The Supreme Court reasoned that “[o]nce it is established that specific money or property has been obtained by fraud, however, ‘any debt’ arising therefrom is excepted from discharge.” Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 1214, 140 L.Ed.2d 341 (1998). The Supreme Court rejected the debtor’s argument that a “debt for money, property, etc. is necessarily limited to the value of the ‘money, property, services, or ... credit’ the debtor obtained by fraud, such that a restitutionary ceiling would be imposed on the extent to which a debtor’s liability for fraud is non-dischargeable.” Id. at 213, 118 S.Ct. 1212. The Supreme Court explained that “[debtor’s] argument is at odds with the meaning of ‘debt for’ in parallel exceptions to [the] discharge set forth in § 523(a), which use ‘debt for’ to mean ‘debt as a result of,’ ‘debt with respect to,’ ‘debt by reason of,’ and the like.” *432Cohen v. de la Cruz, 523 U.S. 213, 214, 118 S.Ct. 1212, 1214, 140 L.Ed.2d 341 (1998).
In order to sustain a derivative fraud claim under § 523(a)(2), the movant must (i) plead a theory of recovery showing that movant’s liability to the third party arises because of debtor’s fraud and (ii) that all of the elements of fraud are present between the debtor and third party.
As currently pled, IBC cannot sustain its subrogation claim. The Texas Supreme Court summarizes the doctrine of equitable subrogation as follows:
The doctrine of equitable subrogation allows a party who would otherwise lack standing to step into the shoes of and pursue the claims belonging to a party with standing. Texas courts interpret this doctrine liberally. Although the doctrine most often arises in the insurance context, equitable subrogation applies in every instance in which one person, not acting voluntarily, has paid a debt for which another was primarily liable and which in equity should have been paid by the latter.
Frymire Eng’g Co., Inc. ex rel. Liberty Mut. Ins. Co. v. Jomar Int’l, Ltd., 259 S.W.3d 140, 142 (Tex.2008) (internal citations omitted).
The facts in this case suggest that IBC may be held liable for Saenz’s fraudulent conduct. However, IBC failed to sufficiently plead how or why it is entitled to equitable subrogation. IBC’s pleadings in support of its subrogation claim is limited to just one sentence: “[t]o the extent that IBC is subrogated to the rights of the Gomez Plaintiffs for damages arising from Saenz’s fraud or fraudulent representation may recover against the Saenz Defendants, the debt resulting from Saenz’s conduct is and should be declared to be non-dischargeable under section 523(a)(2)(A) of the Bankruptcy Code.” (ECF No. 1 at 5). IBC’s request for subrogation, without any explanation, is insufficient to sustain an equitable subrogation claim under § 523(a)(2).
IBC also alludes to an indemnification theory of recovery: “[t]o the extent that IBC is determined to be directly liable to the Gomez Plaintiffs on any of the Gomez Plaintiffs claims, IBC is entitled to declaratory judgment against the Saenz Defendants, jointly and severally, in the amount of the Saenz Defendants’ proportional liability on those claims and under any right of IBC to indemnification by the Saenz Defendants, whether that right arises out of contract or applicable law.” (ECF No. 1 at 5).
IBC fails to articulate why it is entitled to indemnification. IBC does not allege that it has a contractual right to indemnification. Nor does it allege a right to equitable or common law indemnification. Unlike its equitable subrogation claim, the facts in this case do not suggest that IBC may be able to rely on common law indemnification. In Whitfield, the Texas Court of Appeals articulated the application of common law indemnity under Texas law:
Common law indemnity, on the other hand, has been abolished in Texas except in cases where the defendant’s liability is purely vicarious. Vicarious liability is liability placed upon one for the conduct of another, based solely upon the relationship between the two. Therefore, common law indemnity is recoverable by a defendant who, through no act of his own, has been made to pay for the negligence of another defendant based solely upon the relationship between the two defendants.
St. Anthony’s Hosp. v. Whitfield, 946 S.W.2d 174, 177-78 (Tex.App.1997).
*433Accordingly, IBC failed to state an indemnification claim under § 523(a)(2).
Leave to Amend Equitable Subrogation Claim
Although deficiently plead, IBC’s equitable subrogation theory may have some factual support. Accordingly, the Court will allow IBC to replead its equitable subrogation claim under § 523(a)(2) if Gomez attempts to replead his § 523(a)(2) claim.
Rule 15(a) provides that leave to amend pleadings “shall be freely given when justice so requires.” Fed.R.Civ.P. 15(a)(2). A decision to grant leave is within the discretion of the Court, but Rule 15(a) “evinces a bias in favor of granting leave to amend.” Stripling v. Jordan Prod. Co., LLC, 234 F.3d 863, 872 (5th Cir.2000) (quoting Martin’s Herend Imports, Inc. v. Diamond & Gem Trading U.S. Am. Co., 195 F.3d 765, 770 (5th Cir.1999)). The Court does not have the discretion to deny leave to amend unless it has a substantial reason for doing so. Southmark Corp. v. Schulte Roth & Zabel (In re Southmark Corp.), 88 F.3d 311, 314 (5th Cir.1996) (citations omitted). “In deciding whether to grant such leave, the court may consider such factors as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of amendment.” Id.
The court should generally give the plaintiff at least one chance to amend the complaint under Rule 15(a) before dismissing the action with prejudice. See Great Plains Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir.2002) (“[District courts often afford plaintiffs at least one opportunity to cure pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal.”).
Federal Rule of Bankruptcy Procedure 4007(c) requires that complaints to determine exceptions to discharge be filed no later than 60 days after the first date set for the § 341 creditors’ meeting. Fed. R. Bankr.P. 4007(c). In this case, the first date set for the § 341 creditors’ meeting was September 27, 2013. Accordingly, the deadline to file a complaint seeking an exception to discharge was November 26, 2013.
Courts generally adhere to the strict deadlines for filing discharge complaints. However, some courts, including courts in the Fifth Circuit, have allowed a party to amend his complaint from one charge under § 523(a) to another under § 523(a) when the actions involved in both arise out of the same events. When allowed, the new § 523(a) claim relates back to the date of the original § 523(a) claim. See In re Fondren, 119 B.R. 101, 104 (Bankr.S.D.Miss.1990) (“Under the facts of this case, the allegations upon which the proposed amendment under section 523(a)(6) are based are the very same as those presented in the original complaint which alleged a violation under section 523(a)(2). Therefore, under Rule 15(c) ... the requested amendment here is allowable and will relate back to the date of the original complaint.”); In re Heath, 114 B.R. 310, 312 (Bankr.N.D.Ga.1990) (a claim under § 523(a)(6) may relate back to an earlier complaint asserting a claim under § 523(a)(4) if it arises out of the same transaction or occurrence.); In re Osburn, 203 B.R. 811, 813 (Bankr.S.D.Ga.1996) (because the movant’s § 523(a)(15) claim “arises out of the same transactions and set of facts giving rise to the timely filed § 523(a)(5) complaint, the amendment relates back to the date of original filing and is timely under Rule 4007(c).”).
*434The Fifth Circuit has expressly acknowledged that courts allow amendments of § 523(a) claims filed after the Rule 4007(c) sixty-day period has expired to relate back to the original complaint. In Bercier v. Bank of La., the Fifth Circuit barred the plaintiff from asserting a particular amended claim under § 523(a), but stated, “[w]e do not suggest that an amended complaint adding a ground of challenge to the dischargeability of a particular debt would not relate back, for purposes of Bankruptcy Rule 4007(c), to the time of filing of the same creditor’s original complaint challenging the dischargeability of the identical debt.” Bercier v. Bank of La., 934 F.2d 689, 693 n. 7 (5th Cir.1991).
The Court granted Gomez leave to amend his § 523(a)(2) claim. If Gomez attempts to replead his fraud claim under § 523(a)(2), then IBC will have until August 29, 2014 to replead its equitable sub-rogation claim.
Conclusion
The Court will enter an Order consistent with this Memorandum Opinion.
. The Original Complaint and Amended Complaint focus on IBC’s § 523(a)(2)(A) claim and are entitled "Determination of Non-Dis-chargeable Debt under 11 U.S.C. § 523(a)(2)(A). However, both the Original Complaint and Amended Complaint additionally request a determination of non-discharge-ability under § 523(a)(4) and § 523(a)(6) without providing any explanation. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497459/ | MEMORANDUM OPINION REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT
KAREN K. BROWN, Bankruptcy Judge.
Before the Court are the motions for summary judgment filed by Robert Rem-endó and the IRS concerning the discharge of Kemendo’s federal income tax liabilities for 1995 and 1996 under 11 U.S.C. §§ 1328(a) and 523(a)(1)(B). The IRS asserts that as of July 8, 2013, Debt- or’s taxes of $455.86 for 1995 and $6,055.26 pre-petition interest and $ 15,503.06 post-petition interest for 1996 were not discharged by Debtor’s chapter 13 discharge under 11 U.S.C. § 1328(a).
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding. After reviewing the motions and evidence, the Court concludes that Debtor’s motion for summary judgment should be granted and the motion of the IRS should be denied for the following reasons:
I. Undisputed Facts
A. Background
Debtor is a self-employed architect, who was involved in a divorce in 1995. Debt- or’s affidavit in support of summary judgement states that since 1995, Debtor has maintained an active dialogue with the IRS in an attempt to resolve his tax issues.
B. Tax Year 1995
Debtor’s federal income tax return for 1995 was due April 15, 1996. Debtor filed his 1995 tax return after that due date. The parties stipulate that on November 1, 1999, the IRS assessed tax in the amount of $4,786, a penalty of $596 and interest of $2,082.30 for Debtor’s tax year 1995. The parties stipulate that Debtor filed a federal income tax return for 1995 on August 11, 2003, listing his tax liability as $2,137. Subsequently, in March 2004, the IRS abated $2,659 of Debtor’s 1995 tax liability and assessed $652 in additional penalties for tax year 1995.
C. Tax Year 1996
Debtor’s federal income tax return for 1996 was due, with an extension, on October 15,1997. The parties stipulate that on November 1, 1999, the IRS assessed $22,188 of tax, $4,397.35 of penalties and $6,055.26 of interest for Debtor’s tax year 1996. The parties stipulate that Debtor filed a federal income tax return for 1996 on August 11, 2003, listing a total tax due in the amount of $15,807. Subsequently, in March 2004, the IRS abated $6,381 of tax for tax year 1996 and assessed additional penalties in the amount of $3,951.75.
D. IRS Tax Account Transcripts
The parties submitted IRS tax account transcripts in support of summary judgment. Although the parties stipulate that Debtor filed his 1995 and 1996 tax returns in 2003, the IRS tax account transcripts, which on their face purport to be current through 2013, do not show that Debtor filed any tax returns for 1995 or 1996 in 2003. Instead, the 1995 and 1996 transcripts show that the IRS received Debt- or’s 1995 and 1996 federal income tax returns on June 19,1998.
The 1995 transcript shows that the IRS referred Debtor’s 1995 tax return for review on July 27, 1998. The IRS performed an examination of Debtor’s 1995 return on August 15, 1998. The transcript reflects that after the examination, the IRS prepared, on August 24, 1998, a substitute for return for Debtor’s 1995 tax year.
*436The 1996 transcript shows that on April 15, 1998, the IRS transferred a credit of $ 1,206.19 from Debtor’s 1040 tax return. The 1996 transcript reflects that the IRS performed an examination of Debtor’s 1995 return on August 22, 1998. After that examination, the IRS prepared, on August 31, 1998, a substitute for return for Debt- or’s 1996 tax year.
Debtor submitted a Freedom of Information Act request to the IRS to obtain a copy of the substitutes for return. According to its letter response to Kemendo, the IRS was not able to locate copies of the substitutes for return within the applicable response deadline.
In 2005, the IRS filed a notice of tax lien for 1995 and 1996. Again, in March 22, 2006, the IRS filed another notice of tax lien.
E. Chapter 13
On September 19, 2007, Kemendo filed a chapter 13, case no. 07-36408.1 Debtor’s plan was confirmed on February 5, 2008. The IRS timely filed a proof of claim on October 31, 2007, totaling $124,204.87, that includes a general unsecured claim for tax years 1993-1996, 2000 and 2004, and a priority claim for tax year 2006. Post-confirmation, the IRS filed an amended claim on April 16, 2008, reducing the amount claimed to a total of $114,340.23, secured by a right of offset. The IRS filed the only proof of claim.
The IRS was paid $45,491.23 under Debtor’s chapter 13 plan. According to the chapter 13 trustee’s final report and account filed November 14, 2012, Debtor completed his case on August 20, 2012. Debtor received a discharge under 11 U.S.C. § 1328(a) on December 17, 2012. After application of the Debtor’s payments under the Chapter 13 plan and his discharge, the IRS reduced or abated penalties.
F. Subsequent IRS Activity
On January 14, 2013, the IRS recorded two certificates of release of federal tax liens prepared and signed on January 2, 2013, releasing the tax liens filed September 9, 2005, and March 22, 2006. The certificates of release state that Kemendo under section 6325(a) of the Internal Revenue Code has satisfied the taxes listed and all statutory additions. The list includes the following:
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On July 8, 2013, the IRS issued Notices of Intent to Levy to Debtor for unpaid federal income tax liabilities for tax year 1995 in the amount of $455.86 and for tax year 1996 in the amount of $6,055.26 pre-petition interest and $15,503.06 post-petition interest. As of May 26, 2014, IRS *437transcripts reflect that Debtor was indebted to the United States for unpaid federal income tax liabilities for tax year 1995 in the amount of $468.08 and for tax year 1996 in the total amount of $22,186.45.
II. Contentions of the Parties
Debtor contends that his 1995 and 1996 federal income tax liabilities are discharged under 11 U.S.C. § 1328(a). Debt- or asserts that, since he filed his 1040 returns in August of 2003, approximately four years prior to the filing of the Chapter 13 case, and, since no allegations of fraud or submitting a false return have been made, the taxes for 1995 and 1996 were discharged under 11 U.S.C. § 1328(a).
The IRS contends that Debtor’s unpaid federal income taxes for tax years 1995 and 1996 were not discharged by his chapter 13 discharge in 2013 because Debtor’s tax returns were filed late and almost four years after the IRS made its assessments of tax liabilities for the years at issue. The IRS argues that Debtor’s unpaid federal income taxes for tax years 1995 and 1996 were excepted from discharge under 11 U.S.C. § 1328(a)(2), citing to (a) the IRS position in IRS Chief Counsel Notice 2010-016; (b) the Fifth Circuit’s decision in In re McCoy, 666 F.3d 924 (5th Cir.2012); and (c) circuit courts holding that a belated tax “return” fails the test of what constitutes a valid tax “return.” See e.g. Beard v. Commissioner, 82 T.C. 766 (1984) aff'd, 793 F.2d 139 (6th Cir.1986).
III. Conclusions of Law
Bankruptcy Code § 523(a)(l)(B)(i) excepts from discharge taxes for which no return was filed. 11 U.S.C. § 523(a)(1)(B)(i). Under Bankruptcy Code § 523(a), the term “return” is defined as follows:
For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable non-bankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.
11 U.S.C. § 523(a).
In In re McCoy, 666 F.3d 924 (5th Cir.2012), the Fifth Circuit held that McCoy’s Mississippi state income tax liabilities for years for which she filed late returns could not be discharged under 11 U.S.C. § 727 because they were not returns for discharge purposes under the definition of return applicable to 11 U.S.C. § 523(a). 666 F.3d 924 at 929-931. The Fifth Circuit explained that under the Mississippi Tax Code, state income tax returns must be filed on or before April 15th of each year. 666 F.3d at 928. McCoy’s state income tax returns were not filed by that deadline. Id. Further, McCoy’s returns were not filed under a safe harbor provision such as that provided by 26 U.S.C. § 6020(a). 666 F.3d at 931, FN. 10 (“We also note that McCoy does not claim that her returns were ‘prepared pursuant to [§] 6020(a) ... or similar State or local law_’ 11 U.S.C. § 523(a)(*) (emphasis added). McCoy does not point to any Mississippi tax provision analogous to § 6020(a), under which her filings might qualify as returns. Consequently, she cannot rely on this ‘safe harbor’ provision.”)
Referring to the second sentence of the above-quoted definition of “return,” the Fifth Circuit stated:
... this second sentence simply explains that returns filed pursuant to § 6020(a) do qualify as returns for discharge pur*438poses, while those filed pursuant to § 6020(b) do not. In other words, this second sentence in § 523(a)(*) carves out a narrow exception to the definition of “return” for § 6020(a) returns, while explaining that § 6020(b) returns, in contrast, do not qualify as returns for discharge purposes.
666 F.3d at 931.
Considering the House Report, H.R.Rep. No. 109-31 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 167, the Fifth Circuit stated:
The House Report accompanying BAPCPA explains that § 523(a)(*) was intended to provide that a return prepared pursuant to section 6020(a) of the Internal Revenue Code, or similar State or local law, constitutes filing a return (and the debt can be discharged), but that a return filed on behalf of a taxpayer pursuant to section 6020(b) of the Internal Revenue Code, or similar State or local law, does not constitute filing a return (and the debt cannot be discharged).
666 F.3d at 931, FN 9.
The Fifth Circuit explained the difference between a return filed under § 6020(a) and one under § 6020(b):
Section 6020(a) returns are those in which a taxpayer who has failed to file his or her returns on time nonetheless discloses all information necessary for the I.R.S. to prepare a substitute return that the taxpayer can then sign and submit.... In contrast, a § 6020(b) return is one in which the taxpayer submits either no information or fraudulent information, and the I.R.S. prepares a substitute return based on the best information it can collect independently.
666 F.3d at 928. In summary, the Fifth Circuit, in McCoy, preserved the safe harbor for late filed returns prepared by the Secretary with the cooperation of the taxpayer under 26 U.S.C. § 6020(a) for purposes of discharge under 11 U.S.C. § 523(a).
The parties agree that there is no genuine issue of material fact. The IRS, as the party seeking an exception to discharge, bears the burden of proof as to nondischargeability. See In re Fields, 926 F.2d 501, 503 (5th Cir.1991). The IRS transcripts show that the IRS prepared substitutes for return in August 1998 based on information contained in debtor’s tax returns for 1995 and 1996 filed in June 1998. This evidence indicates cooperation of the tax payer in preparation of a substitute for return under § 6020(a). The IRS has not submitted any evidence that Debt- or failed to cooperate in preparation of the substitutes for return for tax years 1995 and 1996. The IRS has not submitted any evidence that the substitutes for return it prepared for debtors tax years 1995 and 1996 fail to meet the statutory requirements of § 6020(a). Under 11 U.S.C. § 523(a), a substitute for return prepared with the cooperation of the taxpayer is a return for dischargeability purposes. See In re McCoy, 666 F.3d 924 (5th Cir.2012).
Debtor’s discharge was granted under Bankruptcy Code § 1328(a). Bankruptcy Code § 1328(a) incorporates and excepts from its discharge any debt “of the kind specified ... in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a).” 11 U.S.C. § 1328(a). Bankruptcy Code § 523(a)(1)(B) excepts from discharge tax liabilities as to which no return was filed or as to which a return was filed late and after two years before the date of the filing of the petition in bankruptcy. 11 U.S.C. § 523(a)(1)(B)(i)-(ii).
June 1998, the date shown by the transcripts that the IRS prepared substitutes for return for Debtor’s tax years 1995 and 1996, is a date before two years before the *439date of Debtor’s chapter 13 petition, which was filed on September 19, 2007. Based on the foregoing, the Court concludes that summary judgment should be GRANTED in favor of Debtor; it is therefore
ORDERED that Debtor’s motion for summary judgment is GRANTED; it is further
ORDERED that Debtor’s taxes, penalties, and interest for tax years 1995 and 1996 are discharged under 11 U.S.C. § 1328(a).
. In addition to the instant chapter 13 case, Debtor filed a previous chapter 7 bankruptcy on August 17, 2001. In that case, Debtor was discharged under 11 U.S.C. § 727 on January 14, 2002. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497460/ | OPINION DENYING DEFENDANTS DIMITRIOS (“JIM”) PAPAS, VIOLA PAPAS, TED GATZAROS, AND MARIA GATZAROS’ MOTION FOR SUMMARY JUDGMENT (DKT. 187)
WALTER SHAPERO, Bankruptcy Judge.
Introduction
Plaintiff, as Litigation Trustee, seeks to avoid transfers made by a debtor corporation to Defendants, arguing that the transfers were fraudulent transfers under applicable Michigan law. Defendants moved for summary judgment on the basis that Plaintiffs action is an “impermissible collateral attack” on the order of the Michigan administrative agency that investigated and approved the overall transaction, including the subject transfers to Defendants. The motion is denied.
Undisputed Facts
Prior to 2000, Dimitrios (“Jim”) and Viola Papas (together, “the Papases”) and Ted and Maria Gatzaros (together, “the Gatza-roses”), owned approximately 86% of the membership interests in Monroe Partners, LLC (“Monroe”). Monroe owned a 50% interest in Greektown Casino, LLC (“Greektown Casino”). Kewadin Greek-town Casino, LLC (“Kewadin”) owned the other 50% interest. Greektown Casino owned and operated a casino in downtown Detroit, Michigan. On or about July 28, 2000, by agreement, Monroe redeemed the membership interests of the Papases and the Gatzaroses (together, “Defendants”) in exchange for specified installment payments. Incident thereto, Kewadin contemporaneously purchased equivalent membership interests in Monroe and agreed to make the installment payments on Monroe’s behalf. Thus, in effect, Mon*447roe and Kewadin became obligated, either directly or indirectly, to make the installment payments to Defendants. The casino opened in November 2000. By 2004, these payment obligations to Defendants were in default.
In 2005, the various parties negotiated a multi-faceted amended redemption agreement and financing arrangement (“the Transaction”) whereby, among other things, (a) the Papases would agree to a discounted cash buyout of about $95 million and (b) the Gatzaroses would agree to a partial payment of about $55 million, leaving about $50 million outstanding. As part of the Transaction, Monroe and Ke-wadin would convey all their membership interests in Greektown Casino to a new special-purpose entity called Greektown Holdings, LLC (“Holdings”). Holdings was formed in September 2005 and its assets would be limited to a subsidiary corporation and the 100% interest in Greektown Casino.
The Transaction required the approval of the Michigan Gaming Control Board (MGCB), a state regulatory agency created by the Michigan Gaming Control and Revenue Act, Mich. Comp. Laws § 432.201 et seq. (“the Gaming Act”). The MGCB’s authority is defined as “the powers and duties specified in this act and all other powers necessary and proper to fully and effectively execute and administer this act for the purpose of licensing, regulating, and enforcing the system of casino gambling established under this act.” Mich. Comp. Laws § 432.204(1). Mich. Comp. Laws § 432.203(3) states “[a]ny other law that is inconsistent with this act does not apply to casino gaming as provided for by this act.” Additionally, Mich. Comp. Laws § 432.204(17)(d) empowers the MGCB to promulgate appropriate rules, which are codified as Mich. Admin. Code r. § 432.1101 et seq. Mich. Admin. Code r. § 432.1509 requires that a casino licensee “may not enter into any debt transaction affecting the capitalization or financial viability of its Michigan gambling operation or casino operation without first receiving the approval of the board.”
Greektown Casino first began discussions with the MGCB regarding the Transaction around June 2005. Because the Transaction qualified as a “debt transaction,” the MGCB conducted an investigation over several months, pursuant to its authority and procedures. See Mich. Admin. Code r. § 432.1509. The MGCB contemplated and understood that the discounted redemption payments to Defendants would be part of the Transaction, and that such funds would be sourced from Holdings issuing unsecured senior notes to qualified institutional buyers (“Noteholders”).1 The Transaction also included other financing and restructuring aspects, which need not be discussed in detail here. At these hearings before the MGCB, Merrill Lynch, Pierce, Fenner & Smith Inc., the issuer and initial purchaser of the senior notes and predecessor in interest to the Noteholders, participated in the discussions regarding the Transaction and advocated for its approval. The MGCB unanimously approved the Transaction and issued a written order on November 15, 2005 (“Order”). Dkt. 187 Ex. 5-A. On November 22, 2005, Holdings issued an Offering Memorandum for the senior notes, advising potential note purchasers that Holdings “will not be insolvent or rendered insolvent as a result of *448issuing the notes; we will be in possession of sufficient capital to run our business effectively; and we will have incurred debts within our ability to pay as the same mature or become due.” Dkt. 187 Ex. 5-K, at 25. On December 2, 2005, the monetary transfers were made to Defendants via wire payments, together with other monetary transfers contemplated as part of the Transaction. More or less contemporaneously, Holdings acquired 100% ownership of Greektown Casino.
The Basis of this Adversary Proceeding
After Greektown Casino, Holdings, Monroe, Kewadin, and other related entities filed their present Chapter 11 bankruptcies on May 29, 2008, the Litigation Trustee (“Plaintiff’), on behalf of the Note-holders and other creditors, sought to avoid the aspects of the Transaction whereby Holdings transferred money to Defendants and other persons.2 Plaintiff brought this action under 11 U.S.C. §§ 544 and 550 and two provisions of the Michigan Uniform Fraudulent Transfer Act (MUFTA): Mich. Comp. Laws §§ 566.34 and 566.35. Plaintiffs principal allegation against Defendants is that Holdings did not receive fair consideration for these transfers to Defendants, thereby rendering Holdings insolvent or inadequately capitalized. Defendants moved for summary judgment on the basis that Plaintiffs action is an “impermissible collateral attack” on the MGCB’s Order, which (a) approved the Transaction and (b) stated that the Transaction “has a low probability of having an adverse impact on the ongoing financial viability of [Holdings] and Greektown [Casino].” Dkt. 187 Ex. 5-A, at 3.
The starting point of Plaintiffs case is 11 U.S.C. § 544(b)(1), which provides:
Except as provided in paragraph (2), 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.
(emphasis added). In Plaintiffs complaint, “under applicable law” solely incorporates and alleges the pertinence of MUFTA. Thus, the Court’s task is to determine the extent to which MUFTA is “applicable” to the present situation in light of the asserted arguments. If the Gaming Act renders MUFTA inapplicable here, as Defendants argue, then there exists no “applicable law” by which Plaintiff can avoid the transfers under § 544. At one point, Plaintiff contended that Defendants are improperly arguing that MUFTA limits the jurisdiction of federal courts, particularly regarding enforcement of § 544. However, the Court views Defendants’ allegations as instead only attempting to define whether MUFTA is “applicable” in light of the asserted arguments. Similarly, Defendants argued that if Plaintiffs case is successful, it would allow federal action to improperly impinge upon the important *449state interests of regulating casinos, discussing BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). Again, because the Court is only asked to determine the applicability of a state statutory cause of action, as it might be incorporated into this adversary proceeding, that argument is irrelevant.
Plaintiff brings MUFTA allegations pursuant to Mich. Comp. Laws § 566.34, which states:
(1) 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 in either of the following:
(a) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor did either of the following:
(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.
(ii) Intended 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.
Plaintiff also brings makes MUFTA allegations pursuant to Mich. Comp. Laws § 566.35, which states:
(1) 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.
(2) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.
Assuming that the transfers are avoided under either of these provisions, Plaintiff seeks recovery from Defendants pursuant to 11 U.S.C. § 550.
Jurisdiction
This is a core proceeding under 28 U.S.C. § 157(b)(2)(H). The Court has jurisdiction under 28 U.S.C. §§ 1334(b) and 157, and E.D. Mich. L.B.R. 83.50(a).
Summary Judgment Standard
Fed.R.Civ.P. 56 provides the statutory basis for summary judgment, and is made applicable to adversary proceedings via Fed.R.Bankr.P. 7056. “Summary judgment is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. The initial burden is on the moving party to demonstrate that an essential element of the nonmoving party’s case is lacking.” Kalamazoo River Study Group v. Rockwell Intern. Corp., 171 F.3d 1065, 1068 (6th Cir.1999) (internal citation omitted). The Court should draw all justifiable inferences in favor of the non-moving party and it should not determine credibility or weigh evidence. Id. “[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material *450fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (emphasis original). “There is no genuine issue of material fact when ‘the record taken as a whole could not lead a rational trier of fact to find for the non-moving party.’ ” Williams v. Leatherwood, 258 Fed.Appx. 817, 820 (6th Cir.2007) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)).
Discussion
I. The Principal Arguments and an Overview of the “Impermissible Collateral Attack” Doctrine
Defendants assert the doctrine of “impermissible collateral attack” and allege that “Plaintiff is making a belated effort to have this Court second guess a debt transaction approved by the MGCB and supplant its judgment for that of the administration agency specifically empowered to review and approve the transaction.” Def. Reply to PI. Sur-Reply, Dkt. 248, at 16. It is important to note that the basis for Defendants’ motion is not collateral estop-pel (nor apparently res judicata).3 Id. Defendants view this action as, in effect, an improper and belated attempt to second guess the MGCB’s Order or usurp the MGCB’s exclusive original jurisdiction, whereas Plaintiffs proper recourse should have been to file an appropriate and timely appeal. See generally Blue Cross & Blue Shield of Mich. v. Comm’r of Ins., 155 Mich.App. 723, 728-29, 400 N.W.2d 638 (1986) (outlining procedures for appealing administrative orders). Defendants stress that this action and the matter that was before the MGCB in 2005 share a common nucleus of facts and would require a very similar, if not identical, inquiry, i.e. the effect that the Transaction (particularly the transfers to Defendants) would have on Holdings’ and Greektown Casino’s capitalization and financial viability. Defendants’ position is that Plaintiffs MUFTA action is “inconsistent” with the MGCB’s Order approving the transaction and that, pursuant to Mich. Comp. Laws § 432.203(3), MUFTA is inapplicable.
The “impermissible collateral attack” doctrine has been described under various nomenclatures, including improper collateral attack, exclusive original jurisdiction, exhaustion of remedies, and preemption. Despite the various descriptive labels, the essential nature of the doctrine has been clearly described as follows: “Our second task ... is to determine whether Woods’s position in this proceeding is a collateral attack. It is well-established in Michigan that, assuming competent jurisdiction, a party cannot use a second proceeding to attack a tribunal’s decision in a previous proceeding[.]” Dir., Workers Comp. Agency v. MacDonald’s Indus. Products Inc., — Mich.App. -, 853 N.W.2d 467, 2014 WL 1267304 (Mich.Ct.App. Mar. 27, 2014). Defendants contend that Michigan courts have clearly and consistently upheld this basic principle under the term “preemption.” For example, in Kraft v. Detroit Entm’t, L.L.C., 261 Mich.App. 534, 543-46, 683 N.W.2d 200 (2004), that Court held that the Gaming Act “preempts” the plaintiffs common law claims of fraud and unjust enrichment. That Court noted that the use of “preemption” is something of a misnomer because “preemption” traditionally applies to a situation where federal law takes precedence over state law. Id. *451at 545 n. 5, 683 N.W.2d 200. However, the Kraft Court noted that the Michigan Supreme Court has used the label “preemption” and, as a result, opined that “if a statute provides for an exclusive remedy or otherwise limits or bars application of other laws, including the common law, any conflicting common law simply cannot apply.” Id. For the sake of consistency, this Court will also use the term “preemption” to mean any limiting or nullifying effect that the Gaming Act might have on Plaintiffs MUFTA action, either on the face of the statutes or as-applied in this case. In McEntee v. Incredible Technologies, Inc., 2006 WL 659347 (Mich.Ct.App. Mar. 16, 2006), that Court opined that the Gaming Act “preempts” inconsistent statutory causes of action. In Cowsert v. Greektown Casino, L.L.C., 2005 WL 1633725 (Mich.Ct.App. July 12, 2005), the Court held that where a plaintiffs asserted causes of action were within the exclusive jurisdiction of the MGCB, his failure to exhaust his remedies before the MGCB and subsequent filing of a civil suit caused the civil court to lack subject matter jurisdiction.
Plaintiff challenges the asserted “impermissible collateral attack” doctrine, both in theory and in application. In any event, Plaintiff stresses that it is not seeking to overturn or challenge the MGCB’s Order, argue that the MGCB acted beyond its authority, or otherwise make any case that is inconsistent with the Order. Plaintiff instead views the MGCB’s authority and jurisdiction to be narrowly limited to casino licensure, gambling regulation, and other related matters, but not extending to the areas of fraudulent transfers and the adjudication and enforcement of MUFTA actions. Distilling these arguments, insofar as relates to the Transaction, the legal issue before the Court is: does the Gaming Act “preempt” MUFTA or create an inconsistency such that the Gaming Act renders MUFTA inapplicable here?
II. The Disputed Facts and Exhibits
To some extent, the parties take sharply conflicting factual positions on the MGCB’s investigation into the Transaction. Defendants argue that the MGCB’s investigation (a) was lengthy, meticulous, and thorough; (b) involved multiple requests for information, inquiries, amendments, and supplements; (c) required several meetings, including meetings open to the public; and (d) involved the MGCB retaining the accounting firm of Grant Thornton as its independent expert and reviewing a voluminous report authored by Grant Thornton. Plaintiff, however, argues that the MGCB’s investigation was (a) delegated by the MGCB to its staff; (b) more administrative than adjudicative, meaning there was no service of process, formal admission of evidence, etc.; (c) largely confidential, given that the relevant substantive issues were not discussed at the brief public meetings; (d) essentially a one-sided presentation with no objection, opposition, or cross-examination; and (e) not as lengthy or as thorough as Plaintiff contends. In furtherance of their arguments, the parties’ briefs include as exhibits the MGCB’s meeting minutes and transcripts, copies of the materials presented to the MGCB, and the Grant Thornton report.
The Court will not consider the substance of these arguments or the exhibits offered in support. First, these arguments and exhibits present contested issues of determining facts and/or weighing evidence, which are both outside the scope of what the Court should consider in this summary judgment context. Second, they are essentially irrelevant to the dispositive legal issues, which relate to statutory interpretation and a legal determination of the interplay between two statutory schemes. It is sufficient for the Court to *452simply note that the MGCB did in fact, as required, conduct an investigation into the Transaction and that such investigation included a review of the Grant Thornton report and an inquiry into how the Transaction would affect the capitalization and financial viability of Holdings and Greek-town Casino. Those facts are undisputed and the Court need not here further consider the substance or specifics of the MGCB’s investigation.
Further, Plaintiff objected to Defendants’ apparent reliance on the Grant Thornton report, characterizing it as inadmissible hearsay that should not be considered because it is offered to prove that the Transaction was not a fraudulent transfer. See Smoot v. United Transp. Union, 246 F.3d 633, 649 (6th Cir.2001) (only admissible evidence may be considered in ruling on motion for summary judgment). Defendants argue that the report is not hearsay because it is instead offered to show that the MGCB undertook an exhaustive analysis. Regardless of whether or not the report is inadmissible hearsay, the Court will not now consider its substance because it is irrelevant to the narrower legal questions at hand. In any event, it is undisputed, as noted, that the MGCB conducted an investigation into the Transaction, as required, including reviewing the Grant Thornton report. There is no dispute that the MGCB was required to, and indeed did, pass upon the pertinent questions of capitalization and viability. A review of that report would add no germane facts (let alone undisputed germane facts) to the disposition of the relevant legal issues. If Defendants are able to admit the report into evidence at trial, it might be relevant to and probative of Defendants’ argument that the Transaction was not a fraudulent transfer.
Similarly, Defendants attached as an exhibit a letter addressed to Defendants’ counsel by which a division of the office of the Michigan Attorney General indicates its support for Defendants’ motion for summary judgment. It summarizes the investigation the MGCB made into the Transaction and states that the MGCB views its Order as a final order not subject to collateral attack. Plaintiff contends the letter is inadmissible hearsay. This brief letter likewise adds nothing material or germane to the disposition of the present issues. The Attorney General merely states that the MGCB has a certain view of the legal issue that is presently before the Court. Regardless of whether or not the letter is inadmissible hearsay, it would be inappropriate for the Court to now consider it for any intent or purpose.
III. The Gaming Act Does Not Explicitly Preempt or Limit MUFTA
The Gaming Act and MUFTA do not specifically refer to or limit one another in any way, which is a relevant consideration. See Estes v. Titus, 481 Mich. 573, 579, 751 N.W.2d 493 (2008) (“We note initially that the language of [MUFTA] does not exempt from its reach property transferred pursuant to divorce judgments.”). This is in contrast to Michigan’s Business Corporation Act, for instance, which explicitly states that “[t]he uniform fraudulent transfer act ... does not apply to distributions governed by this act.” Mich. Comp. Laws § 450.1122(3). Also, the Michigan Consumer Protection Act specifically limits itself from applying to “[a] transaction or conduct specifically authorized under laws administered by a regulatory board or officer acting under statutory authority of this state or the United States.” Mich. Comp. Laws Ann. § 445.904(1). Plaintiff argues the failure of the Michigan Legislature to explicitly limit MUFTA’s application or make MUF-TA submissive or deferential to the Gam*453ing Act (despite having the clear ability to do so) indicates that it did not so intend to limit MUFTA. The Court finds this argument persuasive and agrees with Plaintiff on this point. “When construing a statute, we consider the statute’s plain language and we enforce clear and unambiguous language as written.” In re Bradley Estate, 494 Mich. 367, 377, 835 N.W.2d 545 (2013) (citation omitted). Looking to the plain language of the statutes, the Court finds that the Gaming Act does not explicitly preempt or limit MUFTA.
IV. The Gaming Act Does Not Implicitly or Effectively Preempt or Limit MUFTA
A deeper analysis is required to determine whether preemption is implicit in the purpose, substance, and effect of the two statutory schemes, either on their face or as-applied in this case. The standard for implicit repeal of a statute has been described as follows:
The [Michigan] Supreme Court has stated that it is axiomatic that repeals by implication are disfavored, and that it is to be presumed in most circumstances “that if the Legislature had intended to repeal a statute or statutory provision, it would have done so explicitly.” Wayne Co. Prosecutor v. Dep’t of Corrections, 451 Mich. 569, 576, 548 N.W.2d 900 (1996), citing House Speaker v. State Admin Bd., 441 Mich. 547, 562, 495 N.W.2d 539 (1993). Therefore, repeal by implication will not be found if any other reasonable construction may be given to the statutes, Wayne Co. Prosecutor, supra at 576, 548 N.W.2d 900, such as reading in pari materia two statutes that share a common purpose or subject, or as one law, even if the two statutes were enacted on different dates and contain no reference to one another. See State Treasurer v. Schuster, 456 Mich. 408, 417, 572 N.W.2d 628 (1998), quoting Detroit v. Michigan Bell Tel. Co., 374 Mich. 543, 558, 132 N.W.2d 660 (1965). However, a repeal of a statute may be inferred in two instances: (1) where it is clear that a subsequent legislative act conflicts with a prior act; or (2) when a subsequent act of the Legislature clearly is intended to occupy the entire field covered by a prior enactment.
City of Kalamazoo v. KTS Indus., Inc., 263 Mich.App. 23, 36-37, 687 N.W.2d 319 (2004). That case did not specifically deal with a statute preempting certain causes of action, as is alleged here. Rather, it dealt with two conflicting statutes, one providing for a jury trial on a certain issue and the other not so providing. The Court stated that although it was “extremely hesitant” to find that the Legislature’s enactment of the subsequent statute implicitly repealed the prior statute, that was a rare case where no reasonable harmonious construction could be otherwise given. Id. at 37, 687 N.W.2d 319. The question presented in this case is largely analogous. Here, the question is whether the Legislature’s enactment of the Gaming Act, particularly the aspects granting the MGCB exclusive original jurisdiction over certain matters, implicitly preempts or limits Plaintiffs ability to bring the present MUFTA action. As such, the Court will consider and incorporate into its analysis the two part City of Kalamazoo test.
A. The Scope of the MGCB’s Authority
Defendants’ principal argument is that the MGCB had exclusive original jurisdiction over the Transaction, including the crucial matters of how the Transaction would impact Holdings’ and Greektown Casino’s capitalization and financial viability. Mich. Comp. Laws § 432.204(1) states: “The board shall have the powers and duties specified in this act and all other *454powers necessary and proper to fully and effectively execute and administer this act for the purpose of licensing, regulating, and enforcing the system of casino gambling established under this act.” Mich. Comp. Laws § 432.203(3). states “[a]ny other law that is inconsistent with this act does not apply to casino gaming as provided for by this act.”4
Given the scope of its defined jurisdiction and the various opinions of Michigan courts, it is clear that the MGCB at least has purview over matters related to acts of gambling and the persons engaging in such acts. That is uncontested by the parties. Thus, where a gambler claimed that a casino improperly refused to pay him the jackpot he claimed to have won, he was first required to exhaust his administrative remedies before the MGCB because it had exclusive jurisdiction over such a gambling dispute. Cowsert, 2005 WL 1633725. Similarly, gamblers may not file a civil suit against licensed casinos for allegedly fraudulent gambling games. Kraft, 261 Mich.App. 534, 683 N.W.2d 200. Because the Michigan Consumer Protection Act does not apply to transactions specifically authorized by the Gaming Act and because the Gaming Act preempted the common law claims of fraud and unjust enrichment, the gamblers’ proper remedy was to seek appropriate redress from the MGCB. Id. Similarly, in McEntee, 2006 WL 659347, it was held that the Gaming Act precluded the plaintiffs civil suit for money lost playing an arcade game that had a monetary reward because such dispute was within the MGCB’s gaming jurisdiction.
Further, although Mich. Comp. Laws § 432.203(4) states “[t]his act and rules promulgated by the board shall apply to all persons who are licensed or otherwise participate in gaming under this act ” (emphasis added), the Gaming Act also regulates the conduct of persons other than licensees and persons who are directly involved in acts of gaming, for example, it regulates the licensee’s suppliers and vendors. Mich. Comp. Laws §§ 432.207a and 432.204a(l)(s).
The Michigan Appeals Court has held that “the Legislature vested the board with.exclusive jurisdiction over all matters relating in any way to the licensing, regulating, monitoring, and control of the non-Indian casino industry.” Papas v. Michigan Gaming Control Bd., 257 Mich.App. 647, 658-59, 669 N.W.2d 326 (2003). Despite the broad language “over all matters relating in any way,” it is clear that the Gaming Act does not preempt or curtail every single law or dictate that might apply to regulate or control casinos for any intent or purpose. Id. (emphasis added). Defendants concede that notwithstanding the breadth of the Gaming Act, casinos are not exempt from certain laws of general application, such as local health and safety codes. The Transaction itself contemplated some such regulations being applicable because Holdings’ Offering Memorandum states:
Generally, we are subject to a variety of federal, state and local governmental *455laws and regulations relating to safety and the use, storage, discharge, emission and disposal of hazardous materials. Failure to comply with such laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect operations.
Dkt. 187 Ex. 5-K, at 17.
In fact, the MGCB’s rules, which are promulgated pursuant to its authority under the Gaming Act, specifically indicate that other agencies also have some limited authority to regulate licensed casinos. For example, Mich. Admin. Code r. § 432.1306(3) requires that a casino license application shall include “[t]he status of all required governmental and regulatory permits and approvals and any conditions of all required governmental and regulatory permits and approvals” and “[o]ther information and documentation as may be required by the board concerning the applicant’s plans for providing food and beverage and other concessions, the status of all relevant required governmental and regulatory permits and approvals, and any conditions of all relevant required governmental and regulatory permits and approvals.” A request for approval of a debt transaction (such as the subject one that was before the MGCB) shall contain “[a]ll filings that must be submitted to any regulatory agency in association with the debt transaction.” Mich. Admin. Code r. § 432.1509(3). A person notifying the MGCB of a public offering must provide “[a] statement of intended compliance with all applicable federal, state, local, and foreign securities laws.” Mich. Admin. Code r. § 432.1403. “A casino licensee shall comply with all federal and state regulations for the withholding of taxes from winnings or the filing of currency transaction reports, or both.” Mich. Admin. Code r. § 432.1820. A casino licensee that is a foreign corporation operating in Michigan shall provide to the MGCB upon request “a certificate of authority from the Michigan corporations and securities bureau authorizing it to do business in Michigan.” Mich. Admin. Code r. § 432.11201. What can be distilled from these rules is that licensed casinos are regulated and controlled, to some extent, by authorities other than the MGCB and by laws of general application. Thus, not all laws that directly or indirectly regulate or control a licensed casino are preempted by, or are necessarily inconsistent with, the Gaming Act. Rather, preemption applies only to laws that are at odds with the MGCB’s prescribed statutory jurisdiction.
B. The MGCB had no Subject Matter Jurisdiction over a MUFTA Claim
Plaintiff argues that the MGCB has no jurisdiction or power relating to MUF-TA claims, even if such claims directly involve licensed casinos. Plaintiff views the MGCB’s jurisdiction as being limited predominantly to the licensure of casinos and the regulation of licensees. The MGCB has sweeping powers to regulate and control casinos, including the ability to appoint a conservator to take possession of a casino and sell it in bulk. Mich. Comp. Laws § 432.224(7). However, none of the MGCB’s enumerated powers include undoing or recovering fraudulent transfers pursuant to MUFTA. Defendants have not directed the Court to any provision that would include MUFTA actions within the stated authority of the MGCB, i.e. “the powers and duties specified in this act and all other powers necessary and proper to fully and effectively execute and administer this act for the purpose of licensing, regulating, and enforcing the system of casino gambling established under this act.” Mich. Comp. Laws § 432.204(1). Indeed, when reviewing a debt transaction such as the Transaction, Mich. Admin. *456Code r. § 432.1205 limits the scope of the MGCB’s authority, providing:
An action of the board regarding an applicant or licensee relates only to the applicant’s or licensee’s qualification for licensure under the act and these rules and does not indicate or suggest that the board has considered or passed on the qualifications or application of the applicant or licensee for any other purpose.
In this regard, Defendants’ argument that the Gaming Act impliedly preempted MUFTA, as MUFTA might apply here, is unavailing. Defendants argue that various cases cited by Plaintiff holding that licensed casinos are subject to personal injury and employment claims5 are distinguishable because, unlike the present issue of financial viability, the MGCB did not have exclusive original jurisdiction over employment or personal injury claims and was not required to initially and exhaustively analyze such matters. Plaintiff argues that the present fraudulent transfer action is similarly outside the realm of the MGCB’s jurisdiction. Plaintiff is correct. The MGCB has no jurisdiction over MUF-TA claims, and certainly not exclusive original jurisdiction.
The conclusion that the MGCB has no subject matter jurisdiction over MUFTA claims (particularly when reviewing the Transaction) is an important one. “A collateral attack ‘is permissible only if the court never' acquired jurisdiction over the persons or the subject matter.’ ” Dir., Workers’ Comp. Agency, — Mich.App. at -, 853 N.W.2d 467, 2014 WL 1267304, at *7 (quoting Edwards v. Meinberg, 334 Mich. 355, 358, 54 N.W.2d 684 (1952)). In other words, if a legal issue is beyond the subject matter jurisdiction of the initial tribunal, raising that legal issue in a subsequent proceeding is not an impermissible collateral attack on the initial tribunal’s order. Several cases illustrate this point. In Cowsert, a reason why the MGCB was deemed the appropriate tribunal for the gambling dispute was because the MGCB could fully redress the gambler’s asserted claims of damages. 2005 WL 1633725. In Estes, a creditor alleged in a civil action that a prior divorce judgment was a fraudulent transfer under MUFTA because the divorcing parties had conspired to transfer nearly all the marital assets to the wife in order to prevent the creditor from collecting on a claim held solely against the husband. 481 Mich. at 577-78, 751 N.W.2d 493. The divorce court had properly refused to allow the creditor to intervene in the divorce proceeding because Michigan law strictly limits a divorce court’s jurisdiction to the rights and obligations of the divorcing parties, and not of third parties. Id. at 582-83, 751 N.W.2d 493. The Michigan Supreme Court found that the creditor’s subsequent MUFTA action was not an impermissible collateral attack because it was not premised on any irregularity in the divorce proceedings, but rather was premised on the divorce court’s lack of statutory authority to conduct a MUFTA analysis and offer the creditor appropriate relief. Id. at 588-89, 751 N.W.2d 493. That is akin to the situation here because the divorce court in Estes was as powerless to rule on the creditor’s MUFTA claim as the MGCB was to rule on a MUFTA claim that any person might have brought.
Perhaps the best illustration of this principle is ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208, 928 N.Y.S.2d 647, 952 N.E.2d 463 (2011), which is remarkably similar to the facts of this case. There, an insurance company proposed a substantial restructuring, which required the approval of the New York State Insurance Depart*457ment Superintendent. The Superintendent thoroughly investigated the restructuring on an ex-parte basis, concluded it was fair to policyholders, and approved it. Subsequently, policyholders brought a state law fraudulent transfer action, alleging the restructuring left the insurer insolvent. The insurer contended the action was an “impermissible collateral attack” on the Superintendent’s investigation into and approval of the restructuring. This argument was presented in the sense that the insurance laws preempted the fraudulent transfer laws. The Court opined:
In this case, defendants essentially ask us to construe the Superintendent’s exclusive original jurisdiction to approve the Transformation under the relevant provisions of the Insurance Law to mean that he is also the exclusive arbiter of all private claims that may arise in connection with the Transformation — including claims that the restructuring rendered MBIA Insurance insolvent and was unfair to its policyholders. Defendants’ contention, taken to its logical conclusion, would preempt plaintiffs’ Debtor and Creditor Law and common-law claims. We reject this argument and conclude that there is no indication from the statutory language and structure of the Insurance Law or its legislative history that the Legislature intended to give the Superintendent such broad preemptive power ...
If the Legislature actually intended the Superintendent to extinguish the historic rights of policyholders to attack fraudulent transactions under the Debt- or and Creditor Law or the common law, we would expect to see evidence of such intent within the statute. Moreover, we would expect that, in such a situation, affected policyholders, such as plaintiffs, would have notice and an opportunity to be heard before the Superintendent made his determinations. Here, we find no such intent in the statute. Nor do we see a provision that required the Superintendent to provide notice and an opportunity to be heard to plaintiffs before he approved the Transformation
Defendants nonetheless look to Insurance Law § 326(a) as a provision conferring exclusive authority on the Superintendent to adjudicate plaintiffs’ private claims. Defendants’ reliance on such provision, however, is entirely misplaced ... A cursory reading of the plain language reveals that it does not vest the Superintendent with the power to consider causes of action such as plaintiffs’ ... The Superintendent’s determinations, however, have never included the adjudication of claims like those plaintiffs have put forward in this action.
Id. at 224-25, 928 N.Y.S.2d 647, 952 N.E.2d 463 (footnote omitted). Defendants seek to distinguish ABN AMRO because there, the Superintendent acted in confidentiality and the policyholders had no notice or opportunity to be heard. In the present case, however, the Notehold-ers (via their predecessor in interest) clearly had notice, substantially participated in discussions with the MGCB, and advocated for the Transaction. Defendants speculate that if the ABN AMRO Court was presented with the facts of this case, it would find the fraudulent transfer action to be an “impermissible collateral attack” because of the existence of notice and opportunity to be heard. That speculation is unfounded and unpersuasive. Defendants’ argument ignores the emphasis that Court placed on the limited scope of the Superintendent’s prescribed authority. A person’s opportunity to be heard regarding a fraudulent transfer claim is of little value if the tribunal at which he is to be heard is completely powerless to adjudicate the fraudulent transfer claim or to *458grant appropriate relief. Thus, the City of Kalamazoo factors do not support an implicit preemption because there is no statutory conflict and the Gaming Act was not intended to occupy the field of fraudulent transfers at all, let alone to entirely occupy that field. 263 Mich.App. at 36-37, 687 N.W.2d 319. This is not one of the rare situations where one statute should be seen to implicitly preempt another.
C. Plaintiffs MUFTA Action is not Inconsistent with the Gaming Act
The starting point of this analysis is Mich. Comp. Laws § 432.203(3), which states “[a]ny other law that is inconsistent with this act does not apply to casino gaming as provided for by this act.” The term “inconsistent” is not defined in the statute. Black’s Law Dictionary (9th ed. 2009) defines “inconsistent” as “[flacking agreement among parts; not compatible with another fact or claim ...” In addressing the existence of any inconsistency, the Court will consider whether MUFTA’s purpose, subject, implementation, and effect can be reasonably construed as being compatible with the Gaming Act and not intruding upon its scope.
Defendants stress that the Legislature used the benchmark “inconsistent,” rather than more stringent benchmarks such as “direct conflict” or “actual conflict.” Defendants argue that this adversary proceeding presents a clear “inconsistency” with the MGCB’s Order because of the overlap in the relevant inquiry into the capitalization and financial viability of Holdings and Greektown Casino as a result of the Transaction and the transfers to Defendants. Defendants contend that the MGCB appropriately fulfilled its duty to investigate the Transaction, including its pertinent effects. Indeed, Defendants are correct that the factual inquiry required in this adversary proceeding will be principally similar to that conducted by the MGCB. However, that alone is not sufficient for Defendants to meet their burden of proving inconsistency. The above quoted statute requires that the law be inconsistent with the Gaming Act, not just the inquiry that stems from that law. An overlap in the nucleus of facts and the inquiries involved is insufficient to find that two statutory schemes are inconsistent. For example, in Estes, the divorce court necessarily decided that awarding nearly all the marital assets to the wife was equitable between the spouses, but obviously did not pass upon the question of whether it was equitable as to the aggrieved non-party creditor. 481 Mich. at 584, 751 N.W.2d 493. The creditor was not precluded from subsequently pursuing a MUFTA action and alleging that the property division was fraudulent, despite the fact that the divorce court had already conducted a related, if not identical, inquiry as to the suitability of the asset division.
For three reasons, the Court finds that MUFTA, as Plaintiff would employ it here, is not an “inconsistent” law vis-a-vis the Gaming Act. First, as previously discussed, the MGCB has no jurisdiction over MUF-TA claims and cannot provide an appropriate remedy for such. “A tribunal’s subject matter jurisdiction depends on the kind of the case before it, not on the particular facts of the case ...” Dir., Workers Comp. Agency, — Mich.App. at -, 853 N.W.2d 467, 2014 WL 1267304, at *7. Pursuant to Mich. Admin. Code r. § 432.1205, the MGCB’s purview and its Order were limited to licensure issues, which are not disputed in this adversary proceeding. Because the MGCB’s scope of authority is thus limited, the Court holds that it is reasonable to see a vacancy in the legal landscape where MUFTA applies to licensed casinos without being inconsistent with the Gaming Act. In this case, the *459MGCB’s lack of jurisdiction over MUFTA claims is in itself enough to create and preserve such a vacancy for another tribunal to occupy. This interpretation is well supported by the above quoted maxims that statutes should be interpreted harmoniously and consistently with one another unless such interpretation is impossible. This situation is not one of the rare exceptions to the rule described in City of Kalamazoo, 263 Mich.App. at 36-37, 687 N.W.2d 319.
Second, Mich. Comp. Laws § 432.203(3) provides that “[a]ny other law that is inconsistent with this act does not apply to casino gaming as provided for by this act.” (emphasis added). This MUFTA action, although it would affect a licensed casino, does not per se apply to “casino gaming” or to the scope of the Gaming Act. Defendant argues that although this MUFTA action might not necessarily and directly pertain to “casino gaming,” it would inevitably have a serious impact on the gambling operations of a licensed casino. If Defendants’ liberal reading of the term “inconsistent” is adopted, it might preclude a variety of causes of action pursuant to laws of general application that, although they might apply to licensed casinos, at most have only an incidental relation to and impact on casino gaming. This statutory provision should be viewed narrowly as applying to casino gaming and to the specifically defined scope of the Gaming Act, for example, to matters over which the MGCB clearly has exclusive jurisdiction, such as allegations that a casino game is fraudulent. E.g. Kraft, 261 Mich.App. 534, 683 N.W.2d 200. MUFTA claims are simply outside this scope. If a law might apply to a licensed casino (whether the law pertains to corporate governance, taxation, securities, health and safety, etc.), it is not perforce inconsistent with the Gaming Act. Although the application of MUFTA here might have a substantial impact on a licensed casino (and perhaps even frustrate or defeat the casino’s ability to carry out its essential gambling operations), the same might arguably be said regarding the penalties for a casino’s noncompliance with the local fire or building codes. As previously discussed, the Gaming Act and the MGCB rules clearly indicate that licensed casinos are subject to a variety of regulations, including some that might pertain to debt transactions such as this.
Third, there would not necessarily be an inconsistency in the results. Plaintiff notes that the MGCB’s Order specifically states that the Transaction “has a low probability of having an adverse impact on the ongoing financial viability of [Holdings] and Greektown [Casino].” Dkt. 187 Ex. 5-A, at 3. Plaintiff contends that this statement is merely a prediction, used as a prophylactic measure to further the public interest in ensuring that debt transactions are appropriate. The Court agrees with Plaintiff based on the clear language of the MGCB’s Order. While it may have been a highly educated and thoroughly investigated prediction, it was still a prediction. The MGCB’s Order also required Holdings and Greektown Casino to demonstrate their ongoing financial viability by meeting certain future benchmarks for as long as they remained indebted under the borrowing aspects of the Transaction. Id. at 7-9. This demonstrates their need for continued oversight and compliance in order to avoid being rendered insolvent by the debts incurred by the Transaction. That tends to prove that the question of whether the Transaction rendered, or would subsequently render, the entities insolvent was not firmly answered on the date of the transfers, but rather depended on the unfolding of subsequent events, specifically, the success of the casino’s operations. As such, MUFTA gives a creditor a fraudu*460lent transfer cause of action even if the claim arose after the transfer was made. Mich. Comp. Laws § 566.34(1). Thus, it is possible for the MGCB to have made an accurate finding that, at the time of its Order, the transfers were unlikely to render the entities insolvent, but that subsequent events caused or contributed to the transfers becoming fraudulent transfers.
Holdings’ Offering Memorandum, issued after the MGCB approved the Transaction, marketed the senior notes to potential Noteholders and thoroughly described the Transaction and the risks involved. Dkt. 187 Ex. 5-K. It stated in relevant part, “[o]ur substantial indebtedness could adversely affect our financial results and prevent us from fulfilling our obligations under the notes and our other outstanding indebtedness.” Id. at 22. It further specified:
A portion of the net proceeds from the notes will be distributed to our members. The incurrence of the indebtedness evidenced by the outstanding notes and the making of the distribution are subject to review under relevant federal and state fraudulent conveyance statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of [Holdings]....
We believe that, after giving effect to the offering of the outstanding notes and the new credit facility and the distribm tion to us of a portion of the net proceeds therefrom, we will not be insolvent or rendered insolvent as a result of issuing the notes; we will be in possession of sufficient capital to run our business effectively; and we will have incurred debts within our ability to pay as the same mature or become due. There can be no assurance, however, as to what standard a court would apply to evaluate our intent or to determine whether we were insolvent at the time of, or rendered insolvent upon, the consummation of the offering of the notes and new credit facility, and the making of the distribution or that, regardless of the standard, a court would not determine that we were insolvent at the time of, or rendered insolvent upon, the consummation of the offering of the outstanding notes and the new credit facility, and the making of the distribution.
Id. at 25. Holdings itself recognized this possibility of insolvency, informed the prospective Noteholders of it, and offered assurances that Holdings believed this possibility would be unlikely to occur. Nonetheless, it was clear at that time that all parties recognized the possibility existed.
The Court finds that the MGCB left issues of potential MUFTA claims to a different date and to a different tribunal. Plaintiffs adversary proceeding essentially seeks for the Court to determine whether this contemplated possibility came to fruition. It is a retrospective action and seeks a remedy after-the-fact. If Plaintiff is able to prove its case, this will produce a remedial result, different from the prophylactic result produced by the MGCB. Thus, while the Court might engage in a related factual inquiry as the MGCB, there is a clear distinction in the subject matter of the inquiry, its purpose, its effect, and the perspective from which it is to be viewed. The Gaming Act was not intended to entirely occupy the same field as MUFTA and the two statutes are consistent and complementary. See also Mathis v. Interstate Motor Freight Sys., 408 Mich. 164, 179, 289 N.W.2d 708 (1980) (“The Worker’s Disability Compensation Act (WDCA) and the No-Fault Insurance Act are complete and self-contained legislative schemes addressing discrete problems.”). By way of further analogy, if a doctor makes a well-reasoned prediction that a procedure poses *461low risk to a patient, but the patient later dies, it is not “inconsistent” with the doctor’s prediction for other persons to conduct an autopsy or adjudicate a wrongful death claim. The Court does not find MUFTA to be inconsistent with the Gaming Act or with the MGCB’s Order, either on their face or as-applied to this case.
D. Defendants’ Argument that Plaintiffs Sole Remedy was to Appeal the MGCB’s Order is Unavailing
Defendants argue that Plaintiffs sole remedy should have been timely appealing the MGCB’s Order, rather than instituting this separate action. Defendants argue that the Gaming Act incorporates various procedures for appealing the MGCB’s Order, which neither Plaintiff nor any other person pursued. Defendants cite Womack-Scott v. Dep’t of Corr., 246 Mich.App. 70, 80, 630 N.W.2d 650 (2001), which states:
Considering the function that the [Civil Service Commission] serves to resolve employment disputes of state employees and the availability of a direct appeal to the circuit court from a CSC decision, we hold that a party aggrieved by a ruling of the CSC cannot file an independent action to seek redress of the claims made during the administrative process, but rather must pursue those claims through a direct appeal to the circuit court pursuant to the [Administrative Procedure Act].
Plaintiff contends that an appeal of the MGCB’s Order would have been legally and factually impossible. The Court agrees. Plaintiff would not have had standing to appeal the MGCB’s Order in 2005 because Plaintiff had yet to be appointed as trustee for the Litigation Trust and there was then no bankruptcy estate in existence for any trustee to represent. The Noteholders also likely faced a standing obstacle because, when the MGCB approved the Transaction, they were only future creditors of Holdings and did not yet have a cognizable claim of injury. On a more practical level, an appeal by any person would not have made sense because the unchallenged proponents of the Transaction, including the Noteholders, had received the exact licensure approval they sought from the MGCB (as opposed to a case where an applicant appeals the denial of what it requested, which could actually provide a rational appellate remedy). It would defy logic for a party to appeal a favorable ruling. See Estes, 481 Mich. at 591, 751 N.W.2d 493 (“If a debtor agrees to a transfer of substantially all the marital assets in order to defraud a creditor, he or she cannot be expected to appeal that transfer.”). In any event, given the MGCB’s lack of jurisdiction over a MUF-TA claim, such an appeal likely would not have touched upon any potential MUFTA issues. See ISB Sales Co. v. Dave’s Cakes, 258 Mich.App. 520, 532-33, 672 N.W.2d 181 (2003) (issue not raised at trial court is not preserved for appellate review). If the Noteholders were required to first exhaust their available appellate remedies, as Defendants claim, they clearly satisfied that requirement because there was no ag-grievement to appeal. Womack-Scott is distinguishable because the plaintiff there had feasible appellate remedies available at the administrative level and could have obtained appropriate relief on appeal, but she failed to pursue those remedies. 246 Mich.App. at 79-80, 630 N.W.2d 650. Although the Womack-Scott court recognized the existence of avenues by which the plaintiff could have had the appellate court review constitutional issues that were beyond the original administrative agency’s jurisdiction (such as by having the appellate court entertain legal briefs and take additional evidence), the other above-noted obstacles to functional appellate review would have precluded such ave*462nues in this case. Id. at 80-81, 630 N.W.2d 650.
The Court concludes that an appeal of the MGCB’s Order was not practical or feasible, and failed to provide an appropriate remedy (let alone the sole remedy) for parties who claim they are aggrieved by this allegedly fraudulent transfer. Not only did the MGCB lack jurisdiction over a MUFTA claim, but the identity of the parties, their lack of privity, and the distinct nature of the proceedings made an appeal an inoperable course of action for bringing any MUFTA claim. The lack of a functional appellate remedy strikes at the essence of Defendants’ “collateral attack” allegation, particularly because the failure to appeal an initial ruling is an element of a “collateral attack” allegation. See Dir., Workers Comp. Agency, — Mich.App. at -, 853 N.W.2d 467, 2014 WL 1267304, at *6.
Insofar as Defendants argued that it would be unfair or inequitable for the Noteholders to attack the Transaction because they were originally proponents for and participants in it, such argument is better raised at trial on the merits of Defendants’ defenses. It is beyond the narrower scope here, i.e. the availability and efficacy of an appellate remedy.
Conclusion
The Court finds that Defendants have not met their summary judgment burden and their motion for summary judgment (Dkt. 187) is denied. Plaintiff shall present an appropriate order.
. Originally, the Transaction was structured so that Greektown Casino itself would incur the various financing debts, including the unsecured senior notes. The MGCB apparently suggested or requested that such debts be incurred by a newly-created entity, Holdings, which had no operating history or prior creditors.
. In an order entered on June 13, 2008 in the main Chapter 11 case (Case No. 08-53104, Dkt. 114), these several bankruptcies were consolidated for procedural purposes only and became jointly administered. In an order entered on April 22, 2010 in the main Chapter 11 case (Dkt. 2279), the Court granted the Official Committee of Unsecured Creditors (“Committee”) authority to pursue bond avoidance claims on behalf of Holdings. In accordance with that order, the Committee initiated this adversary proceeding on May 28, 2010. Through a consent order entered in this adversary proceeding on August 14, 2010 (Adv.Pro. No. 10-05712, Dkt. 64), Buchwald Capital Advisors, LLC, solely in its capacity as Litigation Trustee for The Greek-town Litigation Trust, substituted in for the Committee, and thereafter has prosecuted this action.
. Under Michigan law, collateral estoppel applies to a prior decision if "(1) a question of fact essential to the judgment was actually litigated and determined by a valid and final judgment, (2) the same parties had a full and fair opportunity to litigate the issue, and (3) there was mutuality of estoppel.” People v. Trakhtenberg, 493 Mich. 38, 48, 826 N.W.2d 136 (2012) (quoting Estes v. Titus, 481 Mich. 573, 585, 751 N.W.2d 493 (2008)).
. Mich. Comp. Laws § 432.202 defines some pertinent terms:
(g) "Casino” means a building in which gaming is conducted.
(w) "Gambling operation” means the conduct of authorized gambling games in a casino.
(x) "Gaming” means to deal, operate, carry on, conduct, maintain or expose or offer for play any gambling game or gambling operation.
It should be noted that the Gaming Act does not define "gambling” as a standalone term and at times appears to use the terms "gaming” and "gambling” interchangeably. The Court does not intend to make any distinction between the two terms.
. PL Sur-Reply Br. Dkt. 239, at 10-11 n. 4. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497507/ | McMANUS, HOLMAN, LEE, BARDWIL, SARGIS, CLEMENT, Bankruptcy Judges,
Concurring.
We CONCUR that this opinion demonstrates that there is an immediate need for a local bankruptcy rule requiring that chapter 7 trustees prepare, file, and notice for hearing fee applications supported by time records and a narrative statement of services in the following circumstances:
(1) All requests seeking $10,000 or more;
(2) All cases in which the trustee seeks fees exceeding the amount remaining for unsecured priority and general claims;
(3) All cases involving a “carve out” or “short sale”;
(4) All cases where the trustee operates a business; and
(5) Any case in which the court specifically orders such a fee application.
The rule will be prescribed by separate general order issued pursuant to 28 U.S.C. § 2071(e) to have immediate effect, with notice and opportunity for comment provided promptly thereafter.
The Clerk will hereafter provide the court with quarterly reports identifying total chapter 7 trustee compensation *228awards under 11 U.S.C. §§ 330(a) and 330(b) for each chapter 7 trustee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497508/ | MEMORANDUM DECISION ON CHAPTER 7 TRUSTEE’S OBJECTIONS TO DEBTOR’S CLAIM OF EXEMPTIONS
LAURA S. TAYLOR, Chief Judge.
Debtor Isaías Arellano filed a chapter 71 bankruptcy case and concurrently filed a chapter 7 filing fee waiver application. His fee waiver request appeared meritorious given his limited income and the fact that neither his application nor his schedules evidenced an ability to pay the filing fee in installments. The Debtor’s initial schedule C was consistent with this assumption, as the Debtor claimed limited exemptions. The Court, thus, granted the fee waiver request.
At the initial section 341(a) meeting, however, new information came to light. The Debtor, in response to questioning, identified additional personal property assets not previously disclosed. As a result, the Debtor amended his schedule B to add a credit union checking account with a balance of $4,958.65 and an anticipated tax refund of $2,000 based on an amended 2011 income tax return. Concurrent with scheduling the omitted assets, the Debtor modified his schedule C and claimed the omitted assets exempt pursuant to California Code of Civil Procedure (“CCP”) § 703.140(b). The Debtor also paid the filing fee in full notwithstanding the fee waiver order.
Debtor’s chapter 7 Trustee objected to the Debtor’s newly claimed exemption of the omitted assets. As relevant here, he based his objection on the Debtor’s alleged bad faith. Through his counsel’s declaration, the Debtor opposed and contested the allegations of bad-faith.
DISCUSSION
The Bankruptcy Code authorizes a debtor to exempt certain assets. 11 U.S.C. § 522(b). The debtor’s exercise of this right directly impacts creditors as exempt assets are not available for payment of either pre-petition claims or administrative expenses. 11 U.S.C. § 522(c), (k). Notwithstanding, the Bankruptcy Code allows a debtor significant latitude in selecting assets for exemption. The debtor also has significant flexibility in the timing of an exemption claim. Under Rule 1009(a), a debtor may amend his or her schedules, including to add or alter claimed exemptions, as a matter of course at any time prior to the closing of the case. See also Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 630 (9th Cir. BAP 2010).
In the Ninth Circuit, however, a judicially created limit on this latitude and flexibility arose. It was accepted that a bankruptcy court could deny leave to amend or disallow a claimed exemption if the trustee or other party in interest timely objected and showed that either: (1) the debtor acted in bad faith; or (2) the creditors were prejudiced. Martinson v. Michael (In re Michael), 163 F.3d 526, 529 (9th Cir.1998) (adopting the test set forth in Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir.1982)); see also In re Nicholson, 435 B.R. at 630.
The United States Supreme Court’s recent decision in Law v. Siegel, — U.S. -, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014), however, requires that the Court examine the continued viability of the In re Michael equitably based limitations. If *230these two exceptions are “clearly irreconcilable” with the reasoning and analysis of Law v. Siegel, the Court may neither deny exemption nor bar the Debtor’s amendment to add an exemption based on bad faith and In re Michael. See Miller v. Gammie, 335 F.3d 889, 900 (9th Cir.2003) (en banc) (where intervening Supreme Court authority is “clearly irreconcilable” with prior Ninth Circuit authority, the courts “should consider themselves bound by the intervening higher authority and reject the prior opinion of this court as having been effectively overruled.”); see also Rodriguez v. AT & T Mobility Servs. LLC, 728 F.3d 975, 979 (9th Cir.2013) (courts may re-examine prior precedent when the reasoning or theory of that authority is “clearly irreconcilable” with the reasoning or theory of intervening higher authority).
The Court acknowledges that tension between the Supreme Court authority and prior circuit precedent is not enough to require rejection of otherwise binding circuit authority. Instead, the Supreme Court must have undercut the theory or reasoning underlying the prior circuit precedent in such a way that the cases are clearly irreconcilable. See Rodriguez, 728 F.3d at 979 (internal citation omitted). Whether prior precedent is clearly irreconcilable thus focuses “on the reasoning and analysis in support of a holding, rather than the holding alone.” Id. (internal citation omitted) (emphasis in original). And, that the intervening higher authority involved a different issue is not dispositive. See id. (“The issues presented in the two cases need not be identical in order for the intervening higher authority to be controlling.”)
In Law v. Siegel, the Supreme Court held that the bankruptcy court exceeded both its statutory and equitable powers when it permitted the surcharge of Mr. Law’s homestead exemption to pay administrative expenses incurred as a result of Mr. Law’s misconduct. 134 S.Ct. at 1195-97. Mr. Law fabricated a lien against his home in an attempt to keep equity available in the home from his creditors. Id. at 1193. His chapter 7 trustee successfully challenged the lien and obtained a determination that Mr. Law had perpetrated a fraud. Id. The bankruptcy court, therefore, granted his trustee’s motion to surcharge Mr. Law’s entire homestead exemption and to use those funds as recompense for the trustee’s related administrative costs and attorneys’ fees. Id. On appeal, both the Bankruptcy Appellate Panel of the Ninth Circuit and the Ninth Circuit affirmed. Id. at 1193-94.
The Supreme Court reversed. At the outset, it determined that surcharge was “unauthorized [as] it contravened a specific provision of the Code.” Id. at 1195. The Supreme Court first observed that section 522 and California law entitled Mr. Law to exempt equity in his home. Id. Second, it noted that section 522(k) expressly prohibited the use of exempt property for the payment of administrative expenses. Id. As the attorneys’ fees incurred by the trustee were “indubitably an administrative expense,” the Supreme Court concluded that the bankruptcy court violated section 522 by ordering the surcharge to pay such fees. Id.
The Supreme Court also rejected the argument that a bankruptcy court’s exemption denial when based on its equitable powers, whether arising under section 105(a) or its inherent authority, could “comfortably coexist” with the Bankruptcy Code. See id. at 1195-97. Observing first that nothing in section 522 gave the bankruptcy court “discretion to grant or withhold exemptions based on whatever considerations [it] deem[s] appropriate,” the *231Supreme Court emphasized that section 522 vested discretion solely in the debtor to decide whether or not to claim an exemption. Id. at 1196 (emphasis added). Insofar as the debtor claimed to be entitled to a statutorily available exemption, “the [bankruptcy] court [could] not refuse to honor the exemption absent a valid statutory basis for doing so.” Id. (emphasis added).
The Supreme Court further determined that section 522’s thorough enumeration of exemptions — and exceptions to exemptions — “confirm[ed] that courts are not authorized to create additional exceptions.” Id. (emphasis added). It, thus, emphatically rebuffed the .theory that the general, equitable powers of the bankruptcy court somehow conferred a basis for exemption denial based on a debtor’s bad-faith conduct, resolving that the “Code admits no such power.” Id. In doing so, it effectively abrogated three circuit court cases, including In re Doan. See id.
Thus, in Law v. Siegel, the Supreme Court made clear that where the Bankruptcy Code is silent, the only basis for denial of a state law exemption must arise under state law. See id. at 1196-97. And, the Supreme Court emphasized that “federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code.” Id. at 1197 (emphasis in original).
Finally, the Supreme Court noted that there is no real distinction between disallowing or denying an exemption and barring a debtor from amending2 his or her schedules to claim an exemption. See id. at 1196 (“[Authority to disallow an exemption ... [and] bar[ring] a debtor from amending his schedules to claim an exemption, ... is much the same thing....”). This conclusion is logical as the result of a denial of leave to amend is the same as exemption denial: the debtor is deprived of the benefit from the desired exemption.
The Court, thus, determines that its ability to disallow the Debtor’s claimed exemptions in the omitted assets — whether indirectly by denying leave to amend to include a new exemption or directly by disallowing the exemption itself — when based solely on its equitable powers and the existence of bad-faith or prejudice is clearly irreconcilable with Law v. Siegel. First, it is reasonably assumed that the Trustee seeks an order denying the exemption so that the omitted assets are available for payment of administrative or pre-petition unsecured claims. Thus, dis-allowance of the exemption in the omitted assets would result in contravention of specific language of section 522(c) and (k). This is actually the same result that the Supreme Court found improper in Law v. Siegel.
Second, the only authority for disallowing the Debtor’s claimed exemption in the omitted assets is the bankruptcy court’s equitable powers. See In re Nicholson, 435 B.R. at 634 n. 5 (recognizing an objection to exemption based on bad-faith conduct is “a matter of federal common law pursuant to [s]eetion 105(a) ... and the inherent powers of the bankruptcy court as courts of equity to protect the integrity *232of the bankruptcy process.”)- Thus, although Law v. Siegel involved a facially distinct issue, that of surcharge allowing payment of administrative expenses, the Court cannot ignore the Supreme Court’s clear mandate in the area of debtor exemptions: when a debtor properly asserts an exemption under section 522, it must be allowed unless the controlling law provides for disallowance. And this is true whether the debtor asserts the exemption at case initiation or at a later point before case closure. There is nothing in section 522 that provides for the denial or disallowance of an exemption based on a debtor’s bad-faith conduct or prejudice to third parties. In short, the bankruptcy court’s equitable powers are now an insufficient basis for exemption denial even if bad faith or prejudice exists.
The Court’s conclusion is strengthened by Law v. Siegel’s effective abrogation of In re Doan. The Ninth Circuit in In re Michael adopted the bad-faith or prejudice exception to debtor exemptions from Doan. See 163 F.3d at 529. Given Doan’s abrogation, it follows that In re Michael, at least as to the bad-faith and prejudice exceptions, likewise effectively is abrogated. See Rodriguez, 728 F.3d at 979; Miller, 335 F.3d at 893.
To be clear, Law v. Siegel did not deprive this Court of the essential authority to respond to the Debtor’s misconduct, if and when established, with meaningful sanctions. The Trustee’s present objections to the claimed exemptions, however, cannot stand as a form of sanction when based on the Court’s equitable powers. Such a sanction would enlarge the source of payment for administrative or unsecured claims in a manner directly contrary to section 522(c) and (k).
Further, as Law v. Siegel explained, the Code provides for no such grounds for exemption denial. Thus, any objection to these CCP § 703.140(b) exemptions must arise under California law. See Law v. Siegel, 134 S.Ct. at 1196-97. The Trustee, however, supplied no basis for disallowance under California law, and expressly declined the invitation to further brief the issue.
CONCLUSION
For the foregoing reasons, the Trustee’s objections to the Debtor’s claimed exemptions are OVERRULED.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. All "Rule” references are to the Federal Rules of Bankruptcy Procedure.
. Moreover, the term "leave to amend” is inapt; as stated under Rule 1009, a debtor may amend a claimed exemption as a matter of course, without requesting leave to amend from the bankruptcy court. This is in contrast to the rule in the past that required application for leave to amend a petition or schedule. See General Order 11, General Orders and Forms in Bankruptcy of the United States Supreme Court (1939) (abrogated 1973). Thus, while at one time a material difference between amending a debtor’s claim of exemptions and denying an exemption may have existed, it long ago became a distinction without a difference. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497510/ | MEMORANDUM DECISION
FREDERICK P. CORBIT, Bankruptcy Judge.
I. BACKGROUND
In 2008, Bryan and Annette Coonfleld purchased a condominium located in Lake Bellevue Village. The condominium is subject to a recorded declaration that provides the Lake Bellevue Village Homeowners Association with a lien for any unpaid homeowner assessments and is subject to a deed of trust securing a mortgage loan held by Bank of America, N.A. In December of 2012, Mr. and Mrs. Coon-fleld abandoned the condominium and stopped paying assessments to the Homeowners Association. However, Mr. and Mrs. Coonfleld still hold legal title to the condominium because neither the Homeowners Association nor Bank of America have foreclosed.
In July of 2014, Mr. and Mrs. Coonfleld filed a petition under chapter 13 of the Bankruptcy Code and proposed a plan that provides for the transfer of the condominium’s title to Bank of America1 and omits *241any provision for payment of ongoing assessments made by the Homeowners Association. Both Bank of America and the Homeowners Association object to the proposed transfer of title and the Homeowners Association farther objects to the absence of a provision for the payment of ongoing condominium assessments.2
II. ISSUES
The issues resulting from the two objections are:
1. Whether the debtors can force Bank of America to accept title; and
2. If not, whether the debtors’ plan can be confirmed if it does not provide for the payment of ongoing assessments.
III. DISCUSSION
A. The Debtors Cannot Force the Transfer of Title.
Bank of America and the Homeowners Association correctly assert that Mr. and Mrs. Coonfield cannot force Bank of America to accept title to the condominium. In Washington, to complete a transfer of real property, the transferee must accept the transfer.3 Here, where Bank of America is unwilling to accept the proposed transfer, the debtors cannot force the lender to take title. Nonetheless, as discussed below, Mr. and Mrs. Coonfield need not divest themselves of legal title to avoid personal liability for ongoing assessments.
B. Ongoing Association Assessments are Dischargeable.
The Homeowners Association cites Foster v. Double R Ranch Association, a decision rendered by the Ninth Circuit Bankruptcy Appellate Panel, as authority for the proposition that Mr. and Mrs. Coonfield’s chapter 13 plan must provide for ongoing assessments to the Homeowners Association so long as the Coon-fields hold title to the condominium.4 The Foster court addressed a situation where a debtor continued to reside in his condominium and had no intention to surrender it.5 Based on those facts, the Bankruptcy Appellate Panel imposed a rule that it descriptively entitled: “you stay, you *242pay.”6 Given that Mr. Foster continued to enjoy the benefits of ownership, this court finds the Foster ruling compelling on equitable grounds. However, the facts here are distinct in a critical respect.
In cases such as this one, where chapter 13 debtors have surrendered all interests in a condominium but still hold bare legal title, courts are split on whether ongoing assessments are dischargeable under 11 U.S.C. § 1328(a). Those courts that comport with the Homeowners Association’s view assert that assessments are a result of covenants running with the land and conclude that ongoing assessments are non-dischargeable.7 In contrast, other courts view the obligations as flowing from contract and conclude that they are dis-chargeable.8 While both approaches establish the existence of an obligation, neither appropriately addresses whether such obligations are dischargeable.9
To resolve the issue of whether Mr. and Mrs. Coonfield must include ongoing association assessments in their plan, the court must determine whether the assessments are a debt owed to the Homeowners Association as contemplated by the discharge provision under 11 U.S.C. § 1328(a). If so, then the assessments are dischargea-ble — if not, Mr. and Mrs. Coonfield remain personally liable and must provide for the assessments in their plan.
To begin the analysis, the court looks to the language contained in the discharge provision under 11 U.S.C. § 1328(a) which states “... the court shall grant the debt- or a discharge of all debts ...” (emphasis added) with certain exceptions inapplicable here. Section 101(12) of the Bankruptcy Code defines “debt” as a “liability on a claim.” In turn, section 101(5)(A) defines “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.” As the Supreme Court noted, “Congress chose expansive language in both definitions.” 10
In light of these broad characterizations, it appears that the terms necessarily encompass the obligation at issue here. The Homeowners Association possesses its claim by virtue of Mr. and Mrs. Coonfield acquiring title to the condominium and subsequent assessments are a consequence of, and mature from, the act that gave rise to such claim. Thus, absent the debtors’ pre-petition act of taking title, the Homeowners Association would not have a claim. As correctly noted by one court, obligations to Homeowners Associations “are *243a pre-petition claim because they arose upon the Debtor taking title to the property, which occurred pre-petition. The post-petition assessments that are at issue here are merely the ‘contingent’, ‘unmatured’ portion of that prepetition claim.”11 Thus, this court concludes that the claim against Mr. and Mrs. Coonfield for association assessments arose pre-petition and includes obligations for ongoing assessments.12
The express language contained in 11 U.S.C. § 523(a) leads to the same conclusion. By its terms, the discharge exceptions under section 523(a) do not apply to section 1328(a) — the discharge provision relevant here; however, section 523(a) remains relevant to section 1328(a) for other reasons. Section 523(a) states that “[a] discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt — ” (emphasis added) and goes on to list several debts excepted from discharge, including debts for ongoing association assessments under paragraph (16). By including association assessments on this list, Congress not only explicitly identified these obligations as “debts” that give rise to “claims” by operation of section 101(5), but, as a corollary, identified them as dis-chargeable absent a specific exception.13 In light of Congress’ designation, such debts are dischargeable under 11 U.S.C. § 1328(a).
A contrary interpretation of the law divests 11 U.S.C. § 523(a)(16) of significance. If personal liability on such obligations arise post-petition as the Homeowners Association urges, section 523(a)(16) is rendered meaningless and simply restates a principle already infused in bankruptcy law; i.e., that a right to payment arising post-petition is not subject to discharge. This deduction is consistent with the Supreme Court’s conclusion in Pennsylvania Department of Public Welfare v. Davenport. Holding *244that criminal restitution obligations excepted from discharge under section 528(a)(7) fall within the Code’s definition of “debt,” the Court reasoned that:
Had Congress believed that restitution obligations were not “debts” giving rise to “claims,” it would have had no reason to except such obligations from discharge in § 528(a)(7).... [I]t would be anomalous to construe “debt” narrowly so as to exclude criminal restitution orders. Such a narrow construction of “debt” necessarily renders § 523(a)(7)’s codification of the judicial exception for criminal restitution orders mere surplus-age. Our cases express a deep reluctance to interpret a statutory provision so as to render superfluous other provisions in the same enactment.14
It is instructive that Congress ultimately negated the outcome of Davenport by enacting specific discharge exceptions rather than by narrowing the definition of the terms “claim” or “debt.” As such, Davenport remains controlling as the Supreme Court confirmed in Johnson v. Home State Bank:
Congress subsequently overruled the result in Davenport.... It did so, however, by expressly withdrawing the Bankruptcy Court’s power to discharge restitution orders under 11 U.S.C. § 1328(a), not by restricting the scope of, or otherwise amending, the definition of “claim” under § 101(5). Consequently, we do not view the [change] as disturbing our general conclusions on the breadth of the definition of “claim” under the Code.15
Interpreting 11 U.S.C. § 523(a)(16) as this court has done not only confers distinct meaning on the provision but, as a matter of context, is supported by the fact that each discharge exception contained in section 523(a) addresses a debt giving rise to a claim that, absent a specific discharge exception, is dischargeable — for example, debts incurred by fraud, domestic support obligations, educational benefits, etc. This interpretation is further supported by Congress’ specificity in sections 523(a) and 1328(a). Section 523(a) excepts the enumerated debts from “discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b).”16 Likewise, paragraph (2) of section 1328(a) excepts any “debt” from discharge “of the kind specified ... in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a).” If Congress intended to categorically except debts for *245ongoing association assessments from discharge it would have said so.
C. Chapter 18 Provides for a Broad Discharge.
Allowing for the discharge of the obligations at issue is consistent with the principles underlying a chapter 13 discharge and reflects the execution of Congress’ policy that such a discharge should furnish broader relief. Again, the Supreme Court in Davenport addressed this stating:
Congress defined “debt” broadly and took care to except particular debts from discharge where policy considerations so warranted. Accordingly, Congress secured a broader discharge for debtors under Chapter 13 than Chapter 7 by extending to Chapter 13 proceedings some, but not all, of § 523(a)’s exceptions to discharge. See 5 Collier on Bankruptcy ¶ 1328.01[l][c] (15th ed. 1986) (“[T]he dischargeability of debts in chapter 13 that are not dischargeable in chapter 7 represents a policy judgment that [it] is preferable for debtors to attempt to pay such debts to the best of their abilities over three years rather than for those debtors to have those debts hanging over their heads indefinitely, perhaps for the rest of their lives”) (footnote omitted).... Thus, to construe “debt” narrowly in this context would be to override the balance Congress struck in crafting the appropriate discharge exceptions for Chapter 7 and Chapter 13 debtors.17
IV. CONCLUSION
The court sustains the objections brought by Bank of America and the Homeowners Association to the plan provision proposing a transfer of title. The court rejects the Homeowners Association’s contention that Mr. and Mrs. Coon-field’s plan must provide for the payment of ongoing assessments. The debtors may propose a revised plan in accordance with this decision.
So Ordered.
. Section VIII of the debtors’ plan contains the following provision:
All collateral surrendered in paragraph III. A.4.b. [including the condominium] is surrendered in full satisfaction of the underlying claim(s). Pursuant to 1322(b)(8) and (9), title to the property located at 4 Lake Bellevue Drive Unit # 209, Bellevue, Washington 98005, shall vest in Bank of America upon confirmation, and the Confirmation *241Order shall constitute a deed of conveyance of the property when recorded. All secured claims secured by Debtor’s property located at 4 Lake Bellevue Drive Unit # 209, Belle-vue, Washington 98005 will be paid by the surrender of the collateral and foreclosure of the security interests.
. The debtors’ budget allows for, and the debtors’ plan provides for, the payment of $1,000 per month for thirty-six (36) months. If the debtors are required to pay the current monthly assessment of $525.84, the amount available for distribution to all creditors under the plan would be reduced.
. See, e.g., 17 William B. Stoebuck and John W. Weaver, Real Estate: Property Law, Washington Practice Series, at 497 (2d. ed. 2004). "Theoretically, a deed is not effective until it is 'accepted' by the grantee.”
. See Foster v. Double R Ranch Ass'n (In re Foster), 435 B.R. 650 (9th Cir. BAP 2010). The Homeowners Association argues that the ruling in Foster extends to all situations where a debtor retains a "legal, equitable or posses-sory interest” in a condominium unit. Id. at 661. The language relied on by the Homeowners Association and quoted from Foster is lifted from paragraph (16) of 11 U.S.C. § 523(a) which specifically excepts debts for ongoing association assessments from discharge under "section 727, 1141, 1228(a), 1228(b), [and] 1328(b).” However, the exception set forth in section 523(a) does not include section 1328(a) — the discharge provision relevant to this case.
. Courts have distinguished Foster from situations, like this one, where debtors have surrendered the condominium. See, e.g., In re Colon, 465 B.R. 657 (Bankr.D.Utah 2011).
. Foster, 435 B.R. at 661.
. See, e.g., Foster and River Place E. Hous. Corp. v. Rosenfeld (In re Rosenfeld), 23 F.3d 833 (4th Cir.1994).
. See, e.g., In re Rosteck, 899 F.2d 694 (7th Cir.1990).
. "The Tight to payment' described under § 101(5) does not depend upon a contractual arrangement between the parties.” In re Mattera, 203 B.R. 565, 571 (Bankr.D.N.J. 1997) (citing Ohio v. Kovacs, 469 U.S. 274, 279-281, 105 S.Ct. 705, 708, 83 L.Ed.2d 649 (1985)).
. Pa. Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552, 558, 110 S.Ct. 2126, 2130, 109 L.Ed.2d 588 (1990), superseded by statute, Criminal Victims Protection Act of 1990, Pub. L. No. 101-581, 104 Stat. 2865, as recognized in Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (citing H.R.Rep. No. 95-595, at 309, U.S.Code Cong. & Admin. News 1978, p. 6266 (describing definition of “claim” as “broadest possible” and noting that the Bankruptcy Code "contemplates that all legal obligations of the debt- or ... will be able to be dealt with in the bankruptcy case”); accord S.Rep. No. 95-989, at 22, U.S.Code Cong. & Admin. News 1978, p. 5808).
. In re Hawk, 314 B.R. 312, 316 (Bankr. D.N.J.2004) (quoting Mattera, 203 B.R. at 571).
. This conclusion would be different if this court was confronted with facts similar to those in Foster. Simply because the obligations at issue are dischargeable under section 1328(a), does not lead to debtors receiving a free ride if they continue to benefit from the property. Personal liability for ongoing assessments may arise on theories of unjust enrichment, quantum meruit, or implied contract. See, e.g., Mattera, 203 B.R. at 572. Further, this court’s holding leaves property interests intact. The Homeowners Association and Bank of America may pursue their in rem state law remedies. See Siegel v. Fed. Home Loan Mortg. Corp., 143 F.3d 525, 531 (9th Cir.1998) (citing Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991)). Finally, to the extent this court’s conclusion differs from Foster, the Ninth Circuit Court of Appeals has not determined that the Bankruptcy Appellate Panel’s decisions are binding on bankruptcy courts in the circuit as a whole. See State Comp. Ins. Fund v. Zamora (In re Silverman), 616 F.3d 1001, 1005 n. 1 (9th Cir.2010) (citing Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470, 472 (9th Cir.1990)).
.Congress has remained faithful to the manner in which claims are determined. While the substance of a claim is determined by state law, "[t]he question of when a debt arises under the bankruptcy code is governed by federal law.” Siegel, 143 F.3d at 532 (quoting Cal. Dep’t of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 929 (9th Cir.1993)). (" 'The determination of when a claim arises for purposes of bankruptcy law should be a matter of federal bankruptcy law.... ’ "); (quoting Corman v. Morgan (In re Morgan), 197 B.R. 892, 896 (N.D.Cal.1996)) (finding that determination of when a claim arises under the bankruptcy code should be governed by federal law), aff'd, 131 F.3d 147 (9th Cir.1997); (quoting Cohen v. N. Park Parkside Cmty Ass’n (In re Cohen), 122 B.R. 755, 757 (Bankr.S.D.Cal.1991) ("However, federal bankruptcy law, rather than California state law, governs when a debt arises for purposes of determining dischargeability.”))
. Davenport, 495 U.S. at 562, 110 S.Ct. 2126.
. Johnson v. Home State Bank, 501 U.S. 78, 83 n. 4, 111 S.Ct. 2150, 2154, 115 L.Ed.2d 66 (1991). See also 2 Collier on Bankruptcy ¶ 101.05[3] (Alan N. Resnick & Henry J. Som-mer eds., 16th ed.). "The Davenport decision reinforces the statute’s intended effect to define the scope of the term 'claim' as broadly as possible.... It can be expected that in light of Davenport the courts will rebuff virtually all attempts to characterize obligations as outside the scope of the definition due to 'special' or unique characteristics of those obligations. Although Congress, in two separate acts, (footnote omitted) amended Code section 1328(a) to make certain criminal restitution debts nondischargeable in chapter 13 cases, thus reversing the result in Davenport, it did nothing to change the definition of claim or to disturb the Supreme Court's holding regarding the scope of that definition. Therefore, the broad scope of the term "claim” described in Davenport, including obligations for criminal restitution, continues to be law.”
.Cases cited by the Homeowners Association are distinct from this case because the debtors in those cases were not seeking a discharge under section 1328(a). See In re Rivera, 256 B.R. 828 (Bankr.M.D.Fla.2000) (the debtor filed a chapter 7 petition); In re Burgueno, 451 B.R. 1 (Bankr.D.Ariz.2011) (the debtor filed a chapter 11 petition); In re Ames, 447 B.R. 680 (Bankr.D.Mass.2011) (the debtor filed a chapter 7 petition).
. Davenport, 495 U.S. at 562-63, 110 S.Ct. 2126. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497511/ | Chapter 7
ORDER GRANTING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
A. Bruce Campbell, United States Bankruptcy Judge
Before the Court is the Motion to Dismiss Plaintiffs Second Amended Complaint Pursuant to Fed.R.Civ.P. 12(b)(6), or in the Alternative, for Summary Judgment [Docket #46] (“Motion”), filed by Defendants Moye White LLP and James Burghardt. The Motion has been separately joined in by Defendants Daniel A. West [Docket # 45] and Evelyn Jane Lawrence (“Ms. Lawrence”) [Docket # 47]. Plaintiff/Debtor Gary Flanders (“Debtor”) has filed a response in opposition to the *249Motion [Docket # 48]. The Court, having considered the foregoing and the file in this matter, finds as follows.
Introduction and Procedural Background
This adversary proceeding results from the complicated confluence of bankruptcy and divorce proceedings. Debtor’s bankruptcy case was filed two years prior to his former spouse’s petition for dissolution of their marriage. Debtor’s former spouse was not a co-debtor in his bankruptcy. The bankruptcy case and divorce case proceeded at the same time, in separate courts. The liquidation of Debtor’s bankruptcy estate resulted in a surplus after full payment, plus interest, to unsecured creditors. Pursuant to the divorce court’s order, the surplus funds remaining after administration of the bankruptcy estate were paid to the registry of the divorce court. After the bankruptcy case was closed, final orders were issued in the divorce case. The final orders included a judgment in excess of $500,000 against Debtor in favor of his former spouse. Following a largely unsuccessful appeal of the final orders in the state courts, Debtor filed this adversary proceeding. Here he contends that the divorce court’s division of marital property, in particular the valuation of a corporation known as Great Northern Transportation Company, and the divorce court’s treatment of the bankruptcy surplus violated his discharge injunction and/or the automatic stay.
Defendants moved to dismiss Debtor’s First Amended Complaint. While motions to dismiss were pending, Debtor filed a motion for leave to file a Second Amended Complaint. On March 24, 2014, the Court granted Debtor leave to file a second amended complaint, and denied Defendants’ pending motions to dismiss, without prejudice. The Court ordered that, if Defendants intended to rely on pleadings not in this Court’s record in any future dispos-itive motion, Defendants should file a motion for summary judgment supported by certified copies of such pleadings. In response to the second amended complaint, Defendants have filed the current Motion, alternatively captioned a motion to dismiss or a motion for summary judgment. The Motion is supported by certified copies of the state court orders upon which Defendants rely, and an affidavit from Defendant James T. Burghardt. Accordingly, the Court will treat the Motion as one for summary judgment. Plaintiff’s response does not dispute any of the following material facts upon which the Motion is based.
Undisputed Material Facts
1. Debtor filed a Chapter 11 bankruptcy case on October 16, 1998. Docket for Case No. 98-24779 ABC (“Docket”)# 1.
2. At the time his bankruptcy was filed, Debtor was married to Ms. Lawrence, but she was not a joint debtor in the bankruptcy. Amended Final Orders, dated February 10, 2009, in Case No. 00 DR 3896, Exhibit D to Motion (“Amended Final Orders”), ¶ 2; Docket # 1.
3. Debtor’s case was converted to Chapter 7 on December 17, 1999. Docket #213.
4. Two years after Debtor’s bankruptcy was filed, on October 17, 2000, Ms. Lawrence filed for divorce. The divorce proceeding was filed in the District Court for the District of El Paso County, Colorado (“Divorce Court”). Amended Final Orders, ¶ 2.
5. From and after October 17, 2000, the dissolution proceedings continued in the Divorce Court, where, pursuant to the parties’ agreement, a special master was appointed to manage the parties’ affairs and pay marital debts. As part of his duties, the special master received and distributed the proceeds from sales of *250marital assets that were not sold in the bankruptcy. Id.
6. On November 8, 2000, the Chapter 7 Trustee of Debtor’s bankruptcy estate filed an adversary proceeding (“Adversary Proceeding”) against the Debtor, Ms. Lawrence and others, including a corporation known as Great Northern Transportation Company (“GNTC”) which was then owned by Ms. Lawrence. Docket for Adversary Proceeding 00-1589 SBB, # 1.
7. On April 26, 2001, the Bankruptcy Court entered an order approving settlement of the Trustee’s claims in the Adversary Proceeding according to the terms of a written agreement between some of the parties.1 A true and correct copy of this settlement agreement is attached to the Motion as Exhibit A (“Settlement Agreement”). Docket #510; Affidavit of James T. Burghardt, Exhibit J to the Motion (‘Affidavit”), ¶ 8.
8. The Settlement Agreement contemplated that approval by the special master in the divorce proceedings and authorization by the Divorce Court was necessary in order to authorize the Defendants to enter into the Settlement Agreement. It provided that
Nothing contained in this Settlement Agreement shall be deemed or construed as a consent by the Trustee, the Bankruptcy Estates [Debtor’s estate and that of several of Debtor’s companies, which had also filed bankruptcy], or any Defendant [a defined term not including Debtor] to the jurisdiction of the Divorce Court over the Trustee, the Bankruptcy Estates, any property of the Bankruptcy Estates, or the performance or interpretation of this Settlement Agreement.
Settlement Agreement, ¶ 7.
9. In connection with the Settlement Agreement, the parties executed a mutual release. A true and correct copy of the mutual release is attached to the Motion as Exhibit B (“Release”). Affidavit, ¶ A
10. The Release provided that
[T]he Defendants [including Ms. Lawrence and GNTC] hereby release and forever discharge the Bankruptcy Estates, the Trustee, their respective agents, officers, directors, shareholders, employees, attorneys and professionals, from any and all claims and causes of action that have been made or could have been made in the Adversary Proceeding, whether known or unknown, from the beginning of the world, to the date of this Release.
Release, ¶ 2.
11. Defendant James Burghardt (“Bur-ghardt”) is an attorney with the law firm Defendant Moye White LLP (“Moye White”). Burghardt represented Ms. Lawrence in connection with the Settlement Agreement and Mutual Release. Affidavit, ¶ 2.
12. Debtor received a Chapter 7 discharge on September 4, 2002, and administration of his bankruptcy estate continued for some years thereafter. Docket # s 617-767.
13. On July 20, 2006, the bankruptcy trustee filed his final report showing that all administrative expenses had been paid and that unsecured creditors had been paid 100% of their claims, plus interest. A surplus of $227,777.192 remained after liq*251uidation of Debtor’s property and payment in full of all claims (“Bankruptcy Surplus”). The proposed distribution in the Trustee’s Final Report indicated that the Bankruptcy Surplus was to be “Paid to Debtor.” Docket # 750, p. 33.
14. On February 7, 2007, the Divorce Court entered an order regarding how the Bankruptcy Surplus was to be characterized. The Divorce Court’s February 7, 2007 order states:
[The Divorce Court] was informed that [Debtor’s] bankruptcy case that was filed in 1998, prior to the filing of this Dissolution of Marriage case, had a $230,000 surplus that had been garnished by the United States Attorney to pay [Debtor’s] 2005 Oklahoma federal court criminal judgment of $206,000.
The [Divorce Court] received an Order from the United States District Court for the District of Colorado instructing [the Divorce Court] to determine what portion of the surplus was [Debtor’s]. The [Divorce Court], with the permission of counsel, spoke with Magistrate Judge Hegarty, who informed [the Divorce Court] that the garnishment was only intended to attach those funds that belonged to [Debtor] alone and was not intended to attach funds that were deemed marital property.
Exhibit C to Motion (“Bankruptcy Surplus Order”), p. 1.
15. The Divorce Court found that all of the Bankruptcy Surplus was marital property. In so finding, the Divorce Court considered Debtor’s argument “that the Settlement Agreement and [Release] between Ms. Flanders and the Bankruptcy Trustee in 2001 operated to release any claim she might have to the surplus.” The Divorce Court rejected this argument, as follows:
The Court has carefully read and reviewed [the Settlement Agreement and the Release] and concludes that they did not release any claim Ms. Lawrence might have to the surplus. Bankruptcy surpluses are returned to the debtor, in this case [Debtor]. At the time the bankruptcy was filed the parties were married thus the assets that went into the Bankruptcy estate were martial [sic] property and any surplus coming out is marital property. The Release specifically related only to claims that could have been raised in the adversary proceeding that had been filed against [Ms. Lawrence] by the Trustee. The adversary proceeding claims related to fourteen different claims for relief including fraudulent conveyance claims against both [Debtor] and [Ms. Lawrence]. The Court further concludes that a bankruptcy surplus does not exist with certainty until the bankruptcy is completed and all creditors and interest paid. Colorado law presumes that property held during a marriage is martial [sic] property. [Debtor] has not proved to the satisfaction of this Court that any portion of the bankruptcy surplus is his separate property.
Bankruptcy Surplus Order, p. 2.
16. Having found the Bankruptcy Surplus to be marital property, the Divorce Court “requested” that “the United States District Court for the District of Colorado direct that the bankruptcy surplus be transferred to the Registry Fund of the [Divorce Court] ..., for distribution as part of the martial [sic] estate.” Id.
17. Debtor’s bankruptcy case was closed on May 12, 2008. Docket # 767.
18. Nine months later, in February, 2009, the Divorce Court entered the Amended Final Orders. In the Amended Final Orders, the Divorce Court discussed the bankruptcy proceedings, and noted that some marital assets were sold and *252some marital debt paid in the course of the administration of Debtor’s bankruptcy estate. In response to Debtor’s argument that because of the bankruptcy proceedings he no longer had any responsibility for marital debts, the Divorce Court ruled:
[Debtor] has also argued that since all his debts were discharged by the Bankruptcy Court, he is not responsible for any of the remaining debt in the marriage. In addition he argues that the Settlement Agreement ... and [Release] that settled the bankruptcy adversary proceeding that alleged fraudulent transfer claims against [Debtor], Ms. Lawrence and their companies acted to discharge any responsibility he might have for any debts. This Court disagrees. The Bankruptcy court did not have jurisdiction over the entire marital estate. Further it appears that most of the remaining debt occurred after [Debtor] filed bankruptcy in October 1998.
Amended Final Orders, ¶ 9.
19.The Amended Final Orders also valued marital property, including GNTC. The Divorce Court found and concluded as follows:
[GNTC] is a martial [sic] asset that this Court has jurisdiction over. The only remaining asset of [GNTC] is a shareholder advance receivable of $2,322,000 comprised of a $1,900,000 note given by [Debtor] prior to 1991 and then assigned to Ms. Lawrence when ownership of [GNTC] was transferred to her in 1991 and $422,000 in advances or distributions to Ms. Lawrence during the course of these proceedings. This Court is convinced that the $1,900,000 was used by the parties for marital expenses. Advances or distributions to [Debtor] in the approximate amount of $350,000 have been written off because he was presumed to be insolvent due to his bankruptcy and incarceration.... This Court agrees with the expert testimony presented by Mr. Hoffman, Mr. Krems and Mr. Burghardt that in the context of a dissolution of marriage the note and the receivable cancel one another. Thus, this Court concludes that [GNTC] actually has a negative value of $967,176 comprised of: $210,000 estimated taxes due by Ms. Lawrence upon liquidation of [GNTC], $663,461 of federal corporate taxes from 1995 to 2006 and $93,715 of state corporate taxes. [Debtor] argues that [GNTC] actually has a value of $13,581,160.03 based largely on “booking” numerous loan receivables that he claims Ms. Lawrence owes and “rebook-ing” other items. The Court concludes that an account receivable from Ms. Lawrence causes an equal amount to be a liability on the marital spreadsheet. ... The Court awards [GNTC] to Ms. Lawrence at a negative $967,176. She shall be responsible for any and all taxes due by [GNTC] regardless of whether they ultimately are more or less than the estimated $210,000 in estimated personal taxes and the estimated corporate taxes of $757,176.
Amended Final Orders, ¶ 19-20.
20. The Divorce Court also awarded the Great Northern Land Company, Canyon Quarry Company, and 6 burial plots, all of which it determined were marital property, to Ms. Lawrence. Amended Final Orders, ¶¶ 24, 25, 41.
21. In the Amended Final Orders, a judgment in excess of $564,000 was entered in favor of Ms. Lawrence and against Debtor. A small part of the judgment, $22,867, represented an equalization of the property division, this sum being one-half of the amount by which the value of the marital property awarded to Debtor exceeded the value of the marital property awarded to Ms. Lawrence. The majority *253of the judgment, $531,754, was attorneys fees that the Divorce Court found Debtor should pay due to his bad faith litigation conduct and his contribution to the delay of the proceedings. The remaining amount was for Debtor’s criminal fines and restitution that were paid from marital property. Amended Final Orders, ¶ 54-
22. The amount of the attorneys fees Debtor was ordered to pay was corrected from $531,754 to $513,754, and the total amount of the judgment reduced to $563,822, in the Divorce Court’s Corrected Amended Final Orders, dated June 22, 2009. Exhibit E to Motion (“Corrected Final Orders”), ¶ 54.
23. Debtor appealed the Final Orders to the Colorado Court of Appeals, which, on May 26, 2011, upheld the Divorce Court’s findings relating to the valuation of GNTC and treatment of GNTC as a marital asset. Specifically, the Court of Appeals ruled that there was “no abuse of discretion by the trial court in valuing [GNTC].” Exhibit G to Motion (“Court of Appeals Opinion”), p. 8.
24. The Court of Appeals also “reject[ed] [Debtor’s] contention that the trial court erred by effectively extinguishing a $2,322,000 note ostensibly owed by [Ms. Lawrence] to [GNTC].” It found that there was “no abuse of discretion in the trial court’s treatment of the $2 million note as a marital asset that was offset by an equal amount of marital debt, and not as a separate debt to [GNTC] that [Ms. Lawrence] was required to pay.” Court of Appeals Opinion, p. 9, 10.
25. The Court of Appeals found that the Divorce Court erred on a matter not pertinent to this adversary proceeding: the Divorce Court’s characterization of Ms. Lawrence’s interest in the Lawrence Family Ranch Corporation (“LFRC”) as her separate property. The Court of Appeals vacated the portion of the Divorce Court’s orders concerning LFRC and remanded for further findings explaining the basis for the Divorce Court’s conclusion that LFRC was Ms. Lawrence’s separate property. Id., p. 12-18.
26. In so remanding, the Court of Appeals ruled that, “[i]f the court finds on remand that [Ms. Lawrence’s] interest in LFRC is in fact marital property ... the entire property division will have to be reconsidered in light of this change to the marital estate.” The Court of Appeals also stated, however, that “[a]lthough such reconsideration would necessarily involve the distribution of other marital assets, including [GNTC], because of our disposition of the issues concerning [GNTC], the [Divorce Court] need not reconsider those issues and may rely on its previous findings.” Id., p. 18.
27. Debtor appealed the Court of Appeals decision to the Colorado Supreme Court. His Petition for Writ of Certiorari was denied on January 7, 2013. Exhibit I to Motion.
The Complaint
Debtor’s Second Amended Complaint (“Complaint”) alleges the basic facts set forth above regarding the proceedings in his bankruptcy ease and in the divorce. He argues first that Ms. Lawrence had no right to the Bankruptcy Surplus because she waived all claims against his bankruptcy estate in connection with the Settlement Agreement and did not file a proof of claim. Next, Debtor claims that the Divorce Court improperly offset a discharged debt when it treated Debtor and Ms. Lawrence’s promissory note to GNTC as a marital debt. Debtor also alleges that the Divorce Court improperly treated shares of stock in Great Northern Land Company and Canyon Quarry Company and the burial plots as marital property. Debtor alleges that these assets were part of his *254bankruptcy estate, abandoned to him at the close of the bankruptcy case, and that Ms. Lawrence released any claims to them. Debtor further alleges that Ms. Lawrence breached the Settlement Agreement and that she was unjustly enriched by pursuing claims to marital property in the divorce. Debtor requests the Court to find Ms. Lawrence and her attorneys Defendants Daniel West (“West”),3 Bur-ghardt, and Moye White in contempt for violation of the discharge injunction of 11 U.S.C. § 524(a), for their actions in pursuing and obtaining the Divorce Court’s orders concerning the Bankruptcy Surplus and the division of marital property.
Debtor seeks sanctions for this alleged contempt, including attorneys fees and consequential and punitive damages. He also seeks injunctive and declaratory relief essentially voiding the Divorce Court’s orders concerning the division of marital property and prohibiting any of the Defendants from enforcing the judgment entered by the Divorce Court. Defendant has also claimed consequential damages against Ms. Lawrence in the amount of the Bankruptcy Surplus and in the amount Debtor claims is due on the promissory note to GNTC.
The Motion for Summary Judgment
Defendants argue that to succeed on all the claims in his Complaint, Debtor must relitigate matters that have been litigated and decided by the Divorce Court. Because such relitigation is precluded by the doctrines of issue and/or claim preclusion, Defendants argue, Debtor’s Complaint should be dismissed in its entirety.
Defendants also argue that Debtor has no standing to seek damages arising out of the allegedly contemptuous conduct because, to the extent that Defendants’ violation of the bankruptcy court’s orders and/or injunction has produced any harm, the harm has been suffered by the bankruptcy court, and is this court’s, not Debt- or’s, to vindicate. Defendants further contend that, because they were successful in their claim in the Divorce Court, they could not have knowingly violated the bankruptcy court’s orders and injunction such as would give rise to a finding of contempt.
Finally, Defendants argue that, under the Rooker-Feldmcm doctrine, this Court lacks subject matter jurisdiction to review, reverse, or vacate the Divorce Court’s orders.
Debtor’s Response
Debtor asserts that the Divorce Court had no jurisdiction to make a determination concerning discharge of his debts, or to interpret the Settlement Agreement and Release, and that its orders regarding the Bankruptcy Surplus and valuation of marital property are “void oh initio,” as a result of this lack of jurisdiction and/or because they were entered in violation of the automatic stay or the discharge injunction. Debtor asserts that the issues raised in this adversary proceeding were not litigated and decided by the state court and that they are not barred by the doctrine of issue preclusion. He disputes Defendants’ argument that claim preclusion bars his claims, asserting that the divorce case and this adversary proceeding do not involve the same claim, that the Divorce Court lacked jurisdiction, and that the discharge order from his bankruptcy case was the “first judgment,” for claim preclusion purposes.
Debtor also disputes Defendants’ argument that he lacks standing to seek sanctions for Defendants’ allegedly contemptu*255ous conduct or for Ms. Lawrence’s alleged breach of the Settlement Agreement and Release.
Finally, Debtor argues that the Rooker-Feldman doctrine does not deprive this court of subject matter jurisdiction because a bankruptcy court can override a state court judgment entered in violation of the discharge injunction or automatic stay because such a judgment is void ab initio. Debtor asserts that there is a specific exception to the Rooker-Feldman doctrine when the state court judgment is void because it was entered in violation of the discharge injunction.
Discussion
A. Summary Judgment Standards
Federal Rule of Civil Procedure 56 provides that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to a judgment as a matter of law.” Fed R. Civ. P. 56(a); Fed. R. Bankr.P. 7056. When applying this standard, the court must examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. 475 U.S. 574, 587-88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Wright v. Southwestern Bell Tel. Co., 925 F.2d 1288, 1292 (10th Cir.1991). The movant bears the initial burden of establishing that summary judgment is appropriate. Whitesel v. Sengenberger, 222 F.3d 861, 867 (10th Cir.2000); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
B. Rooker-Feldman
Rooker-Feldman is a doctrine that recognizes that lower federal courts are prohibited from exercising appellate jurisdiction over state court judgments. Campbell v. City of Spencer, 682 F.3d 1278, 1281 (10th Cir.2012). Because Rook-er-Feldman concerns this Court’s subject matter jurisdiction, it must be considered before proceeding to the parties’ other arguments. Lance v. Coffman, 549 U.S. 437, 439, 127 S.Ct. 1194, 167 L.Ed.2d 29 (2007).
Prior to 2005, the Supreme Court had only twice denied federal court jurisdiction under the Rooker-Feldman doctrine. Despite this fact, lower federal courts applied the doctrine expansively and frequently and at times confused the doctrine with principles of preclusion. In 2005, however, in Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005), the Supreme Court corrected the lower courts’ misper-ception of the breadth of Rooker-Feldman and limited the doctrine, holding that it
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.
544 U.S. at 284, 125 S.Ct. 1517.
The Exxon Mobil decision also clarified that Rooker-Feldman is distinct from principals of preclusion, and that a court is not barred from exercising jurisdiction under Rooker-Feldman even if a plaintiff attempts to litigate in federal court a matter previously litigated in state court, so long as the plaintiff “presents some independent claim.” Id. at 293, 125 S.Ct. 1517, quoting GASH Assocs. v. Rosemont, 995 F.2d 726, 728 (7th Cir.1993). This is true even if a finding in the federal plaintiff’s favor “denies a legal conclusion that a state court has reached in a case to which he was a party.” Id. In such a case, “state law determines whether [he] prevails under principles of preclusion.” Id.
*256As explained by the Second Circuit Court of Appeals, the Exxon Mobil case demonstrates that
there are four requirements for the application of Rooker-Feldman. First, the federal-court plaintiff must have lost in state court. Second, the plaintiff must complain of injuries caused by a state-court judgment. Third, the plaintiff must invite district court review and rejection of that judgment. Fourth, the state-court judgment must have been rendered before the district court proceedings commenced.
Hoblock v. Albany County Bd. of Elections, 422 F.3d 77, 85 (2d Cir.2005) (internal quotation marks omitted).
Here there is no question that the first and fourth elements of Rooker-Feld-man exist. Debtor was the “loser” in the Divorce Court, and this adversary proceeding was filed after the conclusion of the state court proceedings.4 The determination of the remaining two Rooker-Feldman prerequisites is complicated by the Debtor’s pleadings, which are rambling and repetitive, and which demonstrate Debtor’s disagreement with many factual findings made by the Divorce Court. To the extent Debtor requests this Court to correct alleged fact-finding errors made by the Divorce Court — such as the Divorce Court’s findings regarding who were the obligors on the promissory note to GNTC, the balance of the note, or the amount of accrued interest — and to the extent Debtor seeks outright reversal of the Divorce Court’s judgment, this Court lacks subject matter jurisdiction under Rooker-Feld-man. On the other hand, to the extent Debtor seeks a finding of contempt and sanctions for Defendants’ alleged willful violation of his discharge injunction, this is an independent claim which this Court is not barred from adjudicating by virtue of Rooker-Feldman. See In re Barrett, Case No. 86-01378 ABC, December 19, 2006 [Docket # 101]. By seeking such relief, Debtor is not seeking “review and rejection” of the Divorce Court’s judgment. Instead, he seeks sanctions for alleged violations of a federal court injunction. To the extent that success on his contempt claims seeks relitigation of issues decided by the Divorce Court, principles of preclusion will govern the result.
The more difficult analysis for Rooker-Feldman purposes is posed by Debtor’s *257request that this Court declare the Divorce Court’s Bankruptcy Surplus order and Amended Final Orders to be “void ab ini-tio ” as having been entered in violation of his discharge injunction. Courts have reached differing conclusions regarding whether the discharge injunction of 11 U.S.C. § 524(a)(1), which “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,” is an exception to the Rooker-Feldman doctrine. Compare Ferren v. Searcy Winnelson Co. (In re Ferren), 203 F.3d 559 (8th Cir.2000), In re Toussaint, 259 B.R. 96 (Bankr. E.D.N.C.2000) and In re Candidus, 327 B.R. 112 (Bankr.E.D.N.Y.2005)(holding that Rooker-Feldman precludes bankruptcy court’s review of state court determination of whether a debt is discharged) with In re Dabrowski, 257 B.R. 394 (Bankr. S.D.N.Y.2001) and Pavelich v. McCormick, Barstow, Sheppard, Wayte & Carruth LLP (In re Pavelich), 229 B.R. 777 (9th Cir. BAP 1999)(Rooker-Feldman does not prevent collateral attack in bankruptcy court on state court judgment that wrongly construes the discharge injunction; such a state court judgment is “void”).
The legislative history of Section 14f of the Bankruptcy Act, from which the current Section 524 was derived, suggests that Congress did intend the discharge injunction to be a vehicle for debtors, who did not raise the affirmative defense of bankruptcy in a post-discharge collection suit, to have a resulting judgment declared “void” as in violation of the injunction. The legislative history states that
[T]he major purpose of the proposed legislation is to effectuate, more fully, the discharge in bankruptcy by rendering it less subject to abuse by harassing creditors. Under present law creditors are permitted to bring suit in State courts after a discharge in bankruptcy has been granted and many do so in the hope the debtor will not appear in that action, relying to his detriment upon the discharge. Often the debtor in fact does not appear because of such misplaced reliance, or an inability to retain an attorney due to lack of funds, or because he was not properly served. As a result a default judgment is taken against him and his wages or property may again be subjected to garnishment or levy. All this results because the discharge is an affirmative defense which, if not pleaded, is waived.
H. Rep. No. 91-1502, 91st Cong., 2d Sess. 1-2 (1970).
If, in a case where the debtor failed to raise the affirmative defense of discharge, Rooker-Feldman prevented a state court judgment entered in violation of the discharge injunction from being void, section 524(a)(1) would have no application to post-bankruptcy judgments, and would not effectuate the stated legislative purpose. In the case where a debtor fails to raise his discharge in a post-bankruptcy lawsuit, the discharge injunction is essentially an exception to Rooker-Feldman’s prohibition of “reversal” of state court judgments.
It is a different situation, however, where a debtor raises and litigates the effect of his discharge in a state court proceeding and loses. In such a case, this Court agrees with the courts in In re Candidus and In re Toussaint, supra, that as long as the state court has concurrent subject matter jurisdiction to determine dischargeability,5 i.e. concerning debts oth*258er than those described in 11 U.S.C. § 523(a)(2), (4), or (6), principles of issue preclusion control whether the debtor can relitigate that issue by means of an adversary proceeding in bankruptcy court to declare the judgment “void” under 11 U.S.C. § 524(a)(1).
Here, the debt was not of a type described in § 523(a)(2), (4), or (6), and the parties do not dispute that Debtor’s underlying obligation on the note to GNTC, and any claim by Ms. Lawrence for contribution from Debtor on account of their joint liability, was discharged in Debtor’s bankruptcy. The disagreement is whether the Divorce Court’s consideration of the note as a “marital debt” in its property division analysis amounted to the collection of a discharged debt in violation of the discharge injunction. Defendants contend that Debtor raised this issue in the Divorce Court, and the issue was decided against him. If this is so, Debtor’s claims for a declaration that the Divorce Court’s Orders are “void,” as well as his claims for sanctions, must be analyzed, not on the basis of the Rooker-Feldman doctrine, but on principles of issue preclusion.
C. Issue Preclusion
Issue preclusion (sometimes referred to as collateral estoppel) precludes relitigation of an issue that was litigated and decided in a previous proceeding. It is a doctrine designed to promote the fundamental policies of finality, economy, consistency, and comity in the judicial process. Kremer v. Chemical Const. Corp., 456 U.S. 461, 466 n.6, 102 S.Ct. 1883, 1889 n.6, 72 L.Ed.2d 262 (1982). Generally, collateral estoppel precludes parties to a previous action from relitigating issues of fact or law actually litigated and determined by a valid and final judgment. Restatement (Second) of Judgments § 27 (1982).
Rules for application of preclusion principles are determined by the law of the forum in which the prior judgment was rendered. Marrese v. American Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). Thus, a judgment is afforded the same preclusive effect in a subsequent action brought in a different forum that it would be afforded if the latter action were brought in the original forum. In this case, Colorado law governs the collateral estoppel effect of the Divorce Court’s orders.
Colorado law recognizes issue preclusion as a doctrine that “is intended to reheve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication.” Bebo Constr. Co. v. Mattox & O’Brien, P. C., 990 P.2d 78, 84 (Colo.1999)(internal citation omitted). Under Colorado law, the following elements must be shown in order for issue preclusion to apply:
(1) the issue precluded is identical to an issue actually litigated and necessarily adjudicated in the prior proceeding; (2) the party against whom estoppel was sought was a party to or was in privity with a party to the prior proceeding; (3) there was a final judgment on the merits in the prior proceeding; (4) the party against whom the doctrine is asserted *259had a full and fair opportunity to litigate the issue in the prior proceeding.
McNichols v. Elk Dance Colorado, LLC, 139 P.3d 660, 667 (Colo.2006).
In this case there is no question that the party against whom estop-pel is asserted, Debtor, was a party to the proceedings in the Divorce Court. In addition, according to Colorado law, the Divorce Court’s orders are “final,” for purposes of issue preclusion analysis. According to the Colorado Supreme Court’s decision in Rantz v. Kaufman, 109 P.3d 132 (Colo.2005), a judgment is final, for purposes of issue preclusion, if it is “‘sufficiently firm’ in the sense that it was not tentative, the parties had an opportunity to be heard, and there was an opportunity for review. ’ ” 109 P.3d at 141, quoting Carpenter v. Young 773 P.2d 561, 568 (Colo.1989) (emphasis in original). The court in Rantz held that the requirement that there was “an opportunity for review,” means that a judgment is not final for purposes of issue preclusion while an appeal is pending. Id. Here, the Divorce Court’s orders are not tentative, and because of the limited nature of the remand from the Court of Appeals and the denial of Debtor’s appeal to the Colorado Supreme Court, there is no longer a pending appeal concerning the issues involved in this adversary proceeding. See discussion at note 4, supra.
Under Colorado law, the determination of whether Debtor had a full and fair opportunity to litigate the issues in the prior proceeding depends on
whether the remedies and procedures in the first proceeding are substantially different from the proceeding in which collateral estoppel is asserted, whether the party ... has sufficient incentive to vigorously assert or defend the position ..., and the extent to which the issues are identical.
McNichols v. Elk Dance Colorado, LLC, 139 P.3d at 669. The remedies and procedures in the divorce case and those involved here are virtually identical, and Debtor had ample incentive to, and apparently did, vigorously assert his arguments relating to the division of property in the divorce case. The extent to which the issues are identical is more fully discussed below in connection with the final element of issue preclusion: whether an identical issue was actually litigated and necessarily decided in the prior proceeding.
It is clear from the Divorce Court’s findings that the Debtor raised the identical issues he asserts here throughout the course of the divorce case. First, Debtor argues here that Ms. Lawrence released any and all claims to any property remaining after the conclusion of his bankruptcy ease, including the stock in Great Northern Land Company and Canyon Quarry Company, the burial plots, and the Bankruptcy Surplus in connection with her execution of the Settlement Agreement and Release. The Divorce Court’s Orders show that this precise issue was raised by Debtor and decided against him in the divorce ease. The Divorce Court noted that Debtor argued “that the Settlement Agreement and [Release] between Ms. Flanders and the Bankruptcy Trustee ... operated to release any claim she might have to the [Bankruptcy Surplus],” and ruled that
The Court has carefully read and reviewed [the Settlement Agreement and the Release] and concludes that they did not release any claim [Ms. Lawrence] might have to the surplus. Bankruptcy surpluses are returned to the debtor, in this case [Debtor]. At the time the bankruptcy was filed the parties were married thus the assets that went into the Bankruptcy estate were martial [sic] property and any surplus coming out is *260marital property. The Release specifically related only to claims that could have been raised in the adversary proceeding that had been filed against [Ms. Lawrence] by the Trustee. The adversary proceeding claims related to fourteen different claims for relief including fraudulent conveyance claims against both [Debtor] and [Ms. Lawrence]. The Court further concludes that a bankruptcy surplus does not exist with certainty until the bankruptcy is completed and all creditors and interest paid. Colorado law presumes that property held during a marriage is martial [sic] property. [Debtor] has not proved to the satisfaction of this Court that any portion of the bankruptcy surplus is his separate property....
Bankruptcy Surplus Order, p. 2.
Debtor is thus precluded from arguing here that the Divorce Court improperly treated the Bankruptcy Surplus, the shares of stock in Great Northern Land Company and Canyon Quarry Company, and the burial plots as marital property because Ms. Lawrence released her claims against this property in connection with the Settlement Agreement and Release. He is also precluded from asserting any claim that, by pursuing her claims to these or any other items of marital property, Ms. Lawrence violated the Settlement Agreement and Release.
It is also evident that the Debtor argued that his bankruptcy discharge prevented any consideration of his liability on the GNTC note in the Divorce Court’s valuation of and division of marital property. The Divorce Court ruled as follows.
[Debtor] has also argued that since all his debts were discharged by the Bankruptcy Court, he is not responsible for any of the remaining debt in the marriage. In addition he argues that the [Settlement Agreement and Release] that settled the bankruptcy adversary proceeding that alleged fraudulent transfer claims against [Debtor], Ms. Lawrence and their companies acted to discharge any responsibility he might have for any debts. This Court disagrees. The Bankruptcy court did not have jurisdiction over the entire marital estate. Further it appears that most of the remaining debt occurred after [Debtor] filed bankruptcy in October.
Amended Final Orders, ¶ 9.
Having so considered the effect of Debtors discharge, the Divorce Court went on to determine that the obligation to GNTC was a marital debt which could be considered in determining the division of marital assets.
The Divorce Court’s interpretation of the Settlement Agreement and Release and its determination of the effect of Debtor’s discharge were necessary to the Divorce Court’s orders for payment of the Bankruptcy Surplus to the Divorce Court and to its division of the marital assets. Because all of the elements of issue preclusion are met, Debtor is barred from relitigating those matters here.6
*261D. The Automatic Stay and the Bankruptcy Surplus Order
1. Automatic Stay as Against Estate Property
The automatic stay arising from the filing of a bankruptcy petition prevents, among other things, “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)(8). Under section 362(c)(1), “the stay of an act against property of the estate ... continues until such property is no longer property of the estate.” In a Chapter 7 case, property remains property of the estate until it is administered by the trustee or abandoned. If it is not abandoned during the course of the case, scheduled property is automatically abandoned to the debtor upon the closing of the case under 11 U.S.C. § 554(c).
Debtor argues that the Bankruptcy Surplus, which consisted of funds remaining after the liquidation of the estate’s property and payment of all allowed claims, was not abandoned or distributed to him, and was therefore estate property at the time the Divorce Court issued the Bankruptcy Surplus Order, on February 7, 2007, directing that the funds be paid to the registry of the Divorce Court. He argues that the Bankruptcy Surplus Order was void ab initio because it was issued in violation of the stay.
The Court first notes that there is some question whether the Bankruptcy Surplus was, in fact, estate property, or whether it had already been distributed to Debtor at the time the Bankruptcy Surplus Order entered. The Trustee’s final report, filed on July 20, 2006, some six months prior to the Bankruptcy Surplus Order, indicates that the excess funds were to be “paid to debtor.” Docket # 750. The Bankruptcy Surplus Order itself notes that the excess funds may have been distributed out of the bankruptcy estate, though not actually received by Debtor, because of the garnishment issued by the United States Attorney for collection of a post-petition federal criminal judgment. It appears from the Bankruptcy Surplus Order that the funds were being held in the registry of the United States District Court on February 7, 2007, indicating that they were, at that time, no longer property of the bankruptcy estate.
Assuming, however, for the purpose of the motion for summary judgment, that the funds had not been distributed to Debtor and remained estate property, Debtor has no standing to request an order declaring the Bankruptcy Surplus Order void ab initio. One of the purposes of the automatic stay is to protect the estate and the interests of creditors in allowing for liquidation of the estate to proceed in an orderly manner. In re Cook, 2012 WL 1356490 (10th Cir. BAP 2012)(unpublished decision), aff'd 520 Fed.Appx. 697 (10th Cir.2013)(unpublished decision); Bucchino v. Wells Fargo Bank, N.A. (In re Bucchi-no), 439 B.R. 761, 767-74 (Bankr.D.N.M. 2010). A creditor who pursues an action to obtain estate property interferes with this orderly liquidation and violates the automatic stay of 11 U.S.C. § 362(a)(3). Any injury from such a violation is suffered by the estate, and the trustee, as representative of the estate, is the only *262party with standing to seek redress for such a violation, unless and until the property is abandoned by the trustee or the case is closed. In re Cook, supra.
2. Automatic Stay as Against Actions to Collect from the Debtor
Assuming, as appears to be the case, that the surplus funds from the estate had been distributed to the Debtor, either actually or constructively, and were no longer estate property at the time the Bankruptcy Surplus Order entered, the Court will address the automatic stay as it applies to the Debtor. The automatic stay protects a debtor from the following: (1) the commencement or continuation of judicial proceedings against the debtor that were or could have been commenced before the commencement of the case; (2) the enforcement, against the debtor, of a judgment obtained before the commencement of the case; (3) any act to enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case; (4) any act to recover a claim against the debtor that arose before the commencement of the case; or (5) the setoff of any debt owing to the debtor that arose before the commencement of the case. 11 U.S.C. § 362(a).
The automatic stay of any action other than an action against property of the estate terminates upon the earliest of (a) the time the case is closed; (b) the time the case is dismissed; or (c) in a individual Chapter 7 case, the time a discharge is granted or denied. 11 U.S.C. § 362(c)(2). Here, Debtor’s Chapter 7 discharge was granted on September 4, 2002, more than four years prior to the entry of the Bankruptcy Surplus Order. The entry of the Bankruptcy Surplus Order did not violate the stay of any acts against the Debtor or his property.7
Conclusion
The Rooker-Feldman doctrine prevents this Court from exercising jurisdiction to review or reverse the Divorce Court’s Orders regarding property division between Debtor and his former spouse. Because Debtor already litigated his arguments about the effect of the Settlement Agreement, the Release, and his discharge on the division of marital property, and the Divorce Court rejected those arguments, he is precluded from relitigating those issues here. By virtue of this preclusion, Debtor may not assert his claims for declaratory relief that the Divorce Court’s Amended Final Orders were void, or for a finding of contempt or sanctions against any Defendant for alleged violations of the discharge injunction. Issue preclusion also bars Debtor’s claims that Ms. Lawrence or her attorneys breached the Settlement Agreement or Release. Finally, Debtor has no standing to litigate whether the Bankruptcy Surplus Order violated the automatic stay of actions against estate property, and the stay of any other action had already terminated long before entry of that order. Defendants are accordingly entitled to judgment as a matter of law on all of the claims for relief in Debtor’s Second Amended Complaint, and it is,
ORDERED that Defendants’ Motion for Summary Judgment is GRANTED, and this adversary proceeding is dismissed.
. Debtor was not a party to the Settlement Agreement.
. As a result of an error in the final report (the Trustee’s failure to account for a withdrawn claim), the Bankruptcy Surplus was increased to $230,826.83 pursuant to the Trustee’s Notice of Amended Proposed Distribution filed on September 29, 2006. Docket # 760, p. 17.
. Debtor alleges that West represents Ms. Lawrence in the divorce proceedings. It does not appear that any of the Defendants dispute this allegation.
. In Guttman v. Khalsa, 446 F.3d 1027, 1032 (10th Cir.2006), the Tenth Circuit Court of Appeals stated that, ''[ujnder Exxon Mobil, Rooker-Feldman applies only to suits filed after state proceedings are final.” It cited with approval the following description of “finality” in the context of a Rooker-Feldman analysis:
(1) when the highest’ state court in which review is available has affirmed the judgment below and nothing is left to be resolved; (2) if the state action has reached a point where neither party seeks further action; or (3) if the state court proceedings have finally resolved all the federal questions in the litigation, but state law or purely factual questions (whether great or small) remain to be litigated.
446 F.3d 1027 at 1032, n.2., quoting Federacion de Maestros de Puerto Rico v. Junta de Relaciones del Trabajo de Puerto Rico, 410 F.3d 17, 24 (1st Cir.2005)(internal quotation marks omitted).
In this case, although the Colorado Court of Appeals issued a limited remand so that the Divorce Court could explain the reasons for its conclusion that LFRC was Ms. Lawrence’s separate property, the Court of Appeals decision finally resolved the "federal questions” concerning the distribution of the Bankruptcy Surplus and other surplus property of the bankruptcy estate, and the valuation of GNTC in light of the Debtor’s discharge. Because of the Colorado Supreme Court's denial of Debt- or’s petition for writ of certiorari, there is no longer any ability for review or reversal of the state courts' conclusions on these issues. Thus, the Divorce Court’s Bankruptcy Surplus Order and Amended Final Orders are "final” for purposes of Rooker-Feldman analysis.
. Debtor has challenged the Divorce Court’s jurisdiction to interpret the Settlement Agreement and Release based on the provision in ¶ 7 of the Settlement Agreement, which is *258quoted above in paragraph 8 of the list of undisputed facts. The fact that the parties to the Settlement Agreement (which did not include Debtor) agreed that it did not constitute a "consent” to jurisdiction of the Divorce Court over the bankruptcy estate or its property, or the interpretation of the Settlement Agreement, did not deprive the Divorce Court of any concurrent jurisdiction it in fact possessed to determine the extent of Debtor’s discharge, either before or after the bankruptcy case was closed.
. The application of the doctrine of issue preclusion is a matter of equity and a court may decline to apply the doctrine even when the elements for its application are present. Arapahoe County Public Airport Authority v. F.A.A., 242 F.3d 1213, 1220 (10th Cir.2001). Even had this Court determined not to apply the doctrine, Debtor would lose on the merits of this claim. Debtor’s discharge of personal liability on the promissory note to GNTC only barred collection of the note as a personal liability of the Debtor. 11 U.S.C. § 524(a)(2). It did not bar the Divorce Court from characterizing the debt as a marital debt. The Divorce Court's analysis of the marital nature of the debt, as well as the overall property division between Ms. Lawrence and Debtor, was clearly within the broad discretion of the Di*261vorce Court to make an equitable distribution of marital property after considering all relevant factors, including the contributions of each spouse, the value of property set apart to each spouse, the economic circumstances of each spouse, and any increase, decrease, or depletion in the value of any separate property during the marriage. C.R.S. § 14-10-113; In re Marriage of Cardona and Castro, 316 P.3d 626, 630 (Colo.2014). See also In re Marriage of Hunt, 909 P.2d 525, 537 (Colo.1995)(trial court has great latitude to effect an equitable distribution based upon the facts and circumstances of each case).
. The discharge injunction substitutes for the automatic stay to protect the Debtor and his post-petition property from collection actions on pre-petition debts, but as discussed above, the Divorce Court considered the effect of Debtor’s discharge when entering its orders regarding the division of marital property, and Debtor is precluded from relitigating the effect of his discharge here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497512/ | MEMORANDUM OPINION
DAVID T. THUMA, Bankruptcy Judge.
Before the Court is Petitioning Creditors’ Motion to Convert Debtor’s Chapter 11 Case to a Chapter 7 Case Pursuant to 11 U.S.C. § 1112(b)1 (the “Motion”). The Court held a final hearing on the Motion on August 21, 2014 and took the matter under advisement.2 For the reasons set forth below, the Court will deny the motion.
I. FACTS
The Court finds the following facts:3
The Petitioning Creditors commenced this case by filing an involuntary petition for Chapter 7 relief on January 30, 2014. Debtor moved to convert the case to a voluntary case under Chapter 11 on April 20, 2014. The Court entered an order granting Debtor’s motion for conversion on May 8, 2014.
Sunnyland Farms Incorporated (“Debt- or”) is a New Mexico • corporation that owns and operated a hydroponic greenhouse complex (the “Greenhouse”) in Grants, New Mexico. The Greenhouse consists of about 70 acres of land, improved with a 19.7 acre greenhouse and a 70,000 square foot warehouse.
*265A similar greenhouse in Estancia, New Mexico, also owned by the Debtor, was destroyed by fire in 2003. Debtor sued the Central New Mexico Electrical Cooperative (“CNMEC”) for breach of contract and tort, alleging that CNMEC wrongfully shut off electricity to the Estancia greenhouse, which prevented Debtor from pumping the water it needed to fight the fire. After many years of litigation, the Debtor received payment of about $5.45 million in cash, which currently is held in a state court registry.
The only crop ever produced in the Greenhouse was a crop of tomatoes produced in 2005. Currently, the Greenhouse is in complete disrepair, apparently because the Debtor lacked funds necessary to make repairs, maintain or secure the Greenhouse, or operate. The roof has partially collapsed and the electrical and other systems have been stolen.
Debtor’s Chapter 11 case has been in progress for less than four months. Debt- or filed its statements and schedules on May 21, 2014; it scheduled assets totaling $5,815,006.71 and liabilities totaling $41,890,322.38.
Debtor values the Greenhouse at $365,006.71. The low value is the result of a collapsed roof, substantial vandalism and theft loss, and lack of maintenance. Debt- or asserts that the value of the Greenhouse could not fall any lower and would not be affected by future damage to the improvements.
Debtor lists secured liabilities totaling $41,145,572.38. The largest secured creditor, 1670083 Ontario Inc. (“Ontario”) has a lien on all of Debtor’s assets, securing a debt of about $7.9 million. Ontario purchased the claim from Farm Credit Bank.
Debtor owes approximately $1.7 million in federal and state taxes. The Internal Revenue Service (“IRS”) filed a claim in the amount of $1,322,070.45, of which $459,273.27 is allegedly entitled to priority. The New Mexico Taxation & Revenue Department (“NMTRD”) filed an amended proof of claim in the amount of $43,058.16, of which $1,145.21 is allegedly entitled to priority. Debtor also owes about $2.3 million in real property taxes, interest, and late fees to Cibola County.
There is no current insurance on the Greenhouse. Because of a lack of funds, Debtor has not maintained insurance since 2010.
Debtor has timely filed its monthly operating reports (“MORs”) since the case was converted to Chapter 11.
Debtor is current on post-petition taxes, since none have come due since conversion to Chapter 11. Post-petition property taxes will be due and payable in November, 2014.
The “exclusivity” period under § 1121(c)(2) expired September 5, 2014. On that date the Debtor filed a plan of reorganization and a disclosure statement.
Unless Ontario’s hen is subordinated or set aside, there would be no funds available for junior secured creditors, priority creditors, or general unsecured creditors if the case were converted to Chapter 7. Petitioning Creditors argued at trial that there may be grounds to equitably subordinate Ontario’s secured claim because John Stockwell (“Stockwell”), Debtor’s principal and sole shareholder, sought at one point an option to purchase Ontario’s claim for a nominal sum. Stockwell testified that he had initially requested such an option, but later dropped the request on advice of counsel. Stockwell never obtained such an option. There is no evidence that Ontario would have agreed to such an option, nor that any creditors other than Ontario would have been harmed had such an option been granted.
*266The following creditors expressed a preference regarding conversion of the Chapter 11 case:4
Approximate amount
_Creditor_Type of claim_of asserted claim Preference
John Wright Secured — Services $149,503.42 Chapter 11
_Performed_
_Bevo Farms_Secured_$350,000_Chapter 11
Carver Oil Company Administrative & Unknown Chapter 11 Unsecured—
_Equipment Lease_
Jeremy Stockwell Unsecured — Company $184,000.00 Chapter 11
_Expenses_
Lynn Stockwell_Secured_$12,797,282.00_Chapter 11
Albuquerque Packaging Secured — Judgment $143,829.19 Chapter 11
_Corp._Lien_
Kenneth Lujan — DNA Secured $150,000 Chapter 11
_Hogs_
Patricia Tucker_Secured — Legal Fees_$30,000.00_Chapter 11
Jenna McKie Unsecured — Company $16,400.00 Chapter 11
Expenses
Petitioning Creditors, in contrast, prefer immediate conversion to Chapter 7.
II. DISCUSSION
A. § 1112(b): Conversion for “Cause.”
Conversion of a Chapter 11 case is governed by § 1112(b).5 The Court is generally required to dismiss or convert a case under § 1112(b) upon a finding of “cause.”
Section 1112(b)(4) contains a nonexclusive list of “causes.” See In re Frieouf 938 F.2d 1099, 1102 (10th Cir.1991) (noting that the list contained in § 1112(b)(4) is nonexhaustive). Whether “cause” exists to convert a case is a threshold issue. In re Melendez Concrete Inc., No. 11-09-12334 JA, 2009 WL 2997920, at *3 (Bankr. D.N.M.2009). If cause is established, the Court then considers whether “conversion or dismissal ... [is in the] best interest of creditors and the estate.” In re American Capital Equipment, LLC, 688 F.3d 145, 161 (3rd Cir.2012).
The party requesting dismissal or conversion under § 1112(b) bears the burden of establishing cause by a preponderance of the evidence. In re ARS Analytical, LLC, 433 B.R. 848, 861 (Bankr. D.N.M.2010). In analyzing whether cause for conversion has been established under § 1112(b)(4), the Court applies a materiality standard to the enumerated grounds *267that constitute cause. In re Melendez Concrete Inc., 2009 WL 2997920, at *5.
Petitioning Creditors assert that cause exists to convert the case under subsections (b)(4)(A)—continuing diminution in value of the estate; (b)(4)(B)—gross mismanagement; (b)(4)(C)—failure to maintain insurance; and (b)(4)(I)—failure to pay taxes.
1. Substantial Loss or Diminution of the Estate and Absence of Reasonable Likelihood of Rehabilitation Under § 1112(b)(1)(A). Petitioning Creditors assert under § 1112(b)(4)(A) that there is a “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” This argument is not supported by the current evidence in the record. Debtor’s case has been pending for four months. Debtor is not engaged in business operations and has no post-petition income. Debtor has filed a plan of reorganization and a disclosure statement.
Petitioning Creditors made very little effort to present evidence in support of their position. They called no witnesses and submitted as exhibits only the Debt- or’s schedules and monthly operating reports. At the Court insistence Debtor’s counsel called Mr. Stockwell to the stand and the Petitioning Creditors cross-examined him, but that is all.
There is no evidence that the bankruptcy estate, consisting only of the Greenhouse and the Funds, has lost value since the Chapter 11 case began. Further, there is no evidence that the estate would diminish if the case remains in Chapter 11. Petitioning Creditors pointed to a lack of insurance. That is a real concern, but since there is no equity in the Greenhouse for the estate, any further damage to the Greenhouse would hurt only Ontario. Ontario is not seeking conversion, and apparently is willing to let Debtor attempt to reorganize. The Court finds that, at least at this time, cause does not exist under § 1112(b)(4)(A).
2. Gross Mismanagement of the Estate Under § 1112(b)(1)(B). Petitioning Creditors assert that cause to convert exists under § 1112(b)(4)(B) based on Debt- or’s gross mismanagement of the estate. The alleged gross mismanagement must occur post-petition. See In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799, 809 (Bankr.D.Colo.2012) (pre-petition gross mismanagement is not cause under § 1112(b)(4)(B) because the estate is a post-petition entity); In re First Assured Warranty Corp., 383 B.R. 502, 544 (Bankr. D.Colo.2008), citing In re Rey, 2006 WL 2457435, *5 (Bankr.N.D.Ill.2006).
There is no evidence of mismanagement, let alone gross mismanagement, post-petition. Since bankruptcy proceedings began, Debtor has timely filed all monthly operating reports and has drafted and filed a plan of reorganization. Prudent management dictates that insurance be in place if possible, but here the estate has no money with which to pay insurance premiums. The Court finds that Petitioning Creditors have failed to prove post-petition gross mismanagement as specified in § 1112(b)(4)(B).
3. Failure to Maintain Insurance Under § 1112(b)(1)(C). Petitioning Creditors assert that cause to convert exists under § 1112(b)(4)(C) based on Debtor’s failure to maintain insurance, posing a risk to the estate or the public. There is no dispute that Debtor currently has no insurance of any kind. However, Petitioning Creditors presented no evidence that the lack of insurance poses a material risk to the estate. Debtor’s uncontroverted testimony is that the Greenhouse’s value is as low as it can possibly go based on physical *268condition. Furthermore, as set forth above any risk of further loss to the Greenhouse is borne by Ontario, not the estate, because there is no equity in the property.
There also is no evidence that the lack of insurance poses a risk to the public. If Debtor were an operating business, liability insurance in all likelihood would be required for the benefit of the Debtor and the public. Lacking operations, the only potential harm would be to trespassers and thieves. Petitioning Creditors presented no evidence that the Greenhouse is an attractive nuisance or otherwise a danger to ordinary citizens. The Court is not happy that the Debtor cannot afford to purchase reasonable insurance, and will not allow the lack of insurance to go on any longer than necessary to see if Debt- or’s plan of reorganization is confirmable and has sufficient creditor support. Nevertheless, the Court finds that the current situation does not, at this point in the case, constitute cause under § 1112(b)(4)(C).
4. Failure to Pay Taxes Under § 1112(b) (k) (I). Finally, Petitioning Creditors assert that cause exists to convert based on Debtor’s “failure to timely pay taxes owed after the date of the order for relief.” The Code plainly refers to taxes that become due after the date that the order for relief is entered. Unpaid prepet-ition taxes are not relevant in the cause analysis.
Debtor owes significant taxes to the IRS and the NMTRD. Petitioning Creditors presented no evidence, however, that any post-petition taxes have gone unpaid. Since Debtor is not operating, the only taxes accruing post-petition likely are real property taxes. Those are paid twice a year, in April and November. See N.M.S.A. § 7-88-38. Thus, Debtor’s first post-petition property tax bill will be due in about two months. Debtor’s plan of reorganization addresses payment of all taxes owed. The Court finds no failure to pay post-petition taxes and therefore no cause to convert under § 1112(b)(4)(I).
B. Best Interest of Creditors and the Estate.
The Court has reviewed the status of the case and the interests of secured and general unsecured creditors, and finds that conversion or dismissal would not benefit unsecured creditors at this time.
Debtor has scheduled liabilities of more than $41.89 million and assets of $5.8 million. The first position secured creditor, Ontario, filed a proof of claim for $7.9 million. If the estate were liquidated under Chapter 7, Ontario’s secured claim would prevent payment of any other claims, secured or unsecured. Allowing the Debtor a chance to file a plan of reorganization provides a possibility that other creditors would receive a dividend on their claims.
Petitioning Creditors argue that Ontario’s secured claim could be equitably subordinated, thus providing assets to pay general creditors. That argument is unpersuasive based on the evidence in the current record. Little or nothing in the record indicates grounds for equitable subordination. Stockwell’s one-time interest in obtaining an option to take over Ontario’s secured claim for a nominal purchase price might (or might not) be a breach of Stoekwell’s duty to creditors, but it does not follow that Ontario’s secured claim is at risk. The Court does not have many facts relating to this issue, but from the current record there is no reason to believe an equitable subordination claim has much promise.
Further, the Petitioning Creditors could bring an equitable subordination claim on their own if they chose. See, e.g., In re *269Vitreous Steel Products Co., 911 F.2d 1223, 1231 (7th Cir.1990) (individual creditor has standing to pursue equitable subordination claims under § 510(c)); P.W. Enters., Inc. v. N.D. (In re Racing Servs., Inc.), 363 B.R. 911 (8th Cir. BAP 2007), reversed on other grounds 540 F.3d 892 (8th Cir.2008) (a creditor has standing to pursue § 510(c) equitable subordination claim); In re El-rod Holdings Corp., 392 B.R. 110, 115 (Bankr.D.Del.2008) (an injured secured creditor should be permitted to pursue an equitable subordination claim apart from the trustee); Clippard v. LWD, Inc. (In re LWD, Inc.), 342 B.R. 514, 520 (Bankr. W.D.Ky.2006) (equitable subordination claims may be brought by individual creditors on their own behalf); In re J.S. II, L.L.C., 389 B.R. 570, 580 (Bankr.N.D.Ill. 2008) (the Seventh Circuit has held that creditors have direct standing to pursue an equitable subordination claim under § 510); Bunch v. J.M. Capital Fin., Ltd. (In re Hoffinger Indus., Inc.), 327 B.R. 389, 413 (Bankr.E.D.Ark.2005) (Congress intended for § 510(c) to be available to parties other than the trustee).
All this is not to say that Debtor appears to be headed for easy confirmation of a plan of reorganization. Based on the evidence before the Court, it seems Debtor will have an uphill battle to obtain sufficient funding to pay creditors as required by the Bankruptcy Code, rebuild the Greenhouse, recommence operations, and grow vegetables in the years ahead. If Debtor’s reorganization efforts fail or are abandoned, the Court will revisit the issue of conversion or dismissal, likely at the conclusion of a confirmation hearing on the Debtor’s recently filed plan of reorganization. The lack of insurance adds additional pressure.
III. CONCLUSION
The Court concludes that cause has not been established for conversion at this time. The Court will allow Debtor to proceed with its Chapter 11 case and pursue confirmation of its plan of reorganization. Because there is no liability insurance, the Court will require the Debtor to proceed expeditiously toward confirmation. If the Debtor is able to raise enough money in the near future to purchase insurance, the Court will decrease the time pressure to reorganize or convert.
. Unless otherwise indicated, all statutory reference are to 11 U.S.C.
. Compelling circumstances prevented the court from meeting the 15-day time limit for decision on the Motion outlined in § 1112(b)(3).
. In making these findings, the Court took judicial notice of the docket. See St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins. Corp., 605 F.2d 1169, 1172 (10th Cir.1979) (holding that a court may, sua sponte, take judicial notice of its docket); In re Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 8 (1st Cir.1999) (citing Fed.R.Evid. 201 and concluding that "[t]he bankruptcy court appropriately took judicial notice of its own docket”); In re Quade, 496 B.R. 520, 524 (Bankr.N.D.Ill.2013) (a “bankruptcy court [is authorized] ... to take judicial notice of its own docket”).
. The chart reflects claims on file and representations made by the creditors either who appeared at the final hearing on the Motion or expressed their opinion via emails that were admitted into evidence at the final hearing on the Motion. These findings do not establish conclusively the existence, or extent, of any creditor's allowable claim. Creditors may hold claims not listed in this chart.
. See § 1112(b)(1) ("on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate ... ”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497513/ | Chapter 7
ORDER GRANTING MOTIONS FOR SUMMARY JUDGMENT FILED BY THE TRUSTEE, THE SYNECTIC FUNDS, AND ALCO AND DENYING MOTIONS FILED BY LANGDALE PLAINTIFFS AND THE INVESTMENT GROUP
Caryl E. Delano, United States Bankruptcy Judge
The primary question presented in these two related adversary proceedings is whether a Chapter 7 debtor’s payments to the Chapter 7 trustee in settlement of disputed claims may be avoided as fraudulent transfers under the Florida Uniform Fraudulent Transfer Act (“FUFTA”) by creditors who claim the payments are traceable to funds that the debtor fraudulently obtained from them. Because the Court finds that the Chapter 7 Trustee accepted the payments in good faith and for reasonably equivalent value, the Court concludes that the payments are not subject to avoidance under FUFTA or on other equitable grounds and will grant summary judgment in favor of the Chapter 7 Trustee and the parties to whom she distributed the settlement payments.
I. Facts
A. The History of the Synectic Funds’ Claims
The facts are not in dispute. The Debt- or, Craig Berkman (“Berkman”), is a law school graduate and a well-known political figure in Oregon, having previously run for governor of that state. Berkman formed a number of venture capital investment firms for the purported purpose of investing in start-up companies in the Oregon area, including Synectic Ventures I, LLC, Synectic Ventures II, LLC, and Synectic Ventures III, LLC (collectively, the “Sy-nectic Funds”). Berkman conducted business through a management company, Sy-nectic Asset Management Company, Inc. (“SAM”). As it turned out, the monies invested in the Synectic Funds were not used to develop start-up companies. Instead, Berkman diverted monies from the Synectic Funds and others in the process of running an elaborate Ponzi scheme.
In November 2005, Berkman, aware that creditors were about to take action against him, moved to Florida where he purchased a home for almost $4,000,000.00. In December 2005, he got married.1 On December 20, 2005, the Synectic Funds filed a lawsuit in Oregon against Berkman and others. After being served with the complaint in that lawsuit, Berkman transferred title to his Florida home to himself and his wife as tenants by the entireties. In June 2008, the Oregon jury returned a verdict in favor of the Synectic Funds and against Berkman, SAM, and the other defendants. Shortly after the jury returned its verdict, Berkman transferred over 600,-000 shares of stock he owned in EVI Corporation to himself and his wife as tenants by the entireties. He also transferred nearly all the money he held in bank accounts to a bank account held as tenants by the entireties with his wife. In November 2008, judgment was entered against Berkman and SAM, jointly and severally, in favor of the Synectic Funds for compensatory damages of approximately $15 million and punitive damages against Berk-*294man for $10 million and SAM for $4.7 million. In the meantime, Berkman continued to conduct business, forming new venture capital funds that he managed through SAM.
B. The Bankruptcies and the Global Settlement Agreement
On March 20, 2009, the Synectic Funds, represented by the law firm Trenam, Kemker, Scharf, Barkin, Frye, O’Neill & Mullís, P.A. (“Trenam Kemker”), filed involuntary bankruptcy petitions against Berkman and SAM, both of whom consented to orders for relief (the “Berkman Case” and the “SAM Case”). Susan Woodard was appointed as the Chapter 7 Trustee (the “Trustee”) in both cases. The Trustee retained Trenam Kemker as special counsel.
In the Berkman Case, the Trustee filed objections to Berkman’s claimed exemptions, including his claims that assets such as the Florida home, bank account, and EVI Corporation stock were exempt as tenancy by the entireties property.2 The Trustee also filed an adversary proceeding against Berkman seeking to avoid and recover his transfers of those assets.3 In addition, the Synectic Funds commenced two adversary proceedings against Berk-man: one objecting to his discharge,4 and the other to except their debt from discharge.5
In the SAM case, the Trustee filed an adversary proceeding against Berkman and Ventures Trust Asset Management, a company owned by Berkman, to avoid the fraudulent transfers by SAM of various management agreements,6 and adversary proceedings against other Berkman entities, Synectic Asset Ventures, LLC, to avoid the fraudulent transfer of $295,000.00,7 and Synectic Ventures V, LLC, to avoid the transfer of $50,000.00.8
The Trustee and the Synectic Funds, on the on the one hand, and Berkman and SAM, on the other, negotiated the resolution of all issues between them (the “Global Settlement Agreement”). The Global Settlement Agreement called for Berkman to pay a total of $4,750,000.00 to the Tras-tee (in installments) in exchange for the Trustee’s abatement, and eventual dismissal, of the pending litigation against Berk-man and SAM and the Trustee’s sale of other estate assets back to Berkman. The settlement funds were to be divided equally between the Berkman and SAM Cases. The Synectic Funds, in consideration of the receipt of their pro rata share of the Trustee’s distributions to unsecured creditors (which would include Berkman’s $4,750,000.00 settlement payment), agreed to dismiss their adversary proceedings so that the balance of the debt owed to them by Berkman would be discharged. The Synectic Funds also agreed to pay $97,270.00 and transfer shares of stock in and unrelated company, Well Partner, to one of Berkman’s companies.
Relevant to the issues in these adversary proceedings is Section 4.2 of the Global Settlement Agreement. Section 4.2 provides that if Berkman defaulted in payments or failed to satisfy the requirements of Section 4.5, the Global Settlement Agreement is terminated and of no further effect. Section 4.5 of the Global Settle*295ment Agreement required Berkman’s attorney 9 to
(i) certify that (a) the source of the Settlement Funds is compensation paid or to be paid to Mr. Berkman and is not from an investment fund which is managed for the benefit of third parties, and (b) the funding source has been given notice of the settlement approval objection/hearing process at least five business days in advance of the date of the hearing by the Bankruptcy Court, (ii) provide proof of such notice to the Bankruptcy Court confidentially and under seal, without access to such notice by the Trustee, and Petitioning Creditors [the Synectic Funds] or any other creditors, and (iii) seek and obtain a finding from the Bankruptcy Court that Mr. Berk-man’s fund-raising transaction that is the source of the Settlement Funds is a good faith transaction arising postpetition.10
In other words, rather than obtaining a certification from Berkman, who was known to have defrauded investors in the past, the Trustee required Berkman’s attorney to conduct an independent investigation into the source of the funds. Section 4.5 contemplated that the identity of the funding source would remain confidential and not be disclosed to the Trustee or the Synectic Funds.
Pursuant to Fed. R. Bankr.P. 9019, the Trustee filed a motion with this Court asking for approval of the Global Settlement Agreement.11 To satisfy the requirements of Section 4.5 of the Global Settlement Agreement, on May 21, 2011, Berkman’s attorney wrote a letter to John B. Kern, Esq., a Georgia attorney, and obtained his initials and countersignature to the letter. The letter advised Mr. Kern of the upcoming hearing on the motion to approve the Global Settlement Agreement and confirmed a telephone conversation with Mr. Kern, in which Mr. Kern represented that Ventures Trust Management, LLC (“VTM”) was his client. The letter stated:
You indicated that [VTM] is the source of funds relative to payments that have been made under the Settlement Agreement. You advised that Mr. Berkman is serving as a consultant to [VTM], an entity in which he has no ownership. [VTM] established this consultation role with Mr. Berkman in the fall of 2010. [VTM] has delivered to Mr. Berkman consulting fees and/or has advanced funds for consulting fees to be paid based upon the progress of the various projects which are managed by [VTM]. These projects cover a variety of industries and include those with real, tangible structures and projects. You were very clear that none of the funds use[d] to pay any of the fees delivered to Mr. Berkman are derived from investors in [VTM] projects or from projects of funds that are managed by [VTM] for the benefit of third parties.12
Berkman’s attorney filed a motion to file the letter under seal, which was granted without objection by the Trustee.13 Upon review of the letter, this Court approved the Global Settlement Agreement and made a finding, the condition precedent to *296Global Settlement Agreement, that Berk-man was making the settlement payments from compensation to be paid to him arising from a postpetition good faith transaction.14
Berkman began making installment payments to the Trustee prior to the Court’s approval of the Global Settlement Agreement. After the Global Settlement Agreement was approved, Berkman continued making payments, but he struggled to do so. Berkman’s attorney repeatedly asked the Trustee to grant Berkman extensions of time to make the additional payments. During the year or so period that it took Berkman to complete the payments to the Trustee, Berkman’s attorney sent at least twelve emails to the Trustee’s attorneys indicating that the forthcoming settlement payments were from funds that Berkman himself had earned.15 And Berkman’s attorney filed an Emergency Motion for Extension of Time to Fund Global Settlement, representing that the monies to be paid to the Trustee constituted fees that Berkman himself had fully earned. The motion stated
The Debtor has been working diligently in a volatile global economy to earn a significant amount of money in what is a relatively short time. The monies to be paid under the global settlement are for fees that have been fully earned by the Debtor.16
During this same general time period, the Synectic Funds learned that Berkman, on behalf of VTM, had filed a lawsuit against NuScale Power, Inc. (“NuScale”). In its complaint, VTM alleged that NuS-cale had tortiously interfered with VTM’s prospective business relationship with Tangent Ventures LP (“Tangent”), an entity that Berkman had identified as a potential funding source for NuScale.17 The complaint suggests that Berkman, through VTM, was entitled to substantial compensation for Tangent’s providing financing to NuScale. The Synectic Funds’ manager, Gerson Goldstick, testified at deposition that he researched Tangent and confirmed that Berkman had a relationship with Tangent.18 This additional information confirmed the Trustee’s and the Synectic Funds’ understanding that Berkman did, in fact, have legitimate avenues of personal income available to fund the Global Settlement Agreement. And at this time, neither the Trustee nor the Synectic Funds knew time that VTM was the entity identified in the letter confirming the source of Berkman’s funds. In light of the NuScale litigation, knowledge of the substance of Berkman’s attorney’s letter to Mr. Kern would have served to confirm their belief that the source of Berkman’s funds was legitimate.
On May 9, 2012, Berkman made the final settlement payment of $3,243,027.00 to Trenam Kemker. On June 1, 2012, Trenam Kemker transferred the funds to the Trustee, who allocated them evenly between the Berkman and SAM estates.19 Having received full payment of the settlement funds, the Trustee and the Synectic Funds took actions to consummate the Global Settlement Agreement. The Trus*297tee filed a notice of withdrawal of her objections to Berkman’s exemptions20 and delivered to Berkman a Trustee’s Bill of Sale that conveyed all of the Trustee’s rights, title, and interest in and to all of the scheduled assets in the Berkman Case and SAM Case; the Synectie Funds moved for and obtained an order vacating the final summary judgment declaring their underlying $25 million judgment against Berkman to be non-dischargeable21 and moved to vacate their underlying Oregon and Florida judgments against Berkman and SAM; and one of the Synectie Funds paid Berkman’s company, Synectie Asset Ventures, LLC, $97,270.00 and delivered to it stock certificates representing 13,000 shares of Well Partner stock.
The Trustee also began to wind up the Berkman and SAM bankruptcy estates. On October 25, 2012, the Trustee filed her Trustee’s Final Report in the Berkman Case, proposing distributions to unsecured creditors, after payments of administrative and priority claims, in the total amount of $2,193,800.46.22 After court approval of the Trustee’s Final Report,23 on December 15, 2012, the Trustee distributed the funds to creditors, including to Aleo Holdings, LLC (“Aleo”) and the Synectie Funds.24 And, on March 8, 2013, the Trustee filed her Amended Trustee’s Final Report in the SAM Case, stating that she holds a total of $2,433,318.29 for distribution to creditors.25 As set forth below, these funds have not yet been distributed.
C. Criminal Charges Against Berk-man
On March 15, 2013, the United States Attorney for the Southern District of New York filed a criminal complaint against Berkman and a warrant was issued for his arrest. Shortly thereafter, Berkman was arrested and charged with securities fraud and wire fraud. The charging documents alleged that between December 2010 and March 2013, Berkman, through various entities which he controlled, including Ventures Trust II, LLC (“Ventures Trust II”) and Face-Off Acquisitions, LLC (“Face Off’), had fraudulently obtained over $13,200,000.00 from approximately 120 investors. The U.S. Attorney alleged that Berkman lured investors into yet another fraudulent scheme by representing that Ventures Trust II offered a unique opportunity to purchase discounted shares of Facebook, Inc., and that investments in Face Off would be used to acquire over one million pre-IPO (initial public offering) shares of Facebook.26
The Securities and Exchange Commission made similar allegations against Berk-man, including an allegation that Berkman used the newly defrauded investors’ funds to make the payments to the Trustee.27 The SEC also identified a third fraudulent investment vehicle controlled by Berkman, Assensus Capital LLC (“Assensus”), which promised investors significant profits based on Assensus’ acquisition of equity interests in cutting-edge technology companies.
*298Berkman pleaded guilty to the criminal charges and is presently incarcerated in New York. As a result of the criminal charges, the United States Trustee also filed an adversary proceeding in Berk-man’s bankruptcy case to revoke his discharge.28 Berkman did not defend that proceeding, and the Court entered an order revoking Berkman’s discharge.29
D. The Langdale Plaintiffs and the Investment Group
On April 19, 2013, Langdale Capital Assets, Inc., JLD Properties, LLC, Ferrell Scruggs, Jr., and Patrick Robinson (collectively, the “Langdale Plaintiffs”) commenced an adversary proceeding in the Berkman Case seeking to avoid the transfers from Berkman to the Trustee, and the subsequent transfers from the Trustee to the Synectic Funds and Aleo, as fraudulent transfers under FUFTA,30 specifically Fla. Stat. §§ 726.105(l)(a), 726.106(1)0»), and 726.106(1) (the “Berkman Adversary”).31 In their amended complaint, in addition to the fraudulent transfer claims, the Lang-dale Plaintiffs also state claims for unjust enrichment and money had and received.32 The Langdale Plaintiffs allege that they are victims of Berkman’s most recent fraudulent investment scheme, having purchased membership interests in Face Off and Assensus. They allege that in April 2012, they wired funds in the collective total amount of $1,350,000.00 to a Face Off bank account and in June 2012, they wired additional funds in the collective total amount of $450,000.00 to an Assensus bank account. The Langdale Plaintiffs allege that Berkman used all or a substantial part of those funds to make the settlement payments to the Trustee.
Thereafter, 33 more victims of Berk-man’s fraudulent investment scheme (collectively referred to as the “Investment Group” and, together with the Langdale Plaintiffs, “Plaintiffs”), after being allowed to intervene in the Berkman Adversary, filed a third-party complaint in intervention.33 The Investment Group alleges that from November 2010 through May 2012, its 33 individual members invested a total of $5,185,088.00 with Berkman by wiring funds into one or more accounts that he controlled. In their amended third-party complaint, the Investment Group asserts the same causes of action as the Langdale Plaintiffs.34
In the SAM Case, the Langdale Plaintiffs filed an emergency motion to vacate the Trustee’s court-approved Trustee’s Final Report.35 The Trustee, who has not yet made distributions to creditors in the SAM Case, filed a complaint against the Langdale Plaintiffs for declaratory and in-junctive relief, seeking a judicial determination that the Langdale Plaintiffs have no rights to property in the Trustee’s possession and that the Trustee is authorized to make distributions to creditors (the “SAM Adversary”).36 The Langdale Plaintiffs *299answered and counterclaimed on the same grounds they alleged in their amended complaint in the Berkman Adversary. The Investment Group sought and obtained leave to intervene in the SAM Adversary as defendants and counter-plaintiffs.37 In a nutshell, the issues in the Berkman Adversary and SAM Adversary are identical.
II. The Instant Summary Judgment Motions
The parties have each moved for summary judgment.38 Plaintiffs contend that, on the undisputed facts, the payments from Berkman to the Trustee were fraudulent transfers subject to avoidance and recovery from the Trustee as the initial transferee and that the payments the Trustee made to creditors in the Berkman Case, including to the Synectic Funds and Aleo, are subject to avoidance and recovery from them as subsequent transferees. The Trustee, the Synectic Funds, and Aleo contend that the transfers are not subject to avoidance because they took the payments in good faith and for a reasonably equivalent value.
There is one area of disputed fact that the Court does not find necessary to resolve. The Langdale Plaintiffs rely on the affidavit of a certified public accountant39 to establish that Berkman transferred $1,350,000.00 of the Langdale Plaintiffs’ funds, wired by them to a Face Off account, to the Trustee as part of his settlement payment. Subsequent to the hearing on the summary judgment motions, the Investment Group filed an affidavit to establish that the 33 members of the Investment Group invested a collective $5,258,400.00 with Berkman by wiring funds into bank accounts he controlled and that Berkman caused $2,709,306.00 of that amount to be transferred to his personal bank account.40
The Trustee filed a response to the Investment Group’s affidavit, arguing that it is irrelevant because the Investment Group’s members’ funds are traced only to Berkman’s account and not to the account of Trenam Kemker or the Trustee.41 The Trustee further argues that even if the Court accepts the assertions regarding the tracing of the investments as true, they are immaterial to the Trustee’s defenses of good faith and provision of reasonably equivalent value.
Because the Court finds that Plaintiffs cannot succeed on their claims for relief, the Court does not make a factual finding on the source of Berkman’s payments to the Trustee, including (a) whether the source was, in fact, the Langdale Plaintiffs or the Investment Group’s investments with Berkman, or (b) whether the source was investments by the other 90 or so defrauded investors who are not before the Court.
III. Legal Analysis
A. Jurisdiction
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a), and the Standing Order of Reference from the District Court. This proceeding is a core proceed*300ing under 28 U.S.C. § 157(b)(2)(A), (H), and (0), and the Court has authority to hear and determine the proceeding under 28 U.S.C. § 157(b)(1). To the extent the Court would otherwise lack the constitutional authority to enter a final judgment, the parties have consented to the Court’s adjudication of this proceeding, including the entry of a final judgment, under 28 U.S.C. § 157(c)(2).
B. Summary Judgment Standard and the Burden of Proof
Federal Rule of Civil Procedure 56(a), as incorporated by Fed. R. Bankr.P. 7056, authorizes the Court to grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law. As explained below, the Court’s ruling is based, in part, upon the good faith defense to fraudulent transfer actions provided for by Fla. Stat. § 726.109(1). While an inquiry into a party’s good faith is ordinarily an issue of fact that would not be ripe for determination on summary judgment, the undisputed facts of this case, including the Trustee’s objective efforts to ensure the legitimate source of Berkman’s payments, permit the Court to conclude as a matter of law that the element of good faith has been satisfied.42
The ultimate burden of proof on an actual fraudulent transfer claim rests with the party seeking to avoid the transfer to establish by a preponderance of the evidence that the transferor effectuated the transfer in question with actual fraudulent intent to hinder, delay or defraud creditors.43 Similarly, on a constructive fraudulent transfer claim, the party seeking to avoid the transfer must establish by a preponderance of evidence that the transferor received less than reasonably equivalent value in exchange for the transfer.44 The party asserting a claim for unjust enrichment or money had and received also bears the burden of proof.45
C. Counts 7-/27: The Fraudulent Transfer Claims
Plaintiffs’ FUFTA claims are, first, that Berkman transferred the settlement payments with the actual intent to hinder, delay, or defraud creditors;46 second, that Berkman transferred the settlement payments without receiving a reasonably equivalent value in exchange for the transfer while Berkman (i) was engaged or about to engage in a transaction for which his remaining assets were unreasonably small in relation to the transaction or business, or (ii) intended to incur, or believed or reasonably believed that he would incur, debts beyond his ability to pay;47 and, third, that Berkman made the transfer without receiving reasonably equivalent value and either was insolvent at the time of the transfer or became insolvent as a result of the transfer.48
*301The first claim is generally referred to as an “actual fraudulent transfer,” and the second and third claims are generally referred to as “constructive fraudulent transfer” claims. In order to prevail on her affirmative defense to the actual fraud claim under Fla. Stat. § 726.109(1), the Trustee must demonstrate that she accepted the settlement payments from Berkman in good faith and for reasonably equivalent value. In order for Plaintiffs to prevail on their constructive fraudulent transfer claims, they must establish that the Trustee took for less than a reasonably equivalent value.
1. Reasonably Equivalent Value
Because the reasonably equivalent value issue is common to all three of the fraudulent transfer claims, the Court will first address that issue. Section 726.104(1), Florida Statutes, states, in part, that
Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satis-fied_(emphasis supplied).
In this case, Berkman’s payment to the Trustee was on account of an antecedent debt, namely his liability to the Trustee on her litigation claims against him, as outlined above. And the Synectic Funds and Aleo received their distributions from the Trustee on account of Berk-man’s antecedent debts to them. Therefore, the Trustee, the Synectic Funds, and Aleo have established that they gave value for the transfers they received. To meet the requirement that the value was “reasonably equivalent,” courts recognize that the analysis focuses on the benefit actually obtained by the debtor in the transaction. In other words, value is measured from the debtor’s point of view, not the transferee’s.49
The question before the Court is the value of the consideration received by Berkman in exchange for his payment of $4,750,000.00. As set forth in the Global Settlement Agreement,50 in exchange for this payment, Berkman received the following: (i) the dismissal the Trustee’s adversary proceeding against Berkman and his wife to avoid and recover fraudulent transfers of property, including Berkman’s transfer to himself and his wife as tenants by the entireties of the residence purchased for nearly $4,000,000.00 and now valued by Berkman in his bankruptcy schedules at $2,000,000.00, as well as the artwork and furniture contained therein, over 636,000 shares of stock in EVI Corporation, and a SunTrust Bank account; (ii) the withdrawal of the Trustee’s objections to Berkman’s claims of exemption,51 including, inter alia, his claim that his residence is exempt as tenancy by the entireties property under 11 U.S.C. § 522(b)(3)(B); (in) the dismissal of the Trustee’s complaint against Berkman and several of his entities to avoid and recover fraudulent transfers related to management rights and fees of various investment funds; (iv) the Trustee’s delivery to Berkman of a Trustee’s Bill of Sale conveying to Berk-man all of the Trustee’s rights, title, and interest in and to all of the scheduled assets in the Berkman Case and SAM Case; (v) the vacating of the Synectic *302Funds judgment that Berkman’s debt to them of $25 million-is non-dischargeable; (vi) the dismissal of the Synectic Funds’ objection to Berkman’s discharge; and (vii) payment by one of the Synectic Funds of $97,270.00 and delivery of stock certificates representing 13,000 shares of Well Partner stock to one of Berkman’s companies.
Despite this lengthy recitation of the value given by the Trustee and the Synectic Funds, Plaintiffs argue that there was little value provided because the underlying judgments against Berkman were worthless and uncollectible. But the satisfaction of those judgments constitutes value under Fla. Stat. § 726.104(1) as a matter of law because legitimate, non-illusory antecedent debts were satisfied.52 And reasonably equivalent value need not be dollar-for-dollar. For example, in In re Southmark Corp., the court found reasonably equivalent value where a settlement payment of $16,525,000.00 was made and, in exchange, a judgment totaling over $22,000,000.00 was released.53
In this case, as a result of the Global Settlement Agreement, Berkman’s residence, which he purchased for nearly $4 million and, by his own admission, was worth at least $2 million as of 2009, is now shielded from the Trustee’s avoidance action. The value in not losing his homestead could likely, standing alone, support a finding of reasonably equivalent value. The Court concludes that the value of the residence, in conjunction with the other consideration Berkman received under the Global Settlement Agreement, including the satisfaction of multi-million dollar judgments, the title to his other assets, and his Chapter 7 bankruptcy discharge,54 is reasonably equivalent to the value of the settlement payments.
Plaintiffs also contend that the interplay between Sections 4.2 and 4.5 of the Global Settlement Agreement, together with the fact that Berkman used third-party investors’ monies to fund the settlement, requires the conclusion that the Global Settlement Agreement is now void, such that the Synectic Funds’ judgments can be revived and the Trustee may pursue her rights against Berkman. If that were true, then arguably no value was provided to Berkman because all the litigation rights which were purportedly relinquished survive. But Plaintiffs’ argument misconstrues the express language and terms of the Global Settlement Agreement.
Section 4.2 of the Global Settlement Agreement states that if Berkman fails to satisfy Section 4.5 of the settlement agreement, the Global Settlement Agreement will terminate and be of no further effect. Section 4.5, in turn, required Berkman’s counsel to certify that the source of the funds was Berkman’s own compensation and to obtain a judicial finding that Berk-man’s compensation was derived from a good faith, postpetition transaction. But Section 4.5 does not include language that would allow the Court to undo the settlement or unwind actions that have already been taken. Instead, Section 4.5 merely prescribes the actions that Berkman’s at*303torney was to take in connection with obtaining court approval of the Global Settlement Agreement. Berkman’s attorney satisfied Section 4.5 when she obtained a finding from the Court regarding the source of Berkman’s payments. The fact that the parties, years after this finding and the Court’s approval of the Global Settlement Agreement, learned that Berk-man used defrauded investors’ funds to finance the Global Settlement Agreement does not retroactively negate or invalidate Berkman’s attorney’s compliance with Section 4.5. The Global Settlement Agreement has been consummated, rights have been relinquished, and reasonably equivalent value has been provided. The default provisions of Section 4.2 are not implicated and there is no basis on which the Court can now find that the Global Settlement Agreement is void.
Because the absence of reasonably equivalent value is a required element of Fla. Stat. §§ 726.105(l)(b) and 726.106(1), the Court finds that Plaintiffs have not met their burden of proof on their constructively fraudulent transfer claims. Therefore, the Court grants summary judgment in favor of the Trustee, the Sy-nectic Funds, and Aleo on Plaintiffs’ Counts II and III.
2. Good Faith
Section 726.109(1), Florida Statutes, provides a defense to claims made under Fla. Stat. § 726.105(l)(a), stating
A transfer or obligation is not voidable under s. 726.105(l)(a) against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee.
Having established that Berkman received reasonably equivalent value for the settlement payments he made to the Trustee, in order to prevail on her defense, the Trustee must also establish that she accepted the settlement payments in good faith.
Because the term “good faith” is not defined by statute, courts apply an objective test to determine if a transferee has acted in good faith.55 Good faith does not encompass a creditor’s acceptance of a transfer for the purpose of aiding the debtor in effectuating a fraud upon his creditors.56 Accordingly, the relevant question is whether the transferee had either actual knowledge of the debtor’s fraudulent purpose or knowledge of such facts or circumstances that would have caused an ordinarily prudent person to make further inquiry which, if performed with reasonable diligence, would have disclosed the transferor’s fraudulent purpose.57 Thus, a transferee may not remain willfully ignorant of facts that would cause him to be charged with notice of the trans-feror’s fraudulent purpose.58 So if circumstances exist that would put the transferee on inquiry notice as to a debtor’s underlying fraud, the transferee will be precluded from asserting the good faith defense.59
To the extent that the Trustee’s knowledge that Berkman had defrauded investors in the past was sufficient to require the Trustee to make a reasonably diligent inquiry into the source of payments from Berkman under the Global *304Settlement Agreement, the Court finds that the Trustee satisfied that duty by requiring Berkman’s counsel to certify that the source of funds was not an investment fund that was managed for the benefit of third parties and to obtain a finding from the Court that the source of the settlement funds was a good faith, postpe-tition transaction.
Although Plaintiffs correctly observe that the Court’s finding applied only to payments Berkman had made as of the date of the finding and not to the future payments that he was still scheduled to make, as a practical matter, no one — not Berkman’s counsel and not the Court— could certify the nature of a future event. Plaintiffs have failed to point to a single event or warning sign that would have put the Trustee on notice that there was a concern regarding the source of the funds. In fact, communications to the Trustee, such as the emails from Berkman’s attorney and Berkman’s Emergency Motion for Extension of Time to Fund Global Settlement, 60 were consistent with the Trustee’s understanding that Berkman’s source of funds was legitimate.
The totality of the circumstances, as known to the Trustee during the time period in which Berkman was funding the settlement, leads to only one conclusion: the Trustee lacked both actual and constructive knowledge of Berkman’s fraud perpetrated against Plaintiffs. She undertook a reasonably diligent inquiry to ensure that no such fraud was occurring. That Berkman is a sophisticated pitchman who, as it turned out, was perpetrating a fraud is beyond the Trustee’s control and outside the scope of knowledge with which she can be charged. Accordingly, the Court finds that the Trustee accepted Berkman’s settlement payments in good faith as that term is used in Fla. Stat. § 726.109(1).
Because the Trustee has established both elements of her affirmative defense under Fla. Stat. § 726.109(1), she is entitled to summary judgment on Count I of Plaintiffs’ claims for actual fraudulent transfers. And because they are subsequent transferees of the settlement payments, as recipients of the Trustee’s distributions in the Berkman Case, the Synectic Funds and Aleo are also entitled to rely on the defense afforded in Fla. Stat. § 726.109(1), and the Court likewise grants summary judgment in their favor on Plaintiffs’ actual fraudulent transfer claims.
D. Count V: Unjust Enrichment
To prevail on their claim for unjust enrichment, Plaintiffs must show that (i) they conferred a benefit on the Trustee; (ii) the Trustee has knowledge of the benefit; (iii) the Trustee has accepted or retained the benefit conferred; and (iv) the circumstances are such that it would be inequitable for the Trustee to retain the benefit without paying fair value for it.61 Where a party obtains a benefit through lawful means, courts will not characterize the circumstances surrounding that party’s acquisition of the benefit as being inequitable or unjust.62
A typical unjust enrichment claim involves a plaintiff who directly confers a benefit upon a recipient/defendant. In this case, however, Berkman’s action in defrauding Plaintiffs was an intermediate transaction. In cases where a claim for *305unjust enrichment is based upon an intermediary’s conduct, the recipient/defendant against whom the unjust enrichment claim is asserted is at least generally aware of the relationship between the plaintiff and the intermediary. For example, in Behm v. Cape Lumber Co.,63 a lumber company that provided lumber and trusses to a builder in connection with the builder’s construction of the homeowners’ new home sued the homeowners for unjust enrichment because it had not been paid by the builder. Even if the homeowners were unaware of the specific identity of the plaintiff lumber company, they were generally aware that lumber was necessary for the construction of their house and would have to be paid for. Thus, the homeowners possessed a degree of general knowledge that some entity was conferring a benefit upon them.
But here, the Trustee was unaware that Berkman had any dealings whatsoever with Plaintiffs and they did not directly confer a benefit upon the Trustee. The Trustee had no knowledge of the true source of the settlement funds until four months after she had made distributions to creditors in the Berkman Case and just before she was prepared to make distributions to creditors in the SAM Case. And even if the Court were to conclude that the Trustee had such knowledge, Plaintiffs’ claim for unjust enrichment fails because the Trustee provided value for the benefit conferred by Plaintiffs. As the court stated in American Safety Insurance Service, Inc. v. Griggs,64 “[w]hen a defendant has given adequate consideration to someone for the benefit conferred, a claim of unjust enrichment fails.” In Behm, the appellate court held that the homeowners’ motion for directed verdict on the unjust enrichment claim should have been granted because the homeowners had made all payments that were due under the agreement with their builder. The court refused to impose liability against the homeowners based on the alleged failure of the builder to make full payment to the lumber company. Here, because the Court has found that the Trustee provided reasonably equivalent value to Berkman in exchange for the settlement payments, Plaintiffs cannot prevail on their unjust enrichment claims.
Lastly, Plaintiffs cannot establish that the circumstances surrounding the Trustee’s acceptance of the settlement payments from Berkman were unjust. Although Plaintiffs are the victims of Berkman’s fraud and it would be inequitable to allow Berkman to profit from his own wrongdoing, that is not the issue presented here. Berkman’s wrongs against Plaintiffs have no relationship to the Trustee’s acceptance of payment from Berkman, and Berkman’s fraud is not attributable to the Trustee. Because the Trustee acquired the settlement payments in a lawful manner, there is nothing inequitable in allowing the Trustee and those to whom she made distributions to retain those payments.65
E. Count VI: Money Had and Received
Plaintiffs’ final claim, the common law claim of money had and received, requires Plaintiffs to show that the Trustee received their money as the result of Berkman’s fraud and that the circumstances are such that the Trustee should, in all fairness, be required to return the *306money to Plaintiffs.66 The claim is properly asserted where a defendant erroneously receives the claimant’s money in circumstances where it would be unjust for the defendant to retain the money.67 While technically an action at law, the claim is based on the equitable principle that “no one ought to be unjustly enriched at the expense of another.”68
Florida courts have recognized claims for money had and received in a variety of factual circumstances, including when there has been a failure of consideration, money has been paid by mistake, money has been obtained through extortion or coercion, or where the defendant has taken undue advantage of the claimant’s situation. The nature of the claim defies rigid factual formulations, and it may be based upon any set of facts “which show that an injustice would occur if money were not refunded.”69
The law is equally clear, however, that the injustice must arise from the defendant’s own actions.70 In this case, the Trustee has done nothing improper, untoward, or illegal. Accordingly, for the reasons explained above in connection with the unjust enrichment claim, the Court finds that it is not unjust for the Trustee to retain the settlement payments that she lawfully negotiated and received on behalf of creditors in the Berkman and SAM Cases. Without knowledge of Berkman’s fraud upon Plaintiffs, the Trustee is also an innocent party, and fairness does not dictate that she be held liable for carrying out her duties. Likewise, the Synectic Funds and Also are also innocent parties.
F. The Settlement Payments Are Property of the Estate.
Although Plaintiffs did not raise this issue in their complaints, they alternatively argue in their motions for summary judgment that the settlement payments are not property of the estate and, thus, must be returned to them.71 But their argument is at odds with a plain reading of the Bankruptcy Code, and the cases they cite do not support their position.
First, Plaintiffs appear to argue that their investments with Berkman are not property of the estate because Berkman obtained their funds postpetition. But property of the estate includes any interest in property that a bankruptcy trustee recovers under § 550 of the Bankruptcy Code, as well as any interest in property that the estate acquires postpetition.72 The Trustee’s acceptance of the settlement payments constitutes both a recovery under § 550 (as the settlement of avoidance claims) and an interest acquired postpetition. Accordingly, under the plain language of § 541(a)(3) and(a)(7), the settlement payments are property of the estate.
The three cases Plaintiffs cite are distin*307guishable. In In re Nempower,73 one of two shareholders of a corporation embezzled money that the other shareholder had loaned to the corporation. After the embezzler filed bankruptcy, the aggrieved shareholder sought relief from the automatic stay to continue prosecuting his claims against the transferees of his embezzled funds. The bankruptcy court granted stay relief with respect to the funds that the embezzler had transferred to third parties directly from the corporate account. But the court denied the request for stay relief with respect to the property that the debtor had purchased with the embezzled funds on the basis that such property constituted property of the estate. On appeal, the Sixth Circuit Court of Appeals held that the property which the debtor had purchased with the stolen funds was property of the estate because, under Michigan law, a thief obtains legal title to the goods purchased. That principle is based on the basic notion that a purchaser acquires whatever title the seller had to give. The court explained “if a thief steals funds and uses them to purchase other property the owner cannot follow the funds, and he is left to his remedy against the thief”74 In this case, the Trustee is not a mere “transferee” from Berkman; Berkman used the funds to “purchase” the settlement of the Trustee’s and the Synectic Funds’ claims against him. The court’s analysis in Nem-power does not permit Plaintiffs to recover their investments from the Trustee.
Other courts have recognized an exception to the rule that a thief does not pass good title to stolen property: when money comes into the hands of a bona fide holder. A good faith seller who obtains stolen funds as consideration for the sale is not subject to the true owner’s efforts to recover the funds for itself.75 Here, the Trustee stands in the shoes of that good faith seller. Acting in good faith, she sold valuable litigation rights in exchange for Berkman’s settlement payments. Notwithstanding that those payments ultimately turned out to be made with stolen funds, the Trustee obtained good title to the funds and is insulated from Plaintiffs’ efforts to recover the funds.
Both of the other two cases cited by Plaintiff are inapposite. In In re Mish-kin,76 the debtor, prior to filing bankruptcy, purchased a condominium with defrauded investors’ funds, taking title to the condominium in his own name. The bankruptcy court determined that the condominium was purchased with money that did not belong to the debtor and was not property of the estate. In Mishkin, the issue was whether property titled in the debtor’s name at the commencement of the case was property of the estate under § 541(a)(1). But in this case, the settlement funds obtained by the Trustee are (i) interests in property recovered under § 550, making them property of the estate under § 541(a)(3); and (ii) interests in property that the estate acquired after the commencement of the case, and thus property of the estate under § 541(a)(7).
In In re Motor Freight Express,77 a factual dispute existed as to whether the *308debtor unlawfully retained the proceeds of refund checks from the Internal Revenue Service. Without resolving the factual dispute, the court declined to express an opinion as to whether the funds in question were property of the estate. In dicta, the court merely commented that “property stolen or improperly received by a debtor during a bankruptcy cannot be retained by a debtor on the ground that it is property of the estate.”78 This statement would apply if Berkman himself were attempting to retain the funds. It does not apply to the Trustee or to the funds she received in good faith and for reasonably equivalent value.
G. Equitable Considerations
Finally, Plaintiffs have invoked the Court’s equitable powers in requesting the Court to fashion an equitable remedy and, ultimately, to force the Trustee to return the settlement payments to them. But Plaintiffs bear responsibility for their decision to invest with Berkman. A representative of the Langdale Plaintiffs, William P. Langdale, III, testified at deposition that he conducted an internet search of Berkman in April 2012, prior to the Langdale Plaintiffs’ initial investments with Berkman. Mr. Langdale reviewed online articles published about Berkman in the Oregon press. In fact, Berkman even disclosed his involvement in the prior civil litigation with the Synectie Funds to Mr. Langdale at an in-person meeting. Yet, Mr. Langdale, an attorney, did not review the litigation docket or inquire further. Instead, Mr. Langdale accepted Berk-man’s explanation about the prior litigation and was satisfied that his impending investments were aboveboard.79 And while it is unclear whether the 33 individual investors of the Investment Group had similar interactions with Berkman, it is beyond dispute that the skeletons of Berk-man’s past were available for public viewing, whereas his fraud upon Plaintiffs was unknown to all involved.
As between the Trustee and the Synectic Funds on one hand, and Plaintiffs on the other, equity favors the Trustee and the recipients of her distributions. Plaintiffs, though innocent victims, were in a position to discover Berkman’s previous history of fraud prior to choosing to invest with him. The Trustee, however, did take precautions. Although her precautions proved unsuccessful, the Trustee is an innocent party. The Florida Supreme Court stated long ago “[w]hen one of two innocent parties must suffer through the act or negligence of a third person, the loss should fall upon the one who by his conduct created the circumstances which enabled the third party to perpetrate the wrong or cause the loss.”80 Here, Plaintiffs’ lack of, or insufficient, due diligence requires them to bear the loss. Had they been more wary of Berkman’s past, they may have been able to avoid becoming victims of his fraud.
This outcome also comports with the equities favoring the Trustee and the Sy-nectic Funds and Aleo. It took years of litigation and significant financial expenditures, culminating in a jury trial, for the Synectie Funds to obtain judgments against Berkman and SAM. Aleo also obtained a sizeable judgment against Berk-*309man in state court. With assistance from the Trustee in negotiating the Global Settlement Agreement, the Syneetic Funds and Aleo are finally able to recover some of their losses. And the Trustee has worked diligently to fulfill her statutory duty to maximize the recovery for creditors of the Berkman and SAM estates. Valuable rights have been relinquished and positions have changed. Unfortunately for Plaintiffs, they do not hold a superior claim to the funds in question as against other innocent parties. The lesser of two evils requires the Court to reject Plaintiffs’ equitable arguments.
H. Count IV: Injunctive Relief
Plaintiffs also seek an order enjoining the Trustee from concluding her administration of the SAM estate and making distributions to SAM’s creditors from the funds she has on hand, which Plaintiffs contend includes their investments. In order to obtain an injunction, Plaintiffs must establish that (i) there is a substantial likelihood they will prevail on the merits of their claims; (ii) they will suffer irreparable injury if the injunction is not granted; (iii) such injury outweighs the harm which granting injunctive relief would inflict upon defendants; and (iv) the public interest will not be adversely affected by the granting of an injunction.81 Failure to show any of the four required factors is fatal, and the most common failure is not showing a substantial likelihood of success on the merits.82 Such is the case here. Because the Court has determined that Plaintiffs have not prevailed on the merits, the Court will rule for the Trustee on the requested injunctive relief. The Trustee may proceed to distribute the funds on hand in the SAM Case in accordance with her court-approved Notice of Final Report.
IV. Conclusion
For the foregoing reasons, it is ORDERED:
1. The Trustee’s Motions for Summary Judgment (Adv. Pro. No. 8:18-ap-336-CED, Doc. No. 94; Adv. Pro. No. 8:13-ap-469-CED, Doc. No. 75) are GRANTED.
2. The Syneetic Funds’ Motions for Summary Judgment (Adv. Pro. No. 8:13— ap-336-CED, Doc. No. 97; Adv. Pro. No. 8:13-ap-469-CED, Doc. No. 77) are GRANTED.
3. Alco’s Motion for Summary Judgment (Adv.Pro. No. 8:13-ap-336-CED, Doc. No. 96) is GRANTED.
4. The Langdale Plaintiffs’ Motions for Summary Judgment (Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 95; Adv. Pro. No. 8:13-ap-469-CED, Doc. No. 76) are DENIED.
5. The Investment Group’s Motions for Summary Judgment (Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 98; Adv. Pro. No. 8:13-ap-469-CED, Doc. No. 78) are DENIED.
6. The Court will enter separate judgments in favor of the Trustee, the Syneetic Funds, and Aleo.
. Mrs. Berkman is not a debtor in this case.
. Berkman Case, Doc. No. 50.
. Adv. Pro. No. 8:09-ap-572-CED.
. Adv. Pro. No. 8:09-ap-555-CED.
. Adv. Pro. No. 8:09-ap-513-CED.
. Adv. Pro. No. 8:09-ap-514-CED.
. Adv. Pro. No. 8:1 l-ap-471-CED.
. Adv. Pro. No. 8:1 l-ap-474-CED.
. Berkman’s attorney was a long-standing practitioner before this Court.
. Berkman Case, Doc. No. 115-1, p. 4; SAM Case, Doc. No. 61-1, p. 4.
. Berkman Case, Doc. No. 115; SAM Case, Doc. No. 61.
. Berkman Case, Doc. No. 219, p. 2; SAM Case, Doc. No. 207, p. 2.
. Berkman Case, Doc. Nos. 126, 127; SAM Case, Doc. Nos. 85, 86.
. Berkman Case, Doc. No. 128, p. 3; SAM Case, Doc. No. 87, p. 3.
. Exh. No. 108 (Note: References to exhibits are those provided by the parties to the Court under the Notice of Filing Record Citations, Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 89.)
. Berkman Case, Doc. No. 162, ¶ 19.
. Exh. No. 148.
. Exh. No. 141, pp. 122-23.
. Exh. No. 85.
. Berkman Case, Doc. No. 170.
. Adv. Pro. No. 8:09-ap-513-CED, Doc. Nos. 48, 52.
. Berkman Case, Doc. No. 182.
. Berkman Case, Doc. No. 184.
. Berkman Case, Doc. No. 201, Form 2.
. SAM Case, Doc. No. 165.
. It was public knowledge that Facebook planned an initial public offering. See http:// www.cbsnews.com/news/facebook-poised-for-ipo.
. Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 110-1, ¶¶ 28-29.
. Adv. Pro. No. 8:13-ap-479-CED.
. Berkman Case, Doc. No. 213.
. Fla. Stat. § 726.101, et seq.
. Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 1.
. Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 109.
. Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 62.
. Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 91.
. SAM Case, Doc. No. 168.
. Adv. Pro. No. 8:13-ap-469-CED, Doc. Nos. 1, 45.
. Adv. Pro. No. 8:13-ap-469-CED, Doc. Nos. 31, 41.
. Adv. Pro. No. 8:13-ap-336-CED, Doc. Nos. 94-98; Adv. Pro. No. 8:13-ap-469-CED, Doc. Nos. 75-78. Alco is a party only to Adv. Pro. No. 8:13-ap-336-CED.
. Each. No. 150.
. Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 122, ¶¶ 15-16.
. Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 124.
. See, e.g., In re Equipment Acquisition Resources, Inc., 2014 WL 1979366 (N.D.Il. May 15, 2014) (granting summary judgment to transferee on issue of good faith defense under § 550(b)(1)).
. In re Dealers Agency Services, Inc., 380 B.R. 608, 612 (Bankr.M.D.Fla.2007).
. In re Vista Bella, Inc., 511 B.R. 163, 192-93 (Bankr.S.D.Ala.2014).
. Turner v. Fitzsimmons, 673 So.2d 532, 536 (Fla. 1st DCA 1996); Cullen v. Seaboard Air Line R. Co., 63 Fla. 122, 58 So. 182, 184 (1912).
. Fla. Stat. § 726.105(l)(a).
. Fla. Stat. § 726.105(l)(b).
. Fla. Stat. § 726.106(1).
. In re Phoenix Diversified Investment Corp., 2011 WL 2182881, *4 (Bankr.S.D. Fla. June 2, 2011). That determination is made on the specific facts of the case and the circumstances relevant to the transaction. In re 21st Century Satellite Communications, Inc., 278 B.R. 577, 582 (Bankr.M.D.Fla.2002).
. Berkman Case, Doc. No. 115-1, SAM Case, Doc. No. 61-1.
. Berkman Case, Doc. No. 50.
.See Goldberg v. Chong, 2007 WL 2028792, *6 (S.D. Fla. July 11, 2007) (noting that a transferor may not manufacture an illusory debt merely to satisfy the statute). Cf. In re Southmark Corp., 138 B.R. 820, 830 (Bankr. N.D.Tex.1992) (holding that judgment debtor received reasonably equivalent value when judgment creditor received payment under a supersedeas bond and subsequently released its judgment).
. 138 B.R. at 830.
. At the time, the United States Trustee had not yet filed suit to revoke Berkman’s discharge.
. In re Seminole Walls & Ceilings Corp., 446 B.R. 572, 596 (Bankr.M.D.Fla.2011).
. Nelson v. Cravero Constructors, Inc., 117 So.2d 764, 766 (Fla. 3d DCA 1960).
. Wiand v. Waxenberg, 611 F.Supp.2d 1299, 1319 (M.D.Fla.2009); In re Evergreen Security, Ltd., 319 B.R. 245, 254 (Bankr.M.D.Fla. 2003).
. Wiand, 611 F.Supp.2d at 1319.
. Evergreen Security, 319 B.R. at 255.
. Exh. No. 108; Berkman Case, Doc. No. 162, ¶ 19.
. Della Ratta v. Della Ratta, 927 So.2d 1055, 1059 (Fla. 4th DCA 2006).
. Thompkins v. Lil Joe Records, Inc., 476 F.3d 1294, 1314 (11th Cir.2007).
. 834 So.2d 285 (Fla. 2d DCA 2003).
. 959 So.2d 322, 331-32 (Fla. 5th DCA 2007).
. Thompkins v. Lil Joe Records, Inc., 476 F.3d at 1314.
. In re Standard Jury Instructions—Contract and Business Cases, 116 So.3d 284, 332 (Fla. 2013).
. Id.
. Sharp v. Bowling, 511 So.2d 363, 365 (Fla. 5th DCA 1987).
. Moore Handley, Inc. v. Major Realty Corp., 340 So.2d 1238, 1239 (Fla. 4th DCA 1976).
. Marshall-Shaw v. Ford, 755 So.2d 162, 165 (Fla. 4th DCA 2000) (“where the defendant has appropriated the plaintiff s money, or has taken his property and sold it, a quasi-contract count will lie for money had and received”) (emphasis supplied).
. Adv. Pro. No. 8:13-ap-336-CED, Doc. No. 95, pp. 27-29.
. 11 U.S.C. § 541(a)(3) and (a)(7).
. 233 F.3d 922 (6th Cir.2000).
. 233 F.3d at 930 (emphasis supplied) (citation omitted).
. See U.S. Securities & Exchange Commission v. Universal Express, Inc., 2008 WL 1944803, *3 (S.D.N.Y. Apr. 30, 2008). "Simply put, ‘one acting in good faith may obtain title to money from a thief.’" Id. (citing Regions Bank v. Provident Bank, Inc., 345 F.3d 1267, 1279 (11th Cir.2003)).
. 138 B.R. 410 (Bankr.S.D.N.Y.1992).
. 91 B.R. 705 (Bankr.E.D.Pa.1988).
. 91 B.R. at 712.
. Exh. No. 145, pp. 52-53.
. Inman v. Rowsey, 41 So.2d 655, 659 (Fla. 1949). See also Ruwitch v. First National Bank of Miami, 291 So.2d 650, 652 (Fla. 3d DCA 1974) ("As between two innocent parties suffering from the fraud of a third, the party whose own negligence or misplaced confidence enabled the third party to consummate the fraud must bear the loss”).
. In re Alexander SRP Apartments, LLC, 2012 WL 2339347, *2 (Bankr.S.D. Ga. June 4, 2012) (preliminary injunction); In re Daytona Beach General Hospital, 153 B.R. 947, 950 (Bankr.M.D.Fla.1993) (permanent injunction).
. American Civil Liberties Union of Florida, Inc. v. Miami-Dade County School Board, 557 F.3d 1177, 1198 (11th Cir.2009). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497514/ | CHAPTER 11
ORDER GRANTING IN PART AND DENYING IN PART GECC’S MOTION TO DISMISS (ECF NO. 32)
Paul G. Hyman, Chief Judge
THIS MATTER came before the Court upon the Motion to Dismiss (the “Motion to Dismiss”) (ECF No. 32) filed by General Electric Capital Corporation (“GECC”). The Motion to Dismiss seeks dismissal of the Amended Complaint (ECF No. 26) *319filed by Barry Mukamal (the “Plaintiff’) in his capacity as Liquidating Trustee for the Palm Beach Finance Liquidating Trust and the Palm Beach Finance II Liquidating Trust. For the reasons discussed below, the Court grants in part and denies in part GECC’s Motion to Dismiss and dismisses Counts 2 through 9 of the Amended Complaint without prejudice.
COMPLAINT ALLEGATIONS AND PROCEDURAL BACKGROUND
The following is a summary of the relevant allegations contained in the Amended Complaint. Thomas Petters (“Petters”) and his co-conspirators conspired to commit and actually did commit the third-largest financial fraud in U.S. history (the “Petters Ponzi Scheme”). GECC is one of the most sophisticated commercial lenders in the word, who at all material times through July 2, 2001, was chartered under the New York State Banking Law and subject to supervision by the State of New York banking authority. Palm Beach Finance Partners, L.P. (“PBF I”) and Palm Beach Finance II, L.P. (“PBF II” and together with PBF I, the “Palm Beach Funds”) were Delaware limited partnerships which were formed in 2002 and 2004, respectively, to provide financing to Pet-ters and his affiliates. In order to facilitate these financing activities, the Palm Beach Funds formed PBFP Holdings, LLC (“PBFP Holdings”).
By 1995, Petters began soliciting “investments” for his scheme. In soliciting investments, Petters represented to investors that the funds invested would be used to finance consumer electronic merchandise transactions. Petters claimed he would arrange for the sale and delivery of the consumer electronic merchandise from suppliers to “big box” retailers, such as Costco and Sam’s Club. The financing would allow Petters to pay the suppliers while he awaited payment from retailers. However, unbeknownst to his investors, Petters’ operation was nothing more than a Ponzi scheme — there were no true retailers, there was virtually no merchandise, the suppliers were co-conspirators, and the lenders were repaid from monies sourced from other defrauded lenders.
In 1997, Petters began to communicate with GECC about providing financing for his purchase financing operation. By 1998, GECC and Petters agreed that Pet-ters Capital (a special purpose entity or “SPE”) would be formed to borrow $50 million on a revolving basis from GECC. According to the terms of the loan agreement, (1) the funds advanced would be used to purchase the consumer electronic merchandise, (2) GECC would be repaid from the sale of the merchandise, (3) retailers would be required to make their payments directly to a GECC-controlled lockbox, and (4) GECC would receive various forms of compensation, including interest and profit sharing “success fees.” On March 10, 1998, GECC filed a UCC-1 financing statement (“GECC Financing Statement”) with the Minnesota Secretary of State in order to perfect its security interest in the assets of Petters Capital. In 1999, GECC provided another line of credit to a Petters-controlled entity — a $ 55 million line of credit to RedtagBiz, Inc., £/k/a Redtagoutlet.com, Inc. (“Red-tag”).
Over time, GECC and Petters developed an unusually close relationship, evidenced in part by (1) the profit sharing “success fees” arrangement, (2) the issuance on January 4, 2000, of GECC’s recommendation letter praising Petters in his personal and business capacities (the “Recommendation Letter”), (3) GECC’s overlooking of Petters’ noncompliance with the terms of the loan agreement, (4) GECC’s deviation from its standard procedures, and (5) the *320close relationship between Petters and Richard Menczynski (an Assistant Vice President with GECC who later left GECC to become RedTag’s Vice President of Finance). In particular, the Recommendation Letter was an extraordinary departure from the typical “reference letter” issued by GECC to a borrower’s specific vendor. The Recommendation Letter described Petters Capital as an “excellent customer” — a status which was exclusive to and created for Petters Capital. It also contained the atypical and extraordinary statement that on a personal level, Petters was “of high character and possessed] strong moral values.” Finally, the Recommendation Letter was not addressed to a specific individual or company, but rather was addressed “To whom it may concern,” indicating an understanding on the part of GECC that the Recommendation Letter would be distributed to multiple individuals.
In late 2000, GECC uncovered the fraudulent nature of the Petters Ponzi Scheme, including that Petters and his co-conspirators were engaged in a conspiracy to defraud their lenders. This discovery resulted in part from GECC’s direct communication with Costco, one of Petters’ supposed retailers, during which Costco stated that it had not entered into any purchase orders with Petters as Petters had represented. Upon making this discovery, GECC agreed to keep silent and not disclose its knowledge of the Petters Ponzi Scheme to anyone outside of GECC. Instead, GECC elected to accept a payoff from Petters of the revolving credit line, including payment of the “success fees,” and to otherwise join, encourage, aid, abet, facilitate, and substantially assist Petters’ conspiracy.
In 2002, the Palm Beach Funds became involved with Petters through Frank Ven-nes (‘Vennes”). Petters, acting through Vennes, used his former relationship with GECC as a selling point to entice the Palm Beach Funds to become lenders/investors in Petters’ purchase financing operations. Additionally, Vennes, who was familiar with and influenced by GECC’s Recommendation Letter, gave his own positive recommendation of Petters to the Palm Beach Funds. The Palm Beach Funds eventually agreed to become lenders to Petters and filed a UCC-1 financing statement in the Minnesota public records to ensure its position as first lienholder in the collateral it financed. Upon inspection of the public records, the Palm Beach Funds discovered that the GECC Financing Statement was still in effect. Accordingly, the Palm Beach Funds requested the GECC Financing Statement be terminated. Petters, in turn, asked GECC to terminate its Financing Statement. GECC agreed and appointed Petters Capital as its agent to terminate the GECC Financing Statement. Petters, through Petters Capital, filed a UCC-3 financing statement termination (“GECC Termination Statement”) on March 5, 2003. The Palm Beach Funds then went ahead with its loans to Petters.
Upon the implosion of the Petters Ponzi Scheme in September 2008, the Palm Beach Funds suffered damages in excess of $1 billion and eventually filed for chapter 11 bankruptcy protection on November 30, 2009. On September 3, 2010, the Plaintiff, as the Palm Beach Funds’ Chapter 11 Trustee, filed a Second Amended Joint Plan of Liquidation1 (the “Plan of Liquidation”), which the Court confirmed on October 21, 2010, in the Order Confirming the Joint Plan of Liquidation2 (the *321“Confirmation Order”). Subsequently on September 29, 2012, the Plaintiff filed the instant adversary proceeding against GECC, seeking recovery on nine counts: (1) civil conspiracy to commit fraud, (2) aiding and abetting fraud, (3) fraud by omission, (4) fraudulent misrepresentation, (5) fraudulent concealment, (6) conspiracy to commit fraudulent concealment, (7) negligent misrepresentation, (8) fraud, and (9) negligence. In response, GECC filed the Motion to Dismiss now before the Court.
CONCLUSIONS OF LAW
I. Motion to dismiss standard
A. General pleading standard — Rules 8(a) and 12(b)(6)
In order to state a claim for relief under Federal Rule of Civil Procedure 8(a)3 and thus survive a Rule 12(b)(6)4 motion to dismiss, the factual allegations of the Plaintiffs Amended Complaint must “state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is hable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 663, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In determining facial plausibility, a court should not assume the veracity of mere legal conclusions or threadbare recitals of the elements of a cause of action. Id. at 679, 129 S.Ct. 1937. However, when “there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Id. at 664, 129 S.Ct. 1937. If a plaintiffs allegations do “not nudge[] their claims across the line from conceivable to plausible, [the] complaint must be dismissed.” Twombly, 550 U.S. at 570, 127 S.Ct. 1955.
B. Pleading special matters — Rule 9(b)
When a plaintiff asserts claims based upon fraud or mistake, simply meeting the pleading requirements of Rule 8(a) is insufficient to survive a Rule 12(b)(6) motion to dismiss. In addition, Federal Rule of Civil Procedure 9(b)5 requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Rule 9(b) “serves an important purpose in fraud actions by alerting defendants to the ‘precise misconduct with which they are charged’ and protecting defendants ‘against spurious charges of immoral and fraudulent behavior.’ ” Durham v. Bus. Mgmt. Assoc., 847 F.2d 1505, 1511 (11th Cir.1988) (quoting Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985)). The Eleventh Circuit Court of Appeals held:
Rule 9(b) is satisfied if the complaint sets forth “(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the man*322ner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.”
Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir.2008) (quoting Tello v. Dean Witter Reynolds, Inc., 494 F.3d 956, 972 (11th Cir.2007)). However, “Rule 9(b) does not require a plaintiff to allege specific facts related to the defendant’s state of mind.” Id. “[M]alice, intent, knowledge, and other conditions of a person’s mind” may be pled generally. Fed.R.Civ.P. 9(b).
“In construing allegations of actual fraud in an action brought by a bankruptcy trustee, the ‘particularity’ standard of ... Rule 9(b) is somewhat relaxed.” Cox v. Grube (In re Grube), Adv. No. 10-8055, 2013 WL 343459, at *9 (Bankr.C.D.Ill. Jan. 29, 2013) (citing Zazzali v. AFA Fin. Grp., LLC (In re DBSI, Inc.), 477 B.R. 504 (Bankr.D.Del.2012)); see also, Ivey v. First-Citizens Bank and Trust Co. (In re Whitley), Adv. No. 12-02028, 2013 WL 486782, at *13 (Bankr.M.D.N.C. Feb. 7, 2013); Wiand v. EFG Bank, No. 8:10-CV-241-T-17MAP, 2012 WL 750447, at *6 (M.D.Fla. Feb. 8, 2012); Tolz v. U.S. (In re Brandon Overseas, Inc.), Adv. No. 09-01971-RBR, 2010 WL 2812944, at *5 (Bankr.S.D.Fla. July 16, 2010). Thus, when a trustee brings a claim for fraud, Rule 9(b)’s particularity requirement is met “ ‘if the person charged with fraud will have a reasonable opportunity to answer the complaint and has adequate information to frame a response ... or if it identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.’” In re Brandon Overseas, 2010 WL 2812944, at *5 (quoting Kapila v. Arnel (In re Arizen Homes), Adv. No. 08-01639-RBR, 2009 WL 393863, at *2 (Bankr.S.D.Fla. Jan. 22, 2009)).
“Such flexibility afforded to trustees in bankruptcy with respect to the pleading requirements is [usually] appropriate ‘[g]iven the inevitable lack of knowledge concerning the acts of fraud previously committed against the debtor, a third party.’ ” In re Arizen Homes, 2009 WL 393863, at *2. However, when a trustee does not suffer from this lack of knowledge, the need to relax Rule 9(b)’s heightened pleading requirements does not exist. In such cases, the trustee will be held to the usual Rule 9(b) standard. See Roberts v. Balasco (In re Ernie Havre Ford, Inc.), 459 B.R. 824, 837 (Bankr.M.D.Fla.2011).
Here, the following claims asserted by the Plaintiff are subject to the pleading requirements of Rule 9(b): (1) civil conspiracy to commit fraud, (2) aiding and abetting fraud, (3) fraud by omission, (4) fraudulent misrepresentation, (5) fraudulent concealment, (6) conspiracy to commit fraudulent concealment, (7) negligent misrepresentation,6 and (8) fraud. Count *3239, the Plaintiffs claim for negligence, need only meet the pleading requirements of Rule 8(a).
II. Statute of limitations
GECC contends that the Plaintiffs claims are untimely because the very last GECC act alleged in the Amended Complaint as a basis for the Plaintiffs claims is the March 2003 filing of the GECC Termination Statement. Thus, according to GECC, the statute of limitations on the Plaintiffs claims expired at the latest in March 2007 (using Florida’s four-year statute of limitations)7 or in March 2008 (using Illinois’ five-year statute of limitations).8 The Plaintiff disagrees and contends that a choice of law analysis is not appropriate at this stage and that the Court must deny GECC’s Motion to Dismiss if the Amended Complaint properly alleges a claim under any potentially applicable state law. By that standard, the Plaintiff contends that he properly alleges a cause of action under Minnesota law and that under Minnesota law, the six-year statute of limitations, which is subject to the “discovery rule,” has not expired. The Court agrees with the Plaintiff.
To begin with, the statute of limitations defense is an affirmative defense upon which GECC, as the defendant, bears the burden of pleading and proving. La Grasta v. First Union Sec., Inc., 358 F.3d 840, 845 (11th Cir.2004); see also, Lindley v. City of Birmingham, Ala., No. 12-15073, 2013 WL 1336609, at *2 (11th Cir. Apr. 3, 2013); Steinberg v. A Analyst Ltd., No. 04-60898, 2009 WL 806780, at *8 (S.D.Fla. Mar. 26, 2009); Cantonis v. Stryker Corp., Civ. No. 09-3509 (JRT/JJK), 2010 WL 6239354, at *5 (D.Minn. Nov. 23, 2010). This means that the Plaintiff is not required to affirmatively plead around the statute of limitations defense. La Grasta, 358 F.3d at 845. Accordingly, “a Rule 12(b)(6) dismissal on statute of limitations grounds is appropriate only if it is ‘apparent from the face of the complaint’ that the claim is time-barred.” Id. (emphasis added); see also, U.S. v. Strieker, No. 11-14745, 2013 WL 3838069, at *4 (11th Cir. July 26, 2013); Cantonis, 2010 WL 6239354, at *5. Here, the Court finds that the facts necessary to make a choice of law determination9 are *324not clear on the face of the Amended Complaint, so the Court will not engage in a choice of law analysis at this stage in the proceedings in order to determine which state’s statute of limitations applies. See Cantonis, 2010 WL 6239354, at *5 (“A choice of law analysis is premature at this stage because it requires resolution of fact issues beyond the scope of this 12(b)(6) motion to dismiss.”). For these reasons, the Plaintiffs Amended Complaint need only properly allege a claim for relief under any potentially applicable state law in order to survive GECC’s Motion to Dismiss.
The Plaintiff asserts that under either Illinois or Minnesota law,10 the “discovery rule” delayed the accrual of all of his causes of action until the Palm Beach Funds became aware or should have become aware through exercise of reasonable diligence that they were injured through wrongful means. Minnesota Statute § 541.05, Subd. 1(6) provides a six-year statute of limitations “for relief on the ground of fraud, in which case the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.” Additionally, under both Minnesota and Illinois law, “courts have applied the discovery rule in ... negligence actions.” Cantonis, 2010 WL 6239354 at *6 (citing Klempka v. G.D. Searle & Co., 963 F.2d 168, 170 (8th Cir.1992)); see also, United Labs., Inc. v. Savaiano, No. 06 C 1442, 2007 WL 4162808, at *3 (N.D.Ill. Nov. 19, 2007) (“the discovery rule is equally applicable to negligence claims”) (citing Doe v. Montessori Sch. of Lake Forest, 287 Ill.App.3d 289, 223 Ill.Dec. 74, 678 N.E.2d 1082, 1089 (1997)). Thus, according to the Plaintiff, because the Palm Beach Funds’ causes of action did not accrue until at least 2008 when Petters’ purchase financing operation was exposed as a Ponzi scheme, the statute of limitations is not set to expire until at least 2014. GECC, on the other hand, contends that the Plaintiffs own allegations establish that if the Palm Beach Funds exercised reasonable diligence, they would have uncovered Petters’ fraud immediately in 2002 or 2003. The Court disagrees with GECC.
On a Motion to Dismiss, the Court takes the Plaintiffs allegations at face value in assessing whether the Plaintiff plausibly states a claim for relief. Here, the Plaintiff alleges that (1) the Palm Beach Funds did not know of Petters’ fraudulent conduct until September 2008, (2) the Palm Beach Funds did not discover Petters’ fraud through their own diligence, and (3) the Palm Beach Funds could not have discovered Petters’ fraud sooner through reasonable diligence. Am. Compl. ¶¶ 151— 156. Furthermore, the Plaintiff alleges *325that the Palm Beach Funds did not learn of GECC’s alleged wrongdoing until 2009. Id. at ¶ 156. Although GECC asserts that through “reasonable diligence,” the Plaintiff would have uncovered Petters’ fraud immediately, it would be inappropriate at this stage of the proceedings for the Court to determine: (1) what actions would have qualified as “reasonable diligence,” (2) whether the Palm Beach Funds took such actions and thus exercised reasonable diligence, and (3) when the Palm Beach Funds actually learned of Petters’ fraud and GECC’s alleged role in the fraud. Determining these issues at this stage of the proceedings would require the Court to look beyond the allegations of the Amended Complaint and to make findings of fact11 — neither of which is permitted on consideration of a Motion to Dismiss for failure to state a claim.
Therefore, because the statute of limitations defense is an affirmative defense and because the Plaintiff plausibly alleges that his causes of action did not accrue until at least 2008 when the Palm Beach Funds discovered Petters’ fraud, the Court finds that it would be inappropriate to determine at this stage that the Plaintiffs claims are barred by the statute of limitations. As a result, the Court will deny GECC’s Motion to Dismiss on this basis.
III. Count 9 — Negligence
A. Duty
The threshold question in any claim of negligence is the existence of a duty of care owed by the defendant to the plaintiff. GECC contends that Count 9 must be dismissed because the Plaintiff fails to properly allege a duty owed by GECC to the Palm Beach Funds. The Court agrees.
In its Amended Complaint, the Plaintiff alleges that: (1) GECC had a special relationship with Petters and Petters Capital; (2) GECC had a duty to disclose the truth to the Palm Beach Funds; (3) GECC knew that the Palm Beach Funds were to be defrauded or that the Palm Beach Funds were within a class of persons GECC knew were to be defrauded; and (4) GECC owed a duty of care to protect the Palm Beach Funds from being defrauded and victimized by Petters and Petters Capital. In his Response in Opposition to the Motion to Dismiss (ECF No. 42), the Plaintiff goes to great lengths to explain why based upon these factual allegations, GECC owed a duty of care to the Palm Beach Funds, asserting that:
1. Duty, which is a flexible concept, arises where action creates the risk of foreseeable harm, and GECC’s actions created a risk of foreseeable harm;
2. Once GECC “spoke,” it had a duty to make a full and fair disclosure and to speak completely and fully so that its words did not mislead the Palm Beach Funds;
3. GECC had special knowledge of material facts to which the Palm Beach Funds had no access, and thus, GECC had a duty to disclose those facts to the Palm Beach Funds; and
4. GECC and Petters had a special relationship which gave rise to GECC’s duty of care to the Palm Beach Funds. *326PL’s Resp. at 17-20. The Plaintiff further contends that the Court should not grant GECC’s request that Count 9 be dismissed for failure to allege a duty because whether a duty to disclose exists depends on the circumstances of each individual case and determination of this issue is inappropriate at the motion to dismiss stage. Finally, the Plaintiff asserts that GECC is judicially estopped from arguing that it had no duty to disclose Petters’ fraud to the Palm Beach Funds because of a position taken by GECC in a previous case styled Professional Recovery Services, Inc. v. GECC, No. 06-2829 (D.N.J.2006).
i. Judicial estoppel
To begin with, the Court finds that GECC is not judicially estopped from arguing that it did not owe a duty to the Palm Beach Funds. “Judicial estoppel is an equitable doctrine invoked at a court’s discretion.” Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1285 (11th Cir.2002). In order for a court to apply the doctrine of judicial estoppel, “[f]irst, it must be shown that the allegedly inconsistent positions were made under oath in a prior proceeding. Second, such inconsistencies must be shown to have been calculated to make a mockery of the judicial system.” Id. (internal quotation marks omitted) (iquoting Salomon Smith Barney, Inc. v. Harvey, M.D., 260 F.3d 1302, 1308 (11th Cir.2001)). In deciding whether to exercise their discretion and apply judicial es-toppel:
Courts typically consider: (1) whether the present position is “clearly inconsistent” with the earlier position; (2) whether the party succeeded in persuading a tribunal to accept the earlier position, so that judicial acceptance of the inconsistent position in a later proceeding creates the perception that either court was misled; and (3) whether the party advancing the inconsistent position would derive an unfair advantage on the opposing party.
Id. (citing New Hampshire v. Maine, 532 U.S. 742, 750, 121 S.Ct. 1808, 1815, 149 L.Ed.2d 968 (2001)).
In the Professional Recovery Services proceeding,12 the issue was whether GECC owed a duty to conceal corporate information and the alleged fraudulent activity of a collection agency employed by GECC. Arguing that it had no duty to conceal such information, and conversely, that it was permissible for GECC to alert other companies which GECC knew used the collection agency, GECC argued that “[cjorporations should be encouraged to take reasonable steps to inform law enforcement authorities and at-risk entities about information relating to potential security breaches.” Notice of Filing (ECF No. 43), Ex. 3 at 25. This argument— offered by GECC in support of its position that it had no duty to conceal information related to another corporation’s fraudulent activity — is not clearly inconsistent with GECC’s argument here that it had no affirmative duty to disclose its alleged knowledge of Petters’ fraud to the Palm Beach Funds. GECC’s prior assertion that “corporations should be encouraged to take reasonable steps to inform law enforcement authorities and at-risk entities about information relating to potential security breaches” is not the equivalent of taking the position that corporations have *327an affirmative duty to reveal to unrelated third parties any and all knowledge of another’s fraudulent conduct.
Accordingly, the Court refuses to exercise its discretion and invoke judicial es-toppel as the Court finds that the position taken by GECC in the Professional Recovery Services proceeding is not clearly inconsistent with the position taken by GECC in proceeding currently before this Court.
ii. Duty arising from creation of risk of foreseeable harm
The Plaintiff makes a brief argument that Florida, like other jurisdictions, recognizes that a legal duty will arise whenever a human endeavor creates a generalized and foreseeable risk of harming others. In so arguing, the Plaintiff contends that the facts and public policy concerns of this case “demand the imposition of a duty.” However, in the same case cited by the Plaintiff for the above proposition, Langbehn v. Public Health Trust of Miami-Dade County, the U.S. District Court for the Southern District of Florida noted that “the Florida Supreme Court has recently cautioned that ‘abstract notions of sound public policy are not proper judicial considerations’ in determining whether a duty exists.” 661 F.Supp.2d 1326, 1335 (S.D.Fla.2009) (quoting Wallace v. Dean, 3 So.3d 1035, 1041 n.9 (Fla.2009)). The Court agrees and will not impose a duty on GECC based solely upon “abstract notions of sound public policy.”
Furthermore, when courts impose a duty based upon the creation of a risk of foreseeable harm, they generally do so only when the defendant has engaged in some affirmative conduct which has directly placed the plaintiff in harm’s way. Otherwise, “[generally, no duty is imposed on an individual to protect another from harm,” even when his failure to do so may increase the risk of foreseeable harm to that person. Domagala v. Rolland, 787 N.W.2d 662, 668 (Minn.Ct.App.2010); see also, T.W. v. Regal Trace, Ltd., 908 So.2d 499, 503 (Fla. 4th DCA 2005) (noting that although the law generally will recognize a duty when a defendant’s conduct creates a foreseeable zone of risk, “a person or entity ‘generally has no duty to take precautions to protect another against criminal acts of third parties’ ”); Iseberg v. Gross, 366 Ill.App.3d 857, 304 Ill.Dec. 1, 852 N.E.2d 251, 254-55 (2006) (same); Plowman v. Glen Willows Apartments, 978 S.W.2d 612, 614 (Tex.Ct.App.1998) (same). In fact, “that an actor realizes or should realize that action on his part is necessary for another’s aid or protection does not of itself impose upon him a duty to take such action ... unless a special relationship exists ... between the actor and the other which gives the other the right to protection.” Id. (internal quotation marks omitted) (quoting Delgado v. Lohmar, 289 N.W.2d 479, 483 (Minn.1979)).
Here, the duty alleged by the Plaintiff is that GECC had a duty to warn the Palm Beach Funds, a party with which GECC indisputably had no direct contact or relationship, that Petters was perpetrating a fraud. Accordingly, without more, public policy considerations and the alleged creation of a risk of harm as a result of GECC’s failure to act do not give rise to a duty of care owed by GECC to the Palm Beach Funds.
iii. Duty to make a full and fair disclosure
The Plaintiff also asserts that GECC spoke to the Palm Beach Funds through the Recommendation Letter and the GECC Termination Statement and that once GECC spoke, GECC had a duty to make a full and fair disclosure, which included a duty to correct the Recommenda*328tion Letter once GECC realized it was inaccurate. The Court disagrees.
To begin with, the Plaintiffs assertion that GECC spoke to the Palm Beach Funds through the Recommendation Letter and the GECC Termination Statement is questionable.13 Nevertheless, even if GECC did speak to the Palm Beach Funds through the Recommendation Letter and the GECC Termination Statement, the duty to “speak fully” and to correct prior inaccurate disclosures applies only between two parties to a transaction or two parties who have some kind of preexisting, fiduciary-like relationship.14 All of the cases cited by the Plaintiff involve alleged misrepresentations or non-disclosures by parties which have some kind of relationship with each other or by parties in connection with public securities offerings or other business transactions, scenarios which are not present here. For example, the Plaintiff cites to Rochester Methodist Hospital v. Travelers Insurance Company for the following proposition:
Though one may be under no duty to speak as to a matter, if he undertakes to do so, either voluntarily or in response to inquiries, he is bound not only to state truly what he tells, but also not to suppress or conceal any facts within his knowledge which materially qualify those stated. If he speaks at all, he must make a full and fair disclosure.
728 F.2d 1006, 1018 (8th Cir.1984). The Plaintiff, however, neglects to mention that Rochester Methodist was a fraud case in which an employee of the plaintiffs insurance company made a misrepresentation to the plaintiff regarding a claim which was previously denied by the insurance company. Id. The Rochester Methodist court made the above-cited statement of law in order to reinforce its conclusion that “half truths may amount to fraudulent misrepresentations.” Id. The case had nothing to do with negligence, and more importantly, the plaintiff and the defendant insurance company had an ongoing relationship as insurer and insured. Accordingly, the Rochester Methodist opinion provides no support for the proposition that once GECC indirectly spoke to the Palm Beach Funds, a party with whom the GECC had no direct relationship, it owed some kind of negligence-based duty to the Palm Beach Funds to make a full and fair disclosure and to correct prior inaccurate disclosures.
The Plaintiff also cites to Rudolph v. Arthur Andersen & Company, 800 F.2d 1040 (11th Cir.1986), a case involving statements made by an accounting firm in connection with a public securities offering. The statements made by the accounting firm were accurate when made. However, the plaintiff alleged that that accounting firm eventually became aware that DeLo-rean, the company for whom the accounting report was made, was using its accounting statements and reports to commit a significant fraud. The Rudolph court held:
Standing idly by while knowing one’s good name is being used to perpetrate a *329fraud is inherently misleading. An investor might reasonably assume that an accounting firm would not permit inclusion of an audit report it prepared in a placement memo for an offering the firm knew to be fraudulent, and that such a firm would let it be known if it discovered to be fraudulent an offering with which it was associated. It is not unreasonable to expect an accountant, who stands in a “special relationship of trust vis-a-vis the public,” and whose “duty is to safeguard the public interest,” to disclose fraud in this type of circumstance, where the accountant’s information is obviously superior to that of the investor, the cost to the accountant of revealing the information minimal, and the cost to investors of the information remaining secret potentially enormous.
800 F.2d at 1044-45 (internal citations omitted). The Plaintiff maintains that if the accounting firm in Rudolph had a duty to correct its inaccurate report and disclose DeLorean’s fraud to potential investors, then GECC, a sophisticated commercial bank, had a similar duty. However, the duties to the public of an accounting firm or law firm preparing a report which is to be included in a company’s public offering are unique. Furthermore, complex securities laws play an important role in defining the duties of professionals working on public securities offerings. GECC, who was not Petters’ depository bank, provided no accounting services to Petters, and played no part in any Petters’ public securities offerings, had no such public duty.
In W.W. Vincent and Company v. First Colony Life Insurance Company, another case cited by the Plaintiff, the court considered whether the defendant had a duty to speak in the context of a fraudulent concealment claim, not a negligence claim. 351 Ill.App.3d 752, 286 Ill.Dec. 734, 814 N.E.2d 960, 969 (2004). More importantly, the plaintiff and the defendant in W.W. Vincent were parties to a distinct business transaction to which the alleged nondisclosure was material. Id. In fact, the Court specifically noted that “[t]he concealment of a material fact during a business transaction is actionable if done with the intention to deceive under circumstances creating an opportunity and duty to speak.” Id. (internal citations omitted) (emphasis added). It was in that context that the court held that the defendant imposed upon itself a duty to disclose by making a misleading statement to the plaintiff. Id.
Similarly, in Jetpay Merchant Services, LLC v. Miller, the plaintiff alleged that the defendants, acting as directors or officers of USN Corporation, misrepresented the way in which USN Corporation shipped goods to its customers, thereby inducing the plaintiff to enter into an agreement it would otherwise have avoided, and further misrepresented that USN Corporation would reimburse the plaintiff for its losses, thereby stringing the plaintiff along and causing the plaintiff to incur additional losses. Civ. Action No. 3:07-CV-0950-G, 2007 WL 2701636, at *1 (N.D. Tex Sept. 17, 2007). In the context of assessing the plaintiffs negligent misrepresentation claims, the court noted that “[e]ven with- ' out a special relationship, there is always a duty to correct one’s own prior false or misleading statement.” Id. at *5 (alteration in original) (quoting Trs. of the Nw. Laundry & Dry Cleaners Health & Welfare Trust Fund v. Burzynski, 27 F.3d 153, 157 (5th Cir.1994), cert. denied, 513 U.S. 1155, 115 S.Ct. 1110, 130 L.Ed.2d 1075 (1995)).15 However, like the parties *330in W.W. Vincent (and unlike GECC and the Palm Beach Funds), the plaintiff and the defendants in Jetpay were parties to a distinct business transaction. Thus, the Jetpay case simply stands for the simple proposition that the duties owed between parties to a business transaction include the duty to make full and fair disclosures upon speaking and to correct misleading statements.
The cases cited by the Plaintiff, including specifically Rudolph, W.W. Vincent, Jetpay, and Rochester Methodist, are factually dissimilar from the case now before the Court and thus provide little support for the proposition that once GECC “spoke” to the Palm Beach Funds, a party with whom the GECC had no direct relationship, it owed some kind of negligence-based duty to the Palm Beach Funds to make a full and fair disclosure and to correct prior inaccurate disclosures. In the absence of any kind of alleged relationship between GECC and the Palm Beach Funds, the Court finds that the duty to make a full and fair disclosure after choosing to speak is not applicable here. Accordingly, the fact that GECC allegedly spoke to the Palm Beach Funds did not give rise to any kind of duty which required GECC to make a “full and fair disclosure” and to correct any and all prior misstatements.
iv. Duty arising from special knowledge
The Plaintiff also contends that GECC had a duty to disclose and warn the Palm Beach Funds of Petters’ fraud since it had “special knowledge” of material facts to which the Palm Beach Funds did not have access.
However, like the duty to make a full and fair disclosure upon speaking, the duty to disclose “special knowledge” of material facts arises only in the context of a business transaction to which both the plaintiff and the defendant are a party or where both parties had some kind of preexisting relationship. Stephenson v. Deutsche Bank AG, 282 F.Supp.2d 1032, 1060-61 (D.Minn.2003);16 Albion Alliance Mezzanine Fund, L.P. v. State St. Bank & Trust Co., 8 Misc.3d 264, 797 N.Y.S.2d 699, 704 (2003), aff'd. 2 A.D.3d 162, 767 N.Y.S.2d 619 (2003) (“Although a duty to disclose has sometimes been found to arise where one party has superior knowledge, the context has invariably involved direct negotiations between parties to a business transactions.”); Hooper v. Barnett Bank of *331West Fla., 474 So.2d 1253, 1257 (Fla. 1st DCA 1985) (acknowledging that although even a bank-depositor relationship does not ordinarily impose a duty of disclosure upon the bank, one of the circumstances in which a duty to disclose may arise between a bank and its depositor is when one who has knowledge of material facts to which other party does not have access may have a duty to disclose these facts to other parties). Here, as previously discussed, the Plaintiff does not allege that GECC and the Palm Beach Funds were parties to a business transaction or that they had any kind of direct relationship with each other, let alone a fiduciary relationship.
Accordingly, the Court finds that the duty to disclose “special knowledge” of material facts to which another party did not have access is inapplicable in the case now before the Court and does not support the Plaintiffs allegation that GECC had a duty to disclose certain information to the Palm Beach Funds.
v. Duty arising from special relationship
Lastly, the Plaintiff contends, albeit briefly, that GECC had a duty to prevent the criminal actions of Petters because GECC had a special relationship with Pet-ters and had the ability to control Petters. For the reasons discussed below, the Court finds that the Plaintiff does not allege a plausible duty of care owed by GECC to the Palm Beach Funds based upon GECC’s alleged special relationship with Petters.
As a general rule, there is no duty to control the conduct of a third person so as to prevent him from causing physical harm to another unless: (a) a special relation exists between the actor and the third person which imposes a duty upon the actor to control the third person’s conduct, or (b) a special relation exists between the actor and the other which gives to the other a right to protection. Restatement (Second) of Torts § 315 (1965); Reider v. Dorsey, 98 So.3d 1223, 1226-27 (Fla. 3d DCA 2012) (noting that Florida follows the Restatement (Second) approach); Estate of Johnson v. Condell Mem’l Hosp., 119 Ill.2d 496, 117 Ill.Dec. 47, 520 N.E.2d 37, 40 (1988) (same, as to approach followed by Illinois); Jaramillo v. Weaver, No. A06-2343, 2007 WL 4303775, at *4 (Minn. Ct.App. Dec. 11, 2007) (same, as to approach followed by Minnesota). Here, the Plaintiff contends that a special relationship existed between Petters and GECC such that GECC had the ability to control Petters’ conduct and that as a result, GECC had a duty to control Petters’ conduct by disclosing the nature of Petters’ fraudulent enterprise to the Palm Beach Funds.
To begin with, the types of “special relationships” which give rise to negligence-based duties of care typically fall into the following five categories:
1. Duty of parent to control conduct of child;
2. Duty of master to control conduct of servant;17
*3328. Duty of possessor of land or chattels to control conduct of licensee;
4. Duty of those in charge of persons who have dangerous propensities;18 and
5. Duty of person having custody of another to control conduct of third persons.19
Restatement (Second) of Torts §§ 315-20. Within these five categories, courts have recognized special relationships in a variety of contexts, including but not limited to: employer-employee, landlord-tenant, landowner-invitee, school-minor, university-adult student, car rental agency-customer, and innkeeper-guest. Janis v. Pratt & Whitney Can., Inc., 870 F.Supp.2d 1226, 1230-31 (M.D.Fla. 2005). The alleged relationship between GECC and Petters, however, does not fall into any of the five categories and bears no resemblance to the examples of recognized special relationships. Although the foregoing list of recognized relationships is not necessarily an exclusive one, under the special relationship exception to the general rule, “the Restatement suggests that the duty to aid or protect another will be imposed only in relationships involving some degree of dependence or mutual dependence.” Newton v. Tinsley, 970 S.W.2d 490, 493 (Tenn.Ct. App.1997) (citing Restatement (Second) of Torts § 314A cmt. b (1964)).
Additionally, it is highly implausible that GECC could have controlled the criminal conduct of Petters, who by all accounts was a professional fraudster who orchestrated a multi-billion dollar Ponzi scheme, by refusing to authorize the filing of the GECC Financing Statement or by “correcting” the Recommendation Letter. See Am. Compl. ¶238, ¶240. Further, it is equally implausible and logically circular that (1) GECC’s duty of care to the Palm Beach Funds arose from its ability to control Petters by means of exposing Petters’ fraudulent conduct; (2) the only way GECC could have fulfilled its duty of care would have been to expose Petters’ fraudulent conduct; and (3) GECC breached its duty of care to the Palm Beach Funds by failing to expose Petters’ fraudulent conduct. This kind of circular logic flies in the face of the well-established law of negligence.
For these reasons, the Court finds that the Plaintiffs contention that he properly alleges that GECC had a duty to disclose Petters’ fraud because of GECC’s special relationship with Petters is unpersuasive.
vi. The Plaintiff fails to plausibly allege a duty
Although the Plaintiff need not meet the heightened Rule 9(b) standards when pleading a claim for negligence, the Plaintiff must still allege a “plausible” *333claim that meets Rule 8(a)’s pleading standard and the standards articulated by the Supreme Court of the United States in Twombly and Iqbal. The Court finds that the Plaintiff fails to do so.
In Count 9, the Plaintiff makes the following allegations regarding the duty of care owed by GECC to the Palm Beach Funds:
283. GECC had a special relationship with Petters and Petters Capital.
234. GECC had a duty to disclose the truth to the Palm Beach Funds.
235. GECC knew that the new lender to Petters Capital, the Palm Beach Funds, was to be defrauded. Alternatively, the Palm Beach Funds were within a class of persons GECC knew were to be defrauded, ie., lenders to Petters Capital.
236. GECC owed a duty of care to protect the Palm Beach Funds from being defrauded and victimized by Petters and Petters capital.
237. GECC breached this duty by knowingly placing its agent (Petters Capital) in a position to commit fraud upon the Palm Beach Funds (via the GECC Financing Statement Termination) and its agent did so while acting within the granted scope of authority.
238. GECC had the ability to control Petters Capital and thwart its efforts to defraud the Palm Beach Funds by refusing to appoint Petters Capital as its agent to terminate the GECC Financing Statement.
239. GECC further had the continuing ability to control Petters and Petters Capital by disclosing to law enforcement, regulators, the public, Petters Capital’s or Costco’s banks, or the Palm Beach Funds GECC’s knowledge of the fraud.
240. GECC had the continuing ability to control Petters and Petters Capital by correcting the Recommendation Letter.
Am. Compl. ¶¶ 233-40. Accepting these allegations as true for the purposes of the Motion to Dismiss, the Plaintiff still fails to allege a plausible duty of care. The con-elusory statement that GECC “owed a duty of care” is insufficient. The Plaintiff must allege sufficient facts which plausibly establish that GECC owed a duty of care to the Palm Beach Funds. The Plaintiff fails to do so. As discussed above, not one of the theories advanced by the Plaintiff is applicable here such that the Court can find that the factual allegations contained in the Amended Complaint plausibly establish a duty of care.
Additionally, “[a] bank has no duty to third parties to disclose information about a [bank] customer’s account.” Kesselman v. Nat’l Bank of Ariz., 188 Ariz. 419, 422, 937 P.2d 341 (Ariz.Ct.App. 1996).20 More specifically, “[a] bank ordinarily does not have an obligation to dis*334close information regarding a borrower to the borrower’s investors ... even where the bank might benefit from its silence.” Albion Alliance Mezzanine Fund, L.P., 797 N.Y.S.2d at 704 (emphasis added); see also, 9 C.J.S. Banks and Banking § 250. In fact, “[generally, banks have a duty to their ‘customers not to disclose the customers’ financial conditions to third parties.’” Kesselman, 188 Ariz. at 422, 987 P.2d 341 (emphasis added); Hooper, 474 So.2d at 1259 (“a bank has a duty not to disclose the financial condition of its customers”). The fact that it is alleged that Petters and GECC had ended their borrower/lender relationship at the time of GECC’s alleged negligence only strengthens the Court’s conclusion that GECC owed no duty of disclosure to the Palm Beach Funds.
Based upon the Plaintiffs allegations and for the additional reasons just discussed, the Court finds that the Plaintiff fails to plausibly allege a duty of care.
B. Breach
In addition to the Plaintiffs failure to allege a duty of care, Count 9 also fails to state a claim on the basis that the Plaintiff does not adequately allege how GECC breached its alleged duty of care. The only allegation pertaining to GECC’s breach is the following: “GECC breached [its] duty by knowingly placing its agent (Petters Capital) in a position to commit fraud upon the Palm Beach Funds (via the GECC [Termination Statement]) and its agent did so while acting within the granted scope of authority.” Am. Compl. § 237. Accepting this allegation at face value, it appears that the Plaintiff alleges that GECC had an overarching duty to protect the Palm Beach Funds from all aspects of Petters’ fraudulent conduct and breached this general duty of protection by “knowingly” allowing Petters Capital, as its agent, to defraud the Palm Beach Funds by filing the GECC Termination Statement. Not only is the statement that GECC acted “knowingly” confusing in the context of a negligence claim, but it is entirely implausible that GECC breached whatever alleged duty of care it owed to the Palm Beach Funds simply by authorizing GECC to file a UCC termination statement. Accordingly, the Court finds that the Plaintiff fails to plausibly allege the element of breach.
C. Count 9 shall be dismissed for failure to state a claim
For the reasons just discussed, the Court finds that Count 9 must be dismissed as the Plaintiff fails to plausibly allege a duty of care or a breach of that duty and thus, fails to state a claim for negligence.
IV. Fraud claims — Counts 3, 4, 5, 7, and 8
The Plaintiff institutes various fraud claims — five in total — which at their core, all generally seek to remedy the same alleged wrongdoing: GECC’s failure to alert the Palm Beach Funds to Petters’ fraudulent conduct after GECC allegedly discovered this fraudulent conduct. For the reasons discussed below, the Court finds that all five counts fail to state claims for relief which are facially plausible.
A. Counts 3 and 5 — Fraud by omission and fraudulent concealment
In Count 3 of the Amended Complaint, the Plaintiff asserts a cause of action against GECC for fraud by omission. In Count 5 of the Amended Complaint, the Plaintiff asserts a cause of action against GECC for fraudulent concealment. Fraud by omission and fraudulent concealment are very similar forms of common law fraud. Fraud by *335omission is common law fraud by means of a failure to disclose a material fact— rather than by means of an affirmative misrepresentation — in the face of the a duty to disclose that fact to the plaintiff. Fraudulent concealment is common law fraud by means of actively concealing a material fact in the fact of a duty to disclose that fact to the plaintiff. Specifically, in Florida,21 the elements of a cause of action for fraudulent concealment or fraud by omission are:
1. The defendant concealed or failed to disclose a material fact;
2. The defendant knew or should have known that the material fact should be disclosed or not concealed;
3. The defendant acted in bad faith;
4. The defendant knew that by concealing or failing to disclose the material fact, the plaintiff would be induced to act;
5. The plaintiff suffered damages as a result of the concealment or failure to disclose; and
6. The defendant had a duty to speak.
R.J. Reynolds Tobacco Co. v. Martin, 53 So.3d 1060, 1068-69 (Fla. 1st DCA 2010) (citing Friedman v. Am. Guardian Warranty Servs., Inc., 837 So.2d 1165, 1166 (Fla. 4th DCA 2003); Gutter v. Wunker, 631 So.2d 1117, 1118 (Fla. 4th DCA 1994)). The scenarios which may give rise to a duty to speak include: (a) one party to a transaction who speaks has a duty to say enough to prevent his words from misleading the other party; (b) one party to a transaction who has special knowledge of material facts to which the other party does not have access may have a duty to disclose those facts to the other party; (c) one party to a transaction who stands in a confidential or fiduciary relation to the other party to a transaction has a duty to disclose material facts. Klein v. First Edina Nat. Bank, 293 Minn. 418, 196 N.W.2d 619, 622 (Minn.1972); Friedman, 837 So.2d at 1166.
As discussed in Section III, supra,22 the common thread running through each scenario which gives rise to a duty to speak is that both the plaintiff and the defendant must have been parties to a transaction or must have had some kind of preexisting fiduciary relationship. In the Amended Complaint, the Plaintiff alleges in Count 3 that “GECC had a duty to disclose the truth about the [Petters’ conspiracy] to the Palm Beach Funds,” and in Count 5 that “GECC had a duty to disclose the truth to the Palm Beach Funds.” Am. Compl. ¶¶ 188, 202. However, the Plaintiff alleges no facts which show that the Palm Beach Funds and GECC were parties to a transaction or had any kind of relationship with each other, let alone a fiduciary relationship. Because the Plaintiff fails to allege that the Palm Beach Funds and GECC were involved in a transaction or *336had any kind of relationship with each other, the Plaintiff cannot establish that GECC’s duty to disclose Petters’ fraudulent conduct arose from any one of the three scenarios described above. Accordingly, the Plaintiff fails to allege that GECC had a duty to speak, and Counts 3 and 5 each fail to state a claim for fraud.
Because Counts 3 and 5, which seek damages on account of GECC’s alleged fraudulent concealment or fraud by omission, fail to plausibly allege that GECC had a duty to speak, the Court will dismiss Counts 3 and 5 for failure to state a claim.
B. Counts 4 and 8 — Fraudulent misrepresentation and fraud
In Count 4, the Plaintiff asserts a claim for fraudulent misrepresentation. In Count 8, the Plaintiff asserts a claim for fraud. Fraud and fraudulent misrepresentation refer to the same cause of action — common law fraud.23 The essential elements of common law fraud or fraudulent misrepresentation are:24 (1) a false statement of material fact; (2) defendant’s knowledge that the statement was false; (3) defendant’s intent that the statement induce plaintiff to act; (4) plaintiffs reliance upon the truth of the statement; and (5) plaintiffs damages resulting from reliance on the statement. Butler v. Yusem, 44 So.3d 102, 105 (Fla.2010); Trim-Central, Inc. v. Great S. Xpress, Inc., No. A09-460, 2010 WL 346388, at *6 (Minn.Ct. App. Feb. 2, 2010) (outlining the elements of common law fraud under Minnesota law); Wernikoff v. Health Care Serv. Corp., 376 Ill.App.3d 228, 315 Ill.Dec. 524, 877 N.E.2d 11, 16 (2007) (outlining the elements of common law fraud under Illinois law). GECC asserts that Count 4 and Count 8 each fail to state a claim for fraud because neither recites with sufficient particularity under Federal Rule of Civil Procedure 9(b) the elements of a cause of action for common law fraud. The Court agrees.
i. Count b — Fraudulent misrepresentation
In Count 4, the Plaintiff re-alleges paragraphs 1 through 165 and includes the following additional allegations:
193. Given that there was no “excellent” customer status at GECC, GECC knew that the Recommendation Letter was false.
194. Given the content of the Kroll Re*337port25 as well as Midkiff s fervent view that Petters lacked personal integrity,26 GECC knew that the Recommendation Letter was false.
195. Given the discovery of the Petters conspiracy, GECC knew that the Recommendation Letter was false.
196. GECC intended that the Recommendation Letter reach and influence a class of persons of which the Palm Beach Funds were members.
197. The Palm Beach Funds, through their agent, justifiably relied upon the Recommendation Letter to their detriment and as a result, were damaged.
198. As a result, the Palm Beach Funds suffered over $1 billion in damages.
Am. Compl. ¶¶ 193-198. These allegations are insufficient. To begin with, the Plaintiffs fraudulent misrepresentation claim must be dismissed because it fails to identify a single false statement of material fact. The alleged falsity of the Recommendation Letter does not qualify as the identification of a false statement of material fact. The Recommendation Letter is a letter, not a fact, and it contains several different statements of fact. In order to state a claim for fraudulent misrepresentation, the Plaintiff must identify the false statement or statements of material fact which form the basis of the Plaintiffs fraudulent misrepresentation claim. It must not be left to GECC, as the defendant, or the Court to guess which statements in the Recommendation Letter are the allegedly false ones.
Furthermore, when pleading fraud, Rule 9(b) of the Federal Rules of Civil Procedure requires that the plaintiff must state with particularity the circumstances constituting the fraud. “Circumstances” constituting fraud which must be pled with particularity include such matters as “time, place, and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby.” Moua v. Jani-King of Minn., Inc., 613 F.Supp.2d 1103, 1110 (D.Minn.2009) (quoting Commercial Prop. Invs., Inc. v. Quality Inns Int’l, Inc., 61 F.3d 639, 644 (8th Cir.1995)); see also, Chi. Materials Corp. v. Hildebrandt (In re Hildebrandt), Adv. No. 08-A-00336, 2008 WL 5644893, at *4 (Bankr.N.D.Ill.Dec. 18, 2008) (noting that “circumstances must include the “who, what, when, where, and how: the first paragraph of any newspaper story’ ”). Because the Plaintiff fails to identify even a single false statement of material fact, the Plaintiff not only fails to satisfy Rule 9(b), but he also fails to satisfy Rule 8(a) with respect to the threshold element of fraudulent misrepresentation.
Even if the Court assumed that it was sufficient for the Plaintiff to allege that the Recommendation Letter was false, the Plaintiff also fails to plausibly allege that *338GECC had the specific intent to induce the Palm Beach Funds to act in reliance upon the Recommendation Letter and that the Palm Beach Funds actually relied upon the Recommendation Letter. Spex, Inc v. Joy of Spex, Inc., 847 F.Supp. 567, 579 (N.D.Ill.1994) (“Fraud is an intentional tort, and a plaintiff must demonstrate that defendant had a specific intent to deceive or mislead and cause damage to that plaintiff through the defendant’s fraudulent misrepresentations.”); Cruise v. Graham, 622 So.2d 37, 40 (Fla. 4th DCA 1993) (fraud is an intentional tort); Dresser v. Healthcare Servs., Inc., No. 8:12-cv-1572-T-24-MAP, 2013 WL 82155, at *4 (M.D.Fla. Jan. 7, 2013) (“[I]t is not necessary that the false statement be made directly to the injured party, ‘provided [that the statement is] made with the intent that it shall reach ... and be acted on by the injured party.’ ”). The Plaintiff alleges that “GECC intended that the Recommendation Letter reach and influence a class of persons of which the Palm Beach Funds were members.” Am. Compl. ¶ 196. This allegation that GECC intended the Recommendation Letter to “influence a class of persons” is not sufficient to plausibly allege that at the time the Recommendation Letter was written, GECC intended the Recommendation Letter to induce the Palm Beach Funds to act.
The Plaintiff also alleges that the “[t]he Palm Beach Funds, through their agent, justifiably relied upon the Recommendation Letter.” Am. Compl. ¶ 197. However, the Plaintiff, earlier in the Amended Complaint, also alleges the following:
The Recommendation Letter was shared by Petters with Vennes. Vennes in turn waxed poetic about the successful Pet-ters-GECC relationship as a part of his efforts to convince the Palm Beach Funds to lend to Petters. Vennes’ representations to the Palm Beach Funds in regards to Petters’ “excellent” relationship with GECC were influenced by the Recommendation Letter. The Palm Beach Funds, through its agent, justifiably relied upon these representations.
Am. Compl. ¶ 127 (emphasis in original). This earlier and more specific allegation indicates that the Palm Beach Funds never actually saw the Recommendation Letter. Instead, the Palm Beach Funds allegedly relied on the representations of Vennes — not GECC — who was “influenced” by the Recommendation Letter.
It is true that “false representations need not be made directly to the party claiming to have relied on them, but may instead be indirect, “where a party makes false representations to another with the intent or knowledge that they be exhibited or repeated to a third party for the purpose of deceiving him.’ ” Amerigas Propane, L.P. v. BP Am., Inc., 691 F.Supp.2d 844, 853 (N.D.Ill.2010) (quoting St. Joseph Hosp. v. Corbetta Const. Co., Inc., 21 Ill.App.3d 925, 316 N.E.2d 51, 72 (1974)); Harrell v. Branson, 344 So.2d 604, 606 (Fla. 1st DCA 1977). “However, this requires reliance on the particular statement at issue, even though it is not made directly to the complaining party.” Amerigas Propane, 691 F.Supp.2d at 853. Based upon the conflicting allegations discussed above, the Plaintiff does not plausibly allege that the Palm Beach Funds relied directly upon the allegedly false Recommendation Letter or the allegedly false statements of fact contained therein.
For the reasons discussed above, the Court finds that the Plaintiff fails to state a cause of action for fraudulent misrepresentation based upon the Plaintiffs failure to sufficiently allege pursuant to Rule 9(b): (1) A false statement of material fact; (2) GECC’s intent that the statement induce the Palm Beach Funds to act; and (3) the Palm Beach Funds’ reliance on the state*339ment or statements contained in the Recommendation Letter. Accordingly, Count 4 will be dismissed.
ii. Count 8 — Fraud
Count 8 is simply titled “fraud,” which the Court assumes to mean “common law fraud.”27 Although inartfully pled, the crux of Count 8 is that GECC’s alleged appointment of Petters Capital as its agent to terminate the GECC Financing Statement furthered the Petters’ conspiracy and constituted fraud upon the Palm Beach Funds. For the reasons discussed below, the Court finds that Count 8 fails to state a claim upon which relief can be granted.
As discussed above, the elements of common law fraud are as follows: (1) a false statement of material fact; (2) defendant’s knowledge that the statement was false; (3) defendant’s intent that the statement induce plaintiff to act; (4) plaintiffs reliance upon the truth of the statement; and (5) plaintiffs damages resulting from reliance on the statement. Wernikoff, 315 Ill.Dec. 524, 877 N.E.2d at 16. The following allegations are contained in Count 8 of the Amended Complaint:
223. The Plaintiff re-alleges paragraphs 1 through 165.
224. GECC had a duty to disclose “the truth” to the Palm Beach Funds.
225. GECC knew that the GECC Termination Statement would serve to further the Petters’ conspiracy.
226. GECC knew that the GECC Termination Statement would be utilized to defraud future lenders to Petters.
227. GECC knew that the new lender to Petters, the Palm Beach Funds, was to be defrauded. Alternatively, the Palm Beach Funds were within a class of persons GECC knew were to be defrauded.
228. GECC appointed Petters Capital as its agent to terminate the GECC Financing Statement.
229. GECC knowingly placed its agent, Petters Capital, in a position to commit fraud upon the Palm Beach Funds, and its agent did so while acting within the granted scope of authority. Accordingly, GECC is liable for the acts done pursuant to that agency.
230. GECC had the ability to control Petters Capital and thwart its efforts to defraud the Palm Beach Funds by refusing to appoint Petters Capital as its agent to terminate the GECC Financing Statement.
231. As a result, the Palm Beach Funds suffered over $1 billion in damages.
Am. Compl. ¶¶ 223-31.
As indicated by the recitation of the allegations contained in Count 8, the Plaintiff fails to allege any elements of common *340law fraud. Most importantly, the Plaintiff fails to identify a false statement of material fact which the defendant knew was false. Because Count 8 fails to identify any false statement, the Plaintiff also fails to allege that (1) GECC intended that the statement induce the Palm Beach Funds to act; (2) the Palm Beach Funds relied upon the truth of the statement; and (3) the Palm Beach Funds were damaged as a result of relying on the statement. Furthermore, even if the Plaintiffs allegations could be viewed as proceeding under an agency theory, the Plaintiff still fails to allege that his agent, while acting within its scope of authority, made a false statement of material fact which the agent knew was false. The only thing that the Plaintiff alleges that Petters Capital did in its capacity as GECC’s agent is file the GECC Termination Statement. This single act hardly qualifies as fraud.
For these reasons, Count 8 fails to state a claim for fraud which is plausible on its face and will be dismissed.
C. Count 7 — Negligent misrepresentation
In Count 7 of the Amended Complaint, the Plaintiff asserts a cause of action for negligent misrepresentation. GECC contends that Count 7 must be dismissed for failure to state a claim for the same general reasons that the fraudulent misrepresentation and fraud claims are deficient. The Court agrees.
The tort of negligent misrepresentation has been applied in narrow circumstances,28 usually involving a discrete business transaction between the plaintiff and the defendant where the defendant owes the plaintiff a duty to communicate accurate information. Accordingly, negligent misrepresentation is defined as follows:
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
Gilchrist Timber Co. v. ITT Rayonier, Inc., 696 So.2d 334, 337 (Fla.1997) (citing Restatement (Second) of Torts § 552 (1977)); see also, Florenzano v. Olson, 387 N.W.2d 168, 174 n.3 (Minn.1986) (adopting the Second Restatement’s definition of negligent misrepresentation); McMahan v. Deutsche Bank AG, No. 12 C 4356, 2013 WL 1403073, at *7 (N.D.Ill. Apr. 5, 2013) (same). A defendant’s liability for negligent misrepresentation is limited to loss suffered: (1) by the person or one of a limited group of persons for whose benefit and guidance the misrepresenter intends to supply the information or knows that the recipient intends to supply it; and (2) through reliance upon it in a transaction that the misrepresenter intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. Gilchrist Timber, 696 So.2d at 337 (citing Restatement (Second) of Torts § 552). However, “[t]he liability *341of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.” Id.
Based upon the above definition, the Plaintiff must allege the following elements in order to state a claim for negligent misrepresentation: (1) a misrepresentation of material fact in the course of the defendant’s business, profession, or employment, or in any other transaction in which he has a pecuniary interest; (2) the defendant either knew of the misrepresentation, made the misrepresentation without knowledge of its truth or falsity, or should have known the representation was false; (3) the defendant intended to induce another to act on the misrepresentation; and (4) injury resulted to a party acting in justifiable reliance upon the misrepresentation. Smith v. Questar Capital Corp., No. 12-cv-2669 (SRN/TNL), 2013 WL 3990319, at *12 (D.Minn. Aug. 2, 2013) (citing Baggett v. Elec. Local 915 Credit Union, 620 So.2d 784, 786 (Fla. 2d DCA 1993)). Essentially, the elements of negligent misrepresentation and the elements of fraudulent misrepresentation are identical, except that the defendant need not know the statement is false and that the defendant and the plaintiff must have some kind of relationship such that the defendant owes a duty to the plaintiff to communicate accurate information. McMahan, 2013 WL 1403073, at *7 (internal quotations and citations omitted).
Here, the basis of Count 7, just like the basis of Count 4, is the alleged falsity of the Recommendation Letter. Accordingly, in addition to re-alleging paragraphs 1 through 165, the Plaintiff makes the following allegations:
214.GECC intended that the Recommendation Letter reach and influence a class of persons of which the Palm Beach Funds were members.
215. Given that there was no “excellent” customer status at GECC, GECC knew that the Recommendation Letter was false, should have known it was false, or was without knowledge of its truth or falsity.
216. Given the content of the Kroll Report as well as Midkiffs fervent view that Petters lacked personal integrity, GECC knew that the Recommendation Letter was false, should have known it was false, or was without knowledge of its truth or falsity.
217. Given the discovery of Petters’ fraud, GECC knew that the Recommendation Letter was false, should have known it was false, or was without knowledge of its truth or falsity.
218. GECC was negligent in issuing the Recommendation Letter.
219. GECC was negligent in not correcting the Recommendation Letter.
220. GECC intended to induce reliance by recipients of the Recommendation Letter, which was issued “To whom it may concern.”
221. The Palm Beach Funds, through their agent, justifiably relied upon the Recommendation Letter to their detriment and as a result, were damaged.
222. As a result, the Palm Beach Funds suffered over $1 billion in damages.
Am. Compl. ¶¶ 213-222. Again, as with Count 4, the Plaintiff fails to identify a single false statement of material fact. Alleging that the Recommendation Letter is false does not qualify as an identification of a false statement of material fact. The Recommendation Letter contains numerous statements of fact. In order to state a claim for negligent misrepresentation, the Plaintiff must identify the particular false *342statement or statements of material fact which form the basis of the Plaintiffs negligent misrepresentation claim. Furthermore, when pleading fraud, which includes negligent misrepresentation, Rule 9(b) of the Federal Rules of Civil Procedure requires that a party must state with particularity the circumstances constituting the fraud. “Circumstances” constituting fraud which must be pled with particularity include such matters as “time, place, and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby.” Moua, 613 F.Supp.2d at 1110 (quoting Commercial Prop. Invs., Inc., 61 F.3d at 644); see also, In re Hildebrandt, 2008 WL 5644893, at *4. Because the Plaintiff fails to particularly identify even a single false statement of material fact, the Plaintiff not only fails to satisfy Rule 9(b), but he also fails to satisfy Rule 8(a) with respect to the threshold element of negligent misrepresentation.
Additionally, and equally as importantly, the Plaintiff fails to allege that GECC had a pecuniary interest in supplying the alleged misinformation. Unless the defendant has a public duty to supply the information at issue, a plaintiff may state a claim for negligent misrepresentation “only when the defendant has a pecuniary interest in the transaction in which the information is given. If he has no pecuniary interest and the information is given purely gratuitously, he is under no duty to exercise reasonable care and competence in giving it.” Blumstein v. Sports Immortals, Inc., 67 So.3d 437, 440 (Fla. 4th DCA 2011) (quoting Restatement (Second) of Torts § 552 cmt. e).29 Indeed, courts have held that “the central principle operating [of the Second Restatement view] is that the defendant supplier of information must have a pecuniary interest in the transaction or context in which the information is supplied in order to merit the imposition of a duty of care in obtaining and communicating the information.” Sports Immortals, Inc., 67 So.3d at 441 (quoting State by Bronster v. U.S. Steel Corp., 82 Hawai’i 32, 919 P.2d 294, 308 (1996)).
Here, as discussed extensively in Section 111(A), supra, the Plaintiff fails to allege that GECC had a public duty to provide the information at issue. Accordingly, the Plaintiff must allege that GECC had some kind of pecuniary interest in the transac*343tion in which the information was given and that the information was not given gratuitously. Because the Plaintiff fails to do so, Count 7 will be dismissed for the additional reason that the Plaintiff fails to allege that GECC had a pecuniary interest in supplying the alleged misinformation.
V. Counts 1 and 6 — Conspiracy to commit fraud and conspiracy to commit fraudulent concealment
In order to state a claim for civil conspiracy, the Plaintiff must allege the following: “(1) an agreement between two or more parties; (2) to perform an unlawful act; (3) the doing of some overt act in pursuance of the conspiracy, and (4) damage to plaintiff as a result of the acts done under the conspiracy.” Bray & Gillespie Mgmt. LLC v. Lexington Ins. Co., 527 F.Supp.2d 1355, 1370 (M.D. Fla. 2007) (citing Fla. Fern Growers Ass’n v. Con cerned Citizens of Putnam Cnty., 616 So.2d 562, 565 (Fla. 5th DCA 1993)); see also, Vance v. Chandler, 231 Ill.App.3d 747, 173 Ill.Dec. 525, 597 N.E.2d 233, 236 (1992) (citations omitted); Tatone v. Sun-Trust Mortg., Inc., 857 F.Supp.2d 821, 838-39 (D.Minn.2012). “[E]ach [co-conspirator] ‘need only know of the scheme and assist in it in some way to be held responsible for all of the acts of his cocon-spirators.’ ” SunGard Pub. Sector, Inc. v. Innoprise Software, Inc., No. 6:10-cv-1815-Orl-28GJK, 2012 WL 360170, at *7 (M.D.Fla. Feb. 2, 2012) (quoting Charles v. Fla. Foreclosure Placement Ctr., LLC, 988 So.2d 1157, 1160 (Fla. 3d DCA 2008)). A civil conspiracy claim is not an independent cause of action. Behrman v. Allstate Life Ins. Co., 178 Fed.Appx. 862, 863 (11th Cir.2006). “Thus, ‘an actionable conspiracy requires an actionable underlying tort or wrong.’ ” Bray & Gillespie Mgmt. LLC, 527 F.Supp.2d at 1370 (quoting Fla. Fern Growers Ass’n, 616 So.2d at 565); see also, Tatone, 857 F.Supp.2d at 839.
i. Count 1 — Conspiracy to commit fraud
Count 1 of the Amended Complaint asserts a claim for civil conspiracy to commit fraud. The crux of the cause of action is that GECC conspired with Pet-ters and Petters Capital to commit fraud upon the Palm Beach Funds. Thus, common law fraud is the underlying tort.30 Because civil conspiracy alone is not an independent tort, the Plaintiff must properly allege the elements of civil conspiracy and the elements of common law fraud in order to state an actionable claim for civil conspiracy. At the outset, the Court finds that the Plaintiff sufficiently alleges the elements of common law fraud.31 The Plaintiff identifies a false statement of material fact which was made with knowledge that it was false and which was intended to induce the Palm Beach Funds to act: “Petters and Petters Capital knowingly communicated false and fraudulent information to the Palm Beach Funds to induce them to fund [Petters’ purchase financing operation]. These fraudulent representations included that Petters’ business was a lawful and profitable enterprise32 and *344were continuously made from 2002 through 2008.” Am. Compl. ¶ 168. The Plaintiff also alleges that the Palm Beach Funds relied upon the truth of the representations to their detriment: “The Palm Beach Funds each relied on these misrepresentations to their detriment, causing damages.” Id. The allegations regarding Petters Ponzi scheme contained in paragraphs 1 through 165, which the Plaintiff re-alleges in Count 1, add the factual detail required by Federal Rule of Civil Procedure 9(b).
The Plaintiff sufficiently alleges the first, second, and fourth elements of a civil conspiracy. As to the first and second element — an agreement between two or more parties to perform an unlawful act— the Plaintiff alleges:
169. On or about October 24, 2000, GECC obtained actual knowledge of the Conspiracy and Conspiratorial Objective. Shortly thereafter, GECC entered into an agreement with Petters and Pet-ters Capital, tacit if not explicit, for GECC to join and further the Conspiracy and the Conspiratorial Objective.
170. GECC would remain silent about it discovery of the Conspiracy and assist in its continued fraudulent concealment. Petters would cause GECC to be paid from new, defrauded lenders rather than from the proceeds of legitimate operations. GECC would receive not only the monies which were owed to it (ie., principal, interest and certain fees), but also additional monies which were not: the unearned Final Success Fee.
171. GECC knowingly assisted, furthered, encouraged and concealed the Conspiracy, by, among other things:
a) Failing to retract or correct the Recommendation Letter;
b) Knowingly permitting its name to be used in furtherance of the Conspiracy;
c) Demanding and accepting the entire Final Payment in an atypical and improper manner;
d) Retaining all unearned Success Fees, including the Final Success Fee;
e) Failing to disclose the Conspiracy to anyone, including but not limited to the First Investors, the Second Investors, law enforcement or Costco;
f) Failing to take legal or other public action against Petters or Petters Capital;
g) Deferring any actions based on Petters and Petters Capital’s representations that GECC would get paid the Final Payment;
h) Releasing the Petters Capital stock pledge;
i) Failing to advise anyone, including law enforcement, Costco, the payor bank for the Fraudulent Checks or other lenders about the Fraudulent Checks;
j) Communicating the January 30th Audit Letter Response;
k) Concealing the Fraudulent Checks from Ernst & Young;
l) Knowingly paving the way for the Palm Beach Funds to use the same SPE that GECC had used in its dealings with Petters (a known vehicle of fraud);
m) Causing the termination of the GECC Financing Statement in 2003;
n) Authorizing Petters Capital to act as its agent for purposes of terminating the GECC Financing Statement;
o) Failing to make disclosures to applicable regulators; and
*345p) Violating its Integrity Policies, Internal Policies and industry standards,
172. GECC joined the Conspiracy so it could get paid and then retain what it received. GECC had an extraordinary economic motivation for this: in excess of $45 million.
Am. Compl. ¶¶ 169-72. These allegations are sufficient to allege a tacit agreement between GECC and Petters, and as discussed above, the Plaintiff sufficiently alleges the elements of common law fraud, which is the underlying tort or “unlawful act.” The Plaintiff also properly alleges the fourth element of civil conspiracy— damage to plaintiff as a result of the acts done under the conspiracy. The Plaintiff alleges that “[a]s a result of the Conspiracy, and GECC’s joinder thereof, and the actions and inactions committed by Petters and Petters Capital ... and GECC ... in furtherance of the Conspiracy, the Palm Beach Funds were damaged in excess of $1 Billion.” Am. Compl. ¶ 173.
Finally, the Plaintiff sufficiently alleges the third element of conspiracy — the doing of some overt act in pursuance of the conspiracy. The Plaintiff alleges that GECC knowingly assisted, furthered, encouraged and concealed Petters’ fraud by, among other things:
(a) Failing to retract or correct the Recommendation Letter;
(b) Knowingly permitting its name to be used in furtherance of the Conspiracy;
(c) Demanding and accepting the entire Final Payment in an atypical and improper manner;
(d) Retaining all unearned Success Fees, including the Final Success Fee;
(e) Failing to disclose the Conspiracy to anyone, including but not limited to Pet-ters’ investors, law enforcement, or Costco;
(f) Failing to take legal or other public action against Petters or Petters Capital;
(g) Deferring any actions based on Pet-ters and Petters Capitals’ representations that GECC would get paid the Final Payment;
(h) Releasing the Petters Capital stock pledge;
(i) Failing to advise anyone about the Fraudulent Checks;
(j) Communicating the January 30th Audit Letter Response;
(k) Concealing the Fraudulent Checks from Ernst & Young;
(l) Knowingly paving the way for the Palm Beach Funds to use the same SPE that GECC had used in its dealing with Petters;
(m) Causing the termination of the GECC Financing Statement in 2003;
(n) Authorizing Petters Capital to act as its agent for purposes of .terminating the GECC Financing Statement;
(o) Failing to make disclosures to applicable regulators; and
(p) Violating its Integrity Policies, Internal Policies, and industry standards.
Am. Compl. ¶ 171. Some of these allegations, as discussed in Section V(B), infra, amount to little more than failing to blow the whistle on Petters’ fraud. The Court has already found that GECC had no duty to the Palm Beach Funds to disclose Pet-ters’ fraud, and mere inaction may not be enough to constitute an “overt act.” However, the remaining allegations, when considered in the context of the detailed allegations in paragraphs 1 through 165, plausibly amount to at least one affirmative overt act which furthered the Petters’ conspiracy. Accordingly, the Court finds that these allegations are sufficient to establish at this stage in the proceedings that GECC committed an overt act in fur-*346theranee of Petters’ fraud upon the Palm Beach Funds.
For the reasons just discussed, the Court finds that the Plaintiff states a claim for conspiracy to commit fraud.
ii. Count 6 — Conspiracy to commit fraudulent concealment
In Count 6 of the Amended Complaint, the Plaintiff asserts a claim for conspiracy to commit fraudulent concealment. The crux of this cause of action is that GECC conspired with Petters and Petters Capital to commit fraud concealment with respect to the Palm Beach Funds. Thus, fraudulent concealment is the underlying tort. As with the claim for conspiracy to commit fraud, the Plaintiff must allege the elements of civil conspiracy along with the elements of fraudulent concealment in order to properly state a claim for conspiracy to commit fraudulent concealment. For the reasons discussed below, the Court finds that the Plaintiff fails to do so.
Although Count 6 contains allegations which would be sufficient to establish a claim for fraudulent concealment against Petters, Count 6 contains virtually no allegations relating to GECC’s alleged participation in a conspiracy to commit fraudulent concealment. There is no allegation that GECC and Petters had an agreement, either tacit or explicit, to commit fraudulent concealment. There is no allegation that GECC did any overt act in pursuance of an alleged conspiracy. In fact, the only allegation in Count 6 that even mentions GECC is the following: “GECC had actual knowledge of the Conspiracy.” Am. Compl. ¶ 207. Accordingly, Count 6 fails to state a claim for conspiracy to commit fraudulent concealment and will be dismissed.
VI. Count II — Aiding and abetting fraud
In Count II of the Amended Complaint, the Plaintiff asserts a claim for aiding and abetting fraud. Liability for aiding or abetting fraud requires a showing that an underlying fraud existed, the defendant had actual knowledge of the fraud, and the defendant substantially assisted the commission of the fraud. ZP No. 54 Ltd. P’ship v. Fid. & Deposit Co., 917 So.2d 868, 372 (Fla. 5th DCA 2005); E-Shops Corp. v. U.S. Bank Nat’l Ass’n, 795 F.Supp.2d 874, 877 (D.Minn.2011); Sirazi v. Gen. Mediterranean Holding, SA, No. 12 C 0653, 2013 WL 812271, at *7 (N.D.Il. Mar. 5, 2013) (quoting Thornwood, Inc. v. Jenner & Block, 344 Ill.App.3d 15, 278 Ill.Dec. 891, 799 N.E.2d 756, 767 (2003)).
Here, the Plaintiff fails to sufficiently allege the existence of an underlying fraud. As previously noted by the Court, fraud is not simply a generic term for wrongdoing. Rather, it is a specific tort, the elements of which must be alleged with particularity under Rule 9(b). It is true that the hallmark of a Ponzi scheme, which is inherently fraudulent in nature, is “that the entity gives the false appearance of profitability by seeking investments from new sources rather than earning profits from assets already invested.” Carney v. Lopez, No. 3:12-cv-00182 (SRU), 2013 WL 1274741, at *9 (D.Conn. Mar. 28, 2013). Accordingly, when properly pled, the existence of a Ponzi scheme can be the basis for a claim for common law fraud or aiding and abetting fraud. However, in the operative part of Count 2, the Plaintiff makes virtually no allegations which refer to the specifics of the underlying fraud. Although the Plaintiff “re-alleges paragraphs 1 through 165” within Count 2, this is not sufficient to put GECC or the Court on notice as to which of the *347165 allegations support the Plaintiffs claim for aiding and abetting fraud.33
Further confusing the issue is the fact that the Plaintiff asserts four allegedly separate and distinct fraud claims against GECC (fraud by omission, fraudulent misrepresentation, fraudulent concealment, and fraud) in addition to two other conspiracy claims (conspiracy to commit fraud and conspiracy to commit fraudulent concealment). The Plaintiff undoubtedly understands that fraud comes in many forms and that any one of these forms could potentially serve as the basis for the Plaintiffs aiding and abetting claim. Without any specific allegations as to the underlying fraud in Count 2, it is impossible to know which form of fraud the Plaintiff is referring to when, for example, the Plaintiff alleges:
176. GECC knew that Petters and Pet-ters Capital were seeking to defraud the new lenders, the Palm Beach Funds.
177. GECC knew that the new lender to Petters Capital, the Palm Beach Funds, was to be defrauded. Alternatively, the Palm Beach Funds were within a class of persons GECC knew would be defrauded.
178. GECC had an extraordinary economic motivation to substantially assist the fraud.
179. GECC substantially assisted, aided, abetted, encouraged, concealed, and facilitated the fraud upon the Palm Beach Funds.
180. GECC’s substantial assistance was intended to, and did, aid the primary fraud.
181. GECC’s silence and inaction was consciously and purposely intended to aid and further the primary fraud.
182. GECC had a duty to disclose the truth to the Palm Beach Funds.
183. GECC’s substantial assistance was a substantial factor in furthering the fraud upon the Palm Beach Funds.
Am. Compl. ¶¶ 176-183. Accordingly, the Plaintiff fails to allege with the requisite specificity required by Rule 9(b) the underlying fraud upon which Count 2 is based.
Furthermore, the Plaintiff fails to allege that GECC provided “substantial assistance” to Petters’ fraud. As to this element, the Plaintiff alleges that GECC knowingly assisted, furthered, encouraged and concealed Petters’ fraud by, among other things:
(a) Failing to retract or correct the Recommendation Letter;
(b) Knowingly permitting its name to be used in furtherance of the Conspiracy;
*348(c) Demanding and accepting the entire Final Payment in an atypical and improper manner;
(d) Retaining all unearned Success Fees, including the Final Success Fee;
(e) Failing to disclose the Conspiracy to anyone, including but not limited to Pet-ters’ investors, law enforcement, or Costco;
(f) Failing to take legal or other public action against Petters or Petters Capital;
(g) Deferring any actions based on Pet-ters and Petters Capitals’ representations that GECC would get paid the Final Payment;
(h) Releasing the Petters Capital stock pledge;
(i) Failing to advise anyone about the Fraudulent Checks;
(j) Communicating the January 30th Audit Letter Response;
(k) Concealing the Fraudulent Checks from Ernst & Young;
(l) Knowingly paving the way for the Palm Beach Funds to use the same SPE that GECC had used in its dealing with Petters;
(m) Causing the termination of the GECC Financing Statement in 2003;
(n) Authorizing Petters Capital to act as its agent for purposes of terminating the GECC Financing Statement;
(o) Failing to make disclosures to applicable regulators; and
(p) Violating its Integrity Policies, Internal Policies and industry standards.
Am. Compl. ¶ 171. Out of these sixteen specific instances, at least eight ((a), (b), (d), (e), (f), (g), (i), and (o)) consist of nothing more than a failure to act. Under limited circumstances, courts have held that inaction can form the basis of aiding and abetting liability if it rises to the level of providing substantial assistance. Matthews v. Eichorn Motors, Inc., 800 N.W.2d 823, 831 (Minn.Ct.App.2011). However, “state and federal courts generally have held that a defendant’s failure to act does not constitute ‘substantial assistance.’ ” Id.; see also, Sharp Int’l Corp. v. State Street Bank and Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 49 (2d Cir.2005) (internal citation marks omitted) (quoting Kaufman v. Cohen, 307 A.D.2d 113, 760 N.Y.S.2d 157, 170 (2003)); Hines v. Fi-Serv, Inc., No. 8:08-cv-2569-T-30AEP, 2010 WL 1249838, at *4 (M.D.Fla. Mar. 25, 2010). The Court finds that these allegations, which amount to nothing more than inaction, do not rise to level of substantial assistance and thus cannot provide the basis for aiding and abetting liability.
The remaining allegations, even when taken together, do not amount to “substantial assistance.” Substantial assistance requires an affirmative step on the part of the aider-and-abettor that is a “substantial factor” in causing the breach of duty. Varga v. U.S. Bank. Nat’l Ass’n, 952 F.Supp.2d 850, 859 (D.Minn.2013) (citing Am. Bank of St. Paul v. TD Bank, N.A., 713 F.3d 455, 463 (8th Cir.2013)). “To determine what constitutes substantial assistance, courts generally consider the five factors listed in the comments to section 876 of the Restatement (Second) of Torts.” Id. “Those factors are: the nature of the act encouraged, the amount of assistance given, the aider-and-abettor’s presence or absence at the time of the tort, its relation to the primary actor, and its state of mind.” Id. (citing In re Tempromandi-bular Joint (TMJ) Implants Prods. Liab. Litig., 113 F.3d 1484, 1495 (8th Cir.1997)). Courts must also consider “the potentially devastating impact aiding and abetting liability might have on commercial relationships.” Id.
Assuming it were true that GECC did every one of the things alleged in para*349graphs (c), (h), (j), (k), (1), (m), (n), and (p), it is still not plausible that these actions amount to “substantial assistance” to Pet-ters’ multi-billion dollar fraud. The amount of assistance alleged is minor in comparison to the massive scope of Pet-ters’ overall fraudulent scheme. As to the “aider-and-abettor’s presence or absence at the time of the tort,” there is certainly no allegation that GECC maintained any kind of physical presence during Petters’ fraud upon the Palm Beach Funds. Moreover, GECC had all but completely extricated itself from its relationship with Pet-ters by the time the first of the Palm Beach Funds was even formed. The only alleged relationship GECC had with Pet-ters was that GECC was at one time, a commercial lender to Petters. With regard to GECC’s “state of mind,” the Plaintiff alleges that GECC knowingly assisted in Petters’ fraud and was motivated by its desire to secure repayment of its $50 million loan and preserve its reputation. Accordingly, the nature of the act encouraged and GECC’s alleged state of mind weigh in favor of a finding that the Plaintiff sufficiently alleges the substantial assistance element. However, the other factors, coupled with the potentially devastating impact aiding and abetting liability might have on commercial relationships, particularly commercial lending relationships, outweigh the nature and state of mind factors. Accordingly, the Court finds that the Plaintiff fails to plausibly allege the substantial assistance element of his claim for aiding and abetting fraud.
For the reasons just discussed, the Court will dismiss Count 2 for failure to state a claim for aiding and abetting fraud which is plausible on its face.
VII. Conclusion
The crux of the Plaintiffs Amended Complaint is that GECC discovered Pet-ters’ fraud and arranged not to be among his victims, but did not alert anyone else, which meant that Petters was able to continue to perpetrate his Ponzi scheme. “On the one hand, this seems repugnant; on the other hand, ... [the] discovery that [Petters] was rife with fraud was an asset of [GECC], and [GECC] had a fiduciary duty to use that asset to protect its own shareholders^]” In re Sharp Int’l Corp., 403 F.3d at 52. Whatever GECC knew about Petters’ fraud, it came by that knowledge through diligent inquiries that any other lender, including the Palm Beach Funds, could have made. The Plaintiff fails to establish any general duty on the part of GECC “to precipitate its own loss in order to protect lenders that were less diligent.” Id. at 53.
That being said, for the reasons discussed in the preceding sections, the Court grants GECC’s Motion to Dismiss in part and will dismiss without prejudice Counts 2 through 9 of the Plaintiffs Amended Complaint for failure to state a claim upon which relief can be granted. With regard to Counts 2 through 8, the Plaintiff fails to meet the pleading requirements articulated in Federal Rule of Civil Procedure 9(b). With regard to Count 9, the Plaintiff fails to meet the pleading requirements articulated in Federal Rule of Civil Procedure 8(a). Finally, the Court denies GECC’s Motion to Dismiss as to Count 1, as the Court finds that the Plaintiff sufficiently alleges the elements of a claim for civil conspiracy to commit fraud.
In the event the Plaintiff elects to file a second amended complaint and GECC files a motion to dismiss that complaint, the Court shall not consider any new arguments which could have been raised in a previous motion to dismiss but were not. Finally, should the Plaintiff file a second amended complaint which fails to comply *350with the terms of this Order, the complaint shall be dismissed with prejudice.
ORDER
The Court, being fully advised in the premises and for the reasons discussed above, hereby ORDERS AND ADJUDGES that:
1. GECC’s Motion to Dismiss (ECF No. 32) is GRANTED IN PART and DENIED IN PART.
2. The Motion to Dismiss is granted to the extent it requests dismissal of Counts 2 through 9 and denied to the extent it requests dismissal of Count 1.
3. Counts 2 through 9 of the Amended Complaint (ECF No. 26) are DISMISSED WITHOUT PREJUDICE to the Plaintiff filing a second amended complaint within twenty-one (21) days of the entry of this Order.
. The Plan of Liquidation can be found at ECF No. 245 in Case No. 09-36379-PGH.
. The Confirmation Order can be found at ECF No. 444 in Case No. 09-36379-PGH.
. Federal Rule of Civil Procedure 8(a) is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7008.
. Federal Rule of Civil Procedure 12(b)(6) is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7012.
.Federal Rule of Civil Procedure 9(b) is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7009
. "Courts ... have reached varying conclusions regarding whether Rule 9(b) applies to negligent misrepresentation claims.” Pruco Life Ins. Co. v. Brasner, No. 10-80804-CIV, 2011 WL 2669651, at *4 (S.D.Fla. July 7, 2011) (citing Atwater v. Nat’l Football League Players Ass’n, No. 1:06-CV-1510-JEC, 2007 WL 1020848, at *13 (N.D.Ga. Mar. 29, 2007)). In Florida and in Minnesota, courts have often applied Rule 9(b) to claims of negligent misrepresentation because historically, "negligent misrepresentation sounds in fraud rather than negligence.” Id. (quoting Souran v. Travelers Ins. Co., 982 F.2d 1497, 1511 (11th Cir.1993) (collecting opinions which have applied Rule 9(b) to negligent misrepresentation)); see also, McGregor v. Uponor, Inc., Civil No. 09-1136 ADM/JJK, 2010 WL 55985, at *3 (D.Minn. Jan. 4, 2010) (noting that "Minnesota law holds that allegations of misrepresentation, whether styled as intentional misrepresentation or negligent misrepresentation, sound in fraud and therefore must satisfy the pleading requirements of Rule 9(b)”). In Illinois, courts generally decline to apply Rule 9(b)'s pleading standard to claims of negligent misrepresentation. Chi. Materials *323Corp. v. Hildebrandt (In re Hildebrandt), Adv. No. 08-A-00336, 2008 WL 5644893, at *4 (Bankr.N.D.Ill.Dec. 18, 2008) (citing Triconti-nental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 833 (7th Cir.2007)). After considering the case law on both sides, the Court will apply Rule 9(b) to the Plaintiff's negligent misrepresentation claims.
. Under Florida law, actions founded upon fraud or negligence are subject to a four-year statute of limitations. Fla. Stat. § 95.11(3)(a) and (j).
. Under Illinois law, actions for fraud and negligence are included within the phrase “all actions not otherwise provided for,” to which the five-year limitations period applies. 735 Ill. Comp. Stat. 5/13-205 (West 2008).
. As the Court has previously determined, see, e.g. Mukamal v. Cosmos, Inc. (In re Palm Beach Finance Partners, P.P.), No. 11-02970-BKC-PGH-A (Bankr.S.D.Fla. July 30, 2013), the diversity jurisdiction approach is the proper choice of law approach for bankruptcy courts to apply. The diversity jurisdiction approach requires bankruptcy courts to follow the choice of law rules of the state in which the bankruptcy court sits. Dzikowski v. Friedlander (In re Friedlander Capital Mgmt. Corp.), 411 B.R. 434, 441-42 (Bankr.S.D.Fla. 2009). Because this Court sits in the state of Florida, Florida choice of law rules govern. Florida’s choice of law rules mandate that the Court employ the “significant relationship” test with respect to statute of limitations issues. Merkle v. Robinson, 737 So.2d 540, 542-43 (Fla. 1999). The significant relationship choice of law test requires a detailed factual analysis which the Court may not properly undertake at the motion to dismiss stage. See, e.g. Cantonis, 2010 WL 6239354, at *5 ("A choice of law analysis is premature *324at this stage because it requires resolution of fact issues beyond the scope of this 12(b)(6) motion to dismiss.”).
. The Plaintiff asserts that GECC ignores that the applicability of Minnesota law is strongly implicated by the facts of the case. Primarily, the Plaintiff takes issue with GECC’s statement that "all of GECC’s alleged conduct took place in its Chicago, Illinois office.” Pl.'s Resp. (ECF No. 42) at 3 (citing GECC's Mot. to Dismiss at 10 n. 6). The Plaintiff contends that this statement is false, pointing out that (1) the GECC-Petters revolving credit line was originated by a Minnesota-based GECC Vice President to a Minnesota borrower with a Minnesota guarantor; (2) GECC issued the Recommendation Letters to Petters in Minnesota for his use and dissemination in his Minnesota-based business; (3) GECC communicated with Petters in Minnesota; and (4) GECC appointed Petters as its agent to file the GECC Termination Statement in Minnesota. Id. at 3-4. Not only do the Plaintiff's contentions indicate that Minnesota law potentially governs the Plaintiff's claims, but they also indicate that there are significant factual disputes which prevent the Court from conducting a choice of law analysis at this stage in the proceedings.
. "The question of whether [plaintiffs] knew or should have known of their claims against [defendant] is a question of fact.” United Labs., Inc. v. Savaiano, No. 06 C 1442, 2007 WL 4162808, at *3 (N.D.Ill. Nov. 19, 2007) Ociting Jackson Jordan, Inc. v. Leydig, Voit & Mayer, 158 Ill.2d 240, 198 Ill.Dec. 786, 633 N.E.2d 627, 631 (1994)); see also, Clark v. Galen Hosp. Ill., Inc., 322 Ill.App.3d 64, 255 Ill.Dec. 168, 748 N.E.2d 1238 (2001), appeal den., 196 Ill.2d 538, 261 Ill.Dec. 346, 763 N.E.2d 316 (2001).
. The Plaintiff filed copies of five documents from the Professional Recovery Services proceeding: (1) Notice of GECC’s Motion for Summary Judgment; (2) GECC’s Statement of Material Undisputed Facts; (3) GECC’s Brief in Support of its Motion for Summary Judgment; (4) Exhibit to Statement of Undisputed Facts; and (5) Opinion. See Notice of Filing (ECF No. 43). GECC did not object to the authenticity of these documents and cites to them without objection in its Reply in Support of Motion to Dismiss (ECF No. 53).
. At the very least, it is undeniable that based upon the allegations, GECC did not speak directly to the Palm Beach Funds through the Recommendation Letter and the GECC Termination Statement. Any alleged statements made by GECC to the Palm Beach Funds were made indirectly, at best.
. Indeed, 9 C.J.S. Banlcs and Banking § 250 (2013) lays out the “special circumstances” under which a bank may have a duty of disclosure. Included in this group of circumstances is the following: "[o]ne who speaks must say enough to prevent the words from misleading the other party.” However, the C.J.S. discussion, like all the cases it cites and all the case cited by the Plaintiff, assumes the existence of some kind of business transaction or preexisting relationship between the plaintiff and the defendant-bank.
. The case of Trustees of the Northwest Laundry & Dry Cleaners Health & Welfare Trust Fund v. Burzynski dealt with a fraud claim brought by an ERISA health insurance fund *330against a doctor who allegedly misrepresented the legality of his medical treatments in order to get reimbursements from the fund for the treatments. 27 F.3d at 157. In analyzing whether the doctor had a duty to disclose the legality of his treatments to the fund, the court noted that "[a] speaker who makes a partial disclosure assumes a duty to tell the whole truth even when the speaker was under no duty to make the partial disclosure.” Id. As with the other cases discussed supra, the Burzynski case involved two parties — doctor and health insurance fund — who had a direct, ongoing commercial relationship with each other, and the doctor made the allegedly fraudulent nondisclosure in the course of seeking payment from the health insurance fund.
. The Plaintiff cites to the Stephenson case to support his argument that GECC had a duly to the Palm Beach Funds based on "special knowledge” of material facts to which another party did not have access. However, the Stephenson case makes clear that such a duty only arises between two parties to a transaction: “[I]f a party conceals a fact material to the transaction, and peculiarly within his own knowledge, knowing that the other party acts on the presumption that no such fact exists, it is as much a fraud as if the existence of such fact were expressly denied, or the reverse of it expressly stated.” 282 F.Supp.2d 1032, 1060 (emphasis added) (quoting Richfield Bank and Trust Co. v. Sjogren, 309 Minn. 362, 244 N.W.2d 648, 650 (1976)).
. A master is under a duty to exercise reasonable care so to control his servant while acting outside the scope of his employment as to prevent him from intentionally harming others or from so conducting himself as to create an unreasonable risk of bodily harm to them, if:
(a) the servant
(i) is upon the premises in possession of the master or upon which the servant is privileged to enter only as his servant, or
(ii) is using a chattel of the master, and (b) the master
(i) knows or has reason to know that he has the ability to control his servant, and *332(ii) knows or should know of the necessity and opportunity for exercising such control.
Restatement (Second) of Torts § 317.
. One who takes charge of a third person whom he knows or should know to be likely to cause bodily harm to others if not controlled is under a duty to exercise reasonable care to control the third person to prevent him from doing such harm. Restatement (Second) of Torts § 319.
. One who is required by law to take or who voluntarily takes the custody of another under circumstances such as to deprive the other of his normal power of self-protection or to subject him to association with persons likely to harm him, is under a duty to exercise reasonable care so to control the conduct of third persons as to prevent them from intentionally harming the other or so conducting themselves as to create an unreasonable risk of harm to him, if the actor: (a) knows or has reason to know that he has the ability to control the conduct of the third persons, and (b) knows or should know of the necessity and opportunity for exercising such control. Restatement (Second) of Torts § 320.
. A multitude of other cases arising in various circumstances unequivocally state that banks generally owe no duties to third parties in the absence of some kind of preexisting relationship. Mose v. Keybank Nat’l Ass’n, 464 Fed.Appx. 260, 262-63 (5th Cir.2012); Frost Nat'l Bank v. Midwest Autohaus, Inc., 241 F.3d 862, 874 (7th Cir.2001) (bank did not owe duty to another bank to disclose a check kiting scheme the first bank had discovered); El Camino Res., LTD v. Huntington Nat'l Bank, 722 F.Supp.2d 875, 919 n. 11 (W.D.Mich.2010) (same); Eubanks v. F.D.I.C, 977 F.2d 166, 170 n. 3 (5th Cir.1992) ("banks ordinarily owe no duty, fiduciary or otherwise, to third person”); Guidry v. Bank of LaPlace, 661 So.2d 1052, 1059 (La.App.1995) (bank was "clearly under no duty to disclose information about its customer to a non-customer”); E.F. Hutton Mortg. Corp. v. Equitable Bank, N.A., 678 F.Supp. 567 (D.Md.1988) (bank had no duty to inform third party of its suspicions of fraud by its customer, as there was no contractual or fiduciary relationship requiring disclosure).
. The elements of fraudulent concealment or fraud by omission are largely identical under the laws of Florida, Illinois, and Minnesota. Weidner v. Karlin, 402 Ill.App.3d 1084, 342 Ill.Dec. 475, 932 N.E.2d 602, 605 (2010); Masepohl v. Am. Tobacco Co., Inc., 974 F.Supp. 1245, 1250 (D.Minn.1997); Exeter Bancorporation, Inc. v. Kemper Sec. Grp., Inc., 58 F.3d 1306, 1314 (8th Cir.1995). However, as discussed in footnote 24, infra, the level of reliance on the omission that the plaintiff must show differs under the laws of Florida, Illinois, and Minnesota.
. The Court discussed the first two scenarios which may give rise to a duty to speak in relation to the duty element of the Plaintiff’s negligence claim. The third scenario, which arises when one party stands in a confidential or fiduciary relation to the other party, has no applicability here as it is undisputed that the Palm Beach Funds and GECC had no fiduciary or confidential relationship with each other.
. Fraudulent misrepresentation is simply one form of common law fraud. See, e.g., Schrager v. N. Cnty, Bank, 328 Ill.App.3d 696, 262 Ill.Dec. 916, 767 N.E.2d 376 (2002) (noting that fraudulent misrepresentation is simply a form of common law fraud — another being fraudulent concealment); Bailey v. Tre-nam Simmons, Kemker, Scharf, Barkin, Frye & O’Neill, P.A., 938 F.Supp. 825, 829 (S.D.Fla. 1996) (same); Ransom v. VFS, Inc., 918 F.Supp.2d 888, 899-900, n.11 (D.Minn.2013); Friebel v. Paradise Shores of Bay Cnty., LLC, No. 5:10-cv-120/RS-EMT, 2011 WL 831278, at *3 & n. 3 (N.D.Fla. Mar. 3, 2011); Weidner, 342 Ill.Dec. 475, 932 N.E.2d at 605 (stating that "fraudulent misrepresentation [is] also referred to as common law fraud”).
. As with fraudulent concealment, the elements of fraudulent misrepresentation under tire laws of Florida, Illinois, and Minnesota differ, if at all, only in the level of reliance required. Under Florida law, "justifiable reliance is not a necessary element of fraudulent misrepresentation.” Butler v. Yusem, 44 So.3d 102, 105 (Fla.2010). In Illinois, on the other hand, the plaintiff must establish "justifiable” reliance in order to prevail on a fraudulent misrepresentation claim. Neurosurgery & Spine Surgery, S.C. v. Goldman, 339 Ill. App.3d 177, 274 Ill.Dec. 152, 790 N.E.2d 925 (2003). Finally, in Minnesota, the plaintiff must establish that he "reasonably” relied on the misrepresentation. JJ Holand Ltd. v. Fre-drikson & Byron, P.A., Civil No. 12-3064 ADM/TNL, 2013 WL 3716948, at *7 (D.Minn. July 12, 2013).
. According to the allegations of the Amended Complaint, prior to entering into a loan transaction with Petters, GECC hired a national investigatory firm, Kroll, to investigate Petters and prepare a report (the "Kroll Report"). Am. Compl. ¶ 33. The Kroll report allegedly revealed that Petters had a history of criminal and civil problems, including (1) arrest warrants for forgery and bad checks, and (2) “lying to a court and being found to have acted in 'bad faith.' " Am. Compl. ¶ 34.
. According to the allegations of the Amended Complaint, Catharine Midkiff, then GECC’s Senior Vice President of Risk and Underwriting, stated after meeting with Pet-ters that she "clearly and on the record ... does not support this transaction. [She] believe[s] that the additional controls will largely prevent the opportunity for [GECC's] money to be used improperly but [she does] not approve of being in business with a person who has previously demonstrated a lack of integrity.” Am. Compl. ¶ 36.
. "The term 'fraud' is a generic one which embraces all the multifarious means resorted to by one individual to gain advantage over another by false suggestions or by suppression of the truth. 'Fraud,' a peculiar species of falsity, is the intentional misrepresentation of a material fact made for the purpose of inducing another to rely, and on which the other reasonably relies to his or her detriment.” 37 Am Jur.2d Fraud and Deceit § 1 (internal citations omitted). Although there can be no all-encompassing definition of “fraud,” fraud always "involves a misrepresentation or suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other.” Id. (internal citation omitted); see also, Douglas v. Ogle, 80 Fla. 42, 85 So. 243 (1920) (noting that actual fraud always involves an untruth between the two parties to the transaction so that actual fraud may be reduced to misrepresentation and concealment).
. The liability imposed for negligent misrepresentation is "more restricted than that for fraudulent misrepresentation.... The reason a narrower scope of liability is fixed for negligent misrepresentation than for deceit is to be found in the difference between the obligations of honesty and of care, and in the significance of this difference to the reasonable expectations of the users of information that is supplied in connection with commercial transactions.” Gilchrist Timber Co. v. ITT Rayonier, Inc., 696 So.2d 334, 337 (Fla. 1997) (citing Restatement (Second) of Torts § 552 cmt. a (1977)).
. The comments to the Second Restatement explain:
The defendant's pecuniary interest in supplying the information will normally lie in a consideration paid to him for it or paid in a transaction in the course of and as a part of which it is supplied. It may, however, be of a more indirect character. Thus the officers of a corporation, although they receive no personal consideration for giving information concerning its affairs, may have a pecuniary interest in its transactions, since they stand to profit indirectly from them, and an agent who expects to receive a commission on a sale may have such an interest in it although he sells nothing.
The fact that the information is given in the course of the defendant's business, profession or employment is a sufficient indication that he has a pecuniary interest in it, even though he receives no consideration for it at the time. It is not, however, conclusive. But when one who is engaged in a business or profession steps entirely outside of it, as when an attorney gives a casual and offhand opinion on a point of law to a friend whom he meets on the street, or what is commonly called a "curbstone opinion,” it is not to be regarded as given in the course of his business or profession; and since he has no other interest in it, it is considered purely gratuitous. The recipient of the information is not justified in expecting that his informant will exercise the care and skill that is necessary to insure a correct opinion and is only justified in expecting that the opinion will be an honest one.
Restatement (Second) of Torts § 552 cmt. d (emphasis added); see also, Sports Immortals, Inc., 67 So.3d at 440-41.
. As discussed in Section IV(B)(ii), supra, when the Plaintiff uses the generic term "fraud,” the Court assumes it to mean "common law fraud.”
. The elements of common law fraud are: (1) a false statement of material fact; (2) defendant's knowledge that the statement was false; (3) defendant’s intent that the statement induce plaintiff to act; (4) plaintiff’s reliance upon the truth of the statement; and (5) plaintiff’s damages resulting from reliance on the statement. Wernikoff, 315 Ill.Dec. 524, 877 N.E.2d at 16.
.It can be assumed from the very nature of a Ponzi scheme that the perpetrator of the Ponzi scheme made false representations to lenders/investors as to the profitability and legality of the fraudulent enterprise.
. The Plaintiff’s Amended Complaint is a classic "shotgun pleading.” "Shotgun pleadings” do not comply with Rule 8(a)’s requirement for a "short and plain statement” and thus make " ‘it is virtually impossible to know which allegations of fact are intended to support which claim(s) for relief" Peavey v. Black, 476 Fed.Appx. 697, 699 (11th Cir.2012) (quoting Anderson v. Dist. Bd. of Trs. of Cent. Fla. Cmty. Coll., 77 F.3d 364, 366-67 (11th Cir.1996)). A shotgun pleading "invariably beginfs] with a long list of general allegations, most of which are immaterial to most of the claims for relief.” Johnson Enters, of Jacksonville, Inc. v. FPL Grp., Inc., 162 F.3d 1290, 1333 (11th Cir.1998). The pleading then “ 'incorporate^] every antecedent allegation by reference into each subsequent claim for relief " Liebman v. Deutsche Bank Nat. Trust Co., 462 Fed.Appx. 876, 879 (11th Cir.2012) (quoting Wagner v. First Horizon Pharm. Corp., 464 F.3d 1273, 1279 (11th Cir.2006)). "The result is that each count is replete with factual allegations that could not possibly be material to that specific count, and that any allegations that are material are buried beneath innumerable pages of rambling irrelevancies.” Magluta v. Samples, 256 F.3d 1282, 1284 (11th Cir.2001). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497515/ | MEMORANDUM OPINION
JAMES P. SMITH, Bankruptcy Judge.
PMF Enterprises, Inc. (“PMF”) and KPB Enterprises, LLC (“KPB”) were related entities operating a convenience store in Perry, Georgia. This matter arises from the objection by PMF to the *353claim of SouthCrest Bank, as successor in interest to Century Security Bank (“South-Crest”). As will be explained below, SouthCrest had no privity of contract with PMF, and the debtor with whom it did have privity, KPB, essentially had no assets. Accordingly, at the conclusion of the September 10, 2013, hearing1 on the claim objection, the Court deferred its ruling until the resolution of the Chapter 7 trustee’s2 motion to substantively consolidate the cases of PMF and KPB. After the January 15, 2014, hearing on consolidation 3, the Court granted the trustee’s motion and substantively consolidated the cases. Therefore, the claim objection is now ripe for determination. Having considered the evidence, the parties’ briefs and the relevant law, the Court now publishes its findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
FACTS
Some time prior to August 80, 2007, Pierre Beauchamps4 (“Beauchamps”) formed KPB, of which he is the sole member and manager. On August 30, 2007, KPB borrowed $1,960,000 from Century Security Bank (“Century”) to purchase a convenience store and gas station. To secure the loan, KPB gave Century a security deed on the real property and a security agreement on inventory and other related personality. Beauchamps personally guaranteed the loan.
Shortly thereafter, Beauchamps formed PMF (of which he is the sole shareholder) to operate the convenience store. Beau-champs subsequently obtained commercial liability and property insurance from Catawba Insurance Company (“Catawba”) in the name of “PMF Enterprises, Inc. d/b/a Superfood Mart”.5 Thereafter, and notwithstanding the fact that Century’s loan was to KPB, Century was added to the PMF-Catawba policy as a lien holder. The policy included limits of $400,000 for building coverage, $1,160,000 for fuel pumps and tanks, $280,000 for personal property/contents coverage and additional coverage for debris removal and business income.
A fire occurred at the store on November 28, 2008, causing substantial damage to the building, pumps and contents. Catawba paid PMF and Century, jointly, $400,000, representing the policy limit on the property damage to the building. Catawba also paid Century $76,526.93 under the fuel pumps and tanks coverage. However, Catawba refused to pay any further claims. Century applied a portion of the insurance payment to monthly installments due under the note from KPB and the balance was paid to BGN Restoration, LLC, which Beauchamps had hired to restore the building.6 No further payments *354were made on the note by either PMF or KPB. Accordingly, the note went into default. In addition, the insurance proceeds were insufficient to cover the entire cost of restoration. Accordingly, BGN ceased work on the restoration when it could not get paid.
Subsequently, in November 2009, PMF filed suit against Catawba in the State Court of Fulton County, Georgia (“The Fulton County Suit”) seeking to recover amounts it claimed were owed under the insurance policy. PMF’s complaint alleged, inter alia, that Catawba breached the insurance policy by failing to pay PMF its continuing operating expenses, which PMF contended included the monthly note payments owed by KPB to Century. PMF alleged that this had caused the mortgage to go into default and that, therefore, as consequential damages, Catawba owed PMF the entire amount due under the Century note.7
On February 1, 2010, KPB and PMF each filed voluntary Chapter 7 petitions. On March 31, 2010, SouthCrest (which was by then the holder of the Century claim against KPB) filed its motion for relief in the KPB case asking to foreclose on the real property on which the convenience store had been operating. An order granting relief was entered on April 28, 2010. Thereafter, SouthCrest foreclosed and confirmed the sale in state court.
On July 2, 2010, the trustee filed in the PMF case an application to employ the firm of Bullard & Wangerin, LLP to prosecute the PMF claim pending in the Fulton County Suit8. An order appointing that firm was entered on July 6, 2010.
On May 24, 2011, SouthCrest filed its own suit against Catawba in the State Court of Gwinnett County, Georgia (“Gwinnett County Suit”) seeking amounts it claimed were due under the insurance policy. SouthCrest’s complaint against Catawba sought damages, including $927,949.80, described in the complaint as “the deficiency owed to Plaintiff on its mortgage on the property”.9
On March 16, 2012, SouthCrest and Catawba executed a “RELEASE OF ALL CLAIMS AND SETTLEMENT AGREEMENT” (the “SouthCrest Settlement”) pursuant to which they settled the Gwin-nett County Suit. Paragraph 9 provides, in part:
SouthCrest accepts Catawba’s payment of $150,000, made pursuant to the mortgagee clause of the policy of insurance Catawba Insurance Company issued ... as full payment and satisfaction of SouthCrest’s claim pursuant to the mortgagee clause, including, but not limited to, the mortgage debt, for the $927,949.50 owed to SouthCrest concerning the mortgage on 517 North Perry Parkway, Perry, Georgia, 31069, and including all claims for inventory and contents and personality at the premises.
Further, Paragraph 11 provides:
Pursuant to the terms of the policy of insurance Catawba Insurance Company *355issued ... SouthCrest shall and hereby does release and assign SouthCrest’s interests in the policy of insurance to Catawba.
Approximately two weeks later, the Fulton County Suit was tried before a jury. The jury returned a verdict in favor of PMF, awarding PMF $155,000 in damages for contents, $266,256 for lost net income, $22,800 for continuing operating expenses “excluding any mortgage expenses”, $28,000 for debris removal, $60,000 as a bad faith penalty and $41,825.65 in attorney’s fees. Although the transcript of the trial was not introduced at the September 10, 2018 claims dispute hearing, Kevin Wangerin, the attorney who tried the case for PMF’s Chapter 7 estate, testified that the trial judge ruled that PMF was not obligated to make the mortgage payments because KPB owed the mortgage debt. Accordingly, the trial judge ruled that the jury could not consider the mortgage payments as part of PMF’s operating expenses.10
On April 26, 2012, a “COMPROMISE AND SETTLEMENT AGREEMENT” (the “PMF Settlement”) was entered in the Fulton County Suit by and between PMF, Beauchamps, KPB and Catawba, pursuant to which all of the claims between PMF and Catawba in the Fulton County Suit, as well as any claims which Beauchamps and KPB might have had against Catawba, were settled by Catawba paying PMF’s Chapter 7 estate $550,000. The PMF Settlement referred to the SouthCrest Settlement and stated that:
Said settlement satisfied and released all claims which SouthCrest Bank had filed in the bankruptcy cases of PMF Enterprises, Inc. and KPB Enterprises, LLC. To the extent any bankruptcy claims or other interest of SouthCrest Bank were assigned to Catawba they are hereby waived and released.
On May 17, 2012, pursuant to Bankruptcy Rule 9019, the trustee filed in the PMF Chapter 7 case a motion to compromise the Fulton County Suit pursuant to the terms of the PMF Settlement. South-Crest objected to the motion, contending that the above quoted release language in the PMF Settlement misrepresented the terms of the SouthCrest Settlement because the SouthCrest Settlement did not settle or release SouthCrest’s claims against PMF or KPB. SouthCrest pointed out that PMF and KPB were not parties to the SouthCrest Settlement, and argued that they were not intended beneficiaries thereof.
The parties agreed to strike all of the above quoted release language and added the phrase “assigned or otherwise” to the paragraph on page 3 of the PMF Settlement that now reads:
Catawba Insurance Company agrees that all claims and demands that the Company has or could have had or may have had assigned or otherwise against either of the Claimants, PMF Enterprises, Inc., or Pierre Beauchamps, individually, or KPB Enterprises, LLC, with respect to the herein-described dispute are satisfied, discharged, and settled by this agreement.
*356(Emphasis supplied). The PMF Settlement in that form was approved by order of this Court dated August 20, 2012.
SouthCrest filed in each Chapter 7 case a proof of claim asserting an unsecured claim of $927,949.80, representing the balance owed on the note from KPB after applying the proceeds from the sale of the foreclosed property. After receiving the $150,000 from Catawba pursuant to the SouthCrest Settlement, SouthCrest filed amended claims for $777,949.80 in each case. Thereafter, PMF and KPB objected to the claims contending, inter alia, that the debt had been settled as part of the SouthCrest Settlement.11
DISCUSSION AND ANALYSIS
PMF12 contends that South-Crest’s claim against KPB was settled and assigned to Catawba pursuant to Paragraphs 9 and 11 of the SouthCrest Settlement. PMF further contends that this claim was then satisfied, discharged and released by Catawba pursuant to the PMF Settlement.
A proof of claim is considered prima facie evidence of the validity and the amount of the claim, creating a presumption in favor of allowance. Fed. R.Bankr.P. 3001(f). The burden is on the objecting party to rebut this presumption by presenting “ ‘facts tending to defeat the claim by probative force equal to that of the allegations of the proofs of claim.’ ” Wright v. Holm (In re Holm), 931 F.2d 620, 623 (9th Cir.1991) (quoting 3 Collier on Bankruptcy ¶ 502.02 (15th ed. 1991)). Once past this threshold challenge, the burden is determined by applicable nonbankruptcy law. Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15, 21, 120 S.Ct. 1951, 1955, 147 L.Ed.2d 13(2000).
In re LJL Truck Center, Inc., 299 B.R. 663, 666 (Bankr.M.D.Ga.2003). In this case, PMF does not challenge execution of the note by KPB. Further, PMF acknowledges that, when these chapter 7 cases were filed, SouthCrest was the holder of the note. Accordingly, the burden is on PMF to establish a defense. O.C.G.A. § 11-3-308.
1. The Settlement Contracts.
A settlement agreement is a contract and is subject to the usual rules of statutory construction. LNV Corp. v. Studle, 322 Ga.App. 19, 20, 743 S.E.2d 578, 580 (2013). Under Georgia law, “The construction of a contract is a question of law for the court.” O.C.G.A. § 13-2-1.
It is axiomatic that contracts must be construed to give effect to the parties’ intentions, which must whenever possible be determined from a construction of the contract as a whole. Whenever the language of a contract is plain, unambiguous, and capable of only one reasonable interpretation, no construction is required or even permissible, and the con*357tractual language used by the parties must be afforded its literal meaning.
First Data POS, Inc. v. Willis, 273 Ga. 792, 794, 546 S.E.2d 781, 784 (2001). However, “... if the contract is ambiguous in some respect, the court must apply the rules of contract construction to resolve the ambiguity.” CareAmerica, Inc. v. Southern Care Corp., 229 Ga.App. 878, 880, 494 S.E.2d 720, 722 (1997). “Ambiguity in a contract is defined as duplicity, indistinctness or an uncertainty of meaning or expression.” Horwitz v. Weil, 275 Ga. 467, 468, 569 S.E.2d 515, 516 (2002). As explained by the court in General Steel, Inc. v. Delta Building Systems, Inc., 297 Ga.App. 136, 138, 676 S.E.2d 451, 453-54 (2009):
Ambiguity exists where the words used in the contract leave the intent of the parties in question — i.e., that intent is uncertain, unclear or is open to various interpretations. Conversely, no ambiguity exists where, examining the contract as a whole and affording the words used therein their plain and ordinary meaning, the contract is capable of only one reasonable interpretation.
Paragraph 9 of the SouthCrest Settlement is clearly ambiguous. By combining the phrase “satisfaction of South-Crest’s claim pursuant to the mortgagee clause” with the phrase “including, but not limited to, the mortgage debt”, there is a question as to whether the parties settled only SouthCrest’s claim against Catawba under the insurance contract, or whether they also settled the mortgage debt itself, i.e. SouthCrest’s claim against KPB. The meaning of Paragraph 9 becomes clear, however, upon considering “... the background of the contract and the circumstances under which it was entered into, particularly the purpose for the particular language to be construed”. Hortman v. Childress, 162 Ga.App. 536, 537, 292 S.E.2d 200, 202 (1982).
The “mortgagee clause” referenced in the SouthCrest Settlement is found in Section F.2 of the insurance contract. That section provides:
Mortgage Holders
a. The term “mortgage holder” includes trustee.
b. We will pay for covered loss of or damage to buildings or structures to each mortgage holder shown in the Declarations in their order of precedence, as interests may appear.
c. The mortgage holder has the right to receive loss payment even if the mortgage holder has started foreclosure or similar action on the building or structure.
(Emphasis supplied). Thus, SouthCrest’s “claim pursuant to the mortgagee clause” was for only “covered loss of or damage to buildings or structures”. SouthCrest had no claim against Catawba under the mortgagee clause to recover its mortgage claim against KPB. Therefore, it is clear that SouthCrest’s claim “pursuant to the mortgagee clause” that was being satisfied did not include SouthCrest’s claim against KPB. The reference in Paragraph 9 to the mortgage debt could only have been included to recognize that this demand had been made in SouthCrest’s complaint.
PMF contends that SouthCrest did have a claim against Catawba for the mortgage debt pursuant to Section F.2.e. of the insurance contract. Section F.2.e. provides:
If we pay the mortgage holder for any loss or damage and deny payment to you because of your acts or because you have failed to comply with the terms of this policy:
(1) The mortgage holder’s rights under the mortgage will be transferred *358to us to the extent of the amount we pay; and
(2) The mortgage holder’s right to recover the full amount of the mortgage holder’s claim will not be impaired. At our option, we may pay to the mortgage holder the whole principal on the mortgage plus any accrued interest. In this event, your mortgage and note will be transferred to us and you will pay your remaining mortgage debt to us.
(Emphasis supplied). Clearly, SouthCrest could not make a demand under Section F.2.e that Catawba pay the mortgage debt and take an assignment thereof. Rather, payment of the mortgage debt was an “option” available to Catawba, which could be exercised by Catawba only if it denied payment to PMF because of PMF’s acts or because PMF failed to comply with the terms of the insurance contract. However, the facts establish that Catawba refused to pay PMF the mortgage debt because it was not a covered loss and because PMF was not obligated on the debt, not because of PMF’s acts or failure to comply with the insurance contract.
PMF argues that before Wangerin completed negotiations with Catawba on the PMF settlement, he called Richard Tisinger, the attorney who had represented SouthCrest in the Gwinnett County Suit, to ask Tisinger for clarification about the meaning of Paragraph 9 of the SouthCrest Settlement. Wangerin testified about this conversation at the claim dispute hearing. PMF argues that this testimony establishes that Tisinger understood that the mortgage debt was settled and assigned pursuant to Paragraphs 9 and 11.
Parol evidence is admissible to explain ambiguities. Willesen v. Ernest Communications, Inc., 323 Ga.App. 457, 464, 746 S.E.2d 755, 761 (2014) cert. denied. However, Wangerin’s testimony was unclear as to whether Tisinger simply affirmed that the SouthCrest Settlement settled SouthCrest’s claim against Catawba or whether it also settled (and assigned to Catawba) SouthCrest’s claim against KPB. While Wangerin testified at length about his understanding of the SouthCrest Settlement (which is irrelevant to the issue at hand), when asked, “[N]ow, did you talk with him [Tisinger] specifically about the Release being applicable to PMF, for instance?”, his response was:
Well, you know, I don’t think we talked directly about the Gwinnett County Release in terms of its terms. I think that we discussed that once that Release, when it discussed the mortgage debt and the Deficiency Judgment, that Release was including those items, meaning including the Bank’s claim for that $927,000.
(Emphasis supplied). Trial Transcript, p. 78.
On the other hand, Mike Low, Senior Vice President of SouthCrest Bank, testified that he was personally in charge of the negotiations between SouthCrest and Catawba and was giving Tisinger his instructions with respect thereto. Low testified that the mortgage debt had been obtained from the FDIC in an asset purchase agreement after Century failed. He testified that because of SouthCrest’s obligations to the FDIC to recover all that it could on the mortgage debt, SouthCrest could not assign the mortgage debt to Catawba and release KPB without the FDIC’s consent and that SouthCrest refused to ask the FDIC for its consent. The Court is convinced that Low’s clear testimony as to SouthCrest’s intent outweighs any vague testimony by Wangerin to the contrary.
*359Finally, “The construction placed upon a contract by the parties thereto, as shown by their acts and conduct, is entitled to much weight and may be conclusive upon them.” Scruggs v. Purvis, 218 Ga. 40, 42, 126 S.E.2d 208, 209 (1962). PMF argues that, shortly after the SouthCrest Settlement was executed, PMF and Catawba submitted a consolidated pretrial order in the Fulton County Suit in which Catawba asserted, as part of its contentions in the case, that “because of Catawba’s settlement with SouthCrest Bank, neither PMF nor KPB have any further obligations to Century Security Bank or SouthCrest Bank.” PMF contends that this shows that Catawba understood that the SouthCrest Settlement satisfied the mortgage debt. However, in that same pretrial order, Catawba also stated that it “has agreed to make an additional payment to SouthCrest, as successor to the failed Century Security Bank, in the amount of $150,000, as mortgagee, representing the contents and inventory in the structure.” (Emphasis supplied). Thus, Catawba took inconsistent positions in the pretrial order with respect to its understanding of the SouthCrest Settlement.
More revealing, however, is the fact that Catawba did not assert the mortgage debt as a counterclaim in the Fulton County Suit. At the pretrial stage of the Fulton County Suit, before the Fulton County Court ruled that PMF was not liable on the mortgage debt, PMF was seeking damages from Catawba in an amount equal to the mortgage debt, contending that, because of Catawba’s failure to pay the mortgage payments, PMF was now liable on the mortgage debt. Had Catawba believed that it was the holder of the mortgage debt as a result of the South-Crest Settlement, surely it would have asserted in the pretrial order that the assigned mortgage debt was an offset against that damage claim. Since it did not, this Court concludes that Catawba did not believe that the mortgage debt had been settled and assigned to it by the SouthCrest Settlement.
In summary, this Court concludes that SouthCrest’s claim against KPB was not discharged and settled under the South-Crest Settlement. In light of this conclusion, it is unnecessary for this Court to address PMF’s contention that it was a third party beneficiary of the SouthCrest Settlement.
2. Accord and Satisfaction.
PMF contends that the South-Crest Settlement represents an accord and satisfaction which satisfies the mortgage debt. Under Georgia law:
Accord and satisfaction occurs where the parties to an agreement, by a subsequent agreement, have satisfied the former agreement, and the later agreement has been executed.
O.C.G.A. § 13-4-101. The mortgage debt is evidenced by the note and security deed from KPB to Century which SouthCrest now holds. The SouthCrest Settlement, on the other hand, is an agreement between SouthCrest and Catawba. The SouthCrest Settlement between South-Crest and Catawba does not constitute a new agreement between SouthCrest and KPB. Accordingly, no accord and satisfaction has occurred.
3. Judicial Estoppel.
PMF next argues that South-Crest is judicially estopped from asserting its claim.
The purpose of judicial estoppel is “to protect the integrity of the judicial process by prohibiting parties from changing positions according to the exigencies of the moment.” New Hampshire v. Maine, 532 U.S. 742, 749, 121 S.Ct. 1808, *3601814, 149 L.Ed.2d 968 (2001). Specifically, judicial estoppel is designed to “prevent a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by the party in a previous proceeding.” 18 Moore’s Federal Practice § 134.30 (3d ed. 2008). In New Hampshire v. Maine, the Supreme Court recognized that while the circumstances under which a court might invoke judicial estoppel will vary, three factors typically inform the decision: (1) whether the present position is clearly inconsistent with the earlier position; (2) whether the party succeeded in persuading a court to accept the earlier position, so that judicial acceptance of the inconsistent position in a later proceeding would create the perception that either the first or second court was mislead and; (3) whether the party advancing the inconsistent position would derive an unfair advantage. Id. at 750-51, 121 S.Ct. at 1815-16.
Robinson v. Tyson Foods, Inc., 595 F.3d 1269, 1273 (11th Cir.2010).
In the Eleventh Circuit, courts consider two factors in the application of judicial estoppel to a particular case. Salomon Smith Barney, Inc. v. Harvey, M.D., 260 F.3d 1302, 1308 (11th Cir.2001). ‘First, it must be shown that the allegedly inconsistent positions were made under oath in a prior proceeding. Second, such inconsistencies must be shown to have been calculated to make a mockery of the judicial system.’ Id.
Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1285 (11th Cir.2002).
The doctrine of judicial estoppel does not apply in this case. In these consolidated Chapter 7 cases, SouthCrest is contending that the mortgage debt is a valid claim. SouthCrest has not taken an inconsistent position under oath in any pri- or legal proceeding. The inconsistent position taken by Catawba in the Fulton County Suit and Wangerin’s inconsistent understanding of the meaning of the SouthCrest Settlement do not constitute inconsistent positions under oath by South-Crest.
h. Promissory Estoppel.
PMF next contends that the doctrine of promissory estoppel prevents SouthCrest from claiming the mortgage debt. Under Georgia law:
A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.
O.C.G.A. § 13-3-44(a). The classic law school example of promissory estoppel is when John promises that he will pay Bob an agreed upon sum if Bob will climb to the top of a flag pole. In reliance upon this promise, Bob begins climbing the pole. Immediately prior to Bob reaching the top, John tries to cancel the promise. Under promissory estoppel, John is estopped from revoking the promise because Bob has reasonably relied on the promise and acted to his detriment.
In this case, SouthCrest made no promise to PMF or KPB. While SouthCrest’s counsel did discuss with Wangerin the terms of the SouthCrest Settlement, there is no evidence that SouthCrest’s attorney made Wangerin any promise to do anything in return for Wangerin’s reliance on those discussions. Since there was no promise made to PMF or KPB, promissory estoppel is not applicable.
*361
5. Dismissal with Prejudice.
Finally, PMF contends that SouthCrest’s dismissal with prejudice of the Gwinnett County Suit operates as an adjudication on the merits for res judicata purposes and bars SouthCrest from asserting the mortgage claim in the bankruptcy cases.
The doctrine of res judicata prevents the re-litigation of all claims which have already been adjudicated, or which could have been adjudicated, between identical parties or their privies in identical causes of action. Res judicata prevents a plaintiff from instituting a second complaint against a defendant on a claim that has already been brought, after having previously been adjudged not to be entitled to the recovery sought on that claim. Three prerequisites must be satisfied before res judicata applies — (1) identity of the cause of action, (2) identity of the parties or their privies, and (3) previous adjudication on the merits by a court of competent jurisdiction.
Waldroup v. Greene County Hosp. Authority, 265 Ga. 864, 865-66, 463 S.E.2d 5, 6-7 (1995).
SouthCrest’s claim in the Gwin-nett County Suit was a claim against Catawba on the insurance contract. South-Crest’s claim in these bankruptcy cases is based on SouthCrest’s claim on the note from KPB. Accordingly, because the claims in each matter arose from separate contracts, they are not identical causes of action. See Executive Fitness, LLC v. Healey Bldg. Ltd. Partnership, 290 Ga. App., 613, 615, 660 S.E.2d 26, 29 (2008) (a suit on a lease contract does not represent an identical cause of action as a suit on a note because the claims arise from two separate contracts). Accordingly, South-Crest’s dismissal of the Gwinnett County Suit does not bar its claim on the note from KPB.
CONCLUSION
For the reasons stated above, PMF’s objection to the claim of SouthCrest is overruled.13 An order consistent with this memorandum opinion shall be entered.
. The transcript of the hearing erroneously states the date of the hearing to be September 20, 2013.
. Walter W. Kelley serves as Chapter 7 Trustee in both the PMF and KBP cases.
. The parties have stipulated that the evidence introduced at the January 2014 hearing on consolidation may be considered in determining the claim objection.
. Throughout the filings and exhibits introduced in this case, this individual’s name is alternatively spelled with and without the "s” at the end of the name. Having no definitive guidance as to which is correct, the Court has chosen to use the version with the "s”.
. Notwithstanding the fact that the real property and building were owned by KPB, Beau-champs did not obtain insurance in the name of KPB, nor did he disclose the existence of KPB and its ownership of the real property to Catawba.
. Continuing to ignore the distinction between KPB, the owner of the premises, and PMF, the operator, Beauchamps caused the contract with BGN to be entered into by PMF.
.Beauchamps was also a plaintiff in the law suit and sought the same damages, alleging that he was a third party beneficiary under the insurance policy. His claim was dismissed on summary judgment by the Fulton County State Court. The trial court also ruled on summary judgment that Catawba had waived its incendiarism defense because it tendered payments under the policy without raising the issue of arson as a potential defense to coverage.
. Bullard and Wangerin had represented PMF prepetition and filed the Fulton County Suit against Catawba.
. The deficiency represents the balance owed on KPB’s loan after applying the foreclosure sale proceeds.
. PMF’s contention that the jury might have been able to consider awarding the mortgage debt but for the SouthCrest Settlement is unsupported by the evidence. Specifically, Wangerin testified:
And ultimately when we got down to the jury, the court ruled that because the mortgage was in KPB, that PMF was not obligated to make those mortgage payments. And we were arguing that it was an obligation because we had been making them since the business opened. And the court did not allow the issue to go to a jury and it was reserved for appeal. Trial Transcript of September 10, 2013, p. 64, Case No. 10-50306 (Docket No. 88).
. Pursuant to the PMF Settlement, the settlement proceeds were paid to PMF's Chapter 7 estate. KPB, on the other hand, is essentially a no asset case. Nevertheless, as a result of the substantive consolidation of PMF and KPB, the assets and liabilities of the two entities have been combined and the liabilities are to be satisfied from the common pool of assets. Eastgroup Properties v. Southern Motel Assoc. Ltd., 935 F.2d 245, 248 (11th Cir.1991). Accordingly, even though SouthCrest has no privity of contract with PMF, it now has a claim against the common pool of assets.
. Even though both debtors objected to SouthCrest’s claim, the cases have proceeded under the heading of PMF's case after substantive consolidation. Accordingly, the claim objection will be treated as the objection of PMF. However, because the grounds for the objections are identical, this decision will constitute a decision on the merits of the objection filed in each case.
. Pursuant to footnote 12, this decision shall constitute a decision on the merits of PMF’s objection (in case number 10-50309, Docket No. 74) and KPB’s objection (in case number 10-50306, Docket No. 66). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497516/ | MEMORANDUM OPINION
JOHN T. LANEY, III, Chief Judge.
This matter is before the Court on Debt- or, FMB Bancshares, Inc.’s, Motion to Dismiss the Involuntary Chapter 7 Petition (the “Motion”) filed by Trapeza CDO XII, LTD (“Trapeza”). The Court heard oral arguments on the Motion on July 30, 2014, in Valdosta, Georgia. Appearing at the hearing were counsel and representatives of the Debtor, Trapeza, Wilmington Trust Company, Farmers and Merchants Bank, and the FDIC. At the conclusion of the hearing, the Court took the matter under advisement. The Court has carefully considered all the pleadings and briefs, the parties’ oral arguments, and the applicable statutory and case law. For the reasons set forth below the Court will deny the Debtor’s Motion to Dismiss.
Background
The Debtor, FMB Bancshares, Inc. (“FMB Holdco”) is a Georgia “bank holding company” headquartered in Lakeland, Georgia. FMB Holdco was formed in 1984. As a “bank holding company” it is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Georgia Department of Banking and Finance (the “Commissioner”). Farmers and Merchants Bank (the “Bank”), is a full service community bank headquartered in Lakeland, Georgia. The Bank was founded in 1907 and has a total of six branches, all of which are located in Georgia. The Bank has approximately $566,000,000 in total assets, and is a wholly owned subsidiary of FMB Holdco. Like FMB Holdco, the Bank is also subject to regulation by the Federal Reserve and the Commissioner. In addition, the Bank is also subject to regulation by the Federal Deposit Insurance Corporation (the “FDIC”).
Trapeza is a corporate entity incorporated under the laws of the Cayman Islands. Trapeza’s relationship with FMB Holdco is the result of Trapeza’s investment in FMB Preferred Trust I (“FMB Trust”), a Delaware statutory trust that is also a subsidiary of FMB Holdco. Trapeza’s investment in FMB Trust arises out of its ownership of $12,000,000 of the FMB *365TruPS.1 Wilmington Trust Company (the “Trustee”) is trustee under the Amended Trust Agreement entered by FMB Holdco in connection with the creation of FMB Trust and the issuance of the FMB TruPS.
i. Overview of TruPS
Federally insured banks and their holding companies, such as the Bank and FMB Holdco, are required to maintain certain minimum levels of “Tier 1” capital. These levels are mandated and overseen by the FDIC and the Federal Reserve. TruPS were created as a way for bank holding companies to access Tier 1 capital at attractive rates by issuing very long-term, deferrable, interest-only securities with equity like features. To achieve favorable tax treatment, a bank holding company does not issue the TruPS directly. Instead, a bank holding company forms a wholly-owned trust subsidiary, and that trust issues preferred equity securities— the TruPS — to investors. Concurrent with the issuance of the TruPS, the subsidiary trust purchases junior subordinated notes issued by the bank holding company.
The notes constitute the sole asset of the subsidiary trust. The terms of the TruPS mirror the terms of the junior subordinated notes, whereby the bank holding company is to make payment of principal and interest to the subsidiary trust pursuant to the notes, and the trust in turn uses those funds to make payments to the holders of the TruPS. The bank holding company then invests the funds from the sale of the junior subordinated notes in its operating bank in order to maintain the required minimum level of Tier 1 capital. An important feature of the junior subordinated notes, and consequently the TruPS, is an absolute right of the obligor to elect to defer all payments on the notes for up to five consecutive years.2 This payment deferral period is designed to allow the holding company and subsidiary bank to withstand any economic recessions or misfortune they may face during the long life of the junior subordinated notes.
ii Structure of FMB Trust.
The FMB Trust was formed in 2006 by FMB Holdco and Wilmington Trust Company (the “Trustee”).3 The FMB Trust was created in order to facilitate FMB Holdco’s access to capital via TruPS. To that end, FMB Trust issued securities to investors in the amount of $12,000,000— the FMB TruPS. The proceeds from the sale of the FMB TruPS were then paid to FMB Holdco by FMB Trust. In exchange, FMB Holdco issued unsecured junior subordinated deferrable interest notes (“the Notes”) in favor of the FMB Trust. The Notes were issued pursuant to the terms of the Junior Subordinated Indenture (the “Indenture”). The principal amount of the Notes is $12,000,000 with a maturity date set in 2036. Under the terms of the Indenture, FMB Holdco is to pay interest each quarter to FMB Trust, and in turn FMB Trust is to pay dividends each quarter to the holders of the FMB TruPS. As with all TruPS, FMB Holdco *366and FMB Trust are permitted to defer interest payments for up to five years, during the term of the Notes.
Trapeza acquired all of the FMB TruPS issued by FMB Trust. Accordingly, the FMB TruPS entitles Trapeza to receive quarterly distributions from FMB Trust. However, Trapeza’s right to receive payments is subject to FMB Holdco’s right to defer interest payments to FMB Trust under the terms of the Indenture. In addition, Trapeza’s right to receive distributions from FMB Trust is guaranteed by FMB Holdco pursuant to the terms of a guaranty agreement entered between FMB Holdco and the Trustee.
Hi. Economic Decline and Prompt Corrective Action
Like many financial institutions, the Bank experienced the adverse impact of the financial recession that struck this country. Beginning in 2008 the Bank saw a drastic decrease in its revenues. In fact, in 2009 the Bank experienced a net loss of approximately $13,600,000.4 As a result, the Bank was pushed to the brink of collapse. For that reason the Bank has operated for the last five years subject to a federally mandated rehabilitation program known as “Prompt Corrective Action.” The Bank’s participation in this program is ongoing and will continue until the Bank and FMB Holdco are considered financially sound by their federal regulators. As part of its participation in the Prompt Corrective Action program, the Bank is required to maintain a minimum capital cushion and if it fails to do so it is subject to increased monitoring and restrictions. Pursuant to Prompt Corrective Action the Bank is currently prohibited from making any distributions to FMB Holdco.
As a bank holding company, rather than an FDIC insured bank, FMB Holdco is not directly subject to Prompt Corrective Action, but it is still subject to regulation by the Bank’s regulators via the “source of strength doctrine,” which is codified at 12 U.S.C. § 1831o-l and 12 CFR 225.4(a) of the Federal Reserve’s regulations. Essentially, the “source of strength” doctrine requires that FMB Holdco support the Bank’s obligation to increase its capital cushion to minimally required levels. On November 11, 2009, as part of its support obligation, FMB Holdco was required to enter into a written agreement (the “Federal Reserve Agreement”) with the Federal Reserve Bank of Atlanta and the Commissioner. The Federal Reserve Agreement provided that FMB Holdco and its nonbank subsidiaries, such as FMB Trust, shall not make any distributions related to subordinated debentures or TruPS without the prior written approval of the Federal Reserve Bank of Atlanta, the Federal Reserve, and the Commissioner.
In October 2012, the FDIC required the Bank to submit a capital restoration plan (the “Capital Plan”), which described the Bank’s plan to increase its capital cushion. FMB Holdco was required to guarantee the Bank’s performance under the Capital Plan. Accordingly, in January 2013, FMB Holdco entered into a Capital Maintenance Commitment and Guaranty (the “Capital Guaranty”). The Capital Guaranty may be enforced by either the FDIC or the Bank. Pursuant to the Capital Guaranty, should the Bank fail to comply with the terms of the Capital Plan, FMB Holdco must pay the Bank the lesser of five percent (5%) of the Bank’s total assets or an amount necessary to bring the Bank into compliance. The Bank is currently in default of the Capital Plan. As a result, under the terms *367of the Capital Guaranty FMB Holdco is currently obligated to pay approximately $30,000,000 to the Bank in order to cure the default.
iv. FMB Holdco’s Default
Beginning on March 30, 2009, and continuing for each consecutive quarter, FMB Holdco elected to defer payments under the Notes to FMB Trust. Under the terms of the Notes, FMB Holdco is able to defer payments under the Notes for a maximum of five years. In January 2014, FMB Holdco sent the Trustee a request asking it to waive the expiration of the deferral period and begin a new five year deferral period. In its request, FMB Holdco cited the regulatory restrictions and its lack of funds as the reasons why it could not make any payments to FMB Trust at the expiration of the deferral period. The Trustee did not respond to FMB Holdco’s request and on March 30, 2014, FMB Holdco went into default on the Notes.
On April 7, 2014, Trapeza, acting through its trustee, The Bank of New York Mellon, provided FMB Holdco and the Trustee with written notice that it was accelerating the Notes and that all principal and interest under the Notes was due immediately. Although there is not a direct contractual relationship between Trapeza and FMB Holdco, Trapeza cites Section 6.10(a) of the Amended Trust Agreement as giving it authority to accelerate the Notes.
In summary, Trapeza is claiming that because it is a holder of the TruPS, FMB Holdco is directly liable to it for all amounts due and payable by FMB Holdco to FMB Trust under the terms of the Notes. On the other hand, FMB Holdco argues that it is legally barred from making any payments to FMB Trust because the Federal Reserve Agreement, Prompt Corrective Action, and the Capital Plan prohibit it from making any payments on the Notes without prior approval of its regulators. FMB Holdco does not anticipate receiving such approval because the capital levels of the Bank are not at the required minimum levels. Additionally, FMB Holdco claims that Trapeza has limited contractual rights to seek payment directly from FMB Holdco, and those rights do not include the right to file an involuntary bankruptcy petition against FMB Holdco.
Discussion
FMB Holdco filed the Motion seeking to dismiss the Involuntary Chapter 7 Bankruptcy Petition pursuant to Federal Rule of Civil Procedure 12(b)(6), which is made applicable to involuntary bankruptcy cases by Federal Rule of Bankruptcy Procedure 1011(b).5 FMB Holdco argues that the petition fails to state a claim under Fed. R.Civ.P. 12(b)(6), because it does not meet the requirements of 11 U.S.C. § 303(b) and that the contractual documents do not grant Trapeza the right to commence an involuntary bankruptcy case. Alternatively, FMB Holdco also argues that the Petition should be dismissed pursuant to 11 U.S.C. § 305, which allows a bankruptcy court to abstain from exercising jurisdiction in certain circumstances when the interests of the creditors and the debtor would be better served by dismissal.
Accordingly, FMB Holdco’s motion rests on the Court’s determination of three central issues: (1) Do Trapeza’s limited contractual rights against FMB Holdco include the right to institute an involuntary case; (2) Is Trapeza a proper creditor *368under § 303(b); and (3) is abstention under § 305 proper?
i Does Trapeza Have Standing To File The Petition?
The terms of the Indenture and Amended Trust Agreement provide that following an event of default, the holders of the TruPS may enforce their rights against FMB Holdco directly. However, the right of a holder of TruPS, such as Trapeza, to take direct action against FMB Holdco is limited to certain circumstances set forth in the Indenture and Amended Trust Agreement. Specifically, Section 5.8 of the Indenture provides that Trapeza,
Shall have the right, upon the occurrence of an Event of Default described in Section 5.1(a), Section 5.1(b) or Section 5.1(c), to institute a suit directly against [FMB Holdco] for enforcement of payment to [Trapeza] of principal of and any premium and interest (including any Additional Interest) on the Securities having a principal amount equal to the aggregate Liquidation Amount of the [TruPS] held by [Trapeza].6
Likewise, Section 6.10(b) of the Amended Trust Agreement provides,
For so long as any [TruPS] remain Outstanding, to the fullest extent permitted by law and subject to the terms of this Trust Agreement and the Indenture, upon a Note Event of Default ..., any Holder of [TruPS] shall have the right to institute a proceeding directly against [FMB Holdco], pursuant to Section 5.8 of the Indenture.7
There is no dispute between the parties that an event of default occurred on March 30, 2014, when FMB Holdco failed to make the outstanding interest payments due at the end of the five year deferral period. Additionally, Trapeza properly notified FMB Holdco that it was exercising its rights under Section 6.10 of the Amended Trust Agreement and accelerating the debt owed by FMB Holdco. Therefore, whether Trapeza has standing under the Indenture and Amended Trust Agreement rests on whether an involuntary bankruptcy is a permitted means of enforcement under the Indenture and Amended Trust Agreement.
I believe it is. The Indenture and Amended Trust Agreement allow Trapeza to bring a “suit ... for enforcement of payment” against FMB Holdco.8 Neither the Indenture nor the Amended Trust Agreement define “suit.” Therefore, we must look outside the contract to determine the meaning of the term. According to Black’s Law Dictionary a “suit” is “[a]ny proceeding by a party or parties against another in a court of law.” Black’s Law Dictionary 1663 (10th ed. 2014). Although it appears the Eleventh Circuit has not addressed the issue of whether an involuntary bankruptcy petition is a “suit ... for enforcement” of payment, Courts outside the Eleventh Circuit have addressed the issue.
In In re Federated Group, Inc., the Ninth Circuit interpreted an indenture provision similar to Section 5.8 of the Indenture as allowing a creditor to enforce its right to payment by instituting an involuntary bankruptcy proceeding. 107 F.3d 730, 732 (9th Cir.1997) (finding that an involuntary petition was properly filed because creditors where the holders of qualified claims under an indenture that granted them an absolute right to payment *369and the right to “institute suit for the enforcement of ... payment”). Similarly, the court in In re Envirodyne Industries, Inc., found that an involuntary bankruptcy may be properly construed as a suit to enforce the payment of past due interest payments. 174 B.R. 986, 996 (Bankr. N.D.Ill.1994). I agree with these courts and find that an involuntary bankruptcy petition may be properly construed as a “suit ... for enforcement of payment.”
In addition, FMB Holdco argues that because another section of the Indenture vests the Trustee with broader enforcement rights than those granted to the holders of the TruPS, such as Trapeza, that this places an additional limit on the enforcement remedies available to Trape-za. Section 5.3 of the Indenture allows the Trustee to take “such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights.”9 Additionally, Section 5.7 of the Indenture grants the Trustee the right to “institute any proceeding, judicial or otherwise ... for the appointment of a custodian, receiver, assignee, trustee, liquidator, sequester (or other similar official) or for any other remedy ...”10 FMB Holdco is correct in its assertion that Sections 5.3 and 5.7 vest broad enforcement powers in the Trustee. However, the granting of broad powers on the Trustee is not a limit on enforcement rights specifically granted to holders of the TruPS, such as Trapeza, in Section 5.8. Accordingly, the Court finds that Trapeza has standing under the Indenture and Amended Trust Agreement to file an ■ involuntary bankruptcy petition.
ii Is Trapeza a Proper Creditor Under Section 308(b) ?
Section 303(b) of the Bankruptcy Code allows a creditor to place a debtor into an involuntary bankruptcy in certain situations. Pursuant to § 303(b) an involuntary bankruptcy case may be commenced by a petitioning creditor under either subpara-graph (1), “by three or more entities, each of which is ... a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount,” or subpara-graph (2) if there are fewer than twelve such holders, excluding employees and insiders, “by one or more of such holders.” For the purposes of § 303, “such holders” refers to those creditors holding claims that are “not contingent as to liability” or “the subject of a bona fide dispute as to liability or amount.” Additionally, § 303(b) requires the petitioning creditors under subparagraph (1) or a sole petitioning creditor under subparagraph (2), have at least $15,325.00 in qualifying claims. Since Trapeza is the sole petitioning creditor, § 303(b)(2) is applicable to the instant matter.
The petitioning creditor bears the burden of establishing that it is a qualified creditor under § 303(b). In re DSC, Ltd., 486 F.3d 940, 944 (6th Cir.2007); In re Bimini Island Air, Inc., 370 B.R. 408, 412 (Bankr.S.D.Fla.2007). A qualified creditor is one whose claim is not contingent as to liability or subject of a bona fide dispute. 11 U.S.C. § 303(b); see also In re Brooklyn Resource Recovery, 216 B.R. 470, 478 (Bankr.E.D.N.Y.1997) (citing In re Better Care, Ltd., 97 B.R. 405, 418 (Bankr.N.D.Ill. 1989) (holding that the burden is on the petitioning creditor to show that it is the holder of a claim that is not contingent or the subject of a bona fide dispute as to liability or amount.)). Therefore, Trapeza bears the burden of establishing that it is *370the holder of a claim that is not “contingent” nor “the subject of a bona fide dispute as to liability or amount.” 11 U.S.C. 303(b)(2). Neither FMB Holdco nor Trapeza claim the debt is the subject of a bona fide dispute. For that reason, the Court will only address the issue of whether the debt owed by FMB Holdco is “contingent” within the meaning of § 303(b).
“Although the Bankruptcy Code does not define the term contingent, a claim is ‘contingent’ within the meaning of § 303(b) when the debtor’s obligation to pay does not come into being until the happening of some future event and that event was within the contemplation of the parties at the time their relationship originated.” 2 Collier on Bankruptcy ¶ 303.10 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). Put another way, a claim is contingent if “an alleged debtor’s legal duty to pay does not come into existence until triggered by the occurrence of an extrinsic event and such extrinsic event or occurrence was one that was reasonably contemplated by the parties at the time the event giving rise to the claim occurred.” In re Rosenberg, 414 B.R. 826, 844 (Bankr.S.D.Fla.2009).
A classic example of a claim that is contingent as to liability is that of a guarantor of payment where the obligation of the guarantor remains contingent until it is clear that the principal obligator is unable to pay. Collier on Bankruptcy ¶ 303.10. Another example of a contingent debt is where a debtor owes a sales agent commission only if potential purchasers actually buy the goods. Id. In such a scenario, the debtor would only be liable for the commissions once the sales were made. Therefore, its obligation is “contingent” upon the sale. On the other hand, a claim is not “contingent as to liability” when “all events have occurred which allow a court to adjudicate a claim and determine whether or not payment should be made.” In re Taylor & Associates, LP, 193 B.R. 465, 473 (Bankr.E.D.Tenn.1996) (citing In re Longhorn 1979-II Drilling Program, L.P., 32 B.R. 923, 927 (Bankr.W.D.Okla. 1983)), remanded on other grounds, In re Taylor & Associates, L.P., 249 B.R. 431 (E.D.Tenn.1997). At that point, “the contingency is applicable only to payment and is only a condition of payment.” Id. Thus, a claim is not contingent merely because the debtor lacks the ability to pay.
Here, FMB Holdco claims that its obligations to Trapeza under the TruPS are “contingent as to liability.” In support of that claim FMB Holdco argues that its obligations to Trapeza are “contingent” because FMB Holdco is prohibited by Prompt Corrective Action, the “source of strength” doctrine, and the Federal Reserve Agreement from making any payments on the Junior Subordinated Notes and consequently on the TruPS. FMB Holdco argues that the “triggering event” which would give rise to its liability to pay the TruPS is the fulfillment of its obligations under the Federal Reserve Agreement and obtaining permission from its regulators to make distributions. Until such a release, FMB Holdco maintains that its obligations to Trapeza pursuant to the Indenture and the TruPS are “contingent.”
I do not agree. FMB Holdco’s argument concerns its ability to pay, rather than its legal duty to pay. FMB Holdco has a present legal obligation to pay Trapeza under the Notes and the FMB TruPS because all “triggering” events have occurred. The terms of the Notes provide that FMB Holdco is to make quarterly interest payments to FMB Trust. In turn, FMB Trust is to make quarterly distributions to the holders of the FMB TruPS. Trapeza, as a holder of the FMB TruPS is entitled to receive a quarterly *371distribution from FMB Trust. However, FMB Trust’s right to receive payment on the Notes is subject to FMB Holdco’s absolute right to defer payments under the Notes for a period of up to five years. In March 2009, FMB Holdco chose to defer those payments. The five year deferral period expired on March 30, 2014. On that date FMB Holdco went into default on the Notes.
As we previously established, Trapeza has rights under the Amended Trust Agreement and Indenture to seek payment directly from FMB Holdco. FMB Holdco does not dispute that it is in default on the Notes, only that its debt to Trapeza is contingent because FMB Holdco is legally barred from making any payments to FMB Trust or Trapeza under the terms of the Federal Reserve Agreement. However, FMB Holdco’s inability to pay, be it the result of the Federal Reserve Agreement or FMB Holdco’s lack of funds, does not make its debt to Trapeza “contingent as to liability” within the meaning of § 308(b).
For the purposes of 303(b) a claim is “contingent” when the debtor’s obligation to pay does not arise until the happening of some future triggering event. See In re Rosenberg, 414 B.R. at 844. Here, FMB Holdco’s direct obligations to Trapeza under the Amended Trust Agreement and Indenture were not enforceable unless FMB Holdco defaulted on the Notes or there was a default on the TruPS. That is precisely what happened. Once the default occurred, the direct obligation was “triggered” and FMB Holdco was liable to Trapeza for any amount due to FMB Trust under the Notes. The fact that FMB Holdco entered into an agreement with its regulators after it agreed to the terms of the Indenture does not supersede Trape-za’s right to enforce the terms of the Indenture and seek payment directly from FMB Holdco. FMB Holdco is asking the Court to allow it to forgo one contractual obligation in favor of another, and to hold it harmless for that breach. The Court will not choose one contract over another when FMB Holdco is legally obligated under both. FMB Holdco’s inability to satisfy its obligations to Trapeza does not affect its duty to do so or render those obligations “contingent.”
Hi. Section S05 Abstention
Finally, FMB Holdco moves for discretionary abstention under 11 U.S.C. § 305(a). Section 305(a) of the Bankruptcy Code provides that after notice and a hearing a court “may dismiss ... or suspend” an involuntary bankruptcy case at any time if “the interest of creditors and the debtor would be better served by such dismissal or suspension.” 11 U.S.C. § 305(a)(1). Abstention is an extraordinary measure and should only be exercised in unusual situations. In re Kennedy, 504 B.R. 815, 828 (Bankr.S.D.Miss.2014); In re First Financial Enterprises, Inc., 99 B.R. 751, 754 (Bankr.W.D.Tex.1989). “The party seeking abstention bears the burden of proof and it is substantial. To carry this substantial burden, the party seeking abstention must show that the court’s voluntary refusal to exercise jurisdiction better serves both the debtor and [the] creditors.” In re Kennedy, 504 B.R. at 828 (internal citations omitted).
The Eleventh Circuit has not directly addressed the issue of abstention under § 305.11 However, courts that have *372addressed abstention under § 305 consider several factors, including: (1) whether another forum is available or there is already a pending action in another court; (2) whether the creditor and debtor are actively engaged in an out of court workout; (3) the purpose for which bankruptcy jurisdiction has been sought; (4) whether the bankruptcy will unnecessarily interfere with state or federal regulatory schemes; and (5) the effect the bankruptcy proceeding will have on the debtor’s business See In re Kennedy, 504 B.R. at 828; In re Axl Industries, Inc., 127 B.R. 482, 485 (S.D.Fla.1991); In re First Financial Enterprises, Inc., 99 B.R. at 754. However, these factors are not exhaustive and courts routinely employ a myriad of other factors in determining whether abstention under § 305 is proper. See e.g. In re Spade, 258 B.R. 221, 230 (Bankr.D.Colo.2001); In re Kennedy, 504 B.R. at 828; In re Axl Industries, Inc., 127 B.R. at 485.
Additionally, some courts have acknowledged that abstention may be appropriate in situations where the bankruptcy action is essentially a two-party dispute, provided the petitioning creditor can obtain adequate relief in a non-bankruptcy forum. In re Kennedy, 504 B.R. at 829; In re Axl Industries, Inc., 127 B.R. at 485. However, § 303(b)(2) specifically envisions two party dispute situations because in certain situations it allows a single creditor holding a claim in excess of $15,325 to commence an involuntary bankruptcy case, so long as the claim is not contingent as to liability or subject to a bona fide dispute. 11 U.S.C. § 303(b)(2) (stating an involuntary petition may be commenced “by one or more [creditors]”) (emphasis added); In re Kennedy, 504 B.R. at 829. Moreover, the Court recognizes that these are merely factors for a court to consider and no one factor standing alone represents a threshold issue that requires abstention. It is at the discretion of the court to weigh each factor in reaching its decision.
Here, abstention under § 305(a) is not appropriate. FMB Holdco moves this Court to abstain from exercising jurisdiction because (1) allowing the case to proceed would cause excessive interference and entanglement with FMB Holdco and the Bank’s regulators, (2) bankruptcy is not in the best interest of FMB Holdco or Trapeza, and (3) this case is essentially a “two-party” dispute that would be more appropriately resolved in a court of general jurisdiction. I do not agree and will address each argument in turn.
a. Excessive Government Entanglement
First, FMB Holdco argues that allowing the case to proceed will cause unnecessary interference with the regulatory schemes that FMB Holdco and FMB Bank are currently operating under. In support, FMB Holdco relies on the case of In re First Financial Enterprises, Inc., 99 B.R. 751. In that case the Bankruptcy Court for the Southern District of Texas decided to abstain from exercising jurisdiction over a voluntary Chapter 11 petition filed by a parent holding company because the court found that the petition had been filed in “an attempt by the Debtor and its sole shareholder to halt the state court receivership of the debtor’s subsidiary insurance companies,” which themselves were not eligible for bankruptcy. Id. at 755. In In re First Financial Enterprises, the state appointed receiver of the subsidiary insurance companies was already involved in hotly contested state court litigation against the sole shareholder of the parent holding company, and the proposed plan *373would call for the inclusion of all assets and creditors of the ineligible subsidiaries within the umbrella of its Chapter 11 case. Id. at 754-755. This was intended to halt the state court receiverships. Id. In effect, the proposed plan would end the state court litigation against the sole shareholder of the parent holding company.
Here, neither FMB Holdco nor the Bank is in a state court receivership. In fact, there is not any state or federal court litigation, outside of this bankruptcy action, currently pending between the parties. Unlike the holding company in In re First Financial Enterprises it does not appear to the Court that Trapeza is attempting to accomplish through this bankruptcy what it could not accomplish through litigation in another court. In fact, FMB Holdco acknowledges that Trapeza could seek to enforce its rights in another court. The holding company in In re First Financial Enterprises, sought to halt a state court receivership that was already in place by placing the parent holding company in bankruptcy, a remedy that was not available to the subsidiary insurance company. Trapeza has not attempted to circumvent a state court action and has simply chosen what it feels is the best alternative.
Additionally, allowing the bankruptcy to proceed will not cause excessive entanglement with the regulation of the Bank. The restrictions placed on the Bank by its regulators are in place to help strengthen the Bank and help the Bank replenish its capital reserves. Any potential purchaser of the Bank would be subject to the same regulation and be required to recapitalize the bank as a condition to obtaining regulatory approval for control of the Bank. Thus, the bankruptcy would not cause excessive entanglement with the Bank’s regulators.12
b. Best Interest of Debtor and Creditor
Next, FMB Holdco argues that abstention is proper because bankruptcy is not in the best interest of FMB Holdco or Trape-za because a liquidation of FMB Holdco’s stock in the Bank would yield an amount that is less than the face value of the FMB TruPS, destroy the value of FMB Holdco common stock, and end the Bank’s existences as a community bank. Section 305 allows abstention when dismissal is in the best interest of both the debtor and the creditors. FMB Holdco has argued and presented evidence that its financial condition is improving and that if it continues on its current upward trend FMB Holdco will eventually be able to repay its obligations to Trapeza. Thus, bankruptcy is not in the best interest of FMB Holdco. However, § 305 permits abstention only when dismissal is in the best interest of both the debtor and its creditors. Trapeza represents the sole non-insider creditor of FMB Holdco and has chosen to file this bankruptcy.13 The deferral period under the Notes has given FMB Holdco five years to improve its financial situation and Trapeza has not received any payments under the FMB TruPS during that time. FMB Holdco contracted for a five year deferral period and that period has expired. Trapeza now has the right to seek payment of the amounts it is owed. Trapeza is a sophisticated party and has considered its options carefully and has chosen to seek its remedy in bankruptcy. Trapeza feels *374that bankruptcy is the proper forum to enforce its rights and the Court will not second guess its business judgment. Accordingly, the Court finds dismissal is not in the best interest of both the debtor and the creditor.
c. Two Party Dispute
Finally, FMB Holdco argues that this case is a two-party dispute that would be more appropriately decided in a court of general jurisdiction. Some courts have acknowledged that abstention may be appropriate where the bankruptcy action is essentially a two-party dispute and the petitioning creditor can obtain adequate relief in a non-bankruptcy forum. In re Kennedy, 504 B.R. at 829 (citing In re Mountain Dairies, Inc., 372 B.R. 623 (Bankr.S.D.N.Y.2007) and In re Spade, 258 B.R. 221 (Bankr.D.Colo.2001), for the proposition that abstention may be possible in a two-party dispute situation, but ultimately finding that abstention was not proper based on the facts of the case before it.); see also In re Axl Industries, Inc., 127 B.R. at 485. However, § 305 “specifically contemplates a two-party dispute by allowing a single creditor holding a claim greater than $15,325.00 that is not contingent as to liability or subject to a bona fide dispute to file an involuntary petition.” Id. (citing 11 U.S.C. § 303(b)(2)). Additionally, even those courts acknowledging the “two party” dispute theory recognize that abstention may be appropriate only where there is another forum available to adequately protect the interest of the parties. See In re Spade, 258 B.R. at 234.
Here, there is no dispute that Trapeza could seek to enforce its rights in another forum as the Indenture specifically allows Trapeza to file a “suit” to enforce payment. However, Trapeza chose this Court and jurisdiction in this Court is proper. Dismissal would likely result in a long protracted litigation in a court of general jurisdiction and force Trapeza to wait even longer for any recovery of its investment. FMB Holdco may be correct in that this Court is not the best forum, but Trapeza is a proper creditor under § 303(b)(2) and jurisdiction in this Court is appropriate under § 303. Therefore, the Court will not exercise the extraordinary power of abstention because it is not clear to the Court that both the debtor and creditors would be better served by this Court relinquishing jurisdiction, and the court is not certain that Trapeza could obtain adequate relief in another forum.
Conclusion
For the reasons stated in this opinion, the Court will deny the Motion to Dismiss the Involuntary Chapter 7 Petition.
. TruPS are preferred equity securities issued by a statutory trust in order to raise capital for the parent bank holding company. TruPS is discussed in greater detail later in the opinion.
. This deferral period is stated as 20 consecutive calendar quarters in the notes.
.FMB Trust was formed pursuant to the Delaware Statutory Trust Act, 12 Del. C. § 3801, et seq., by the entry of a Trust Agreement between FMB Holdco and Wilmington Trust Company dated November 14, 2006. The Trust agreement was subsequently amended on November 17, 2006. Therefore, it is the Amended Trust Agreement, dated November 17, 2006, that is pertinent to this action.
. FMB Exhibit 3 (chart depicting revenues of FMB Holdco and the Bank).
. Fed. R. Bankr.P. provides that in an involuntary bankruptcy case "[d]efenses and objections to the petition shall be presented in the manner prescribed by Rule 12 F.R.Civ.P. ...”
. Indenture, § 5.8
. Amended Trust Agreement, § 6.10(b).
.Indenture § 5.8, Amended Trust Agreement, § 6.10(b) (stating that Trapeza may exercise any rights available under § 5.8 of the Indenture).
. Indenture, § 5.3
. Indenture, § 5.7
. This is perhaps a result of a bankruptcy court’s decision to abstain under § 305 being only appealable to the district court. Section 305(c) provides that "An order under subsection (a) of this section dismissing a case ... or decision not so to dismiss ... is not reviewable by ... the court of appeals ... or by the Supreme Court of the United States.” *372The Eleventh Circuit has found this section to only authorize appeal of a § 305 decision to the district court. Goerg v. Parungao (In re Goerg), 930 F.2d 1563 (11th Cir.1991).
. The Court notes that counsel for the FDIC appeared at the hearing on the Motion and took no position as to the appropriateness of the bankruptcy.
. Because of the Capital Guaranty FMB Holdco has a current obligation to the Bank of approximately $30,000,000. Thus, the Bank is a substantial creditor of FMB Holdco. Additionally, neither side has made any mention of any creditors other than Trapeza. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497517/ | FINKLE, Bankruptcy Judge.
Puerto Rico Electric Power Authority (“PREPA”) appeals from a bankruptcy court order denying its motion for payment of administrative expenses under Bankruptcy Code § 503(b)(9)1 (the “Expense Motion”), as well as a subsequent order denying its motion for reconsideration (the “Reconsideration Motion”). For the reasons discussed below, we VACATE the order denying the Expense Motion and REMAND to the bankruptcy court for further proceedings consistent with this opinion. For the reasons discussed infra, the appeal of the order denying the Reconsideration Motion is waived.
BACKGROUND
PMC Marketing Corp. (“PMC”) filed a voluntary petition for chapter 11 relief on March 18, 2009. The bankruptcy court converted PMC’s case to chapter 7 and appointed Noreen Wiscovitch Rentas as the chapter 7 trustee (the “Trustee”) in May 2010.
In April 2013, PREPA filed the Expense Motion, seeking administrative expense priority under § 503(b)(9) in the amount of $89,336.42, representing the value of its claim for electricity supplied to PMC during the twenty-day period preceding the petition date. In support, PREPA alleged that: (1) it supplied the electricity during *388PMC’s ordinary course of business, as required for priority treatment as an administrative expense under § 503(b)(9); and (2) because electricity satisfies the Uniform Commercial Code (the “UCC”) definition of a “good,” it also qualifies as a good for purposes of § 503(b)(9).2
In opposition to the Expense Motion, the Trustee did not address the issue of whether electricity is a service or a good. Instead, she urged the court to disallow the Motion as a “disguised” and “extremely belated” proof of claim. In its reply, PREPA challenged the Trustee’s characterization of the Expense Motion, maintaining that neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure prescribe a time limitation for the filing of administrative expense claims.
Without a hearing, the court denied the Expense Motion in its Opinion and Order dated September 4, 2013. See In re PMC Mktg., Corp., 501 B.R. 17 (Bankr.D.P.R. 2013). At the outset, the court readily dispatched the Trustee’s timeliness challenge, noting among other things, that the docket revealed PREPA had timely filed a proof of claim covering the amounts for which it sought administrative expense priority. The court concluded that there was no dispute that PREPA provided electricity to PMC within the twenty-day period preceding the bankruptcy filing and that PMC purchased that electricity in the ordinary course of its business. The only issue that remained was whether the electricity provided by PREPA was a “good” or a “service.”
In ruling that PREPA’s provision of electricity to PMC was a service, and therefore outside the scope of § 503(b)(9), the bankruptcy court determined that it was necessary to consider the totality of the circumstances. The dominant focus of its analysis was PREPA’s domination of the electricity supply in Puerto Rico and its status as a regulated public utility. The bankruptcy court found this factor crucial, contrasting PREPA with the electricity provider in In re Erving Indus., Inc., 432 B.R. 354 (Bankr.D.Mass.2010), where that court concluded electricity was a “good” rather than a “service.” The bankruptcy court elaborated:
In this instant case, PREPA plays a different role than the alternative energy provider in Erving. Contrary to PREPA, the alternative energy provider in Erving is exactly that, an [alternative ] energy provider, in which the consumer can elect such alternative energy from a private corporation. This Court takes judicial notice of PREPA’s web-page. [Under the] “PREPA is” tab, PREPA provided the following description in relevant part:
The Puerto Rico Electric Power Authority (PREPA) is a public corporation that was founded in 1941. Our Mission is to provide electric energy services to customers in the most efficient, cost-effective and reliable manner in harmony with the environment. Our Vision is to ensure that PREPA’s operations are competitive to similar corporations around the world. PREPA produces, transmits and distributes, practically, all the electric power used in Puerto Rico. It is one of the major public electric power *389corporations in the United States. PREPA is directed by a Government Board, comprised of nine members. Seven of its members are appointed by the Governor of Puerto Rico with the approval of the Senate. (emphasis added)
As seen above, PREPA is a government agency, seeking to provide utilities to the residents of Puerto Rico. Both the House Judiciary Report and the Senate Report on the provision provide in relevant part:
[Section 366] gives debtors protection from a cut-off of service by a utility because of the filing of a bankruptcy case. This section is intended to cover utilities that have some special position with respect to the debtor, such as an electric company, gas supplier, or telephone company that is a monopoly in the area so that the debtor cannot easily obtain comparable service from another utility.
In re PMC Mktg. Corp., 501 B.R. at 23-24 (footnote and citation omitted) (alterations added).
The bankruptcy court then turned to the meaning of “utility,” observing that while that term is not defined in the Bankruptcy Code, its ordinary meaning is “ ‘a service (such as light, power, or water) provided by a public utility.’ ” Id. at 24 (quoting Merriam-Webster’s Collegiate Dictionary (10th ed. 2001)). Citing One Stop Realt-our Place, Inc. v. Allegiance Telecom, Inc. (In re One Stop Realtour Place, Inc.), 268 B.R. 430, 435 (Bankr.E.D.Pa.2001), the bankruptcy court further observed that some courts have concluded that the term “utility” refers to a “business organization (as an electric company) performing a public service and subject to special governmental regulations, that has some special position with respect to the debtor, and has a monopoly in the area so that the debtor cannot easily obtain comparable service from another.” 501 B.R. at 24 (internal quotations and citation omitted). PREPA, the bankruptcy court found, qualified as a “utility provider” because:
(1) [I]t is subject to governmental regulation as are traditional utilities; (2) PREPA does fit the ordinary definition of a utility as it does enjoy a “special relationship” with the Debtor (PREPA is the sole provider of electricity in Puerto Rico) and it does have a monopoly; and (3) PREPA is a government owned corporation of Puerto Rico.
Id. The bankruptcy court ruled that as a regulated utility provider, PREPA provided a “service” rather than a “good” to PMC and, therefore, was not entitled to payment of prepetition priority expenses pursuant to § 503(b)(9). Id.
On September 5, 2013, PREPA filed the Reconsideration Motion pursuant to Fed. R. Bank. P. 9023, contending that the-court committed an error of fact when it concluded that PREPA has a state-granted monopoly over the sale of electricity in Puerto Rico, and an error of law when it ruled that § 503(b)(9) does not apply to the electricity sold by PREPA to its customers because of that monopoly.
The Trustee opposed reconsideration, arguing “there can be no doubt that PREPA is a ‘utility,’ ” as “almost every person and/or entity in Puerto Rico has to purchase electricity from PREPA.” The bankruptcy court denied the Reconsideration Motion in its Opinion and Order dated October 1, 2013, on the grounds that PREPA had failed to present newly discovered evidence or any intervening change in the law. This appeal followed.
POSITIONS OF THE PARTIES
The sole issue on appeal is whether the bankruptcy court erred in concluding that the electricity PREPA supplied to PMC within the twenty days of the petition date *390is a “service” rather than a “good” entitled to receive priority treatment as an administrative expense under § 503(b)(9). Although PREPA identified in its notice of appeal the order denying reconsideration as one of the matters on appeal, it waived that aspect of the appeal by failing to discuss this order in its statement of issues and brief. See Eakin v. Goffe, Inc. (In re 110 Beaver St P’ship), 355 Fed.Appx. 432, 436-37 (1st Cir.2009).
PREPA urges the Panel to follow Ewing, supra, where the court determined that electricity satisfies the UCC definition of a “good” and therefore constitutes a “good” for purposes of § 503(b)(9). It contends that the electricity it sold to PMC “is just as moveable and just as identifiable when it passe[d] through the meter as was the electricity supplied by the electricity provider in” Ewing. Challenging the bankruptcy court’s “public utility” analysis and its emphasis on the relationship between the provider and its customer, PREPA further argues:
Electricity is electricity regardless of who sells it. Its nature and physical properties do not change depending on who is the seller. Either' electricity is always a “good” or is always a “service” for purposes of the UCC and section 503(b)(9). Simply put, electricity does not cease to fall under the definition of “goods” of the UCC just because the seller happens to be a public utility.
Citing the principle that Bankruptcy Code provisions governing claims priority are to be “narrowly construed,” see Travelers Prop. Cas. Corp. v. Birmingham-Nashville Express, Inc. (In re Birmingham-Nashville Express, Inc.), 224 F.3d 511, 517 (6th Cir.2000), the Trustee counters that Puerto Rico did not adopt § 2-105(1) of the UCC and that PREPA has “failed to otherwise explain how electricity is a good under Puerto Rico law.” The Trustee argues alternatively that electricity does not satisfy the UCC definition of a “good.” Relying on In re NE Opco, Inc., 501 B.R. 233 (Bankr.D.Del.2013), the Trustee asserts that for something to be a “good,” the purchaser must be able to separate and move or return the “good.” Applying this test to electricity, she contends:
Once electricity has been ‘identified’ by measurement at the meter, it has already been consumed by the end user. It is impossible for the consumer to return electricity to the provider after it has passed the meter point. The mere fact that electricity is sold in metered quantities does not bring it within UCC § 2-105 or Code § 503(b)(9).
(citation omitted). Accordingly, she maintains that PREPA’s claim is not entitled to priority treatment under this provision of the Bankruptcy Code.
JURISDICTION
A bankruptcy appellate panel is “‘duty-bound’” to determine its jurisdiction before proceeding to the merits, even if not raised by the litigants. Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724, 725-26 (1st Cir. BAP 1998) (quoting Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (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) ].” In re Bank of New England Corp., 218 B.R. at 645. The bankruptcy court’s determination that PREPA’s claim is not entitled to administrative priority under § 503(b)(9) is a final order. In re Saco Local Dev. Corp., 711 F.2d 441, 445-46 (1st Cir.1983) (stating a final judgment includes an order that conclusively determines a dispute over the *391priority of a creditor’s claim); see also Polsky v. Renew Energy, LLC, No. 09-cv-701-bbc, 2010 WL 842317, at *4 (W.D.Wis. Mar. 5, 2010) (“There is no question that the disallowance of [the creditor’s] § 503(b)(9) claim is a final order.”).
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). This appeal involves a question of statutory interpretation; accordingly, the Panel’s review is de novo. See Boston & Me. Corp. v. Mass. Bay Transp. Auth., 587 F.3d 89, 98 (1st Cir.2009) (citation omitted); Larson v. Howell (In re Larson), 513 F.3d 325, 328 (1st Cir.2008) (citations omitted).
DISCUSSION
I. The Standard Under § 503(b)(9)
Enacted as part of BAPCPA, § 503(b)(9) “creates a priority administrative expense claim for the value of goods received by a debtor in the ordinary course of business during the 20 days prior to the bankruptcy filing.” In re Erving Indus., Inc., 432 B.R. at 361 (footnote and citation omitted). The statute provides:
(b) After notice and a hearing, there shall be allowed administrative expenses ..., including—
(9) the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.
11 U.S.C. § 503(b)(9).
“ ‘The language of the statute provides for the allowance of an administrative claim provided the claimant establishes: (1) the vendor sold “goods” to the debtor; (2) the goods were received by the debtor within twenty days prior to filing; and (3) the goods were sold to the debtor in the ordinary course of business.’ ” In re NE Opco, Inc., 501 B.R. at 240-41 (quoting In re Goody’s Family Clothing, Inc., 401 B.R. 131, 133 (Bankr.D.Del.2009)). An administrative expense claimant bears the burden of establishing that its claim qualifies for priority status. In re Goody’s Family Clothing, Inc., 401 B.R. at 136 n. 24 (internal quotations and citation omitted).
II. What is a “Good”?
It is well-settled that the statute does not provide priority status to claims for services rendered; it refers only to “the value of ... goods.” In re Erving Indus., Inc., 432 B.R. at 361 (quoting 11 U.S.C. § 503(b)(9)); see also In re NE Opco, Inc., 501 B.R. at 241 (“An administrative priority claim under [§] 503(b)(9) is limited to the provision of goods”). Beyond that, however, the Bankruptcy Code does not define the term “goods,” and the First Circuit has not addressed the issue.
In the absence of a Code definition, nearly every court to consider the issue, other than the bankruptcy court in this case, has concluded that the meaning of “goods” under § 503(b)(9) “is primarily informed by the meaning of goods under Article 2 of the UCC.” In re Erving Indus., Inc., 432 B.R. at 365; see also In re NE Opco, Inc., 501 B.R. at 260; Hudson Energy Servs., LLC v. Great Atl. & Pac. Tea Co. (In re Great Atl. & Pac. Tea Co.), 498 B.R. 19, 25-26 (S.D.N.Y.2013); GFI Wis., Inc. v. Reedsburg Util. Comm’n, 440 B.R. 791, 798 (W.D.Wis.2010); In re Circuit City Stores, Inc., 416 B.R. 531, 535-36 (Bankr.E.D.Va.2009); In re Goody’s Family Clothing, Inc., 401 B.R. at 134-36; In re Pilgrim’s Pride Corp., 421 B.R. 231, 237 (Bankr.N.D.Tex.2009); In re Plastech En*392gineered Prods., Inc., 397 B.R. 828, 836 (Bankr.E.D.Mich.2008); see also In re Samaritan Alliance, LLC, No. 07-50735, 2008 WL 2520107, at *3 (Bankr.E.D.Ky. June 20, 2008).3
As justification, one bankruptcy court within this circuit reasoned that “[gjiven the wide usage and acceptance of the definition of goods found in the UCC at § 2-105(1), it is hardly plausible that Congress expected bankruptcy judges to roll up their sleeves and set to work reinventing the proverbial wheel and divining a more amorphous ‘common understanding’ of the term.” In re Erving Indus., Inc., 432 B.R. at 365. Some courts have also reasoned that the UCC definition is consistent with the expectations of the marketplace, GFI Wis., Inc., 440 B.R. at 798, In re Circuit City Stores, Inc., 416 B.R. at 536 n. 7, and In re Goody’s Family Clothing, Inc., 401 B.R. at 134, while another emphasized the necessity of a uniform definition to ensure similarly situated claims receive the same treatment. In re Pilgrim’s Pride Corp., 421 B.R. at 236-37.
The fundamental problem in the instant case is that the bankruptcy court did not conduct its analysis utilizing a particular definition of the term “good” which the court deemed appropriate for purposes of its determination. While it acknowledged that the Erving court used UCC § 2-105(1) to reach its conclusion that electricity is a “good” for purposes of § 503(b)(9), it never considered the merits of that approach one way or another, and merely noted that many courts disagree with Ewing's holding that electricity is a “good” rather than a “service.” Instead, the bankruptcy court adopted a case-by-case inquiry into “the totality of the circumstances of all relevant facts,” which seemingly focused on facts distinguishing PREPA from the electric provider in Erv-ing. Indeed, the only part of the Erving decision that the bankruptcy court emphasized was the electric provider’s argument that it was not a utility because its “service” was different from those traditional functions commonly associated with electric utilities and it lacked a monopoly or exclusive service area regulated by the government.
This approach was inherently flawed because rather than considering whether electricity is a “good,” the question squarely before the bankruptcy court, it first determined that PREPA is a utility and then focused on whether a utility provides services rather than a “good.” The bankruptcy court ultimately found that the relationship between PMC and PREPA was clearly one between a customer and a regulated utility and, given PREPA’s nature as a “traditional utility” provider with a monopoly in the provision of electricity to its customers, PREPA provided a “service” rather than a “good.” In doing so, it erroneously rejected the idea that electricity is, in and of itself, either a “good” or a “service.” Moreover, the bankruptcy court mistakenly relied on several observations to inform its decision.
First, the bankruptcy court gave inappropriate evidentiary weight to PREPA’s characterization of itself as a service provider on its own website. PREPA’s website is merely a self-serving marketing tool and of no moment. Furthermore, “[tjhat a company provides services does not bar it from selling goods that qualify for administrative priority under § 503(b)(9).” GFI Wis., Inc., 440 B.R. at 801-802.
*393Next, having concluded from PREPA’s website that it is “a government agency, seeking to provide utilities to the residents of Puerto Rico,” the bankruptcy court considered the legislative history of § 366,4 noting Congress’ recognition that utilities hold a special position or monopolistic relationship with respect to a debtor. It then looked to the ordinary meaning of “utility” and “public utility,” generally defining it as an entity providing a “service,” such as power or water, to the public and having a special relationship with the government and the consumer. The bankruptcy court’s reliance on these considerations is problematic.
Courts have uniformly rejected the relevance of § 366 to the § 509(b)(9) “goods” versus “services” determination. See, e.g., GFI Wis., Inc., 440 B.R. at 801; In re NE Opco, Inc., 501 B.R. at 244; In re Erving Indus., Inc., 432 B.R. at 363-4; In re Pilgrim’s Pride Corp., 421 B.R. at 241; In re Plastech Engineered Prods., Inc., 397 B.R. at 839. The purpose of § 366 is “to prevent the threat of termination from being used to collect pre-petition debts while not forcing the utility to provide services for which it may never be paid.” Jones v. Boston Gas Co. (In re Jones), 369 B.R. 745, 748 (1st Cir. BAP 2007) (citation and internal quotations omitted). As aptly stated by the district court in GFI Wisconsin., Inc., “|j]ust because a seller of goods may also be a utility that is entitled to the protection of § 366 ... does not mean it is prohibited from allowance of a § 503(b)(9) administrative expense claim....” 440 B.R. at 801; accord In re NE Opco, Inc., 501 B.R. at 255 (noting “there are things such as natural gas that are specifically identified in the [UCC] as goods but which are services under [§] 366”); In re Erving Indus., Inc., 432 B.R. at 364 n. 15 (concluding that even if the court were to determine that the claimant is a utility, that characterization would not foreclose a claim under § 503(b)(9)); In re Plastech Engineered Prods., Inc., 397 B.R. at 839 (concluding that natural gas is a “good” recoverable under § 503(b)(9), regardless of whether creditor was entitled to protections under § 366); In re Pilgrim’s Pride Corp., 421 B.R. at 241 (holding that nothing in § 366 forecloses gas providers from asserting priority claim under § 503(b)(9)).
More troubling, however, is that the bankruptcy court’s focus on the definition of a “utility” led it to place undue weight on the monopolistic relationship between PMC and PREPA. In rejecting such emphasis on the parties’ relationship, one court observed:
If one makes the good/service determination based on the parties’ relationship, then the electric current could travel from origination to use, starting as a good and ending as a service. Indeed, since [§] 366 is unique to the Bankruptcy Code, whether the wholesaler providing electricity to the consumer is delivering a good or a service might depend on whether the consumer is in bankruptcy. The problems with this approach are self evident. The proper course is to determine whether electricity, in and of itself, is a good.
In re NE Opco, Inc., 501 B.R. at 255-6. Moreover, focusing on the relationship of the parties could potentially yield unpredictable and inconsistent results depending on the nature of the claimant rather than the substance of the product provided to a debtor. We conclude that the bankruptcy *394court’s reliance on § 366 and its legislative history was misplaced. Ultimately, we are persuaded by the vast weight of authority that a proper analysis of whether electricity constitutes a “good” for purposes of § 503(b)(9) administrative priority must begin with an analysis of the term “good” itself. Thus, we conclude that the bankruptcy court applied the incorrect legal standard and the case must be remanded for a proper analysis focusing on the definition of the term “good,” and then applying that definition to the facts at hand.5 Because the bankruptcy court has not yet considered the merits of any definition of a “good” for purposes of § 503(b)(9), we need not opine at this time on whether electricity is a “good” or a “service” entitled to administrative expense priority.
CONCLUSION
In light of the foregoing, we VACATE the bankruptcy court’s order denying the Expense Motion, and REMAND to the bankruptcy court for further proceedings consistent with this opinion.
. Unless otherwise indicated, the terms "Bankruptcy Code,” "section” and "§ ” refer to Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, 119 Stat. 37 ("BAPCPA”).
. UCC § 2-105(1) defines "goods,” in relevant part, as "all things ... which are movable at the time of identification to the contract for sale” except "money in which the price is to be paid, investment securities (Article 8) and things in action.” UCC § 2-105(1). The Official Comment to UCC § 2-105 explains that "[t]he definition of goods is based on the concept of movability and the term 'chattels personal’ is not used. It is not intended to deal with things which are not fairly identifiable as movables before the contract is performed.”
. Ironically, near uniformity has not flowed from this widespread application of the UCC definition of a “good” to § 503(b)(9). Cf. GFI Wis., Inc., 440 B.R. at 802; In re Erving Indus., Inc., 432 B.R. at 370 (electricity is a "good”), with In re NE Opco, Inc., 501 B.R. at 260; In re Pilgrim’s Pride Corp., 421 B.R. at 240.
. Section 366 provides, in pertinent part, that "a utility may not alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.” 11 U.S.C. § 366(a).
. As previously indicated, most courts to consider the issue have adopted the definition of "goods” contained within UCC § 2-105(1). The Trustee, however, notes that Puerto Rico has not enacted the UCC or the definition of a "good” as provided by UCC § 2-105(1). PREPA, on the other hand, asserts that the Supreme Court of Puerto Rico has already ruled that electricity is a "good” in Pueblo v. Uriel Alvarez, 112 D.P.R. 312, 12 P.R. Offic. Trans. 388 (1982) (observing in dicta that electricity is "property” that may be the subject of unlawful appropriation under the Penal Code of Puerto Rico); see also Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp., 163 F.3d 153, 155 (2d Cir.1998) (apre-BAPCA case in which the district court for the Southern District of New York held that "the UCC does not apply to [the] sale of electricity which is a service under New York law.”). Consideration of these issues is appropriately left to the bankruptcy court in the first instance. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497520/ | OPINION AND ORDER
ENRIQUE S. LAMOUTTE, Bankruptcy Judge.
This case is before the court upon the Motion for Summary Judgment (Docket No. 17) filed by the Plaintiffs seeking a determination of value (at $150,000) of a real property registered as Lot No. 8,479, page no. 147, volume no. 266 (the “Real Property”) of the Property Registry of Puerto Rico, Section I of Caguas (the “Property Registry”) and that First Bank Puerto Rico (“First Bank”), a junior lien holder on the property, be found to be a wholly unsecured creditor under Section 506(a) of the Bankruptcy Code. The Plaintiffs also request an order directing the Registrar of the Property Registry (the “Property Registrar”) to eliminate First Bank’s junior mortgage from the Property Registry under Section 1322(b)(2). Also before the court is the Partial Opposition to Motion for Summary Judgment (Docket No. 22) contending that an order for the Property Registrar to eliminate its junior mortgage cannot be entered until the Plaintiffs have completed all payments under their Chapter 13 plan. For the rea*405sons stated herein, the Motion for Summary Judgment is granted in part and denied in part.
Procedural Background
The Plaintiffs filed their Chapter 13 bankruptcy petition on April 26, 2013. See Lead Case Docket No. 1. In Schedule A, they listed the Real Property as their residential property with a value of $150,000.00 and a secured claim of $230,319.19. See Lead Case Docket No. 3, p. 21.
On June 21, 2013, the Plaintiffs filed the Complaint that initiated the instant adversary proceeding (Docket No. 1). On September 19, 2013, First Bank filed the Answer to Complaint (Docket No. 13).
On October 18, 2013, the court held an initial pre-trial conference in which it granted the parties 90 days to conclude discovery and 120 days to file dispositive motions and/or file a settlement agreement (Docket No. 15).
On May 9, 2014, the Plaintiffs filed the Motion for Summary Judgment (Docket No. 17) and the Statement of Uncontested Facts in Support of Plaintiffs’ Motion for Summary Judgment (Docket No. 18). The Plaintiffs pray for an order (a) determining that the value of the Real Property is $150,000.00; (b) declaring that First Bank’s junior lien on the Real Property is wholly unsecured; (c) declaring that First Bank’s claim for its junior lien be classified as unsecured; (d) to enter an order directing the Property Registrar to erase from the Property Registry First Bank’s junior mortgage; and (e) to provide for reasonable attorney fees and costs incurred in the litigation of this proceeding.
On June 13, 2013, First Bank filed a Partial Opposition to Motion for Summary Judgment “agree[ing] with: (i) Plaintiffs’ proposed value of the [Real Pjroperty, (ii) the correctness of the amounts of any senior lien encumbering the [Real Pjroperty, and (in) with the consequent application of the law to [its] claim” (Docket No. 22, p. 2, ¶ 6) Notwithstanding, First Bank’s “partial objection refers to Plaintiffs’ request for an immediate order instructing the Registrar of the Property Registry to erase from their records [First Bankj’s mortgage note for the junior lien recorded on the Plaintiff’s property”. Id. Fist Bank also “agree[dj and incorporate^] Plaintiffs’ Statement of Uncontested Facts”. Id., p. 2, ¶ 9.
No further briefs or replies were filed.
Uncontested Material Facts
As per First Bank’s admissions and the totality of the record, the following facts are uncontested 1
1. On May 14, 2004, the Plaintiffs and First Bank executed Deed of Mortgage No. 139 before Notary Public David Gómez Rosario (the “First Mortgage ”). See Claims Register No. 6-1, Part 4, pp. 1-24. The First Mortgage was recorded on the Real Property at the Property Registry at page 38 of volume 562, 7th inscription. See Claims Register No. 6-1, Part 2, p. 1.
2. Also on May 14, 2004, the Plaintiffs and First Bank executed Deed of Mortgage No. llpO before Notary Public David Gó-mez Rosario (the “Second Mortgage”). See Claims Register No. 18-1, pp. 7-32. The Second Mortgage was recorded on the Real Property at the Property Registry at page 38 of volume 562, 8th inscription. See Claims Register No. 18-1, p. 5.
3. The Plaintiffs are the owners of the Real Property.
4. As of the date the instant case was filed, the Real Property had been valued at $150,000.00.
*4065. First Bank holds a senior lien over the Real Property in the amount of $182,340.53.
6. First Bank also holds a junior lien over the Real Property in the amount of $50,500.00.
7. The Real Property is encumbered by liens senior to First Bank’s junior mortgage, to wit, the Second Mortgage.
8. There is no equity in the Real Property after payment in full of the liens senior to First Bank’s junior and thus, the value of First Bank’s interest in the Real Property, as it pertains to the junior lien, is zero.
9. First Bank’s interest on the Real Property as to the junior lien is completely unsecured.
Jurisdiction
The court has jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E). Fed. Rs. Bankr.P. 7001(2) and 7001(9) provide that proceedings to determine the validity, priority or extent of a lien or other interest in property and to obtain a declaratory judgment relating to such validity or priority are adversary proceedings 2.
Applicable Law and Analysis
Section 506 of the Bankruptcy Code governs the determination of whether a claim is secured, partially secured or unsecured. Section 506(a)(1) explains the bifurcation of an allowed claim into secured and unsecured portions, the secured part being “secured” by the collateral’s value and the unsecured part being the remaining amount of the claim in excess of the collateral’s value:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, ... and is an unsecured claim to the extent that the value of such creditor’s interest ... is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
11 U.S.C. § 506(a)(1).
Therefore, “under 11 U.S.C. § 506(a), an under-secured creditor’s claim is split (bifurcated) into two claims: (a) a secured claim equal to the value of the collateral; and (b) an unsecured claim equal to the amount by which the allowed claim exceeds the value of the collateral.” In re Moore, 275 B.R. 390, 392 (Bankr.D.Colo. 2002).
Section 506(d) of the Bankruptcy Code provides that:
To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
*40711 U.S.C. § 506(d).
“[I]f a creditor does not have an in rem interest in a debtor’s property or if that interest was voided in bankruptcy, the creditor simply has a debt with no right to collect from the debtor or his property.” In re Dendy, 396 B.R. 171, 178 (Bankr. D.S.C.2008).
For Chapter 13 cases, like the instant one, the foregoing must be read in conjunction with Section 1322 of the Bankruptcy Code. Section 1322(b)(2) allows a Chapter 13 debtor to “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”. 11 U.S.C. § 1322(b)(2). A “debtor’s principal residence”:
(A) means a residential structure, including incidental property, without regard to whether that structure is attached to real property; and
(B) includes an individual condominium or cooperative unit, a mobile or manufactured home, or trailer.
11 U.S.C. § 101(13A).
A majority of courts have held that a junior mortgagee whose lien is supported by no equity can be treated as an unsecured creditor and its lien “stripped off’ by the debtor’s Chapter 13 plan. For instance, the Second,' Third, Fifth, Sixth, Ninth, and Eleventh Circuits have ruled that such strip off is permissible. See e.g. In re Pond, 252 F.3d 122 (2nd Cir.2001); In re McDonald, 205 F.3d 606 (3rd Cir. 2000); First Mariner Bank v. Johnson, 2011 U.S.App. Lexis 402 (4th Cir.Md. 2011); In re Bartee, 212 F.3d 277 (5th Cir.2000); In re Lane, 280 F.3d 663 (6th Cir.2002); In re Zimmer, 313 F.3d 1220 (9th Cir.2002); In re Tanner, 217 F.3d 1357 (11th Cir.2000). The Bankruptcy Appellate Panel for the First Circuit has ruled that Section 1322(b)(2) does not bar a Chapter 13 debtor from stripping off a wholly unsecured lien on his principal residence. See Domestic Bank v. Mann (In re Mann), 249 B.R. 831 (1st Cir. BAP 2000). Pursuant to First Bank’s admissions, there is no dispute that the current value of the Real Property is $150,000.00 and therefore there is no equity on the Real Property to secure First Bank’s Second Mortgage. In other words, First Bank’s junior lien is wholly unsecured under Section 506(d) of the Bankruptcy Code. The exception afforded in Section 1322(b)(2) for primary residences is not applicable to the instant case as it pertains to the Second Mortgage.
The only remaining controversy is whether the Plaintiffs are entitled to an order voiding First Bank’s Second Mortgage from the Property Registry at this juncture, that is, prior to the discharge order and the completion of payments under the Chapter 13 plan. First Bank contends that this controversy is “an issue of first impression in our circuit” and that “[sjeveral courts, presented with the same facts have concluded that unsecured junior mortgage liens are permanently avoided only once a chapter 13 plan is confirmed and all plan payments have been made” (Docket No. 22, p. 4, ¶ 16). The Plaintiffs did not reply to First Bank’s contention. Thus, First Bank objects “to Plaintiffs’ request for an immediate order instructing the Registrar of the Property Registry to erase from their records [First BankJ’s [Second Mortgage] ... on the Plaintiffs [Real Property]” (Docket No. 22, p. 4, ¶ 15). To support its contention, First Bank argues that “unsecured junior mortgage liens are permanently avoided only once a chapter 13 plan is confirmed and all plan payments have been made” (Docket No. 22, p. 4, ¶ 16) and cites the following cases: In re Miller, 462 B.R. 421, 433 (Bankr.E.D.N.Y.2011); Frazier v. Real Time Resolutions, Inc. (In re Frazier), 469 B.R. 889 (E.D.Cal.2012); In re Okosisi, 451 B.R. 90, 103 (Bankr.D.Nev.2011); *408In re Tran, 431 B.R. 230, 236-37 (Bankr. N.D.Cal.2010); Fisette v. Keller (In re Fisette), 455 B.R. 177, 185 (8th Cir. BAP 2011), appeal dismissed, 695 F.3d 803 (8th Cir.2012); In re Jennings, 454 B.R. 252, 255 (Bankr.N.D.Ga.2011).
In all the eases cited by First Bank, the debtors had previously obtained a Chapter 7 discharge and subsequently filed a Chapter 13 case in such close proximity to their Chapter 7 case that they were ineligible for a Chapter 13 discharge under Section 1328(f)(1) of the Bankruptcy Code, which proves that
Notwithstanding subsections (a) and (b), the court shall not grant a discharge of all debts provided for in the plan or disallowed under section 502, if the debt- or has received a discharge—
(1) in a case filed under chapter 7, 11, or 12 of this title during the 4-year period preceding the date of the order for relief under this chapter ...
11 U.S.C. § 1328(f)(1).
These types of cases are commonly referred to as “Chapters 20”. See In re Fisette, 455 B.R. at 184. Because Chapter 20 debtors are not entitled to discharge, courts have recognized that “the strip off of a wholly unsecured lien on a debtor’s principal residence is effective upon completion of the debtor’s obligations under his plan, and it is not contingent on his receipt of a Chapter 13 discharge”. Id. at 185. Also see In re Dolinak, 497 B.R. 15, 22-23 (Bankr.D.N.H.2013).
The instant case is not a Chapter 20 but an ordinary Chapter 13, and therefore the doctrine developed for Chapters 20 is not directly applicable because the Plaintiffs are entitled to discharge under 11 U.S.C. § 1328. Hence, if the Plaintiffs complete their payments under the confirmed plan, they are eligible for the discharge afforded in Section 1328 of the Bankruptcy Code, which requires that “as soon as practicable after completion by the debtor of all payments under the plan, and in the case of a debtor who is required by a judicial or administrative order, or by statute, to pay a domestic support obligation, after such debtor certifies that all amounts payable under such order or such statute that are due on or before the date of the certification (including amounts due before the petition was filed, but only to the extent provided for by the plan) have been paid ... the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed ... ”. 11 U.S.C. § 1328(a).
Neither the Bankruptcy Code or the Rules of Bankruptcy Procedure address the procedure to require mortgagees to release their liens in Property Registries upon completion of Chapter 13 plan with a strip off provision/order. In In re Moore, supra, the creditor had an under-secured claim against the debtors’ estate. Under the debtors’ Chapter 13 plan, once the debtors paid the secured portion of the debt, the creditor would be required to release the lien against the debtors’ automobile and forward the title to the debtors. The creditor claimed that it should not be required to release the lien until the debtors had made all payments under their Chapter 13 plan and had obtained a discharge of their debts. The court found that “in order to obtain the benefit of the modification of a secured creditor’s rights and release of a lien without full payment of the debt, the Debtors must complete all of the payments under their Chapter 13 plan and be granted a discharge”. 275 B.R. at 293. This court applies the same principle regarding the avoidance of the Second Mortgage at the Property Registry. The stripping of liens pursuant to a confirmed plan is not final unless and until the debtor completes the payments of the plan and obtains a discharge pursuant to Section 1328 of the Bankruptcy Code. The *409foregoing also takes into consideration Section 1325(a)(5)(B)(i)(I)(bb), which requires Chapter 13 plans to provide that the claim holder “retain[s] the lien securing such claim until ... discharge under section 1328Section 1325(a)(5)(B)(i)(II), which provides that “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 Section 349(b)(1)(C), which provides that:
Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title—
(1) reinstates—
(C) any lien voided under section 506(d) of this title.
11 U.S.C. § 349(b)(1)(C).
Conclusion
In view of the foregoing, the Motion for Summary Judgment filed by the Plaintiffs is partially granted to determine that First Bank’s Second Mortgage is wholly unsecured under Section 506(d) of the Bankruptcy Code. The Plaintiffs request for an order to the Property Registrar to eliminate First Bank’s Second Mortgage is hereby denied without prejudice at this juncture.
SO ORDERED.
Judgment will be entered accordingly.
. See Docket Nos. 18 (Statement of Material Uncontested Facts) and 22, p. 2, ¶ 9 (where First Bank "agree[s] and incorporate^] Plaintiffs’ Statement of Uncontested Facts).
. The court is cognizant that many courts have held that "the appropriate procedure for lien avoidance under Section 506 is by motion because lien avoidance is the inevitable byproduct of valuing a claim, which is accomplished by motion pursuant to Bankruptcy Rule 3012.” In re Robert, 313 B.R. 545, 549 (Bankr.N.D.N.Y.2004), quoting In re Sadala, 294 B.R. 180, 183 (Bankr.M.D.Fla.2003). Also see In re Miller, 462 B.R. 421, 433 (Bankr.E.D.N.Y.2011) ("the proper mechanic to value the mortgage lien under § 506(a) in chapter 13 cases is to bring a motion pursuant to Rules 3012, 9013, and 9014”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497521/ | Chapter 7
MEMORANDUM DECISION AND ORDER DENYING OBJECTION TO PROOF OF CLAIM
HONORABLE NANCY HERSHEY LORD, United States Bankruptcy Judge
Krishna Chaitan and Carol Chaitan (the “Debtors”), filed a motion under 11 U.S.C. *424§ 502(b)(1) (the “Objection”) to object to Proof of Claim No. 1 (the “Claim”) filed by the New York City Office of Administrative Trials and Hearings (“OATH”), arising from a series of citations issued by the Environmental Control Board (“ECB”). The issues before the Court are: (1) whether this Court has jurisdiction to entertain the Objection; (2) whether the Debtors have standing to object to the Claim; (3) whether a preclusion doctrine prohibits this Court from invalidating the Claim; and (4) whether the Claim is valid under applicable law.
JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2). This decision constitutes this Court’s findings of fact and conclusions of law to the extent required by Rule 7052 of the Federal Rules of Bankruptcy Procedure.
BACKGROUND
In 2008, Diananand Sundarsingh (“Diananand”) and Mr. Chaitan co-signed a mortgage (the “Mortgage”) secured by 8 Trinity Place, Staten Island, New York (the “House”).1 Objection Ex. A, ECF No. 27-2. Mr. Chaitan claims that Diana-nand and his brother Damien Sundarsingh (“Damien”) lived in the House, and that Diananand “owned the house through a straw man, his brother Damien Sundar-singh.” Objection ¶ 9, ECF No. 18. Also in 2008, Damien executed and recorded a deed (the “Deed”) purporting to transfer the House from himself to himself and “Krishne Chaitan.” Objection Ex. C, ECF No. 18-3. Mr. Chaitan asserts that he never exercised ownership rights to, or had a key for, the House. Objection ¶ 9, ECF No. 18. The Sundarsingh brothers subsequently abandoned the House and the Mortgage went into default. Objection ¶¶ 10-11, ECF No. 18.
The abandoned House fell into disrepair with overgrown shrubbery obstructing the sidewalk and refuse accumulating in the yard. Objection ¶ 12, ECF No. 18. On September 29, 2010, the ECB issued the first of numerous citations to “Krishne Chaitan” (or iterative spellings thereof) for violations of the New York City Administrative Code, including § 16-118 (prohibiting litter); § 16-120 (specifying acceptable receptacles for the removal of waste material); and § 16-123 (requiring the removal of snow, ice, and dirt from sidewalks).2 Objection Ex. D 25, ECF No. 18-4. Each time the ECB issued a citation, an officer filled out and signed the ticket and attempted to personally serve it upon an individual at the House. Finding no one present, the officer affixed the ticket, and mailed a copy, to the House. The front of each ticket described the details of the violation and stated:
If you do not appear (or pay by mail if permitted) you will be held in default and subject to the maximum penalties permitted by law. Failure to appear or pay a penalty imposed may lead to suspension of your license or other action *425affecting licenses you now have or may apply for as well as the possibility of a judgement [sic] entered against you in Civil Court
I, an employee of [N.Y.C. Department of Sanitation] personally observed the commission of the civil violation charged above.
Objection Ex. D, ECF No. 18-4.
In December of 2009, Mr. Chaitan received and ignored a summons in a foreclosure action against the House.3 Objection Ex. E, ECF No. 18-5.
On August 20, 2012, Mr. Chaitan learned of the Deed to Damien and “Krishne Chai-tan.” Around this time, he began receiving collection calls regarding the citations and requested a hearing to contest the accrued citations (the “Initial Citations”). Objection ¶ 17, ECF No. 18. On October 11, 2012, Mr. Chaitan, represented by counsel, presented his arguments to an Administrative Law Judge (the “ALJ”) at OATH. After hearing the case on its merits, the ALJ dismissed three of the Initial Citations, due to technical defects, and upheld the remainder. On November 16, 2012, Mr. Chaitan filed an administrative appeal with the ECB and, on January 23, 2013, the ECB upheld the ALJ’s decision in a written opinion. Mr. Chaitan did not file an Article 78 petition to challenge the ECB’s decision.
Because no one remedied the violations at the House, the ECB continued to issue citations in September and October of 2012 (the “Additional Citations” and, together with the Initial Citations, the “Citations”). Mr. Chaitan did not pursue available state remedies to challenge the Additional Citations.
On May 7, 2013, the Debtors filed a petition under chapter 7 of the Bankruptcy Code. On June 27, 2013, OATH filed the claim for the unpaid Citations and, on September 23, 2013, the Debtors filed the Objection.
The Court heard oral arguments at a hearing on the Objection held on December 4, 2013. On January 10, 2014, OATH and the Debtors filed briefs addressing the Debtors’ standing to object, an issue raised at the hearing. OATH Standing Brief, ECF No. 32; Debtor Standing Brief, ECF No. 33.
DISCUSSION
For the reasons discussed below: this Court has jurisdiction to hear the Objection, as the Rooker-Feldman doctrine is inapplicable; the Debtors have standing to object to the Claim, as the debt is non-dischargeable; the Court is precluded from entertaining the Objection, as a previously decided matter; and the is Claim is allowed, as the underlying citations are valid.
1. Jurisdiction & the Rooker-Feldman Doctrine
OATH argues that under the Rooker-Feldman doctrine, this Court lacks jurisdiction to question the underlying Citations’ validity. The Rooker -Feld-man doctrine provides that a lower federal court, including a bankruptcy court, has no jurisdictional authority to review state-court judgments. In re 56 Walker LLC, No. 13-11571, 2014 WL 1228835, at *3 (Bankr.S.D.N.Y. Mar. 25, 2014). The narrow doctrine is confined 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.” Lance v. Dennis, 546 U.S. 459, 464, 126 S.Ct. 1198, 163 L.Ed.2d 1059 (2006) (quoting Exxon Mobil Corp. v. Saudi Basic *426Indus. Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005)); In re 231 Fourth Ave. Lyceum, LLC, 513 B.R. 25, 31-32 (Bankr.E.D.N.Y.2014). The doctrine applies even if the case raises a federal question. Exxon Mobil, 544 U.S. at 284, 125 S.Ct. 1517. However, Rooker-Feldman only strips federal courts of jurisdiction over cases filed after a state court renders a judgment; it is inapplicable to administrative decisions. Verizon, 535 U.S. at 644 n. 3, 122 S.Ct. 1753; Mitchell v. Fishbein, 377 F.3d 157, 165 (2d Cir.2004); Van Harken v. City of Chi., 103 F.3d 1346, 1348-49 (7th Cir.1997); Narey v. Dean, 32 F.3d 1521, 1525 (11th Cir.1994); Scott v. Flowers, 910 F.2d 201, 206-08 (5th Cir.1990); Abiuso v. Donahoe, 12-CV-1713 (JFBXETB), 2014 WL 1330641 at *8 (E.D.N.Y. Mar. 31, 2014); Birmingham v. Ogden, 70 F.Supp.2d 353, 362-65 (S.D.N.Y.1999). Only after a state court reviews an administrative agency’s decision does the decision constitute a state-court judgment to which Rooker-Feldman applies. See Hason v. Office of Prof'l Med. Conduct, 314 F.Supp.2d 241, 247 (S.D.N.Y.2004).
The ECB and OATH operate outside of the New York State court system and their decisions are administrative.4 Because a state court never reviewed the ECB and OATH decisions, they are not state-court decisions. Hason v. Office of Prof'l Med. Conduct, 314 F.Supp.2d at 247. Accordingly, the Rooker-Feldman doctrine is inapplicable and does not limit this Court’s jurisdiction over the Objection.
2. Standing
OATH argues that the Debtor lacks standing — a prerequisite for seeking judicial redress. Standing arises from a legally protected interest in a case’s outcome. Tachiona v. United States, 386 F.3d 205, 210 (2d Cir.2004). Standing in a bankruptcy case requires a pecuniary interest in the case’s outcome. In re Slack, 164 B.R. 19, 22 (Bankr.N.D.N.Y.1994). Although an individual has pecuniary interests in his debts before filing a bankruptcy petition, the chapter 7 discharge generally strips a debtor of these interests, thus eliminating his standing to object to most claims. Id. However, if there is a reasonable possibility for a surplus or distribution in the case, then the chapter 7 debtor has standing to object as a residual claimant. In re 60 East 80th St. Equities, Inc., 218 F.3d 109, 115-16 (2d Cir.2000); Pasca-zi v. Fiber Consultants, Inc., 445 B.R. 124, 127 (Bankr.S.D.N.Y.2011). Alternatively, when a claim is non-dischargeable, the chapter 7 debtor has standing to object as a residual debtor. In re Toms, 229 B.R. 646, 651 (Bankr.E.D.Pa.1999).
Here, the “Debtors concede that neither a distribution nor a surplus is likely.” Debtor Standing Brief 3, ECF No. 33. However, the Debtors and ECB agree that “to the extent that the ECB’s claim is valid, it is non-dischargeable.” Debtor Standing Brief 3, ECF No. 33; see also OATH Standing Brief 8-9, ECF No. 32. Accordingly, the Debtors have standing to challenge the non-dischargeable Claim as residual debtors.
3. Preclusion
OATH argues that res judicata and collateral estoppel preclude this Court from reviewing the validity of the Citations and, consequently, the Claim. “The federal courts have traditionally adhered to the related doctrines of res judicata and collateral estoppel to relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on *427adjudication.” Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980). That tradition, codified by 28 U.S.C. § 1738, gives state court judgments the same preclusive force in a federal court as in the judgment-rendering court. See Thomas v. Washington Gas Light Co., 448 U.S. 261, 270, 100 S.Ct. 2647, 65 L.Ed.2d 757 (1980); see generally Hampton v. McConnel, 16 U.S. 234, 3 Wheat. 234, 4 L.Ed. 378 (1818). “If the proceedings of a state trial court comported with due process, every federal court must afford the final judgment entered therein the same preclusive effect it would be given in the courts of that state.” Conopco, Inc. v. Roll Intern., 231 F.3d 82, 87 (2d Cir.2000); see Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81, 85, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984); Kremer v. Chem. Const. Corp., 456 U.S. 461, 466, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982); Allen v. McCurry, 449 U.S. 90, 95, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980); Jacobson v. Fireman’s Fund Ins. Co., 111 F.3d 261, 265 (2d Cir.1997).
Res judicata prohibits re-litigating claims that could or should have been litigated in a prior proceeding. Coliseum Towers Assoc. v. Cnty. of Nassau, 217 A.D.2d 387, 637 N.Y.S.2d 972, 974 (1996); see also Hyman v. Hillelson, 79 A.D.2d 725, 434 N.Y.S.2d 742, 744-45 (1980) aff;d, 55 N.Y.2d 624, 446 N.Y.S.2d 251, 430 N.E.2d 1304 (1981). New York state courts apply res judicata liberally, taking a transactional approach, such that “once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.” O’Brien v. City of Syracuse, 54 N.Y.2d 353, 357, 445 N.Y.S.2d 687, 429 N.E.2d 1158 (1981). Res judicata applies not only to litigated court claims, but also to default judgments. Silverman v. Leucadia, Inc., 156 A.D.2d 442, 548 N.Y.S.2d 720, 721 (1989); see Rizzo v. Ippolito, 137 A.D.2d 511, 524 N.Y.S.2d 255, 257 (1988); 119 Rosset Corp. v. Blimpy of N.Y. Corp., 65 A.D.2d 683, 409 N.Y.S.2d 735, 736 (1978).
Collateral estoppel prohibits re-litigating decided issues of fact or law. Allen, 449 U.S. at 94, 101 S.Ct. 411. Under New York law, collateral estoppel requires the issue to be identical to the one raised previously and for there to have been a full and fair opportunity to be heard. Halyalkar v. Bd. of Regents of State of N.Y., 72 N.Y.2d 261, 266, 532 N.Y.S.2d 85, 527 N.E.2d 1222 (1988). In applying collateral estoppel, courts consider “the nature of the forum and the importance of the claim in the prior litigation, the incentive and initiative to litigate and the actual extent of litigation, the competence and expertise of counsel, the availability of new evidence, the differences in the applicable law and the foreseeability of future litigation.” Ryan, 62 N.Y.2d at 501, 478 N.Y.S.2d 823, 467 N.E.2d 487.
New York applies both res ju-dicata and collateral estoppel to quasi-judicial administrative decisions. Josey v. Goord, 9 N.Y.3d 386, 389-90, 849 N.Y.S.2d 497, 880 N.E.2d 18 (N.Y.2007); Jeffreys v. Griffin, 1 N.Y.3d 34, 40, 769 N.Y.S.2d 184, 801 N.E.2d 404 (2003); Allied Chem. v. Niagara Mohawk Power Corp., 72 N.Y.2d 271, 276, 532 N.Y.S.2d 230, 528 N.E.2d 153 (1988). To qualify as a quasi-judicial proceeding, the agency must employ procedures “sufficient both quantitatively and qualitatively ... to permit confidence that the facts asserted were adequately tested, and that the issue was fully aired.” Jeffreys, 1 N.Y.3d at 40-41, 769 N.Y.S.2d 184, 801 N.E.2d 404 (internal quotation omit ted). Thus, decisions “rendered pursuant to the adjudicatory authority of an agency ... employing procedures substantially similar to those used in a court of law” are given preclusive effect. Ryan v. N.Y. Tel. *428Co., 62 N.Y.2d 494, 499, 478 N.Y.S.2d 823, 467 N.E.2d 487 (1984).
The Debtors argue that this Court may nevertheless intercede on decided matters, citing Burgos v. Hopkins, 14 F.3d 787, 790 (2d Cir.1994). Under Burgos, res judicata, does “not apply ... where ‘the initial forum did not have the power to award the full measure of relief sought in the later litigation.’ ” Burgos 14 F.3d at 790 (2d Cir.1994) (quoting Davidson v. Capuano, 792 F.2d 275, 278 (2d Cir.1986)) (holding res judicata does not bar a 42 U.S.C. § 1983 suit for monetary damages when the state court action could only grant habeas relief). In Burgos, the Second Circuit held that res judicata does not bar a suit for monetary damages when the state court could only provide equitable relief. Burgos 14 F.3d at 790. Here, however, Mr. Chaitan’s seeks the same remedy from this Court that he did before the ECB and OATH—invalidation of the Citations.
Mr. Chaitan, represented by counsel, challenged the Initial Citations before the ALJ. Before ruling against Mr. Chaitan, the ALJ considered the same arguments and evidence Mr. Chaitan now submits to this Court. The ECB also reviewed the same arguments and evidence before affirming the ALJ’s decision. Both the ALJ and the ECB issued written opinions. This Court finds that the proceedings and procedures employed by the ECB and OATH sufficiently and fully aired and tested Mr. Chaitan’s liability for the House and the presence of the underlying violations. Accordingly, as to those two matters, res judicata bars further litigation of claims arising out of the same occurrences and transactions that were, or could have been, litigated; likewise, collateral estoppel bars further litigation of issues raised and decided. However, res judicata and collateral estoppel are inapplicable to the two matters undecided by the ECB and OATH: Mr. Chaitan’s constitutional arguments and the validity of the Additional Citations included in the Claim.
4. Due Process Violations
The Debtors raise several constitutional challenges to the Claim rooted in the Due Process Clause of the Fourteenth Amendment, which guarantees fairness through “reasonable notice and reasonable opportunity to be heard.” Dohany v. Rogers, 281 U.S. 362, 369, 50 S.Ct. 299, 74 L.Ed. 904 (1930). The Debtors allege that due process injuries render the Claim invalid and it should, therefore, be disallowed. First, the Debtors argue that holding Mr. Chaitan strictly liable for wholly passive conduct is impermissible under Lambert v. California, 355 U.S. 225, 78 S.Ct. 240, 2 L.Ed.2d 228 (1957). Second, Debtors argue that service of process was not “reasonably calculated, under all the circumstances, to apprise” Mr. Chaitan of the Citations. Jones v. Flowers, 547 U.S. 220, 226, 126 S.Ct. 1708, 164 L.Ed.2d 415 (2006). Third, the Debtors argue that the ECB knew, or should have known, that the service of process was ineffective. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865 (1950).
Notice is “[e]ngrained in our concept of due process.” Lambert, 355 U.S. at 228, 78 S.Ct. 240. As the United States Supreme Court explained in Lambert, notice serves two functions: the opportunity to behave lawfully and the chance to defend against charges. 355 U.S. at 225, 78 S.Ct. 240. Accordingly, as the Court held in Lambert, strict liability for a wholly passive crime is unconstitutional if the individual has no reason to know of the law. In that case, California instituted a law requiring all felons to register within five days of entering the state. *429Ms. Lambert, a felon, failed to register after entering California, and was held criminally liable under the statute. Id. The Court held that strict liability, under those circumstances, was unconstitutional. Id. However, strict liability for wholly passive conduct is permissible in similar situations if individuals are on notice of the law. See Conn. Dep’t of Pub. Safety v. Doe, 538 U.S. 1, 123 S.Ct. 1160, 155 L.Ed.2d 98 (2003) (upholding law requiring that sex offenders register).
In arguing that the ECB Citations violate his procedural due process rights, as set forth in Lambert, the Debtor fads to recognize that the critical factor in Lambert was not strict liability for passive conduct, but the absence of notice. Lambert, 355 U.S. 225, 78 S.Ct. 240, 2 L.Ed.2d 228. Mr. Chaitan co-signed the Mortgage, thereby exposing himself to significant obligations and risks. By signing the Mortgage, Mr. Chaitan expressly granted the bank an interest in the House; if he had no interest to grant, then his signature might constitute a fraudulent misrepresentation. Additionally, Mr. Chaitan was or should have been aware of his interest in the House after receiving the notice of foreclosure in December 2009 and collection calls regarding the Citations in August 2012. Objection Ex. D, ECF No. 18-4. Moreover, Mr. Chaitan had an interest in ensuring the property was in good repair because, as a co-signor, he stood hable for a deficiency judgment after a foreclosure. Finally, property ownership is not wholly passive — the failure to maintain buildings subjects a property’s owner to liability.
Notice also implicates service of process. Service must be reasonably calculated, under all the circumstances to apprise the defendant of the charges. Jones, 547 U.S. at 220, 126 S.Ct. 1708. Additionally, if a party has reason to know that service failed to reach the intended target, then service is inadequate, even if service was “reasonably calculated” at dispatch. Mullane, 339 U.S. at 306, 70 S.Ct. 652.
The purpose of service is to allow a full and fair hearing on the merits; thus, the remedy for improper service, if practical, is to provide a full and fair hearing on the merits. See generally Wilmer v. Beddoe, 102 A.D.3d 582, 958 N.Y.S.2d 388 (2013). In Wilmer, the court held that service of process was insufficient after the ECB failed to make a “reasonable attempt” at personal service. Id. at 388. That court vacated an ECB default order and remanded the issue for a determination on the merits. Id. Similarly, in Gallo, the court held that Gallo was entitled to vacate a default judgment and have a hearing on the merits after the state failed to effect personal service. Gallo v. City of New York, 36 Misc.3d 1204(A), 954 N.Y.S.2d 759 (N.Y.Sup.Ct.2012).
Here, Mr. Chaitan received a hearing on the merits on October 11, 2012. The hearing was more than just a rubber stamp— the ALJ heard Mr. Chaitan’s arguments, dismissed three Citations due to technical errors, and issued a written opinion explaining his rational. Thus, any due process violations relating to the Citations addressed at that hearing are null, including inadequate service.
In evaluating the constitutional adequacy of process, courts consider both the procedures followed and the remedies available. Zinermon v. Burch, 494 U.S. 113, 126, 110 S.Ct. 975, 108 L.Ed.2d 100 (1990). A plaintiff must take “advantage of the processes that are available to him or her, unless those processes are unavailable or patently inadequate.” Alvin v. Suzuki, 227 F.3d 107, 116 (3d Cir.2000); *430Dusanek v. Hannon, 677 F.2d 538, 543 (7th Cir.1982). “If ... a process on the books ... appears to provide due process, the plaintiff cannot skip that process and use the federal courts as a means to get back what he wants.” Alvin v. Suzuki, 227 F.3d 107, 116 (3d Cir.2000) (citing Dwyer v. Regan, 777 F.2d 825, 834-35 (2d Cir.1985)). Moreover, “a claimant cannot ... let the time for seeking a state remedy pass without doing anything to obtain it and then proceed in federal court on the basis that no state remedies are open.” Vandor, Inc. v. Militello, 301 F.3d 37, 39 (2d Cir.2002) (citing Gamble v. Eau Claire Co., 5 F.3d 285, 286 (7th Cir.1993)).
In New York, a party harmed by the ECB and OATH, based upon a constitutional due process violation or otherwise, can file an Article 78 petition to request a hearing. N.Y. C.P.L.R. 7801 (McKinney 2013). An Article 78 proceeding can redress any administrative agency due process abuse by providing mandamus relief and remanding the case for a new hearing. N.Y. C.P.L.R. 7803 (McKinney 2013). Accordingly, the availability of an Article 78 hearing is sufficient to correct an agency’s due process error. See Marino v. Ameruso, 837 F.2d 45, 47 (2d Cir.1988); Hughes Vill. Rest., Inc. v. Vill. of Castleton-on-Hudson, 46 A.D.3d 1044, 848 N.Y.S.2d 384, 386-87 (2007).
An Article 78 petition and hearing could have resolved Mr. Chaitan’s constitutional complaints by granting mandamus relief. Although represented by counsel at the hearing, Mr. Chaitan did not file an Article 78 petition to pursue the unanswered constitutional questions. By failing to file an Article 78 petition, Mr. Chaitan allowed the applicable four-month statute of limitations to lapse; thus, making state remedies unavailable. Unfortunately, this Court is powerless under the circumstances to modify the Citations. See Vandor, 301 F.3d at 39 (citing Gamble, 5 F.3d at 286).
5. Liability for the Citations
Mr. Chaitan contends that his liability for the Citations depends on his ownership of the House; thus, he argues that his liability would require deed reformation, changing ownership from “Krishne Chai-tan” to “Krishna Chaitan.”
Mr. Chaitan’s Citations were for violations of Administrative Code of the City of New York. The relevant code sections have two elements: (1) that the cited party is “[t]he owner, lessee, agent, occupant or other person who manages or controls a building or dwelling,” and (2) the underlying violation. The agency, to sustain a fine, must be convinced of both elements by a “preponderance of the credible evidence.” 48 R.C.N.Y. § 3-54. Additionally, on review, OATH decisions that are not “arbitrary or capricious” are upheld. N.Y. C.P.L.R. § 7803 (McKinney 2013). In contrast, a proponent of a deed reformation must establish their right to relief by clear and convincing evidence — it is unavailable upon a “probability nor even upon a mere preponderance of evidence.” Ross v. Food Specialties, 6 N.Y.2d 336, 341, 189 N.Y.S.2d 857, 160 N.E.2d 618 (1959) (internal citations omitted).
Mr. Chaitan’s argument, that the actions by the ECB and OATH constitute an ultra vires deed reformation, is incorrect.5 The ALJ was only required to find, *431by a “preponderance of the credible evidence,” that Mr. Chaitan was both “[t]he owner, lessee, agent, occupant or other person who manages or controls a building or dwelling,” and the presence of the underlying violations, 48 R.C.N.Y. § 3-54, which he did.
Even if this Court were to consider the underlying violations, ample evidence supports the ECB’s position: the Mortgage and the Deed. Therefore, if charged with determining whether the decision was arbitrary or capricious, this Court decides that it was not. Moreover, if charged with determining the validity of the Additional Citations, this Court holds that Mr. Chaitan was the “owner, lessee, agent, occupant or other person who manages or controls [the] building or dwelling,” by a preponderance of the credible evidence, and the Additional Citations are therefore valid.
Accordingly, the violations assessed against Mr. Chaitan are valid; thus, the Claim is valid.
CONCLUSION
For the reasons set forth above, the Objection is denied.
SO ORDERED
. OATH’s Response to the Objection also notes a property at 324 Broadway, Staten Island, New York 10310. No fines were imposed on that property. Objection Ex. A, ECF No. 18-1.
. The ECB issued Citations on: 2/9/2011, 6/29/2011, 7/21/2011, 7/30/2011, 8/16/2011, 8/19/2011, 9/10/2011, 9/13/2011, 9/27/2011, 9/29/2011, 10/8/2011, 10/13/2011, 10/18/2011, 10/20/2011, 10/21/2011, 10/27/2011, 11/29/2011, 9/20/2012, 9/25/2012, 9/27/2012, 9/28/2012, 10/6/2012, 10/7/2012, 10/11/2012, 10/17/2012, and 10/25/2012. Objection Ex. A, ECF No. 18-1; Debtors’ Reply Ex. A, ECF No. 27-1.
. In January 2012, the foreclosure was discontinued. Objection Ex. F, ECF No. 18-6.
. The ECB, charter agency created by Chapter 45 of the New York City Charter, operates under OATH, in accordance with New York City Charter Chapter 45 § 1049-a.
. The clear and convincing standard used to reform deeds is, by definition, irrelevant to the “preponderance of evidence” used by the ECB and OATH. 48 R.C.N.Y. § 3-54. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497522/ | Chapter 7
MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO CONSOLIDATE ADVERSARY PROCEEDINGS
HON. LOUIS A. SCARCELLA, UNITED STATES BANKRUPTCY JUDGE
Before the Court is the motion dated May 13, 2014 (the “Motion to Consolidate”) [dkt no. 86] of the pro se Debtor Defendant, Michael Koper (“Michael” or the “Defendant”), seeking to consolidate the three above-captioned adversary proceedings for purposes of discovery and trial pursuant to Rule 42 of the Federal Rules of Civil Procedure. International Christian Broadcasting, Inc. (“ICB”) and Trinity Christian Center of Santa Ana, Inc. (“TCCSA”, together with ICB, the “Plaintiffs”), filed an objection dated June 16, 2014 (the “Objection”) [dkt no. 107] to the Motion to Consolidate. For the reasons set forth below, the Motion to Consolidate is granted to the extent of consolidating the adversary proceedings for trial, but is otherwise denied. The following constitutes the Court’s findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).
JURISDICTION
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011.
FACTS1
I. Background and Prepetition Litigation between the Parties.
TCCSA is a California nonprofit corporation that operates as a church and a religious broadcasting company that does business as Trinity Broadcasting Network. TCCSA is featured on thousands of television and cable systems worldwide and on the internet. Michael and his non-debtor spouse, Brittany Koper (“Brittany”, together with Michael, the “Kopers”), were employed by TCCSA and related organizations from 2006 to September 2011 (the “Employment Period”) and by 2008 they held various positions as high ranking employees and corporate officers. Brittany is the granddaughter of Paul Crouch, Sr., TCCSA’s founder. TCCSA’s Board of Directors and corporate officers are made up of a core group of Brittany’s family members. During the Employment Period, the Kopers also were appointed directors of ICB, an associated non-profit entity of TCCSA, which also does business as Heroes Under God (“HUG”).
Brittany was employed as TCCSA’s Director of Personnel and eventually became Director of Finance around June 2011. In connection with her employment, Brittany signed a confidentiality agreement (the “Confidentiality Agreement”) and a Comprehensive Arbitration Agreement on February 21, 2008. Under the Confidentiality Agreement with TCCSA, through its Trinity Broadcasting Network, Brittany agreed to keep certain information she received *434through her employment confidential and to return any documents or materials containing any confidential information to TCCSA upon the termination of her employment. Pursuant to the Comprehensive Arbitration Agreement, Brittany agreed and acknowledged that she and TCCSA will utilize binding arbitration to resolve all disputes that may arise out of the employment context.
At least from July 2009 to September 2011, Michael resided in Lake Forest, California. Michael worked directly with TCCSA’s General Counsel in the legal department as a law clerk. By 2008, Michael became a corporate officer holding the position of Assistant Secretary. On August 16, 2010, Michael also signed a Comprehensive Arbitration Agreement similar to the one Brittany signed with TCCSA. Michael also allegedly signed a confidentiality agreement although a copy of such confidentiality agreement has not been submitted to the Court. In June 2011, Michael was promoted to Director of TCCSA’s Media Services Agency. As part of his promotion, Michael received a corporate credit card from TCCSA. In addition, when the Kopers were appointed to the Board of Directors for ICB, Michael was provided with an ICB American Express Plum Card in connection with the Kopers’ positions as board members.
On September 30, 2011, TCCSA and ICB terminated the Kopers’ employment for alleged wrongdoing that occurred in connection with their employment. Thereafter, TCCSA and ICB commenced multiple legal proceedings against the Defendant, some of which are described herein, in different jurisdictions, including the Superior Court of the State of California in the County of Orange (the “Orange County Superior Court”), the United States District Court for the Central District of California (“California District Court”), the United States District Court for the Eastern District of New York, the Supreme Court of the State of New York, and the New Jersey Superior Court.
On October 18, 2011, Redemption Strategies, Inc., a for-profit corporation, allegedly created by the TCCSA and ICB, sued the Kopers in the Orange County Superior Court for alleged embezzlement of approximately $1.3 million from the Plaintiffs.
On May 4, 2012, TCCSA filed an action before the Orange County Superior Court, Case No. 30-2012-00566620, seeking in-junctive relief against the Kopers pursuant to the Confidentiality Agreements to prevent disclosure of certain confidential information, trade secrets and family confidences obtained by them during their employment with TCCSA (the “Confidentiality Enforcement Action”). In that action, TCCSA alleged that the Kopers misappropriated corporate records, including computer records, emails, financial records and corporate resolutions. TCCSA also accused the Kopers of launching a media smear campaign against it and causing damage to its reputation and financial harm by distributing TCCSA’s confidential information to the public.
On June 8, 2012, TCCSA sued the Kop-ers in another action before the Orange County Superior Court, Case No. 30-2012-00575085, asserting similar allegations as the Confidentiality Enforcement Action but sought, inter alia, to compel arbitration of their disputes pursuant to the Comprehensive Arbitration Agreements. The action was removed to the California District Court under Case No. 8:12-CV-01121.
On June 26, 2012, TCCSA filed an action against the Kopers in California District Court captioned Trinity Christian Center of Santa Ana, Inc. v. Michael Koper et al, No. SACY 12-01049 (the “Central District Case”) alleging that during the Employment Period, (i) the Kopers made unlawful *435use of corporate credit cards, (ii) Michael created a separate entity known as “Michael Koper d.b.a Media Services” in order to unlawfully obtain funds owed to TCCSA’s Media Services Agency, (iii) the Kopers obtained and embezzled TCCSA’s funds for their own use, and breached their fiduciary duties, including the duty of loyalty owed to TCCSA, (iv) the Kopers stole and converted TCCSA’s assets for their own use, and (v) the Kopers breached the terms of the Confidentiality Agreements. TCCSA also moved to compel the Kopers to participate in an arbitration to resolve the disputes between the parties. Michael opposed, arguing, inter alia, that there is an issue as to the applicability of the arbitration agreement to the existing dispute between the parties.
On June 21, 2013, U.S. District Court Judge David O. Carter granted TCCSA’s motion to compel arbitration (the “Arbitration Order”) in the Central District Case, finding “that the question of arbitrability itself is one for the arbitrator, and that the California District Court’s involvement on this issue must end.” Arbitration Order at 5. Accordingly, before a determination of TCCSA’s underlying claims against the Kopers in the Arbitration Proceeding can proceed, the arbitrator must determine whether the dispute between TCCSA and the Kopers is even subject to arbitration.
II. Defendant’s Bankruptcy Proceedings.
Michael filed for chapter 7 relief under the Bankruptcy Code on August 14, 2013 and the bankruptcy case was assigned to Judge Dorothy Eisenberg. On October 14, 2013, TCCSA and ICB commenced three adversary proceedings between them against the Defendant (Adversary Proceeding No. 13-8167 (“Case No. 13-8167”), Adversary Proceeding No. 13-8168 (“Case No. 13-8168”), and Adversary Proceeding No. 13-8169 (“Case No. 13-8169”), collectively, the “Adversary Proceedings”). The complaint in each of the Adversary Proceedings seeks a determination that debts owed by the Defendant to TCCSA and/or ICB are not dischargeable under section 523(a)(2)(A) and (a)(6) of the Bankruptcy Code, and the complaints for Case No. 13-8167 and Case No. 13-8168 also seek an exception from discharge of debt under section 523(a)(4) of the Bankruptcy Code.
A. Case No. 13-8167.
In the complaint filed in Case No. 13-8167 (the “13-8167 Complaint”), ICB alleges that during the Defendant’s employment with ICB, the Defendant used the company American Express Plum Card to make numerous unauthorized personal charges, such as Rolex watches, a hunting rifle and scope and a hunting expedition, payment of his personal automobile insurance bill, over $10,000 of cabinetry for the Kopers’ home, over $17,000 worth of items at Home Depot, and high end meals and purchases at luxury retailers. The purchases on the American Express Plum Card total over $280,000.
ICB also avers that the Kopers embezzled from ICB’s bank accounts approximately $150,000 to make a down payment on a house they purchased in Lake Forest, California, $36,000 to purchase a Lexus SUV for their personal use, and $30,000 to purchase a Dodge Ram Truck for the Defendant’s personal use. The Kopers allegedly also transferred $500,000 from an ICB bank account to an account with Farmers & Merchants Bank which the Kopers controlled and then used $225,000 from the Farmers & Merchants Bank account to purchase a condominium in the Defendant’s name for cash. ICB further alleges that the Defendant distributed over $70,000 in cash embezzled from ICB to the Defendant’s uncle, Joseph McVeigh.
ICB also contends that the Defendant created fraudulent documents purporting to be from ICB, including (i) a fraudulent *436ICB Board Resolution granting the Kop-ers the sole authority to manage and maintain the Farmers and Merchants Bank account, (ii) a letter stating that the Defendant was authorized to receive a $150,000 salary from ICB when the bylaws of ICB provided that no one was to receive a salary, (iii) documents purporting to lease a portion of the Kopers’ home, which was purchased with ICB funds, to ICB for use as storage, (iv) false entries into ICB’s Quiekbooks account to make it appear as if the expenses charged to the credit card were legitimately related to ICB/HUB events, (v) credit card statements and bank statements which were provided to the other ICB directors in an effort to conceal the Defendant’s wrongdoing, (vi) tax return documents, including form 990s, whereby one version of the forms was submitted to the IRS by the Kopers but another version was kept in the office of ICB’s President for public review, and (vii) a closing statement provided to Brittany’s father to make it appear that Brittany’s father purchased the condominium.
Pursuant to the 13-8167 Complaint, the First Count seeks a determination under 11 U.S.C. § 523(a)(2)(A) that the Defendant obtained ICB’s funds through fraudulent documents used to deceive ICB and third parties. The representations were materially false and were made with the specific intent to mislead ICB, and ICB and third parties justifiably relied upon such false representations. Accordingly, the debt owed by the Defendant is nondis-chargeable because it was for money obtained by false pretenses, false representations and actual fraud. The Second Count seeks a determination that the Defendant was acting in a fiduciary capacity and committed fraud, defalcation, embezzlement and larceny with respect to the Defendant’s funds and corporate documents and that the debt owed by the Defendant is nondischargeable under 11 U.S.C. § 523(a)(4). Lastly, the Third Count seeks a determination that the Defendant willfully and maliciously caused damage and injury to ICB and its property by embezzling, converting and stealing ICB’s funds without any authorization or consent and that this debt should also be nondis-chargeable under 11 U.S.C. § 523(a)(6).
B. Case No. 18-8168.
In the complaint filed in Case No. 13-8168 (the “13-8168 Complaint”), TCCSA alleges that the Defendant (1) created fraudulent documents, which included a multi-year consulting agreement, by forging signatures of TCCSA directors and officers on the documents in order to benefit himself financially, and (2) conspired with Brittany to misappropriate TCCSA funds by making purchases in excess of $25,000 for personal use on the TCCSA credit card issued to the Defendant and to have TCCSA pay the unauthorized credit card charges. The Defendant also allegedly redeemed corporate credit card bonus points in excess of $16,000 for his personal benefit, received expense reimbursements from TCCSA for expenses that were never actually incurred, and placed his father on TCCSA’s payroll even though his father was not an employee of TCCSA. TCCSA also asserts that the Defendant registered a fictitious business in the name of “Koper doing business as Media Services” with the Orange County Clerk Recorder’s Office, opened bank accounts with U.S. Bank and with Bank of America in Media Services’ name, and then misappropriated TCCSA’s funds by diverting and depositing checks intended for its Media Services Agency into those bank accounts.
The First Count of the 13-8168 Complaint seeks a determination that the debts owed to TCCSA are nondischargeable because the Defendant obtained such funds under false representations, false pretenses and actual fraud pursuant to 11 *437U.S.C. § 523(a)(2). The Second Count seeks a determination pursuant to 11 U.S.C. § 523(a)(4) that the debt is nondis-chargeable on the basis that the Defendant’s actions during the Employment Period constituted embezzlement, and/or defalcation while acting in a fiduciary capacity. The Third Count seeks a determination pursuant to 11 U.S.C. § 523(a)(6) that the Defendant’s actions constitute willful and malicious injury to TCCSA and/or its property and the debt is nondischargeable.
C. Case No. 13-8169.
In the complaint filed in Case No. 13-8169 (the “13-8169 Complaint”), TCCSA and ICB allege, among other things, that the Defendant obtained a $22,000 loan from Brittany’s grandmother, Janice Crouch (“Janice”), by misrepresenting that he needed the loan to avoid active, military deployment. Defendant allegedly represented that he signed a contract with the United States Marine Corps (the “Marine Corps”) for four years of military service and that he obtained a $22,000 loan through a bank lender which he used to finance his education. Defendant purportedly claimed that he was called to active duty in Afghanistan while in college, and was injured in battle and was put on inactive duty. Defendant allegedly had a fraudulent letter created to appear it was from the Marines Corps indicating that he had to repay the loan or be forced back into active duty or put in jail. Based upon the Defendant’s representations, Janice agreed to loan the Defendant the $22,000. The Defendant has not repaid Janice for the loan and Janice purportedly discovered in December of 2011 that the Defendant has never been in the military.
TCCSA and ICB also contend that the Defendant stole confidential and privileged information and documents, such as emails, memoranda, reports, audio recordings/tapes, and other materials from the general counsel’s offices, through the use of computers and mail and unlawfully transferred the stolen information to third parties. This theft of information was intended to damage the rights of the Plaintiffs.
The First Count of the 13-8169 Complaint seeks a determination that the Defendant obtained the loan through fraud and false pretenses with regard to his military service and obligations, TCCSA and ICB justifiably relied upon the fraudulent documents, and the debt owed by the Defendant is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). The Second Count seeks a determination that by illegally accessing and stealing the Plaintiffs’ confidential and privileged information and communications, the Defendant willfully and maliciously caused damage and injury to the Plaintiffs and their property, and that such debt owed by the Defendant is nondischargeable pursuant to 11 U.S.C. § 523(a)(6).
D. Discovery Disputes.
Answers to the Adversary Proceedings were due November 14, 2013. The Defendant filed an answer to the complaints on November 6, 2013 asserting general denials, affirmative defenses, and a counterclaim that in the event the alleged debts are discharged, a judgment against the Plaintiffs should be awarded for reasonable attorneys’ fees and costs. The Plaintiffs filed an answer to the Defendant’s counterclaim in each of the Adversary Proceedings on November 18, 2013.
ICB served third party subpoenas in Case No. 13-8167 on the Defendant’s current employer, Penta Communications, LLC, and its co-owners, Joseph Iglesias and Jason Boyd, on October 15, 2013, the same date the Summons was issued. The third party subpoenas demanded the production of documents by October 31, 2014 *438for the period after the Kopers’ employment was terminated and scheduled third party depositions on the same October 31, 2014 date. These third party subpoenas were issued notwithstanding the deadline for filing an answer had not even passed and before the required Rule 26(f) planning conference under the Federal Rules of Civil Procedure (“Fed. R. Civ.P.”) had taken place.
Even before Defendant’s answer was filed, the Defendant, the Plaintiffs, and third party deponents engaged in extensive motion practice regarding various discovery disputes. Without delving into the substance of those disputes, almost every subpoena was met with one or more motions for a protective order or motion to quash, which in turn elicited an objection and/or a corresponding motion to compel discovery. In Case No. 13-8167 alone, by the time Judge Eisenberg retired on March 27, 2014, there were four pending motions for a protective order and/or motions to compel. Two more motions to quash were filed before the bankruptcy ease and the Adversary Proceedings were transferred to this Court on May 19, 2014. Currently, this Court has eleven pending discovery motions before it in Case No. 13-8167. Two of the motions to compel filed by the Defendant in Case No. 13-8167 were also filed in Case No. 13-8168 and Case No. 13-8169.
III. Motion to Consolidate the Adversary Proceedings.
On May 14, 2014, the Defendant filed this motion seeking to consolidate the three Adversary Proceedings for purposes of discovery and trial. The Defendant argues that the Plaintiffs allege in all three Adversary Proceedings that (a) the Defendant committed fraud by lying to Janice about prior military service in order to obtain the personal loan and that the Defendant continued making these misrepresentations until he was terminated in September 2011, (b) because of these misrepresentations and the fact that the Kopers were trusted family members, the Kopers were promoted to high ranking officer positions by the Plaintiffs and that the Kopers embezzled money from them, and (c) after the Defendant’s employment with the Plaintiffs was terminated, the Defendant accessed the Plaintiffs’ computers through blackmail and extortion so he could steal the Plaintiffs’ documents and distribute them to third parties. Defendant submits that these allegations raise common questions of law and fact, and the series of events that give rise to the allegations are linked together and cannot be viewed separately. The Defendant contends that all the allegations raised in the three Adversary Proceedings were combined into one lawsuit brought by Redemption Strategies, Inc. Moreover, the Defendant asserts that the same witnesses will be present for each Adversary Proceeding as the Plaintiffs share common employees, officers and directors.
In addition, the Defendant seeks a protective order pursuant to Fed.R.Civ.P. 26(c) in his Motion to Consolidate on the basis that the Plaintiffs issued a Notice of Deposition for Case No. 13-8167 and Case No. 13-8169 and demanded the Defendant sit for a deposition for 21 hours for the three Adversary Proceedings in addition to approximately 17 hours of deposition that they already have taken in the other lawsuits. Defendant argues that such deposition is unduly burdensome and improperly seeks to increase the costs of litigation for the Defendant and to harass him. Accordingly, the Defendant seeks to limit the amount of time the Plaintiffs may take his deposition to no more than one day of seven hours.
In their Objection, the Plaintiffs do not oppose the consolidation of Case No. 13-*4398167 and Case No. 13-8169 for purposes of trial to avoid duplication and to conserve judicial resources. However, the Plaintiffs oppose the consolidation of these two adversary proceedings for purposes of discovery, arguing that these adversary proceedings are based upon different facts. ICB has not completed its depositions of the Kopers with respect to Case No. 13-8167. As to the military false pretense claim in Case No. 13-8169, the Plaintiffs have deposed the Defendant on this issue in the non-bankruptcy proceedings but wish to dispose the Defendant again in the context of the adversary proceeding. In addition, the Kopers have not been deposed in Case No. 13-8169 regarding the Plaintiffs’ claims of corporate theft.
As to Case No. 13-8168, Plaintiffs opposes consolidation of this case with the other two adversary proceedings because the claims underlying Case No. 13-8168 are the subject of an arbitration proceeding before the Central District of California, which has been stayed as a result of the Defendant’s bankruptcy filing. TCCSA has filed a motion to stay Case No. 13-8168 and to compel the Defendant to participate in the arbitration proceeding (the “Motion to Compel Arbitration”). TCCSA does state that should the Court deny its Motion to Compel Arbitration, then TCCSA desires to have the maximum amount of time to depose the Kopers to prepare this case for trial, but TCCSA does not object to consolidation of Case No. 13-8168 with the other adversary proceedings solely for purposes of trial.
A hearing on the Motion to Consolidate was held by the Court on July 14, 2014 and the Court took the matter under advisement. On September 30, 2014, the Court issued a Memorandum Decision and Order denying TCCSA’s Motion to Compel Arbitration.
In considering the Motion to Consolidate, the Court has evaluated the arguments of the parties at the July 14, 2014 hearing, and has reviewed and considered the motion itself and exhibits submitted in conjunction with the motion. The Court also has taken judicial notice of the contents of the docket in this bankruptcy case and the Adversary Proceedings. Teamsters Nat’l Freight Indus. Negotiating Comm. et al. v. Howard’s Express, Inc. (In re Howard’s Express, Inc.), 151 Fed.Appx. 46, 48 (2d Cir.2005) (Courts are empowered to take judicial notice of public filings, including a court’s docket).
DISCUSSION
I. General.
At issue before the Court is whether the three Adversary Proceedings should be consolidated for purposes of trial and discovery.
Pursuant to Fed.R.Civ.P. 42 as made applicable by Bankruptcy Rule 7042:
[i]f actions before the court involve a common question of law or fact, the court may:
1) join for hearing or trial any or all matters at issue in the actions; or
2) consolidate the actions; or
3) issue any other orders to avoid unnecessary cost or delay.
Fed. R. Bankr.P. 7042. “The trial court has broad discretion to determine whether consolidation is appropriate.” Johnson v. The Celotex Corp., 899 F.2d 1281, 1284 (2d Cir.1990). In exercising its discretion in determining whether consolidation is appropriate, the Court must consider:
[w]hether the specific risks of prejudice and possible confusion [are] overborne by the risk of inconsistent adjudication of common factual and legal issues, the burden on parties, witnesses, and available judicial resources posed by multiple lawsuits, the length of time required to conclude multiple suits as against a sin*440gle case, and the relative expense to all concerned of the single-trial, multiple-trial alternatives.
Id., 899 F.2d at 1285 (citing Hendrix v. Raybestos-Manhattan, Inc., 776 F.2d 1492, 1495 (11th Cir.1985)). The court needs to balance considerations of convenience and judicial economy with risks of prejudice and a concern for a fair and impartial trial. Megan-Racine Assocs., Inc. v. Niagara Mohawk Power Corp. (In re Megan-Racine Assocs., Inc.), 176 B.R. 687, 691 (Bankr.N.D.N.Y.1994). When an opposing party demonstrates substantial prejudice, then the motion to consolidate would be defeated. Id.
II. Request to Consolidate for the Purpose of Trial.
In the Adversary Proceedings before this Court, there clearly exists common questions of law as all three proceedings seek an exception to discharge pursuant to section 528(a)(2) and 528(a)(6) of the Bankruptcy Code, and two of the proceedings also seek an exception to discharge pursuant to section 523(a)(4) of the Bankruptcy Code. While the facts relating to the various claims arise out of different allegations of misconduct, there are sufficient common questions of fact given that complaints involve (a) the same parties, (b) similar allegations of the Defendant creating fraudulent documentation and embezzling and misappropriating the Plaintiffs’ funds for his personal use and benefit, and (c) allegations of misconduct or fraudulent transactions occurring during the course of the Defendant’s employment with the Plaintiffs. Moreover, many of the witnesses would be the same for all three Adversary Proceedings. As the Plaintiffs do not object to consolidation for trial purposes of Case No. 13-8167, Case No. 13-8169, and Case No. 13-8168 should the Court deny the Motion to Compel Arbitration, the Court finds it to be judicially efficient to have the determination of the common questions of law and fact conducted in a single proceeding as that would conserve judicial resources without any risk of prejudice to the parties or witnesses.
III. Request to Consolidate for the Purpose of Discovery.
As to the Defendant’s request to consolidate the three Adversary Proceedings for purposes of discovery, the Court acknowledges the Defendant’s concerns about the potential for abuse and harassment if the Plaintiffs were to be permitted to depose the Defendant for approximately twenty-one hours of actual deposition time when the Plaintiffs have already deposed him in other lawsuits on some of the same issues. However, the Court notes that any of the depositions taken of the Defendant in pending litigation prior to the Defendant’s bankruptcy filing may not have focused upon the issue of dischargeability. While there is a possibility that the Defendant may need to sit through more than seven hours of deposition time, it is premature at this juncture to gauge whether the information sought at the deposition will be duplicative or unnecessary, whether the deposition can be accomplished in seven hours, or that there will be an abuse of the discovery process. Moreover, the Court recognizes that the potential for misuse of the discovery process is not just one-sided.
Fed.R.Civ.P. 26(b), as made applicable by Bankruptcy Rule 7026, empowers the courts to control the discovery process and prevent any abuse without the need to consolidate the multiple actions for discovery purposes. Indeed “the court may alter the limits in these rules on the number of depositions and interrogatories or on the length of depositions.” Fed. R. Bankr.P. 7026(b)(2)(A). Moreover, the court, on motion or sua sponte, must limit *441the frequency or extent of discovery if it determines that:
(i) the discovery sought is unreasonably cumulative or duplicative, or can be obtained from some other source that is more convenient, less burdensome, or less expensive;
(ii) the party seeking discovery has had ample opportunity to obtain the information by discovery in the action; or
(iii) the burden of expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.
Fed. R. Bankr.P. 7026(b)(2)(C).
Thus far, the pro se Defendant, Brittany and third-party deponents, and the Plaintiffs have been vigilant in bringing motions for protective orders, motions to quash, and motions to compel discovery under the Bankruptcy Rules to Judge Eisenberg and to this Court in order to protect their respective rights. Given the potential prejudice that may occur if discovery for the Adversary Proceedings were to be consolidated and limited as to the length of time as opposed to the scope, the Court finds that consolidation not be to appropriate or necessary at this time. Rather, the Court will manage the discovery process by hearing and determining these issues as they arise on a case by case basis and can limit the scope of discovery under Bankruptcy Rule 7026(b) so as to avoid any risk of abuse of the discovery process. Accordingly, this Memorandum Decision is without prejudice to, and does not preclude, any party from seeking a protective order under Fed.R.Civ.P. 26(c).
CONCLUSION
For the foregoing reasons, the Court concludes that the Motion to Consolidate is granted in part, and the Adversary Proceedings consolidated for trial, and denied insofar as it seeks to consolidate the Adversary Proceedings for purposes of discovery.
A separate order granting in part and denying in part the Motion to Consolidate will be issued concurrent with this Memorandum Decision.
. These facts are taken from the pleadings, exhibits and other papers submitted by the parties. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497523/ | MEMORANDUM OPINION AND ORDER DETERMINING THE AMOUNT OF ALLOWED CLAIM OF FRANK AND CHRISTINA REED
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
This is a case involving, on the one hand, seemingly undeserving borrowers — who have not paid their mortgage, property taxes, or homeowners’ insurance for over seven years but continue to occupy their home — and, on the other, a loan servicer that was willing to cut corners and ignore applicable law while proceeding with an improperly filed foreclosure action. Frank and Christina Reed (the “Reeds”) defaulted on their mortgage in early 2008; their default led to two related prepetition lawsuits filed in New Jersey state court: (1) a foreclosure action initiated by their then loan servicer, GMAC Mortgage, LLC (“GMACM”), on May 19, 2008 (the “Foreclosure Action”) and (2) a lawsuit filed by the Reeds against GMACM and Residential Funding Corp.1 related to the Foreclosure Action on May 10, 2010 (the “Reed Action”). The Reeds filed four claims (the “Claims”) in these bankruptcy cases: two claims against GMACM2 and two claims against Residential Capital, LLC (“Res-Cap”),3 based on the prepetition lawsuits.
As described below, the Foreclosure Action was dismissed because GMACM could not prove that it complied with New Jersey notice requirements before commencing its foreclosure action. Thereafter, the Reeds filed the Reed Action against GMACM for wrongful foreclosure, negligence, breach of contract, and estoppel. The Reeds were permitted to amend their original complaint (the “Reed Complaint”), and filed an amended complaint (the “Amended Complaint”) on January 6, 2012, adding claims for economic and non-economic losses stemming from the Foreclosure Action, punitive damages, and consumer fraud. The Reeds voluntarily dismissed the Reed Action on February 9, 2012, to participate in the Federal Reserve Board’s Independent Foreclosure Review. On May 14, 2012 (the “Petition Date”), ResCap and various related entities (collectively, the “Debtors”) filed chapter 11 bankruptcy petitions, and the Reeds filed the Claims, seeking relief for the following: violation of the New Jersey Fair Foreclosure Act (the “FFA”) (Claim No. 1); negligence (Claim No. 2); breach of contract (Claim No. 3); punitive damages related to actual malice (Claim No. 4); violation of the New Jersey Consumer Fraud Act (the “CFA”) (Claim No. 5); and malicious use of process (Claim No. 6). Additionally, the Reeds sought to establish a constructive trust to avoid alleged unjust enrichment (Claim No. 7) and to be “made whole” under the Consent Order (defined below) (Claim No. 8).
The ResCap Borrower Claims Trust (the “Trust”), successor in interest to the Debtors for the purpose of resolving borrower claims, filed an objection to the *468Reeds’ Claims on May 29, 2014.4 After a hearing on the Objection on July 9, 2014, the Court sustained the Objection in part and overruled the Objection without prejudice in part. (See “Preliminary Reed Order,” ECF Doc. # 7246.) The Court additionally set an evidentiary hearing (the “Evidentiary Hearing”) for September 15-16, 2014, for claims 2 (negligence), 3 (breach of contract), 4 (punitive damages based upon actual malice), and 5 (the Reeds’ CFA claim) (collectively, the “Surviving Claims”); the Trust’s Objection to the Reeds’ other claims was sustained.5 (See id.) The purpose of the Evidentiary Hearing was to determine whether the Trust is liable for any of the Reeds’ Surviving Claims and, if so, the amount of damages incurred by the Reeds as a result.
At the Evidentiary Hearing,6 the Reeds called four witnesses: (1) Mr. Reed;7 (2) Christy Donati, a New Jersey attorney who testified regarding foreclosure custom and practice in New Jersey; (3) Evan Hendricks, who testified regarding the effect of a lis pendens on refinancing a mortgage loan; and (4) Drew Murdock, a friend of the Reeds. The Trust called one witness, Lauren Graham Delehey, Chief Litigation Counsel of the Trust and, formerly, of the Debtors (after the Petition Date) and ResCap (before the Petition Date). In addition to the testimony from these witnesses, each of the parties submitted documentary evidence over the course of the two-day Evidentiary Hearing.
After considering all of the evidence and arguments, the Court determines pursuant to section 502(b) of the Bankruptcy Code that the Reeds are entitled to one allowed unsecured claim against GMACM in the amount of $17,469.00, on one of their claims under the New Jersey Consumer Fraud Act — the amount of attorneys’ fees they incurred ($5,823) in defending against the Foreclosure Action, trebled.8 The *469Reeds have not demonstrated that any other damages are recoverable from GMACM on any of the theories asserted in their Claims.
I. FACTUAL FINDINGS9
A. Chapter 11 Proceedings
On the Petition Date, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The General Bar Date to file proofs of claim was originally set for November 9, 2012, and was extended to November 16, 2012 at 5:00 p.m. (Prevailing Eastern Time) (ECF Doc. #2093). All of the Claims were timely filed.
On March 21, 2013, the Court entered the Procedures Order, approving, among other things, procedures to be applied for objections to claims filed by current or former Borrowers (the “Borrower Claims Procedures”) (ECF Doc. # 3294). The Procedures Order includes specific protections for Borrowers and sets forth a process for the Debtors (and now the Trust) before objecting to certain categories of Borrower Claims. The Borrower Claims Procedures require that before objecting to certain Borrower Claims, the Trust must send the Borrower a letter (a “Request Letter”) requesting additional documentation in support of the purported claim. (See Procedures Order at 4.)
On December 11, 2013, the Court entered an Order Confirming Second Amended Joint Chapter 11 Plan Proposed by Residential Capital, LLC, et al. and The Official Committee of Unsecured Creditors (the “Confirmed Plan,” ECF Doc. # 6065). The Confirmed Plan became effective on December 17, 2013 (the “Effective Date”). (ECF Doc. #6137.) On the Effective Date, the Trust and the ResCap Liquidating Trust were established as successors in interest to the Debtors; the Trust is the successor in interest specifically with respect to Borrower Claims. (Id.) The Trust was established to, among other things, “(i) direct the processing, liquidation and payment of the Allowed Borrower Claims in accordance with the Plan, and the distribution procedures established under the Borrower Claims Trust Agreement, and (ii) preserve, hold, and manage the assets of the Borrower Claims Trust for use in satisfying the Allowed Borrower Claims.” (Confirmed Plan, Art. IV.F.) The Trust is empowered to object to borrower claims that it believes do not reflect liability of the Debtors. The Trust filed its Objection to the Claims on May 29, 2014.
B. The Reed Loan
On May 31, 2006, the Reeds borrowed $1,000,000 (the “Loan”) from Metrocities Mortgage, LLC (“Metrocities Mortgage”), evidenced by a note (the “Note”) secured by a mortgage (the “Mortgage”) on real property located at 817 Matlack Drive, Moorestown, New Jersey (the “Property”).10 GMACM began servicing the Loan on June 27, 2006 but never owned the Note. GMACM continued servicing the Loan until servicing was transferred to *470Ocwen Loan Servicing, LLC (“Ocwen”) on February 15, 2013. Ocwen thereafter transferred servicing to 21st Mortgage Corp. on October 1, 2018. RFC acquired the Loan on December 30, 2009 from non-debtor GMAC Bank (which, in turn, acquired the Loan from the originator, Me-trocities Mortgage); RFC transferred the Note to 21st Mortgage Corp. on February 6, 2013. 21st Mortgage Corp. currently owns and services the Reed Loan; it filed a foreclosure complaint against the Reeds on March 5, 2014. (See Ex. UU.)
The Reeds made their last monthly payment on the Loan on January 4, 2008. (See Ex. A (Servicing Notes), entry for 1/4/2008.) But, according to the Servicing Notes, the Reeds had not paid property taxes on the Property since the third quarter of 2006. On October 18, 2007, Moores-town Township informed GMACM that the Property was going to be sold in a tax sale; unpaid property taxes totaled $1,892.44 for 2006, and $32,683.61 for 2007 through October 18, 2007. (See id., entry for 10/18/2007; see also Sept. 16, 2014 Tr. 133:17-25.) Prior to the notice of tax sale, the Reeds’ monthly payments did not include an escrow for taxes and insurance. (See Sept. 16, 2014 Tr. 135:12-14.) GMACM then altered the monthly payments, as it was permitted to do, establishing an escrow for property taxes and insurance premiums, with GMACM making those payments directly. (Id. 135:19-24 (referencing Servicing Notes, entry for 10/18/2007).) The altered monthly payment became effective beginning February I, 2008, but the Reeds never made the February Mortgage payment. The Reeds have not made any monthly Mortgage payments for the period February 1, 2008 through July 1, 2014. (See Trust’s Request for Admissions Directed to Claimants ¶¶ 9-25.) The Reeds have not made any property tax payments for the period June 1, 2008 through July 1, 2014. (Id. ¶¶ 28-33.) Finally, the Reeds have not made any insurance premiums on the Property for the period June 1, 2008 through July 1, 2014. (Id. ¶¶ 34-39.)
1. The Foreclosure Action
The Reeds defaulted on the Loan in March 2008, after they failed to make their payments for thirty days. (See Servicing Notes, entry for 3/18/2008.) GMACM sent at least one letter notifying the Reeds that their mortgage payments were delinquent and remained due and owing. (See id.; “Notice of Default Letter,” Delehey Decl. Ex. A.) GMACM contends that, in addition to this notice, it mailed a Notice of Intent to Foreclose (“NOI”) to the Reeds pursuant to the FFA, but it is unable to prove this contention. The Reeds deny that they received an NOI, and GMACM’s failure to produce proof of mailing an NOI was the basis for the dismissal without prejudice of the Foreclosure Action.
GMACM filed the Foreclosure Action on May 19, 2008 in the Superior Court of New Jersey, Chancery Division (the “Chancery Division Court”). (See Ex. G (Complaint of Foreclosure — GMACM).) GMACM also recorded a lis pendens on the Property on May 28, 2008. (See Ex. 6 (Lis Pendens).) Mortgage Electronic Registration Services, Inc. (“MERS”), identified in the Mortgage as nominee for Metrocities Mortgage and its successors and assigns, assigned the Mortgage to GMACM on May 22, 2008.11 (See Delehey Decl. Ex. D.) Jeffrey Stephan, a now-former GMACM employee and admitted robo-sig-ner, signed the assignment of mortgage on behalf of MERS. (Id.) In its motion for summary judgment in the Foreclosure Action, GMACM asserted that it was the *471holder of the Note and Mortgage. (Id.) However, the Trust did not provide any evidence to this Court that it was the holder of the Note at the time it initiated the Foreclosure Action or at any other time thereafter; instead, the Trust relied only on the assignment of the Mortgage from MERS. (See Trust’s Pretrial Memorandum at 12; Trust’s Proposed Findings of Fact and Conclusions of Law ¶ 30.)
GMACM maintains that it mailed an NOI to the Reeds before filing the Foreclosure Action but, as GMACM explained to the Chancery Division Court, it was unable to locate either the NOI or the certified mail receipt. (Delehey Decl. ¶ 15.) The Debtors maintain that, regardless of this deficiency, GMACM had a good faith basis for filing the Foreclosure Action; it is undisputed that the Reeds defaulted on the Mortgage. The Reeds filed an answer in the Foreclosure Action (the “Answer,” Delehey Decl. Ex. C) on June 24, 2008. GMACM filed a motion for summary judgment (the “Summary Judgment Motion,” Delehey Decl. Ex. D) in July 2008; the Reeds filed a cross-motion for summary judgment (the “Summary Judgment Cross-Motion,” Delehey Decl. Ex. E), arguing that the Foreclosure Action should be dismissed due to failure to provide a proper NOI.
In the fall of 2008, the Foreclosure Action was stayed as the Reeds requested a “stop/gap”12 loan modification. (See Ex. A (Servicing Notes), entry for 7/23/20081) GMACM sent the Reeds a HOPE NOW13 letter on July 23, 2014;14 Reed met with a HOPE NOW representative, Mark Fol-weiler, on July 26, 2008. (Id., entry for 7/26/2008.) At that meeting, Reed indicated to Folweiler that he had a buyer for the Property, but the buyer had breached a contract in December of 2007. (Id.) Reed told Folweiler that the Property was on the market and that Reed was evaluating a potential offer and, consequently, did not want to go deeper into foreclosure. (Id.) Folweiler explained the stop/gap payment plans to Reed, who told Folweiler that he could afford to make $7,000 payments per month for three months. (Id.) The agreement (the “Foreclosure Repayment Agreement”) Reed discussed with Folweiler would have initiated a forbearance plan with GMACM, beginning August 1, 2008, to allow the Reeds time to sell the Property. (See Delehey Decl. ¶ 21.) Under the terms of the Foreclosure Repayment Agreement, the Reeds were required to make a $3,000 down payment on August 1, 2008, and $7,000 payments each month beginning on August 30, for six months, or until the Property was sold. (Servicing Notes, entry for 7/31/2008; Ex. YY (Foreclosure Repayment Agreement); Ex. ZZ (Foreclosure Repayment Agreement Signature Page, signed 8/8/2008).)
*472A GMACM representative contacted Reed on August 1, 2008 to review the Foreclosure Repayment Agreement and to discuss whether Reed could afford it, but Reed refused to discuss his financial situation with the representative. (Servicing Notes, entry for 8/1/2009.) Instead, he advised the representative that he was not interested in working on arrangements with GMACM — he only wanted to keep the Property long enough to sell it. (Id.) Reed said he was looking for a plan that would enable him to stay the foreclosure for one month to give him time to close a sale that was then in progress. (Id. (“Justification for resolution chosen is able to provide listing agreemnt [sic] that qualify for one month plan, to give time for spo [sic] in progress to get finalized.”).) The GMACM representative advised Reed of the terms (including the $8,000 down payment and $7,000 monthly-payments for six months), payment options, late fees, credit implications, potential future breach implications respecting the foreclosure process, and Reed was told that there would be no grace period associated with the Foreclosure Repayment Agreement. (Id.)
But Reed did not fax the signed Foreclosure Repayment Agreement or deliver the $8,000 down payment on August 1, 2008 as required. (Servicing Notes, entry for 8/1/2008; Sept. 16, 2014 Tr. 140:1-5.) GMACM followed up with a phone call to Reed on August 13, 2008, to discuss the late payment; GMACM agreed to extend the grace period until August 18, 2008, to allow the Reeds to send the $3,000 payment. (Servicing Notes, entries for 8/11/2008, 8/13/2008; Sept. 16, 2014 Tr. 147:24-148:20.) GMACM received the executed Foreclosure Repayment Agreement and $3,000 initial payment from the Reeds on August 18, 2008. (Servicing Notes, entry for 8/18/2008; Sept. 16, 2014 Tr. 148:22-149:5.) Reed did not make the first required monthly payment by September 1, 2008 (see Servicing Notes, entry for 8/1/2008), and GMACM was unable to reach Reed by phone to discuss the delinquency (see id., entries for 9/3/2008, 9/10/2008). On September 16, 2008, GMACM cancelled the Foreclosure Repayment Agreement after Reed did not make the required $7,000 payment.15 GMACM then advised its counsel to proceed with the Foreclosure Action.16 (Id., entry for 9/16/2008.)
*473The Chancery Division Court denied the GMACM’s Summary Judgment Motion and granted the Reeds’ Summary Judgment Cross-Motion on February 9, 2009. (See Claims, Ex. A.) The Chancery Division Court determined that the Foreclosure Action should be dismissed without prejudice because GMACM could not prove that it delivered an NOI in accordance with N.J.S.A. 2A50-56. (Id.) It appears that, for the purposes of deciding the cross-motions for summary judgment, the Chancery Division Court credited GMACM’s assertion that it was the holder of the Note; Reed, while proceeding pro se in the Foreclosure Action, filed the Summary Judgment Cross-Motion, arguing only that the action should be dismissed for failure to comply with the FFA. (Dele-hey Decl. Ex. E.)
While the issue was not argued by the parties or addressed by the Chancery Division Court, the record before this Court establishes that GMACM did not have *474standing to bring the Foreclosure Action when it was filed for three reasons: First, GMACM did not obtain an assignment of the Mortgage until after the Foreclosure Action was filed; second, the assignment to GMACM that was executed on behalf of MERS by GMACM’s employee, Jeffrey Stephan, falsely stated that MERS transferred the Note to GMACM, an impossibility since MERS did not own or have authority to transfer the Note; and third, GMACM did not hold the Note or demonstrate that it was given authority to bring the Foreclosure Action on behalf of the noteholder. These grounds would have been fatal to GMACM’s effort to foreclose on the Property when it commenced the Foreclosure Action, apart from GMACM’s failure to provide the Reeds with the NOI under New Jersey’s FFA. The Court concludes that this conduct by GMACM was wrongful, and, as explained below, supports the Reeds’ CFA claim against GMACM.
Despite the dismissal without prejudice on February 9, 2009, a final judgment was not entered in the Foreclosure Action until August 9, 2013. (See Delehey Decl. Ex. F, “Docket for the Foreclosure Action.”) It is unclear to the Court why the Foreclosure Action was not actually dismissed until more than four years after the dismissal order was entered. The lis pendens GMACM filed on the Property on May 28, 2008 remained on record throughout this period, and before it would have expired at the end of its five-year duration (see N.J.S.A. 2A:15-11), Ocwen, the successor to GMACM as loan servicer, filed a lis pendens on the Property. 21st Mortgage Corp. currently has a lis pendens on the Property, associated with its own foreclosure action against the Reeds, which is pending.
The Reeds never filed a lawsuit to have GMACM’s lis pendens discharged. (Ex. OO (Trust’s Request for Admissions Directed to Claimants)17 ¶ 51.) The Reeds never made a written request to GMACM, GMACM’s attorneys in either the Foreclosure Action or the Reed Action, or the Clerk of Burlington County to have the lis pendens discharged. (Id. ¶¶ 52-55.) The Reeds never made an effort to have the lis pendens on the Property discharged. (Id. ¶ 56.)
In connection with the Foreclosure Action, the Reeds retained several lawyers, including (1) Jeffrey S. Walters (who Reed admits was only minimally involved (see Sept. 16, 2014 Tr. 48:11-14)); (2) Linda Campbell; and (3) Matt McCrink. Reed contends that Campbell’s fees related to the Foreclosure Action total $1,840.00 (see Exs. 14, 14a) and that McCrink’s fees related to the Foreclosure Action total $3,983.00 (see Exs. 15, 15a). Reed was unable to attribute any of Walters’ fees to the Foreclosure Action. (See Ex. 13, 13a.) The Court has reviewed the exhibits and concludes that the Reeds adequately demonstrated that the fees charged by Campbell and McCrink were incurred as a result of the Foreclosure Action, for a total of $5,823.00. The Court addresses below whether any of these fees are part of any compensable damages claims by the Reeds.
2. The Reed Action
The Reeds filed the Reed Complaint on May 10, 2010 against GMACM, RFC, and unnamed defendants, allegedly employees or agents of GMACM and RFC. The Reed *475Complaint lists five counts: (1) GMACM negligently and/or recklessly wrongfully filed the Foreclosure Action and recorded a lis pendens against the Property without first providing an NOI; (2) GMACM breached its contract — the “financial transaction secured by the mortgage” — with the Reeds by failing to provide an NOI before commencing the Foreclosure Action; (3) RFC, after it acquired ownership of the Reed Loan on December 30, 2009, inherited GMACM’s liabilities as GMACM’s successor in interest, and is therefore liable for GMACM’s actions; (4) GMACM’s and RFC’s agents/employees were responsible for GMACM’s failure to provide the Reeds with a NOI; and (5) due to the Foreclosure Action and lis pendens, the Reeds were unable to obtain the funds to pay off their mortgage and their credit was “destroyed,” and GMACM, RFC, and any other successor in interest should be estopped from instituting another foreclosure action against the Reeds and the Property. (See Reed Compl. at 4-6.) The Reed Complaint erroneously states that GMACM was the owner of the mortgage on the Property and that GMACM transferred ownership of the mortgage to RFC on December 30, 2009. (See Reed Compl. at 2, ¶¶4, 6.) Non-debtor GMAC Bank transferred ownership of the Note to RFC on December 30, 2009; GMACM never owned the Note.
GMACM’s motion to dismiss the Reed Complaint was denied in July 2010 (the “Order Denying the Motion to Dismiss,” Delehey Decl. Ex. G). In its Order Denying the Motion to Dismiss, the New Jersey court does not explain its basis for denying GMACM’s motion; instead, it appears that the judge simply wrote “DENIED” on a proposed order submitted by GMACM that would have granted the motion to dismiss submitted by the Defendants. (See id.)
The Reeds filed the Amended Reed Complaint on January 6, 2012, adding claims for economic and non-economic losses resulting from the Foreclosure Action,18 punitive damages for acts taken with actual malice and/or accompanied by a wanton and willful disregard of any potential injury to the Reeds, and consumer fraud under the CFA. (See Am. Compl., Claims Ex. E.) The Amended Complaint incorporates the first five counts from the Reed Complaint before focusing on an additional theory of liability — GMACM, in its NOI, was required to inform the Reeds that they had the right to cure any mortgage default before the entry of a final foreclosure judgment, the NOI was not sent, and GMACM falsely led the Reeds to believe that their only option was to remit the entire principal balance and interest (at the time amounting to more than $1,000,000). The Reeds claimed that, at the time, they were approximately three months in arrears and “could have easily cured the default if Defendant had not deceived Plaintiff into believing that he did not have this right.”19 (Am. Compl. ¶ 6.) *476The Reeds assert that during the nine months the Foreclosure Action was pending, their credit was destroyed and they were unable to obtain further financing to conduct their real estate business and earn income. (Id. ¶ 8.)
After filing the Amended Complaint, the Reeds sought an order either (1) staying the Reed Action to allow time for the Reeds to participate in the Independent Foreclosure Review or (2) granting leave to voluntarily dismiss the Reed Action without prejudice. On February 9, 2012, the New Jersey court entered an order granting the Reeds’ motion to voluntarily dismiss the Reed Action without prejudice (the “Dismissal Order,” Delehey Decl. Ex. H).
S. The FRB Settlement
Before the Petition Date, several of the Debtors and their affiliates were the subjects of an examination by the Board of Governors of the Federal Reserve System (the “FRB”), the Federal Deposit Insurance Corporation (the “FDIC”), the Office of the Comptroller of the Currency (the “OCC”), and the Office of Thrift Supervision (together with the FRB, the FDIC, and the OCC, the “Regulators”). The Regulators were investigating alleged foreclosure abuses by major mortgage servicing companies, including the Debtors. Without admitting fault, Debtors ResCap and GMACM (the “Consent Order Debtors”), as well as non-debtors Ally Financial Inc. (“AFP) and Ally Bank, entered into a consent order with the FRB and the FDIC (the “Consent Order”) on April 18, 2011. Under the Consent Order, the Consent Order Debtors, AFI, and Ally Bank agreed to develop and implement certain risk management and corporate governance procedures under the guidance of the FRB. The parties were further required to undertake risk assessment of their mortgage servicing operations and make improvements to their residential mortgage loan servicing business. Of particular relevance to the Claims, GMACM agreed to pay for an independent file review regarding certain residential foreclosure actions and foreclosure sales prosecuted by the Debtors (the “FRB Foreclosure Review”), and to prepare and submit a report regarding the results of that review. (Consent Order ¶¶ 3-4; Delehey Decl. ¶ 7.) The Debtors were required to remediate any financial harm to borrowers resulting from errors or misrepresentations by the Debtors that the FRB Foreclosure Review uncovered. (Consent Order ¶ 3(c); Delehey Decl. ¶ 7.)
According to the FRB Foreclosure Review requirement, GMACM must “retain one or more independent eonsultant(s) acceptable to the [Federal] Reserve Bank [of Chicago] to conduct an independent review” of residential foreclosure actions GMACM prosecuted between January 1, 2009, and December 31, 2010 (the “Consent Order Review Period”), as well as foreclosure sales pending or completed during the Consent Order Review Period. (Consent Order ¶ 3(a); Delehey Decl. ¶ 8.)
In June 2013, a term sheet was executed among the FRB and the Consent Order Debtors, suspending the FRB Foreclosure Review. The Debtors escrowed $230 million as their anticipated settlement amount. (Delehey Decl. ¶ 9.) After the term sheet was executed, the Debtors’ independent consultant, Pricewaterhouse-Coopers (“PwC”), conducted a review of the population of borrowers who may have been eligible to receive payments from the settlement fund. (Id.) PwC provided an initial “IFR Waterfall” to the FRB.” (Id.) Under the settlement agreement, all individual foreclosure file reviews were halted and the Debtors instead provided a pay*477ment of some amount — with no determination having been made of actual harm — to each borrower in the final population (the “Eligible Population”), i.e., all borrowers being serviced by the Debtors who had been subject to residential mortgage foreclosure actions or proceedings, including residential foreclosure sales, that were pending or occurred at any time during the Consent Order Review Period. (Id.)
On July 26, 2013, the previously es-crowed funds were moved into a settlement fund outside the Debtors’ control (the “Settlement Fund”). (Delehey Decl. ¶ 10.) After the Settlement Fund was established, the Debtors provided data from their loan servicing system to an independent consultant and the FRB; the independent consultant and the FRB verified the eligibility and placement of all the borrowers into the IFR Waterfall. (Id.) On November 21, 2013, the Debtors provided Rust Consulting, Inc., as paying agent for the settlement, specific borrower placement information, and the borrower placement into the IFR Waterfall was deemed final. (Id.) The paying agent is now in the process of distributing the funds to borrowers according to the distribution plan implemented by the FRB. (Id.)
The Reeds received a payment of $500 in respect of the FRB settlement — the lowest payout provided for in the IFR Waterfall.20 (Delehey Decl. ¶ 12.) Rust Consulting, Inc. distributed the remediation settlement payment to the Reeds on January 27, 2014. (Id.) This payment does not indicate or represent any determination or acknowledgement by the Debtors that the Reeds Claims have merit or that they suffered any harm caused by the Debtors. (Id. ¶ 11.) The Reeds were included in the Eligible Population because they were subject to a foreclosure proceeding during the Consent Order Review Period. (Id.) Indeed, the Debtors’ role in the FRB Foreclosure Review settlement was limited to providing servicing system data to the independent consultant with respect to borrowers who, given the time period in which their foreclosure actions were pending, may have been eligible to be included in one of the various “potential harm” categories in the IFR Waterfall. (Id. ¶ 12.) It was only after the Debtors provided the data to the independent consultant that the FRB finalized the Eligible Population and the placement of each eligible borrower in the IFR Waterfall’s potential harm categories. (Id.)
As the Court stated at the Evidentiary Hearing, it is very familiar with the Consent Order and the IFR Waterfall, as the Court approved the modified Consent Order during the bankruptcy case. Neither AFI nor any of the Consent Order Debtors admitted any liability when they entered into the Consent Order. Additionally, the IFR Waterfall procedures set up under the FRB settlement have no bearing on any of the issues raised by the Reeds’ Claims.
C. The Reeds’ Attempts to Sell the Property
Before, during, and after the Foreclosure Action was initiated, the Reeds engaged Louise Carter, a real estate agent for BT Edgar & Sons Realtors (“BT Edgar”), to list the Property for sale. The Reeds first engaged Ms. Carter at the end of 2007 (Sept. 15, 2014 Tr. 43:18-19); the initial listing price was slightly more than $2 million. Throughout the relevant period, the Reeds entertained several offers (several came close to closing) and lowered *478the asking price for the Property on multiple occasions. Between 2008 and 2010, the listing price was reduced, from just over $2 million to $1,895,000, to $1,780,000, to $1,690,000, and ultimately to $1,595,000. (See Ex. O (BT Edgar Status Change Forms).) Reed contends that in early 2008, before the Foreclosure Action was filed, his contract with the Jacobs (discussed below) is an accurate indication of the market value of the Property: $2,040,000. From fall 2008 through 2011, Reed contends that the value of the Property was between $1.75 and $1.9 million. However, when the Reeds filed their Claims in November 2012, they alleged that the Property was worth $1,650,000.
1. Scott and Traci Jacobs
Before the Reeds defaulted on the Loan, Scott and Traci Jacobs (the “Jacobs”) made an offer to purchase the Property for $1.9 million on October 30, 2007. (See Ex. R (Proposal of Purchase Reed to Jacobs, $1.9M).) Following price negotiations, on December 8, 2007, the Reeds entered into an Agreement of Sale (the “Jacobs Sale Contract”) with the Jacobs to sell the Property for $2.04 million (which was less than the original asking price). (See Ex. 1 (Jacobs Sale Contract).) The Jacobs Sale Contract contained a mortgage contingency clause (see Ex. R ¶ 9), and settlement (closing) was to occur on February 7, 2008 (see id. ¶ 14).
The sale of the Property to the Jacobs did not close. The Jacobs informed the Reeds, before the Foreclosure Action was filed, that they were exercising their rights to terminate the Jacobs Sale Contract because their application for financing had been denied by Commerce Bank, N.A.21 (“Commerce Bank”). (See Sept. 16, 2014 Tr. 84:9-18; Ex. V (Jacobs’ Motion for Summary Judgment with Certification and Exhibits — Jacobs v. Reed); Ex. W (Opinion Granting Summary Judgment in Jacobs v. Reed).) The appraisal required by Commerce Bank indicated that the value of the Property was only $1,950,000— less than the sale price. (See Sept. 16 Tr. 85:24-86:2.) An appraiser hired by Commerce Bank, Robert Jones, completed the appraisal. (See id.; Ex. W at 3.) Reed complained to Commerce Bank about the appraised value, and the Reeds refused to return the Jacobs’ $50,000 deposit. Instead, the Reeds commissioned a second appraisal for Commerce Bank, which engaged a second appraiser, Peter McCaf-frey. (See Ex. 2 (January 21, 2008 Commerce Bank Appraisal).22) The second appraiser arrived at a value of $2.04 million. (See Sept. 15, 2014 Tr. 50:18-19.) The Jacobs, however, did not accept the revised appraisal and sued the Reeds for the return of their deposit. (See Exs. V, W.) The Reeds countersued the Jacobs, Commerce Bank, Robert Jones, and BT Edgar. (See Ex W.) Ultimately, the Jacobs were granted summary judgment in their favor in their action against the Reeds. (See id.)
2. Mark Weaver aka Brett Cooper
After the sale to the Jacobs failed to close, the Reeds relisted the Property sometime after the Foreclosure Action was commenced. (Sept. 15, 2014 Tr. 59:5-6.) According to Reed, when the Reeds and their real estate agency, BT Edgar, relist-ed the Property, they lowered the asking price to $1,895,00 because of the added pressure of the Foreclosure Action. (Id. 59:24-60:2; 61:12; Ex. O.)
*479Sometime in June or July, a second potential buyer, Mark Weaver (aka Brett Cooper23) (‘Weaver”) made a verbal and written offer of $1,800,000, which the Reeds accepted. (Sept. 15, 2014 Tr. 61:14-17; 61:20-22; 62:5.) The Reeds and Weaver entered into an Agreement of Sale on August 25, 2008 for an agreed price of $1,800,000 (the “Weaver Agreement of Sale,” Ex. X (Contract for Sale Reed to Weaver for $1.8M)). Under the Weaver Agreement of Sale and an addendum attached thereto, Weaver paid the Reeds a $50,000 deposit, which was held in escrow by BT Edgar. (See Exs. X, Y (Addendum to Contract of Sale between Reed and Weaver). Closing was postponed several times until Weaver finally told the Reeds that, as of November 21, 2008, he still did not have enough funds to close the cash sale. At that point, the parties instead entered into a lease/purchase agreement, whereby Weaver would take immediate possession of the Property in exchange for an up-front payment to Reed of $400,000 and monthly rental payments of $25,000. (See Ex. Z (Lease Agreement with Option to Purchase with Mr. Weaver.) Weaver paid the initial $400,000 via wire transfer. Reed claims that, in the lobby of the Bank of America building when Weaver wired the funds, Weaver required Reed to pay off the Second Mortgage with a portion of the $400,000 payment he received. (Sept. 15, 2014 Tr. 88:10-15 (“But Mr. Cooper required that ... I had to take the money [the $400,000 initial payment] and I had to use it to pay off the second mortgage or any other lien besides the first mortgage on the property, which I did.”); Sept. 16, 2014 Tr. 77:7-9 (“That actually happened orally ... in a Bank of America lobby, at the time of the money transfer.”).) The Second Mortgage company (according to Reed, Debtor Homecomings Financial (see Sept. 15, 2014 Tr. 84:1-2)) agreed to accept a reduced payoff. (Sept. 16, 2014 Tr. 60:10-14.) Reed and his family then relocated to another of the Reeds’ properties in Virginia. (See Sept. 15, 2014 Tr. 84:17-20.)
Weaver then moved into the Property, but subsequently defaulted under the lease agreement, failing to make required monthly payments. After Weaver did not make the first monthly payment in December 2008, Reed called Weaver, who told Reed that his money was still “tied up.” (Sept. 15, 2014 Tr. 87:13-22.) Reed and Weaver then arranged for Weaver to release $25,000 of his initial $50,000 deposit to cover the December rent. (Id. 88:1-7.) After Weaver failed to make his second monthly payment in January 2009, Reed went to New Jersey to see the realtor. (Id. 88:15-16.) While he was in New Jersey, Reed gave a default notice to a person he believed to be Weaver’s wife at the Property. (Id. 88:17-18.) Weaver eventually paid the January rent with the remaining $25,000 in the escrow account, bringing the escrow balance to zero. (Id. 88:25-89:5.) At this point, Weaver contacted Reed to extend his lease with option to purchase for an additional six months at $25,000 per month; Reed agreed and extended the term of Weaver’s lease. (Id. 89:8-10; 89:16-17.) From that point on, Reed received only bad checks from Weaver (id. 89:20-21), and Reed did not collect any additional rent (id. 89:22-25).
The Reeds brought an eviction action against Weaver, who was finally evicted from the Property in fall of 2009. (Id. 90:11.) Weaver still had the six month option to purchase the Property at the time he defaulted on his rental agreement (id. 90:11-12), and the Reeds began showing the house again on or about the time *480Weaver was evicted. (Id. 97:18-25 (“So the next time the house is on the market is immediately — around the time that Mr. Cooper is evicted. I believe that as part of the agreement to — it was a consent decree in the eviction. And Mr. Cooper agreed to start letting people walk through. I don’t remember if that was a month or forty days or sixty days or — and I can’t tell you if it was September or October. But we immediately listed the house.”).)
3. Frank and Gina Roccisano
The next offer the Reeds received on the Property was from Frank and Gina Rocci-sano (the “Roccisanos”), who offered $1,300,000 on March 20, 2010; the Reeds rejected this offer. (Id. 102:20; Ex. 3 (Roccisano Proposal to Purchase).)24 Reed believes that he tried negotiating a different price with the Roccisanos, but they never agreed to terms. (Sept. 15, 2014 Tr. 103:1-6.) According to Reed, by this point, the $1,300,000 offer would not have been enough to allow the Reeds to pay off the Loan, which had accumulated additional interest (and likely penalties). (See id. 167:18-168:1 (“I believe that the million-three wasn’t sufficient to be able to close the loan, or not the loan, the sale of the house, even if it was cash, because the ... interest and everything that had run on the mortgage had now accumulated to the point where the house was underwater with that offer. It wouldn’t ... convey clear title. It would not clean up the debt.”).)
The Roccisanos made a second offer, on June 12, 2010, for $1,450,000 (Ex. DD), which the Reeds considered. (See Sept. 15, 2014 Tr. 169:12-13.) The Roccisanos withdrew their second offer before entering into an agreement of sale with the Reeds. Reed testified that he believes the Reeds were unable to reach an agreement with the Roccisanos because the Roccisa-nos were unable to wait for the Reeds to sort out the Reed Action. (See id. 173:2-6 (“They didn’t want to wait for us to — to sort out our, you know, how much we would owe on the house, and the mortgage, and the — you know, there was liti— at that point there was litigation. I think they found out we had filed litigation, it’s like they didn’t want to bother anymore.”).) The Trust submitted an email from Frank Roccisano to Kevin Aberant, the Roccisanos’ attorney, in which Mr. Roccisano indicated that he would have to “discontinue any negotiations” with the Reeds because he was “moving back home to Louisville and resuming [his] old job.” (Ex. EE.) According to Reed, the Roccisa-nos’ move to Louisville was determined based on a variety of factors, one of which was their ability to purchase the Property. (See Sept. 15, 2014 Tr. 175:14-22 (“I think what I remember is Mr. Roccisano ... was entertaining two positions with the same company, or something like that. He can — whatever was favorable to him in his personal life, he would’ve taken. I understood our — our house played a role in that; if he could get it for a certain price, then he would have taken the position in New Jersey, instead of moving back to [Louisville].”).)
In any event, after negotiations with the Roccisanos did not result in sale of the Property, the Reeds lowered the listing price again. (Id. 173:8-11.) Eventually, sometime around Thanksgiving of 2010, the Reeds moved back into the Property and, at that time or shortly thereafter, unlisted the Property. (See id. 173:17-18; 174:5-6.)
4. Kris and Nina Singh
The final offer Ms. Carter received on the Property was from Kris and Nina *481Singh for $1,100,000, at a point when the Property was not listed on the market. (See id. 174:14-15.) The Reeds rejected this offer because it was not sufficient to convey clear title to the Property. (See id. 174:22-175:1.) Reed contends that the Singhs offered a low price because of the Foreclosure Action (see Sept. 16, 2014 Tr. 97:24), but the only evidence of the offer from the Singhs is an email that states “we would like a full description of what the legal dealings are with the bank and seller, as this may affect the closing.” (Ex. FF.)
After the Reeds rejected the Singh offer, they ceased marketing the Property. The Reeds believed that the ongoing litigation with GMACM and the lis pendens on the Property resulted in fewer and lower offers than they could accept that would offer clear title to the Property. (See Sept. 15, 2014 Tr. 176:12-177:9.) Consequently, since the Reeds moved back in to the Property around Thanksgiving of 2010, they have not tried to sell the Property. (See id. 180:21-24.)
D. The Reeds’ Attempts to Refinance the Property
Reed admits that he did not complete a written application to refinance the Property. Though he did not complete an application with Commerce Bank (Sept. 15, 2014 Tr. 47:23-48:1), Reed claims that because of his “relationship” with Commerce Bank, he never needed to complete an application to receive refinancing. (Id. 48:4-9 (“As I’ve said ... that was our relationship, because I — they never needed one, Your Honor; that’s just the way we— we had a business relationship. I think the last application, to be clear, that I filled out for TD Bank [Commerce Bank’s successor] may have been 1992 or something, ’93, involving one of my original properties.”).) Reed testified that while the contract with the Jacobs “was not in dispute” (id. 48:14-15), he asked Commerce Bank to complete a cash-out refinance of the Property in the event that the sale to the Jacobs did not close. (Id. 46:12-13.) The appraisal Reed commissioned for Commerce Bank was a necessary part of the refinance process. (Id. 48:20-21.) According to Reed’s recollection, Commerce Bank was going to provide a refinancing of the Property that would have satisfied the Mortgage; it is unclear if it would have also satisfied the Second Mortgage. (See id. 46:12-16 (“I asked them to do a cash-out refi, could they take out the first. And I believe I had a balance on the second, which was a line of credit, and provided me free cash beyond that. My recollection was that number would have been about 4-, 500,000 dollars beyond the liens that were there.”).) Due to the Foreclosure Action, Reed claims that Commerce Bank denied his requested refinance.
The Court finds that Reed’s testimony regarding his attempts to refinance the Property with Commerce Bank was not credible. Reed relies solely on his own testimony to establish that (1) he applied to refinance the Loan on the Property with Commerce Bank for a cash-out refinance before the Foreclosure Action was filed; (2) he was going to be approved for a refinance; and (3) the refinance was denied because of the Foreclosure Action. However, Reed told a very different story in connection with the Jacobs’ lawsuit against him in 2009. Then, at a deposition in which Reed was represented by counsel, he testified under oath that (1) he applied for a refinance of the Second Mortgage with Commerce Bank for $250,000; (2) the loan was not approved by Commerce; (3) the process died down due to his belief that he was going to sell the Property, making a refinance unnecessary. (See Sept. 16, 2014 Tr. 106:1-107:20, 109:3-110:3.) Reed’s “explanation” of these discrepancies in his sworn testimony was not *482credible.25 In light of this conflicting testimony and lack of corroboration, the Court does not credit Reed’s claim that he was denied a cash-out refinance from Commerce Bank because of the Foreclosure Action.
According to Reed, he also asked Allied Mortgage for a cash-out refinance of the Property in March 2008 and was informed that they had multiple options available for the Property, but Reed did not ask for interest rates or closing costs when he was negotiating the refinancing loan. (See Sept. 16, 2014 Tr. 99:15-24.) Reed submitted a letter from Thomas J. Tartamosa, a Loan Officer for Allied Mortgage in March 2008, indicating that, at the time Reed contacted him, the Property was under contract for sale and Reed qualified for various loan programs. (See Ex. 19 (Tar-tamosa Letter).) Tartamosa’s letter states that the “options [he] presented to Mr. Reed [became] null and void when his property at 817 Matlack Dr. Moorestown NJ 08057 was placed into foreclosure.” (Id.) However, GMACM introduced evidence that Allied Mortgage confirmed that it has no record of an application by Reed. (See Ex. LL.) Though Stuart Shilling, a Vice President at Allied Mortgage, confirms that Mr. Tartamosa was employed by Allied Mortgage in March 2008 (id. ¶ 5), Allied Mortgage “has no documentation or information supporting Mr. Tartamosa’s claim that Plaintiffs sought financing from Allied Mortgage Group at any time, including March 2008.” (Id. ¶ 8.)
The Court finds that Reed has not established that he was denied a cash-out refinance on the Property due to the Foreclosure Action.
E. The Claims
The Reeds’ Claims assert as their bases “Negligence — Unjust Enrichment — Constructive Trust.” Each claim is listed in the amount of $2,958,000, of which $1,650,000 is purportedly secured as the value attributed to the Property, and $1,303,000 is unsecured and should be afforded priority status under section 507(a)(3) of the Bankruptcy Code. The Claims attach a number of documents, some of which were admitted into evidence at the Evidentiary Hearing. The Claims are all based on the Foreclosure Action and the Reed Action.
F. The Trust’s Objection to the Claims
The Trust filed the Objection on May 29, 2014, arguing that the Claims fail as a matter of law. The Court held a hearing on the Trust’s Objection and the Reeds’ Response on July 9, 2014. The Court entered a written Order, sustaining in part and overruling in part the Trust’s Objection, and indicating that an evidentiary hearing would be necessary. At the July 9, 2014 hearing, Reed showed that GMACM’s initial foreclosure complaint alleged that GMACM owned the Note and Mortgage; in the Objection, however, GMACM affirmatively asserted that it never owned the Note. The Trust’s counsel asserted that the allegation in the foreclosure complaint was an error. The discrepancy raised a disputed issue of fact about the ownership of the Note. The Court therefore overruled the Trust’s Objection to the Reeds’ (1) breach of contract claim and (2) CFA claim, to the extent the Reeds’ claims could be premised on *483GMACM’s lack of standing in the Foreclosure Action. The Court additionally overruled the Trust’s Objection to the Reeds’ negligence and punitive damages/actual malice claims, determining that any ruling on those claims involved disputed issues of fact. The Court sustained the Trust’s Objection to the Reeds’ claims arising under the FFA, claims for unjust enrichment/constructive trust, malicious use of process, and his claim to be “made whole” under the Consent Order and Foreclosure Review. (See Preliminary Reed Order.)
Between the July 9, 2014 hearing and the Evidentiary Hearing, the Court held a number of telephonic conferences regarding various discovery disputes; the Court resolved these disputes by entering a series of orders: (1) an order limiting the scope of witness testimony (and the Reeds’ damages contentions) to the single Property subject to the Foreclosure Action (ECF Doc. # 7314); (2) an order precluding the Reeds from introducing the testimony of Mrs. Reed at the Evidentiary Hearing, because Mrs. Reed was not made available for deposition prior to the close of discovery26 (ECF Doc. #7387); (3) an order granting in part and denying in part the Trust’s motions in limine to exclude certain expert evidence that, among other things, excluded the expert reports filed by the Reeds, thereby (i) precluding any of the witnesses from testifying about the effect of credit reporting with respect to the Reeds since Reed failed to produce any credit reports, (ii) limiting expert testimony about alleged damages resulting from the Reeds’ failed refinance efforts, (iii) precluding experts from testifying about any non-economic damages suffered by the Reeds, (iv) allowing expert testimony (assuming proper foundation) for economic damages suffered by the Reeds from diminution of the value of the Property as a result of the Foreclosure Action, and (v) allowing a New Jersey attorney, Donati, to testify about New Jersey foreclosure custom, practice, and procedures (but not to offer opinion testimony as to whether the Debtors violated these rules) (ECF Doc. # 7499); and (4) an order precluding the expert testimony of Dr. Jay I. Sussman, who was not timely identified to the Trust as a witness (ECF Doc. # 7516).
II. DISCUSSION
A. Negligence Claim
The Reeds claim that GMACM negligently brought the Foreclosure Action without first complying with the FFA’s notice requirements, resulting in damages to the Reeds, apparently in the form of damage to their credit and a subsequent inability to obtain financing for Reed’s home-flipping business. The Court ruled in its July 29, 2014 order limiting the scope of witness testimony that “the Reeds may not recover damages relating to any other properties [other than the Property] or lost business opportunities that the Reeds assert they lost because of the Foreclosure Action. The Court concludes as a matter of law that such other damages, if any, are speculative and not foreseeable, and are not recoverable on the Reeds’ surviving claims.” (ECF Doc. #7314 at 1-2.) To the extent the Reeds seek to recover on their negligence claim for damages not related to the Property, they cannot. Additionally, in the Court’s September 8, 2014 order regarding the Trust’s motions in limine, the Court concluded that “[b]ecause the Reeds have failed to provide any credit reports reflecting an adverse impact on the Reeds’ credit from the alleged wrongful foreclosure, de*484spite the Trust’s timely request that such items be produced, neither Mr. Reed nor any of the experts may testify about the effect of credit reporting with respect to the Reeds.” (ECF Doc. # 7499 ¶3.) Consequently, to the extent the Reeds seek to recover damages for their negligence claim relating to adverse impact on credit reports they failed to submit, they are precluded from doing so.
The Reeds argue that the Debtors’ statutory duty to provide notice under the FFA is sufficient to support their negligence claim. (See Response ¶¶ 44-45.) At the Evidentiary Hearing, the Reeds asserted that, in addition to the FFA deficiency, GMACM failed to establish that it had standing to foreclose before it filed the Foreclosure Action. The Reeds assert that this supports their negligence claims.
First, the Trust argues that the Reeds cannot rely on the statutory NOI requirement as definitive proof that the Trust owed a duty to the Reeds that they breached and, therefore, the Reeds’ negligence claim fails. Second, the Trust argues that GMACM acted reasonably under the circumstances. Finally, the Trust argues that the Reeds have not provided any credible evidence that they can establish damages, because they still have the right to cure the default at any point prior to the entry of a final judgment of foreclosure. The Reeds respond that fairness, public policy, and foreseeability support their negligence claim. (Id. ¶¶ 44-45.)
Under New Jersey law, negligence has four elements: “(1) duty of care, (2) breach of duty, (3) proximate cause, and (4) actual damages.” Wartsila NSD N. Am., Inc. v. Hill Int’l, Inc., 342 F.Supp.2d 267, 278 (D.N.J.2004) (citation omitted). “[T]he standard of care is the conduct of the reasonable person of ordinary prudence under the circumstances.” Rappaport v. Nichols, 31 N.J. 188, 156 A.2d 1, 8 (1959). “The most common test of negligence ... is whether the consequences of the alleged wrongful act were reasonably to be foreseen as injurious to others coming in the range of such acts.” Di Cosala v. Kay, 91 N.J. 159, 450 A.2d 508 (1982) (citations omitted).
“There can be no actionable negligence if defendant or the act violated no duty to the injured plaintiff. The question of the existence of duty is one of law and not one of fact.” Ryans v. Lowell, 197 N.J.Super. 266, 484 A.2d 1253, 1258 (App. Div.1984) (citations omitted). “The question is not simply whether a[n] ... event is foreseeable, but whether a [d]uty exists to take measures to guard against it. Whether a [d]uty exists is ultimately a question of fairness. The inquiry involves a weighing of the relationship of the parties, the nature of the risk, and the public interest in the proposed solution.” Goldberg v. Hous. Auth. of Newark, 38 N.J. 578, 186 A.2d 291, 293 (1962).
In New Jersey, a “violation of a statutory duty of care is not conclusive on the issue of negligence in a civil action but it is a circumstance which the trier of fact should consider in assessing liability.” Braitman v. Overlook Terrace Corp., 68 N.J. 368, 346 A.2d 76, 85 (1975). “[Statutes rarely define a standard of conduct in the language of common-law negligence.” Eaton v. Eaton, 119 N.J. 628, 575 A.2d 858, 866 (1990). The statute at issue in this case — the FFA — does not incorporate the negligence standard of “reasonableness,” and so, the Trust argues, a violation of the statute alone does not establish the existence of a duty of care or a breach of such duty. But even where a statute does not create a separate cause of action for its violation and does not incorporate a standard of reasonableness, the trier of fact may still consider violation of the statute as evidence possibly supporting a determination of negligence. See Braitman, 346 *485A.2d at 85. In Braitman, the Supreme Court of New Jersey gave two examples of instances where it had considered statutory duties in the context of civil negligence actions: traffic violations and landlord-tenant law. In both instances, the court noted that while the statutes at issue did not create separate causes of action for their violation, they did create standards of conduct that juries should consider in assessing the ultimate determination of negligence. Id. Thus, under New Jersey law, plaintiffs can rely on statutory duties— even those without private rights of action — as evidence of a defendant’s negligence that a trier of fact can consider when assessing a negligence claim, regardless of whether or not the statute incorporates “reasonableness” standards into the provisions at issue, even if a violation of a statute is not negligence per se, when the violation is causally connected to the damages incurred. See Horbal v. McNeil, 66 N.J. 99, 103, 328 A.2d 604 (1974) (citations omitted).
Even considering GMACM’s violation of the FFA and apparent lack of standing to pursue the Foreclosure Action, however, New Jersey courts generally do not impose any heightened duty on loan servicers for negligently initiating foreclosure actions. For example, when addressing negligence claims against loan servi-cers, New Jersey courts typically state the proposition that a bank does not owe a duty of care to a borrower, even if the borrower is a consumer. See Shinn v. Champion Mortg. Co., Civil Action No. 09-CV-00013(WJM), 2010 WL 500410, at *4 (D.N.J. Feb. 5, 2010) (citing United Jersey Bank v. Kensey, 306 N.J.Super. 540, 704 A.2d 38, 45 (App.Div.1997) (discussing whether banks have fiduciary obligations to disclose certain information to borrowers, noting that “the relationship between lenders and borrowers is conducted at arms-length, and the parties are each acting in their own interest” (citations and quotation marks omitted))); see also Park v. M & T Bank Corp., Civil Action No. 09-CV-02921 (DMC), 2010 WL 1032649, at *7 (D.N.J. Mar. 16, 2010) (citing Kensey, 704 A.2d at 45); Stolba v. Wells Fargo & Co., Civil Action No. 10-cv-6014 (WJM)(MF), 2011 WL 3444078, at *5 (Aug. 8, 2011) (dismissing plaintiffs negligence claim against loan servicer based on alleged negligent processing of HAMP modification, and noting that “[e]ven if a preexisting commercial relationship between a bank and its customer might be said to give rise to a duty of care,” the plaintiff was not a “bank customer” because the defendant merely serviced the loan on behalf of its customer, the noteholder (citing Shinn, 2010 WL 500410, at *4)). In Shinn, the complaint alleged that the defendant loan servicer “owed [the pjlaintiffs a duty of care with respect to servicing their mortgage loans, that [the defendant] was negligent, and that [the pjlaintiffs suffered damages as a direct result.” Shinn, 2010 WL 500410, at *4. The court dismissed this theory, finding that the loan servicer’s relationship with the borrower did not establish a duty outside of a contractual relationship sufficient to support a negligence claim.
Rather than focusing on remedies in tort, New Jersey courts appear to remedy violations of standing requirements and FFA notice requirements in foreclosure proceedings through dismissal of the proceedings, generally without prejudice. See, e.g., Deutsche Bank Nat’l Trust Co. v. Mitchell, 422 N.J.Super. 214, 27 A.3d 1229, 1236 (App.Div.2011) (reversing trial court’s grant of summary judgment in favor of plaintiff and dismissing, without prejudice, foreclosure action, because plaintiff did not have standing to foreclose; it only acquired assignment of the mortgage the day after the foreclosure action was filed, which was inadequate to confer standing); *486see also U.S. Bank Nat’l Ass’n v. Guillaume, 209 N.J. 449, 38 A.3d 570, 587 (2012) (reversing earlier precedent to hold that dismissal without prejudice is not the only remedy a trial court may impose for the residential mortgage lender’s failure to comply with the NOI requirements of the FFA; instead, when “determining an appropriate remedy for a violation of [the FFA], trial courts should consider the express purpose of the provision: to provide notice that makes the debtor aware of the situation, and to enable the homeowner to attempt to cure the default” (citations and quotation marks omitted)). When the New Jersey courts have granted such dismissals — for failure to comply with notice requirements under the FFA or for failure to obtain necessary documents to confer standing prior to filing foreclosure actions — they have not granted economic relief to borrowers. Instead, New Jersey courts have taken the position that dismissal of the underlying action itself is the appropriate remedy. The Court cannot impose a duty on loan servicers under New Jersey negligence law that the New Jersey courts have not articulated.
Moreover, the only relationship between the Reeds and GMACM was of a contractual nature: On May 22, 2008, MERS assigned its interest in the Mortgage to GMACM. This assignment of the Mortgage to GMACM after the Foreclosure Action was filed was not sufficient to grant GMACM standing in the Foreclosure Action — the assignment must occur before the foreclosure action is commenced — but it did establish a contractual relationship with the Reeds after the assignment. To the extent that the Reeds assert claims arising from GMACM’s failure to comply with the terms of the Mortgage, their negligence claims are barred by the New Jersey economic loss doctrine. “Under New Jersey law, a tort remedy does not arise from a contractual relationship unless the breaching party owes an independent duty imposed by law.” Saltiel v. GSI Consultants, Inc., 170 N.J. 297, 788 A.2d 268, 280 (2002) (citations omitted). Only if a defendant “owe[s] a duty of care separate and apart from the contract between the parties” will New Jersey courts allow a tort claim such as negligence. Id. at 277. As explained above, violation of the statutory requirements identified by the Reeds do not impose any additional duties under New Jersey law.
Additionally, it is worth noting that arguments that the New Jersey economic loss doctrine is rendered inapplicable based on alleged emotional injuries or damage to credit resulting from such violations have been repeatedly rejected by the New Jersey courts. See, e.g., Skypala v. Mortg. Elec. Registration Sys., Inc., 655 F.Supp.2d 451, 460-61 (D.N.J.2009) (rejecting argument because the court found it incredible that the defendant’s alleged overcharging of fees in connection with the curing of the plaintiffs default could have a negative effect on the plaintiffs creditworthiness and because “it is axiomatic that a plaintiff cannot collect contract damages for emotional distress” (citations omitted)); Restatement (Seoond) of CONTRACTS § 353 and cmt. a (“Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result.... Damages for emotional disturbance are not ordinarily allowed.”); see also Shinn, 2010 WL 500410, at *4 (rejecting plaintiffs’ claim that their case “ ‘is about more than the loan’ and that the ‘impact to [the plaintiffs] concerns their credit worthiness, the emotional upset from [defendants’ egregious actions and possible loss of their home in addition to any contractual damages’ ”). Thus, to the extent that the Reeds’ negligence claim arises from the Mortgage, it is barred by the economic loss doctrine.
*487The Trust’s Objection to the Reeds’ negligence claim is SUSTAINED.
B. Breach of Contract Claim
To state a claim for breach of contract under New Jersey law, the Reeds must establish: (1) the existence of a contract; (2) a breach of that contract; (3) damages flowing from that breach; and (4) that they performed their own contractual duties. See Video Pipeline Inc. v. Buena Vista Home Entm’t, Inc., 210 F.Supp.2d 552, 561 (D.N.J.2002) (citation omitted); see also In re Cendant Corp. Sec. Litig., 139 F.Supp.2d 585, 604 n.10 (D.N.J.2001) (stating that New Jersey law requires pleading performance of the movant’s own contractual duties).
The Reeds assert that GMACM is liable for breaching the Mortgage and Note by filing the Foreclosure Action without first sending an NOI, as allegedly was required by the terms of the Mortgage. Additionally, the Reeds argue that RFC, who purchased the Mortgage “from GMACM” in December 2009, is liable as a successor-in-interest for GMACM’s breach of contract. The Trust asserts that the Reeds cannot sustain a breach of contract claim against any of the Debtors due to the Reeds’ own breach of the Note and Mortgage.
To the extent the Reeds assert a breach of contract claim against RFC, this claim fails. The Reeds identify the contractual breach as the filing of the Foreclosure Action without having first issued an NOI. The Foreclosure Action was filed on May 19, 2008, but RFC did not acquire ownership of the Loan until December 30, 2009. The Reeds’ contention that RFC acquired ownership from GMACM is incorrect. Therefore, the Trust’s Objection to the Reeds’ breach of contract claim (Claim No. 3) against RFC is SUSTAINED.
MERS assigned the Mortgage to GMACM on May 22, 2008. GMACM filed its foreclosure complaint on May 19, 2008 asserting that it owned the Note and Mortgage. This was an error. On June 3, 2008, after GMACM was party to the Mortgage via MERS’ assignment, GMACM amended its foreclosure complaint to reflect that GMACM did not own the Note and Mortgage; instead, the Mortgage was assigned to GMACM by MERS, as nominee for Metrocities Mortgage. Though GMACM never owned the Note, it became a party to the Mortgage by assignment.
The Mortgage provides that, before proceeding with a foreclosure action, GMACM was required to comply with the FFA’s notice requirements. GMACM failed to do so. The Trust contends that GMACM’s performance under the Mortgage was excused by virtue of the Reeds’ admitted default. The Trust’s interpretation of New Jersey law, however, as excusing a loan servicer or owner’s obligation to comply with noticing requirements under instruments such as the Note or Mortgage, would render these provisions meaningless. The Trust has not provided the Court any authority that suggests this result. It is precisely when a borrower defaults on mortgage payments that notice must be given to the borrower before filing a foreclosure action. The Court rejects the Trust’s argument.
The question that arises is what damages the Reeds are entitled to collect as a result of this breach. The Reeds argue that their damages consist of (1) lost refinance opportunities, (2) an inability to sell the Property due to the Foreclosure Action, (3) diminution in the value of the Property proximately caused by wrongful foreclosure and (4) attorneys’ fees for defending the Foreclosure Action.
*4881. Lost Refinance Opportunities
The Reeds contend that they were denied cash-out refinances of the Property after the Foreclosure Action was filed. The Reeds failed to carry their burden of proof to establish that they were denied refinancing of the Loan on the Property because of the Foreclosure Action. The Reeds failed to produce any credit reports establishing that their credit was harmed because of the Foreclosure Action; therefore, the Court excluded testimony from their expert, Mr. Hendricks, on the matter. Because the Reeds did not submit any credit reports, there is no evidence concerning how creditors, including GMACM, were reporting on the Reeds at the time Reed says he applied for cash-out refinancing. Additionally, Reed failed to provide any loan applications indicating that he applied for refinancing. Reed testified that he never submitted applications because his “relationship” with Commerce Bank allowed him to request refinancing in a more informal manner. The Court finds this testimony unconvincing. The affidavit from Stuart Shilling at Allied Mortgage further provides that Allied Mortgage has no record of ever receiving a loan application from the Reeds. Finally, Reed’s prior inconsistent testimony on the subject renders the Court unable to credit his trial testimony on this subject. Consequently, the Reeds have failed to establish a claim for damages based on lost refinance opportunities.
2. Inability to Sell the Property
Next, the Reeds assert that they were unable to sell the Property as a result of the Foreclosure Action and concomitant lis pendens on the Property. The Court finds and concludes that the Reeds failed to carry their burden of proof of establishing damages based on this theory. The Reeds have not provided any evidence other than Reed’s own personal conjecture that their inability to sell the Property had anything to do with the Foreclosure Action. While it is true that, at various points in 2008, the Reeds had two different fully-executed agreements to sell the Property, those agreements did not close through no fault of GMACM. First, the Jacobs’ offer was withdrawn before the Foreclosure Action was filed, because the appraisal conducted on the Property was for less than the agreed purchase price. GMACM’s improper filing of the Foreclosure Action had no effect on the Jacobs’ offer. Second, the Weaver offer failed to close because Weaver could not come up with the funds necessary to close the sale. Despite several attempts by the Reeds to work out an acceptable payment schedule, Weaver did not comply. Weaver’s option to purchase the Property also prevented the Reeds from selling the Property to anyone else until they succeeded in evicting Weaver from the Property. Again, GMACM’s Foreclosure Action had nothing to do with Weaver’s failure to come up with enough money to close.
After these two agreements failed to close, the next offer made on the Property came from the Roccisanos in 2010. At this point the Foreclosure Action had been dismissed, but the Reeds were still in default under the terms of the Note and Mortgage. The Roccisanos made two offers that Reed contends were below the market value of the Property. However, the Roc-cisanos never entered into a contract with the Reeds; instead, they relocated to Louisville, Kentucky, due to Mr. Roccisa-no’s employment. Reed’s tortured explanation that the Roccisanos may have made a different decision had they been able to close on the Property more quickly is pure conjecture. In any event, per Reed’s testimony, it was the Reeds who delayed action on any attempt by the Roccisanos to close on the Property. Reed asserts that he was still in the process of determining whether the Roccisanos’ second offer *489would convey clear title to the Property when they informed him that they were no longer considering purchasing the Property-
The final “offer” the Reeds received on the Property came in 2011 from the Singhs, when the Property was no longer listed with a broker. The Singhs informed the realtor, Ms. Carter, by email that they “would like a full description of what the legal dealings are with the bank and seller, as this may affect the closing.” (Ex. FF.) This, however, does not establish that the Singhs gave the Reeds a low offer because of the Foreclosure Action.
In any event, the' Foreclosure Action was dismissed in early 2009. Reed asserts that this does not matter, because the Foreclosure Action still impacted sale efforts due to the lis pendens, which remained in effect after the dismissal of the Foreclosure Action. At any point after that time, however, Reed — who was at various points represented by counsel — could have had the lis pendens discharged, either by presenting the county clerk with the dismissal order (see N.J.S.A. 2A:15-14) or by petitioning the court to remove the lis pendens for failure to prosecute (see N.J.S.A. 2A:15-10). The Reeds did not do either. Moreover, GMACM’s original notice of lis pendens is part of a judicial proceeding, and absolute privilege applies under New Jersey law. See, e.g., Wendy’s of South Jersey, Inc. v. Blanchard Mgmt. Corp. of N.J., 170 N.J.Super. 491, 406 A.2d 1337, 1340 (Ct. Ch. Div.1979) (refusing to permit action for slander of title because the filing of a notice of lis pendens is an absolutely privileged act from which no liability in an action for slander of title can arise).
In sum, the Reeds failed to establish that GMACM was responsible for their inability to sell the Property. In fact, many factors appear to have contributed to Reed’s failure to sell the Property, including his growing obligation on the Loan as he continued to ignore his monthly payments. As the Reeds’ arrearages and interest accumulated, they were unable to accept offers that would not convey clear title to the Property. Additionally, Reed’s flippant contention that “Moorestown operates like the top of a [mountain] when a flood comes and may, in my opinion, avoid much of the collateral damage of a flood, if not entirely,” referring to the effect of the housing market collapse on Moorestown, is utterly without basis. In fact, there was a real impact on the real estate market in 2008 that was completely unrelated to GMACM’s improperly filed Foreclosure Action.
Reed also wants to ignore the obvious. While GMACM improperly cut corners in commencing the Foreclosure Action, and must bear the consequences of that action, the Reeds unquestionably have been in default on the Loan since February 2008; they have failed to pay any property taxes since before that date; and GMACM was required to obtain forced place insurance to protect the mortgagee’s interest in the Property. The Reeds cannot blame GMACM if the Property cannot be sold for more than the outstanding Loan and other liens that have accumulated while the Reeds have continued to live in the Property without paying a dollar.
3. Diminution in the Value of the Property Due to Wrongful Foreclosure
The Court permitted Reed, as a home owner, to give opinion testimony about the value of the Property. While the value unquestionably declined over time, Reed failed to prove by a preponderance of the evidence that any diminution in value of the Property was the proximate result of a wrongful foreclosure action filed by GMACM.
*4904. Attorneys’ Fees
What remains, then, is consideration of whether the Reeds may recover as damages the attorneys’ fees associated with defending the Foreclosure Action. According to the Reeds, they incurred these fees due to the improperly filed action. As the Court noted above, Mr. Reed presented additional affidavit support for Exhibits 14 and 15, detailing that the fees listed on these exhibits were performed by attorneys in connection with defending the GMACM v. Reed matter. In light of these sworn affidavits, the Court concludes that the Reeds have established that they incurred fees amounting to $5,823 defending the Foreclosure Action.
New Jersey generally follows the American Rule regarding attorneys’ fees awards, with several exceptions. In New Jersey,
A party who prevails in a civil action, either as plaintiff or defendant, against any other party may be awarded all reasonable litigation costs and reasonable attorney fees, if the judge finds at any time during the proceedings or upon judgment that a complaint, counterclaim, cross-claim or defense of the non-prevailing person was frivolous.
N.J.S.A. 2A:15-59.1(a)(l). A complaint is “frivolous” if it “was commenced, used or continued in bad faith, solely for the purpose of harassment, delay or malicious injury; or” the “nonprevailing party knew, or should have known, that the complaint ... was without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law.” N.J.S.A. 2A:15-59.1(b).
However, an application for sanctions under N.J.S.A. 2A:15-59.1 requires an affidavit specifying
the nature of the services rendered, the responsibility assumed, the results obtained, the amount of time spent by the attorney, any particular novelty or difficulty, the time spent and services rendered by the secretaries and staff, other factors pertinent in the evaluation of the services rendered, the amount of the allowance applied for, an itemization of the disbursements for which reimbursement is sought, and any other factors relevant in evaluating fees and costs; and [h]ow much has been paid to the attorney and what provision, if any, has been made for the payment of these fees in the future.
N.J.S.A. 2A:15-59.1(c). Additionally, the party seeking the award must “make application to the court which heard the matter.” Id. The Reeds did not file any such application in the Chancery Division Court, which granted the Reeds’ cross-motion for summary judgment. “The requirements of the provisions imposing sanctions must be strictly construed.” Marenbach v. Cty. of Margate, 942 F.Supp.2d 488, 496 (D.N.J. 2013) (citing DeBrango v. Summit Ban-corp, 328 N.J.Super. 219, 745 A.2d 561 (App.Div.2000)). Consequently, the Court cannot grant the Reeds’ motion for attorneys’ fees under N.J.S.A. 2A:15-59.1. The Reeds failed to prove that they are entitled to recover any of their legal fees based on the breach of contract claim.27
The Court concludes that the Reeds failed to establish that they are entitled to recover any damages on the breach of contract claim.
C. Punitive Damages Claim Based Upon Actual Malice
The Reeds assert claims for punitive damages premised upon claims for actual malice under New Jersey law. The *491Reeds justify their demand based on allegations that GMACM’s noncompliance with the FFA was motivated by actual malice or accompanied by a wanton and willful disregard of the injuries that the Reeds may have suffered.
Under New Jersey law, actual malice “is nothing more or less than intentional wrongdoing, an evil minded act or an act accompanied by a wanton and willful disregard of the rights of another.” Chli Tital Ins. Co. v. Goldberg (In re Goldberg), 12 B.R. 180, 185 (Bankr.D.N.J. 1981) (citing Sandler v. Lawn-A-Mat Chem. & Equip. Corp., 141 N.J.Super. 437, 358 A.2d 805 (App.Div.1976)). To recover punitive damages under New Jersey law, the Reeds must show by clear and convincing evidence that the harm suffered was the result of GMACM’s acts or omissions, and “that such acts or omissions were actuated by actual malice or accompanied by a wanton and willful disregard of persons who foreseeably might be harmed by those acts or omissions.” N.J.S.A. 2A:15-5:12(a). They must also first receive a compensatory damages award before they are eligible for punitive damages. In re Estate of Stockdale, 196 N.J. 275, 953 A.2d 454 (2008). Additionally, in the absence of exceptional circumstances, punitive damages are generally not permitted in litigation involving breach of a commercial contract. See Sandler v. Lawn-A-Mat Chem. & Equip. Corp., 141 N.J.Super. 437, 358 A.2d 805, 811 (App.Div.1976) (citations omitted).
While the Court concludes below that the Reeds are entitled to an allowed claim for compensatory damages on their CFA claim, for which treble damages are applicable, they have not established entitlement to compensatory damages on any other claims, making the award of punitive damages inappropriate. Furthermore, while GMACM’s conduct gives rise to CFA liability, the Reeds failed to prove by clear and convincing evidence that GMACM’s conduct satisfies the high standards required to award punitive damages. An award of punitive damages in this case would not punish GMACM in any event; rather, it would reduce recoveries by other Borrowers with allowed claims. See Novak v. Callahan (In re GAC Corp.), 681 F.2d 1295, 1301 (11th Cir.1982) (affirming the bankruptcy court’s decision to strike a claim for punitive damages against the trustees of a chapter X debtor under the Bankruptcy Act, finding that “the effect of allowing a punitive damages claim would be to force innocent creditors to pay for the bankrupt’s wrongdoing”). The confirmed Plan of Liquidation sets a fixed amount for recovery of Borrower Claims. Awarding punitive damages to the Reeds would hurt other Borrower Claimants by further diluting the amount available to satisfy Borrower Claims.
D. Consumer Fraud Act Claim
A claim under the New Jersey CFA requires three elements: “(1) an unlawful practice, (2) an ‘ascertainable loss,’ and (3) a ‘causal relationship between the unlawful conduct and the ascertainable loss....’” Gonzalez v. Wilshire Credit Corp., 207 N.J. 557, 25 A.3d 1103, 1115 (2011) (quoting Lee v. Carter-Reed Co., 203 N.J. 496, 4 A.3d 561, 576 (2010)); Fre-derica v. Home Depot, 507 F.3d 188, 202 (3d Cir.2007) (requiring that a plaintiff “allege that the defendant engaged in an unlawful practice that caused an ascertainable loss to the plaintiff”) (citing Cox v. Sears Roebuck & Co., 138 N.J. 2, 647 A.2d 454, 462-65 (1994)). Claims brought under the CFA “are subject to the particularity requirements of Federal Rule of Civil Procedure 9(b).” Parker v. Howmedica Osteonics Corp., No. 07-2400, 2008 WL 141628, at *2 (D.N.J. Jan. 14, 2008) (un published opinion). The CFA provides for recovery of treble damages. See N.J.S.A. *49256:8-19 (“In any action under this section the court shall, in addition to any other appropriate legal or equitable relief, award threefold the damages sustained by any person in interest.”) (emphasis added).
The CFA defines an “unlawful practice” as
[t]he act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived, or damaged thereby....
N.J.S.A. 56:8-2. In other words, “[u]nlawful practices fall into three general categories: affirmative acts, knowing omissions, and regulation violations.” Frederico, 507 F.3d at 202 (citation and quotation marks omitted). Notably, “misrepresentations” are affirmative acts that “do not require a showing of intent,” i.e., “[o]ne who makes an affirmative misrepresentation is liable even in the absence of knowledge of the falsity of the misrepresentation, negligence, or the intent to deceive.” Glass v. BMA of N. Am., LLC, No. 10-5259, 2011 WL 6887721, at *5 (D.N.J. Dec. 29, 2011) (citations and quotation marks omitted). “[Collecting or enforcing a loan, whether by the lender or its assignee, constitutes the ‘subsequent performance’ of a loan, an activity falling within the coverage of the CFA.” Gonzalez v. Wilshire Credit Corp., 207 N.J. 557, 25 A.3d 1103, 1116 (2011) (citations omitted).
To state an “ascertainable loss,” a plaintiff must allege “a cognizable and calculable ... loss.” Parker, 2008 WL 141628, at *3 (citations and quotation marks omitted). The ascertainable loss must be stated with “reasonable certainty.” Id. Factual allegations of a “future loss do not meet the ascertainable loss requirement as they are too speculative.” Id. (citations and quotation marks omitted). Finally, a plaintiff must state a “causal nexus” between the first two elements, namely that the loss suffered is a result of the defendant’s misrepresentation. Id. (citations omitted).
The CFA is intended to “be applied broadly in order to accomplish its remedial purpose, namely, to root out consumer fraud.” Lemelledo v. Beneficial Mgmt. Corp. of Am., 150 N.J. 255, 696 A.2d 546, 551 (1997). Consequently, the CFA is to be liberally construed in favor of the consumer. See Cox, 647 A.2d at 454. “The history of the [CFA] [has been] one of constant expansion of consumer protection.” Gennari v. Weichert Co. Realtors, 148 N.J. 582, 691 A.2d 350, 364 (1997).
The Reeds’ original fraud claims were not pled with particularity, as required by both federal and New Jersey pleading standards. See Fed R. Civ. P. 9(b); N.J. Ct. R. 4:5-8(a); Levinson v. D'Alfonso & Stein, 320 N.J.Super. 312, 727 A.2d 87, 88 (App.Div.1999). New Jersey courts have recognized that a claim under the CFA is essentially a claim for fraud and must be pled with particularity. Hoffman v. Hampshire Labs, Inc., 405 N.J.Super. 105, 963 A.2d 849, 853 (App.Div.2009). Conclu-sory statements are insufficient to satisfy the particularity requirement. Rego Indus. v. Am. Modern Metals Corp., 91 N.J.Super. 447, 221 A.2d 35, 40 (App.Div. 1966). To state a claim under the CFA, the Reeds must satisfy a heightened pleading standard, and must state the particulars of the wrong, including dates and items if necessary. They failed to do so. Their original CFA claim merely parrots the language of the CFA itself, and is *493insufficient to state a claim for relief. The Reeds’ Response provides no further details, only asserting that “[i]t can reasonably be inferred that the Debtors intended to defraud the Reeds into believing that their ONLY choice was to pay the note in full.” (Response ¶ 87.) The Reeds do not provide any evidence of this fact. Consequently, the Reeds failed to carry their burden to prove that CFA claim by a preponderance of the evidence.
At the July 9, 2014 hearing, however, the Court allowed the Reeds to proceed with their CFA claim as to a limited claim, upon consideration of GMACM’s misrepresentation during the Foreclosure Action that it owned the Reeds’ Note (and therefore had standing) when it initiated the Foreclosure Action. (See Preliminary Reed Order at 8.) The Court permitted the Reeds to proceed with the CFA claim based only on this single misrepresentation. The Trust asserts that the June 3, 2008 amended complaint cured this defect; however, as explained above, GMACM did not have standing to foreclose when it initiated the Foreclosure Action as it cannot demonstrate that it was a holder of the Note as of May 19, 2008 and, in any case, it was not assigned an interest in the Mortgage until May 22, 2008. Indeed, the Trust’s “explanation” of this discrepancy only highlighted the multiple flaws that should have prevented GMACM from filing the Foreclosure Action when it did. Based on the evidence presented, the Court concludes that GMACM did not have standing to foreclose when it filed the Foreclosure Action — it did not yet have an assignment of the Mortgage, and it never owned or held the Note. The assignment bearing the signature of GMACM’s employee, Jeffrey Stephan, on behalf of MERS, was false — MERS could assign the Mortgage, but it could not assign the Note since it never owned the Note and had no authority to assign it on behalf of Metrocities. See In re Lippold, 457 B.R. 293, 296-99 (Bankr.S.D.N.Y.2011) (“The language of the Assignment in this case purports to transfer both the Mortgage and the Note.... But MERS, as the purported assignor, could not legally assign the Note; it only had legal rights with respect to the Mortgage.”) (applying New York law). The question is whether GMACM’s misrepresentations, first that it owned the Note and Mortgage (in the original foreclosure complaint), and, second, that it was assigned both the Note and Mortgage by MERS after it initiated the Foreclosure Action, are actionable under the CFA, and, if so, what damages are recoverable.28
The Court concludes that GMACM committed an “unlawful act” that violated the CFA when it submitted the assignment signed under oath by Stephan to try to establish GMACM’s standing to bring the Foreclosure Action. This was an affirmative act/misrepresentation by GMACM; therefore, no showing of intent is required. See Glass, 2011 WL 6887721, at *5; Gonzalez, 25 A.3d at 1116. Additionally, this false filing of a document signed under oath by Stephan was hardly *494an isolated instance of similar misconduct by GMACM. See In re Residential Capital, LLC, 501 B.R. 531, 547-48 (Bankr. S.D.N.Y.2013) (overruling objection to claim under North Carolina Unfair & Deceptive Practices Act because of false affidavit signed by Stephan and filed in court, and discussing other cases in which courts discussed false affidavits signed by Stephan).
Having concluded that GMACM committed an unlawful act, ascertainable loss and causal connection needs to be established to recover damages. The only possible “ascertainable loss” the Reeds have established resulting from the improperly filed foreclosure action is the attorneys’ fees the Reeds incurred in defending the Foreclosure Action; and the incurrence of those fees were clearly caused by the wrongful filing of the Foreclosure Action. The fees that the Reeds have incurred in prosecuting their affirmative action against GMACM, which was then dismissed without prejudice at Reed’s request, cannot satisfy the requirements (explained below) to recover attorneys’ fees — the Foreclosure Action had already been dismissed, the Reed Action was not necessary to protect their interests, and the Reeds did not prosecute the Reed Action to a conclusion. The Reeds have appeared pro se throughout the bankruptcy case and in filing the Claims, and therefore no attorneys’ fees are recoverable in connection with this case. As the Court stated earlier in this Opinion, any other bases for damages other than attorneys’ fees have already been rejected above. The Court has already concluded above that the Reeds’ attorneys’ fees are not recoverable on their breach of contract claim.
As a general rule in New Jersey, each party must bear its own litigation expenses, including attorneys’ fees. Right to Choose v. Byrne, 91 N.J. 287, 450 A.2d 925, 940 (1982). However, a prevailing party can recover those fees and costs if they are expressly provided by statute, court rule, or contract. Dep’t of Envt’l. Prot. v. Ventron Corp., 94 N.J. 473, 468 A.2d 150, 166 (1983). Under New Jersey law, many statutes expressly authorize these awards. See, e.g., The Conscientious Employee Protection Act, N.J.S.A. § 34:19-5e, 34:19-6; The CFA, NJSA § 56:8-19; The Law Against Discrimination, NJSA § 10:5-27.1. Additionally, N.J. Court Rule 4:42-9 provides for an award of attorneys’ fees in certain situations, none of which are applicable here. See N.J. Ct. R. 4:42-9. The Reeds did not avail themselves of the procedures for recovery of fees under N.J.S.A. 2A:15-59.1. Courts need to be chary about awarding fees on some other legal basis, particularly under a treble damages statute such as the CFA. But the CFA imposes a different standard of liability than the statute permitting fee shifting based on frivolous filings such as N.J.S.A. 2A:15-59.1.
New Jersey courts also permit recovery of legal fees in circumstances that fall within the exception to the American rule reflected in section 914 of the Restatement (Second) of Torts. That section provides in part as follows: “One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for loss of time, attorney fees and other expenditures thereby suffered or incurred in the earlier action.” Restatement (SECOND) OF TORTS § 914(2). See, e.g., Estate of Lash, 169 N.J. 20, 776 A.2d 765, 769-70 (2001) (“Thus, if a plaintiff has been forced because of the wrongful conduct of a tortfeasor to institute litigation against a third party, the plaintiff can recover the fees incurred in that litigation from the tortfeasor. Those fees are merely a portion of the damages the plaintiff suffered at the hands of the tortfea-*495sor.”); DiMisa v. Acquaviva, 400 N.J.Super. 307, 947 A.2d 168, 172 (App.Div.2008) (stating that “one whose tortious conduct requires another to bring or defend a suit against a third party to protect his interests may be assessed the attorneys’ fees incurred in the third-party action as an element of damages arising from the tort” (citations omitted)).
Here, GMACM brought the Foreclosure Action and it is against GMACM that the Reeds filed their Claims. At first blush these circumstances would not seem to fit the requirements of Restatement section 914(2) that, in order to recover attorneys’ fees as damages, it is the “tort of another” that required the Reeds to incur attorneys’ fees in defending the Foreclosure Action. But GMACM, which never owned the Note, brought the Foreclosure Action in its capacity as loan servicer; foreclosure would have benefitted the holder of the Note. The Reeds’ FCA claim is against GMACM for its own misconduct. While neither party has cited any cases addressing the circumstances of a party against whom attorneys’ fees are sought acting in two different capacities — the Court has not found any cases in its own research — the Court concludes that such circumstances can satisfy the “tort of another” requirement; and the Reeds’ attorneys’ fees in defending the Foreclosure Action satisfy the “ascertainable loss” and “causal relationship between the unlawful conduct and the ascertainable loss” requirements for recovery under the CFA. The Court has found earlier in this Opinion that the Reeds incurred fees in the amount of $5,823 defending the Foreclosure Action. The Court concludes that this amount— trebled ($17,469.00) — reflects the Reeds’ damages.
The Reeds also seek to recover the attorneys’ fees they incurred in prosecuting the Reed Action, but that case was not filed until after the Foreclosure Action was dismissed without prejudice and GMACM never refiled a foreclosure case. The Reeds did not need to file the Reed Action to protect their interests and the Reeds also voluntarily dismissed the Reed Action without prejudice. The Court concludes under these circumstances that the attorneys’ fees incurred by the Reeds in prosecuting the Reed Action are not recoverable under Restatement section 914(2) or on any other basis. While the CFA also allows recovery of attorneys’ fees incurred successfully prosecuting a CFA cause of action, the Reeds have not incurred attorneys’ fees in this Court prosecuting the CFA claim because they have been acting pro se. Furthermore, the evidence the Reeds submitted concerning the attorneys’ fees incurred in prosecuting the Reed Action does not break down fees among the many causes of action asserted in the Reed Action, so the Court is unable in any event to attribute any portion of those fees to prosecuting the CFA cause of action.
The damages amount determined above is an unsecured claim against GMACM.29 Therefore, the Reeds will be granted an allowed unsecured claim in the amount of $17,469.00.
III. CONCLUSION
For the reasons explained above, the only claim on which the Reeds may recover damages is the CFA claim. With respect to that claim, the only recoverable damages proven by the Reeds by a preponderance of the evidence are the attorneys’ fees the Reeds incurred in defending *496the Foreclosure Action. Trebled under the CFA, the Reeds have established a claim in the amount of $17,469.00, which is determined to be the allowed amount of their unsecured claim.
GMACM was all too willing to cut corners and submit false evidence in support of the Foreclosure Action against the Reeds. Such conduct by a loan servicer is unacceptable. The Reeds are hardly deserving claimants; they have resided in the Property for the majority of the time that has passed since early 2008 without paying their mortgage, late charges, property taxes or insurance premiums. They face a new foreclosure action filed by the current holder of the Note and Mortgage. Certainly, nothing in this Opinion provides the Reeds with a .defense to that new foreclosure action, which the New Jersey courts will have to adjudicate on the merits.
But unless there are consequences for a loan servicer that ignores the law, as GMACM did here, such wrongful conduct will not be deterred. In most instances, as the New Jersey courts have held, dismissal of a foreclosure action without prejudice will suffice as the appropriate remedy. Where, as here, the loan servicer engages in unlawful acts that violate the CFA, an affirmative recovery by a borrower that can establish ascertainable loss and a causal connection is appropriate. Here, the Reeds’ only ascertainable loss with a causal connection to the wrongful conduct is the attorneys’ fees incurred in defending the Foreclosure Action.
IT IS SO ORDERED.
. Residential Funding Corp. was the predecessor of Residential Funding Company, LLC, a Debtor entity. For the purposes of this Opinion, the Court will refer to both as "RFC.”
. Claim Nos. 3759 (filed by Mr. Reed on November 8, 2012) and 4736 (filed by Mrs. Reed on November 14, 2012).
.Claim Nos. 3708 (filed by Mr. Reed on November 8, 2012) and 4759 (filed by Mrs. on November 14, 2012). The Reeds assert that a "scrivener’s error” led to the filing against ResCap; in fact, they intended to assert these claims against RFC. (Response ¶ 120.) The Trust agreed to the Reeds’ request to amend the designation of these claims. (Reply ¶ 4 n.5.) Therefore, the Court will treat Claim Nos. 3708 and 4759 as asserted against RFC.
. See ResCap Borrower Claims Trust’s Objection to Proofs of Claim Filed by Frank Reed and Christina Reed Pursuant to Section 502(b) of the Bankruptcy Code and Bankruptcy Rule 3007 (the "Objection,” ECF Doc. #7017). Attached to the Objection is the Declaration of Lauren Graham Delehey (the “Delehey Decl.,” Objection Ex. 3; admitted in evidence as Ex. B). The Reeds filed a response (the "Response,” ECF Doc. #7153), attaching hundreds of pages of exhibits purporting to support their Claims filed in these chapter 11 cases, including a Declaration of Frank Reed (the "Reed Decl.,” ECF Doc. #7153-36). The Trust filed a reply (the "Reply,” ECF Doc. # 7228), attaching the Supplemental Declaration of Lauren Graham Delehey (the "Supp. Delehey Decl.,” Reply Ex. 1).
. In advance of the Evidentiary Hearing, the parties filed several additional briefs on September 8, 2014. The Trust filed its Pretrial Memorandum (ECF Doc. # 7494) and Proposed Findings of Fact and Conclusions of Law (ECF Doc. # 7495), and the Reeds filed a Pretrial Memorandum (ECF Doc. # 7504). The Reeds’ Pretrial Memorandum includes their proposed findings of fact and conclusions of law. The Parties also presented the Court with pre-marked exhibits and witness lists.
. Trial exhibits were pre-marked: The Reeds’ trial exhibits were marked with numbers and are referenced in this Opinion as, e.g., Ex. 1, Ex. 2, etc.; the Trust's trial exhibits were marked with letters and are referenced in this Opinion as, e.g., Ex. A, Ex. B., etc. References to the trial transcript in this Opinion are shown as [date] Tr. [page]:[lines],
. References in this Opinion to both Frank and Christina Reed are to the “Reeds.” References to Frank Reed alone are hereinafter to "Reed.”
. As explained below, the Reeds’ two Claims against RFC (Claims 3708 and 4759) are disallowed and expunged. The Reeds’ two Claims against GMACM (Claims 3759 and 4736), one filed by each of the Reeds, are duplicative. Therefore, the Court will allow Claim 3759 (filed by Mr. Reed) in the amount determined in this Opinion; Claim 4736 (filed by Mrs. Reed) is disallowed.
. This Opinion contains the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 52, made applicable by Fed. R.Civ.P. 52. In making its findings of fact, the Court has resolved credibility issues and the weight appropriately given to conflicting evidence. Where contested or disputed facts or opinions were offered during trial, this Opinion reflects the Court’s resolution of those disputes, whether or not the Opinion specifically refers to the contrary evidence introduced by the opposing parties.
. The Reeds took out a second loan, also from Metrocities Mortgage, in the amount of $414,400, secured by a second mortgage on the Property (the “Second Mortgage”). (See Ex. KK (HUD Settlement Statement for Reed Closing).) The Second Mortgage was repaid in full and is not the subject of the Reeds’ Claims.
. As explained below, it is legally, significant that the assignment of the Mortgage to GMACM did not occur until after the Foreclosure Action was filed; the Mortgage must be assigned to the loan servicer before a foreclosure action is filed.
.A “stop/gap'' is an arrangement designed to allow a borrower time to become current on his mortgage, to bring the loan back into compliance, and avoid foreclosure. (Sept. 16, 2014 Tr. 139:21-23.) A stop/gap does not work like a loan modification — it does not change the terms of the loan or the maturity date of the loan. (Id. 140:6-9.) Instead, it allows the borrower only additional time to bring the loan current, according to an exact schedule. (Id. 140:9-12.) If the borrower complies with the schedule, the foreclosure is not withdrawn, but it is stayed as long as the borrower is making timely payments. (Id. 140:13-17.)
. HOPE NOW is a partnership between mortgage companies, including GMACM, and non-profit housing counselors. Representatives from HOPE NOW would meet with borrowers in an attempt to work out loan modifications to allow borrowers to avoid foreclosure. (Sept. 16, 2014 Tr. 137:19-23.)
. GMACM also sent the Reeds HOPE NOW letters in April, May, and June 2008; the Reeds did not respond. (Sept. 16, 2014 Tr. 138:16-22.)
. GMACM held the $3,000 deposit in a suspense account, which was ultimately transferred to 21st Mortgage Corp., the successor servicer and owner of the Loan. (Supp. Dele-hey Deck ¶ 7.)
. The Servicing Notes reflect other purported efforts by GMACM to reach a loan modification agreement with the Reeds. Reed denied any knowledge of several of these efforts. The Court is unable to resolve the conflicting evidence, arising from Reed's trial testimony, Delehey’s trial testimony, and the Servicing Notes. It is clear to the Court (and the Court finds) that with respect to the forbearance agreement that Reed acknowledges he reached with GMACM, Reed had no intention to make the required monthly payments. Rather, the Court finds that Reed was using the forbearance agreement as a stalling tactic to delay foreclosure while he tried to sell the Property.
The Trust offered evidence that GMACM and the Reeds attempted to work out either a repayment agreement or a loan modification. The Trust points to the Servicing Notes, which indicate that GMACM received a financial package from the Reeds on May 7, 2009 (see Servicing Notes, entry for 5/7/2009; Sept. 16, 2014 Tr. 152:9-13) and approved a loan modification on May 10, 2009 (see Servicing Notes, entry for 5/10/2009; Sept. 16, 2014 Tr. 151:5-20). The Reeds never returned the executed loan modification documents to GMACM, and the loan was not modified. (See Sept. 16, 2014 Tr. 151:22-23, 155:13-14.) This loan modification was not a HAMP modification; the Reeds would not have been eligible for a HAMP modification at this time because, as explained below, the Property was not owner-occupied in 2009.
*473Additionally, the Trust contends that another forbearance agreement was offered to the Reeds in July 2009, when GMACM approved the Reeds for a "thirty percent reduction campaign” and sent the Reeds a solicitation to participate. (Sept. 16, 2014 Tr. 155:18-156:5.) This plan was never finalized because Reed called GMACM and indicated that he could not make a payment until the end of the month. (See Servicing Notes, entry for 8/6/2014; Sept. 16, 2014 Tr. 156:17-157:6.) The Reeds were subsequently approved for a non-HAMP trial modification on August 13, 2009 (see Servicing Notes, entry for 8/13/2009; Sept. 16, 2014 Tr. 157:6-13), but the trial plan was not completed because the Reeds failed to make any payments (see Servicing Notes, entry for 8/31/2009 ("REPAY PLAN CANCELED AUTOMATIC"); Sept. 16, 2014 Tr. 157:14-19). In fact, on the day that GMACM was expecting payment on this trial modification, the Servicing Notes indicate that Reed contacted GMACM by fax to see if GMACM would accept a short payoff of $480,000 and release the lien in full; GMACM did not accept that offer. (See Servicing Notes, entry for 8/31/2009; Sept. 16, 2014 Tr. 157:19-23.)
Reed contends that he never received any communications from GMACM and does not recall ever sending GMACM a financial package seeking a loan modification. (Sept. 16, 2014 Tr. 173:14-16.) Though the Servicing Notes indicate that, on multiple occasions, GMACM called and left messages for the Reeds, Reed asserts that he does not recall receiving phone calls. (Id. 173:19-20.) He apparently believes that GMACM may have sent the documents to his address in New Jersey at a time that he was living in Virginia. He does not recall if he had mail forwarded to him from New Jersey while he was living in Virginia (id. 174:13-16), and does not recall contacting GMACM while he was living in Virginia, from approximately Thanksgiving 2008 to Thanksgiving 2010. (Id. 174:17-24.)
The Trust, in turn, claims that GMACM would send borrowers correspondence at their residence, unless instructed of a change of address by the borrower. (Id. 170:15-17.) If a borrower contacted GMACM to indicate a change of address or change of phone number, the changes would be reflected in the Servicing Notes. (Id. 170:21.) Delehey testified that she checked but did not find any entries in the Servicing Notes for mail marked "return to sender.” (Id. 170:22-171:7.)
What Delehey failed to clarify, however, is that there are many indications in the Servicing Notes that GMACM was informed that it had the wrong number, presumably after Reed vacated the Property in late 2008. (See, e.g., Servicing Notes, entries for 5/11/2010.) The Servicing Notes reflect that Reed contacted GMACM multiple times after he resumed residence at the Property and he refused to provide his telephone number to GMACM. (See, e.g., id., entries for 11/5/2012, 12/13/2012.) It is clear from the Servicing Notes that the parties failed to communicate and reach resolution on numerous occasions. The Court does not need to resolve the factual disputes regarding whether GMACM contacted the Reeds or the Reeds contacted GMACM regarding additional stop/gap repayment options or loan modification plans. The Reeds do not allege that they were wrongfully denied a loan modification or that GMACM acted improperly as servicer outside of its role in the Foreclosure Action, and these factual disputes are not relevant to the determination of the Reeds’ Claims.
. The Reeds did not respond to the Trust's Request for Admissions and, pursuant to Federal Rule of Civil Procedure 36(a)(3), the matters are deemed admitted. See Fed. R. Civ. P. 36(a)(3) ("Time to Respond; Effect of Not Responding. A matter is admitted unless, within 30 days after being served, the party to whom the request is directed serves on the requesting party a written answer or objection addressed to the matter and signed by the party or its attorney....”).
. The Reeds list injuries including: (1) their inability to consummate "income-producing transactions” they assert were in progress when the Foreclosure Action was filed; (2) Reeds’ inability to resume "income-producing endeavors” that Reed conducted before the Foreclosure Action; (3) injuries stemming from the loss of “at least 3 income-producing rental properties to foreclosure due to Plaintiff’s inability to service the mortgages as a result of his compromised income-producing ability”; (4) the destruction of the Reeds’ credit; (5) below market offers on the Reeds’ home; and (6) mental and emotional distress. (Am. Compl. ¶ 11.)
. In their Brief in Opposition to Defendants’ Motion to Bar Expert’s Report, the Reeds assert that the three month arrearage was the result of Mrs. Reed's “oversight or prioritizing of funds for business reasons.” (Opposition to Defendants’ Motion to Bar Expert's Report at 2.) Based on the evidence at trial, the Court finds that the Reeds did not intend to bring the Loan current. GMACM did not deceive the Reeds regarding their right to *476cure any mortgage default before entry of a final foreclosure judgment.
. The Trust asserts that the Reeds’ placement in this IFR Waterfall category means that there was no indication of even potential harm suffered by the Reeds that would have placed them into a higher payout category. (Delehey Decl. ¶ 12 n.3.)
. Commerce Bank is the predecessor to TD Bank. (See Sept. 15, 2014 Tr. 49:23-24.)
. Exhibit 2, an appraisal by Peter R. McCaf-frey on January 21, 2008, was admitted in evidence for the limited purpose of Reed’s notice and knowledge of the report, but not for the truth of the matter as to the value of the Property. (See Sept. 15, 2014 Tr. 55:15-18.)
. By all indications, Mr. Weaver/Cooper was not an honest individual. Beyond using a false name, he sent several bad checks to the Reeds before his eviction.
. Exhibit 3 was admitted in evidence, with the exception of the first two pages, which were excluded. The portion of Exhibit 3 con-taming the Roccisano Proposal to Purchase was admitted.
. At the Evidentiary Hearing, Reed unsuccessfully sought to admit into evidence several writings from the TD Bank loan officer, Robert E. Curley, dated long after the events involved. These writings did not satisfy the business records exception to the hearsay rule. Even though Curley was not listed on Reed's witness list, the Court agreed to permit Curley to testify at trial about the reasons Reed's effort to refinance the Property was refused. Reed, however, failed to produce Curley as a witness.
. The Court eventually extended the Reeds' opportunity to make Mrs. Reed available for deposition until August 29, 2014, but Mrs. Reed never appeared for her deposition and she was excluded from testifying at trial.
. The Court separately addresses below whether the Reeds’ attorneys’ fees in defending the Foreclosure Action are recoverable as compensable damages on the CFA claim.
. Any contention by the Reeds that GMACM's failure to comply with the FFA is actionable under the CFA is incorrect. See Wilson v. Deutsche Bank Nat’l Trust Co., No. L-6495-11, 2014 WL 1716093, at *4 (N.J.Super.Ct.App.Div. May 2, 2014) (“As to the FFA violation count, the [plaintiffs] do not address the trial judge’s correct holding that there is no private right of action under the FFA, which we are convinced prevents [the CFA] claim from proceeding.... Additionally, the [plaintiffs] contend that by providing a defective NOI, the bank committed fraud under the CFA.... Even if it was defective, such defect would not generally rise to the level of fraud or illegality required by the CFA. Nor would a defect in the NOI cause ascertainable harm since [the defendant] would have an opportunity to cure such a defect.” (citations omitted)) (unpublished decision).
. Section 726(a)(4) of the Bankruptcy Code effectively subordinates treble damages claims to unsecured claims in a chapter 7 case. See 11 U.S.C. § 726(a)(4). However, section 726(a)(4) does not apply in a chapter 11 case. See 6 Collier on Bankruptcy ¶ 726.01 (16th ed. 2014) (“Section 726 applies directly only in liquidation cases under chapter 7."). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497525/ | Chapter 11
MEMORANDUM OPINION
KEVIN GROSS, U.S.B.J.
Before the Court are identical motions for summary judgment filed by the defen*510dants in this adversary proceeding, Knight Hawk Coal, LLC (“Knight Hawk”) and Avoca Bement Corp. (“Avoca”; collectively the “Defendants”).1 On September 5, 2013, Pirinate Consulting Group, LLC, as litigation trustee for the NP Creditor Litigation Trust (the “Trustee”), initiated this adversary proceeding against the Defendants seeking to recover $2,805,745.25 in allegedly preferential transfers. The Defendants seek entry of summary judgment in their favor on all counts of the Trustee’s adversary complaint based on the United States Court of Appeals for the Third Circuit’s Kiwi decision. See Kimmelman v. Port Auth. of New York & New Jersey (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311 (3d Cir.2003) (“Kiwi”). For the reasons that follow, the Court agrees with the Defendants and will enter summary judgment in their favor on all counts of the Trustee’s adversary complaint.
JURISDICTION
The Court has jurisdiction over this matter and the judicial authority to issue a final order pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b).
STANDARD OF REVIEW
Pursuant to Federal Rule of Civil Procedure 56, made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056, in order to succeed on a motion for summary judgment, the moving party must demonstrate 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). “By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-8, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (emphasis in original). A material fact is one that “might affect the outcome of the suit under the governing law.” Id. at 248, 106 S.Ct. 2505. A dispute regarding a material fact is genuine “when reasonable minds could disagree on the result.” Delta Mills, Inc. v. GMAC Comm. Fin., Inc. (In re Delta Mills, Inc.), 404 B.R. 95, 105 (Bankr.D.Del. 2009).
Summary judgment is designed to avoid the expense of a trial where the facts are settled and the dispute turns on an issue of law. Delta Mills, 404 B.R. at 104. To this end, the Court’s “function is not ... to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Anderson, 477 U.S. at 249, 106 S.Ct. 2505. In performing this function, the Court must draw all inferences “in the light most favorable to the non-moving party, and where the non-moving party’s evidence contradicts the movant’s, then the non-movant’s must be taken as true.” Big Apple BMW, Inc. v. BMW of North America, Inc., 974 F.2d 1358, 1363 (3d Cir.1992).
“The movant must put the ball in play, averring ‘an absence of evidence to support the nonmoving party’s case.’ ” Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir.1990) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). The burden then shifts to the non-movant to “present definite, competent evidence to rebut the motion.” Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir.1991). See also Delta Mills, 404 B.R. at 105. “[T]he nonmoving *511party cannot rely upon eonclusory allegations in its pleadings or in memoranda and briefs to establish a genuine issue of material fact. Instead, it ‘must make a showing sufficient to establish the existence of every element essential to his case, based on the affidavits or by the depositions and admissions on file.’ ” Pastore v. Bell Tel. Co. of Pennsylvania, 24 F.3d 508, 511 (3d Cir.1994) (quoting Harter v. GAF Corp., 967 F.2d 846, 852 (3d Cir.1992)). See also Fed. R. Civ. P. 56(c)(1) (“Supporting Factual Positions”).
BACKGROUND
The material facts are not in dispute.2 At all times relevant to the Trustee’s complaint, the Debtors3 produced and sold coated paper and specialty paper products used in, among other things, magazines, advertising materials, catalogs, and textbooks. The affiliate debtor at issue in this adversary proceeding, NewPage Wisconsin System, Inc. (“NewPage Wisconsin”), is a Wisconsin corporation which owned and operated paper mills in Wisconsin and Minnesota. Prior to the petition date, NewPage Wisconsin entered into a “Coal Supply Agreement,” dated July 6, 2010, with the Defendants (the “Coal Supply Agreement”). Knight Hawk Mot. for Summ. J.App. A [hereinafter “App. A”], 60-63, 84-87. Under the terms of the Coal Supply Agreement, Avoca (defined as “Agent”) “acting with and for” Knight Hawk (defined as “Seller”) agreed to sell and NewPage Wisconsin agreed to buy coal of a certain quality, quantity, and price for a two-year term beginning January 1, 2011 and ending December 31, 2012. Id. The quantity term of the Coal Supply Agreement provided that “[a]nnual volume will be approximately 105,000 tons to be shipped at approximately 2,000 to 2,200 tons per week.” Id.4
On September 7, 2011, the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Among the Debtors’ first-day motions was a motion seeking authority to pay pre-petition claims of certain critical vendors [Main Case D.I. 18] (the “Critical Vendor Motion”). On September 8, 2011, the Court entered an order granting the Debtors’ Critical Vendor Motion [Main Case D.I. 58] and on October 11, 2011, the Court entered an amended order granting the motion [Main Case D.I. 337] (the “Critical Vendor Order”). The Critical Vendor Order authorized the Debtors to pay certain pre-petition claims of critical vendors so long as the critical vendors continued to provide goods and services on “Customary Trade Terms.”5 The Critical Vendor Order further authorized the Debtors to obtain “written verification” that the critical *512vendor would continue to provide goods and services on Customary Trade Terms. Under the terms of the Critical Vendor Order, if the critical vendor accepted payment on its pre-petition claim but did not provide goods and services on Customary Trade Terms, the payment was deemed to be an unauthorized post-petition transfer under § 549 of the Bankruptcy Code and recoverable by the Debtors.
Pursuant to the Critical Vendor Order, the Debtors and Defendants entered into an agreement memorialized in a “Critical Vendor Letter” dated November 4, 2011, and signed by representatives of the Debtors and Defendants (the “Critical Vendor Agreement”). App. A at 71-74. Under the terms of the Critical Vendor Agreement the Debtors agreed to grant the Defendants an administrative claim in the amount of $128,565.92 pursuant to § 503(b)(9)6 of the Bankruptcy Code, representing pre-petition amounts due under the Coal Supply Agreement. App. A at 72. In return, the Defendants agreed to “extend to the Debtors all Customary Trade Terms, which shall comply with the terms and provisions set forth in the Coal Supply Agreement.” App. A at 72. Additionally, under the terms of the Critical Vendor Agreement the Defendants reserved their rights to pursue “a claim arising under section 503(b)(9) of the Bankruptcy Code or pursuant to [their] rights under section 3657 of the Bankruptcy Code as a party to the Coal Supply Agreement .... ” App. A at 72.
On December 14, 2012 (the “Confirmation Date”), the Court entered an order [Main Case D.I. 2945] confirming the Debtors’ Modified Fourth Amended Joint Chapter 11 Plan [Main Case D.I. 2904] (the “Plan”). On December 21, 2012, the Plan became effective [Main Case D.I. 3014]. Article V of the Plan established the NP Creditor Litigation Trust (the “Trust”) and appointed the Trustee to, as is relevant here, liquidate preference claims arising under § 547 of the Bankruptcy Code for the benefit of Trust beneficiaries. Plan §§ 5.1, 5.7. See also Plan Schedule 1.2.95 (“NP Creditor Litigation Trust Agreement”) [Main Case D.I. 2909-2]. Article VIII of the Plan provided for the assumption or rejection of executory contracts and unexpired leases. As is relevant here, under Article VIII of the Plan an executory contract that: (1) “has not expired by its own terms on or prior to the Confirmation Date”; (2) was not assumed or rejected with Court approval prior to the Confirmation Date; (3) was not subject to a motion to assume or reject as of the Confirmation Date; and (4) was not otherwise accorded specific treatment by virtue of being listed on Plan Schedules 8.1(A)-(E) was automatically deemed to be assumed by the Debtors (the “Catchall Provision”). Plan § 8.1; Plan Schedule 8.1 [Main Case D.I. 2909-5]. Article VIII of the Plan further provided that “[e]ntry of the Confirmation Order ... shall constitute approval of the assumptions pursuant to section 365(a) of the Bankruptcy Code....”
The Coal Supply Agreement was not listed on Plan Schedules 8.1(A)-(E)8, as*513sumed or rejected with Court approval prior to the Confirmation Date, or the subject of a motion to assume or reject as of the Confirmation Date. After the Confirmation Date but prior to December 31, 2012, Knight Hawk supplied three shipments of coal to NewPage Wisconsin, totaling 3,791.65 tons, for which Avoca invoiced NewPage Corporation9 in the aggregate amount of $326,081.90. App. A at 56, 79. On December 31, 2012, pursuant to its terms, the Coal Supply Agreement expired. NewPage Wisconsin and the Defendants entered into a subsequent agreement, dated September 27, 2012, for the purchase and sale of coal for a two-year term beginning January 1, 2013 and ending December 31, 2014 (the “Subsequent Coal Supply Agreement”). App. A at 88-93. In substance the Subsequent Coal Supply Agreement is similar to the Coal Supply Agreement but the terms are not identical. The quantity term of the Subsequent Coal Supply Agreement provides that:
During 2013, Seller shall supply and Buyer may purchase up to approximately 110,000 tons of coal. During 2013, Seller shall supply up to approximately 2,000 tons of coal per week. By August 1, 2013, Buyer shall provide Seller written notice identifying the tons of coal that Seller shall supply Buyer in 2014. The 2014 volume of coal purchased by Buyer from Seller shall be equal to at least 95% of the volume of coal consumed by Buyer’s Biron, WI mill boiler No. 4.
App. A at 88.
On September 5, 2013, the Trustee initiated this adversary proceeding by filing its adversary complaint seeking avoidance and recovery of $2,805,745.25 in allegedly preferential pre-petition transfers to the Defendants pursuant to § § 547 and 550 of the Bankruptcy Code. On December 11, 2011, the Defendants filed their answers to the Trustee’s complaint, each raising an affirmative defense based on the Third Circuit’s Kiwi decision. Avoca Answer 6 [Adv. D.I. 10]; Knight Hawk Answer 6 [Adv. D.I. 11]. On May 29, 2014, Knight Hawk filed its motion for summary judgment [Adv. D.I. 41] and brief in support [Adv. D.I. 42] based on its Kiwi defense. On May 30, 2014, Avoca filed its motion for summary judgment [Adv. D.I. 43], which adopted Knight Hawk’s motion and brief in their entirety. On June 19, 2014, the Trustee filed its objection to the Defendants’ motions for summary judgment [Adv. D.I. 47]. On July 3, '2014, Knight Hawk filed its reply brief [Adv. D.I. 49], which Avoca subsequently adopted as well [Adv. D.I. 50]. On July 16, 2014, the Trustee filed a request for oral argument [Adv. D.I. 54] and the Court heard argument on the matter on September 16, 2014.
ANALYSIS
As the material facts are undisputed, all that is left for the Court is to determine whether the Defendants are entitled to judgment as a matter of law. See Fed. R. Crv. P. 56(a). In order for the Trustee to avoid an allegedly preferential transfer pursuant to § 547 of the Bankruptcy Code, it must satisfy the elements set forth in the statute itself:
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;
*514(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).
In Kiwi, the Third Circuit held that a trustee may not employ § 547 to avoid pre-petition transfers made pursuant to an executory contract which the trustee or debtor in possession assumed post-petition. Kiwi 344 F.3d at 317-19, 321. The Kiwi holding was based on the Third Circuit’s observation that before a trustee or debtor in possession may assume a contract pursuant to § 365 of the Bankruptcy Code, it must “cure all defaults, assure future performance, and make the other contracting party whole.” Id. at 318. See also 11 U.S.C. § 365(b)(1). Since the contract creditor whose contract is assumed would be paid in full pursuant to § 365, a trustee seeking to avoid as preferential pre-petition transfers made pursuant to the contract could not satisfy § 547(b)(5) (the liquidation analysis). Kiwi, 344 F.3d at 318-19. Accordingly, the Defendants argue that the Coal Supply Agreement was an executory contract that was assumed under the Catchall Provision of Article VIII of the Plan and so under Kiwi the Trustee may not avoid as preferential pre-petition transfers made pursuant thereto.
The Trustee’s counterargument is three pronged. First, the Trustee argues that the Coal Supply Agreement was not an executory contract because the “Debtors had no material obligations thereunder.” Trustee Obj. 11. In the Third Circuit, an executory contract is “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” Sharon Steel Corp. v. Nat’l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3rd Cir.1989). The Trustee argues that since the Coal Supply Agreement did not require that NewPage Wisconsin purchase a specific or minimum amount of coal or provide for a breach or remedy in the event that NewPage Wisconsin did not purchase any coal at all, NewPage Wisconsin did not have any material unperformed obligations under the Coal Supply Agreement as of the petition date. The lack of specificity in the Coal Supply Agreement is especially striking, according to the Trustee, when compared to the relatively more detailed quantity term in the Subsequent Coal Supply Agreement, which, in the Trustee’s view, requires that NewPage Wisconsin purchase a minimum amount of coal. To the extent NewPage Wisconsin’s only post-petition obligation under the Coal Supply Agreement was the payment of money, the Trustee argues that is not enough to make it an executory contract. See In re Su-permedia, Inc., 2013 WL 5567838, at *3 (Bankr.D.Del. Oct. 9, 2013) (“where the payment of money is the only remaining performance, a contract is not executory”).
*515In support of its argument, the Trustee cites Kaye v. A.R.E. Distribution & Alpine Records, LLC (In re Value Music Concepts, Inc.), 329 B.R. 111 (Bankr. N.D.Ga.2005). In Kaye, the United States Bankruptcy Court for the Northern District of Georgia found that a pre-petition settlement agreement was not an executo-ry contract. Id. at 122. The Court characterized the settlement agreement as “a business divorce between two recently married groups of companies, settling disputes and dividing up assets.” Id. at 123. The Court further observed that the settlement agreement “did not contemplate any significant ongoing business relationships among the parties of the type that are typically present when a contract is found to be executory.” Id. Additionally, the Trustee cites a footnote of the Critical Vendor Motion in which the Debtors stated that they did not “intend” to categorize vendors that are a party to an executory contract as critical. Critical Vendor Motion 6 n.3.
The Court finds more persuasive the cases cited by the Defendants. In Carolina Fluid, Judge Christopher S. Sontchi of this Court determined that a supply agreement under which the defendant “agreed to supply parts to the Debtors based on the requirements of the Debtors, and the Debtors have agreed to buy the parts required, at a rate specified in the Supply Contract” was an executory contract. Guiliano v. Almond Inv. Co. (In re Carolina Fluid Handling Intermediate Holding Corp.), 467 B.R. 743, 754 (Bankr. D.Del.2012) (“Carolina Fluid”). Judge Sontchi found that the “Supply Agreement evidences an on-going requirement for supply and purchase of parts” and so was executory and subject to assumption. Id. As here, Carolina Fluid involved a preference action and Judge Sontchi ultimately entered summary judgment in favor of the defendant based on the Kiwi decision. Id. at 757.
Similarly, in Sharon Steel the Third Circuit affirmed the United States Bankruptcy Court for the Western District of Pennsylvania’s determination that a natural gas service agreement under which the supplier agreed to deliver natural gas to the debtor based on a certain rate schedule was an executory contract. Sharon Steel, 872 F.2d at 39. The Third Circuit observed that “[t]he agreement is characterized by reciprocal obligations continuing into the future: [the supplier] has promised to provide natural gas to [the debtor], and [the debtor] has promised to purchase the gas at a certain price under the [ ] rate schedule.” Id.
The Trustee asserts that Carolina Fluid and Sharon Steel are distinguishable because the purchasing parties under the agreements at issue were required to purchase a certain minimum quantity. "While the Coal Supply Agreement could perhaps have been clearer with respect to a minimum quantity requirement and remedies, the Court is persuaded that, as in Carolina Fluid and Sharon Steel, the Coal Supply Agreement evidences ongoing, reciprocal obligations for supply and purchase. If, for example, NewPage Wisconsin had purchased only 50,000 tons of coal in 2012, it would certainly have been in breach of the Coal Supply Agreement as 50,000 tons is not approximately 105,000 tons. The same would be true of the Defendants had they supplied only 50,000 tons of coal in 2012. Further, the Court finds that the Coal Supply Agreement had not expired by its own terms as of the Confirmation Date since the parties were obligated to supply and purchase and did in fact supply and purchase several thousand tons of coal pursuant to the Coal Supply Agreement after the Confirmation Date.
Finally, the Court declines to bind the Defendants to the Debtors’ intention, as expressed in footnote 3 of the Critical Ven*516dor Motion, that parties to executory contracts not be classified as critical vendors. At any rate, whether or not the Debtors believed that the Defendants were parties to an executory contract when the Debtors and Defendants executed the Critical Vendor Agreement is irrelevant. As explained by Judge Sontchi in Carolina Fluid:
The Debtors requested that [the creditor] enter into a [Critical Vendor] Agreement. [The creditor] declined. The Trustee argues that, as a result of such conduct, the Debtors believed [the creditor] to be a critical vendor rather than a counterparty to an executory contract. Whether a “critical trade vendor” is a vendor, supplier, licensor, landlord, subcontractor, counterparty to an execu-tory contract, etc., etc. is irrelevant. The basis and point of a critical [vendor] order is to give a debtor authorization to pay pre-petition services or goods when necessary to preserve the debtor’s estate. Indeed, one of the primary bases for issuing the relief is to avoid having to inquire or to litigate the details of the relationship of the parties, e.g. executory contract or supply agreement, because there is no time to do so.
467 B.R. at 755. Further, the Critical Vendor Order provides that “nothing in the [Critical Vendor] Motion or this Order shall be deemed to constitute the post-petition assumption of an executory contract between the Debtors and any third party.” The clear implication of this language is that the Court recognized the possibility that a critical vendor may also be a party to an executory contract. Accordingly, the Court finds that the Coal Supply Agreement was an executory contract which was eligible for assumption under the terms of Article VIII of the Plan as of the Confirmation Date.10
The Trustee next argues that the Coal Supply Agreement was not eligible for assumption under Article VIII of the Plan because the Critical Vendor Agreement replaced and superseded the Coal Supply Agreement prior to the Confirmation Date. In support of its argument the Trustee cites Wisconsin case law on the common law contract doctrine of novation and points out a number of terms contained in the Critical Vendor Agreement that are not contained in the Coal Supply Agreement. The Trustee further contends that it is not common practice for debtors to grant suppliers which are a party to an executory contract critical vendor status— if the debtor could simply assume and enforce the executory contract pursuant to § 365, there would be no reason to grant the vendor any extra benefit attendant to critical vendor status. The Trustee asserts that the Critical Vendor Agreement was in effect up to the Confirmation Date, after which the parties operated without a formal written agreement until the effective date of the Subsequent Coal Supply Agreement.
The Court, though, is persuaded, as the Defendants argue, that the Critical Vendor Agreement, while related to the Coal Supply Agreement, is a separate agreement *517that did not supersede or replace the Coal Supply Agreement. In the Critical Vendor Agreement, the Debtors simply agreed to a certain favorable treatment of the Defendants’ pre-petition claim and in return the Defendants agreed to continue to perform their obligations under the Coal Supply Agreement. In other words, the parties agreed to maintain the status quo because, as Judge Sontchi recognized in Carolina Fluid, there was no time to inquire into the details of the relationship between the Debtors and Defendants, i.e. whether or not the Coal Supply Agreement was an executory contract. See Carolina Fluid, 467 B.R. at 755. The fact that the Defendants specifically reserved their rights with respect to § 365 in the Critical Vendor Agreement only strengthens the argument that it is a separate agreement which did not supersede or replace the Coal Supply Agreement.
Further, the Critical Vendor Order, as is relevant here, only authorized the Debtors to pay certain pre-petition claims of critical vendors and obtain “written verification” that the critical vendor will continue to provide “Customary Trade Terms.” The Critical Vendor Order did not authorize the debtor to enter into a new, stand-alone supply agreement. Thus, the Critical Vendor Agreement is most accurately characterized as written verification that the Debtors and Defendants would continue to operate pursuant to the terms of the Coal Supply Agreement and is not a new, standalone supply agreement as the Trustee suggests. The Critical Vendor Agreement in this instance is similar to a reaffirmation agreement. See 11 U.S.C. § 524(c). Just as a' reaffirmation agreement does not supersede or replace the underlying contract, the Critical Vendor Agreement did not supersede or replace the Coal Supply Agreement.
Finally, the Trustee argues that the Coal Supply Agreement was not eligible for assumption under Article VIII of the Plan because the parties executed the Subsequent Coal Supply Agreement several months prior to the Confirmation Date, which was meant to govern the post-bankruptcy business relationship of the Debtors and Defendants. The Trustee asserts that there would be no benefit to the Debtors to assume the Coal Supply Agreement on the Confirmation Date since the Subsequent Coal Supply Agreement was already in place.
The Trustee’s argument seems to rest on the fact that the Confirmation Date happened to be only seventeen days prior to the expiration date of the Coal Supply Agreement. It is clear to the Court, especially given the January 1, 2013, effective date of the Subsequent Coal Supply Agreement, that the Debtors and Defendants intended for their relationship to be governed by the Coal Supply Agreement through December 31, 2012, after which the Subsequent Coal Supply Agreement took effect. The Debtors and Defendants conducted over $300,000.00 worth of business after the Confirmation Date but prior to the expiration of the Coal Supply Agreement. So, clearly there was some benefit to the Debtors in assuming the Coal Supply Agreement, even though assumption occurred only a short time prior to the contract expiration date. Accordingly, the Court finds the Trustee’s final argument to be without merit.
CONCLUSION
For the reasons set forth above, the Court finds that the Debtors assumed the Coal Supply Agreement on the Confirmation Date in accordance with the Catchall Provision of Article VIII of the Plan. Pursuant to the Third Circuit’s Kiwi decision, the Trustee may not recover allegedly preferential transfers which arose under a contract that the Debtors assumed post-*518petition. Therefore, the Defendants are entitled to judgment as a matter of law on all counts of the Trustee’s adversary complaint. Accordingly, the Court will grant the Defendants’ motions for summary judgment. The Court will issue an order.
. Avoca adopted Knight Hawk’s motion for summary judgment, brief in support of its motion for summary judgment, and reply brief in their entirety. Avoca Mot. for Summ. J. ¶ 3 [Adv. D.I. 43]; Avoca Reply Br. 1 [Adv. D.I. 50].
. While Knight Hawk supported its motion for summary judgment (adopted by Avoca) with affidavits and other documents from the docket of the main case, the Trustee did not file any affidavits or other evidentiary-quality materials in connection with its objection to the Defendants’ motions for summary judgment, evidently electing to challenge the Defendants’ motions only on a legal basis.
. The Debtors are NewPage Corporation, Chillicothe Paper Inc., Escanaba Paper Company, Luke Paper Company, NewPage Canadian Sales LLC, NewPage Consolidated Papers Inc., NewPage Energy Services LLC, NewPage Group Inc., NewPage Holding Corporation, NewPage Port Hawkesbury Holding LLC, NewPage Wisconsin System Inc., Rum-ford Paper Company, Upland Resources, Inc., and Wickliffe Paper Company.
. The Coal Supply Agreement is the second such agreement between NewPage Wisconsin and the Defendants. A similar agreement was in effect between the parties from January 1, 2009 through December 31, 2010. As discussed infra, NewPage Wisconsin and the Defendants entered into a third such agreement which took effect January 1, 2013 and extends through December 31, 2014.
. "Customary Trade Terms” is defined in the Critical Vendor Order as "the most favorable terms in effect between such Critical Vendor and the Debtors in the 12 months before the [petition date], or such other favorable terms *512as the Debtor and the Critical Vendor may otherwise agree.”
.Section 503(b)(9) provides for an administrative expense for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”
. As discussed in more detail infra, § 365 of the Bankruptcy Code provides for the assumption or rejection of executory contracts and unexpired leases.
. An executory contract with Avoca was listed on the Debtors’ amended schedule G (execu-tory contracts and unexpired leases) of the schedules of assets and liabilities filed in sup*513port of their bankruptcy petitions. App. A at 11-17.
. The Debtors utilized a centralized cash management system whereby NewPage Corporation satisfied payables of its affiliates, including NewPage Wisconsin.
. The Trustee also makes much of the fact that the Debtors took the time to list more than 1,000 executory contracts on Plan Schedules 8.1 (A)-(E) but did not list the Coal Supply Agreement. In the Trustee’s view, if the Debtors believed the Coal Supply Agreement was an executory contract, they would have taken the time to accord the contract specific treatment by listing it on Plan Schedules 8.1(A)-(E). Again, the Court declines to hold the Defendants responsible for the Debtors’ actions. Further, the Catchall Provision clearly provides for the assumption of execu-tory contracts which are not listed in Plan Schedules 8.1(A)-(E) (and which satisfy the other requirements of the Catchall Provision). Accordingly, the fact that the Debtors did not list the Coal Supply Agreement on Plan Schedules 8.1(A)-(E) does not affect the Court’s analysis. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497526/ | Chapter 11
OPINION
CHRISTINE M. GRAVELLE, U.S.B.J.
I. INTRODUCTION
This matter comes before the Court at the request of Liza Price Rappaport (“Debtor”) for an order expunging the claims of The Ridge at Back Brook, LLC (“The Ridge”). The Ridge claims damages for unpaid membership dues and argues that, if its contract with Debtor is determined to be executory, it is also entitled to rejection damages arising from Debtor’s unauthorized resignation from The Ridge at Back Brook (the “Club”). Following trial, the Court finds an executory contract between Debtor and The Ridge that Debt- or rejected as of the filing date, grants Debtor’s motion to expunge claims numbered 2-1 and 2-2 as duplicative, denies claim 16-1 as unsupported, and denies Debtor’s motion to expunge claim number 15-1, instead modifying and allowing claim number 15-1 as a general unsecured claim in the amount of $283,677.79.
II. JURISDICTION AND VENUE
The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (B). Venue is proper in this Court pursuant to 28 U.S.C. § 1408. The statutory predicates for the relief sought herein are 11 U.S.C. § 365 and 11 U.S.C. § 502. Pursuant to Fed. R. *524Bankr.P. 7052, the Court issues the following findings of fact and conclusions of law.
III. PROCEDURAL HISTORY
Debtor filed a voluntary Chapter 11 bankruptcy petition on September 15, 2011 and confirmed her First Modified Plan (the “Plan”) approximately fifteen months later, proposing to pay all creditors in full. The Plan treats Debtor’s contractual obligation to The Ridge as unsecured, defines the contract as executory, and rejects it as of the effective date of the Plan.1 The Ridge objected to Debtor’s characterization and claimed the contract could not be rejected as executory. The Plan, as confirmed, noted the dispute and explained that, if the Court found the contract to be non-executory, payment of 100% of unsecured claims may prove impossible.
No claim had been allowed to The Ridge as of the confirmation date. The Ridge filed a proof of claim early in the case in the amount of $59,037.10, evidenced by a judgment entered against Debtor in the Superior Court of New Jersey, Law Division, Hunterdon County. The Ridge amended its original claim prior to confirmation of the Plan2, and filed two additional claims just after confirmation.3
IV. FACTS DEVELOPED AT TRIAL
The Club is a private membership club offering an 18-hole golf course, practice range, short game area, clubhouse with locker rooms, pro shop, golf cart storage, bar and grille, and administrative offices. See “The Ridge at Back Brook Membership Plan” (the “MP”), admitted at trial as Exhibit D-l, at page 1. The Ridge is the owner and operator of the golf course and all other amenities offered to the members of the Club. See id. Joel Moore is the managing member of The Ridge and shares ownership with his wife, Pamela Moore. At trial, Mr. Moore testified that the Club is a non-equity golf club, meaning that the land and facilities are owned and operated by individuals or a company rather than by its members. As such, the members of the Club have no say in its operation.
Debtor testified that she joined the Club “the day [T]he Ridge broke ground,” which she believed was in 1998. The only documents admitted into evidence that contained the Debtor’s signature were a Personal Information Profile for the Club, and a one-page Regular Membership Agreement (the “Agreement”), dated November 15 and November 20, 2000, respectively.4 The Agreement, which Debtor testified she read before signing, states that Debtor accepted membership in the Club at the $65,000 deposit level. Debtor began paying annual dues the year the golf course opened for play as required in the MP. MP at p. 6.
Joel Moore testified that the golf course opened in the summer of 2002 upon completion of construction of nine holes. Con*525struction of the clubhouse had not begun because memberships in the Club had not reached the levels required in the construction financing documents for the project. Because the members wanted to find a way to build the clubhouse sooner, The Ridge developed an alternate financing plan whereby the members would contribute directly to construction of the clubhouse. The Ridge put the financing plan to a vote of the members and it was accepted with 94% voting in favor. As a result, the clubhouse opened in 2004.
The financing plan allowed the members to choose one of two options: to become an “A” member by investing $25,000 toward construction costs, or a “B” member by paying $1,800 annually, which payments would be used to make interest payments on the “A” member investments.5 All members would eventually be reimbursed for their contributions. Members who did not make a choice became “B” members by default. Debtor testified she was not given a choice as to the alternate financing options and that she was forced to become a “B” member. On cross-examination, Debtor testified that she was not aware of the vote regarding the financing or of the choice of investment options. She admitted that she was willing to abide by a majority vote of the members and, perhaps more importantly, admitted that she thought construction of the clubhouse was a good idea. She testified that, if she had known of the vote, she would have voted in favor of member financing of construction.6
Through a certification in support of her motion to expunge the claim of The Ridge, which certification was admitted as an Exhibit at trial (“Debtor’s Cert.”), Debtor testified that she attempted to terminate her membership long before she filed bankruptcy.7 She testified that she enjoyed her membership privileges until October 2006 when she had major surgery that prevented her from golfing in 2007. She notified the Club that she would be unable to play that year and the Club found a substitute member to pay her dues and use her membership. Her medical problems continued to prevent her from using her membership and she testified that she again contacted The Ridge to request another substitute member. According to the Debtor’s Cert., she learned then that members can use substitute members only once. She found someone willing to buy her membership, but was told she was not allowed to assign her membership. Instead, The Ridge sold a membership directly to Debtor’s contact. Debtor certified that “The Ridge’s contract ... does not allow members to terminate.” Debtor’s Cert, at ¶ 9. Debtor testified that her medical problems worsened and she has not been able to use the Club facilities since 2007.
Mr. Moore testified that he and his wife came up with the substitute member plan to address member concerns. They viewed it as a “win-win.” Allowing substitute members gave members the opportunity to take a one-year leave of absence from the Club, and allowed the Club to showcase its amenities to the substitute member for a year in the hope the substitute member would become a permanent member.
*526The parties did not direct the Court’s attention to any document outlining the substitute member program other than a letter from Pamela Moore, Membership Director, to Debtor dated November 10, 2008, which was admitted into evidence. In it, Ms. Moore tells Debtor that The Ridge extended an invitation for permanent membership to the person who assumed Debtor’s membership for 2008. She explains the one-year policy for “temporary membership.” Ms. Moore suggests that, if Debtor did not plan to return to The Ridge in 2009, she “may propose a different person to assume [her] membership in order to remain in good standing.”8 Although the letter requests a response before December 1, 2008, Debtor replied in a writing dated December 6th. In it, Debtor asks Ms. Moore to find another person to assume her membership for 2009. She states that she would like to remain in good standing but that she needed to sell her farm before she could afford to pay dues again.
In the Agreement, Debtor acknowledged receipt of a copy of the MP and the Rules and Regulations (“R & R”) for the Club, both of which documents were admitted as trial exhibits. Debtor testified that she also received a copy of the Confidential Private Placement Memorandum dated March 26, 1999 (the “Memorandum”), which she briefly reviewed before she decided to join the Club.
The Ridge moved the following membership documents into evidence:
— Regular Membership Agreement (signed by Debtor and referred to above as “the Agreement”);
— Confidential Private Placement Memorandum (referred to above as “the Memorandum”);
— Personal Information Profile (signed by Debtor and referred to herein as “Profile”).
Debtor moved a document entitled “Membership Documents” into evidence. The Membership Documents consisted of the MP, a ten page document; the Rules and Regulations, a thirteen page document (referred to above as “R & R”); and two Amendments to the Membership Documents dated July 14, 1999 and March 5, 2003, respectively. The Debtor testified that she signed the July 1999 Amendment (“Amendment # 1”) but her signature was not presented at trial. The March 2003 Amendment (“Amendment #2”) did not have signature lines. It stated that it superseded any previous policy including Amendment # 1.9
To join the Club, a member was required to pay a deposit as specified in the MP. MP at p. 1. No portion of the deposit would be refunded for thirty years unless the membership could be re-issued to a new member. Id. at pp. 1, 4. Memberships would not be re-issued (or sold) by the Club until all 275 memberships were sold. Id. at pp. 2, 4.10 Memberships could be assigned or transferred only to the Club. Id. at p. 4. Members were also required to pay annual dues, the amount of which would be determined by the Club *527“from time to time.” Id. at p. 5. The obligation to pay could not be abated for any reason, “including, without limitation, extended absences from the area or temporary disability.” Id. The obligation to pay dues remained even if a member were prohibited from using the Club facilities due to suspension or termination of their membership by the Club. Id. The MP required that a member wishing to resign give notice, in writing, thirty days prior to resignation. Id. at p. 4. Resigning members would be obligated to pay dues until their memberships were re-issued, which could not occur until all memberships were sold. Id. Resigning members would be excused from paying assessments approved after the effective date of their resignation. Id. at p. 5. The Club maintained a list of resigned members, kept in chronological order of the Club’s receipt of a member’s written resignation notice. Once the Club achieved full membership, memberships would be re-issued beginning with the first member on the resigned member list and would proceed chronologically in accordance with the list.
The MP explained that membership in the Club provided “only a revocable license to use the Club Facilities;” that members had “no right to vote, hold office, or otherwise be involved in the operation or management of the Club;” and that the “Club reserve[d] the right, at any time and in its sole discretion, to modify or amend all or any terms and provisions of the [MP and R & R].” Id. atp.6.11
Mr. Moore testified that The Ridge amended the MP twice, in response to members’ concerns about their ability to leave the Club if they were unable to take advantage of the facilities for reasons beyond their control. Amendment # 1 allowed resignation if a member relocated 100 miles or more from the Club, or if a member incurred a permanent medical disability. Amendment # 2, also adopted in the sole discretion of The Ridge, extended the mileage requirement to 200 miles and held the resigning member responsible for payment of annual dues for the remainder of the calendar year in which he or she resigned and for the following calendar year. It required that the resigning member sell his or her personal residence in connection with their relocation and defined the effective date of resignation as the date on which the residence is sold. Amendment #2 clarified that, unless a member resigned because of relocation or a permanent medical disability, the member would be responsible for paying all dues until their membership was re-sold by the Club. It reiterated that no sales of existing memberships could occur until the Club memberships were sold out. See also MP at p. 4.
The Agreement, which Debtor signed, acknowledges that she received the MP and the R & R. It acknowledges that the membership deposit paid by Debtor will be repaid in accordance with the terms of the MP and the R & R, upon her resignation from the Club in accordance with the terms of the MP and the R & R.
The Memorandum references the MP, explains the ownership structure of The Ridge, the plan to finance and construct a golf facility, and the relationship of The Ridge to the Club. See Memorandum at pp. 3-4. It outlines the intent of The Ridge to sell memberships and to use the proceeds to pay start-up expenses and to purchase real property for construction of the golf course. Id. at p. 4. It lists the types, numbers, and costs of available *528memberships and explains the number of memberships needed to be sold before the real estate could be purchased or construction of the golf course and clubhouse could begin.12 See id. The Memorandum states that The Ridge “reserves the right to change, modify and/or adjust ... [m]em-bership [djeposit levels and the number of [mjemberships available at each level.” Id.
The Memorandum includes 17 paragraphs of “Risk Factors” on three full, single-spaced pages. See id. at pp. 5-9. It contains additional warnings in bold print on the first three pages. Those warnings include the following:
— THE PURCHASE OF A CLUB MEMBERSHIP INVOLVES SUBSTANTIAL ECONOMIC RISK AND POTENTIAL CONFLICTS OF INTEREST.
— TRANSFER OF CLUB MEMBERSHIPS IS SPECIFICALLY RESTRICTED UNDER THE TERMS OF THE MEMBERSHIP DOCUMENTS. A CLUB MEMBER WILL BE REQUIRED TO RETAIN OWNERSHIP AND BEAR THE ECONOMIC RISK OF OWNERSHIP FOR AN INDEFINITE PERIOD.
The Profile, completed and signed by Debtor, acknowledges, among other things, that she received a copy of the Memorandum, that she is able to bear the economic risk of losing her entire membership deposit, that she had adequate means of providing for her current needs and personal contingencies and had no need for liquidity with her membership deposit. See Profile at p. 3 of 3. The Profile further states that “Debtor ha[s] substantial experience in making decisions of this type” and “ha[s] consulted with [her] personal tax advisor and/or legal counsel in evaluating the merits and risks associated with acquiring a membership in the Club”. Id. Debtor initialed each acknowledgement. In the Profile, Debtor stated that she was the president of a company called “Amateur Golf Tournaments” and that she was also a member of TPC Jasna Polana, an exclusive private golf club in Princeton, NJ.
Debtor testified that she did not remember if she read the MP or R & R at the time she joined the Club, but she understood the language to mean The Ridge would employ fair business practices. She remembered being given a copy of the Membership Documents on the day of the groundbreaking and that she took them home, glanced at them, and brought back a check for her membership deposit in the amount of $65,000.00 because “Nancy,” the salesperson who represented The Ridge, said she needed a check. According to Debtor, Nancy assured her that she needn’t worry, memberships in the Club were sure to sell out within the next 2 years and she would get 70% of the new membership dues back.13 Debtor believed *529this to be true since The Ridge was such a beautiful golf course.
When she began to have medical problems, Debtor testified that she orally asked to be put on the resignation list and asked how she could get out of the Contract. The testimony is in conflict with Debtor’s note to Pam Moore dated December 6, 2008 wherein she wrote she “would like to remain in good standing” and asked that The Ridge find someone to assume her membership. Debtor testified that she never expected that it would be impossible to resign from the Club. She testified that she understood that The Ridge had raised membership costs to a level that would make it unlikely that the available memberships would ever sell out. The fact that The Ridge had sole control as to the price and sale of memberships meant it could continue raising the price, making it impossible to sell all of the memberships and thereby forcing her to remain a member forever.
Mr. Moore testified that, at the time of trial, the Club had 267 members, with 2814 regular memberships left to sell. He explained that the terms of the MP, that held members to their financial obligations until all available memberships were sold, were necessary to obtain the financing needed to construct the facilities. He explained that The Ridge had made changes to the membership levels and types in order to attract more members. For example, at the time of trial, The Ridge was offering three levels of regular memberships: $75,000, which was 100% non-refundable, $100,000, of which $99,000 was refundable, and $125,000, which would participate in an appreciation plan. He further testified that the Contract contained specific requirements for resignation from the Club and that Debtor never met those requirements. In fact, he understood that Debtor wanted to remain in good standing, but claimed she could not afford the dues. According to Mr. Moore, the substitute member program was available to Debtor but she only took advantage of it for one year.
Debtor stopped paying her dues in 2008. The Ridge obtained a judgment against Debtor in May 2011, in the amount of $58,307.24 representing unpaid dues for the period prior to that judgment. According to her First Amended Disclosure Statement, Debtor filed her Chapter 11 petition in September 2011 because she had lost money in real estate investments and The Ridge had begun pursuing her for unpaid membership dues.
V. LEGAL ANALYSIS
A. The Contract Between The Ridge and Debtor is Enforceable and Not the Result of Unconscionability or a Lack of Meeting of the Minds.
i. The Contract Between Debtor and The Ridge Resulted from a Meeting of the Minds
The Code provides that a claim may be disallowed if it is unenforceable against a debtor under any applicable law “for a reason other than because such claim is contingent or unmatured”. See 11 U.S.C. § 502(b)(1). If Debtor is correct that there was no meeting of the minds or that the Contract is unconscionable, § 502(b)(1) would serve as the basis for disallowance of The Ridge’s claim.
For a contract to be enforceable there “must be a ‘meeting of the minds’ for each material term to an agreement.” Pacific Alliance Grp. Ltd. v. Pure Energy Corp., 2006 WL 166470 at *3, 2006 U.S. *530Dist. LEXIS 2246 at *8 (D.N.J. Jan. 23, 2006) (citing Sampson v. Pierson, 140 N.J. Eq. 524, 55 A.2d 218 (N.J. Ch.1947)). This requirement of a meeting of the minds is “an essential element to the valid consummation of any contract.” Ctr. 48 P’ship v. May Dep’t Stores Co., 355 N.J.Super. 390, 406, 810 A.2d 610 (App.Div.2002). A meeting of the minds occurs when there has been a common understanding and mutual assent to all the terms of a contract. Knight v. New England Mut. Life Ins. Co., 220 N.J.Super. 560, 565, 533 A.2d 55 (App.Div.1987). “The phrase ‘meeting of the minds’ can properly mean only the agreement reached by the parties as expressed, i.e., their manifested intention, not one secret or undisclosed, which may be wholly at variance with the former.” Leitner v. Braen, 51 N.J.Super. 31, 38, 143 A.2d 256 (App.Div.1958).
Debtor argues that the terms of the Contract were so illusory that there could not have been a meeting of the minds. The Contract gave The Ridge sole discretion to change any membership term, which it did on a number of occasions, including its incorporation of the substitute member plan and adoption of Amendments 1 and 2. Debtor argues that, because she could not have known the terms that would be changed or added in the future, it would have been impossible to achieve the common understanding and mutual assent necessary for a meeting of the minds. This Court finds that the terms of the Contract were very clear on its face. Debtor testified that she received the Contract and knowingly signed documents that would bind her to the Contract. She knew, or should have known, that she was signing an agreement through which the “Club reserve[d] the right, at any time and in its sole discretion, to modify or amend all or any terms and provisions of the Membership Plan and Rules & Regulations.” She knew, or should have known, she was signing an agreement (1) through which memberships would not be re-issued until all existing memberships were sold; (2) through which members would be obligated to continue paying dues until such time as their memberships were re-issued; and (3) through which members were given no rights to hold office, vote, or be involved in the operation of the Club. There is nothing to indicate that Debtor did not understand the terms of the Contract.
The Memorandum provided Debtor with a list of risk factors inherent in becoming a member. One such factor specifically addressed the speculative nature of the membership, stating that the transfer of a membership was restricted and that “[a] club member will be required to retain ownership and bear the economic risk of ownership for an indefinite period.” Additionally, Debtor made representations during the membership application process which indicated that she had reviewed the membership documents with a tax advisor and/or counsel, that she had sufficient assets to meet her expenses without the membership deposit and that she had experience with private golf club memberships. Despite the representations, she now states that she does not remember if she read these documents.
The fact that the terms of the Contract were subject to change does not mean that there was no meeting of the minds. Put another way, it has been demonstrated that there was mutual assent between The Ridge and Debtor to the term in the Contract whereby the Ridge was given the discretion to modify or amend any of the terms and provisions. It is disingenuous for Debtor to now say that, even though she understood that term at the time she signed the contract, that now, almost 14 years later, it was impossible for her to understand the true ramifications of that clearly defined provision. In no way did *531The Ridge attempt to hide this provision or word the provision in such a way as to make it misleading. Debtor had every opportunity to consider the ramifications of the provision, even certifying to reviewing it with a tax advisor and/or lawyer. Her choosing not to do so does not prevent a meeting of the minds.
ii. The Contract Between Debtor and The Ridge Was Not Unconscionable
Unconscionability is an amorphous concept. See Kugler v. Romain, 58 N.J. 522, 543, 279 A.2d 640 (1971). It has been described as “overreaching or imposition resulting from a bargaining disparity between the parties, or such patent unfairness in the contract that no reasonable person not acting under compulsion or out of necessity would accept its terms.” Muhammad v. County Bank of Rehoboth Beach, 879 N.J.Super. 222, 236-37, 877 A.2d 340 (App.Div.2005), rev’d on other grounds, 189 N.J. 1, 912 A.2d 88 (2006). In determining unconscionability, courts look to two factors: “(1) unfairness in the formation of the contract, and (2) exces sively disproportionate terms.” Delta Funding Corp. v. Harris, 189 N.J. 28, 55, 912 A.2d 104 (2006) (quoting Sitogum Holdings, Inc. v. Ropes, 352 N.J.Super. 555, 564, 800 A.2d 915 (Ch. Div.2002)). The first factor can be termed “procedural unconscionability,” and considers inadequacies such as “age, literacy, lack of sophistication, hidden or unduly complex contract terms, bargaining tactics, and particular setting existing during the contract formation process.” Id. (citations omitted). The second factor, labeled “substantive unconscionability,” relates to the substantive unfairness of the agreement, and asks the court to consider whether, “the exchange of obligations is so one-sided as to shock the court’s conscience.” Id.
Courts have generally taken three approaches to unconscionability determinations, as noted in Sitogum Holdings, Inc. v. Ropes, 352 N.J.Super. 555, 800 A.2d 915 (Ch. Div.2002). The Sitogum Court analyzed these approaches and found that most courts have looked for a showing of both procedural and substantive uncon-scionability. Id. at 565, 800 A.2d 915 (citations omitted). Some courts require only substantive unconscionability. Id. (citations omitted). Other courts use a “sliding scale” approach, weighing the two factors together, where a relatively minor showing of one factor can be outweighed by a large showing of the other. Id. at 565-66, 800 A.2d 915. (citations omitted).
This Court cannot find the Contract to be unconscionable due to its wording. Procedural unconscionability simply does not exist in this case. Debtor is not illiterate or unsophisticated. She is an intelligent woman, who was already a member of another exclusive golf club in the area. She testified that she organized amateur golf tournaments and disclosed on the Profile that she owned a company called “Amateur Golf Tournaments”. She clearly has some familiarity with the organization and operation of golf clubs. The Contract terms were clearly and carefully presented to her. Even if the Contract was presented to Debtor as “take-it- or-leave-it,” this was not a result of unequal bargaining power. There are hundreds of private golf courses within the immediate area of Debtor. If she was not satisfied with the terms presented by The Ridge, or if she truly was leery of entering into a contract where The Ridge could change any terms at its discretion, then she had the option of taking her business to any of those other golf clubs. In fact, as stated, Debtor already belonged to another club. The Court finds she willingly and freely entered into the Contract.
*532Substantively, the issue is much closer. One can imagine countless scenarios whereby The Ridge could take advantage of the open-ended term allowing it to change the Contract in its sole discretion. Debtor’s hypothetical whereby The Ridge could raise the annual dues to $1,000,000 yearly is well taken even though common sense should prevent The Ridge from making such a change. Ultimately, the fact that The Ridge may do so does not shock the conscience of this Court. As already described, this sophisticated Debtor knew, or should have known, the terms and conditions of the Contract, and willingly entered into it. Debtor did not have a problem with the terms of the Contract for the years during which she used the Club facilities, even after The Ridge amended the MP on two occasions and instituted a financing plan for construction of the clubhouse, to which Debtor made payments as a “B” member. Only now is she belatedly attempting to void the Contract. This Court will not allow such a result.15
The Contract is valid and enforceable as written, and is not unconscionable, nor was there an absence of a meeting of the minds. Accordingly, the claim of The Ridge will not be expunged.
B. The Contract Between Debtor and The Ridge is Executory
Finding that a contract exists between Debtor and The Ridge, the Court must determine whether it is executory. The Plan explains that The Ridge asserts the Contract is non-executory and cannot be rejected, and notes that if the Court agrees with The Ridge, “there may not be enough money to pay unsecured creditors 100% of their claims.” The Plan estimates allowed unsecured claims at $123,000, in-eluding the amended claim of The Ridge, which, at the time of confirmation, totaled $81,112.26. The Court asked the parties to brief the issue and the Debtor presented her legal analysis. The Ridge chose not to address it beyond its statement that the Contract was not executory and could not be rejected.
Under the Code, a debtor may assume or reject an executory contract. 11 U.S.C. § 365(a). If the contract is not executory, the debtor does not have this option. See In re Columbia Gas Systems, Inc., 50 F.3d 233, 239 (3d Cir.1995). While there is no definition of executory contract in the Code, the Third Circuit defines an executory contract as “a contract under which the obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” In re Exide Tech., 607 F.3d 957, 962 (3d Cir.2010) (citing In re Columbia Gas Systems, Inc., supra, 50 F.3d at 239); see also Sharon Steel Corp. v. Nat’l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir.1989). This is an adaptation of the definition set forth by Vern Countryman in an oft-cited law review article. See Vern Countryman, Ex-ecutory Contracts in Bankruptcy, Part 1, 57 Minn. L.Rev. 439, 460 (1973). The Third Circuit explains that, “unless both parties have unperformed obligations that would constitute a material breach if not performed, a contract is not executory under section 365.” See In re Exide Tech., supra, 607 F.3d at 962. The time for determination of whether there are material unperformed obligations of both parties *533to a contract is as of the entry of the order for relief. See id.
To determine whether a breach is material, the Court must look to state law. See General Datacomm Indus. v. Arcara, (In re General Datacomm Indus.), 407 F.3d 616, 627 (3d Cir.2005). New Jersey law recognizes that a material breach of contract on the part of one party entitles the other party to terminate it. See Ross Systems v. Linden Dari-Delite, 35 N.J. 329, 173 A.2d 258 (1961); see also Young Travelers Day Camps, Inc. v. Fel-sen, 118 N.J.Super. 304, 287 A.2d 231 (App.Div.1972). A breach is material if it goes to the essence of the contract. See, generally, Ross Systems, supra, 35 N.J. at 341, 173 A.2d 258; accord 2 Restatement, Contracts (1932) § 399 at 274-276. Whether a breach is material is a question of fact. See Magnet Resources, Inc. v. Summit MRI, Inc., 318 N.J.Super. 275, 723 A.2d 976 (App.Div.1998); see also Farnsworth on Contracts § 8.16 (1990).
New Jersey courts have further described “material breach” as follows:
Where a contract calls for a series of acts over a long term, a material breach may arise upon a single occurrence or consistent recurrences which tend to “defeat the purpose of the contract” [citation omitted]. In applying the test of materiality to such contracts a court should evaluate “the ratio quantitatively which the breach bears to the contract as a whole, and secondly the degree of probability or improbability that such a breach will be repeated.”
Magnet Resources, Inc., supra, 318 N.J.Super. at 286, 723 A.2d 976 (citing Medivox Productions, Inc. v. Hoffman-La Roche, Inc., 107 N.J.Super. 47, 59, 256 A.2d 803 (Law Div.1969)).
In the ease before the Court, both Debtor and The Ridge have obligations to each other that are underperformed. The obligations go to the essence of the Contract. Debtor is obligated to pay annual dues and any assessment made by the Club unless and until she terminates her membership in accordance with the Contract. The Club relies on the payment of dues and expenses to fund its operation. Debtor has not made a payment in a number of years and, as she admits in the Plan, hopes to terminate the Contract and limit her liability. The Ridge has an obligation to maintain and operate its 18 hole golf course and clubhouse for the use of its members. While not an express provision of the Contract, The Ridge also has an obligation to continue to solicit members until it reaches full capacity as defined in the Contract, and then to maintain it membership levels to support its business purpose as set forth in the Contract. These reciprocal obligations go to the heart of the Contract and are, therefore, material.
We note that The Ridge chose not to terminate Debtor’s membership when she stopped paying dues, instead choosing to obtain a collection judgment against her. While this fact may indicate that The Ridge did not treat Debtor’s failure to pay as material breach of the Contract, it does not instruct this Court’s analysis of materiality as it relates to the determination of whether the Contract is executory under the Code. Both the Third Circuit and New Jersey courts recognize that a party injured by a material breach need not choose to terminate the contract and may decide to pursue damages as its only course of action. See Aetrex Worldwide, Inc. v. Sourcing for You Consulting, 2013 WL 1680258 at *5, 2013 U.S. Dist. LEXIS 54943 at *13-14 (D.N.J. Apr. 16, 2013); Frank Stamato & Co. v. Borough of Lodi, 4 N.J. 14, 71 A.2d 336 (1950). “In a case of ‘a material breach of contract which does not ... indicate any intention to renounce or repudiate the remainder of the contract ... the injured party has a *534genuine election offered him of continuing performance or of ceasing to perform and any action indicating an intention to perform will operate as a conclusive choice, not indeed depriving him of a right of action for the breach which has already taken place, but depriving him of any excuse for ceasing performance on his own part.’ ” See Frank Stamato & Co., supra, 4 N. J. at 21, 71 A.2d 336 (citing 5 Williston on Contracts (rev. ed.) 3749).
The Contract incorporates this choice. The contractual obligations of The Ridge require it to continue performance even if one member fails to pay, since its obligations remain to other members. In addition, the Contract provides that a suspended member’s privileges will be restored if their account is brought current. The Contract allows the Club to suspend or terminate a non-paying member’s club privileges, but it does not release that member from her obligation to continue paying dues. Unpaid dues and assessments continue to accrue. Her continuing failure to pay does not become any less material. In other words, substantial obligations remain to be performed by both parties to the Contract. The Contract is executory.16
C. Rejection Does not Terminate the Contract
The Code states that if a debtor chooses to reject an executory contract before assumption, that rejection will be deemed as “eonstitut[ing] a breach of such contract or lease ... immediately before the date of the filing of the petition.” 11 USC § 365(g)(1). The overwhelming majority of courts addressing the issue, including many courts within the Third Circuit, hold that rejection under § 365 does not equate to termination of a contract. See, e.g., In re CB Holding Corp., 448 B.R. 684, 686-87 (Bankr.D. Del 2011) (well settled that lease rejection pursuant to § 365 results in pre-petition breach; not termination); In re Grand Union, 266 B.R. 621, 627 (Bankr.D.N.J.2001) (readily evident that rejection of executory contract not termination but breach under § 365(g)(1)). This holding is further defended by the Fifth Circuit, explaining that “[t]o assert that a contract effectively does not exist as of the date of rejection is inconsistent with deeming the same contract breached. Furthermore, a party aggrieved by contract rejection may assert a claim for damages,” pursuant to 11 U.S.C. § 502. O’Neill v. Cont’l Airlines, Inc. (In re Cont’l Airlines), 981 F.2d 1450, 1460 (5th Cir.1993).
Debtor misapplies the Third Circuit’s opinion in Sharon Steel when she argues that it excuses her from any further obligation to The Ridge. See Sharon Steel Corp., supra, 872 F.2d at 40 (rejection of service agreement under § 365 merely relieves parties from their respective obligations under the contract). In Sharon Steel, the debtor filed its bankruptcy petition approximately seven months before its eleven year contract with National Fuel Gas Distribution Corp. (“NFG”) was set to expire by its terms. The Third Circuit found the contract to be executory, and held it rejected as of the date of the filing. In so holding, the court found NFG had no *535claim for an allowance of administrative expenses at the amount set in the contract. The Third Circuit did not address rejection damages, which would be treated as an unsecured pre-petition claim and which are necessarily calculated by valuing the benefit of the unperformed obligations of the breaching party. Instead, the question presented to the court in Sharon Steel, was the amount to be paid for natural gas supplied to the debtor after the entry of the order for relief. NFG argued that payment should be made at the contract rate, which was higher than the rate approved by the Pennsylvania Public Utilities Commission at the time. Since the court held the contract executory and allowed its rejection pre-petition as a benefit to the estate, there was no basis to apply the contract rate post-petition. See id. at 41. This result is in keeping with the court’s holding that rejection reheves the parties from their respective obligations.
After an executory contract is rejected, the remedy available to the non-debtor party is a claim against the estate under 11 USC § 502(g), which provides that:
A claim arising from the rejection, under section 365 of this title or under a plan under chapter 9, 11, 12, or 13 of this title, of an executory contract or unexpired lease of the debtor that has not been assumed, shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section or be disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition.
The language in section 502(g) is unambiguous and contains a clear command that all claims arising out of rejected executory contracts are subject to allowance or disal-lowance under 11 USC § 365(a)-(e). See Durkin v. Benedor Corp. (In re G.I. Indus.), 204 F.3d 1276, 1281 (9th Cir.2000).
Rejection does not ..., cause an execu-tory contract to vanish or become unenforceable against the debtor, and is not a matter of the “debtor rejecting] its obligation.” It is the estate’s decision to decline the asset, leaving the liabilities of the debtor intact to form the basis of a claim
Rejection establishes that the estate will not become obligated on the contract; it does not affect the continued existence of the debtor’s obligations, which form the basis of the non-debtor’s claim.
Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding ‘Rejection’, 59 U Colo L Rev 845, 888 (1988).
Debtor argues that her rejection of the Contract equates to a termination of her obligations under that Contract. This Court disagrees, and finds that her rejection constitutes a breach of the Contract from which damages must be calculated pursuant to the Contract from the date immediately before the filing of the petition. Debtor’s rejection of the Contract relieves her of the obligations imposed on her by the Contract. But, she confuses the extent of that relief. For example, if The Ridge sought allowance of an administrative claim for dues and assessments due post-petition, it would be prevented from doing so as the Contract has been rejected and The Ridge provided no benefit to the estate. See 11 U.S.C. § 503(b) (allows payment of administrative expenses, including actual necessary costs of preserving estate). It does not mean that The Ridge is not entitled to compensation for damages it suffered as a result of Debtor’s breach. The benefit of rejection to a debtor is that those damages are treated as an unsecured claim. In most Chapter 11 cases, unsecured claims are *536paid a small percentage of their actual value.17
D. Damages
i. Overview
Section 502(c) of the Code provides: There shall be estimated for purposes of allowance under this section ...
(1) any contingent or unliquidated claim, fixing or liquidation of which, as the case may be, would unduly delay the administration of the case....
The Code is silent as to the manner in which contingent or unliquidat-ed claims are to be estimated. See Bittner v. Borne Chemical Co., 691 F.2d 134, 135 (3d Cir.1982). Despite the lack of express direction on the matter, the Third Circuit is, “persuaded that Congress intended the procedure to be undertaken initially by the bankruptcy judges, using whatever method is best suited to the particular contingencies at issue. The principal consideration must be an accommodation to the underlying purposes of the Code.” Id. However, in estimating a contingent or unliquidated claim a court is still bound by the legal rules which may govern the ultimate value of the claim. Id. “There are no other limitations on the court’s authority to evaluate the claim save those general principles which should inform all decisions made pursuant to the Code.” See id. at 136.
New Jersey law provides some guidance. One who breaches a contract is liable for “all of the natural and probable consequences of the breach of that contract.” Pickett v. Lloyd’s, 131 N.J. 457, 474, 621 A.2d 445 (1993). Where a wrong has been committed resulting in damages, mere uncertainty to the amount will not preclude recovery; courts will fashion a remedy even though the proof of damages is inexact. See Albemarle Paper Co. v. Moody, 422 U.S. 405, 418-419, 95 S.Ct. 2362, 45 L.Ed.2d 280 (1975); Tessmar v. Grosner, 23 N.J. 193, 203, 128 A.2d 467 (1957).
The Court is well within its powers to make a determination of the claims filed by The Ridge. The Contract has several contingencies and unknown factors that may remain unknown for some time. In the interest of administering the estate in a timely fashion, it falls on the Court to estimate the value of the claims. The Court heard the testimony of Mr. Moore, wherein he explained the calculations behind the proofs of claim, and Debtor’s arguments with regard to estimation.
Not surprisingly, the two sides have very different views of the correct amount of any damage award. Debtor suggests that the Court has great discretion as to what damages are appropriate under the circumstances. She argues that in determining damages, “the court ‘is permitted to make the most intelligible and probable estimate which the nature of the case will permit, given all the facts and circumstances having relevancy to show the probable amount of damages suffered.’ ” See In re Stone & Webster, Inc., 279 B.R. 748, 794 (Bankr.D.Del.2002) (quoting Pombriant v. Blue Cross/Blue Shield of Maine, 562 A.2d 656, 660 (Me.1989)). Debtor asks the Court to consider several factors when calculating the claim, including: (1) the benefit to the estate from the rejection; (2) The Ridge’s failure to mitigate damages; (3) a one-year limit on rejection damages; (4) denial of post-petition interest; and (5) credits to Debtor for payment of the membership fee and “B” member interest payments.
*537The Ridge argues that the Court need not estimate rejection damages because Mr. Moore has already calculated the amount due to compensate The Ridge for Debtor’s breach. It argues that its damage calculations are clear and definitive, therefore no estimation is needed. It claims the cases cited by Debtor are factually distinguishable.
The arguments of both parties are flawed. While we address many of Debtor’s specific arguments below, her argument that the Court has a general equitable power to re-write the Contract is incorrect. In Bittner, the Third Circuit makes clear that the Court must honor a claim for breach of contract in accordance with accepted contract law. Bittner, supra, 691 F.2d at 136. This Court will not disregard or rewrite a contract negotiated at arms-length, the terms of which were understood by each party, solely to assist Debtor. On the other hand, The Ridge overstates the simplicity of its calculations. There are several factors which makes its claim contingent and unliquidated. For instance, the claim calculation assumes membership through 2030 and makes several other assumptions to enhance its value. It assumes that Debtor will not be permanently disabled in the next 16 years. It assumes that Debtor will not move more than 200 miles away in the next 16 years. It assumes that The Ridge will not sell out its memberships and begin to reissue same. Granted, The Ridge makes those assumptions because at the time of the rejection of the lease (the date of the filing of the petition), none of those factors were true. However, assuming the worst serves only to benefit The Ridge by calculating the maximum in damages, and not necessarily what its damages may have been as of 2030. As the Contract was rejected but not terminated, Debtor may still have had these options to limit her damages.
Additionally, The Ridge asserts that its claim is not speculative. But, in addition to the factors noted above, it also assumes a dues increase of approximately $1,000 per year every three years. Mr. Moore certified in support of the proof of claim that, “the dues projections are conservatively estimated by extrapolation from current dues levels with minor adjustments for inflation once every five years starting five years from now.” Not only does Mr. Moore’s statement contradict the filed proof of claim, which appears to raise the dues by $1,000 per year every three years starting in 2016, but it also contradicts his testimony. During that testimony Mr. Moore was rightfully proud of the fact that he had managed to keep raises in dues to a minimum at The Ridge. He stated that over the last 7 to 8 years the dues have increased by only $1,010, something he believes not many golf courses could state. Additionally, he testified that he believed that dues actually decreased one year.
While The Ridge may be an outlier among golf clubs in terms of keeping dues static over its history, it is now the victim of its own success. It cannot point to a history of minor dues increases, yet file a proof of claim in which the increases in dues occur at a far higher level than that history. This is especially untoward when the testimony of Mr. Moore indicated that theoretically, as The Ridge gains more members, the dues would go down. Yet the proof of claim seeks to significantly increase dues over the next 16 years. Therefore, it is left to this Court to estimate the claim due. Before doing so, we will address the factors which the Debtor asks the Court to consider in its calculation.
a. Benefit to the Estate
Debtor argues that in rejecting the Contract, she now receives no post-petition services from The Ridge. In calculating *538damages at the full amount of what she would have paid, she is gaming no benefit, thus defeating the purpose of § 365. In support she cites to Sharon Steel for the proposition that § 365 is meant to help debtors reorganize their affairs by sloughing off burdensome executory obligations. See Sharon Steel, 872 F.2d at 38, and this Court’s discussion of same, supra. Nevertheless, Debtor has made a business judgment to reject the Contract, and misinterprets the role of a “benefit to the estate” analysis when calculating rejection damages. As noted by a well-regarded law review article on the subject:
Rejection is merely the trustee’s business judgment that the estate should not assume the burden of an executory contract as an administrative expense. Thus, the non-debtor party has an unsecured claim for such nonperformance instead of an administrative expense claim. It is often not advisable for a trustee or debtor-in-possession to assume and obligate itself to pay the obligation in regular U.S. dollars as opposed to rejecting and turning the claim into an unsecured claim payable in what are usually attenuated “bankruptcy dollars” (i.e., paying 10 [cents] on the $ 1.00 is probably above average in most chapter 7 cases).
Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 Minn L Rev 227, 252-53 (1989).
The benefit of rejection then, is the potential elimination of an administrative claim against the estate and the opportunity to discharge allowed rejection damages through confirmation of a plan that pays less than 100% to unsecured claimants. In this case, there appears to be substantial equity in Debtor’s properties, which may result in payment in full of the claim for rejection damages. The Plan explains that if The Ridge prevails on its allegation that the Contract is not executory, there may not be sufficient money to pay the unsecured creditor class 100%. This opinion, while finding the contract to be executory, has also found a substantial unsecured claim for The Ridge.18 This may result in the necessity of the filing of a modified plan. However, it is Debtor who has asked for this rejection in her business judgment. It may still be possible for her to discharge a portion of this obligation,
b. Failure to Mitigate
Debtor further argues that The Ridge has a duty to mitigate its damages, and has not done so because it did not allow Debtor to bring in a replacement member to take her position at the club. “It is well settled that injured parties have a duty to take reasonable steps to mitigate damages.” Ingraham v. Trowbridge Builders, 297 N.J.Super. 72, 82, 687 A.2d 785 (App.Div.1997)(quoting McDonald v. Mianecki 79 N.J. 275, 299, 398 A.2d 1283 (1979)). “Damages will not be recovered to the extent that the injured party could have avoided his losses through reasonable efforts ‘without undue risk, burden, or humiliation.’” Id. at 82-83, 687 A.2d 785 (citing Restatement (Second) of Contracts, §§ 350(1), (2) (1981)).
Debtor asserts that, once she informed The Ridge that she could not afford to be a member and provided The Ridge with a replacement member, The Ridge’s duty to mitigate dictated that it release her from all future performance obligations under the Contract. The Ridge, while agreeing that it has a duty to mitigate damages, argues that it has done *539everything in its power to mitigate. It asserts that accepting the replacement member in full satisfaction of Debtor’s contractual obligations would be a breach of its own obligations to its other members in favor of Debtor. The Ridge points out that the Contract does not allow such replacement or substitution until all memberships are sold.
This Court agrees with The Ridge. The membership documents clearly indicate that memberships cannot be reissued until the Club reaches full membership. Sale of memberships by anyone other than The Ridge is not permitted. Resignation requires each member to follow certain procedures, and even then could not occur until certain conditions regarding membership had been met. Allowing Debtor to substitute a new member in her place would effectively allow her to jump the members who had followed the proper procedures for resignation, and circumvent the explicit terms of the Contract. Each member of the Club is bound by the same terms and conditions, yet Debtor claims that The Ridge, in failing to give her special treatment, did not mitigate its damages. Yet, The Ridge has done its part in actively soliciting new members and working to gain full membership, at which point the re-issuance of memberships would be an option.
The Court notes that Debtor has taken no steps to mitigate her own damages. At the time of the evidentiary hearing and post-hearing briefing, she had not provided proof of a permanent disability. She had not moved more than 200 miles away, though she claims that is her intent. Either of these circumstances would have terminated the Contract pursuant to its terms. She had not sought additional one-year replacement members, even though Pamela Moore suggested, by letter, that she do so. She had not asked to be placed on the waiting list to resign her membership once the Club reached full capacity. To now argue that The Ridge is not properly mitigating damages is disingenuous.19
c. One Year Limit on Rejection Damages
Debtor asks the Court to be guided by 11 U.S.C. § 502(b)(6), which limits rejection damage claims as follows:
“if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds:
(A) The rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of—
(i) The date of the filing of the petition; and
(ii) The date on which such lessor repossessed or the lessee surrendered the leased property.”
The statute cited is specific to leases. Debtor has provided no support for her contention that a one-year limit should be applied in this, non-lease, scenario. As such, the Court rejects Debtor’s request that the terms of § 502(b)(6) be factored into our calculation.
d. Interest Calculations
It is not in controversy that The Ridge holds a pre-petition judgment against Debtor, which accrued interest at the state court judgment rate until the petition date. The parties disagree, how*540ever, on whether The Ridge is entitled to post-petition interest on the judgment. Debtor argues that the judgment is unsecured, and therefore not subject to interest. The Ridge argues that New Jersey law provides that a docketed judgment constitutes a lien. Both parties are correct.
The Ridge correctly notes that its judgment constitutes a lien but it fails to recognize that a judgment creditor must take additional steps to perfect its lien through levy upon the property in order to achieve secured status. See In re Italiano, 66 B.R. 468, 476-77 (Bankr.D.N.J.1986). While The Ridge contends it “followed applicable Court Rules in scheduling supplemental proceedings,” it has not articulated how it perfected its lien to obtain secured status.
The Code provides that unma-tured interest be disallowed. See 11 U.S.C. § 502(b)(2); see also, In re W.R. Grace & Co., 475 B.R. 34, 165 (D. Del 2012), citing United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 372-73, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (general rule in bankruptcy is that “unsecured creditors are not entitled to recover post-petition interest”); In re Washington Group Intern., Inc., 432 B.R. 282 (D.Nev.2010) (Code prohibits claims for post-petition interest on unsecured claims); In re United Artists The-atre Co., 406 B.R. 643 (Bankr.D.Del.2009) (interest on judgment which was unsecured claim accrued only to date of petition). In liquidating interest-bearing claims, the computation of interest must be made as of some fixed date. Bankruptcy law selects the petition date and disregards, for purposes of the liquidation of the debtor’s assets, interest accruing beyond that date. See 4 Collier on Bankruptcy, ¶ 502.03 [3][b][ii] (16th ed.2014), citing Vanston Bondholders’ Protective Comm. v. Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162 (1946) (use of petition date technical policy device used to cope with debtor’s insolvency in most convenient, equitable and economical way). The principle that interest stops running from the date of the filing of the petition can be viewed as a bankruptcy rule of liquidation rather than as a rule of substantive law. See 4 Collier on Bankruptcy, supra, citing Bursch v. Beardsley & Piper, 971 F.2d 108 (8th Cir.1992); In re Hanna, 872 F.2d 829 (8th Cir.1989) (because general rule disallowing unmatured interest is rule of administrative convenience and fairness to all creditors, when concerns for such convenience and fairness not present, post-petition interest may be allowed).20
The pre-petition judgment obtained by The Ridge was an unsecured claim as of the filing date. Therefore, The Ridge is not entitled to post-petition interest on the judgment.
The spreadsheet attached to the proof of claim filed by The Ridge includes a column titled “Dec 31 Interest Calculation.” The column includes a charge of 1.5% for each unpaid dues installment and Option B payment, and an additional charge of 18% for “Interest on Unpaid Dues & Option B from Prior Years.” The *541Court finds no basis for an award of interest. The Contract provides for a service fee of 1.5% per month on unpaid dues, but does not include an interest obligation. See R & R at p. 3. The service fee is not the equivalent of contractual interest and is contingent on Debtor’s continuing failure to pay through 2030. In other words, the service fee had not matured as of the filing date. Further, a service fee is intended to compensate the payee for the additional administrative work required to track and collect the unpaid obligation. In this case, the .Court fixes a single amount due to compensate The Ridge for Debtor’s breach, thereby eliminating the need for future recordkeeping. It is inappropriate to include the service fee in the claim calculations.
e. Credit for Deposits
Debtor’s final argument is that she should be entitled to a credit for her membership deposit and “B” member interest payments when calculating rejection damages. The Ridge counters that the Contract calls for a return of the membership deposit only when that member becomes eligible. Eligibility for refund requires that the member’s name be at the top of the resignation list and that the member be in good standing. The Ridge notes that Debtor is not currently on the resignation list nor is she in good standing.
But, the Contract provides that “[t]he Club shall repay to each Member one hundred percent (100%) of the Membership Deposit, without interest, thirty (30) years from the date that the Membership deposit was paid to the Club.” See MP at p. 2. There appears to be no qualification or restriction on this provision. To argue that the Debtor must pay rejection damages in full pursuant to her bankruptcy, and to calculate said damages far into the future, but not credit Debtor with a deposit that is meant to be returned, stretches this Court’s definition of equity. To be sure, we do not seek to re-write the Contract, but for the purposes of claim estimation under 502(c) we will credit Debtor with the present value of the membership deposit and the “B” member interest payments she made, said “B” payments also subject to reimbursement.
ii. Calculation of Damages
As a final matter, pursuant to the discussion above, the Court must wade into the murky waters of estimating the Ridge’s claim for damages under section 502(c). In doing so, we attempt to balance the competing interests of the parties: that of The Ridge in receiving its expected benefits of the Contract as if it had been fully performed, and of Debtor in achieving a fresh start, free of a burden that provides no benefit to her. We recognize our limitations in the field of accounting, but shall make what we feel is a proper estimation based on the facts available to the Court.
We note again the extremely speculative nature of the Contract. There are many variables which may occur in the future that would change the obligations of the parties. The Ridge could gain full membership at any time. Debtor could move more than 200 miles away, as she has stated she intends to do. Debtor could become permanently disabled. Dues could rise or fall in any given year. In an attempt to account for these variables, we set the claim as unsecured in the amount of $283,677.79. We briefly address the rationale behind this figure for the parties’ understanding.
The Ridge projects damages in its proof of claim to 2030, which is the full term of Debtor’s membership, assuming she never meets the requirements for resignation. Additionally, even if she were to resign, she would be bound to wait for reimbursement or other relief until The Ridge at*542tained Ml membership and sold such additional memberships that would allow relief to those members whose names appear before Debtor’s on the waiting list. It is apparent from the testimony of Mr. Moore that he is working diligently towards obtaining the goal of Ml membership prior to the 2030 date. Therefore, we are comfortable limiting the damages to a period of 14 additional years, through 2028, as opposed to 2030. We expect that, by 2028, Debtor would have taken the proper steps to resign and membership would be at a level where it would be possible to excuse her from the obligation to pay dues and to reimburse her deposit and “B” member payments.
The proof of claim also calculates raising dues in the amount $1,000 per year every three years. As discussed, this is in contrast with the testimony of Mr. Moore, who states that the dues had only been raised $1,010 in the past 7 or 8 years, and that with more members, dues could be kept down. Therefore, the Court is also comfortable in setting the dues at the current rate of $14,000 per year from 2012 to and including 2018, at $15,000 per year from 2019 to 2023, and at $16,000 per year from 2024 to 2028. The “B” payments would be factored in at $1,800 per year, beginning in July 2011. Based on the Court’s calculations, from the petition date through 2028 Debtor would owe approximately $284,800 in dues and “B” payments. In addition, the Ridge is further entitled to its judgment amount plus taxed costs and judgment interest through the petition date, said sums totaling approximately $59,037.10.21 The total of the pre-petition judgment, with interest, to the petition date, plus breach of contract damages is $343,837.10.
However, as discussed above, the Debt- or is entitled to a credit for her $65,000 membership deposit, discounted to present value at $28,359.31,22 and $31,800.00 in “B” payments to 2028.23 Therefore, the Court’s estimation of the total amount of the claim is $283,677.79, and the claim will be reduced to that amount pursuant to the order to be submitted accompanying this opinion.
Conclusion
For the reasons set forth above, this Court GRANTS Debtor’s Motion to Expunge Claims numbered 2-1, 2-2, and 16-1 and DENIES Debtor’s Motion to Expunge Claim 15-1, instead MODIFYING that claim and allowing it as a general unsecured claim in the amount of $283,677.79. A conforming order will be docketed along with this opinion.
. At trial, Debtor argued that no contract existed because there was no meeting of the minds. She made no such allegation in the Plan.
. The amendment, docketed as Claim 2-2, and in the amount of $81,112.26, added additional interest on the judgment and unpaid monthly dues and finance charges that accumulated pre- and post-petition.
. Claim 15-1, filed on 2/20/13 and in the amount of $525,786.05, calculated rejection damages consisting of monthly dues and expenses through 2030; Claim 16-1, filed on 2/25/13 and in the amount of $1,099,784.16, stated as its basis "contract rejection” damages (with 5% discount value).
.The Agreement estimated construction of the golf course would begin on or about November 6, 2000, which comports with Debt- or's testimony that she joined "the day [T]he Ridge broke ground.”
. The testimony is unclear as to the duration of the "B” member payments. The calculations attached to proofs of claim filed by The Ridge, calculate payments through 2030.
. The Court is unclear as to Debtor's complaint with regard to the member financing. If she had voted, she would have voted in favor. If she chose option "A,” she would have invested more into a club she is now trying to leave.
.There is conflicting testimony about Debt- or’s attempts to terminate her membership that will be discussed later in this decision.
. The suggestion is confusing as all other documents presented to the Court emphasize the inability of members to assign their memberships.
. The Agreement, the Memorandum, the Membership Plan, the Rules and Regulations, and the two Amendments will be collectively referred to herein as the "Contract.”
.The Club reserved the right to increase the number of available regular memberships by ten as long as the added memberships did not degrade the quality of golf play. MP at p. 2. It has seventeen additional memberships, ten of which could also be converted into regular memberships, and reserved the right to create "invitational memberships until regular memberships were sold out.” Id. at p. 7.
. The MP provided for the establishment of an Advisory Board "to foster good relations between the [m] embers and the management.” MP at p. 8. According to Mr. Moore, the Board consists of Club members and meets with Club management on a periodic basis to discuss operations, as provided in the MP. Id.
. The Memorandum provided for 275 memberships: 15 Charter and 260 Regular Memberships, with costs ranging from $30,000 to $80,000.00 in a total of 11 levels. Memorandum at p. 4. It explained that memberships would be offered for sale beginning with the least expensive level. See id. There were six membership levels sold out before Debtor purchased her membership at the $65,000.00 level, indicating that the Club had a minimum of 140 members at the time. By the time Debtor joined, the Club had sold enough memberships to allow The Ridge to purchase the real estate and begin construction of the golf course in accordance with the Memorandum.
. On cross examination, The Ridge pointed out that the Memorandum provides its terms cannot be changed by oral representations. See Memorandum at p. 3 ("Any representations [whether oral or written] other than those contained herein or in documents ... *529have not been authorized by the company and are not to be relied upon.”)
. The Ridge had increased membership capacity from 275 to 295 after Debtor joined the Club, in accordance with the Contract.
. Because we find that there has been neither procedural nor substantive unconsciona-bility, it is not necessary to determine which of the competing approaches for determining unconscionability, as articulated in Sitogum, is the proper standard, and we will not address the issue.
. There are very few reported cases analyzing the nature of the membership contract between a debtor and a private golf club. Most of the cases reviewed by this Court address issues arising when a private golf club flies for bankruptcy protection. Debtors involved in the latter have entirely different concerns. The only case found in the former category held the membership contract to be executory. See Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d 689 (6th Cir.1992). In that case, the Chapter 7 trustee attempted to assume and assign the golf membership. The Magness court denied the trustee’s motion to assume and assign for reasons unrelated to the executory analysis.
. This Court notes that the Plan provides for full payment to unsecured creditors. Therefore, the amount awarded by this Court in rejection damages must be paid in full as required in the Plan.
. If this Court accepted The Ridge’s position that the Contract is not executory, its allowed pre-petition claim would be substantially lower than the claim allowed as a consequence of rejection. Further, it is unlikely that an administrative claim would be allowed as Debt- or’s golf membership provided no benefit to the estate.
. The Court again notes that Debtor never made clear to The Ridge her alleged intention to terminate her membership. According to the testimony and written correspondence admitted at trial, it appeared the Debtor made clear that she could not afford dues, but wanted to remain in good standing at the Club.
. If the debtor is solvent, interest may accrue on unsecured claims. See W.R. Grace & Co., 475 B.R. at 165, citing, In re Washington Mutual, Inc., 461 B.R. 200, 240 (Bankr.D.Del. 2011). Collier recognizes that disputes like the one before this Court are often academic because creditors receive less than they are owed in most cases. See 4 Collier, supra, citing Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964); In re John Osborn’s Sons & Co., Inc., 177 F. 184 (2d Cir.1910). The Ridge did not develop any argument for post-petition interest based on Debtor’s solvency or concerns of convenience and fairness. Therefore, the Court will not consider allowance of post-petition interest on those grounds.
. See Proof of Claim 2-1
. The Court applies a 5.0% present value discount, which is the same as that employed by The Ridge per Exhibit B at Docket No. 150, for 17 years. The claim is reduced to present value because the refund of the deposit would not occur until such time as The Ridge reached full membership plus enough replacement members to satisfy the waiting list. We have estimated this date to be approximately 2028, or 17 years from the date of the judgment.
.The Court does not discount the “B” payments to present value because there was insufficient testimony to determine how far into the future the "B” payments must be made. Because of the prospective nature of those payments, we will not reduce the refund to present value because we are unsure whether 17 years of payments is required. The payments may never be made. Since the allowed gross claim of The Ridge includes $31,800 as the amount of "B” payments to be made by Debtor, we will consider it reimbursable in full. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497527/ | OPINION
OBJECTION TO EXEMPTIONS
MARY D. FRANCE, Chief Judge.
Before me are Objections filed by John P. Neblett, the Chapter 7 Trustee in the *544within case (the “Trustee”), to three sets of amended schedules claiming certain property as exempt filed by Michael J. Gress and Brandy L. Gress (“Debtors”). For the reasons that follow, an order will be entered compelling Debtors to comply with an order entered by this Court on March 19, 2014, directing Debtors to turnover certain property to the Trustee.
I. Procedural and Factual History
Debtors filed a voluntary Chapter 7 petition on December 4, 2013. Later the same month, Debtors filed their schedules and statements. At the creditors’ meeting held on January 24, 2014, the Trustee informed Debtors that certain household goods disclosed on Schedule B, while eligible for exemption, had not been claimed as exempt on Schedule C. The Trustee adjourned the meeting to February 28, 2014 to allow Debtors an opportunity to claim their household goods as exempt and to resolve other issues. In response, Debtors filed a first amendment to Schedules B and C followed shortly by a second amendment to the same schedules. In the first amendment (Docket # 16), Debtors list some of the same household goods included in item 4 on the original Schedule B. There is no indication whether Debtors are purporting to add or delete these items.1 Debtors also list an anticipated tax refund in an estimated amount of $7500 that was not included on the original schedules. In amended Schedule C, Debtors change the statutory grounds for the exemption for certain household good from § 522(d)(5) to § 522(d)(3). They also claim as exempt the previously listed anticipated tax refund under § 522(d)(5). In the second amendment to Schedules B and C, Debtors report and claim as exempt the actual amount of the tax refund — $8478. After two amendments to Schedule C, certain household goods listed on the original Schedule B, Line 4 valued at $4000 remain non-exempt.
On February 20, 2014, the Trustee filed objections to Debtors’ exemptions claims as set forth in the original and first amendment to Schedule C and demanded turnover of specific items of personal property (“Trustee’s First Objection”). Specifically, the Trustee demanded turnover of: (1) household goods listed on Schedule B, Line 4 not claimed as exempt on Schedule C; (2) 50 “Longaberger baskets;” (3) flea market inventory valued at $2000; and (4) an iPad and iPhone used in Debtors’ business, but not disclosed in the schedules. He objected to the exemption claimed in the baskets valued at $1000 asserting that they were not household goods and were undervalued. He also objected to Debtors’ exemption claim in the flea market inventory as not constituting tools of the trade under § 522(d)(6) and as being undervalued. After Debtors failed to respond to the Trustee’s First Objection, an order was entered on March 19, 2014 (“Turnover Order”) sustaining the Trustee’s objections and disallowing the claimed exemptions. The order further directed Debtors to turn over the contested items to the Trustee at the Trustee’s direction.
On March 20, 2014, Debtors filed a third amendment to Schedule C, an “Objection” to the Trustee’s objections to Debtors’ exemptions, and a motion to reconsider the Turnover Order (“First Reconsideration Motion”). In the First Reconsideration *545Motion, Debtors stated that because their counsel was relocating his office, “a technical error was made and a timely response to the Trustee’s Objection to Exemptions and Demand for Turnover was not filed.” Motion for Reconsideration, Docket #25, ¶ 4. Debtors further alleged that the failure to respond was “of no fault of the Debtors.” Id., ¶ 5. The Trustee filed an answer to the First Reconsideration Motion and a hearing was scheduled for April 29, 2014. Although the Trustee appeared at the hearing, neither Debtors nor their counsel were present.2 On the same date, the Court denied the First Motion for Reconsideration on the basis that Debtors had failed to allege a meritorious defense to the Trustee’s First Objection.
Debtors filed a fourth amended Schedule B and C (Docket # 33) and a fifth amended Schedule B and C (Docket # 34) (collectively “April 29 Exemptions”) on April 29, 2014. In the fourth amended Schedule B, Debtors list the iPhone and iPad that were included in the Turnover Order. This schedule also listed a fax/copier/printer. The identical information is included in the fifth amended Schedule B. In the fourth amended Schedule C, Debtors claim as exempt under § 522(d)(3) the household goods listed in the original schedules that were not exempted in prior amendments to the schedules and which were subject to the Turnover Order. Also claimed as exempt was the actual amount of the tax refund, which previously had been claimed as exempt, and the iPad, iPhone, and fax/printer/copier. The electronic equipment was claimed as exempt under § 522(d)(5) and (6). In the fifth amended Schedule C, Debtors claim certain items as exempt under § 522(d)(5) rather than (d)(3), including the Longaberger baskets that were subject to the Turnover Order. Debtors also changed their exemption claim in inventory from § 522(d)(6) to (d)(5). The flea market inventory was also subject to the Turnover Order.
Under Fed. R. Bankr.P. 8002, the deadline for filing an appeal of the Turnover Order was fourteen days after the entry of the order denying the motion to reconsider the Turnover Order, or May 13, 2014. Fed. R. Bankr.P. 8002. Debtors did not appeal the Turnover Order, and on May 5, 2014, filed a motion requesting the Court to reconsider its order denying reconsideration of the Turnover Order (“Second Reconsideration Motion”) (Docket # 39). In the Second Reconsideration Motion, Debtors’ counsel represented that he was ill the morning of the hearing on the First Reconsideration Motion and was unable to obtain permission to appear telephonically. He also stated that the Trustee did not oppose relisting the matter for a hearing on the merits. The Court denied the Second Reconsideration Motion on May 6, 2014 finding that no grounds for reconsideration were alleged.3
On May 19, 2014, the Trustee filed objections to Debtors’ third amended Schedule C (Docket #43) and an objection to the exemptions filed April 29, 2014 (Docket # 42). The latter objection addressed the April 29 Exemptions. (Docket # s 33 and 34). Both objections addressed Debtors’ attempt to exempt items that previously were included in the Turnover Order— *546specifically, the iPad, iPhone, the Longa-berger baskets, and the inventory.4
Debtors filed an answer (Docket #59) to the Trustee’s objection asserting that Debtors did not intend to conceal assets and had no reason to do so because the available exemptions were sufficient to cover all of their assets. Therefore, they argued, their failure to correctly describe their assets and claim exemptions in a timely manner does not indicate bad faith. Debtors further argued that the Turnover Order did not bar them from seeking to assert a new statutory basis for exempting the property and that no decision on the merits of their exemption claims has been rendered. Debtors also filed an answer (Docket # 60) to the Trustee’s objection to the third amended Schedule C (referred to in the answer as “Debtor Amended Exemptions dated March 20, 2014”) alleging that Debtors intended to exempt the items omitted from their original schedules, that they were omitted due to “a technical problem,” and that a response was not filed to the Trustee’s First Objection because counsel had incorrectly calendared the response date as March 20, 2014.5 Debtors further allege that the third amended Schedule C was not an attempt to relitigate matters previously decided by the Court because Debtors were advancing an exemption claim for the omitted property under a different provision of § 522(d).
On June 30, 2014, the Trustee requested the Court to schedule a hearing on the Trustee’s objection to the third, fourth, and fifth amended Schedule C. Argument of the parties was heard on July 22, 2014, but no testimony was taken. The matter was taken under advisement.6
II. Discussion
Most of the confusion in this case could have been avoided if greater care had been taken in the preparation of the original schedules, appropriate amendments had been clearly stated and timely filed, and the federal and local bankruptcy rules had been followed. Debtors have asserted that they proceeded in good faith although they: (1) failed to disclose all their assets; (2) failed to properly claim exemptions in certain assets until after a default judgment was entered against them; (3) failed to allege a meritorious defense in two motions for reconsideration; and (4) failed to appeal the order directing them to turnover assets to the Trustee. Balanced against Debtors’ cavalier preparation of documents signed under oath and their disregard of procedural rules is the reality that most of the assets subject to turnover are of limited value and would produce a modest return to creditors if administered by the Trustee. Nevertheless, the Trustee owes a fiduciary duty to the creditors of the estate and is obligated to administer assets unless the return to creditors, after considering the costs of administration, would be negligible. Compare 11 U.S.C. § 704(a)(1) (“The trustee shall — (1) collect and reduce to money the *547property of the estate for which such trustee serves, ... ”) and 11 U.S.C. § 554(a) (“[T]he trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.”).
In resolving this matter, the Court is not free to simply balance the equities and ignore relevant statutes, rules of procedure, and controlling law. Whether Debtors’ tardy amendments may be allowed must be considered within the prism of the Code, the Rules, and the Supreme Court’s recent decision in Law v. Siegel, — U.S. -, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014).
A. Disallowance of exemptions on equitable grounds
Fed. R. Bankr.P. 1009(a) provides that any schedule may be amended “as a matter of course at any time before the case is closed.” Fed. R. Bankr.P. 1009(a). Courts generally lack the power to disallow a debtor’s amended exemptions. See Tignor v. Parkinson (In re Tignor), 729 F.2d 977, 978 (4th Cir.1984) (“[A] court ordinarily does not have discretion to deny leave to amend or to require a showing of good cause.”). As I observed in Bierbach v. Walck (In re Walck), 459 B.R. 208 (Bankr.M.D.Pa.2011), courts have denied amendments to exemptions when a debtor has engaged in bad faith or the amendment would result in prejudice to creditors. Id. at 212 (citing cases). Since I issued my decision in Walck, however, the legal landscape has changed.
On March 4, 2014, the Supreme Court of the United States issued its opinion in Law v. Siegel in which the Court held that a bankruptcy court may not exercise its equitable powers “to contravene express provisions of the Bankruptcy Code by ordering that the debtor’s exempt property be used to pay debts and expenses for which that property is not liable under the Code.” 134 S.Ct. at 1198. The trustee in Law pursued a surcharge against the debt- or’s homestead exemption claimed under state law arguing that several lower courts had disallowed a debtor’s exemption when the property sought to be exempted had been concealed. Id. at 1196. The Supreme Court held that “§ 522 does not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate ... The Code’s meticulous — not to say mind-numbingly detailed — enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to create additional exceptions.” Id. (citations omitted).7
Following Law, several courts have held that they no longer have the discretion to deny a debtor the opportunity to amend his exemptions based upon equitable considerations such as bad faith or prejudice to creditors. See In re Franklin, 506 B.R. 765, 771 (Bankr.C.D.Ill.2014) (observing that the Supreme Court has determined that § 522 does not authorize a court to grant or withhold an exemption based upon considerations not in the statute); In re Scotchel, Case No. 12-09, 2014 WL 4327947, at *4 (Bankr.N.D.W.Va. Aug. 28, 2014) (holding that after Law courts no longer have the discretion to deny amended exemptions based upon equitable considerations); In re Pipkins, Case No. 13-30087DM, 2014 WL 2756552, at *7 (Bankr.N.D.Cal. June 17, 2014) (observing that the Supreme Court has ruled that a “court cannot disallow an exemption or prevent the amendment of an exemption on equita*548ble grounds if the exemption satisfies the statutory requisites.”); In re Gutierrez, No. 12-60444, 2014 WL 2712503, at *6 (Bankr.E.D.Cal. June 12, 2014) (finding that the precedent which permitted a bankruptcy court to disallow an amended claim of exemption based on bad faith and prejudice is no longer valid). I join these other bankruptcy courts in finding that under Law v. Siegel, equitable considerations cannot be used to disallow exemption that otherwise would be allowable under § 522. Thus, to the extent that the Trustee’s objections to Debtors’ amended exemptions are based upon Debtors’ bad faith, they are overruled.
B. Claim preclusion
Claim preclusion, or res judicata, “applies to claims that ‘were or could have been raised’ in a prior action involving the ‘parties or their privies’ when the prior action had been resolved by ‘a final judgment on the merits.’ ” Graham v. IRS (In re Graham), 973 F.2d 1089, 1093 (3d Cir.1992) (quoting Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980)). “Claim preclusion bars a party from relitigating a claim that could have been raised in the prior action even if the claim was not raised.” In re Graham, 973 F.2d at 1093.
Claim preclusion is relevant in the context of resolving objections to a debtor’s exemption claims. See Ladd v. Ries (In re Ladd), 450 F.3d 751, 753 (8th Cir.2006) (considering but not applying res judicata principles because amendment filed to claim state homestead exemption rather than federal exemption); Cogliano v. Anderson (In re Cogliano), 355 B.R. 792, 805-06 (9th Cir. BAP 2006) (holding that claim preclusion would bar debtor from amending exemption after final judgment if disputed IRA was property of the estate); In re Wilson, 446 B.R. 555, 562 (Bankr.M.D.Fla.2011) (holding that once an exemption claim dispute is resolved and a final non-appealable order has been entered, res judicata bars relitigation); In re Daniels, 270 B.R. 417, 422 (Bankr. E.D.Mich.2001) (holding that bankruptcy courts should disallow an amended exemption claim when it attempts to relitigate a previously determined claim); In re St. Hill, No. 04-30919F, 2005 WL 6522764, at *9 (Bankr.E.D.Pa. Sept. 2, 2005) (observing that an order either sustaining or overruling an exemption claim is a final judgment under Fed. R. Bankr.P. 7054(a)).
Any appeal from an order denying an exemption claim must be taken within the time allowed under the bankruptcy rules or the right to appeal will be waived. Kollar v. Miller, 176 F.3d 175 (3d Cir.1999) (appeal from order sustaining the trustee’s objection to the debtor’s exemption). When a trustee objects to an exemption claim, the debtor must analyze the objection and amend the claim before the bankruptcy court rules and not afterward. In re Romano, 378 B.R. 454, 465 (Bankr. E.D.Pa.2007). If a timely appeal is not taken, all of the elements of claim preclusion have been established. Claim preclusion bars matters that could have been raised and defenses that could have been asserted as well as those actually raised. Therefore, a debtor cannot later amend his exemptions to relitigate the issue even if the exemption is being asserted under another provision of § 522(d). See St. Hill, 2005 WL 6522764, at *9.
The Turnover Order was entered on March 19, 2014. Debtors filed a motion for reconsideration on March 20, which was denied on April 29, 2014. Debtors then filed a second motion for reconsideration, which was denied on May 6, 2014. No appeal from either order denying reconsideration was taken. Accordingly, the Turnover Order became a final order. Having failed to appeal a final order, Debtors cannot continue to file amendments in *549a never-ending effort to exempt items that are subject to the Turnover Order.
III. Conclusion
For the reasons set forth above, a further order will be entered in this case compelling Debtors to turnover the property subject to the Turnover Order. To the extent that the Trustee has objected to Debtors’ exemption claims based upon the lack of good faith or other equitable considerations, the objections will be overruled.
. Local Bankruptcy Rule 1009-l(c) specifies that an amendment to a schedule or a statement should include "only the additions or deletions to the schedule or statement.” The rule further directs that "[t]he change must be prefaced by the statement: "ADD” or "DELETE.” During the administration of the case thus far, Debtors have filed four amendments to Schedule B and six amendments to Schedule C. In each filing, Debtors have not stated whether items are being added or deleted from the schedule and often have included items previously claimed as exempt and not disputed by the Trustee.
. Debtors’ counsel, who stated that he was ill, contacted the Court’s chambers at 9:25 a.m. on the day of the hearing to obtain permission to appear telephonically at the 9:30 a.m. hearing. He was informed that it was impossible to make such arrangements on such short notice.
. Even if the time to appeal ran from the date of the denial of the Second Reconsideration Motion, no appeal was filed within fourteen days of the date of the order — May 20, 2014.
. On May 19, 2014, the Trustee filed a motion requesting the Court to direct Debtors to turnover certain jewelry listed on Schedule B, but not claimed as exempt on Schedule C. Debtors filed an objection to the Trustee’s motion and filed a further amendment to Schedule C claiming the jewelry as exempt. On June 24, 2014 the Court denied the motion for turnover of the jewelry for lack of prosecution.
. The deadline for objecting to the Trustee’s First Objection was March 16, 2014. The Court takes judicial notice that Debtors’ counsel was notified of this date through service of the notice at Docket # 20.
.This Court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(A) and (B). This Opinion constitutes findings of fact and conclusions of law made pursuant to Federal Rule of Bankruptcy Procedure 7052 made applicable to contested matters by Rule 9014.
. The Supreme Court held that other tools are available to a bankruptcy court to address debtor misconduct: denial of a debtor’s discharge under § 727; sanctions under Rule 11, § 105(a), and the court's inherent authority; and criminal prosecution under 18 U.S.C. § 152. Id. at 1198. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497528/ | OPINION
ERIC L. FRANK, Chief Judge.
I. INTRODUCTION
Thomas Olick (“the Debtor”) filed a chapter 13 bankruptcy case on February 9, 2007. His chapter 13 plan was confirmed and he performed his obligations under the plan. He received a chapter 13 discharge on March 6, 2012.
The Debtor’s bankruptcy case remains open in 2014, more than seven (7) years after it was filed and more than two and one-half (2]é) years after the entry of his chapter 13 discharge, because the Debtor has filed at least sixteen (16) adversary complaints in this court since March 2007 in connection with the main bankruptcy case. Nine (9) of the seventeen (17) adversary complaints were filed prior to his March 6, 2012 discharge; at least seven (7) were filed after the entry of the discharge, the last one as recently as July 17, 2014.
More than half of the lawsuits the Debt- or has filed in this court since 2007 involve the same issue — whether certain taxing authorities and governmental officials are violating bankruptcy law and Pennsylvania law in their attempts to collect real estate taxes they claim are due on several properties the Debtor owns. The adversary proceeding sub judice is one such lawsuit.1
This adversary proceeding was filed on October 11, 2012, more than six (6) months after the entry of his discharge. The Debtor’s prime contention is that Defendant Northampton County (“the County”) violated the terms of his confirmed and completed chapter 13 plan and the terms of a settlement in a prior adversary proceeding by attempting to collect certain prepetition real estate taxes. He also claims that the County’s collection efforts violate Pennsylvania law.
Presently before the court is the County’s motion for summary judgment (“the Motion”).
As explained below, based on the evidence in the summary judgment record, there are no disputed issues of material fact. The record establishes that the *551County has not been attempting to collect taxes that fell due before the Debtor filed his bankruptcy case and that were provided for in his chapter 13 plan. Therefore, as a matter of law, the County’s actions did not violate the Debtor’s chapter 13 plan. As for the Debtor’s claims based on the settlement of the prior adversary proceeding and the other state law claims, this court lacks subject matter jurisdiction to consider them.
Accordingly, I will grant the Motion and enter judgment in the County’s favor on the Debtor’s claim for enforcement of his confirmed chapter 13 plan and dismiss all of his other claims for lack of jurisdiction.
II. PROCEDURAL HISTORY
A. The Settlement With the Other Defendants
As stated above, the Debtor commenced this bankruptcy case on February 9, 2007. His chapter 13 plan was confirmed on January 22, 2008 and he received a chapter 13 discharge on March 6, 2012. Six (6) months after the entry of his discharge, on October 11, 2012, the Debtor initiated this adversary matter by filing a complaint against the City of Easton, the County, Portnoff Law Associates, LTD, Sal Panto, Howard White and William Murphy.
On December 13, 2012, I held a hearing to consider whether the court should dismiss the adversary proceeding for lack of subject matter jurisdiction or to abstain from hearing the matter, as well as discuss the possibility of a settlement. The Debt- or and all of the Defendants other than the County (“the Other Defendants”) attended the hearing. At that time, the Plaintiff and the Other Defendants reached a global settlement encompassing a resolution of the claims in the adversary proceeding as well as two (2) other related proceedings (Adv. Nos. 12-444 and 12-628). (Doc. # 13). No settlement between the Debtor and the County was reached.
B. The Rule 12(b) Motions
On March 7, 2013, the County filed a motion to dismiss the adversary to which the Plaintiff responded on April 6, 2013. (Doc. #’s 36, 53, 57 & 62). On June 5, 2013, I dismissed the Complaint, but granted the Debtor leave to file an amended complaint. (Doc. #70). The Debtor filed an Amended Complaint against the County on June 14, 2013. (Doc. # 74).
In the Amended Complaint, the Debtor asserted claims for: j
(1) relief under 11 U.S.C. § 362(k);
(2) breach of contract; and
(3) fraud, negligence and conversion.
On July 9, 2013, the County filed a motion to dismiss the Amended Complaint, to which the Debtor responded on July 23, 2013. (Doc. #’s 76, 77). On August 7, 2013, I granted in part and denied in part the motion to dismiss the Amended Complaint. (Doc. # 78).
I dismissed the Plaintiffs § 362(k) claim because, as a matter of law, the automatic stay had terminated before any of the events described in the Amended Complaint had occurred. However, at the same time, I also determined that the Plaintiffs § 362(k) claim should be construed as a request for relief under 11 U.S.C. § 105(a) to enforce the terms of the Debtor’s confirmed chapter 13 plan and, as such, stated a valid claim for purposes of Fed.R.Civ.P. 12(b)(6).2
*552I dismissed the breach of contract claim, which was based on a settlement agreement between the parties in an earlier adversary proceeding (Adv. No. 08-264). I did so because the express terms of the agreement “provided only the equivalent of a release to the Plaintiff ... [and] no affirmative remedy in the event that the Defendant undertook prohibited collection activity.” (Order dated August 7, 2018, at n. 3; Doc. # 78).
I dismissed the fraud, negligence and conversion claims because they were not accompanied by factual allegations sufficient “to state a claim that is plausible on its face.” (Id. at n. 4) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
The August 7, 2013 Order authorized the Debtor to file a Second Amended Complaint with respect to the relief requested under the Bankruptcy Code (ie., the claim originally styled as a § 362(k) claim and construed as a § 105(a) claim) and the inadequately pled fraud, negligence and conversion claims.3 The Debtor filed a Second Amended Complaint on September 9,2013. (Doc. #100).
In the Second Amended Complaint, the Debtor stated two (2) counts: (1) 11 U.S.C. §§ 105 & 1327 and (2) fraud, negligence and conversion.4 The County did not seek dismissal of the nonbankruptcy claims, but instead filed an Answer on October 17, 2013. (Doc. #108).
C. The Summary Judgment Motion
On February 10, 2014, the County filed the Motion. (Doc. # 175). After requesting and receiving an extension of time to file a response, the Debtor filed a brief in opposition to the Motion on June 27, 2014. (Doc. #’s 200 & 201). I also granted the County an extension of time to file a reply in support of the Motion. The County’s reply was filed on July 18, 2014. (Doc. # 205). The matter is now ready for disposition.
III. SUMMARY JUDGMENT STANDARD
The legal standard for the entry of summary judgment under Fed.R.Civ.P. 56, incorporated into bankruptcy adversary proceedings by Fed. R. Bankr.P. 7056, is well established. Summary judgment is appropriate only when, drawing all reasonable inferences in favor of the nonmoving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. E.g., Tri-M *553Group, LLC v. Sharp, 638 F.3d 406, 415 (3d Cir.2011); In re Bath, 442 B.R. 377, 387 (Bankr.E.D.Pa.2010). In other words, summary judgment may be entered if there are no disputed issues of material fact and the undisputed facts would require a directed verdict in favor of the movant. See Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir.1993).
In evaluating a motion for summary judgment, the court’s role is not to weigh the evidence, but to determine whether there is a disputed, material fact for resolution at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue of material fact is one in which sufficient evidence exists that would permit a reasonable fact finder to return a verdict for the non-moving party. Id. at 248, 106 S.Ct. 2505. The court must view the underlying facts and make all reasonable inferences therefrom in the light most favorable to the party opposing the motion. Montone v. City of Jersey City, 709 F.3d 181, 189 (3d Cir.2013). On the other hand, if it appears that the evidence “is so one-sided that one party must prevail as a matter of law,” the court should enter judgment in that party’s favor. Anderson, 477 U.S. at 252, 106 S.Ct. 2505.
As a threshold matter, the moving party’s initial burden is to demonstrate that there are no disputed issues of material fact. E.g., U.S. v. Donovan, 661 F.3d 174, 185 (3d Cir.2011); Aman v. Cort Furniture Rental Carp., 85 F.3d 1074, 1080 (3d Cir.1996). How the movant meets this burden and how the respondent may rebut the movant’s showing is affected by the allocation of the evidentiary burden of persuasion if the dispute were to proceed to trial.
Here, the County (the moving party) does not have the burden of proof at trial. Therefore, it may establish the absence of a disputed issue of material fact and grounds for summary judgment one (1) of two (2) ways: First, and most simply, if the County presents evidence establishing that the undisputed facts negate at least one (1) element of the Debtor’s claims, it is entitled to summary judgment. See Quaker State Minit-hube, Inc. v. Fireman’s Fund Ins. Co., 868 F.Supp. 1278, 1287 n. 5 (D.Utah 1994). Alternatively, the County may obtain summary judgment by demonstrating that the Debtor lacks evidence to support an essential element of its claim. See, e.g., Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1366 (3d Cir.1996); In re Polichuk, 506 B.R. 405, 421-22 (Bankr. E.D.Pa.2014).
In this case, the two (2) approaches overlap. The County seeks summary judgment asserting that, not only that the Debtor lacks evidence to support essential elements of his claims, but also that evidence it has presented actually disproves elements of his claim. More specifically, the County argues that the record negates the central fact the Debtor asserted, i.e., his claim that the County has attempted to collect prepetition taxes that were provided for (and paid off) in the Debtor’s chapter 13 plan.
IV. SUMMARY JUDGMENT RECORD
The Motion is supported by the detailed affidavit of Nancy J. Poplawski, a Revenue Manager for the County (“the First Po-plawski Aff.”) and thirteen (13) attached exhibits, all of which are referenced in the Affidavit.
In his initial response to the Motion, the Debtor filed two (2) rambling, overlapping responses, one (1) styled as an “Answer,” the other as a “Brief’ and attached several documents to each. (Doc. #’s 200, 201). These responses consist of a mixture of legal argument, conclusory denials as to the accuracy of the First Poplawski Aff., *554inflammatory charges5 and occasional factual representations.
Along with its Reply Memorandum, the County submitted a second affidavit from Ms. Poplawski (“the Second Poplawski Aff.”), which was intended to clarify certain representations in the First Poplawski Aff. The Debtor’s Sur Reply largely rehashes the material he previously submitted.6
In addition to this material, I have considered docket entries and documents filed in the main bankruptcy case and adversary proceedings which are subject to judicial notice.7
Y. STATEMENT OF UNDISPUTED FACTS
This dispute centers on the County’s tax collection efforts with respect to two (2) properties located in Easton, PA. The first is a vacant lot located at 1209-1215 Chid-sey Street (“the Chidsey Lot Property”). The second property, which has a residential structure which the Debtor leases to tenants, is located at 1220-22 Chidsey Street (“the Chidsey Rental Property”). Playing a lesser role in the dispute is a third property, 4014 Crestview Avenue, also in Easton, PA (“the Crestview Residence”), the property in which the Debtor actually resides.
Based on the summary judgment record developed by the parties,8 the following facts are not in dispute.
A. The Bankruptcy Case and the Debtor’s Properties
1. On February 9, 2007, the Debtor filed a chapter 13 bankruptcy petition in this court.
2. As of the commencement of his bankruptcy case on February 9, 2007, the Debtor was the record owner of two (2) properties: the Crestview Residence and the Chidsey Rental Property.
3. As of the commencement of his bankruptcy case on February 9, 2007, the Debtor did not have any interest in the Chidsey Lot Property. Rather, the Olick Family Trust (“the Family Trust”) owned the Chidsey Lot Property.9
*5554. On Schedule A, the Debtor listed his ownership of only one (1) property, the Crestview Residence, omitting his ownership of the Chidsey Rental Property.10
5. As of the filing of the commencement of the bankruptcy case, the Family Trust owed $271.71 in delinquent real estate taxes on the Chidsey Lot Property. (First Poplawski Aff., ¶ 31 & Ex. K attached thereto).
B. The Proofs of Claim for the Crestview Residence and the Chidsey Rental Property
6. The deadline for filing proofs of claim in the Debtor’s chapter 13 case was August 7, 2007. (See Bky. No. 07-10880, Doc. # 48).11
7. On August 6, 2007, the County, acting through the Northampton County Tax Claim Bureau (“the County Tax Claim Bureau”),12 filed Proof of Claim No. 7 (“Claim No. 7”) in the amount of $1,881.79 for unpaid real estate taxes together with costs, penalties and interest related to those taxes that accrued against the Crest-view Residence as of the commencement of the case.
8. The unpaid taxes referenced in Claim No. 7 were for tax years 2006 and 2007.
9. On August 6, 2007, the County also filed Proof of Claim No. 8 (“Claim No. 8”) in the amount of $5,952.84 for unpaid real estate taxes together with costs, penalties and interest related to those taxes that accrued against the Chidsey Rental Property as of the commencement of the case.
10. The unpaid taxes referenced in Claim No. 8 were for tax years 1995, 1996, 2004, 2006, and 2007.
11. The County did not file a Proof of Claim in the Debtors’ bankruptcy case with respect to the delinquent real estate taxes on the Chidsey Lot Property.13
*556C.The Debtor’s Claims Objection
12. The Debtor filed an objection to Claim Nos. 7 and 8 on August 9, 2007 (“the Objection”).
13. By Order dated October 10, 2007, this court sustained in part and denied it in part the Objection to Claim No. 7, allowing the Claim No. 7 in the amount of $1,553.82. (Bky.Doc. # 128). In the same order, the court sustained the Objection to Claim No. 8 in its entirety and disallowed Claim No. 8.
D.The Plan, Confirmation and Discharge
14. The Debtor’s Fifth Amended Chapter 13 Plan, filed on November 5, 2007 (Bky. No. 07-10880, Doc. # 136) specifically identified the claims that had been filed and allowed by name and amount and provided for full payment of those claims.
15. Included among the claims specified to be paid under the terms of the Fifth Amended Chapter 13 Plan was Claim No. 7 in the amount of $1,553.82 (i.e., the proof of claim filed by the County for delinquent real estate taxes on the Crest-view Residence).
16. On January 22, 2008, the Bankruptcy Court confirmed the Debtor’s Fifth Amended Chapter 13 Plan. (Id., Doc. # 150).
17. Like the Debtor’s bankruptcy schedules, the Debtor’s confirmed plan makes no reference to the Chidsey Lot or any delinquent real estate taxes owed on that property.
18. On November 30, 2011, the Chapter 13 Trustee filed a Final Report and Account stating, inter alia, that “[t]he case was completed.” (Id., Doc. # 214).
19. The Debtor received his Chapter 13 Discharge on March 6, 2012. (Id., Doc. # 225).
E.Adv. No. 08-264
20. On September 22, 2008 (after confirmation, but three and one-half (3 lk) years before the Debtor received his discharge), the Debtor filed an adversary complaint in the bankruptcy court against inter alia, the County, docketed as Adv. No. 08-264.
21. In this Complaint, the Debtor asserted that the County was continuing to collect unpaid real estate taxes that were otherwise disallowed in Claim No. 8.
22. On April 21, 2009, the Debtor and the County (as well as the Northampton County Tax Claim Bureau, the City of Easton and the Easton Area School District), entered into a stipulation of settlement (“the Settlement”). (Adv. No. OS-264, Doc. # 85).
23. In Paragraphs 10 and 11, the Settlement refers to the two (2) proofs of claim filed in the Debtor’s chapter 13 bankruptcy case: Claim No. 7 for delinquent taxes on the Crestview Property and Claim No. 8 for delinquent taxes on the Chidsey Rental Property.
24. The Settlement makes no reference to the Chidsey Lot Property.
25. Paragraph 19.a. of the Settlement provided, in pertinent part:
a. Northampton County, the Northampton County Tax Claim Bureau ... will not take any action of any nature to collect claims for taxes that were due as of the date of fifing of the Chapter 13 Bankruptcy Petition and acknowledge that to the extent those claims are allowed, they will be fully satisfied upon receipt of the amounts allowed by the Bankruptcy Court from the Trustee in Bankruptcy.
b. Should Northampton County, the Northampton County Tax Claim Bureau ... take any steps to collect *557those prepetition claims for taxes, this Stipulation of Settlement will be a full defense to any such claims or actions....
26. The Settlement does not include any provision providing for the retention of jurisdiction by the bankruptcy court to enforce its terms.
27. This court approved the Settlement on June 16, 2009.
F. The County’s Actions Following the Settlement of the Adv. No. 08-264
28. On June 22, 2009, shortly after the bankruptcy court’s approval of the Settlement in Adv. No. 08-264, the County Tax Claim Bureau recorded an adjustment in its records and wrote-off all 2006 and 2007 pre-petition taxes, costs, penalties and interest associated with the Chidsey Rental Property to comply with the amount disallowed by the bankruptcy court. The total amount written off was $7,037.75. (First Poplawski Aff., ¶¶ 14-16 & Ex. C attached thereto).
29. After the adjustments were made in the County’s tax records, the balance due for unpaid, post-petition real estate taxes and related charges for the Chidsey Rental Property was $4,884.61. (First Po-plawski Aff., Ex. C).
30. This $4,884.61 in delinquent taxes on the Chidsey Rental Property as of June 22, 2009 is comprised of post-petition charges from 2007-2009.14
31. School District taxes for 2007, totaling $1,971.20 in taxes interest and penalties were not written off following the Settlement.15
32. Nor did the County Tax Claim Bureau write off any taxes in connection with the Chidsey Lot Property. (See id. & Ex. K attached thereto).
G. The County’s Collection Efforts After the Settlement
33. By an undated Reminder Notice, sent in December 2011, the County Tax Claim Bureau gave the Debtor notice (“the 2010 Chidsey Rental Property Reminder *558Notice”) that, as of December 9, 2011 there were delinquent real estate taxes on the Chidsey Rental Property for tax year 2010 of $2,698.59. (First Poplowski Aff. ¶ 22 & Ex. G thereto).
34. By an undated Reminder Notice, sent in December 2011 the County Tax Claim Bureau gave the Debtor notice (“the 2010 Chidsey Lot Property Reminder Notice”) that, as of December 9, 2011 there were delinquent real estate taxes on the Chidsey Lot Property for tax year 2010 of $891.88. (Ex. B to Second Amended Complaint; Doc. # 100).
35. On July 9, 2012, the County Tax Claim Bureau issued a Notice of Public Sale (“Tax Sale Notice”) for the Chidsey Rental Property for delinquent taxes. (First Poplawski Aff. ¶¶ 19-20, Ex. F; Ex. 3 to Debtor’s Answer to Motion).
36. The Tax Sale Notice for the Chid-sey Rental Property scheduled the sale for September 23, 2012 and stated that the “approximate upset price” is $13,568.72.
37. On July 9, 2012, the County Tax Claim Bureau issued a Tax Sale Notice for the Chidsey Lot Property. (Ex. M to First Poplowski Aff.; Ex. 3 to Debtor’s Answer to Motion).
38. The Tax Sale Notice for the Chid-sey Lot Property scheduled the sale for September 23, 2012 and stated that the “approximate upset price” is $3,605.97.
39. The September 23, 2012 tax sales were stayed by the Court of Common Pleas. (First Poplowski Aff. ¶ 39 & Ex. H thereto).16
VI. DISCUSSION
A. Introduction
In this adversary proceeding, the Debt- or claims that the County is trying to collect prepetition taxes that were either (a) disallowed in connection with or (b) were provided for and paid through his chapter 13 plan. In effect, the Debtor contends that the County’s actions violate 11 U.S.C. § 1327.
Section 1327(a) of the Bankruptcy Code provides:
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,
(emphasis added).
Section 1327(c) of the Bankruptcy Code provides:
Except as otherwise provided in the plan or in the order confirming the plan, the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan.
(emphasis added).
If the facts supported the Debtor’s claim, relief from the bankruptcy court to enforce 11 U.S.C. § 1327 is available through exercise of the court’s authority under 11 U.S.C. § 105(a). Section 105(a) provides that the court may “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the plan.” See In re Padilla, 389 B.R. 409, 428-433 (Bankr.E.D.Pa.2008);17 *559accord In re Thomas, 497 B.R. 188, 203-04 (Bankr.E.D.Pa.2013).
To succeed on a claim which invokes § 105(a) to enforce § 1327(a), a debtor must prove that the defendant’s claim was resolved in the prior bankruptcy case and that the creditor has continued its efforts to collect that same prepetition debt. In a case like this one, in which there is an ongoing relationship between the parties, and claims for taxes falling due post-petition continue to arise on a periodic basis, the most obvious way to prove that the creditor continued to seek collection of back taxes is to identify all of the taxes that arose post-petition and produce evidence of their payment.
In this case, the Debtor chose not to develop the record in the manner described above.
The Debtor’s legal and factual theories are further muddled because he has not drawn any distinction between the two (2) Chidsey Properties, despite their differences in ownership and treatment in his chapter 13 bankruptcy case. Further, each property is the subject of a separate Tax Sale Notice and the scope of the County’s collection efforts differed as between the properties.
Thus, in order to determine whether the County’s collection efforts and ultimately, the scheduled tax sales, involve the collection of tax claims that were resolved during the Debtor’s chapter 13 case (as well as whether there are any disputed facts and whether either party is entitled to judgment as a matter of law),18 it is necessary to consider the record with respect to each property separately.
B. The Chidsey Rental Property
The County filed a proof of claim for back taxes owed on the Chidsey Rental Property in the Debtor’s chapter 13 bankruptcy case that was disallowed. Fact Nos. 9-10, 12-13. Whatever delays may have occurred in the County’s recognition of the disallowance of its claim for taxes assessed prior to February 2007 and the judicial determination that there were no such prepetition taxes owed on that property, once the County entered into the court-approved Settlement in Adv. No. OS-264 and adjusted its tax records (on June 22, 2009), see Fact Nos. 25, 28-30, there is nothing in the summary judgment record to suggest that the County thereafter attempted to collect any taxes that fell due prior to February 9, 2007, the date the Debtor filed his chapter 13 bankruptcy petition. On their face, the County tax records in the summary judgment record show that any Chidsey Rental Property taxes presently shown as delinquent are attributable solely to taxes assessed after the Debtor commenced his bankruptcy case. Standing alone and unless rebutted by some contrary evidence creating a material issue of fact, the County’s evidence establishes that it has not attempted to collect prepetition taxes in violation of the order disallowing Claim No. 8 or the confirmed chapter 13 plan and is entitled to judgment as a matter of law.
*560The Debtor’s contention that other facts show the inaccuracy of the County’s records and that the County continues to seek collection of prepetition taxes for the Chid-sey Rental Property appears to be based on his superficial and erroneous interpretation of the tax notices the County issued in connection with the delinquent, post-bankruptcy taxes before it scheduled and gave notice of the September 2012 tax sale.
While it is difficult to pinpoint the Debt- or’s exact theory among the bombast of his rhetoric, he seems to be arguing that because the 2010 Chidsey Rental Property Reminder Notice stated that $2,698.59 in real estate were unpaid as of December 9, 2011 and the 2012 Tax Sale Notice stated a much higher amount (the “approximate upset price” is $13,568.72), the difference cannot be attributable to taxes falling due between the dates of the two (2) notices, making it obvious that the County is attempting to collect taxes that pre-date his bankruptcy case.19
The Debtor’s interpretation of these notices is plainly wrong.
The 2010 Chidsey Rental Property Reminder Notice stated on its face in bold print: “THIS NOTICE DOES NOT INCLUDE INFORMATION ON DELINQUENT TAXES PRIOR TO 2010 WHICH MAY BE DUE.” That statement alone makes it obvious that at the time the Notice was sent, additional amounts for prior tax years also may have been delinquent. Indeed, the Debtor has presented no receipts or other evidence that he paid any of the real estate taxes falling due on the Chidsey Rental Property for 2008 or 2009 other than those reflected in the County’s tax records (attached as Ex. C to the First Poplowski Aff.).
By comparison, the 2012 Tax Sale Notice states the total amount of taxes due on the Chidsey Rental Property as of the date of the Notice, not merely the unpaid taxes for tax year 2010. (First Poplawski Aff. ¶ 19). The County presented evidence that the total amount of taxes due when the 2012 Tax Sale Notice was issued included delinquent taxes for tax years prior to 2010, but did not include taxes assessed prior to the commencement of the Debtor’s bankruptcy case in February 2007. (See First Poplowski Aff. ¶ 21 & Ex. C).20
Simply put, the Debtor has come forward with no evidence sufficient to rebut the County’s evidence and create a triable issue of fact. At best, the 2012 Tax Sale Notice creates some ambiguity because it references only tax year 2010 while stating an upset bid price that includes other tax years. This creates the apparent conflict between the 2012 Tax Sale Notice and the 2010 Chidsey Rental Property Reminder Notice, which leads to the Debtor’s argument that the 2012 Tax Sale Notice was intended to coerce collection of his pre-bankruptcy taxes. The County, however, has explained the apparent discrepancy. In issuing the 2012 Tax Sale Notice, it considered itself bound to refer only to tax year 2010 because it understands the law to be that a tax sale is not authorized until the taxes have been delinquent for two (2) years; hence, the reference to 2010 in the *5612012 Tax Sale Notice. (First Poplowski Aff. ¶ 20).
Whether the County has correctly stated the law in explaining the basis for the reference to 2010 in the 2012 Tax Sale Notice, in light of the other evidence demonstrating that the 2012 Tax Sale Notice was based on other tax years, all post-bankruptcy, and the absence of evidence that the Debtor fully paid the taxes falling due between the commencement of his bankruptcy case and the issuance of the 2012 Tax Sale Notice, the Notice, by itself, is insufficient to create a material issue of disputed fact. See, e.g., Polichuk, 506 B.R. at 444 (summary judgment may be entered when, after considering the weight of the evidence, there can be only one conclusion that a reasonable factfinder can reach) (citing authorities).
In the absence of sufficient evidence to warrant a trial on the issue whether the County attempted to collect prepetition taxes due on the Chidsey Rental Property that were disallowed by the bankruptcy court in the chapter 13 case, the Debtor’s claim must fail and the County is entitled to the entry of summary judgment in its favor.21
C. The Chidsey Lot Property
At the time the bankruptcy case was filed in March 2007, there were $271.71 in delinquent real estate taxes owed on the Chidsey Lot Property. However, the Debtor did not own the Chidsey Lot Property on the date he filed for bankruptcy; it was owned by the “Family Trust.” The Chidsey Lot Property was not listed in the Debtors’ bankruptcy schedules as an asset of the Debtor (quite properly) and was not part of the Debtor’s bankruptcy estate. See Fact No. 3 & n. 9, supra. The County did not file a proof of claim for any tax claims secured by the Chidsey Lot Property.22 Nor was the Chidsey Lot property referenced in any way in the Debtor’s confirmed chapter 13 plan.
In contrast to the Chidsey Rental Property, the County freely admits that it has continued its efforts to collect pre-petition taxes owed on the Chidsey Lot Property. The Debtor argues that these collection efforts are improper. The Debtor appears to have two (2) overlapping theories for his contention: (1) the County’s collection efforts violated the terms of the confirmed chapter 13 plan and 11 U.S.C. § 1327; and (2) the collection efforts with respect to the 2006 and 2007 tax delinquency on the Chidsey Lot Property violated the Settlement in Adv. 08-264.
1. the Confirmed Plan
As a matter of law, the undisputed facts that the Chidsey Lot Property was not property of the bankruptcy estate and no claims against it were addressed in the Debtor’s confirmed chapter 13 doom the Debtor’s § 1327/ § 105 claim.
*562As I explained in In re Thomas, 497 B.R. at 204-05,
It is trae that § 1327(a) does not require that a claim be “provided for” in a plan for the plan to bind a creditor. However, the legal principle that a plan is binding on a creditor necessarily contemplates that plan include some provision that addresses, affects or restricts the creditor’s rights in some fashion.23
As in Thomas, because the Debtor’s confirmed plan did not address any claim for taxes on the Chidsey Lot Property, the controlling legal principle is that if a lien is not addressed and treated in some fashion during the course of a bankruptcy case— either by being provided for in a reorganization plan or avoided pursuant to a Code avoidance power—it passes through the bankruptcy case unaffected and that post-bankruptcy actions to enforce the lien do not violate any provision of the Bankruptcy Code. See, e.g., Cusato, 485 B.R. at 828 (citing authorities, including Lellock v. Prudential Ins. Co. of America, 811 F.2d 186, 189 (3d Cir.1987)).
Despite his contention otherwise (see Debtor’s Br. in Opp’n.), the Debtor never exercised any affirmative action to extinguish or modify any lien on the Chidsey Lot Property. Consequently, any and all liens on the Chidsey Lot Property passed through the bankruptcy case unaffected. The County’s collection efforts did not violate the confirmed plan.
2. the Settlement in Adv. No. 08-264
The Debtor also argues that the Chidsey Lot Property was part of the Settlement in Adv. No. 08-264 and, therefore, the County’s collection of the 2006 and 2007 taxes was a breach of the Settlement.
On (3) independent grounds, I disagree.
First, to the extent the Debtor is seeking to enforce the Settlement, that claim was dismissed by the Order dismissing the Amended Complaint and was not re-pled in the Second Amended Complaint, See Part H.B., supra.
Second, to the extent that the claim may be viable through trial by implied consent, see Fed.R.Civ.P.15(b)(2), the court lacks jurisdiction to consider the claim.
The exercise of subject matter jurisdiction by a bankruptcy court is governed by 28 U.S.C. § 1334(b). Without setting out the entire architecture of the statutory jurisdictional scheme, suffice it to say that the exercise of bankruptcy jurisdiction requires that the dispute bear a relationship to the administration of the bankruptcy case. See, e.g., In re Bell, 476 B.R. 168, 173-74 (Bankr.E.D.Pa.2012). If the litigation lacks that relationship, the court lacks jurisdiction to adjudicate it. See, e.g., In re Resorts International, Inc., 372 F.3d 154 (3d Cir.2004) (citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)).
Even if the Debtor’s interpretation of the scope of the Settlement of Adv. 08-264 is correct (a premise that, ultimately, I reject, as explained below), the Settlement resolved issues relating to both the Chid-sey Rental Property and the Chidsey Lot Property. As such, the settlement involved a resolution of issues concerning property of the bankruptcy estate (the Chidsey Rental Property) and non-estate property (the Chidsey Lot Property).
*563The present litigation between the parties regarding the Chidsey Lot Property was brought to the bankruptcy court after the completion of the Debtor’s chapter 13 plan and the entry of his discharge and involves a dispute regarding the meaning of an agreement insofar as it affects non-estate property that was not treated in the confirmed and completed chapter 13 plan. Even recognizing that the agreement at issue was approved by the bankruptcy court, in these circumstances, it is difficult to see the justification for the exercise of bankruptcy court jurisdiction to enforce the Settlement.24 This does not leave the Debtor without a forum to air his grievances. The Settlement is a contract and, as such, it may be enforced by a state court of competent jurisdiction.
Third, and assuming arguendo that this dispute regarding the scope and meaning of the Settlement Agreement falls within the bankruptcy court’s jurisdiction, I conclude that the County is entitled to judgment as a matter of law. In this respect, I reaffirm my dismissal of this claim in the Amended Complaint, but on another ground.
In the adversary complaint in Adv. No. 08-264, the Debtor made no allegations regarding the Chidsey Lot Property. (See Adv. No. 08-264, Doc. # 1). The Settlement made no reference to the Chidsey Lot Property with respect to the County; the only reference to the Chidsey Lot Property pertained to the proof of claim the City of Easton filed in the bankruptcy case.25 Id. (emphasis added). In describing the County’s involvement in the bankruptcy case, the Settlement refers only to the Claim Nos. 7 and 8, the claims the County filed for delinquent taxes on the Crestview Residence and the Chidsey Rental Property.
Based on the text and structure of the Settlement, there is no basis to conclude that the parties intended that the County would release its claims for pre-petition taxes owed against the Chidsey Lot Property. The Debtor has come forward with no evidence to suggest that the text of the Settlement is ambiguous or any extrinsic evidence that would establish that the Chidsey Lot Property tax claims were released. See generally Bohler-Uddeholm Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79, 92 (3d Cir.2001).26
*564VIL CONCLUSION
Based on the undisputed facts and, as a matter of law, I find that the Debtor has not met his burden and failed to raise a disputed issue of fact that the County made post-confirmation attempts to collect pre-petition debts that were treated in his confirmed chapter 13 plan, in violation of 11 U.S.C. § 1327. Rather, the County has shown that the Debtor lacks evidence to support this claim. Accordingly, the County is entitled to summary judgment. And, this court lacks jurisdiction to resolve the Debtor’s other claims.
An appropriate Order follows.
ORDER
AND NOW, upon consideration of the Motion for Summary Judgment filed by Defendant Northampton County (“the Motion”), and the Debtor’s response thereto, and for the reasons stated in the accompanying Opinion,
It is hereby ORDERED that:
1. The Motion is GRANTED.
2. JUDGMENT is entered in favor of Northampton County on the Debtor’s claim under 11 U.S.C. § 105(a) for enforcement of his rights under 11 U.S.C. § 1327.
3. All of the other claims asserted in the Debtor’s Second Amended Complaint are DISMISSED WITHOUT PREJUDICE for lack of subject matter jurisdiction.
. The completion of the administration of this chapter 13 case has been delayed not only by the sheer volume of duplicative adversary litigation that the Debtor has initiated, but also by the Debtor’s propensity for filing appeals. The Debtor has filed at least (7) notices of appeal to the district court from various orders entered by the bankruptcy court in the post-2007 adversary proceedings. He also has taken unsuccessful appeals to the Court of Appeals that have resulted in three (3) reported decisions affirming the rulings of the district court and the bankruptcy court, see In re Olick, 2014 WL 2979273 (3d Cir. July 3, 2014) (per curiam); In re Olick, 504 Fed.Appx. 189 (3d Cir.2012) (nonprecedential); In re Olick, 498 Fed.Appx. 153 (3d Cir.2012) (nonprecedential). The Debtor also has sought review in the U.S. Supreme Court in two (2) of the adversary proceedings. The Court denied certiorari in both cases. See Olick v. Kearney, - U.S. -, 134 S.Ct. 59, 187 L.Ed.2d 50 (2013); Olick v. Northampton County Tax Claim Bureau, — U.S. -, 134 S.Ct. 95, 187 L.Ed.2d 71 (2013).
. In the August 7, 2013 Order, I explained: Although the automatic stay was not in effect when Defendant County of Northampton made its demand for payment ... that does not necessarily mean that the Plaintiff has failed to state a valid claim against the Defendant or that the Complaint must be dismissed. A chapter 13 debtor may seek relief from the bankruptcy court to enforce the terms of a confirmed plan pursuant to 11 U.S.C. § 105(a). See, e.g., In re Padilla, 389 B.R. 409, 423-31 (Bankr. *552E.D.Pa.2008). That is exactly what this pro se plaintiff is alleging here: that his chapter 13 plan provided for the payment and full satisfaction of the Defendant’s pre-petition tax claims, that his plan was confirmed, that he performed his plan, that the Defendant received full payment of the claim and that the Defendant subsequently attempted to collect the same debt again, in violation of his chapter 13 plan. In the circumstances presented here, I consider it appropriate to construe the Amended Complaint liberally to state a claim for equitable relief under § 105(a).
(Order dated August 7, 2013, at n. 2) (Doc. #78).
. On August 14, 2013, I amended the August 7, 2013 Order to correct a clerical error. (See Doc. # 84). The amendment is not material to the present matter.
. The Debtor’s claim for breach of contract (based on the alleged violation of the settlement agreement reached in a prior adversary proceeding) was dismissed without leave to amend and was not raised in the Second Amended Complaint. Nevertheless, the Debt- or continues to raise this claim in his response to the Motion. Putting aside that, strictly speaking, this claim is not before the court, as a practical matter, it is co-extensive with the Debtor’s claim for violation of the confirmed chapter 13 plan. Nevertheless, because the County responded to the Debtor's arguments that were based on this claim, and for sake of completeness, I address it in Part VI.C.2, infra.
. For example, early in the Answer, the Debt- or states that not only are the statements in the First Poplawski Aff. incorrect, but even worse “ARE WILLFUL AND INTENTIONAL MISREPRESENTATIONS DESIGNED TO COMMIT FRAUD UPON THE COURT AND THE [DEBTOR.]." (Debtor’s Answer to Motion for Summary Judgment at 4; Doc. # 201) (emphasis in original).
. The Debtor signed the Answer, Brief and Sur Reply under penalty of perjury. To that extent, the responses are in technical compliance with Fed.R.Civ.P. 56(c)(1)(A).
. The court may take judicial notice of the dockets and the content of the documents filed in the bankruptcy case for the purpose of ascertaining the timing and status of events in the case and facts not reasonably in dispute. See Fed.R.Evid. 201; In re Scholl, 1998 WL 546607, at *1 n. 1 (Bankr.E.D.Pa. Aug. 26, 1998); see also In re Indian Palms Assocs., Ltd., 61 F.3d 197, 205 (3d Cir.1995).
. Evidence that is inadmissible at trial may not be considered at summary judgment. See Fed.R.Civ.P. 56(c)(2), (4). In his Answer to the Motion, the Debtor argues that the First Poplawski Aff. should be disregarded as inadmissible hearsay. (Debtor’s Answer to Motion for Summary Judgment at 6; Doc. # 201). However, the premise of the Debt- or’s argument is incorrect. The evidence in the First Poplawski Aff. that he asserts is hearsay would be admissible at trial based on an exception to the hearsay rule. See Fed. R.Evid. 803(8).
The Debtor also complains that the First Poplawski Aff. includes legal opinions that do not constitute admissible evidence. The same is equally true of much of the Debtor’s responses. To the extent that the submissions of both parties include statements that are properly characterized as legal argument rather factual representations, I have disregarded them in identifying and setting out the undisputed facts.
.The County conveyed the Chidsey Lot Property to the Family Trust pursuant to a Tax Claim Unit Deed filed with the County Re*555corder of Deeds on March 24, 2003. (First Poplawski Aff. ¶ 27, Ex. I). Therefore, on February 9, 2007, when the Debtor filed this bankruptcy case, he had no interest in the Chidsey Lot Property. In his capacity as Trastee of the Family Trust, the Debtor conveyed 5% of the Chidsey Lot Property to himself in July 2009, more than two (2) years after the commencement of the bankruptcy case and more than one (1) year after the confirmation of his chapter 13 plan. (Second Poplowski Aff., ¶ 10). Three (3) years later, in September 2012, the Debtor, again in his capacity as Trustee of the Family Trust, conveyed the remaining 95% of the Chidsey Lot Property to himself. (Id.; First Poplawski Aff., ¶ 28, Ex. J;).
The Debtor attempts to gloss over his family's initial decision to title the Chidsey Lot Property in the name of an artificial entity, the Family Trust, claiming that it was part of his bankruptcy estate because of his beneficial interest in the Trust. This is incorrect. Only his interest in the Family Trust was included in the bankruptcy estate; the bankruptcy estate did not include the actual assets owned by the Trust. See Fowler v. Shadel, 400 F.3d 1016, 1019 (7th Cir.2005); Manson v. Fried-berg, 2013 WL 2896971, at *3-4 (S.D.N.Y. June 13, 2013).
. The Debtor points out that he filed amendments to his bankruptcy schedules. He fails to mention, however, that none of those amendments disclosed his ownership of the Chidsey Rental Property.
. Henceforth, in this Opinion, I will refer to documents from the docket of the main bankruptcy case as "Bky. Doc. # .”
. The County Tax Claim Bureau is authorized by statute, the Real Estate Tax Sale Law, 72 P.S. § 5860.101 et seq., to act as the County’s agent in collecting delinquent real estate taxes. See 72 P.S. § 5860.208.
. The filing of proofs of claim for asserted delinquent taxes due on the Crestview Residence and the Chidsey Rental Property and the absence of a proof of claim for any delinquent taxes on the Chidsey Lot is entirely understandable. The Debtor was the record owner of the Crestview Residence and the Chidsey Rental Property. He was not the record owner of the Chidsey Lot Property.
. The following is a break down of each tax from 2007-2009 the Debtor incurred prior to the write off in June 2009 as extracted from Exhibit C attached to the First Poplawski Affidavit:
Line Year/Tax Amount
56 2007 Easton Area SD Interest $94.29
71 2007 Easton Area SD Interest $80.82
47 2007 Easton Area SD Penalty $163.28
46 2007 Easton Area SD Tax $1,632.81
73 2008 County Penalty $39.10
61 2008 Easton Area SD Tax $1,802.07
43 2008 County $390.96
58 2008 County Cost $15.00
60 2008 County Cost $15.00
63 2008 County Cost $10.00
67 2008 County Interest $16.15
49 2008 County Penalty $39.10
62 2008 Easton Area SD Penalty $180.20
72 2008 Easton Areas SD Interest $14.87
59 . 2009 County Tax $390.96 $4,884.61
. The Counly Tax Claim Bureau did not write off the School District taxes for 2007 because those taxes were levied by the School District in July 2007 (and referred to the Tax Claim Bureau for collection in April 2008), after the commencement of the Debtor’s bankruptcy case. (First Poplawski Aff., Ex. C, Line 46).
. Although not directly relevant to the pending Motion, it appears that the state court stay has been lifted because the properties have been rescheduled for sale on September 23, 2014. (See Adv. No. 14-0325, Exhibits to Complaint). The Debtor has filed two (2) motions in this court to stay the sale, both of which were denied. (Adv. No. 14-0325, Doc #'s 18, 25).
. In Padilla, I held that a chapter 13 debtor may invoke the equitable power of the bankruptcy court under 11 U.S.C. § 105(a) to enforce the debtor’s rights under 11 U.S.C. § 1327(a) because such orders are necessary and appropriate to enforce the provisions of the Bankruptcy Code and do not override any other applicable Code provisions:
The need for a confirmed plan to be enforceable is intrinsic to the chapter 13 reha*559bilitation process. Otherwise, the confirmed plan would be a scrap of paper (or perhaps more accurately in today’s digital age, a collection of electronic impulses) that creditors could disregard with impunity. Given the role of the confirmed plan in the chapter 13 system, the principle that a confirmed chapter 13 plan must be enforceable requires no extended or elaborate justification. It is difficult to conceive how the chapter 13 system could function if confirmed chapter 13 plans were not judicially enforceable.
389 B.R. at 429.
. Although the Debtor did not file a motion for summary judgment, the court has the authority not only to deny summary judgment to a moving party, but to grant summary judgment to a non-moving party. See, e.g., In re Styer, 477 B.R. 584, 589, (Bankr.E.D.Pa. 2012).
. The Debtor also appears to argue he was not properly credited with a $535.10 payment he made in February 2012. Given his failure to distinguish between the Chidsey Rental Property and the Chidsey Lot Property, it is difficult to discern exactly what the Debtor is trying to say. In any event, the record is clear that this payment was made on account of taxes owed on the Chidsey Lot Property, not the Chidsey Rental Property.
. After the write-off of $7,037.75 in prepetition taxes in June 2009, the County’s tax records show that $4,884.61 remained in delinquent taxes on the Chidsey Rental Property. It is reasonable to infer that further delinquencies accrued thereafter.
. The only other minor issue is whether the 2007 School District taxes the County Tax Claim Bureau has continued to attempt to collect involve prepetition taxes that also were disallowed when the court sustained his Objection to Claim No 8. By comparison, with respect to its tax collection efforts on behalf of other taxing authorities, the County Tax Claim Bureau has limited its efforts to taxes arising in 2008 and thereafter. The Debtor argues that 2007 School District taxes were prepetition taxes.
This contention requires little discussion. The 2007 School District taxes were not assessed by the School District until July 2007, several months after the commencement of the Debtor's chapter 13 case. (Second Po-plowski Aff. ¶ 6 & n. 1). The taxes arose post-petition and therefore, were not encompassed by the Order disallowing Claim No. 8.
. The City of Easton filed such a claim, but the City taxes and the City’s conduct is not at issue here. The Debtor settled his dispute with the City.
. A plan might also provide that a creditor's rights are not being altered or impaired in any way. In some sense, that is “providing for” a claim. But, such a plan provision would leave the creditor’s lien in place. See also In re Cusato, 485 B.R. 824, 833 (Bankr. E.D.Pa.2013) (property rarely revests free and clear of all liens pursuant to § 1327(c) following confirmation in chapter 13 cases because plans lypically provide otherwise in order to comply with the § 1325(a) confirmation requirement that secured creditors retain their liens during the pendency of the plan).
.Any rights the Debtor may have under the Settlement are not based on the Bankruptcy Code. Thus, I note further that even if the sliver of a connection to the bankruptcy case sufficed to give rise to non-core, "related to” jurisdiction under 28 U.S.C. § 1334(b), see, e.g., In re Mullarkey, 536 F.3d 215, 220-21 (3d Cir.2008), that grant of jurisdiction likely would be nullified by operation of the federal Tax Injunction Act, 28 U.S.C. § 1341 because, ultimately, the Debtor is requesting that this court restrain a state taxing authority from collecting taxes that it claims are due. See generally Thomas, 497 B.R. at 196-98.
I note further that, with hindsight, when I granted the County’s motion to dismiss the Amended Complaint, it may have been more proper to dismiss the claim based on the alleged breach of the Settlement for lack of jurisdiction, rather than on the merits. My order in resolving the Motion will be a non-merits dismissal. However, as explained in the text infra, if my jurisdictional ruling is incorrect, I am prepared to dismiss the claim on the merits.
. Paragraph 7 of the Settlement stated that the City of Easton filed Claim No. 5 in the amount of $1027.53 plus 10% per annum for pre-petition taxes and interest due on both the Chidsey Rental and Chidsey Lot Properties. In contrast, Paragraph 11 of the Settlement stated that the County filed Claim No. 8 in the amount of $5,952.84 for pre-petition taxes, including delinquent County taxes for 1995, 1996, 2004, 2006, 2007, delinquent City of Easton taxes for 1996, and delinquent Easton Area School District taxes for the years 1995, 1996 and 2004 on the Chidsey Rental Property.
. The Second Amended Complaint asserts claims for fraud, negligence and conversion. Essentially, the Debtor’s theory is that the *564collection efforts that violated his rights under his confirmed chapter 13 plan and the Settlement were engaged in due to the County’s negligence or fraud and has resulted in the conversion of his property. These claims are totally dependent upon an initial determination that the Debtor’s rights were violated under his confirmed chapter 13 plan and the Settlement. Because his rights were not violated, the state law claims also fail. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497529/ | Opinion
STEPHEN RASLAVICH, Bankruptcy Judge.
Introduction
The Debtor has filed an adversary proceeding seeking a declaration that the Defendant’s second mortgage lien is void. PNC Bank, the holder of the second mortgage lien, opposes the relief. A hearing was held on August 12, 2014, after which the Court took the matter under advisement. For the reasons discussed herein, the Court finds the value of the Debtor’s real property to have been not more than $125,000 on May 24, 2013. The effect of that finding will permit the Debtor to avoid the second lien under his Chapter 13 plan.1
The Property, Liens and Claims
The following is established: the Debt- or’s home is located at 442 Hillside Road in the Borough of Ridley Park, Delaware County, Pennsylvania (the Property). The surrounding area is suburban with single family residential homes. The Property is situated on a public road. The site in question is an irregularly shaped lot consisting of 0.34 acres and is improved with a single-story detached ranch style structure with a brick exterior. The residence is approximately 62 years old. The Debtor purchased it in 2001. The home has a *566built-in one-car garage, three bedrooms, one bath and gross living space of approximately 1300 square feet. Access to the home is gained via a macadam driveway.
The Property is encumbered by two mortgages both of which are held by PNC Bank. The first mortgage debt is in the amount of approximately $135,000 and the second in the amount of $103,000. In his Schedules the Debtor valued the Property at $125,000. The Amended Complaint herein avers the same value. In its Proof of Claim for the first mortgage, the Bank also valued the Property at $125,000. In its Proof of Claim for the second mortgage — filed four months later — the Bank valued the Property at $158,000. In its Answer to the Complaint, the Bank contended that the value of the Property was $205,000. Response, ¶ 12.
Section 1322
Under the Debtor’s Amended Chapter 13 Plan, the Debtor proposes to keep the Property and make no payment on the Bank’s second mortgage. See Plan. To do that, the Debtor seeks to void (i.e., “strip off’) the lien in its entirety. Because the second lien encumbers the Debtor’s principal residence, the Debtor’s right to treat the lien in that way is not unqualified. Section 1322 of that Bankruptcy Code provides, in pertinent part:
Subject to subsections (a) and (c)2 of this section, the plan may—
(2) 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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
11 U.S.C. § 1322(b)(2) (emphasis added). Thus, to the extent that there exists any value which would secure some or all of the second mortgage debt, the second lien may not be modified. If, on the other hand, there is no excess equity beyond the amount due on the first mortgage, then the lien may be modified. See In re McDonald, 205 F.3d 606, 615 (3d Cir.2000) (holding that a wholly unsecured mortgage is not subject to the anti-modification clause in § 1322(b)(2)). To determine whether the second lien is wholly unsecured the Court must accordingly undertake a valuation of the Property.
Section 506
Valuation of secured claims is provided for in the Bankruptcy Code:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest. *567determine the validity, priority, or extent of a lien in property)
*56611 U.S.C. § 506(a). The Amended Complaint requests such a determination as it is necessary if the Debtor is to confirm the Plan. See B.R. 7001 (defining among adversary proceedings (2) a proceeding to
*567
Purpose of The Valuation
The Court cannot determine the value of the Property without first considering what the Debtor intends to do with it. In this regard, the Plan proposes the Debt- or’s continued ownership of the Property as his home. In circumstances where the Debtor intends to retain and use a secured party’s collateral, case law instructs that the valuation method will normally take the form of a hypothetical purchase by the Debtor of the asset in question on the date as of which the value of the asset is found. In this instance two competing experts opined on value. Their conclusions purport to be based on arms-length sale transaction data for comparable properties within a time frame proximate to the Debt- or’s bankruptcy filing. See Associates Commercial Corp. v. Rash, 520 U.S. 953, 965 n. 6, 117 S.Ct. 1879, 1886 n. 6, 138 L.Ed.2d 148, 160 n. 6, C.B.C.2d 744, 751 n. 6 (1997).
Timing
Neither party has raised the issue of the date of valuation. This matters given that the bankruptcy case was filed over two years ago. Accordingly, the Court is guided by the Third Circuit’s opinion in In re McDonald, supra. There, the Third Circuit observed there is no clear consensus in the case law as to the particular date which should control for valuation purposes. The Court did not resolve the timing question, although it noted 1) that § 506(a) states that value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of the property in question, and in conjunction with any hearing on such disposition or use or on a plan affecting the subject creditor’s interest in same, and 2) that whatever rule is adopted it is desirable to avoid allowing an appeal to delay the date used for valuation so as to discourage a party from bringing an appeal in the hope of obtaining a more favorable evaluation. 205 F.3d at 615. Considering 1) that the Debtor’s plan is not yet confirmed, 2) that a hearing on this matter has been continued numerous times, and 3) that there is no evidence that real estate values in the relevant market have changed significantly in the last two years,3 the Court concludes that the date of the valuation will be based on the later of the two appraisals. In this regard, the Debtor’s appraisal is as of August 9, 2012 and the Bank’s is as of May 24, 2013.
Burden of Proof
The Court is guided here by the Third Circuit’s holding in In re Heritage Highgate, Inc., 679 F.3d 132 (3d Cir.2012). There, the Court of Appeals adopted a burden-shifting approach in the context of § 506(a) valuations. The initial burden is on the party challenging a secured claim’s value because § 502(a) grants prima facie effect to the validity and amount of a properly filed claim. If the debtor establishes with sufficient evidence that the proof of claim overvalues a creditor’s secured claim because the collateral is of insufficient value, the burden then shifts to the creditor. Thereafter, the creditor bears the ultimate burden of persuasion to demonstrate, by a preponderance of the evidence, both the extent of its lien and the value of the collateral securing its claims. Id., 679 F.3d at 139-140.
Second Mortgage Claim
On March 27, 2013, the Bank filed a Proof of Claim based on the second mortgage. The amount of the claim is $102,738.44; the value of the Property securing the claim is alleged therein to be *568$158,000. That claim is deemed an allowed claim until challenged by the Debtor. See 11 U.S.C. § 502(a). The Debtor’s Amended Complaint joins the issue of whether the Bank’s second mortgage claim is secured at all.
Debtor’s Appraisal
Both parties offered expert appraisal testimony for and against the claim of secured value.4 The Court begins with the Debtor’s appraiser, Joseph Ballasy. He values the Property at $125,000 as of August 9, 2012. At the outset, the Court highlights two points about the Debtor’s appraisal which makes it especially probative: first, the comparable sales used are of the same style as the Debtor’s house and second, they are all located in the same borough as the Debtor’s house. The Debtor’s house is a ranch-style dwelling and the Debtor’s appraiser used only sales of ranch — style homes to arrive at his value. T-16. Likewise, the Debtor’s home is located in the Borough of Ridley Park. Similarly, his appraiser used properties in that borough. Id. Mr. Ballasy’s choice of similarly styled and closely located comparable sales increases the probative weight of his conclusions. See In re Moore, 2012 WL 2870710, at *3 (Bkrtey.ND.Ga. May 15, 2012) (finding that a dwelling of one and one-half floor not as comparable to a ranch-style dwelling); In re Stealey, 2006 WL 2792224, at *8 (Bkrtcy.N.D.Ohio, Sept. 26, 2006) (“The best comps are those in the closest proximity with the closest sale date.”); see also In re Melgar Enterprises, Inc., 151 B.R. 34, 37 (Bkrtcy.E.D.N.Y. 1993) (rejecting appraisal which did not examine properties within the vicinity of the subject property); In re Thompson, 18 B.R. 67, 70 (Bkrtcy.E.D.Tenn.1982) (“It is generally recognized that comparable sales in the vicinity of the subject property produce the best guides to determine fair market value”).
Debtor’s Appraiser on Condition
Having chosen a comparable data set based on style and location, the Debtor’s appraiser next opined on the condition of the Property. T-17 The Debtor’s appraiser describes the condition along a six grade scale with 1 being the highest grade of “superior” and 6 being the lowest grade of “poor.” Id. Mr. Ballasy considered the Property to be in “fair” condition. T-18. “Fair” would be considered a “4” on the six grade scale. Id. He based that opinion on his observation of the following: the interior required painting and he emphasized that fact; the floors were in need of refinishing; the ceiling has tape marks where the roof has leaked; the gutters were loose having separated from the side of the house; there was rotted exterior wood and paint peeling around windows; and the toilet in the half-basement was not functional. T-18-19, 29. Within his report on condition, Mr. Ballasy found the that the sun room door was difficult to open; that the basement door was leaking and has allowed insect infestation; that the kitchen cabinets showed signs of wear on their surfaces; and that some of the windows in the family room were cracked. See Debtor’s Appraisal, 3. In general, he noted that in comparison to other homes in the immediate area, as well as the comparable sales used, the condition of the Debt- or’s home was not as well maintained; therefore, he assessed it as “fair.” T-19. In other words, it was below average. T-21. Based on his opinion as to condition, he *569adjusted each of his comparable sales downward by $10,000 to reflect the condition of the Debtor’s property. Id.
Debtor’s Appraiser’s Other Adjustments
The Debtor’s appraiser also made downward adjustments based on seller concessions, the room count, the patio, and the age of the kitchen. Seller concessions reduced comparable sale # 1 ($8000) and # 2 ($7400) but not # 3 which was a short sale. The Debtor has but one bathroom while two of the comparable properties have 1.5 to 2 baths and so a $2500 reduction was made as to the first comparable sale and a $5000 deduction was made to the third. As to outdoor living space, the appraiser noted that the comparable sales had either a patio/sunroom, a screened deck or a porch. The Debtor’s home is listed as having only a patio.5 He thus made downward adjustments of $8000, $2500 and $1000 respectively. As to the kitchen, two of the comparable sales had updated modern kitchens and so the Debtor’s kitchen was adjusted downward by $5000 and $2500.
All of the adjustments were not negative. The size of the Debtor’s lot was larger than the comparables and so it was adjusted upward ($1500, $1000 and $1000). Similarly, none of the comparables had garages and so an across the board $2500 upward adjustment was made to the subject property. In the ease of the basements, no two were the same: the Debt- or’s basement was partial and unfinished; the first comparable had no basement, the second had a full, finished basement with a powder room, and the third was full but unfinished. Thus, the Debtor received an upward adjustment of $10,000 for the comparable without a basement but a $6500 reduction for the second and $1500 reduction for the third.
Taking all of the factors together, Mr. Ballasy reached a negative net adjustment for all three comparable sales but in varying amounts. With all but one of his adjustments, the Court finds no fault. Only the inclusion of a patio, which would only serve to lower value, is questionable; the photographs of the subject property do not reveal a patio and the Bank’s appraisal reports that no patio exists. Other than that, the appraised value of $125,000 is supported by the evidence.
Relevance of First Mortgage Claim
That alone would shift the burden back to the Bank to prove a different value; however, Debtor sought to offer more evidence on that score. He also offered at trial the Proof of Claim filed as to the first mortgage. That claim was filed roughly 4 months before the claim for the second mortgage was filed. The claim for the first mortgage debt values the Property at $125,000. That is inconsistent with the Bank’s second mortgage Proof of Claim, filed only four months later, which values the Property at $158,000. The Debtor sought to enter the first mortgage claim into evidence, but the Bank objected. The Bank argued that the Proofs of Claims were not valuation determinations and thus had no probative weight. T-33. The Debtor argued that the claim was entitled to some weight. Id. The Court allowed the claims into evidence leaving for later the determination of the weight to accord to them.
Upon consideration, the Court observes two points. On the one hand, the claims are not wholly without probative value. In a space of four months, a creditor has given significantly divergent opinions as to the value of the same piece of collateral. On the other hand, the Proofs of Claim *570were filed in a context different from valuation. Proofs of claims are filed in order to be allowed against the estate; valuation determinations are undertaken to determine the extent of collateral. See 11 U.S.C. § 502(a) and § 506(a). See In re Fareed, 262 B.R. 761, 765 (Bkrtcy.N.D.Ill. 2001) (explaining that claims allowance process initiated by proof of claim deals only with total amount of creditors claim and does not involved collateral valuation or determination of claims secured or unsecured status); see also In re Slovak, 489 B.R. 824, 827 (Bkrtcy.D.Minn.2013) (“the Court does not consider the creditor’s proof of claim as direct evidence of value because the purpose of a property valuation under section 506(a) is different from the creditor’s purpose in filing the proofs of claim”) The claims constitute, at most, an admission against interest. See F.R.E. 801(d)(2) (made applicable by B.R. 9017). The significance of what is in the claims will matter more if, after consideration of the evidence offered by each expert, the decision is a relatively close call. The Court thus turns to the opinion of the Bank’s valuation expert.
Bank’s Appraisal
The Bank’s appraiser was Charles Huhn. Mr. Huhn values the Property at $155,000 as of May 24, 2013. Beginning with the same two factors that the Court found to be significant in the Debtor’s appraisal; to wit, the style of the comparable sales and their location, the Court observes a basic difference between the two appraisals. Mr. Huhn’s report does not use ranch homes for comparison. Instead, he relies on Cape-Cod type dwellings. At trial, he stated that he could not find any ranch-style homes, notwithstanding that the Debtor’s appraiser did. T-36. The Court considers such a style to be less comparable than the ranch style. The differences are not insignificant. As a ranch-style home, the Debtor’s dwelling is limited to a single floor; a Cape-Cod structure has one and one-half floors. Mr. Huhn even testified to that fact. T-45. The Court also observes that none of the Bank’s comparable sales are located in Ridley Park Borough. While the Court observes that as a matter of distance, the Bank’s comparable sales are not much further removed from the Debtor’s home than are the Debtor’s comparables, they are still outside the same municipality. So in terms of both style and location, the Bank’s comparable sales are less probative than those offered by the Debtor.
Bank’s Appraiser On Condition
Focusing on the subject property itself, the appraisers disagree on its general condition. The Bank’s appraiser did not agree that the Property was in “fair” condition. Mr. Huhn considers the condition to be at worst “slightly below average.” T-36. In specific, he considers the interior of the Property to be in “average” condition. T-40. His testimony, however, offered few specifics as to why that was so. For the most part, Mr. Huhn believed that the defects identified by the Debtor’s appraiser were cosmetic at most. Id. For example, as to the condition of the paint, Mr. Huhn did not agree that repainting was required. T-38. He noted a damaged downspout but stated it could be repaired. He conceded that the basement door was leaking and so should be repaired. Id. He opined generally that overall the house was in average condition. Whereas the Debtor’s appraiser pointed to specific items in clear need of attention, the Bank’s appraisal took a somewhat holistic view. As a result, no adjustments to comparable sales were made based on condition.
Bank’s Appraiser’s Adjustments
Elsewhere in the Bank’s appraisal, generally fewer adjustments to the comparable sales were made. The adjustments made dealt with sales concessions, room count, basement, patio, and a fireplace. *571The sales concessions applied to each comparable were $8900, $7763, and $5000, respectively. As to baths, the first two com-parables have 2 baths and so a downward adjustment of $3000 was made. As to gross living area, the second and third comparables have more square footage and so deductions of $3000 and $2000 were made. As to outdoor living, all three com-parables have either a patio, a porch, or an enclosed porch/patio while the Debtor’s home is reported to have none. Downward adjustments were made for that reason: $1000, $1000 and $3000. On the plus side, one of the comparables had no garage and two of them lacked a fireplace which resulted in upward adjustments.
Weight of Evidence
In weighing the evidence, the Court finds that the decision is not a particularly close call. The Court rejects the Bank’s appraiser’s rationale for choosing Cape-Cod style homes over ranchers for his comparable sales. Mr. Huhn stated that there was a dearth of suitable ranchers available. T-36. He rejected the ranchers the Debtor’s appraiser chose because they were not in similar condition. T-37. The Court is unpersuaded by this. Similar condition is not a prerequisite for a comparison. In fact, the URAR form contemplates differences in condition. That is why there is a line item for condition on the form. The appraiser may make numerous adjustments to a comparable property based on the condition of the subject property. Indeed, that is what the Debt- or’s appraiser did here: all of the compa-rables were in better condition than the Debtor’s home. As a result, Mr. Ballasy adjusted them downward. There was no need for the Bank’s appraiser to rely only on ranch-style dwellings as comparable sales, and his decision to do so detracted from the probative weight of his valuation.
As to condition, the Debtor’s appraiser offered considerably more evidence in support of his opinion. His conclusions were based on observation of discrete and specific deficiencies which adversely affect property condition. His conclusions in this regard are corroborated in the photographs attached to his appraisal.
In contrast, the Bank’s opinion that the Property is in average condition is not as well supported by evidence. It is worth noting that while the Bank’s appraiser used the term “average” in his testimony at the hearing, his appraisal uses the specific designation “C4” instead of the word “average.” The grade “C4” comes from the Freddie Mac and Fannie Mae condition rating standards for documenting the condition of a dwelling during an appraisal process. “C4” is defined as
[s]ome minor deferred maintenance, physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components and mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate
Fannie Mae Selling Guide, Bl-1.3-06: Property Condition and Quality of the Construction of the Improvements (4/15/2014) available at www.fanniemae. com/content/guide/selling/b4 (listing six levels of condition grading for appraisers); see also Latham v. Latham, 2013 WL 2350754, at *4 (Conn.Super. May 18, 2013) (explaining the “C4” designation in appraisal report means that the home is adequately maintained and needs only minimal repairs)
By this yardstick, the Bank’s evidence does not support a finding of average condition. The only specific testimony that Mr. Huhn offered as to the condition needing no more than cosmetic fixes was with regard to paint. He maintained that all that the walls needed was an application of *572paint. Other than that, he did not dispute any of the specific shortcomings identified by the Debtor’s appraiser. In fact, he even conceded shortcomings not commented upon by the Debtor’s appraiser; to wit, that the basement door and sewer pipes were leaking. See Bank’s Appraisal, Supp. REO Appraisal Addendum. Such evidence certainly does not support a finding that the Property suffers from nothing more than minor deferred maintenance, or wear and tear. To the contrary, it has not been adequately maintained. In fact, the evidence demonstrates a significant degree of neglect. For that reason the Court finds the Property to be at best below average, or “fair,” as the Debtor’s appraiser puts it.
Summary
As between the two appraisals, the evidence weighs heavily in favor of the Debtor’s expert’s estimation of value. His comparable sales are a better gauge of what a willing, arms-length buyer would pay for the Property. His opinion of the Property’s condition is amply supported by evidence and the Court therefore finds that the value of the Property was not more than $125,000 as of May 24, 2013.6 As a consequence, the Bank’s second mortgage lien is wholly unsecured and will be declared void.
An appropriate Order follows
ORDER
And Now, upon consideration of the Debtor’s Amended Complaint to Avoid Lien, the Defendant’s Answer, after trial held on August 12, 2014, and for the reasons set forth in the foregoing Opinion, it is hereby:
Ordered that the value of the Debtor’s principal residence is determined to be not greater than $125,000 as of May 24, 2013, and it is further:
Ordered that judgment is entered in favor of Plaintiff and against the Defendant on the Plaintiffs Amended Complaint. The Defendant’s second mortgage lien is hereby declared void.
. Because this adversary proceeding involves the determination of the validity, extent or priority of a lien, it is within this Court’s "core” jurisdiction. See 28 U.S.C. § 157(b)(2)(K).
. Neither of these two subsections applies to the instant transaction. In particular as to subsection (c), the Debtor is not proposing to cure the arrears; neither does the loan have fewer than 60 payments left on its term.
. Indeed, both experts testified that home values have been “stable.” T-22, 41
. Each appraiser prepared a written report which was received into evidence. Both expert reports utilize the same method; that is, the subject property is compared to sales of similar homes in the area. The background of each sale is set forth and from there the appraiser identifies distinguishing characteristics between a subject property and purported comparable sales.
. That, too, is undetermined because the Bank’s appraisal lists “NONE” next to "PATIO.”
. This conclusion makes it unnecessary to further discuss the import of the Bank’s Proof of Claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497531/ | MEMORANDUM OPINION AND ORDER
CATHARINE R. ARON, Bankruptcy Judge.
THIS MATTER came before the Court for trial on September 4, 2014, after due and proper notice, upon the Complaint Objecting to Discharge (the “Complaint” or “Objection to Discharge”) filed by Wann Van Robinson, Mary D. Robinson, and the Wann Van Robinson Revocable Trust (collectively, the “Robinsons”). Appearing before the Court was R. Scott Adams and Rayford K. Adams, counsel for the Robin-sons; Jason Jelinek and Phillip Bolton, counsel for Jason Clint Worley (the “Debt- or”); and Bruce Magers (“Mr. Magers”) as Chapter 7 Trustee. The Debtor also appeared and testified before the Court. Following the trial, and upon consideration of the Complaint, the responses thereto, the arguments of counsel, the live testimony of the Debtor and Mr. Magers, and the deposition testimony of Daniel Crapps and Joshua Crapps, and for the reasons that follow, the Court will grant the Robinsons’ Objection to Discharge pursuant to 11 U.S.C. § 727(a)(4) and deny the Debtor’s discharge in the bankruptcy case.
FINDINGS OF FACT
I. PRE-PETITION BACKGROUND
A. The Debtor’s Financial Experience and Employment History
Beginning in the early 2000s, the Debtor became actively involved in the financial industry. Graduating from the University of Florida in 2001 with a Bachelor’s degree in finance, the Debtor obtained employment with Edward Jones in 2002. The Debtor subsequently received his Series 7 and Series 68 licenses, which allowed him to purchase securities and perform financial transactions. Between 2006 and 2007, Edward Jones promoted the Debtor to a limited partner, and the Debtor earned approximately $140,000.00 in 2009. Although the Debtor insisted at trial that he was unable to recall his salary for the years preceding 2009, he later admitted that he first earned in excess of $100,000.00 in 2004, and made over $850,000.00 in 2008. During his employment at Edward Jones from 2002 to 2009, the Debtor earned a total of $1,400,000.00, and received approximately $1,100,000.00 after taxes.
*596While the Debtor initially deposited all paychecks into his Edward Jones account, he later transferred funds to Amy Wor-ley’s trust account on a regular basis. Amy Worley’s trust account was established at Bank of America between 2001 and 2002, and was originally funded with her own income. The Debtor’s contributions to Amy Worley’s trust account were used to cover daily living expenses. The Debtor then either spent or invested the remaining funds in his Edward Jones account. Specifically, the Debtor was enticed by the “heavy investment environment” of the early 2000s and made the following relevant expenditures:
1. The Debtor purchased a house in Florida by putting $15,000.00 down and securing a loan for $305,000.00.
2. The Debtor purchased property at Cinnamon Lake by putting between $10,000.00 and $15,000.00 down and securing two loans for a total of $70,000.00.
3. The Debtor purchased a home in Highlands, North Carolina by putting $10,000.00 down and securing a loan for $325,000.00.
4. The Debtor and two other individuals invested in property located at Dog Island. The Debtor’s share of this expense was approximately $60,000.00.
5. The Debtor and two other individuals invested in property located at Alligator Island. The Debtor put $60,000.00 down and was responsible for his 1/3 share of the $720,000.00 loan.
6. The Debtor invested in Gemini Land Trust, LLC (“Gemini”), with Joshua Crapps on January 24, 2006. The Debtor provided the initial funds for Gemini in the amount of $130,000.00, consisting of $65,000.00 for the Debtor’s share and a loan from the Debtor to Joshua Crapps in the amount of $65,000.00.
The Debtor’s payments on these mortgages and loans totaled approximately $90,000.00 per year. Additionally, the Debtor lost his $240,000.00 investment in the Alligator Island property and incurred $100,000.00 in student loan debt to pursue his Master of Business Administration at Emory University. Moreover, the Debtor established three LLCs during this period, including Gator Pointe, LLC, Dog Island Land Trust, LLC, and Euton Capital International, LLC. However, these LLCs were never funded, and the Debtor could not recall the purpose of these entities. By 2011, all of the Debtor’s income from Edward Jones was gone.
Following his departure from Edward Jones, the Debtor opened two Roth IRA (E*Trade) accounts, which are currently valued at $102,000.00 and $195,000.00. The Debtor converted his Edward Jones’ IRA accounts to Roth IRA accounts in 2010, and paid all applicable taxes on the conversion. These Roth IRA (E*Trade) accounts were funded solely through legal IRA contributions, and the Debtor maxed out his contributions every year since 1997.
After a brief stint at Worley Financial Services, LLC from 2009 to 2011, the Debtor secured employment at LPL Financial (“LPL”) in March 2011. LPL paid the Debtor a $75,000.00 signing bonus and offered the Debtor a $75,000.00 loan. The remainder of the Debtor’s income at LPL was based solely on commissions. The Debtor soon realized he was losing money at LPL and ended his employment contract. The Debtor was unable to secure full time employment for over a year before filing bankruptcy, and voluntarily relinquished his Series 7 and Series 63 licenses.
*597
B. The Debtor’s Interest in Gemini
During the Debtor’s energized investment phase at Edward Jones, he and Joshua Crapps established Gemini Trust, LLC for the sole purpose of investing in real estate. The Debtor provided all initial funding for Gemini in the total amount of $130,000.00, consisting of $65,000.00 for the Debtor’s share and a loan from the Debtor to Joshua Crapps in the amount of $65,000.00. The Debtor financed Gemini by securing a $60,000.00 loan, and provided the remaining capital from his Edward Jones account. Although the Debtor fronted all capital contributions for Gemini, Joshua Crapps received a 2% interest in Gemini up front, and the Debtor and Joshua Crapps each received 49% of the remaining interest.
Subsequent to its formation, and in order to fulfill its sole purpose, Gemini purchased a 10% ownership interest in Pel-ham Land Group, LLC (“Pelham”). The Debtor and Joshua Crapps learned of Pel-ham through Daniel Crapps, an experienced real estate broker.1 Pelham owned approximately 587 acres of timberland in Mitchell County, Georgia, with an initial estimated sale value of $8,000.00 per acre. By the end of 2006, Pelham listed Gemini’s 10% interest as having a total value of $164,484.00 (49% of which represented the Debtor’s share). This valuation decreased slightly from 2007 to 2012, with the current valuation figure at $132,128.00. For 2012, the price per acre of the Pelham land had decreased to $2,250.00. The Georgia tax valuation illustrates that the entire Pelham property is divided into two parcels, with a fair market value of $604,000.00 for the larger tract and $107,000.00 for the smaller tract.
In addition to its sale value, the Pelham land produces income through farming, hunting, and timber leases. The farming lease generates approximately $8,000.00 per year of revenue while the hunting lease produces $5,000.00 per year. The income obtained through the timber lease, however, varies significantly with the age and condition of the trees, and is difficult to estimate in advance.
AlS a result of the Debtor’s interest in Gemini, he received annual Kl filings from the firm of Odom, Moses & Co, LLP. The Debtor obtained his first Kl form for the 2007 calendar year (the “2007 Kl”), which showed a proportional income loss of $137.00. The 2007 Kl listed the Debtor’s interest at 50%, and reflected an ending capital account of $68,502.00 for the Debt- or’s share. The Kl forms filed for 2008 through 2012 similarly showed ending capital account balances between $68,985.00 and $67,555.00. The account balances fluctuated based on annual ordinary business gains or losses, with the Debtor receiving the highest gain in 2008 of $483.00. All Kl forms listed the Debtor’s interest at 50%, despite the Debtor’s assertion that his interest was 49%. As of 2012, the total value of Gemini was estimated at $126,705.00.
II. THE BANKRUPTCY FILING
The Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code on February 14, 2013. Anticipating that no funds would be available for distribution to unsecured creditors, the Debtor *598categorized the bankruptcy filing as a no asset case. However, on March 25, 2013, Mr. Magers filed the Trustee’s Notice of Assets & Request for Notice to Creditors (the “Notice of Assets”), implying that assets would be available for distribution.2 On Schedule A — Real Property, the Debt- or listed only one parcel of residential real estate located in Winston-Salem, North Carolina. On Schedule B — Personal Property, the Debtor disclosed the following relevant assets:
2. Checking, savings or other financial accounts: Jointly held checking account at SunTrust worth $687.00.
12. Interest in IRA, ERISA, Keogh, or other pension or profit sharing plans: Roth IRA (E*Trade) worth $102,000.00 and Roth IRA (E*Trade) worth $195,000.00.
14. Interests in partnerships or joint ventures: 1/4 interest in Cinnamon Lake Recreation Society with an unknown value, and a 48% interest in Gemini Land Trust, LLC with a value of $2,500.00.
The Debtor exempted a total value of $340,947.00, but did not exempt an interest in Gemini.3 On the Statement of Financial Affairs, the Debtor indicated “none” to the following pertinent categories: 1. Income from employment or operation of business; 2. Income other than from employment or operation of business; 3. Payments to creditors; 4. Suits and administrative proceedings, execution, garnishments, and attachments; 11. Closed financial accounts; 14. Property held for another person; 15. Prior address of debtor; and 18. Nature, location and name of business. The Debt- or signed his petition under penalty of perjury, signifying that all information provided was accurate and complete.
A. The Debtor’s Amended, Schedules
On February 20, 2013, the Debtor filed his first amendment to the petition schedules (the “First Amendment”). The Debt- or received a copy of his petition in the mail and noticed that legal counsel omitted his interest in Chesapeake Operating, Inc. (“Chesapeake”), which he inherited in 2008 from his grandfather, Charles Bates. The Debtor’s interest in Chesapeake generates approximately $20.00 in annual royalties, and pays one time per year based on production. The Debtor revised Schedule B to disclose a $100.00 interest in Chesapeake under number 14. Interests in partnerships or joint ventures. However, the Debtor’s classification of his mineral interest in Chesapeake was improper and should have been listed under number 35. Other personal property of any kind not already listed. Following this First Amendment, the Debtor felt his schedules were complete.
The Debtor’s second amendment to the petition occurred on May 7, 2013 (the “Second Amendment”), two days before the Debtor’s scheduled 2004 examination. On Schedule B, the Debtor added the following items to number 2. Checking, savings or other financial accounts: a jointly held checking account at Chase Bank worth $0.00, and a Checking account at LPL Financial worth $142.00. These accounts were omitted oversights. The Debtor further revised Schedule B to reflect a 49% interest in Gemini Land Trust, LLC, rather than a 48% interest. The *599value of the Debtor’s interest in Gemini, however, remained constant at $2,500.00. Additionally, the Debtor amended his claim for property exemptions to $341,189.00 (an increase of $242.00). The Debtor further altered his Statement of Financial Affairs to provide the following information:
1. Income from employment or operation of business: Joint wages for 2011 in the amount of $46,090.00.
2. Income other than from employment or operation of business: 2011 other income in the amount of $23,195.00 and 2012 other income in the amount of $21,000.00.
3(b). Payments to creditors: Chase in the amount of $3,492.00, John Mandala in the amount of $400.00, SunTrust in the amount of $1,580.00, and Dieter, Stephens, Durham & Cook in the amount of $459.00. The majority of these payments occurred pre-petition in November and December of 2012.
4. Suits and administrative proceedings, executions, garnishments and attachments: Worley v. Edward D. Jones & Co., L.P. et al. (settled in July 2012) and Robinson v. Worley, et al. (judgment in favor of Robinson on December 3. 2012).
11. Closed financial accounts: Bank of America checking account with a balance of $0.00, which closed pre-petition in September 2012.
14. Property held for another person: Amy Verderosa Worley. Debtor states that he is trustee of the Amy Verderosa Worley Revocable Trust, which holds funds in trust for Amy Worley. The assets of the trust are located at Bank of America in the amount of $9,060.57.
15. Prior address of debtor: two prior addresses listed for the Debtor where he resided from 2005 to May 2011, and then May 2011 to June 2012.
18. Nature, location and name of business: Debtor added eight businesses, including Edward D. Jones & Co., L.P., Worley Financial Services, LLC, Gemini Land Trust, Cinnamon Lake Recreation Society, Chesapeake Operating, Inc., Gator Pointe, LLC, Dog Island Land Trust, LLC, and Euton Capital International, LLC.
All of the information provided by the Debtor in the Second Amendment was available pre-petition. The Debtor added number 14. Property held for another person, after being instructed by the Court to disclose his wife’s trust account. Additionally, the Debtor had provided the information in number 15. Prior address of debtor, to his counsel, and was unsure why the information had not been included in the original petition. Finally, the Debtor conceded that the impending 2004 examination influenced his decision to submit the Second Amendment “out of an abundance of caution” and “for clarity.”
On May 16, 2013, approximately seven days after the 2004 examination, the Debt- or filed his third amendment to the petition (the “Third Amendment”). The Third Amendment solely affected the Statement of Financial Affairs. Specifically, the Debtor altered number 2. Income other than from employment or operation of business, to reflect 2011 other income in the amount of $33,195.00 and 2012 other income in the amount of $41,000.00. The figures represented in the Second Amendment were typos, and thus, an additional amendment was necessary to clarify the 2011 and 2012 income values. The Debtor further amended item number 10. Other transfers, to disclose periodic transfers of funds to and from the Jason C. Worley Revocable Trust between June 23, 2004 and July 2012. The funds in this trust were used to cover the Debtor’s general living expenses.
*600In October 2013, the Debtor received correspondence from his aunt informing him that he inherited a 1/3 interest in mineral rights on eight acres in Oklahoma. Although the Debtor became aware of this interest in September 2013, he mistakenly believed the Oklahoma mineral rights interest was identical to his interest in Chesapeake. The Debtor amended his schedules a fourth time on October 25, 2013. This time, the Debtor altered Schedule A to provide a description of the Oklahoma property, and stated the value as “Unknown.” Five days later, on October 30, 2013, the Debtor filed his fifth and final amendment, which decreased his interest in the Oklahoma mineral rights property from 1/3 to 1/24. The Debtor further valued his interest in this property at $6,815.44.
B. The Debtor’s Valuation of Gemini
The Debtor’s original schedules and all subsequent amendments consistently valued the Debtor’s interest in Gemini at $2,500.00. To obtain this figure, the Debt- or selected the capitalization rate as his method of valuation. Specifically, the Debtor multiplied the highest income distribution he received from Gemini, which was in the amount of $483.00 (rounded to $500.00), by five. The Debtor obtained the $483.00 figure from the 2008 Kl, and that he referred to the Kl documents when valuing his interest in Gemini. The Debt- or never requested an appraisal of the Pelham property prior to his valuation, and had never visited the property in person. Although the Debtor informed Mr. Magers of the methodology used to calculate his interest in Gemini, he never disclosed his $65,000.00 payment to fund Gemini.
Furthermore, the Debtor did not contact either Joshua Crapps or Daniel Crapps when estimating the value of his interest, despite the fact that Joshua Crapps was the managing member of Gemini and Daniel Crapps was an experienced real estate broker. The Debtor even conceded that Joshua Crapps would be in a better position to value Gemini because of his access to Daniel Crapps. Both Daniel Crapps and Joshua Crapps disagreed with the Debtor’s $2,500.00 valuation of his interest in Gemini. Specifically, Daniel Crapps explained that a minority share in an LLC will typically be sold to other members for 20-30% of its value. Given that Pelham listed Gemini’s 2012 value at $132,128.00, Gemini’s minority share in Pelham could be sold for a minimum of $26,425.60. This makes the Debtor’s minority interest in Gemini worth at least $13,212.80. Both Daniel Crapps and Joshua Crapps expressly refuted the notion that Gemini should be valued as low as $2,500.00.4
Finally, prior to the trial, Pelham sold its largest tract of land and distributed $100,000.00 to each 10% interest holder, including Gemini. The Debtor is currently in the process of receiving his $50,000.00 share. However, even with the knowledge that his interest in Gemini’s proceeds is $50,000.00, the Debtor claimed that he would still list Gemini’s value at $2,500.00 on the petition.
III. THE ADVERSARY PROCEEDING
Following the Debtor’s bankruptcy filing, the Robinsons initiated an adversary proceeding against the Debtor on September 30, 2013, objecting to the Debtor’s *601discharge on four grounds. First, the Debtor intentionally undervalued his interest in Gemini Land Trust, LLC by more than 95% and should be denied a discharge pursuant to § 727(a)(4) of the Bankruptcy Code. Second, the Debtor failed to explain his deficiency of assets after having earned $1,400,000.00 at Edward Jones, and neglected to identify the source of exempt funds in his two Roth IRA (E*Trade) accounts, supporting a denial of discharge under § 727(a)(5). Third, the Debtor omitted his ownership interest in Chesapeake from the original petition schedules and misrepresented its value in an attempt to hinder, delay, or defraud the trustee and creditors pursuant to §§ 727(a)(2) and (4). Finally, the Robinsons argue that the five amendments to the Debtor’s petition illustrate the Debtor’s intent to conceal property from the trustee and creditors, thus warranting denial of a discharge under § 727(a)(2).
DISCUSSION
A principal goal of the Bankruptcy Code is to provide the debtor a fresh start “unhampered by the pressure and discouragement of preexisting debt.” In re Belk, 509 B.R. 513, 518 (Bankr. W.D.N.C.2014). The reward of a fresh start, however, is limited to the “honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Debtors who “play fast and loose with their assets or with the reality of their affairs” may be denied their bankruptcy discharge pursuant to 11 U.S.C. § 727. In re Belk, 509 B.R. at 518. While the denial of a discharge is a drastic remedy, it is warranted where debtors have been “less than honest” or unscrupulous. In re Olbur, 314 B.R. 732, 740 (Bankr.N.D.Ill.2004); In re McGalliard, 183 B.R. 726, 732 (Bankr. M.D.N.C.1995); see In re Spiers, Ch. 7 Case No. 11-32345, Adv. No. 1203211, 2013 WL 319785, at *6 (Bankr.W.D.N.C. Jan. 28, 2013).
To prevail on an objection to discharge, a party need only prove one ground for non-dischargeability under § 727(a). Farouki v. Emirates Bank Int’l, Ltd., 14 F.3d 244, 250 (4th Cir.1994) (noting that the provisions of § 727(a) are phrased in the disjunctive). The party objecting to discharge bears the burden of proof by a preponderance of the evidence. Id. at 249; In re McGalliard, 183 B.R. at 731; see Bankr.R. 4005. Although the burden may shift to the debtor to provide satisfactory, explanatory evidence following the creditor’s prima facie case, the ultimate burden resides with the moving party. Farouki, 14 F.3d at 249; In re Michael, 452 B.R. 908, 916 (Bankr. M.D.N.C.2011).
The Robinsons first contend that the Debtor should be denied a discharge pursuant to § 727(a)(4) for purposefully undervaluing his interest in Gemini. For the Court to deny a discharge under this section, the Robinsons must establish that the Debtor (1) made a false statement under oath and (2) that such statement was made willfully and with the intent to defraud. In re Johnson, 82 B.R. 801, 805 (Bankr.E.D.N.C.1988); see 11 U.S.C. § 727(a)(4)(A).
The first element requiring a false statement under oath is an easily satisfied question of fact. In re Belk, 509 B.R. at 519. For purposes of § 727(a)(4)(A), a debtor’s petition, schedules, statement of financial affairs, answers to interrogatories, responses made at a 341 meeting, and in-court testimony all constitute statements under oath. Id.; see In re Abdelaziz, Ch. 7 Case No. 10-51257, Adv. No. 11-6017, 2012 WL 359756, at *3 (Bankr.M.D.N.C. Feb. 2, 2012). An oath becomes false if it includes any material *602misrepresentation or omission. See In re Michael, 452 B.R. at 919 (“A false oath sufficient to merit a denial of discharge includes a misrepresentation or an omission in the debtor’s bankruptcy Schedules or Statement of Financial Affairs.”) (internal quotation marks omitted).
In contrast to the false statement, the element of fraudulent intent depends largely upon a subjective evaluation of the debtor’s credibility and demeanor. In re Belk, 509 B.R. at 520. A court will find the requisite intent to deceive where a debtor’s statements are inconsistent or incompatible with his own knowledge and information. In re Michael, 452 B.R. at 919; In re Barnette, 2002 WL 1544472, at *2. Such statements and misrepresentations must exceed the debtor’s honest mistake. In re Michael, 452 B.R. at 919; In re Barnette, 2002 WL 1544472, at *2. However, a debtor’s reckless indifference to the truth is the functional equivalent of fraudulent intent, and weighs in favor of denying the debtor’s discharge. In re Belk, 509 B.R. at 520; In re Johnson, 82 B.R. at 805; see In re Abdelaziz, 2012 WL 359756, at *5 (noting that “a reckless indifference for the truth ... supports a finding of fraudulent intent”). While fraudulent intent may be established by direct evidence, it is customarily proven through circumstantial evidence and “inferences drawn from a course of conduct.” In re Belk, 509 B.R. at 520 (internal quotation marks omitted); In re Abdelaziz, 2012 WL 359756, at *4; see In re Johnson, 82 B.R. at 805 (“Because debtors are unlikely to acknowledge a fraudulent intent, the court may infer such intent from circumstantial evidence including a pattern of nondisclosure.”). Thus, if the debtor’s original schedules contain materially incorrect or inaccurate information, his discharge should be denied. In re Michael, 452 B.R. at 919.
In the present case, the Court finds that the Robinsons have met their burden of proof under § 727(a)(4)(A). The Debtor’s original petition and five subsequent amendments served as oaths for which the Debtor certified under penalty of perjury that all information contained in the schedules was accurate and complete. In these schedules, the Debtor claimed that the value of his interest in Gemini was only $2,500.00 despite the fact that he originally contributed $65,000.00 to fund Gemini. Although the Debtor described his capitalization rate valuation methodology to Mr. Magers, he never disclosed his $65,000.00 capital contribution.
Furthermore, the Debtor received annual K1 filings since 2007 that valued his interest in Gemini between $68,985.00 and $67,555.00. The Debtor did not divulge these figures to Mr. Magers, and made no attempt to contact either Daniel Crapps or Joshua Crapps during the valuation process. The Debtor’s failure to converse with the managing agent of Gemini and the experienced realtor who informed the Debtor of the Pelham investment opportunity illustrates a reckless indifference to the true value of Gemini.5 This conclusion is strengthened by the Debtor’s own admission that Joshua Crapps and Daniel Crapps were in a superior position to value Gemini. Neither Joshua Crapps nor Daniel Crapps would value the Debtor’s interest in Gemini as low as $2,500.00, even when discounted to 20-30% of its original value. The fact that Mr. Magers engaged in his own valuation of Gemini and subsequently *603notified the Court that assets would be available for distribution further supports denying the Debtor his discharge.
Additionally, the sale of Pelham’s largest tract of land occurred immediately preceding the trial. The sale generated $100,000.00 for Gemini, with the Debtor receiving a $50,000.00 share. However, despite having contributed $65,000.00 to fund Gemini and obtaining $50,000.00 from the sale of Pelham’s property, the Debtor testified at trial that he would still value his interest in Gemini at $2,500.00 today. The Court finds this testimony suspect and believes it is improbable that the Debtor would still value his interest as low as $2,500.00.
Moreover, while the Court agrees with Debtor’s counsel that the value of an LLC is not equivalent to the sale price of the underlying real property, the Court finds that the Debtor’s valuation of Gemini is so low as to be unrealistic. In re Soderstrom, 484 B.R. 874, 880 n. 5 (M.D.Fla.2013) (stating that the interest an LLC member owns is “wholly different than an undivided interest in property that co-owners own in a tenancy in common or joint tenancy”). The Debtor impermissibly disregarded his initial capital contribution to Gemini, and also devalued the timber, hunting, and farming profits of the Pelham property. See generally In re Warner, 480 B.R. 641, 653 (Bankr.N.D.W.Va.2012) (explaining that the rights of an LLC member “may be broader than merely sharing in distributions from a LLC”). Given the Debtor’s extensive background in finance and his experience interpreting financial documents, the Court concludes that the $2,500.00 value of Gemini was a material misrepresentation and inconsistent with the Debtor’s knowledge. Therefore, the Debtor’s discharge is denied pursuant to § 727(a)(4).
Provided the disjunctive phrasing of § 727, the Court need not address the Robinsons’ remaining three arguments. Nonetheless, the Court notes that the Robinsons have only carried their burden of proof with respect to the Debtor’s valuation of Gemini, and have failed to prove any further ground for denial of a discharge. Specifically, the Court finds that the Debtor has adequately explained the deficiency of the $1,400,000.00 earned at Edward Jones, given his six investments with loan payments of over $90,000.00 per year. The Debtor also incurred $100,000.00 of student loan debt, lost a $240,000.00 investment with Wann Van Robinson, and expended $50,000.00 in legal fees for litigation against the Robinsons. Moreover, the Debtor traced the source of funds in his two Roth IRA (E*Trade) accounts to his IRA account at Edward Jones, and has maximized his IRA contributions for over seventeen years. For these reasons, the Robinsons have failed to satisfy their burden of proof under § 727(a)(5).
Finally, the Court concludes that the Debtor’s omission of his interest in Chesapeake and the five amendments to his petition were not undertaken with the intent to hinder, delay, or defraud creditors or with the intent to conceal property. Rather, the schedule amendments primarily corrected accidental oversights by Debt- or’s counsel. The Robinsons have not adequately overcome the Debtor’s assertion of honest mistake and have failed to carry their burden of proof with respect to the Debtor’s intent.
CONCLUSION
Based on the foregoing, it is therefore ORDERED that the Robinsons’ Objection to Discharge is granted pursuant to 11 U.S.C. § 727(a)(4) and the Debtor is denied his discharge in the bankruptcy case.
. Daniel Crapps is Joshua Crapps’ father. He possesses a Florida real estate broker’s license and has an office licensed in Georgia. Daniel Crapps has performed over one hundred land trust and LLC transactions and has been the manager or co-manager in at least 90% of those deals. Given his experience, Daniel Crapps stated that he ”know[s] more than appraisers,” and no longer uses appraisals to value land. (Daniel Crapps Dep. 17:18, Aug. 28, 2013.)
. Mr. Magers filed the Notice of Assets after learning that Gemini owned a 10% interest in Pelham, which owned 587 acres of timberland. Mr. Magers felt the Debtor’s interest in Gemini exceeded the scheduled petition value and would produce income for distribution to creditors.
. If the case had been closed as a no asset case, the Debtor’s property interest in Gemini would have been abandoned to the Debtor pursuant to 11 U.S.C. § 554.
. When asked whether he "would ... ever value the interest of Gemini as something like $2500 or something that low,” Daniel Crapps responded, "In this property? No.” (Daniel Crapps Dep. 60:25-61:3, Aug. 28, 2013.) Similarly, although Joshua Crapps admitted that he was unsure of Gemini’s actual value, he stated that “it would be more than [$]2500.” (Joshua Crapps Dep. 65:7, Aug. 28, 2013.)
. The Court notes that the Debtor has known Joshua Crapps since high school and has interacted with Daniel Crapps on numerous occasions throughout his childhood. Both Joshua Crapps and Daniel Crapps attended the Debtor's wedding. The Debtor’s personal relationship with both parties creates further speculation as to why the Debtor refused to request their assistance in valuing his interest in Gemini. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497532/ | Chapter 7
ORDER DENYING PLAINTIFF’S MOTION TO DISQUALIFY COUNSEL FOR DEFENDANTS
David R. Duncan, Chief US Bankruptcy Judge
This matter is before the Court on a motion to disqualify counsel for the defendants, Heritage Funding, LLC and Ronald F. LeGrand (“Defendants”), filed by the plaintiff, Michelle L. Vieira, Trustee (“Plaintiff’), on July 25, 2014. Defendants objected to the motion, and this Court held a hearing on the motion on August 26, 2014. After careful consideration of the applicable law, arguments of counsel, and evidence submitted, Plaintiffs motion to disqualify is denied.
FACTS
Plaintiff filed this adversary proceeding on January 9, 2014. In the amended complaint filed on April 24, 2014, Plaintiff asserts numerous causes of action, including causes of action for equitable subordination and for setting aside a fraudulent conveyance. Plaintiff alleges Heritage Funding, LLC (“Heritage”) transferred $2,000,000 to the debtor in the involuntary chapter 7 bankruptcy underlying this adversary proceeding, Legacy Development SC Group, LLC (“Legacy”). The transfer was memorialized by a note and mortgage on ten lots Legacy owned. Shortly thereafter, Legacy transferred $997,566.22 to LeGrand, who is the managing member of Heritage and Legacy. Heritage filed a proof of claim in Legacy’s bankruptcy in the amount of $8,100,277.78. In support of its equitable subordination cause of action in which Plaintiff seeks to subordinate Heritage’s claim, Plaintiff alleges:
Heritage, through its Manager Le-Grand, has engaged in gross and egregious conduct in that, inter alia:
a. The Heritage “loan” was merely a vehicle to transfer funds for the direct benefit of Heritage’s Manager, LeGrand;
b. Heritage and LeGrand caused the Debtor’s property to be encumbered by a Mortgage when the funding did not benefit the Debt- or;
c. Heritage and LeGrand transferred funds to Legacy under the guise of a loan for the purchase of real property, when it knew or should have known that the funds would not be used for the purchase of real property;
*606d. Heritage and LeGrand knew or should have known that its funds would not be used for the benefit of the Debtor, and instead were primarily for the direct benefit of Heritage’s own Manager;
e. Heritage and LeGrand caused the Debtor to execute Loan Documents under terms that Heritage failed to enforce, and never intended to enforce, in order to boost itself into a secured position to the detriment of the other creditors and to protect the equity in the real property for itself.
With respect to her fraudulent conveyance cause of action, Plaintiff alleges the transfer to LeGrand of the $997,566.22 constituted a fraudulent transfer without valuable consideration under South Carolina’s Statute of Elizabeth. The same attorney is representing both defendants in this adversary proceeding.
LEGAL STANDARD
“A motion to disqualify counsel is a matter subject to the court’s general supervisory authority to ensure fairness to all who bring their case to the judiciary for resolution.” Clinton Mills, Inc. v. Alexander & Alexander, Inc., 687 F.Supp. 226, 228 (D.S.C.1988). Although a disqualification determination must be based upon “a proper application of applicable ethical principles,” the “drastic nature of disqualification requires that courts avoid overly-mechanical adherence to disciplinary canons at the expense of litigants’ rights freely to choose their counsel ... and that they always remain mindful of the opposing possibility of misuse of disqualification motions for strategic reasons.” Shaffer v. Farm Fresh, Inc., 966 F.2d 142, 145-46 (4th Cir.1992). Because of the balance that must be struck “ ‘between the client’s free choice of counsel and the maintenance of the highest ethical and professional standards in the legal community,’ ” disqualification motions should be decided on a “case-by-case analysis.” Buckley v. Airshield Corp., 908 F.Supp. 299, 304 (D.Md.1995) (quoting Tessier v. Plastic Surgery Specialists, Inc., 731 F.Supp. 724, 729 (E.D.Va.1990)). Moreover, “[s]ince disqualification is such a drastic measure, [the party seeking disqualification] ‘bears a high standard of proof to show that disqualification is warranted.’ ” Id. (quoting Tessier, 731 F.Supp. at 729); see also Sanford v. Commonwealth of Va., 687 F.Supp.2d 591, 602 (E.D.Va.2009).
To support disqualifying counsel based on conflict of interest grounds, “the asserted conflict must be a real one and not a hypothetical one or a fanciful one.” Sanford, 687 F.Supp.2d at 602. “Put another way, disqualification simply cannot be based on mere speculation that ‘a chain of events whose occurrence theoretically could lead counsel to act counter to his client’s interests might in fact occur.’ ” Id. at 603 (quoting Shaffer, 966 F.2d at 145). “[S]ome stronger objective indicator — even of ‘likelihood’ — than simple judicial intuition is needed to warrant the drastic step of disqualification of counsel.” Shaffer, 966 F.2d at 145-46. The Fourth Circuit is in full accord with the following observations regarding applying the canons of a state’s code of professional conduct for attorneys to motions to disqualify: *607Aetna Cas. & Sur. Co. v. United States, 570 F.2d 1197, 1202 (4th Cir.1978).
*606It behooves this court, therefore, while mindful of the existing Code, to examine afresh the problems sought to be met by that Code, to weigh for itself what those problems are, how real in the practical world they are in fact, and whether a mechanical and didactic application of the Code to all situations automatically might not be productive of more harm than good, by requiring the client and the judicial system to sacrifice more than the value of the presumed benefits.
*607
ANALYSIS
In her motion to disqualify, Plaintiff asserts defense counsel’s representation of LeGrand is directly adverse to Heritage because (1) Heritage is a creditor of Legacy and a judgment against LeGrand is beneficial to the bankruptcy estate and its creditors; (2) Legacy may have a defense against the equitable subordination cause of action through distancing itself from LeGrand; and (3) there are numerous crossclaims that Heritage could assert against LeGrand. Rule 1.7 of South Carolina Rules of Professional Conduct deals with conflicts of interest involving current clients:
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
(4)each affected client gives informed consent, confirmed in writing.
S.C.App.Ct. R. 407, Rule 1.7. “[Simultaneous representation of parties whose interests in litigation may conflict, such as coplaintiffs or codefendants, is governed by paragraph (a)(2)” of Rule 1.7. Id. at Rule 1.7, cmt. 21. With respect to consent under Rule 1.7(b), Rule 1.13(g) provides that “[a] lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization’s consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders.” Id. at Rule 1.13(g). Plaintiff asserts Defendants’ counsel has not obtained the consent of an official of Heritage other than LeGrand to the dual representation and has not obtained the consent of the shareholders of Heritage.
The Heritage operating agreement provides that there are two classes of members: class A members and class B members. LeGrand is the sole class A member of Heritage and the manager of Heritage. The operating agreement states that “[e]x-cept as specifically required in this Operating Agreement or by the provisions of the [Florida Limited Liability Company] Act, Class B Members shall have no right to vote, consent to, or approve of any actions taken or not taken by the Manager of the Company or by the Class A Member(s) and Class A Member(s) shall have the sole right to vote as herein provided.” Additionally, the operating agreement sets forth that “[t]he business and affairs of the Company shall be managed by its Manager. Except for situations in which the consent or approval of the Members is expressly required by this Operating Agreement or by nonwaivable provisions *608of applicable law, the Manager shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incidental to the management of the Company’s business.” In her motion to disqualify, aside from asserting in a conclusory manner that the shareholders of Heritage must consent, Plaintiff does not address the impact of these provisions in the operating agreement on Rule 1.13(g) of the South Carolina Rules of Professional Conduct and whether, in light of these provisions, somebody other than LeGrand must still consent to the representation of both defendants by the same attorney. Nothing has been presented to the Court suggesting that the class B members of Heritage were forced to participate in a limited liability company in which such broad authority is given to one person. Given the high standard of proof on Plaintiff to show disqualification is appropriate, not addressing this issue constitutes a basis for denying the motion. See Buckley, 908 F.Supp. at 304.
A second basis for denying the motion to disqualify lies in Plaintiffs delay in pursuing the motion, as it was filed three days after discovery concluded in this adversary proceeding even though Plaintiffs counsel raised concerns with Defendants’ counsel regarding the dual representation early in the case. Plaintiff asserts she filed this motion after receiving discovery on July 9, 2014, suggesting that LeGrand may not have fully informed the members of Heritage about this litigation. However, if Plaintiff wanted proof that the members of Heritage or a Heritage official other than LeGrand had consented to the dual representation, she could have demanded such proof from Defendants’ counsel early in this adversary proceeding. While the Fourth Circuit has not ruled on whether delay alone constitutes a valid reason for denying a motion to disqualify, this Court concludes that Plaintiffs delay either by itself or in combination with other factors courts have considered is a basis for denying the motion. See Buckley, 908 F.Supp. at 307-08. These other factors include “when the movant learned of the conflict; whether the movant was represented by counsel during the delay; why the delay occurred, and, in particular, whether the motion was delayed for tactical reasons; and whether disqualification would result in prejudice to the nonmoving party.” Id. at 307 (citation and internal quotation marks omitted). Plaintiff learned of the possible conflict early in this adversary proceeding, she has been represented by counsel throughout this adversary proceeding, and substantial prejudice would potentially result to the defendants because of the significant expense incurred and resources expended thus far pursuing a joint defense strategy. While it does not appear to the Court that the motion was filed for tactical reasons, the motion was filed after the conclusion of discovery and shortly after the Court issued an order protecting LeGrand from appearing for a deposition in South Carolina rather than his residence in Florida.
Finally, the facts supporting the fraudulent conveyance cause of action and equitable subordination cause of action are interwoven in that proving LeGrand did not convey a benefit upon Legacy for the nearly $1 million transferred to him supports Plaintiffs theory with respect to her equitable subordination cause of action. Defendants’ counsel has indicated he believes it is in the best interests of both defendants to pursue a common defense against both causes of action because defeating one will help defeat the other. In other words, there is a litigation strategy that supports common counsel or close coordi*609nation of defenses.1 While it is conceivable that as yet unknown further developments in this case could possibly result in Defendants’ counsel not being able to act in the best interest of both defendants, the Court does not conclude it should interject itself in the decision of Defendants’ counsel to undertake the dual representation. Moreover, the class B members of Heritage have the ability to take action to protect themselves if they believe LeGrand is not acting appropriately, and no authority has been presented indicating that by not asserting crossclaims against LeGrand, Heritage’s ability to pursue any such claims that might exist would be barred in another proceeding. See Fed.R.Civ.P. 13(g) (“A pleading may state as a cross-claim any claim by one party against a coparty-” (emphasis added)). Furthermore, no legal authority has been presented suggesting the outcome of this adversary proceeding would preclude a class B member of Heritage from taking independent legal action. With respect to Plaintiff’s concern that the dual representation could affect the validity of any judgment entered in this adversary proceeding, no authority has been presented suggesting that a class B member of Heritage could attack, on behalf of Heritage, a judgment against Heritage.
CONCLUSION
For the reasons set forth herein, Plaintiffs motion to disqualify is denied.
AND IT IS SO ORDERED.
. In her motion to disqualify, Plaintiff relies on Sanford v. Commonwealth of Virginia, 687 F.Supp.2d 591 (E.D.Va.2009). However, Sanford is distinguishable from the present situation because in Sanford there were substantial discrepancies in the parties’ testimony and an incompatibility in positions in relation to opposing parties. Sanford, 687 F.Supp.2d at 597. Plaintiff has not alluded to any discrepancies in the testimony of the two defendants in this case or incompatibilities in their positions. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497534/ | Chapter 11
MEMORANDUM OPINION AND ORDER
Keith L. Phillips, United States Bankruptcy Judge
Before the Court is the objection of Debtors Robert M. Lewis, Jr. and Linda S. *617Lewis to the claim filed by American Express Centurion Bank. After considering the evidence and the arguments of the parties, the Court finds that the objection must be sustained and the claim disallowed.
Background and Positions of the Parties
Debtors filed their chapter 11 case on October 8, 2012. The case was designated a small business case, pursuant to § 101(51 C)1 of the Bankruptcy Code. Debtors’ chapter 11 plan was confirmed on May 10, 2018. The confirmed plan provides for the payment of general unsecured creditors at one hundred percent of their allowed claims, without interest.
American Express Centurion Bank (“American Express”) filed a proof of claim in Debtors’ case on November 15, 2012, asserting an unsecured claim in the amount of $67,927.75. The basis for the claim was amounts due on an American Express Rewards Plus Gold Card (the “Credit Card”), a revolving account opened in 1987 in the name of Dr. Robert Lewis. The parties have stipulated that the American Express cause of action accrued on November 16, 2007, the date of the last payment made on the account.
Debtors filed an objection to the American Express claim on October 21, 2013 (the “Objection”). In the Objection, Debtors assert that the American Express claim should be disallowed because its collection is time-barred by Virginia’s three-year statute of limitations for oral contracts. Va.Code Ann. § 8.01-249(4)
American Express responds by arguing that the defense of statute of limitations is an affirmative defense and that the burden of proving its applicability lies with the party asserting it, in this case the Debtors. It points to Rule 3001(f) of the Bankruptcy Rules, Fed. R. Bankr. P. 3001(f), which provides that a claim filed in accordance with the Bankruptcy Rules is prima facie evidence of the validity and amount of the claim. American Express maintains that Debtors have not produced sufficient evidence to deprive the claim of its prima facie validity and thus shift the burden of proof to American Express.
American Express contends that the agreement between the parties explicitly states that the law of Utah governs. It asserts that its claim is for a credit card debt based upon a written contract and is therefore subject to Utah’s six-year limitations period for written contracts, Utah Code Ann § 78B-2-309. American Express argues that the Utah six-year statute of limitations does not bar enforcement of American Express’s claim because the last payment by Debtor Robert Lewis (Debtor) was within the six-year period prior to the October 8, 2012, filing of the Debtors’ bankruptcy case.
American Express also argues that even if Utah law is not applicable, enforcement of its claim would be allowed pursuant to the Virginia five-year statute of limitations for written contracts, as provided in Va. Code Ann. § 8.01-246(2). It disputes Debtors’ contention that the claim is based on an oral contract that would be therefore barred by the three-year statute of limitations of Va.Code Ann. § 8.01-246(4).
Conclusions of Law and Additional Facts
American Express concedes that if Virginia’s three-year statute of limitations is applicable, then its claim is time-barred and should be disallowed. Therefore, the *618Court must determine which statute of limitations applies.
Does the Utah statute of limitations apply?
American Express bases its assertion that Utah’s six-year statute of limitations applies on two provisions contained in a document entitled “Agreement Between Rewards Plus Gold Card Member and American Express Centurion Bank” (the “Cardholder Agreement”). Those provisions are as follows:
Welcome to American Express Card-membership This document and the accompanying supplement(s) constitute your Agreement. Please read and keep this Agreement. Abide by its terms. When you keep, sign or use the Card issued to you (including any renewal or replacement Cards), or you use the account associated with this Agreement (your “Account”), you agree to the terms of this Agreement.
Applicable Law This Agreement and your Account, and all questions about their legality, enforceability and interpretation, are governed by the laws of the State of Utah (without regard to internal principles of conflicts of law), and by applicable federal law. We are located in Utah, hold your Account in Utah, and entered into this Agreement with you in Utah.
In October 2004, Debtor upgraded his card to “Rewards Plus.” At that time, a copy of the Cardholder Agreement was sent to Debtor along with the actual credit cards. The Cardholder Agreement was not signed by either party. It did not contain a signature on behalf of American Express, and no signature was requested of Debtor. American Express relies upon the language included in the Cardholder Agreement that use of the Credit Card constitutes acceptance of its terms,2 including the provision applying the laws of the State of Utah. It disagrees with Debtors’ assertion that conflicts of law principles dictate the application of Virginia’s statute of limitations.
The Supreme Court has established that a federal court sitting in diversity jurisdiction must apply the choice of law rules of the forum in which the court sits. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). In Compliance Marine, Inc. v. Campbell (In re Merritt Dredging Co.), 839 F.2d 203, 206-07 (4th Cir.1988), the Fourth Circuit extended that principle to bankruptcy cases:
The question of what choice of law rules should be applied by a bankruptcy court presents another wrinkle. Although bankruptcy cases involve federal statutes and federal questions, a bankruptcy court may, as here, face situations in which the applicable federal law incorporates matters which are the subject of state law. It is clear that a federal court in such cases must apply state law to the underlying substantive state law questions. Whether a court in such a situation must apply the conflicts rule of the forum state in determining which state’s law to apply or may choose the applicable state law as a matter of independent federal judgment, however, has remained an open question. See 1A Moore’s Federal Practice ¶ 0.325 (2d ed. 1985). We believe, however, that in the absence of a compelling federal interest which dictates otherwise, the Klaxon rule should prevail where a federal bankruptcy court seeks, to determine the extent of a debtor’s property interest. *619The argument for applying the Klaxon rule to state law questions arising in bankruptcy cases is compelling. A uniform rule under which federal bankruptcy courts apply their forum states’ choice of law principles will enhance predictability in an area where predictability is critical. Most important, such a rule would accord with the model established by Erie and Klaxon. Both those cases make clear that federal law may not be applied to questions which arise in federal court but whose determination is not a matter of federal law: “[ejxcept in matters governed by the Federal Constitution or by Acts of Congress, the law to be applied in any case is the law of the State.” Erie, 304 U.S. at 78, 58 S.Ct. at 822. Such is the case with questions regarding the extent of a bankruptcy debtor’s property interests. “Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” Butner, 440 U.S. at 55, 99 S.Ct. at 918. It would be anomalous to have the same property interest governed by the laws of one state in federal diversity proceedings and by the laws of another state where a federal court is sitting in bankruptcy. Because no overwhelming federal policy requires us to formulate a choice of law rule as a matter of independent federal judgment, we adopt the choice of law rule of the forum state, South Carolina.
Id. Accordingly, in this case, the Court must apply the conflict of law rules of the Commonwealth of Virginia.
Under Virginia conflict of law principles, the parties’ choice of law provision will be enforced, provided that it reasonably relates to the purpose of the agreement and only to the extent that the question is one of substantive law. Hooper v. Musolino, 234 Va. 558, 566, 364 S.E.2d 207, 211 (1988). As to all matters of procedure, Virginia courts will apply the law of Virginia. Id. Statutes of limitations are “considered matters of procedure in Virginia courts, unless they are so bound up with the substantive law of a claim that the limitations period is itself considered substantive.” RMS Tech., Inc. v. TDY Indus., Inc., 64 Fed.Appx. 853, 857 (4th Cir.2003) (citing Jones v. R.S. Jones and Assoc., Inc., 246 Va. 3, 431 S.E.2d 33, 35 (Va.1993)). See also Want v. St. Martin’s Press LLC, No. 1:12cv908 (LMB/TRJ), 2012 WL 5398887 (E.D.Va. Nov. 1, 2012):
As defendant correctly argues, any claim under a theory of breach of either a written or unwritten contract is time-barred. Although the contract included a choice-of-law provision stipulating that “[t]his [a]greement, and the rights and remedies of the parties with respect to it, shall be governed by the internal laws of the State of New York,” Mot. to Dismiss, Ex. 1 at ¶ 28, Virginia’s statute of limitations applies because Virginia generally treats statutes of limitations as procedural, such that they apply to civil actions based on contracts governed by a separate source of substantive law.
Id., at *2. Therefore, the statutes of limitations of the Commonwealth of Virginia are applicable in this case, and Utah statutes of limitations do not apply.
American Express argues that the provision in the Cardholder Agreement that Utah law applies “without regard to internal principles of conflicts of law” requires this Court to refrain from applying Virginia statutes of limitations, citing Education Resources Institute, Inc. v. Orndorff, Case No. CL-2008-4995, 2008 Va. Cir. Lexis 176 (Fairfax Cnty. Va Cir. Ct. Dec. 18, 2008). In Orndorff, a promissory note between the parties provided that it would be governed by “federal laws and *620the laws of the state of Ohio, without regard to conflict of law rules.” The court found that the procedural/substantive distinction of Hooper v. Musolino was inapplicable in light of the language “without regard to conflict of law rules,” finding that the language was “a contractual exclusion of the substantive law/procedural law distinction” and that “[t]he language means that the parties agree to use the law of Ohio completely, without regard to what the procedural rules might be in the forty-nine other states.” Id. at *3.
The Court is aware of no Virginia precedent other than that set forth in Omdorff that deviates from the substantive/procedural distinction set forth in Hooper v. Musolino and RMS Technology. In light of the clear statement in Hooper v. Muso-lino that “[u]nder settled choice-of-law principles ... we will apply our own law in matters that relate to procedure,” 234 Va. at 566, 364 S.E.2d 207, this Court declines to adopt the Omdorff opinion.
Moreover, the Court finds the language in the Cardholder Agreement referring to conflicts of law to be ambiguous, as its intended meaning is unclear. Under Virginia law, ambiguous language must be construed against the drafter. Hamden v. Total Car Franchising Corp., 548 Fed.Appx. 842, 846 (4th Cir.2013). In Hamden, the Fourth Circuit cited the case of Doctors Co. v. Women’s Healthcare Associates, Inc., 285 Va. 566, 740 S.E.2d 523 (2013), in which the Virginia Supreme Court noted that “[w]e have consistently held that in the event of an ambiguity in the written contract, such ambiguity must be construed against the drafter of the agreement.” Id. at 573, 740 S.E.2d at 526 (citation omitted). The Court will not rely upon the ambiguous language of the Cardholder Agreement as a basis for abandoning Virginia’s clearly-stated rule to apply Virginia law to procedural matters.
Which Virginia statute of limitations applies?
Having determined that the Utah statute of limitations is inapplicable, the remaining question before the Court is whether the agreement between Debtor and American Express is in the nature of a written contract. Va.Code Ann. § 8.01-246 provides that:
Subject to the provisions of § 8.01-243 regarding injuries to person and property and of § 8.01-245 regarding the application of limitations to fiduciaries, and their bonds, actions founded upon a contract, other than actions on a judgment or decree, shall be brought -within the following number of years next after the cause of action shall have accrued: ...
2. In actions on any contract which is not otherwise specified and which is in writing and signed by the party to be charged thereby, or by his agent, within five years whether such writing be under seal or not; ...
4. In actions upon any unwritten contract, express or implied, within three years.
If the five-year limitations period of Va. Code Ann. § 8.01-246(2) applies, the claim is not barred by the Virginia statute of limitations, but if the three-year period of Va.Code Ann. § 8.01-246(4) applies, American Express is barred from enforcing its claim against Debtors.
Whether an agreement is an oral contract or a written and signed contract for purposes of the statute of limitations has become more difficult to discern in the electronic age. When Va.Code Ann. § 8.01-246 was enacted in 1977, documents were not typically exchanged or executed electronically. Nevertheless, despite the advent of various methods now used to obtain written signatures or acknowledge-ments to legal documents delivered electronically, American Express did nothing *621to secure Debtor’s written signature on the Cardholder Agreement.
American Express relies upon language in the Cardholder Agreement indicating that Debtor’s use of the Credit Card is deemed to be acceptance of the terms of the Cardholder Agreement. American Express cites abundant authority that it claims establishes that there is a legally binding agreement between the parties. However, the issue is not whether the actions of the parties created a binding contract.3 The issue is whether the transaction between the parties created a written contract for the purpose of determining the appropriate statute of limitations. Case law on the issue is scant. American Express cannot direct the Court to a case in which a Virginia court has found that an unsigned document constitutes a written contract subject to the five-year statute of limitations. It instead relies on an advisory opinion of the Virginia Attorney General. In 2011, in response to an inquiry as to “whether credit card agreements governed by the laws of Virginia are written contracts for statute of limitations purposes under [Va.Code Ann.] § 8.01-246, even though the terms of the contract are found in a series of documents, at least one of which is signed by the cardholder,” the Virginia Attorney General opined that:
It is my opinion that the statute of limitations for written contracts applies to credit card agreements in the situation where the agreement consists of a series of documents, provided that at least one of the documents referencing and incorporating the others is signed by the cardholder, and also provided that the written documents evidencing the agreement contain all essential terms of the agreement.
Op. Va. Att’y Gen. No. 10-128, 2011 WL 565650 (Feb. 7, 2011).4 American Express argues that this language mandates that the Court find the contract at issue here to be a written contract.
The plain language of § 8.01-246(2) requires that a contract be “in writing and signed by the party to be charged thereby” in order to have the five-year statute of limitations apply. The Attorney General’s advisory opinion contains that same requirement, i.e., “that at least one of the documents referencing and incorporating the others is signed by the cardholder.” 2011 WL 565650, at *1. In this case, the party to be bound is the Debtor. There is *622no document signed by Debtor that has been offered in evidence in this case. There being no evidence of any signed document referencing and incorporating the agreement between the parties, the Court must find that Va.Code Ann § 8.01-246(2) is inapplicable and the appropriate statute of limitations is three years.5, 6
By establishing the date of the accrual of the cause of action and the absence of any writing signed by the Debtor, Debtors have carried their burden of proving the affirmative defense of the three-year statute of limitations for oral contracts contained in Va.Code Ann. § 8.01-246(4). American Express has not succeeded in establishing that the five-year statute of limitations of Va.Code Ann. § 8.01-246(2) for written contracts applies. Therefore,
IT IS ORDERED that the objection of Debtors Robert M. Lewis, Jr. and Linda S. Lewis to the claims of American Express Centurion Bank is SUSTAINED and the claim is DISALLOWED.
. Unless otherwise noted, all references to the Bankruptcy Code are to 11 U.S.C. §§ 101— 1532.
. Debtors do not contest that the Credit Card was used after Debtor received the actual physical credit cards in 2004.
. It does not appear that Debtors dispute that there was a valid contract between the parties, nor is there a dispute as to the amount claimed by American Express.
. Va.Code Ann. § 2.2-505 gives the Attorney General the authority to give advice and render advisory opinions under certain prescribed guidelines:
A. The Attorney General shall give his advice and render official advisory opinions in writing only when requested in writing so to do by one of the following: the Governor; a member of the General Assembly; a judge of a court of record or a judge of a court not of record; the State Corporation Commission; an attorney for the Commonwealth; a county, city or town attorney in those localities in which such office has been created; a clerk of a court of record; a city or county sheriff; a city or county treasurer or similar officer; a commissioner of the revenue or similar officer; a chairman or secretary of an electoral board; or the head of a state department, division, bureau, institution or board.
B. Except in cases where an opinion is requested by the Governor or a member of the General Assembly, the Attorney General shall have no authority to render an official opinion unless the question dealt with is directly related to the discharge of the duties of the official requesting the opinion. Any opinion request to the Attorney General by an attorney for the Commonwealth or county, city or town attorney shall itself be in the form of an opinion embodying a precise statement of all facts together with such attorney’s legal conclusions.
. While it is true that modern technology has in many cases obviated the handwritten signature on a physical document, there are still many other ways in which parties may establish a signed writing. This is contemplated in the opinion of the Attorney General addressing § 8.01-246. The Attorney General remarked that "the signature requirement is met by the consumer’s electronic or physical signature on the credit card application, on purchase transaction slips and on the back of a credit card containing reference to the credit card agreement.” Again, in this case, the Court has before it no such evidence.
. American Express also cites this Court’s opinion in Cohen v. Un-Ltd.. Holdings, Inc. (In re Nelco, Ltd.), 264 B.R. 790 (Bankr.E.D.Va. 1999). However, in that case the document was clearly signed by the party sought to be bound, unlike the case before this Court. In Nelco, the court found that ”[i]n order for a writing to satisfy the statute of limitations writing requirement, the contract 'must show on its face a complete and concluded agreement between the parties. Nothing must be left open for future negotiation and agreement: otherwise it cannot be enforced.’ ” Id. at 803-04 (quoting Marley Mouldings, Inc. v. Suyat, 970 F.Supp. 496, 498 (W.D.Va.1997)). In Nelco, the court’s focus was upon whether the signed document at issue was a complete agreement between the parties, with nothing else left to be negotiated, thus making it a written contract for purposes of Virginia’s statute of limitations. As this Court has found that there is no signed agreement between Debtor and American Express, as required by Va.Code Ann. § 8.01-246(2), it is not necessary to address the Nelco “complete agreement” issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497535/ | MEMORANDUM OPINION
REBECCA B. CONNELLY, Bankruptcy Judge.
The question this Court must answer is whether to dismiss the debtor’s case for his failure to disclose assets, failure to disclose appropriate values, failure to comply with court orders, and other cause under 11 U.S.C. § 1208. The chapter 12 trustee advocates for dismissal under § 1208(c). Conversely, the debtor argues *624these mistakes are not sufficient to justify dismissal. For the reasons described below, the Court concludes that cause exists to dismiss this case pursuant to 11 U.S.C. § 1208. The Court, therefore, grants the chapter 12 trustee’s motion to dismiss.
Findings of Fact & Procedural History
Charles Gose Dickenson filed a chapter 12 petition on August 7, 2013. See Chapter 12 Petition, In re Dickenson, 13-71283 (Bankr.W.D.Va. Aug. 7, 2013) ECF Doc. No. 1. Two weeks later, on August 21, Mr. Dickenson filed his bankruptcy schedules and statements. See Balance of Schedules, In re Dickenson, 13-71283 (Bankr.W.D.Va. Aug. 21, 2013) ECF Doc. No. 11. The next month, on September 19, 2013, the chapter 12 trustee conducted the section 341 Meeting of Creditors, which he continued to November 21, 2013, when it concluded. In the interim, on October 4, the debtor filed his amended Schedule A (“First Amended Schedule A”) and amended Schedule D. See Amended Schedule A, Amended Schedule D, In re Dickenson, 13-71283 (Bankr.W.D.Va. Oct. 4, 2013) ECF Doc. No. 14.
Shortly thereafter, on October 21, 2013, Farm Credit of the Virginias, ACA (“Farm Credit”), filed a motion for relief from stay for cause under section 362, citing a lack of adequate protection. See Motion for Relief at 10, In re Dickenson, 13-71283 (Bankr.W.D.Va. Oct. 21, 2013) ECF Doc. No. 15. According to Farm Credit, as of the petition date, Mr. Dickenson owed it approximately $1,086,832.80, which represented roughly seventy percent of Mr. Dickenson’s total debt and was secured by five separate tracts of real estate and certain items of personal property. Id. at 9-10. Farm Credit alleged that the collateral was insufficient to fully secure its claim and that the debtor was unable to provide it with adequate protection. Id.
Mr. Dickenson responded to the motion for relief by admitting all of the facts; except, he denied that Farm Credit had any lien on his farm products and denied that relief from stay was appropriate. See Response to Motion for Relief at 1-2, In re Dickenson, 13-71283 (Bankr.W.D.Va. Oct. 31, 2013) ECF Doc. No. 21. Furthermore, Mr. Dickenson asserted that granting Farm Credit relief from stay would not be in the best interest of the creditors. Specifically, he argued:
Granting relief from the automatic stay, could generate a large deficiency judgment which would and or [sic] could harm other unsecured creditors. The debtor asserts that his farm properties are being maintained and are not suffering any loss or depreciation in value. Therefore, the interest of the movant is adequately protected and the automatic stay should not be lifted or modified.
Id.
The parties agreed to continue the hearing on the motion for relief; however, pri- or to the continued hearing, the parties reached an accord wherein Farm Credit would table and continue its motion for relief for seven more months, until October 2014, in exchange for Mr. Dickenson providing adequate protection to Farm Credit in the form of a $10,0001 payment and an additional lien on other collateral. See Order Approving Adequate Protection, In re Dickenson, 13-71283 (Bankr.W.D.Va. Mar. 24, 2014) ECF Doc. No. 64. The additional collateral was allegedly the debtor’s one-quarter interest in unencumbered real property described as “parcel(s) of land identified as Tax Map Numbers 158R 2085, 141L SB 1549, 139L 596A, 139L 596, and 142L 1699 (each in Russell County, Virginia).” Id. at 2. Along with this consent order, Mr. Dickenson also petitioned the Court for authority to: (1) sell *625his one-eighth interest in real property, colloquially known as “the George Osborne Real Property,” to his sister for a price of $10,738.90, (2) remit $10,000 from the sales proceeds to Farm Credit as adequate protection, and (3) grant Farm Credit a lien on other collateral as additional adequate protection. See Motion to Sell, In re Dickenson, 13-71283 (Bankr.W.D.Va. Dec. 19, 2013) ECF Doc. No. 38. After notice and hearing, the Court approved the consent order and authorized the sale with the specified conditions. See Order Granting Motion to Sell, In re Dickenson, 13-71283 (Bankr.W.D.Va. Mar. 24, 2014) ECF Doc. No. 65.
After Farm Credit filed its motion for relief, on November 4, 2013, Mr. Dicken-son filed his chapter 12 plan for reorganization (“the November 4 Plan”). See Chapter 12 Plan, In re Dickenson, 13-71283 (Bankr.W.D.Va. Nov. 4, 2013) ECF Doc. No. 22. The chapter 12 trustee and two of the debtor’s four secured creditors — Farm Credit and New Peoples Bank — filed objections to confirmation of the November 4 Plan. Along with his objection to confirmation, the chapter 12 trustee also sought dismissal of the case, citing 11 U.S.C. § 1208. Trustee’s Objection at 2, In re Dickenson, 13-71283 (Bankr.W.D.Va. Nov. 8, 2013) ECF Doc. No. 25.
During the confirmation hearing, the debtor conceded the November 4 Plan could not be confirmed over the objections of Farm Credit and New Peoples Bank. Additionally, the chapter 12 trustee argued the plan could not be confirmed, because (1) it provided a payment term for unsecured creditors exceeding the period permitted under section 1222; (2) it was unclear in its payment terms for its debts to the County Treasurer; (3) it did not provide sufficient funding to pay the claims as proposed; and (4) most importantly, the trustee was unable to determine the extent of the debtor’s ownership interests in real property and was uncertain if the Code permitted the treatment proposed in the plan, wherein the debtor would transfer certain property to a certain secured creditor. Id. Accordingly, the Court entered an order denying confirmation of the plan and directing Mr. Dickenson to file an amended plan within fourteen days, absent which the Court would dismiss the case.
The debtor filed an amended plan on March 25, 2014 (“the March 25 Plan”), and noticed it to be heard on May 8, 2014, which the Court set aside as a special hearing date specifically for these matters. See Amended Chapter 12 Plan, In re Dickenson, 13-71283 (Bankr.W.D.Va. Mar. 25, 2014) ECF Doc. No. 67. Nearly every secured creditor filed an objection to the March 25 Plan.
One month later, on April 23, Mr. Dick-enson docketed a pleading entitled “Motion to Exchange Property (11 U.S.C. § 363(b)),” but which was actually a motion to sell (“the Motion to Exchange”). Motion to Exchange, In re Dickenson, 13-71283 (Bankr.W.D.Va. Apr. 23, 2014) ECF Doc. No. 75. As part of the relief requested, the debtor also sought approval of a reduction in the notice period required by Rule 2002 to fourteen days. Id. at 2. The Motion to Exchange stated that the debtor was the owner of a one-quarter interest in approximately 200 acres of property, which he desired to transfer to his nephew. Id. According to the Motion to Exchange, “[t]he debtor desires to exchange his interest in this farm in exchange for the conveyance by his nephew ... of his nephew’s three-quarter (3/4) interest in another farm of fifty (50) acres.” Id. Thus, the Motion requested that Mr. Dickenson “be authorized to exchange properties with his nephew.” Id.
Although the request sought permission prospectively, the debtor had, in fact, al*626ready transferred his interest in the 200 acres to his nephew. Indeed, the Motion to Exchange acknowledged that “one portion” of the exchange had already occurred, because Mr. Dickenson conveyed his one-quarter interest in 203.86 acres located in Russell County, Virginia, to his nephew by a deed dated, and signed on, July 29, 2013.2 Id. Mr. Dickenson’s nephew subsequently recorded this deed on October 21, 2013, before the adjourned 341 meeting. May 8 Transcript at 18, In re Dickenson, 13-71283 (Bankr.W.D.Va. May 22, 2014) ECF Doc. No. 105 [hereinafter May 8 Transcript]. Similarly, Mr. Dick-enson’s nephew conveyed to Mr. Dicken-son the nephew’s three-quarter interest in fifty acres located in Russell County, Virginia, by a deed dated July 26, 2013, and signed on July 29, 2013. See Exhibit F to Trustee’s Objection of Motion to Exchange, In re Dickenson, 13-71283 (Bankr. W.D.Va. May 8, 2014) ECF Doc. No. 85. Mr. Dickenson, however, never recorded the deed. May 8 Transcript, at 42-43. By filing the Motion to Exchange, the debtor hoped the Court would enter an order retroactively approving this transaction.
On April 30, 2014, shortly after filing the Motion to Exchange, Mr. Dickenson filed another amended plan (“the April 30 Plan”), which was more than a month after the Court’s deadline to do so, ultimately frustrating the purpose of the special hearing on May 8 (the “May 8 Hearing”). See Second Amended Chapter 12 Plan, In re Dickenson, 13-71283 (Bankr.W.D.Va. Apr. 30, 2014) ECF Doc. No. 77. With only eight days before the special hearing date, the creditors did not have sufficient time to consider whether the April 30 Plan resolved their existing objections or gave rise to any new onés. See Fed. R. BankR.P. 2002(a)(5).
Two days later, on May 2, 2014, the chapter 12 trustee filed an objection to the Motion to Exchange. See Trustee’s Objection to Motion to Exchange, In re Dickenson, 13-71283 (Bankr.W.D.Va. May 2, 2014) ECF Doc. No. 78. One of the grounds raised by the trustee in opposition to approval of the exchange was the debt- or’s failure to disclose in his schedules his interest in the 200 acres he sought to transfer as well as the clandestine nature of the transaction with his nephew. Id. at 1. Although the Court could not confirm the April 30 Plan, it resolved to go forward and hear the other matters already set for the May 8 Hearing — including the Motion to Exchange.
The May 8 Hearing
At the outset of the May 8 Hearing, counsel for Mr. Dickenson moved to withdraw his Motion to Exchange; however, the chapter 12 trustee, who responded in opposition to the Motion, objected to its withdrawal. May 8 Transcript, at 22-23. The Court denied the motion to withdraw, so counsel for the debtor proceeded with evidence in support of the Motion to Exchange. Id. at 68. Mr. Dickenson was the only witness to testify.
Mr. Dickenson testified that his failure to disclose both his interest in the 203.86 acres and his transfer of that interest to his nephew was simply an innocent mistake. Id. at 29 (“I had a lot of pieces of property and I guess I overlooked that.”); id. at 44 (“I didn’t forget [about the transfer].”). Throughout the hearing, Mr. Dick-enson continually referred to his failure to disclose this information as “an oversight,” and he explained the omission was merely because he “didn’t have the tax tickets.” Id. at 44. When pressed on whether he had made any other mistakes or omissions in his schedules, he stated, “I feel sure I *627have. And I’m not going to say that I haven’t. I could have.” Id.
Mr. Dickenson explained that he owned a one-quarter interest in both the fifty— and 200-acre parcels, and his nephew owned the remaining three-quarters interest in each property.3 See id. at 28-34. In Mr. Dickenson’s opinion, if he could exchange his one-quarter interest in the 200-acre parcel for his nephew’s three-quarter interest in the fifty-acre parcel, thereby giving Mr. Dickenson full ownership of the fifty-acre tract, the value per acre of the property would increase. Id. at 46. Furthermore, Mr. Dickenson owned an adjoining parcel of land to this tract of fifty acres, so consummating the transfer would increase his road frontage, thereby increasing the value of the adjacent property as well. Id.
When pressed further to discuss his valuation of the properties, Mr. Dickenson testified that he believed the value of fifty-acre parcel was around $1900 per acre, which would increase to about $2000 per acre if he owned the entire property outright with no other interest holders. Id. at 63. Although Mr. Dickenson acknowledged that his schedules valued the property at only $1700 per acre, he could not explain the discrepancy between his current statements regarding valuation and the values he scheduled. Id. at 59, 62.
Furthermore, throughout his examination, Mr. Dickenson could not definitively identify which particular parcel of land was subject to this transfer between himself and his nephew. See id. at 34, 35, 37, 63. Again, when pressed, he explained that he did not have the “tax tickets,” so he just forgot to list it in his schedules, even though the transfer occurred merely days before he filed his petition, when he would have been preparing his schedules. Id. at 26, 29, 34, 36, 44.
Later in the hearing, the chapter 12 trustee also confronted Mr. Dickenson about his Statement of Financial Affairs. According to his Statement of Financial Affairs, Mr. Dickenson indicated that he had not transferred any property within the two years immediately preceding the filing of his bankruptcy petition. See Exhibit B at 5, In re Dickenson, 13-71283 (Bankr.W.D.Va. May 8, 2014) ECF Doc. No. 81. Mr. Dickenson acknowledged that he failed to disclose the transfers to and from his nephew, and, once again, he asserted that this failure to disclose was simply an oversight. See May 8 Transcript, at 36, 37, 65.
When asked about these discrepancies in the record, Mr. Dickenson readily admitted that he intentionally concealed the interest in real property that his nephew conveyed to him and intentionally did not record the deed. Id. at 28. “I did not record my 50 acre deed because I knew I had to come before the Court to get that approved.” Id. When asked why he thought he had to come before the Court to request permission to record deeds that he executed prior to his filing for bankruptcy, he testified, “I guess I was aware not to do that. That I had to come before this Court to do that, I guess.” Id. 55. Mr. Dickenson did not, however, explain why he decided to wait ten months after filing his petition to come before the Court to request approval of the exchange as opposed to doing so right after filing.
At the conclusion of the May 8 Hearing, the Court continued the hearing on confir*628mation of the plan and objections thereto to June 5 (the “June 5 Hearing”) to allow time for adequate notice and opportunity to object to the plan. Id. at 67-68. The Court, in addition, continued the hearing on the chapter 12 trustee’s motion to dismiss to June 5 and orally ruled:
[T]he debtor shall appear and show cause at the continued hearing date why the case should not be dismissed for the debtor’s bad faith in failing to disclose all assets and up to date values of those assets to the extent that there has not been a full and complete disclosure of assets and values as of June 5[, and in] addition, whether the plan should be denied confirmation for not being filed in good faith to the extent that it does not address all assets that are in this case and full values of the assets as of June 5.
Id. at 68-69. The Court’s ruling was incorporated in orders.
The June 5 Hearing
Prior to the continued hearing on June 5, the debtor filed another amended Schedule A (“Second Amended Schedule A”) as well as several operating reports and a “Second Amended Chapter 12 Plan.”4 Second Amended Schedule A, In re Dickenson, 13-71288 (Bankr.W.D.Va. May 16, 2014) ECF Doc. No. 89; Second Amended Chapter 12 Plan, In re Dicken-son, 13-71283 (Bankr.W.D.Va. May 13, 2014) ECF Doc. No. 88. At the June 5 Hearing, the Court took testimony from two witnesses — Ms. Nancy Dickenson, who is the debtor’s sister, and Mr. Dickenson. Nancy Dickenson took the stand first.
Ms. Dickenson testified that her nephew was experiencing financial problems, so she signed on as guarantor for some of his loans. June 5 Transcript at 10-11, In re Dickenson, 13-71283 (Bankr.W.D.Va. June 27, 2014) ECF Doc. No. 130 [hereinafter June 5 Transcript]. In an effort to improve his financial condition, the nephew sought out a refinancing loan from First Bank and Trust for $150,000, secured by the “Home Place” (the 200-acre tract), but the bank required the nephew to own the property outright, with no other interest holders. Id. Accordingly, the nephew had to obtain Mr. Dickenson’s one-quarter interest in the Home Place, in exchange for which, the nephew would give Mr. Dicken-son his three-quarter interest in the fifty-acre “George Gose Place.” Id. at 24-25. To consummate this deal, Ms. Dickenson admitted to having encouraged her nephew and the debtor to exchange the properties; however, she denied having knowledge of the debtor’s intention to petition for bankruptcy.5 Id. at 11, 14. After the exchange, Ms. Dickenson admitted to having urged the nephew to record his deed, but she asserted that she did not realize the impact it would have on her brother’s bankruptcy. Id. at 17. Furthermore, Ms. Dickenson explained that Mr. Dickenson never recorded his deed, because after the exchange, she kept, and still has, the deed transferring property to Mr. Dickenson. Id. at 11,18-21, 28.
Next, the debtor took the stand. To begin, Mr. Dickenson testified that he filed his Second Amended Schedule A to “cure” his previous omission of the parcels of property as well as to include both the tax-assessed values of the properties and his personal valuations of the properties. Id. at 37. When asked by the trustee why he had failed to include these parcels of prop*629erty when amending his schedules earlier in the case, the debtor responded, “I guess I was just unaware of it.” Id. at 38.
On cross examination, the chapter 12 trustee walked Mr. Dickenson through each of his iterations of Schedule A, identified which parcels he had omitted in the earlier iterations, and questioned him as to why these parcels were not disclosed after the prior amendments. Mr. Dickenson could offer no explanation except that it was an oversight. Id. at 42, 44, 45. Furthermore, the trustee asked Mr. Dicken-son why he had still failed to include the property transferred to him from his nephew in his Second Amended Schedule A. Id. at 45. Mr. Dickenson, once again, could not explain this omission.6 Id.
Delving further into the Second Amended Schedule A, the trustee confronted Mr. Dickenson about three newly disclosed pieces of property,7 called the “Ramsey Land,” and questioned him about the transfer and ownership interests therein. Mr. Dickenson asserted he had purchased these parcels “about two, three years ago.” Id. at 46. Curiously, however, Mr. Dick-enson was a party to a deed transferring to him a one-half interest in that property on February 19, 2014, with the other one-half interest to Michael Hilton, II, and Claude Hart. See Exhibit N, In re Dickenson, 13-71283 (Bankr.W.D.Va. June 4, 2014) ECF Doc. No. 122. Although Mr. Dickenson asserted he had owned a one-quarter interest in the property for two to three years, he could not explain how the February 2014 deed conveyed, from a third party, a one-half interest to him and his wife, as tenants by the entirety with right of survivorship, and another one-half interest to Mr. Hart and Mr. Hilton. Id. at 48.
Furthermore, in explaining his relationship with the aforementioned Mr. Hart and Mr. Hilton, Mr. Dickenson continually referred to them as his “partners;” however, he could not explain why he had not listed Mr. Hilton and Mr. Hart as partners in his statement of financial affairs or his interest in the partnership on his Schedule B.8 June 5 Transcript, at 48-51. Furthermore, he could not explain why he had not sought approval of, or disclosed, the purchase of this property in February to the Court, which ultimately resulted in a further indebtedness to the estate.9 Id. The trustee also asked Mr. Dickenson why, in his Second Amended Schedule A, he valued those tracts of real estate at $21,300, *630but the deed dated only four months earlier indicated he had paid $24,368 for it. Id. at 51-52. Though Mr. Dickenson’s schedules claimed he had valued the properties at their actual costs, when asked to explain why the valuation was different from the cost he paid only a few months earlier, Mr. Dickenson responded, “I don’t know.” Id. at 52.
Upon hearing of the February 2014 deed, counsel for Farm Credit realized one of the tracts of property included therein was that which Mr. Dickenson had pledged as adequate protection to his client as part of their compromise to settle its motion for relief from stay. Id. at 59-64. After the trustee’s questioning, Farm Credit’s counsel also asked questions about how Mr. Dickenson could have pledged the property as adequate protection, when he apparently did not own any interest in it at the time. Id. at 63. Mr. Dickenson claimed the deed must have been wrong, saying, “[w]ell, I guess it’s a mistake. I don’t know.” Id. Furthermore, Mr. Dickenson, disclosed that Mr. Hilton and Mr. Hart were already timbering the property, without approval from Farm Credit, without any of the proceeds going to the estate, and without ever even disclosing the presence of marketable timber10 on the property. Id. at 56-57. Instead, according to Mr. Dickenson’s testimony, the proceeds from the sold timber went “to pay the debt off. The purchase price.” Id. at 56. When asked to whom he owed this debt, he responded, “Claude Hart and Mike Hilton.” Id.
In conclusion, the trustee asked Mr. Dickenson if he could find anywhere in the schedules where he disclosed the existence of a life insurance policy, for which he had reported a $683.28 per month payment on his Operating Reports. Id. at 53. Mr. Dickenson responded that he had “evidently not” disclosed it. Id. Continuing, the trustee asked if he had disclosed anywhere in the schedules the transfer of the property to his nephew, which Mr. Dickenson again said that he had not. Id. at 54-55. Finally, the trustee asked Mr. Dickenson about some cattle that he had recently sold.11 Mr. Dickenson testified that he had sold one load of cattle in April 2014, and another load was still on the feed lot, ready for sale. Id. at 58. He explained further, “[a]fter all the expenses and the loan payment was made,” “we received $36,000” for that first load of cattle. Id. When asked why his operating reports had not disclosed the sale of the cattle, the payment of the expenses and loan, or the receipt of $36,000, he informed the Court, “[t]he [proceeds from the sale of] cattle goes into my sister’s checking account.” Id. at 59. When asked when he will receive income from the sale of cattle, Mr. Dickenson responded, “I feel like as I need the money to pay my debts, that’s when I’ll be drawing from that account to pay my debts, make my payments.” Id.
According to the testimony and record in the case, the Court finds the following facts. Mr. Dickenson:
1. Failed to disclose in his initial schedules his interest in various parcels of real estate, including sixteen acres in Bear Branch, a one-half interest in 64.5 acres at Lick Creek, and a one-quarter interest in 200 acres in Russell County.
*6312. Filed a Second Amended Schedule A that lists various tracts of property twice, with different valuations for same the parcels. See Second Amended Schedule A at 3, 7, In re Dickenson, 13-71283 (Bankr. W.D.Va. May 16, 2014) ECF Doc. No. 89 (listing the properties separately at the top of page 3, worth $15,100 in total, and listing the properties as a single entry on page 7 at $21,300).
3. Failed to disclose accurate or consistent valuations of the property listed in his original and amended schedules.
4. Failed to file schedules and statements with sufficient detail and accuracy to enable the Court to determine whether a proposed plan provides for all creditors, is feasible, and complies with the requirements of section 1225(a)(4).
5. Failed to disclose the transfer of his one-quarter interest in the 200-acre Home Place property to his nephew on any of the various iterations of his schedules and failed to reveal the alleged rescission or produce the deed of rescission.
6. Failed to disclose his interest in the George Gose Place, conveyed to him by his nephew in the deed that his sister held for him and he did not record.
7. Failed to disclose the existence of any transfer of real estate in his Statement of Financial Affairs within the two years prior to filing for his bankruptcy.
8. Failed to disclose his interest in his ongoing partnership with Claude Hart and Michael Hilton, II, wherein the partners purchased tracts of property for the mineral rights and/or timber.
9. Failed to seek court approval for the purchase of property known as the Ramsey Land, even though according to his testimony, he “knew he had to come before this court” in order to secure approval for him to record a different deed of exchange with his nephew.
10. Failed to disclose the debt he owed to Claude Hart and Michael Hilton, II, arising from the purchase of the Ramsey Land.
11. Failed to disclose the value of his interest in timber and potential oil and mineral rights in the property he purchased with his partners, known as the Ramsey Land.
12. Entered into a post-petition transaction with his partners, without prior approval from the Court, whereby his partners would remove valuable assets from the Ramsey Land and retain the proceeds to pay off Mr. Dickenson’s post-petition debt to them.
13. Transferred encumbered assets out of the estate without the secured creditor or the Court’s permission to the detriment of the secured creditor.
14. Sold cattle post-petition and failed to report or reveal the net proceeds of $36,000 on his Operating Statements or in any other report in the case.
15. Failed to disclose his interest in a life insurance policy.
16. Failed to resolve three or more objections to confirmation.
17. Failed to file a confirmable plan by March 27, 2014, in compliance with the Court’s prior order. See May 8 Transcript, at 4.
18. Filed another plan on May 13, 2014, with leave of court, which did *632not resolve the outstanding objections to confirmation.
19. Has yet to file an appropriate and complete Schedule A, Schedule B, Schedule D, or Statement of Financial Affairs, and, after two prior opportunities to amend, has failed to convince the Court he is able to do so.
Conclusions of Law and Analysis
The question before the Court is whether the conduct of the debtor constitutes cause to dismiss his case under Bankruptcy Code section 1208. The chapter 12 trustee urges the Court to conclude that the debtor’s conduct warrants dismissal under section 1208(c)(1), based on the debtor’s repeated failure to provide accurate schedules, failure to confirm a plan, and post-petition misconduct. Conversely, the debtor argues that while such conduct may warrant dismissal, the debt- or’s representations and actions in this case do not rise to the level to justify dismissal.
As more fully set forth below, the Court agrees with the trustee and finds that cause exists to dismiss the case under section 1208(c)(1) and for other good cause under section 1208(c) and (d). The Court holds that Mr. Dickenson’s behavior throughout the pendency of the case constitutes not only an unreasonable and prejudicial delay to creditors but also a lack of good faith in dealing with the creditors and the Court in this case. Accordingly, cause exists to dismiss the case.
A. Section 1208(c)(1)
The Bankruptcy Code outlines the circumstances justifying dismissal of a case in section 1208(c). Specifically, subpart (c)(1) provides, “the court shall dismiss a case under this chapter for cause, including ... unreasonable delay, or gross mismanagement, by the debtor that is prejudicial to creditors....” 11 U.S.C. § 1208(c)(1). The Code does not specify a particular length of delay that is considered per se “unreasonable” or “prejudicial;” however, examples of what courts have found to be unreasonable are abundant. See, e.g., United States v. Suthers (In re Suthers), 178 B.R. 570 (W.D.Va.1994) (ruling the bankruptcy court’s decision not to dismiss a case was an abuse of discretion, when the debtor failed to confirm multiple amended plans over a span of just under three years and violated various court orders, and directing dismissal of the petition for “unreasonable delay”); In re Carroll, No. 13-08930, 2014 WL 3571535 (Bankr.W.D.Mich. July 14, 2014) (holding the debtors’ failure to file an amended plan “promptly,” as indicated by the court’s denial of confirmation of an earlier plan and refusal to adjourn the hearing, was “unreasonable” under the circumstances and ran afoul of the intended “swift” disposition of chapter 12 cases). Consequently, the Court will determine if cause for dismissal exists by considering the specific facts of this case, including the length of the delay, the reason for or explanation of the delay, the impact of the delay on creditors, and how close the debtor is to having a viable plan ready for confirmation.
Mr. Dickenson’s case has now been pending for several months,12 with no confirmed or confirmable plan and consistently inaccurate schedules, and there is little reason to be optimistic circumstances will change any time soon. As pointed out by the chapter 12 trustee at the June 5 Hearing, Mr. Dickenson has had ample time and opportunity to provide the Court and *633interested parties with accurate information, but he has failed to do so and has been unable to provide any meaningful explanation for the inaccuracies. June 5 Transcript, at 73. Without accurate schedules, the Court, trustee, and creditors cannot determine the feasibility or propriety of a proposed plan, and the case cannot progress toward the ultimate goal of plan confirmation and discharge.
At the May 8 Hearing, in attempting to explain the circumstances surrounding his Motion to Exchange, Mr. Dickenson acknowledged that his original Schedule A, filed on August 21, 2013, did not disclose the parcel of real estate he sought to transfer to his nephew, with no explanation as to why. May 8 Transcript, at 44. Only a few weeks later, Mr. Dickenson amended his Schedule A (“First Amended Schedule A”) to fix some inaccuracies; however, even the First Amended Schedule A did not include his interest in the 200 acres he sought to transfer. See Amended Schedule A, Amended Schedule D, In re Dickenson, 13-71283 (Bankr.W.D.Va. Oct. 4, 2014) ECF Doc. No. 14. Still, Mr. Dicken-son could provide no proper explanation as to why he did not include the property in his schedules and still has yet to do so.
Ultimately, despite being filed under penalty of perjury and the many opportunities to correct them, Mr. Dickenson’s schedules remain deficient. To date, his Second Amended Schedule A double-counts certain parcels of real estate and may have other deficiencies that remain unknown; he has not disclosed his partnership with Mr. Hilton and Mr. Hart; he has not disclosed a life insurance policy; he has not indicated any transfers of property in his statement of financial affairs; and his valuations of the property on his schedules compared to his testimony before the Court are at odds.
Furthermore, since the filing of the case, Mr. Dickenson has proposed four separate chapter 12 plans for reorganization, none of which the Court can confirm due to the myriad deficiencies in the schedules. It is impossible for the Court, the trustee, or Mr. Dickenson’s creditors to accurately evaluate the sufficiency of the proposed plan without the assurance of adequate disclosure of his assets and liabilities in his schedules. Despite all of these misgivings, Mr. Dickenson has provided no reasonable explanation to quell any fears of the various parties in this case that he can provide accurate and reliable schedules.
Considering the facts of this case, it appears to the Court that despite many months under the protections of the Bankruptcy Code, four failed attempts to propose a confirmable plan, and three attempts to file accurate and complete schedules and statements, Mr. Dickenson’s case is getting more convoluted and perplexing with each passing hearing. Meanwhile his creditors are waiting in the wings without payment, as their interests are impaired and collateral is devalued. Accordingly, the Court finds Mr. Dickenson’s repeated delays and failure to propose a confirmable plan unreasonable, without justification, and harmful to his creditors. Accordingly, the case should be dismissed under section 1208(c)(1).
B. Other Cause
Similarly, the Court holds that other good cause exists to dismiss the case under section 1208. As mentioned above, Bankruptcy Code section 1208(c) lists the various circumstances under which a court may dismiss or convert a case. Courts across the country, however, have held the enumerated provisions of subsection (c) are not exclusive, and other circumstances may rise to the level of necessitating dismissal “for cause.” See Euerle Farms, Inc. v. State Bank in Eden Valley (In re Euerle Farms, Inc.), 861 F.2d 1089, 1091 *634(8th Cir.1988) (“Although this reason for dismissal is not expressly listed in 11 U.S.C. § 1208(c), inequities existed to find ‘cause’ sufficient for dismissal under the section. We note a multiplicity of factors may be considered in the aggregate to meet the cause requirement of the section.”); see also Suthers, 173 B.R. at 572-73 (citing Euerle Farms approvingly and relying on it as precedent for dismissal of a case for delay in obtaining confirmation).
Thus, a court may dismiss a case by analyzing the totality of the circumstances and reasoning that cause exists for dismissal based on the debtor’s inappropriate and fraudulent post-petition conduct.13 Courts often deem such a dismissal as one for “bad faith.” See, e.g., In re Love, 957 F.2d 1350 (7th Cir.1992) (discussing the debtor’s bad actions in the context of whether they filed his petition in “good faith”); In re Suthers, 173 B.R. 570, 573 (W.D.Va.1994) (“Second, debtors have shown bad faith in several instances.... ”). Indeed, the Fourth Circuit has acknowledged, “a good faith filing requirement is implicit in several specific provisions of the bankruptcy code,” including the original petition. Carotin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir.1989). It should be noted, however, such relief is drastic and courts should be reluctant to dismiss a petition for bad faith.14 Love, 957 F.2d at 1356.
Courts applying the totality of the circumstances approach consider various factors, including:
[T]he nature of the debt, including the question of whether the debt would be nondischargeable in a Chapter 7 proceeding; the timing of the petition; how the debt arose; the debtor’s motive in filing the petition; how the debtor’s actions affected creditors; the debtor’s treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors.15
Id. at 1357. Ultimately, at the heart of the inquiry is “whether the filing is fundamentally fair to creditors and, more generally, is ... fundamentally fair in a manner that complies with the spirit of the Bankruptcy Code’s provisions.” Id. Furthermore, the Fourth Circuit has held that “[o]ne factor *635in determining good faith is the debtors’ honesty in representing facts.” Harford v. Moore Bros. Co. (In re Hafford), No.. 86-1178, 1986 WL 17681, at *1 (4th Cir. Oct. 2, 1986).
Considering the aforementioned factors, the Court finds cause to dismiss Mr. Dick-enson’s case for his improper post-petition conduct. As explained more fully below, the Court finds that Mr. Dickenson’s actions during the pendency of his case, considering the totality of the circumstances, necessitate dismissal. Mr. Dickenson has repeatedly failed to disclose assets, failed to provide the Court with complete and correct filings, and failed to comply with various orders of the Court. Accordingly, in terms of the Love factors, mentioned above, Mr. Dickenson’s actions have negatively affected his creditors; he has not been forthright with the Court and his creditors; and his actions suggest his filing does not comply with the spirit of the Bankruptcy Code.
a. Failure to Disclose
As extensively detailed above, Mr. Dickenson repeatedly failed to disclose several parcels of real property as well as various property transactions. A debtor’s lack of candor to the Court by concealing assets and transactions undermines the entire bankruptcy process and prejudices creditors. See In re Kloubec, 268 B.R. 173, 178 (N.D.Iowa 2001); see also Harford, 1986 WL 17681, at *1 (affirming the bankruptcy court’s ruling that the debtors’ lack honesty in representing facts alone was sufficient to dismiss the case, because such conduct placed an undue burden on the trustee to “check up” on the debtor); In re Alt, 305 F.3d 413, 421 (6th Cir.2002) (‘Whether the debtor has been forthcoming with the bankruptcy court and the creditors is properly considered in deciding whether dismissal for lack of good faith is appropriate.”). Although mistakes and omissions certainly occur, when the debtor demonstrates a pattern of such behavior, dismissal may be appropriate.
In this case, the trustee repeatedly requested and, in addition, the Court directed, that Mr. Dickenson update his schedules to include any omitted properties, yet every time Mr. Dickenson amended, more uncertainty emerged. The Court became aware of Mr. Dickenson’s inaccurate disclosures when he filed his Motion to Exchange on April 23, 2014, and revealed that he and his nephew had signed deeds of exchange shortly before the filing of his petition. See Motion to Exchange, In re Dickenson, 13-71283 (Bankr.W.D.Va. Apr. 23, 2014) ECF Doc. No. 75. At the May 8 Hearing, the Court, trustee, and creditors heard evidence concerning the fact that Mr. Dickenson’s schedules were not complete. In particular, he had not included the property he sought to transfer to his nephew or the property he had received from his nephew. May 8 Transcript, at 44. Furthermore, Mr. Dickenson had not indicated on his statement of financial affairs that he had engaged in this transaction with his nephew. Id. at 36-37. Mr. Dickenson had no explanation for either of these omissions. At this hearing, Mr. Dickenson admitted he had likely made other mistakes in his schedules, but he could not identify any other particular omissions or mistakes. Id. at 44.
Prior to the next hearing on June 5, Mr. Dickenson, once again, amended his schedules to include his previously omitted parcels of property. June 5 Transcript, at 37. Notwithstanding, Mr. Dickenson still failed to include either the property he had received from his nephew or the existence of the transfer of property between them. Id. at 54. Also, during the June 5 Hearing, the trustee questioned Mr. Dickenson about his recently revealed transfer of the property known as the “Ramsey Land.” Although Mr. Dickenson had previously *636disclosed an interest in these properties, a deed of transfer he had filed with the Court suggested he had recently received this property with his two partners. Id. at 55. According to the deed of transfer, the transaction occurred after Mr. Dickenson had filed his petition. Id. Additionally, the values Mr. Dickenson disclosed were inaccurate and misleading because he reported the cost at an amount different from what he paid for the Ramsey Land. Id. at 51.
Furthermore, at the June 5 Hearing, Mr. Dickenson disclosed his “partnership” with Claude Hart and Michael Hilton. Id. at 48-49. Although this was an informal arrangement, as mentioned above, such an understanding is considered a partnership under Virginia law,16 which the debtor should have disclosed. Next, the trustee questioned Mr. Dickenson as to why he had disclosed the payment to a life insurance policy in his operating reports, yet he had not disclosed the existence of a life insurance policy in his statement of financial affairs. Id. at 52. Finally, the trustee asked Mr. Dickenson why he had not disclosed his sale of $86,000 worth of cattle on his operating reports. Id. at 58-59. Once again, Mr. Dickenson could not provide the Court with any explanation as to why he had not included these interests on his schedules and statements. Id. at 49, 52, 58-59.
b. Failure to Comply with Court Orders and Bankruptcy Code
Throughout the duration of the case, Mr. Dickenson has repeatedly failed or refused to comply with the various orders and directives of the Court and the Bankruptcy Code and Rules. Not only has he constantly failed to provide the Court with complete operating reports, he has also knowingly violated his consent order with Farm Credit of the Virginias and failed to file complete and accurate schedules.
First, Mr. Dickenson failed to provide complete operating reports as required by Rule 2015(b) of the Federal Rules of Bankruptcy Procedure and section 704(a)(8) of the Code. Rule 2015(b) requires a chapter 12 debtor in possession to comply with the requirements of subsection (a)(2)-(4). Fed. R. BaNKrP. 2015(b). Subsection (a), clauses (2) through (4) require the debtor in possession:
(2) keep a record of receipts and the disposition of money and property received;
(8) file the reports and summaries as required by § 704(a)(8) of the Code ...;
(4) as soon as possible after the commencement of the case, give notice of the case to every entity known to be holding money or property subject to withdrawal or order of the debtor....
Fed. R. BANKR.P. 2015(a)(2)-(4). Furthermore, section 704(a)(8) of the Code requires the debtor in possession to “file with the court ... periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as ... the court requires.... ” 11 U.S.C. § 704(a)(8).
Mr. Dickenson’s conduct ran afoul of these provisions. At the June 6 Hearing, Mr. Dickenson admitted he had sold a load of cattle, with net receipts of $36,000, yet he did not disclose this income on his monthly operating reports. June 5 Transcript, at 58-59. Instead, he testified the proceeds went into a bank account in his sister’s name, where she would draft money for him, upon his request. Id. at 59. His failure to disclose the receipt of such substantial amounts of money and his retention of such in an undisclosed bank account held by a third party violated the *637reporting obligations of Rule 2015 and section 704(a)(8).
Second, on January 22, 2014, Farm Credit and Mr. Dickenson filed a Motion for Adequate Protection, wherein Mr. Dickenson would pledge a certain parcel of real estate, in which he allegedly owned a one-quarter interest, to Farm Credit as adequate protection. See Motion for Adequate Protection, In re Dickenson, 13-71283 (Bankr.W.D.Va. Jan. 22, 2014) ECF Doc. No. 52. In exchange for this pledge as well as his pledge of various other parcels, Farm Credit agreed to postpone prosecuting its motion for relief from stay for nearly a year. Id. The Court approved the consent agreement on March 13, 2014. See Order Approving Motion for Adequate Protection, In re Dickenson, 13-71283 (Bankr.W.D.Va. Mar. 21, 2014) ECF Doc. No. 64.
At the June 5 Hearing, however, the trustee confronted Mr. Dickenson with a deed signed on February 19, 2014, which transferred real estate from Garland Ramsey, Betty Lou Mays, Robert Preston Ramsey, Rebecca Ramsey Sturgill, Paul David Carroll, and Larry Carroll a one-half interest to Charles Gose Dickenson, Jr., and Barbara Jean Dickenson, as tenants by the entirety with right of survivor-ship, and a one-half interest to Michael Hilton, II, and Claude Hart. Exhibit N at 1, In re Dickenson, 13-71283 (Bankr. W.D.Va. June 4, 2014) ECF Doc. No. 122. One of the tracts of real estate involved in this transaction was the property Mr. Dickenson pledged as adequate protection to Farm Credit a month earlier. Mr. Dickenson could not explain how he pledged his interest in this property in January, yet the grantors of the deed transferred two one-half interests to the grantees in February.17 June 5 Transcript, at 59-64.
Even assuming he did own the property when he pledged it as adequate protection, though, Mr. Dickenson’s conduct remains disconcerting. When discussing the property at the June 5 Hearing, Mr. Dickenson explained that he did not have to pay anything for the property, because Claude Hart and Michael Hilton paid for his share. Id. at 55. He claimed he owed them no money for this transaction; however, he later explained that although Hart and Hilton were timbering the property, he had yet to receive any proceeds, because he needed to pay them back for buying the property for him. Id. at 56. Although such an arrangement could be proper, Mr. Dickenson had not procured Farm Credit’s consent and was allowing Hart and Hilton to remove valuable assets from Farm Credit’s collateral.
Regardless, his conduct was improper. It appears to the Court one of three scenarios occurred: (1) Mr. Dickenson pledged property he did not actually own as adequate protection; (2) he owned the property when he pledged it as adequate protection, but he later transferred it to someone else, who then re-conveyed to it to him and his wife in a form that placed it beyond the reach of Farm Credit; or (3) he obligated himself on further debts to his partners without prior approval and was actively involved in transferring proceeds from the assets pledged as adequate protection out of the estate without the secured creditor’s consent.
Finally, as mentioned above, the Court directed Mr. Dickenson to correct his *638schedules. He failed to do so. At the June 5 Hearing, when confronted about why he had still failed to disclose the transfer of property to his nephew, Mr. Dickenson replied, “I thought we had a specific list to do and I thought I had done that now.” Id. at 54. Similarly, the schedules still did not disclose his interests in his partnership with Claude Hart and Michael Hilton or an insurance policy, apparently because the Court had not expressly instructed him to reveal such items.
“The veracity of the bankrupt’s statements is essential to the successful administration of the Bankruptcy Code.” McLean v. Harlow (In re Harlow), 107 B.R. 528, 530 (Bankr.W.D.Va.1989). “When a debtor signs a schedule and a statement of affairs, he does so under penalty of perjury, and such ‘written declarations have the force and effect of oaths.’ ” Peoples Bank of Charles Town v. Colburn (In re Colburn), 145 B.R. 851, 857 (Bankr. E.D.Va.1992) (quoting Bold City VII, Ltd. v. Radcliffe (In re Radcliffe), 141 B.R. 1015, 1021 (Bankr.E.D.Ark.1992)). Accordingly, when a court directs a debtor to amend and update schedules, implicit within that directive is the mandate that the schedules should be correct, even if the court did not expressly identify each and every defect the debtor should cure.
c. Prejudicial Delays
As detailed above, Mr. Dickenson’s conduct led to prejudicial delays to his creditors. The creditors have patiently waited on the sidelines while Mr. Dickenson’s case has floundered. While the creditors waited, Mr. Dickenson improperly obligated himself on further debts; he devalued a creditor’s collateral by transferring property pledged to it out of the estate; and he hid money in a bank account held by a third party.
Further, however, these delays not only prejudice the creditors by affirmatively devaluing collateral and the debtor assuming more debt, but they also cause the various parties iii interest other prejudices — most notably, uncertainty. In Harford, the Fourth Circuit explained, “[m]isrepresen-tations place a burden on the trustee because most of the burden of checking upon [sic] debtors’ schedules falls upon the ... trustee and counsel for the ... trustee.” Harford, 1986 WL 17681, at *1. Thus, such continually incomplete and improper representations make it impossible for the creditors to evaluate whether Mr. Dicken-son’s proposed plans are fair and proper, or whether the secured creditors’ interests are adequately addressed and/or protected. Similarly, the Court and the trustee cannot evaluate whether the plan complies with the provisions of the Bankruptcy Code or whether the treatment of the various creditors is equitable. Thus, these incessant improprieties demonstrate Mr. Dickenson’s clear disregard of the spirit and essence of the Bankruptcy Code and Rules. See Love, 957 F.2d at 1357.
d. The Totality of the Circumstances
When a debtor has consistently misrepresented his assets, income, and liabilities and has failed to honor his obligations to the Bankruptcy Court and process, his conduct merits dismissal. Mr. Dickenson’s case is similar to In re Suth-ers, another case from the Western District of Virginia, in which the district court determined dismissal was appropriate. See United States v. Suthers (In re Suthers), 173 B.R. 570 (W-D.Va.1994). In Suthers, the district court held that the bankruptcy court abused its discretion by not dismissing the debtors’ case for bad faith. Id. at 573. Important to this ruling, the district court highlighted the fact that the debtors had incurred further debts without consent of the bankruptcy court, sold collateral securing a creditor’s *639loans without notice or approval, purchased cattle without approval of the court, and incurred other debts for services performed during the pendency of the case without the court’s permission. Id. Today, we find this ruling instructive and believe Mr. Dickenson’s post-petition actions warrant dismissal as well.
This ruling is not one the Court takes lightly. As explained above, Mr. Dicken-son did not merely make mistakes. His case was marred with omissions, contradictions, and tribulations, transforming it from that of the “typical” to the “atypical.” The Court is aware that honest mistakes happen, and such mistakes may not warrant dismissal for bad faith per se. When, however, a debtor has demonstrated a pattern of deceitful and/or irresponsible conduct that prejudices the creditors and confounds the trustee, the case should be dismissed. In such an instance, the debtor has revealed a lack of respect for the spirit of the Bankruptcy Code and proven himself not to be an “honest but unfortunate debtor.”
It appears to the Court Mr. Dickenson is either actively concealing assets from his creditors, or he is not able or willing to provide the Court and interested parties with reliable information sufficient to confirm a plan. Either way, the Court does not believe giving Mr. Dickenson yet another opportunity to try to amend his schedules is in the best interest of any party.
For all of these reasons, the Court grants the trustee’s motion to dismiss. The Court will enter the order of dismissal after ordering the appropriate disposition of the funds held by the trustee and resolving any other remaining matters. Accordingly, the Court will set a hearing on October 16, 2014, in the second floor courtroom, United States Bankruptcy Court, 210 Church Avenue, SW, Roanoke, VA 24011, at 2:00PM, to hear and consider the disposition of the pre-confirmation funds held by the chapter 12 trustee or such other and further relief as is necessary before entering the order of dismissal.
Conclusion
Thus, the Court finds that cause exists to dismiss the debtor’s bankruptcy case pursuant to the provisions of 11 U.S.C. § 1208 and GRANTS the chapter 12 trustee’s motion to dismiss. The Court finds that the debtor’s actions throughout the case have demonstrated an inability to provide the Court and interested parties with full, clear, and trustworthy information, resulting in unreasonable and prejudicial delays to the creditors and little likelihood of proposing a confirmable plan of reorganization in the future.
The Court will contemporaneously issue an order consistent with the findings and ruling of this opinion.
. The $10,000 to come was from the sale of other, unencumbered, property.
. The parties signed these deeds nine days prior to the petition date.
. Mr. Dickenson testified that New Peoples Bank has a lien on his nephew's three-quarter interest in the real estate, but the lien does not encumber any of Mr. Dickenson’s interest. May 8 Transcript, at 57-58. According to the testimony, New Peoples Bank was not aware that the property had been conveyed by a deed, albeit unrecorded, to Mr. Dickenson in exchange for other real property. Id. at 28.
. Although styled as a "Second Amended Plan,” this plan was actually Mr. Dickenson’s third amended plan.
. After she admitted to knowing Mr. Dicken-son was experiencing financial difficulty, had considered bankruptcy in the past, and was facing foreclosure actions initiated by New Peoples Bank, Ms. Dickenson testified that she did not expect him to actually file. Id. at 14.
. Mr. Dickenson claimed he had executed a deed of rescission prior to the hearing; however, his counsel could not produce the document at the hearing and he had not electronically filed it prior to the hearing. Id. at 22.
. Upon closer inspection of the previous iterations of Schedule A, it appears Mr. Dickenson had disclosed these parcels already, albeit as three separate tracts and valued at a lower total amount. See Schedule A at 2-3, In re Dickenson, 13-71283 (Bankr.W.D.Va. Aug. 21, 2013) ECF Doc. No. 11. Interestingly, Mr. Dickenson failed to remove the prior disclosures of these parcels in his Second Amended Schedule A, so even after his third try, Schedule A remains defective.
. Although the association between Dicken-son, Hilton, and Hart was not subject to a formal partnership agreement, according to the Virginia Code, a partnership is any “association of two or more persons to carry on as co-owners a business for profit formed under § 50-73.88, predecessor law, or comparable law of another jurisdiction, and includes, for all purposes of the laws of this Commonwealth, a registered limited liability partnership.” Va.Code Ann. § 50-73.88. Furthermore, business includes "every trade, occupation, and profession.” Id.
.Mr. Dickenson’s failure to disclose this transaction is especially disconcerting to the Court, since he had previously testified that he did not disclose the transaction with his nephew because he knew he had to get the Court’s permission before recording the deed. See May 8 Transcript, at 55.
. Mr. Dickenson also testified that he believes the property has valuable mineral deposits, which he also had not scheduled as an asset of the estate. Id. at 55.
. Ms. Dickenson testified earlier in the hearing, “I know that we have sent two loads [of cattle] to the feed lot. We have one ready to go next week and two more on the farm being readied to go.” Id. at 35. She then suggested asking Mr. Dickenson about the cattle, as he would be more knowledgeable about the topic. Id.
. At the time of the hearing on June 5, 2014, Mr. Dickenson's case had been pending for ten months. At that hearing, however, he was requesting yet another continuance once again to amend his schedules and file another plan. June 5 Transcript, at 75-77.
. Additionally, subsection 1208(d) permits a court to dismiss or convert a case “upon a showing that the debtor has committed fraud in connection with the case.” 11 U.S.C. § 1208(d). Although the chapter 12 trustee cited only section 1208(c), section 1208(d) is unique to the context of chapter 12 bankruptcy cases and provides the court with the authority to consider the debtor’s conduct and actions within the case, disrespect of the bankruptcy process, and candor to the court. See In re Zurface, 95 B.R. 527, 539 (Bankr. S.D.Ohio 1989) (citing the legislative history to support the proposition that Congress included this provision to foster an environment of good faith and honest dealing by the debtor throughout the pendency bankruptcy case).
. Nevertheless, the Supreme Court has recognized that nothing in the Bankruptcy Code “limits the authority of the court to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor." Marrama v. Citizens Bank of Mass., 549 U.S. 365, 374-75, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007).
.Although in Love, the Seventh Circuit considered the question of good faith in the chapter 13 context, such analysis applies in the context of a chapter 12 filing as well. See Barger v. Hayes Cnty. Non-Stock Co-op (In re Barger), 233 B.R. 80, 83 (8th Cir. BAP 1999) (suggesting courts may consider precedent applying identical provisions in different chapters, unless there are practical reasons not to do so). Here, the dismissal provisions under chapter 13 and chapter 12 are nearly identical; good faith is implied in all filings with the Court; and there are no reasons not to apply the chapter 13 precedent, as the practical considerations for dismissal are identical.
. See supra note 8.
. Furthermore, it remains unclear to the Court whether Mr. Dickenson could even pledge the interest, assuming he owned it at the time, when his ownership was as a tenancy with his wife who is not liable on the debt to Farm Credit. See Exhibits E, F, G, H to Motion for Relief from Stay at 37-52, In re Dickenson, 13-71283 (Bankr.W.D.Va. Oct. 21, 2013) ECF Doc. No. 15. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497536/ | MEMORANDUM OPINION
PAUL M. BLACK, Bankruptcy Judge.
The matters before the Court are the Motion for Summary Judgment (“Motion”) filed by Don Fox, individually, and d/b/a Big Giant Warehouse (collectively “Plaintiff”), by counsel, and the Response thereto filed by Stanley Joseph Crowgey (“Defendant” or “Debtor”), by counsel. A hearing was held on September 9, 2014. On that same date, the matter was taken under advisement. For the reasons stated herein, the Plaintiffs Motion for Summary Judgment is granted.
FINDINGS OF FACT
Don Fox, the Plaintiff, filed this adversary proceeding by complaint on January 23, 2014, seeking to except from discharge his prepetition state court judgment against the Debtor, Stanley Joseph Crow-gey, in the amount of $634,395.73 under 11 U.S.C. § 5231 of the Bankruptcy Code. The Plaintiff, by counsel, filed the Motion on August 8, 2014 and the Memorandum in Support of the Plaintiffs Motion on August 29, 2014. On August 22, 2014, the parties filed a Stipulation of Facts,2 attaching as exhibits a copy of the Plaintiffs State Court Petition in the District Court of Oklahoma County, Oklahoma (“Oklahoma State Court”); the Debtor’s Answer, Counterclaim and Third Party Petition; an Order regarding the withdrawal of the Defendants’ counsel in that case; and the Journal Entry of Judgment, which awards the Plaintiff $634,395.73 in compensatory and punitive damages. The Debtor, by counsel, filed a Response to the Motion on August 25, 2014. A hearing on the Motion and the Response thereto was held on September 9, 2014, where the Debtor and counsel for both parties appeared.
Prior to Debtor’s bankruptcy filing, the Plaintiffs limited liability company, Big Giant Warehouse, L.L.C.,3 sued the Debtor and two corporate entities with which the Debtor was formally associated, known as K.I.N.E. Ministries, Inc. and K.I.N.E. Services, L.L.C. (collectively “Defendants”), alleging, among other things, fraud, common-law fraud, and misrepresentation in Oklahoma State Court. Stip. ¶ 1. The Complaint alleges that over a twenty-year period, Debtor was employed by Plaintiff a cumulative of seven years and that during this time, Debtor was trained as a product locator of wholesale goods and was therefore entrusted with trade secrets, confidential and proprietary information, including a customer list that the Plaintiff spent over forty-seven years compiling. Compl. ¶¶ 2, 3, 11, 12. The Complaint further alleges that in July 2000, while still employed with Plaintiff, Debtor formed non-profit charitable organizations, K.I.N.E. Ministries, Inc. and K.I.N.E. Services, L.L.C., which Debtor used to compete against Plaintiff by misappropriating confidential and proprietary data obtained through his employment with Plaintiff. *643Id. ¶ 13. The Complaint also alleges that Defendants misrepresented the intentions of the non-profit charitable organizations, and fraudulently induced Plaintiff to permit the Defendants to use a warehouse and various machinery and equipment free of charge. Id. ¶¶ 4, 5, 17. The Complaint further alleges that Debtor breached his fiduciary responsibility to Plaintiff and fraudulently concealed his activities by soliciting donated goods and merchandise under the guise of non-profit charitable organizations, and selling the donated items at a profit to Plaintiff’s customers, and that Defendants have interfered with Plaintiff’s business relations by obtaining donated goods and merchandise ordinarily distributed by Plaintiff, and selling them to Plaintiff’s customers by using confidential customer lists, credit reputation, and commercial relationships. Id. ¶¶ 24, 28.
The Defendants, by counsel, responded to the Complaint with an Answer, Counterclaim and Third Party Petition, filed with the Oklahoma State Court on October 25, 2006. Stip. Ex. B. The Defendants denied the allegations in the Complaint, pled affirmative defenses, and listed various allegations against Plaintiff in the Counterclaim and Third Party Petition. Id. In its Counterclaim and Third Party Petition, Defendants alleged, among other things, that Plaintiff tor-tiously interfered with Defendants’ business relations by contacting various entities with whom Defendants conduct business and falsely represented the nature of Defendants’ business practices. Id. ¶ 25. In addition, Defendants alleged that Plaintiff committed libel and/or slander by maliciously misrepresenting the true purpose and intent of Defendants’ business to third parties. Id. ¶ 26. The Counterclaim and Third Party Petition further alleges that Plaintiff also breached its agreement to voluntarily give equipment to Defendants for its use by seeking to recover money for those items that Plaintiff voluntarily donated or gave to Defendants at no charge. Id. ¶30.
By Order filed on August 30, 2010, the Oklahoma State Court granted Defendants’ counsel’s Motion to Withdraw. Stip. Ex. C. The Order also directed that the Defendant ■ Stan Crowgey obtain new counsel within thirty days or he will be deemed to represent himself pro se and directed that the Defendants K.I.N.E. Ministries, Inc. and K.I.N.E. Services, L.L.C. obtain new counsel within thirty days as required by Oklahoma statute. Further, the Order stated that “[f]ailure by Defendants to defend the case may result in a dismissal of the case without prejudice or default judgment entered against the Defendants.” Id. The Order also provided that “notice and service of future filings” may be served on Defendants at an address in Roanoke, Virginia. Id. The parties stipulate that the Defendants did not obtain new counsel at any time following the Order. Stip. ¶ 4.
The Oklahoma State Court entered a Journal Entry of Judgment on April 15, 2013 stating that the court “granted default judgment against the Defendants” based on Plaintiff’s Motion for Default Judgment, and held an evidentiary hearing on damages on April 11, 2013. Stip. Ex. C. The Journal Entry of Judgment also states that “notice was given of the eviden-tiary hearing date” but “Defendants did not appear and no responsive brief was filed by or on behalf of Defendants.” The Oklahoma State Court found that Plaintiff is entitled to $334,395.73 in compensatory damages after “review[ing] the brief and having received supporting evidence.” Id. Further, the Oklahoma State Court concluded, “evidence is sufficient to support a finding for punitive damages as the Defendants acted intentionally, with malice and in reckless disregard to the rights of oth*644ers. Defendants received the money and property at issue in this litigation by false representations and by fraud.” Id. Accordingly, the Oklahoma State Court also awarded the Plaintiff punitive damages in the amount of $300,000.00. Id.
The parties stipulate that the Oklahoma State Court judgment was not appealed and is a final judgment. Stip. ¶ 7. Further, the parties stipulate that the Oklahoma State Court judgment was recorded in Bedford County, Virginia Circuit Court on August 28, 2013 (“Virginia Judgment”), pursuant to the Uniform Enforcement of Foreign Judgments Act. The Defendants did not take any of the actions set forth in Virginia Code § 8.01-465.4 to challenge the Virginia Judgment, and the Virginia Judgment is final and enforceable. Id. ¶¶ 8-9. Execution of the Virginia Judgment was commenced by garnishment on October 29, 2013. On November 5, 2013, the Debtor filed for relief in this Court under Chapter 7 of the Bankruptcy Code. Id. ¶ 11.
The parties also stipulate that in addition to the Oklahoma State Court proceeding, Plaintiff also filed a companion case against Fox Wholesale, L.L.C., Fox Wholesale, and Tim Fox, who participated in the sale and brokering of goods with Defendants’ enterprise in Oklahoma. This case was tried before a jury in the District Court of Oklahoma County and the jury found in favor of the Plaintiff, but did not award any damages against the defendants in that case. Id. ¶ 12.
In its Memorandum in Support of its Motion, the Plaintiff correctly asserts that Oklahoma preclusion law applies, and argues that the issues underlying its complaint on nondischargeability were actually litigated, as this is not a true default situation. In addition, the Plaintiff contends that the Oklahoma State Court’s Journal Entry of Judgment establishes that the issue was actually litigated because the Oklahoma State Court took and considered evidence and the Debtor was actively involved inasmuch as he hired an attorney, answered the suit, and sought affirmative relief by filing a counterclaim in the Oklahoma State Court proceeding.
However, the Debtor, in its Opposition to Plaintiffs Motion, asserts that the record does not establish that the parties actually litigated the issues relating to the Plaintiffs nondischargeability complaint in the Oklahoma State Court proceeding. Rather, the Debtor, citing to Virginia case law and not mentioning any Oklahoma cases, argues that collateral estoppel does not apply in this case because neither the default judgment nor the record before this Court establishes that the issues were actually litigated. Further, the Debtor argues that even if he is collaterally estopped from litigating the issues underlying the Plaintiffs nondischargeability complaint, the punitive damages award of $300,000.00 should not be nondischargeable because it falls under 11 U.S.C. § 523(a)(6) rather than Section 523(a)(2), and the Plaintiff agreed to only proceed under Section 523(a)(2).
CONCLUSIONS OF LAW
This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on July 24, 1984 and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. This Court further concludes that consideration of the dischargeability of particular debts is a “core” bankruptcy proceeding within the meaning of 28 U.S.C. § 157(b)(2)(I).
Section 727 of the Bankruptcy Code allows a debtor to obtain a “fresh start” by providing that a debtor shall receive a discharge from all debts arising *645prior to the debtor’s Chapter 7 filing, except for some debts listed in Section 523. 11 U.S.C. § 727(b). Importantly, the Supreme Court held that this “fresh start” is limited to the “honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)). In the instant case, the Plaintiff seeks to except its Oklahoma State Court judgment against the Debtor in the amount of $634,395.73 from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). Section 523(a)(2)(A) excepts from discharge 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 eondition[.]
11 U.S.C. § 523(a)(2)(A).
The Bankruptcy Code defines a “debt” as “liability on a claim.” 11 U.S.C. § 101(12). A “claim” is defined as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliqui-dated, fixed, contingent, matured, unma-tured, disputed, legal, equitable, secured, or unsecured[.]” 11 U.S.C. § 101(5)(A). Plaintiff’s Oklahoma State Court judgment falls under the definition of a “debt” under the Bankruptcy Code.
In order to establish that a claim is nondischargeable under Section 523(a)(2)(A), a creditor must prove all five elements of fraud: (1) a false representation; (2) knowledge that the representation was false; (3) intent to deceive; (4) justifiable reliance on the representation; and (5) proximate cause of damages. Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 218 (4th Cir.2007). A creditor seeking to except his debt from discharge in bankruptcy “must establish by a preponderance of the evidence that his claim is not dischargeable.” Grogan, 498 U.S. at 287, 111 S.Ct. 654 (explaining that holding a creditor to the preponderance of the evidence standard “reflects a fair balance” between protecting the interests of a debtor in bankruptcy and protecting the interests of victims of fraud). “Exceptions to the discharge are to be narrowly construed in favor of the debtor and against the creditor.” Frank & Barbara Broyles Legacy Found. v. Nichols (In re Nichols), 509 B.R. 722, 724 (Bankr.N.D.Okla.2014) (footnote omitted).
Significantly, while not phrased identically, the elements that a plaintiff must prove under Section 523(a)(2)(A) as listed above are “substantially similar to actual fraud as defined under Oklahoma law.” Speedsportz, LLC v. Lieben (In re Lieben), No. 11-77399-JRS, Adversary No. 11-05712-JRS, 2013 WL 5183503, at *6 n. 6 (Bankr.N.D.Ga. Aug. 21, 2013) (citing Croslin v. Enerlex, Inc., 308 P.3d 1041, 1045 (Okla.2013)). Under Oklahoma law, actual fraud is defined as “the intentional misrepresentation or concealment of a material fact, with an intent to deceive, which substantially affects another person.” Croslin, 308 P.3d at 1045; see also Hitch Enters. Inc. v. Cimarex Energy Co., 859 F.Supp.2d 1249, 1259 (W.D.Okla.2012). Further, Oklahoma law establishes that “[t]o be actionable, both actual fraud and constructive fraud require detrimental reliance by the person complaining.” Howell v. Texaco Inc., 112 P.3d 1154, 1161 (Okla. 2004). Thus, the threshold findings for an actual fraud claim in Oklahoma can support a claim for non-dischargeability under Section 523(a)(2)(A).
Plaintiff sued the Defendants in Oklahoma State Court and obtained a default judgment in the amount of $634,395.73 based on, among other things, the Defendants’ “fraud,” “common-law fraud,” and *646“misrepresentation.” Stip. ¶ 1. Plaintiff asserts that the Oklahoma State Court judgment collaterally estops the Debtor from arguing that the $634,395.73 debt is dischargeable in his bankruptcy case.
It is well established that the doctrine of collateral estoppel or issue preclusion may apply in a bankruptcy case. See, e.g., Nelson v. Tsamasfyros (In re Tsamasfyros), 940 F.2d 605, 606 (10th Cir. 1991). “State court judgments can collaterally estop the litigation of issues in adversary proceedings in federal bankruptcy court.” Song v. Duncan (In re Duncan), 448 F.3d 725, 728 (4th Cir.2006) (citing Pahlavi v. Ansari (In re Ansari), 113 F.3d 17, 19 (4th Cir.1997)). In order to determine whether a state court judgment should be given collateral estoppel effect, courts “must apply the relevant state law of collateral estoppel.” Id. (citing Ansari, 113 F.3d at 19). Accordingly, this Court must look to Oklahoma law to determine whether the Oklahoma State Court judgment can be given preclusive effect in this case.
Under Oklahoma law, the doctrine of collateral estoppel will preclude relitigation of factual issues if: “(1) the issue to be precluded is the same as the one litigated in the earlier state court proceeding; (2) the issue was actually litigated in the prior proceeding; and (3) the state court’s determination of that issue was necessary to the resulting final and valid judgment.” Tsamasfyros, 940 F.2d at 606-07; see also Nealis v. Baird, 996 P.2d 438, 458-59 (Okla.1999). “Under the doctrine of issue preclusion, once a court has decided an issue of fact or law necessary to its judgment, the same parties or their privies may not relitigate the issue in a suit brought for a different claim.” Nealis, 996 P.2d at 458-59.
The second requirement is the crux of the issue in this case-was the issue of the Debtor’s “false misrepresentation” or “fraud” actually litigated in the Oklahoma State Court proceeding? The Debt- or asserts that the judgment rendered by the Oklahoma State Court was a default judgment, and the issue was therefore not actually litigated. The Plaintiff, however, argues that this is not a true default situation, and the issue was actually litigated in the Oklahoma State Court proceeding because the Debtor had a full and fair opportunity to litigate. However, even though the Debtor answered and filed a counterclaim, he chose not to actually litigate further, and supporting evidence was received and considered by the Oklahoma State Court in his absence prior to entering its Journal Entry of Judgment.
In the Oklahoma State Court’s Journal Entry of Judgment, the Court noted that it held “an evidentiary hearing on damages,” where the Plaintiff and the Plaintiffs counsel appeared, but the Defendants did not appear. Stip. Ex C. After “reviewing] the brief and having received supporting evidence” at the damages hearing, the Court found that the Plaintiff was entitled to $334,395.73 in compensatory damages, and also awarded the Plaintiff $300,000.00 in punitive damages based on a finding that “the Defendants acted intentionally, with malice and in reckless disregard to the rights of others” and that the “Defendants received the money and property at issue in this litigation by false representations and by fraud.” Id.
The Oklahoma Supreme Court has held that:
An issue is actually litigated and necessarily determined if it is properly raised in the pleadings, or otherwise submitted for determination, and judgment would not have been rendered but for the determination of that issue. The doctrine may not be invoked if the party against whom the earlier decision is interposed did not have a “full and fair opportunity” *647to litigate the critical issue in the previous case. For invocation of issue preclusion there need not be a prior adjudication on the merits (as is often the case with res judicata) but only a final determination of a material issue common to both cases.
Okla. Dep’t of Pub. Safety v. McCrady, 176 P.3d 1194, 1199 (Okla.2007) (footnotes omitted) (emphasis omitted); see also Nealis, 996 P.2d at 458 (Okla.1999).
While some courts find that default judgments should not support a finding of collateral estoppel, others find collateral estoppel fully applicable in certain circumstances. See, e.g., McCart v. Jordana (In re Jordana), 221 B.R. 950, 953 (W.D.Okla.1998), aff'd, 232 B.R. 469 (10th Cir. BAP 1999). For example, where a party “has engaged in serious misconduct, such as refusing to comply with discovery and obstructing the actual judicial process of litigation,” applying collateral estoppel is appropriate. Jordana, 221 B.R. at 954 (citations omitted). Moreover, “if the losing party has significantly participated in the previous action, such as by engaging in discovery over a period of sixteen months, then collateral estoppel will apply.” Id. (citing United States v. Gottheiner (In re Gottheiner), 703 F.2d 1136, 1140 (9th Cir.1983)).
Like Gottheiner, the Defendants, including the Debtor, “significantly participated” in the previous action because they were represented by counsel in the Oklahoma State Court proceeding, seemingly for a period of almost four years. See Gottheiner, 703 F.2d at 1140. Therefore, this is not a “true” default situation, in which a defendant “fail[s] to file an answer or to take any steps to defend the action.” Building Commc’ns, Inc. v. Rahaim (In re Rahaim), 324 B.R. 29, 37 (Bankr.E.D.Mich. 2005) (citation omitted). Rather, in this case, the Debtor did file an Answer to the Plaintiffs Oklahoma State Court Complaint, pled affirmative defenses, and laid out his own allegations in a Counterclaim. Gottheiner explained that in that case, the debtor “did not give up from the outset. For sixteen months he actively participated in litigation.” Gottheiner, 703 F.2d at 1140. The court stated that just because “after many months of discovery, [the debtor] decided his case was no longer worth the effort,” and decided not to oppose a motion for summary judgment, this did not mean that the debtor did not “ha[ve] his day in court.” Id. Thus, Got-theiner held that the issue was “actually litigated” in the lower court and collateral estoppel did apply. Id. at 1141. Similarly, the Debtor in this case filed an Answer, Counterclaim and Third Party Petition in the Oklahoma State Court proceeding on October 25, 2006, and the Oklahoma State Court did not grant the Defendants’ counsel’s Motion to Withdraw until August 2010, nearly four years later.
The U.S. Bankruptcy Appellate Panel for the Tenth Circuit (“B.A.P.”), although applying Georgia law, noted that “numerous courts” have held that the “actual litigation requirement may be satisfied by substantial participation in the adversary contest in which the party is afforded a reasonable opportunity to defend himself on the merits but chooses not to do so.” Cherry v. Neuschafer (In re Neuschafer), No. 11-10282, Adversary No. 11-05103, 2014 WL 2611258, at *7, 2014 Bankr.LEX-IS 2582, at *29 (10th Cir. BAP June 12, 2014) (citing FDIC v. Daily (In re Daily), 47 F.3d 365, 368 (9th Cir.1995); Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319, 1323-25 (11th Cir.1995); Wolstein v. Docteroff (In re Docter-off), 133 F.3d 210, 215-16 (3d Cir.1997); Hebbard v. Camacho (In re Camacho), 411 B.R. 496, 501-04 (Bankr.S.D.Ga.2009)). In Neuschafer, the B.A.P. explained that the debtor “actively participated in the [Georgia state court proceeding] for a year — he *648answered the complaint, filed a counterclaim, and participated in discovery. After his attorney’s withdrawal, the debtor chose not to participate in the state trial by failing to keep the state court informed of his current address and his decision to stop monitoring the [state court proceeding].” Id.
As stated above, the Defendants in the Oklahoma State Court proceeding, including the Debtor, filed an Answer, Counterclaim and Third Party Petition, and the Defendants’ counsel did not withdraw until almost four years later, in August 2010. In the same Order granting the Motion to Withdraw, the Oklahoma State Court ordered that the Defendants obtain substitute counsel and informed the Defendants that “[f]ailure by the Defendants to defend the case may result in a dismissal of the case without prejudice or default judgment entered against the Defendants.” Stip. Ex. C. Therefore, the Defendants, including the Debtor, were fully aware of their obligation to obtain new counsel and were made aware of the possibility of a default judgment if they failed to do so. Nevertheless, the Defendants did not obtain new counsel. Further, in the Defendants’ absence, the Oklahoma State Court “received supporting evidence” before rendering its judgment. Therefore, this Court finds that the application of collateral estoppel is appropriate in this case.
Accordingly, this Court holds that the entire $634,395.73 debt is nondis-chargeable under Section 523(a)(2)(A). After holding an evidentiary hearing on damages, reviewing the brief, and receiving supporting evidence, the Oklahoma State Court found that “the Plaintiff is entitled to compensatory damages in the amount of $334,395.73” and concluded that in addition, “the evidence is sufficient to support a finding for punitive damages as the Defendants acted intentionally, with malice and in reckless disregard to the rights of others. Defendants received the money and property at issue in this litigation by false representation and by fraud.” Stip. Ex. C. Accordingly, the Oklahoma State Court also awarded the Plaintiff $300,000.00 in punitive damages.
The Debtor argues in his Opposition to the Plaintiffs Motion that if he is collaterally estopped, only the $334,395.73 in compensatory damages should be determined to be nondischargeable because the punitive damages award falls under Section 523(a)(6), and the Plaintiff has stipulated that he is only proceeding under Section 523(a)(2). However, the Debtor makes this argument without citing any law to support it, and this argument is unpersuasive. Several courts, including the Supreme Court, have concluded that punitive damages can be excepted from discharge under Section 523(a)(2)(A) rather than under Section 523(a)(6) as long as the damages stem from “situations where the debtor has fraudulently acquired money, property, or services from the creditor.” See, e.g., Nunnery v. Rountree (In re Rountree), 330 B.R. 166, 171 (E.D.Va. 2004), aff'd, 478 F.3d 215 (4th Cir.2007) (citing Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998)); see also Nemec v. Bolzle (In re Bolzle), 158 B.R. 853, 856 (Bankr.N.D.Okla.1993) (holding that “punitive damages are excepted from discharge under 11 U.S.C. § 523(a)(2)(A) along with actual damages”). In Cohen, the Supreme Court held that Section 523(a)(2)(A) “prevents the discharge of all liability arising from fraud,” and concluded that the entire debt, including treble damages, attorney’s fees, and costs were nondischargeable in bankruptcy. Cohen, 523 U.S. at 215, 118 S.Ct. 1212 (emphasis added). The Supreme Court explained that “[t]he most straightforward reading of § 523(a)(2)(A) is that it prevents discharge of ‘any debt’ respecting ‘money, property, services, or ... credit’ *649that the debtor has fraudulently obtained, including treble damages assessed on account of the fraud.” Id. at 218, 118 S.Ct. 1212 (citation omitted) (explaining that “[o]nce it is established that specific money or property has been obtained by fraud, however, ‘any debt’ arising therefrom is excepted from discharge”). The Supreme Court noted that it is “unlikely that Congress ... would have favored the interests in giving perpetrators of fraud a fresh start over the interests in protecting victims of fraud.” Id. at 223, 118 S.Ct. 1212 (quoting Grogan, 498 U.S. at 287, 111 S.Ct. 654). Here, the Journal Entry of Judgment made an unambiguous finding that the Debtor “received the money and property at issue in this litigation by false representations and by fraud.” Therefore, this Court holds that both the compensatory damages and the punitive damages awards are nondischargeable in Debtor’s bankruptcy case.
CONCLUSION
For the foregoing reasons, the Plaintiffs Motion for Summary Judgment is granted, and this Court determines that the Oklahoma State Court Journal Entry of Judgment in Case No. CJ-2006-7578 dated April 15, 2013 in the amount of $634,395.73 is nondischargeable under 11 U.S.C. § 523(a)(2)(A). An Order to such effect shall be entered contemporaneously herewith.
.In less than pristine drafting, the Complaint filed herein was filed only under "11 USC § 523,” not referencing which subsection of Section 523 the Plaintiff was proceeding under. The Defendant filed a response for a more definite statement, and at the pre-trial conference held March 20, 2014, all parties concurred that Plaintiff was proceeding under 11 U.S.C. § 523(a)(2), and an Order was entered to that effect.
. References to the Stipulation of Facts are hereafter referred to as "Stip.” References to the Oklahoma State Court Petition (hereafter “Complaint”) attached to the Stipulation of Facts are referred to as "Compl.”
. At some point in the Oklahoma State Court litigation, the Plaintiff was re-identified as "Don Fox, individually, and d/b/a Big Giant Warehouse.” Stip. ¶ 3, Ex. C. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497538/ | REASONS FOR DECISION
ROBERT SUMMERHAYS, Bankruptcy Judge.
The present matter before the court is an adversary proceeding brought by Kenny Shereck and Karr Plex Ltd. (collectively, “Shereck”) against the debtor, Johnny Hollier. Shereck seeks to éxclude a state court judgment from the discharge under 11 U.S.C. § 523(a). The court took the matter under advisement following a trial on the merits. After considering the record, the parties’ arguments, and the relevant authorities, the court rules as follows.
JURISDICTION
The court has jurisdiction over the matters asserted in this adversary proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a). This matter is a core proceeding in which this court may enter a final order pursuant to 28 U.S.C. § 157(b)(2)® and (J) and Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). The following Reasons for Decision shall constitute the court’s findings of fact and conclusions of law.
BACKGROUND
This dispute arises out of a used car sales agreement between Shereck and Hollier. The parties’ agreement was never documented and the trial record includes often conflicting and contradictory testimony on the nature and terms of the parties’ agreement. Shereck contends that Hollier orally agreed to sell Shereck’s cars on consignment, and that Hollier agreed to pay Shereck a “consigned value” and a $500 commission for each car he sold. Hollier also agreed to provide Sher-eck with office space at Used Cars of Acadiana. Plaintiffs ultimately consigned as many as 10-11 cars under this oral agreement. The present case centers on six cars delivered to Hollier in or around August 2006:
1) 1997 Jaguar XK8
2) 1999 Mitsubishi Montero
3) 2002 BMW 325ci
4) 1999 BMW 528
5) 2003 Mercury Mountaineer
6) 2002 Kia Sadona
*675(Plaintiffs’ Trial Exhibit (“PI. Trial Exh.”) Nos. 2-7). Shereck contends that Hollier and Used Cars of Acadiana did not pay him the consigned values or the commissions for these vehicles.
The parties, however, apparently modified their agreement with respect to these six cars because, according to Hollier’s testimony, Shereck issued bills of sale and transferred the titles for these vehicles to Hollier, actions that are not consistent with a true consignment relationship. Hollier testified that Shereck agreed to allow Hollier to obtain “floor financing” on the six cars from Automotive Finance Corporation (“AFC”), and that Shereck agreed to this arrangement because he would receive regular (albeit, smaller) payments before the cars were actually sold. The record includes statements showing payments to AFC pursuant to these floor financing arrangements. (Defendant’s Trial Exhibit (“Def. Trial Exh.”) No. 3). The record also includes copies of checks reflecting payments to Shereck from August through December 2006. (Def. Trial Exh. No. 4; PI. Trial Exh. No. 11 at Attachment 18). Hollier testified that he made additional payments to Shereck but could not produce copies of any checks or other records that document these payments.1 Once the cars were sold, the proceeds of the sales were used to pay off the floor financing from AFC. The transfer of the titles to Hollier is consistent with this floor financing arrangement because AFC would have required the titles as a condition of releasing funds to Hollier. In sum, the record reflects that Shereck was not paid when the cars were delivered or when they were sold, but instead was to receive multiple payments after the cars were delivered to Hollier.
Shereck contends that Hollier failed to fully pay for the cars. The total commissions and “consigned values” of the cars delivered to Hollier was $68,900. (15th JDC Trial Ruling, Bankruptcy Court Dckt. No. 34, Attachment 1 at 12). The record includes a 2006 Internal Revenue Service Form 1099 provided by Hollier to Shereck showing non-wage payments totaling $27,636.45 to Shereck. (PI. Trial Exh. No. 11 at Attachment 11). Hollier contends that this Form 1099 represents payments made to Shereck for his cars prior to December 31, 2006. The record does not show any additional payments to Shereck or Karr Plex in 2007. To the contrary, Hollier stopped payment on a January 2007 check to Shereck totaling $2,000. (PI. Trial Exh. 11 at Attachments 8, 9). Sher-eck and Karr Plex subsequently filed suit in state court against Hollier and Used Cars of Acadiana alleging breach of contract and fraud. Hollier was represented in that case, but his counsel withdrew prior to trial and Hollier did not attend the trial of the case. Following the trial, the 15th Judicial District Court entered a judgment against Hollier and Used Cars of Acadiana for $70,967. (15th JDC Trial Ruling, Dckt. No. 34, Attachment 1 at 12). Hollier filed for relief under Chapter 7 of the Bankruptcy Code on December 7, 2009. The debtor identified Shereck and Karr Plex as creditors on his statement of financial affairs, but failed to list them on his schedule of creditors. The debtor received a dis*676charge on March 29, 2010. In January 2012, plaintiffs moved to re-open the case in order to request leave to assert a non-dischargeability claim. The debtor responded with a motion requesting leave to add Shereck and Karr Plex as creditors. The court found that the debtor had satisfied the requirements to add creditors under In re Stone, 10 F.3d 285 (5th Cir.1994), and granted Hollier’s motion.
Shereck then filed the present adversary proceeding seeking a declaration that the state court judgment is non-dischargeable. Shereck contends that the judgment is non-dischargeable under 11 U.S.C. § 528(a)(4) on the grounds of fiduciary fraud and/or defalcation, embezzlement, and larceny. Shereck also asserts a claim for non-dischargeability under section 523(a)(6) on the grounds of willful and malicious injury. Shereck moved for summary judgment based on preclusion. Collateral estoppel applies to bankruptcy proceedings and can be invoked to prevent the re-litigation of issues previously decided by a non-bankruptcy court. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In order to invoke collateral estoppel, a plaintiff must show that the elements of a non-dischargeability claim were actually litigated and that the determination of these elements was essential to the judgment. Id. Here, Shereck asserted a breach of contract and fraud claim in state court. However, after reviewing the state court record and the transcript of the state court’s ruling, the court could not determine whether the state court’s judgment was based on a finding of fraud or even whether fraud was actually litigated. Accordingly, the court granted partial summary judgment as to the amount of Shereck’s claim based on the state court judgment. The court denied summary judgment with respect to- whether this debt was non-dischargeable.
DISCUSSION
A creditor has the burden of proof in an action to determine the dis-chargeability of a debt. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “Intertwined with this burden is the basic principle of bankruptcy that exceptions to discharge must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start.” Hudson v. Raggio & Raggio, Inc. (In re Hudson), 107 F.3d 355, 356 (5th Cir.1997). Accordingly, a creditor must establish each an every element of a statutory exception to discharge under 11 U.S.C. § 523 et seq. by a preponderance of the evidence.
A. Non-Dischargeability Under 11 U.S.C. § 523(a)(4) — Fraud or Defalcation by a Fiduciary, Larceny, and Embezzlement 1. Elements of a Claim Under § 523(a)(4).
The Bankruptcy Code excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.” ' 11 U.S.C. § 523(a)(4). This exception “was intended to reach those debts incurred through abuses of fiduciary positions and through active misconduct whereby a debt- or has deprived others of their property by criminal acts; both classes of conduct involve debts arising from the debtor’s acquisition or use of property that is not the debtor’s.” Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598, 602 (5th Cir.1998) (quoting In re Boyle, 819 F.2d 583, 588 (5th Cir.1987)). With respect to embezzlement and larceny, the manner in which the debtor comes into possession of the property determines which definition applies. For purposes of section 523(a)(4), embezzlement is defined as the “fraudulent ap*677propriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.” In re Miller, 156 F.3d at 602 (emphasis added). Larceny is defined as the “fraudulent and wrongful taking and carrying away of the property of another with intent to convert it to the taker’s use and with intent to permanently deprive the owner of such property.” In re Hayden, 248 B.R. 519, 526 (Bankr.N.D.Tex.2000) (emphasis added).
2. Was There a Fiduciary Relationship Within the Meaning of § 523(a)(4)?
In order to establish a non-dis-chargeability claim for fiduciary fraud or defalcation, Shereck must establish that his relationship with Hollier fell within the narrow confines of section 523(a)(4). Not all fiduciary relationships under state law fall within section 523(a)(4). The type of relationship required to trigger liability for fraud or defalcation under section 523(a)(4) is determined by federal law. A fiduciary under section 523(a)(4) is limited to cases involving technical or express trusts. In re Bennett, 989 F.2d 779, 784 (5th Cir.1993) (citing In re Angelle, 610 F.2d 1335 (5th Cir.1980)); see also In re Tran, 151 F.3d 339, 342 (5th Cir.1998); In re Schwager, 121 F.3d 177, 186 (5th Cir.1997). The requisite trust relationship must exist prior to the act creating the debt and without reference to that act. In re Bennett, 989 F.2d at 784; see also In re Tran, 151 F.3d at 342 (trustee’s obligations must have been imposed prior to, rather than by virtue of, any claimed misappropriation or wrong). “In other words, the trust giving rise to the fiduciary relationship must be imposed prior to any wrongdoing. The debtor must have been a trustee before the wrong and without any reference to it.” In re Bennett, 989 F.2d at 784 (citation omitted). As a result, constructive trusts or trusts ex malificio are insufficient to create a fiduciary relationship within the meaning of section 523(a)(4). In re Tran, 151 F.3d at 342. However, the “ ‘technical’ or ‘express’ trust requirement is not limited to trusts that arise by virtue of a formal trust agreement, but includes relationships in which trust-type obligations are imposed pursuant to statute or common law.” In re Bennett, 989 F.2d at 784-85 (emphasis added).
Shereck relies on the parties’ oral consignment agreement as grounds for the creation of a fiduciary relationship between the parties. This oral agreement does not support a fiduciary fraud or defalcation claim for at least two reasons. First, the record does not support the presence of a true consignment relationship between plaintiffs and Hollier. In a true consignment arrangement the consignor entrusts goods with the consignee to sell for the consignor and the consignor retains title to the goods that are consigned. See McGill v. Cochran Sysco Foods, Div. of Sysco Corp., 690 So.2d 952, 955 (La.App. 2 Cir.1997) (citing C.V. Hill & Co. v. Interstate Electric Co. of Shreveport, 196 So. 396 (La.App. 2 Cir.1940)); In re Marshall, 497 B.R. 3, 13-15 (Bankr. D.Mass.2013). Here, Shereck executed written bills of sale for each of the six vehicles at issue to Hollier and/or Used Cars of Acadiana. These bills of sale evidence an actual transfer of ownership as opposed to a consignment relationship. Moreover, Hollier testified that Shereck transferred the vehicle titles to him. Finally, Hollier had to represent himself as the owner of the vehicles in order to receive floor financing from AFC, and the record reflects that this floor financing arrangement was done with Shereck’s knowledge. The court, therefore, concludes that the transfer of the six vehicles was an actual sale (albeit, subject to the *678parties’ oral installment payment agreement), not a consignment relationship.
Second, even if the parties had entered into a consignment relationship, this relationship does not create the type of fiduciary relationship that falls within section 523(a)(4) unless the consignment proceeds are segregated and unavailable for the consignee’s general use. Smallwood v. Howell (In re Howell), 178 B.R. 730, 733 (Bankr.W.D.Tenn.1995); see also Freer v. Beetler (In re Beetler), 368 B.R. 720, 726 (Bankr.C.D.Ill.2007); Lykins v. Thomas (In re Thomas), 2013 WL 6840527, at *15 (Bankr.D.Colo. December 27, 2013). There is no evidence in the record that any of the proceeds for the six vehicles at issue were segregated. Accordingly, Shereck cannot prevail on a non-dischargeability claim under the fiduciary fraud and defalcation prongs of section 523(a)(4).
3. Embezzlement and Larceny
With respect to embezzlement and larceny, the manner in which the debtor comes into possession of the property determines which definition applies. Embezzlement is the “fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.” In re Miller, 156 F.3d at 602. Larceny is defined as the “fraudulent and wrongful taking and carrying away of the property of another with intent to convert it to the taker’s use and with intent to permanently deprive the owner of such property.” In re Hayden, 248 B.R. 519, 526 (Bankr.N.D.Tex.2000) (emphasis added).
The record does not support a non-dis-chargeability claim under the embezzlement and larceny prongs of section 523(a)(4) for at least two reasons. First, ownership of the vehicles was transferred to Hollier according to the sale documents in the record. In return, Hollier orally agreed to pay Shereck a fixed amount on each vehicle in multiple installments. Hol-lier’s failure to pay Shereck the full amount he owed on the six vehicles delivered to Hollier in August 2006 is a breach of that oral agreement, but it does amount to the fraudulent appropriation of Sher-eck’s property.
Second, Shereck has not established that Hollier acted with fraudulent intent. Specifically, a breach of an oral promise to pay does not support a fraud claim unless the debtor did not intend to perform at the moment he made his promise. Matter of Haber Oil Co., Inc., 12 F.3d 426, 439-40 (5th Cir.1994). Shereck has not established by a preponderance of the evidence that Hollier did not intend to perform when the parties first entered into their agreement. Indeed, Hollier’s payments to Shereck from August to December 2006 tend to cut against any such finding. In sum, the court finds against plaintiffs on their non-dischargeability claim under section 523(a)(4) based on embezzlement.
For the same reasons, the court also finds against plaintiffs on their non-dis-chargeability claim based on larceny. Specifically, because Hollier owned the vehicles (albeit, subject to the parties’ oral payment agreement) his actions “did not amount to the taking and carrying away of the property of another ...” In re Hayden, 248 B.R. 519, 526 (Bankr.N.D.Tex. 2000). Nor does the record support plaintiffs’ allegations that Hollier acted with fraudulent intent.
B. Non-Dischargeability Under 11 U.S.C. § 523(a)(6) — Willful and Malicious Injury
Section 523(a)(6) provides for the non-dischargeability of debts arising from a “willful and malicious injury by the debtor to another entity or to the property of another entity.” Courts have often dis*679agreed over the level of culpability required under section 528(a)(6). In Kawaauhau v. Geiger, the Supreme Court put some of these disputes to rest. 523 U.S. 57, 64, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). The Court held that injuries resulting from negligent or reckless conduct are insufficient to satisfy the requirements of section 523(a)(6). A finding that the debtor engaged in intentional acts that resulted in injury is similarly insufficient. Id. Geiger did not, however, resolve all of the questions over the appropriate standard for a section 523(a)(6) claim. The circuits employ different standards in determining whether a debtor’s conduct amounts to a “willful and malicious injury ... to another entity or to the property of another entity.” In order for conduct to qualify as willful and malicious under Fifth Circuit precedent, the debtor must act with “either an objective substantial certainty of harm or a subjective motive to cause harm.” Williams v. IBEW Local 520 (In re Williams), 337 F.3d 504, 509 (5th Cir.2003) (quoting In re Miller, 156 F.3d 598, 606 (5th Cir.1998)). Injuries covered by section 523(a)(6) are not limited to physical damage or destruction; harm to personal or property rights is also covered by this provision. 4 Collier on Bankruptcy ¶ 523.12(4) (15th ed. rev. 2003).
Here, the basis for non-dis-chargeability under section 523(a)(6) is Hollier’s sale of the last six vehicles and his failure to pay Shereck according to their oral agreement. As far as Hollier’s contractual obligation to pay Shereck, a mere breach of contract does not rise to the level of a willful and malicious injury under section 523(a)(6). Some courts have required a showing of tortious conduct in addition to a breach of contract to support a section 523(a)(6) claim. See, e.g., In re Jercich, 238 F.3d 1202 (9th Cir.2001) (requiring showing of tortious conduct in connection with the breach of contract). In In re Williams, 337 F.3d 504, 510 (5th Cir.2003), the Fifth Circuit held that a breach of contract could rise to the level of a willful and malicious injury under section 523(a)(6) without a showing of tortious conduct. However, evidence of a knowing or intentional breach does not, standing alone, state a non-dischargeability claim under section 523(a)(6). The plaintiff must also establish that the debtor intended to injure the plaintiff or that injury was substantially certain to result from the debt- or’s actions. Id.; In re Boring, 445 B.R. 576, 580 (Bankr.M.D.La.2011) (section 523(a)(6) satisfied where breach of contract involves “intentional or substantially certain injury.”) According to the Fifth Circuit, “a knowing breach of a clear contractual obligation that is certain to cause injury may prevent discharge under section 523(a)(6).” Williams, 337 F.3d at 510 (emphasis added). Whether the breach rises to the level of a willful and malicious injury turns on “the knowledge and intent of the debtor at the time of the breach.” Id.
The key hurdle for Shereck is showing that there was a “clear contractual obligation” arising out of the parties’ convoluted, evolving business arrangement and that Hollier knowingly breached that obligation. Based on the state court judgment, Hollier breached the parties’ oral agreement by failing to fully pay Shereck for all of the vehicles subject to the AFC floor financing. The total amount of Hollier’s liability is thus fixed at the $70,900 awarded by the state court. However, the state court judgment does not establish the extent to which this amount is non-dischargeable under section 523(a)(6). Under Williams, the court must look to Hollier’s knowledge and intent at the time he breached his agreement with Shereck and determine whether Hollier committed a knowing breach of a clear contractual obligation that was certain to cause injury. *6803B7 F.3d at 510-11. The parties had an oral agreement to pay for the six vehicles in installments. The record reflects multiple payments to Shereck from August through December 2006 that are consistent with this agreement. However, the record also reflects that these payments did not total the $68,900 owed on the six vehicles at issue in this case. Specifically, the 2006 Form 1099 filed by Hollier after December 2006 shows payments to Sher-eck totaling $27,636. In January 2007, Hollier wrote a $2,000 check to Shereck, but subsequently ordered his bank to stop payment on the check. As a result, Sher-eck’s account was overdrawn.
The court concludes that Hollier’s actions in January 2007 amount to a knowing breach of a clear contractual obligation that was certain to cause injury. Specifically, the stop payment order was a deliberate act by Hollier that was substantially certain to cause injury. Hollier also knew that he had only made payments to Sher-eck totaling a third of the value of the six vehicles at issue in light of the Form 1099 filed for 2006. The record does not reflect any additional payments to Shereck after the stop payment order, nor does it reflect any justification for Hollier’s stop payment order or the failure to make additional payments. The failure to pay Shereck the remaining value of the vehicles was substantially certain to cause harm to Shereck because he lost at least two-thirds of the value of the vehicles he purchased and then transferred to Hollier for re-sale. However, this finding does not support the non-dischargeability of the entire state court judgment because the record does not support Shereck’s contention that Hol-lier breached the parties’ agreement prior to the January stop-payment order. The record shows that, prior to January 2007, Hollier made payments to Shereck that appear to be consistent with their oral agreement. The court, therefore, concludes that $43,264 of the $70,900 judgment entered by the state court ($70,900 minus the $27,636 of payments reflected on the Form 1099) results from willful and malicious conduct by Hollier and is excepted from the discharge under section 523(a)(6).2
CONCLUSION
For the foregoing reasons, the court finds for the plaintiffs on their claims under 11 U.S.C. §§ 523(a)(6). Plaintiffs claim is fixed at $70,900. Of this amount, $43,264 is nondischargeable under 11 U.S.C. § 523(a)(6). Plaintiffs shall submit a judgment in conformity with the court’s ruling within thirty (30) days.
. At trial, Hollier attempted to introduce a list of checks showing these additional payments to Shereck. The list was prepared for trial, but Hollier could not produce copies of the original checks that were used to prepare the list. Shereck timely objected to the list and the court took the objection under advisement. The court sustains the objection on the grounds that this proposed exhibit does not comply with the requirements of Federal Rule of Evidence 1006 (Hollier could not make the checks available for inspection and it does not appear that the checks were voluminous) and it is hearsay that does not fall within an exception to the hearsay rule.
. The Court cannot determine whether the payments reflected on the Form 1099 are payments on the six vehicles at issue, payments on other vehicles, or other unrelated payments made to Shereck during 2006. Neither party maintained or produced any records that account for the purpose or application of these payments. Given that Shereck has the burden of proof on a non-discharge-ability claim and that Fifth Circuit precedent requires this court to construe discharge exceptions in favor of the debtor, the court concludes that the $27,636 in payments reflected on Form 1099 should be credited to the six vehicles at issue in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497539/ | MEMORANDUM OPINION AND ORDER
JEFFREY P. NORMAN, Bankruptcy Judge.
It has been common practice in the Shreveport division for attorneys to seek and obtain court approval for the payment of some post-petition and post-confirmation attorney’s fees directly from debtor(s). These include “no look” post-confirmation attorney’s fees pursuant to the Amended Standing Order Regarding “No Look” Fees in Chapter 13 Cases entered September 19, 2013, and post-petition fees not encompassed by the standing order for which a fee application is required. The “No Look” standing order includes a no look fee for certain post-confirmation legal services which are enumerated in the order. These fees include $500.00 for the defense of a motion for relief from the stay, the defense of a motion to dismiss, or a plan modification, $750.00 for the combined defenses of a motion for relief from the stay or motion to dismiss and a plan modification resulting therefrom, $350.00 for post-confirmation motions to sell, incur debt or “substitute collateral-use of cash collateral,” and finally $250.00 for post-confirmation objections to claims. In these instances reviewed by the court, these fees were paid directly by the debtor to the attorney prior to seeking court approval of the post-petition fees or the filing of any Rule 2016(b) statement. The fees were paid by the debtor directly to the attorney or law firm who then by motion, application, or by way of response sought court approval of the prior direct payment from the debtor(s).
Pre-confirmation attorney’s fees, except retainer amounts, are always paid by the Chapter 13 Trustee pursuant to that same “No Look” standing order or by fee application. Many Chapter 13 cases are filed in this division with no attorney retainer and are commonly referred to as “no money down” cases. This bifurcation of pre-con-firmation fees being paid by the Chapter 13 Trustee and some but not all of the post-petition and post-confirmation attorney’s fees being paid directly by the debt- or is troubling to the court, and this practice predates this Judge’s appointment. The court sua sponte has raised the issue of whether these payments are appropriate, if they violate the Bankruptcy Code and/or Bankruptcy Rules, and if, for the orderly administration of Chapter 13 cases, the court should require all Chapter 13 attorney fees post-petition to be exclusively disbursed by the Chapter 13 Trustee. This is not an insignificant issue, as legal fees disbursed by the Chapter 13 Trustee based on her last audit published by the United State Trustee in 2013 to*683taled $7,480,383, and the court is unable to track or account for the fees that were directly paid by debtor(s) to their lawyers. The amount paid to debtors’ attorneys by the Chapter 13 Trustee is 12% of the total amount disbursed by the Chapter 13 Trustee ($62,624,577) in her fiscal year of 2013 (see http://www.justice.gov/ust/eo/private_ trustee/data_statistics/chl3.htm). Post-confirmation services of the types described by the “No Look” fee order are routine, common, and incur in almost every Chapter 13 case. In a division with a current Chapter 13 case load of 10,473 (per the court’s August 2014 Statistical Reporting), if just a quarter of the pending Chapter 13 cases each year requires post-confirmation legal services with a no look post-confirmation attorney’s fee that averages $450.00, then over $1,000,000.00 in “No Look,” post-confirmation fees are paid to attorneys each year in the Shreveport division.
The Chapter 13 Trustee argues that debtor’s counsel is prohibited from accepting post-petition fees directly from a debt- or without prior disclosure to the court and urges that a formal Disclosure of Compensation be filed whenever an attorney is to be compensated for work performed. The Trustee bases her arguments primarily on four (4) sources of law: 1) F.R.B.P. 2016(b); 2) 11 U.S.C. § 329; 3) 11 U.S.C. § 330; and 4) Barron v. Countryman, 432 F.3d 590 (5th Cir.2005). It is important to note, however, that the Trustee raises this argument only after being directed by the court to brief the issue and that the Trustee’s office appears to have remained silent on the issue for many years until this court brought the matter to her attention.
Debtor’s counsel argues that the procedure for allowing post-petition direct payments of “No Look” fees in select circumstances “can be efficient, economical, and in the best interest of the debtor and the estate.” Counsel points out that the “No Look” fee of $500.00 for his services in this case is not an issue, in that it is “a pre-calculated lodestar no look fee for [the] post-confirmation defense of a motion for relief from stay pursuant to Section (4)(A) of the Amended Standing Order Regarding “No-Look” Fees in Chapter 13 Cases,” entered on September 19, 2013. Counsel claims the $500.00 fee is not at issue, as it is predetermined, and that § 330 is only important in so far as its requirement for notice and hearing. Debtor’s counsel further claims that 11 USC § 329 is only implicated for disclosure requirements and review for excessiveness, in that post-petition monies paid to counsel constitute property of the estate.
Finally, counsel suggests a procedure for use by this court whereby a direct payment by a Debtor to his attorney for post-petition services could be made that would be in compliance with Barron. That procedure is as follows: (1) a detailed written contract between the debtor and counsel would be executed; (2) the contract would reflect that the fee is a “fixed no look fee for a designated service that will be held in trust and will not become property of the attorney until approved by the court;” and (3) counsel will then file a Notice of Application to Approve Direct Payment as Compensation for Post-Petition Services, which will disclose the total amount previously approved for all services rendered in the case and will comply with Rule 2002(6).
FINDINGS OF FACT
Debtor, Kelly Deon Saveli filed a voluntary petition for relief under Chapter 13 on July 15, 2011, and was represented by Mr. Sam Henry, IV. Pursuant to F.R.B.P. 2016(b), Mr. Henry filed his Disclosure of Compensation and therein certified that he agreed to accept the “No Look” fee of $2,800.00, which was not objected to. On *684September 27, 2011, a plan was confirmed and the $2,800.00 fee for Mr. Henry was approved. Subsequent thereto, but before debtor changed counsel, all of the $2,800.00 fee was paid to Mr. Henry.
Nearly three (3) years later, on July 23, 2014, a Motion for Relief From Stay was filed by Select Portfolio Servicing (hereafter “Select”), requesting that the Automatic Stay on debtor’s principal residence be lifted due to a post-petition default in her direct payments to Select. At that time the debtor’s original counsel was not practicing in this division, and the debtor sought the services of another attorney, Mr. Robert Raley, for purposes of enrolling as new counsel and responding to the motion for relief. Debtor’s counsel then filed a Motion to Enroll, which was granted on July 28, 2014.
On August 4, 2014, debtor’s counsel filed an Opposition to Motion for Relief from Automatic Stay on behalf for the debtor and stated therein that the debtor would either have the funds to bring all arrears current by the date of the hearing on the motion for relief or would make at least one (1) cash payment and file a modified plan to cure the remaining arrears. Additionally, the opposition pleading requested approval of a fee of $500.00 for the “preparation and prosecution” of same and further stated that those monies had been paid directly to debtor’s counsel by the debtor. Debtor’s counsel did not file a Disclosure of Compensation in conjunction with this fee request and has never made a Rule 2016(b) disclosure.
The original hearing on Select’s Motion for Relief was scheduled for September 2, 2014. Prior to that date, the Chapter 13 Trustee had filed no opposition to the requested fee of $500.00 nor to the direct payment arrangement. On September 2, 2014, the parties announced that they had settled the merits of the Motion for Relief, but the court sua sponte continued the matter until September 9, 2014. The court requested that briefs be filed by the Trustee, debtor’s counsel, and any other party in interest no later than Monday, September 8, 2014, at 5:00 p.m. regarding the appropriateness of the direct payment by the debtor of attorney’s fees to debtor’s counsel. Debtor’s counsel and the Chapter 13 Trustee filed briefs for consideration.
At the scheduled hearing, both the Chapter 13 Trustee, Lucy Sikes, and debt- or’s counsel, Robert Raley, were sworn and responded to direct questioning from the court. The court finds both witnesses credible. They both testified that direct payments from debtor’s to debtor’s attorneys for post-confirmation attorney’s fees had been common practice, that Rule 2016(b) statements were not filed, nor amended in these cases that they could remember, nor could they remember a debtor ever amending a budget to reflect a debtor’s direct payment to debtor’s counsel. In addition, the bifurcation of payments to debtor’s counsel from both the Chapter 13 Trustee and the debtor left no way to the court to track, monitor, or account for the total amount that a debt- or’s attorney had been paid in a specific case except if the court conducted a detailed review of every order ever entered in that case.
CONCLUSIONS OF LAW
This court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334 and by virtue of the reference of the District Court pursuant to Local District Court Rule 83.4.1 as incorporated by Local Bankruptcy Rule 9029.3. This is a core proceeding under 28 U.S.C. § 157(b).
Read together, 11 U.S.C. § 330(a) and Fed.R.Bankr.P.2016(a) require that, after the commencement of a chapter 13 case, counsel for the debtor *685apply for and receive court authorization before collecting any money or property from the debtor. In re Anderson, 253 B.R. 14, 20 (Bankr.E.D.Mich.2000). It is elementary bankruptcy law that all post-petition earnings of a Chapter 18 debtor constitute property of the bankruptcy estate. A chapter 13 debtor has no authority to transfer estate property to an attorney without proper notice to the court. Barron v. Countryman, 432 F.3d 590 (5th Cir.2005). As such, the court cannot condone and takes exception to the current practice in the Shreveport division regarding direct payments from debtor’s to debt- or’s counsel for post-petition and post-confirmation attorney’s fees with no disclosure and no prior court approval. Other courts have routinely adopted this position. See also In re Karen Jensen, 2008 WL 2405023 (Bkrtcy.E.D.Pa.); In re Berg, 356 B.R. 378, 383 (Bankr.E.D.Pa.2006); and In re Taylor, 2004 WL 1746112, at *1 (Bankr. D.D.C. Aug. 4, 2004).
The court rejects that any procedure for allowing post-petition direct payments of “No Look” fees from estate property “can be efficient, economical, and in the best interest of the debtor and the estate” as claimed by debtor’s counsel. The estate does not benefit from any direct payment of post-confirmation attorney’s fees from the debtor to debtor’s counsel. In this division where a majority of the cases filed are Chapter 13 cases and many debtor budgets have expenses well below limits placed in the means test, paying attorney’s fees directly to counsel requires the debtor to “rob Peter to pay Paul.” The expression refers to times before the Reformation when church taxes had to be paid to St. Paul’s church in London and to St. Peter’s church in Rome; originally it referred to neglecting the Peter tax in order to have money to pay the Paul tax. This case is a prime example. A Motion for Relief occurred, because the debtor neglected to make direct payments on her principle residence. She diverted her house payments to other uses, because she lacked income or had expenses past her Chapter 13 budget. Requiring or asking a debtor to make a direct payment for post-petition attorney’s fees simply encourages the debtor to continue to not make her principle residence payment and become further in arrears. This is especially true where the debtor is aware that the agreement reached between the creditor and the debtor’s counsel will allow the debtor to retain the home and cure the post-petition arrears over time in a plan modification. While this arrangement will be beneficial to the debtor’s attorney, the court fails to see how there is any benefit to the estate. The diversion of funds from the debtor’s budget to the debtor’s attorney is clearly contrary to the stated principles of a Chapter 13. To hold otherwise would usurp the court’s authority to monitor and control attorney fees of chapter 13 debtor’s attorneys and would interfere with the court’s jurisdiction over property of the estate.
The court, however, is aware that in certain circumstances a direct payment may not be inappropriate. There are limits on 11 USC § 330, and direct payments could be allowed from a source other than the debtor’s estate.
The court also admonishes that the fees allows by the Amended Standing Order Regarding “No Look” Fees in Chapter IS Cases are not presumptive fees. Debt- or’s counsel’s allegation that the $500.00 attorney fee is not at issue, as it is predetermined by Amended Standing Order Regarding “No Look” Fees in Chapter IS Cases is incorrect. The Amended Standing Order Regarding “No Look” Fees in Chapter IS Cases expressly provides otherwise. At page 4 the “No Look” order provides as follows: “IT IS ORDERED THAT: Nothing in this Standing Order *686should be viewed as barring an objection to a presumptive fee request by any party in interest or the Court, sua sponte. In the event of such an objection, after notice and a hearing, the Court may determine the reasonableness and/or appropriateness of a particular fee.”
All fees provided by the “No Look” fee order are subject to objection, notice and hearing, and a determination of reasonableness or appropriateness. These fees are the most allowed under the “No Look” fee order, and in many instances they could and should be less than this ceiling amount.
The court also finds that when direct payments are made by a debtor to a debt- or’s counsel post-petition, the court and all interested parties are robbed of the opportunity to review and object prior to the payment as provided for in the Amended Standing Order Regarding “No Look” Fees in Chapter 13 Cases. The practice is in also in direct conflict not only with F.R.B.P.2016 but also with the requirement to file an addendum under Section 2(C) of the Amended Standing Order Regarding “No Look” Fees in Chapter 13 Cases.
The court does not take lightly the failure to disclose by debtor’s counsel. There is a duty to disclose all compensation paid or agreed to be paid by the debtor. The disclosure requirement of 11 U.S.C. § 329 is implemented by Fed. R.Bankr.P.2016(b), In re Berg, 356 B.R. 378, 380 (Bankr.E.D.Pa.2006). Counsel for the debtor has failed to comply with any of the provisions of § 329 or Rule 2016(b). However, this failure is tempered by three salient facts, and, therefore, the court determines that sanctions past disgorgement are not appropriate. The facts are; first, long time practice in the Shreveport division has allowed such conduct in the past with no repercussions; second, the debt- or’s attorney openly disclosed the payment and sought court approval, albeit improperly; lastly, the lack of objection by the Chapter 13 over an extended period of time to this local but illogical practice.
While the Bankruptcy Code and Bankruptcy Rule requirements for disclosure, approval, and monitoring discussed are a sufficient legal basis for the court’s order in this case, there are matters of case administration that must be addressed. This court presently oversees over 10,000 Chapter 13 cases, and each includes payments for attorney fees. Millions of dollars are paid out in this division to debtor’s attorneys for debtor representation each year. Proper and timely case administration is of prime importance to this court. The court must have reliable records of each attorney payment and attorney fee totals on each case to properly evaluate any fee application. Having a centralized database that can be easily accessed and that is accurate is of extreme importance to the court both in reviewing and granting attorney’s fees, given the number of cases this court administers. The court should be able to see on each case how much has been paid to debtor’s counsel, the timing of those payments, and what amount is yet to be paid. The court should be able to reasonably inquire as to how much a particular individual or law firm has been paid over a period of time and what is the average attorney fee paid per case.
These records would not be available but for the Standing Chapter 13 Trustee who maintains accounting records on each case and is audited by the United States Trustee yearly. These records are accurate and easily available to the court, debtors, and creditors without extra cost or effort at the Chapter 13 Trustee web site. See https://www.13network.com. Additionally, they are available to any party via the *687National Data Center. See https://www. ndc.org/
The Chapter 13 Trustee, however, cannot track and, therefore, cannot maintain accounting records on or publish data from post-petition direct payments from debtors to debtor’s counsel. Even without the legal justification for directing that all post-petition attorney fees be paid by the Chapter 13 Trustee, the court finds that allowing direct payments would be an obstruction to this court’s administration of its 10,473 pending Chapter 13 cases. Efficient case administration dictates that the Court should not permit direct payments of post-petition and post-confirmation attorney fees from debtors to debtor’s counsel.
CONCLUSION
It is therefore ORDERED within 14 days of this order that that debtor’s counsel, Robert W. Raley, disgorge to the Chapter 13 Trustee all property of the estate he has been directly paid by the Chapter 13 debtor post-petition.
It is further ORDERED that all post-petition attorney fees in all Chapter 13 cases in the Shreveport division must be disbursed by the Chapter 13 Trustee.
It is still further ORDERED that debt- or’s counsel in this case and all other cases pending in the Shreveport division are prohibited from accepting payments from debtor(s) of property of the estate without prior court order and the filing of the disclosures required by the Bankruptcy Code, Bankruptcy Rules and the Amended Standing Order Regarding “No Look” Fees in Chapter 13 Cases. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497541/ | *699
MEMORANDUM OPINION AND CERTIFICATION OF DIRECT APPEAL
ROBERT L. JONES, Bankruptcy Judge.
McLoba Partners, Ltd. d/b/a U.S. Gold Firm (“McLoba”), appellant, filed its request with this Court, the bankruptcy court, to certify a direct appeal to the Fifth Circuit Court of Appeals of this Court’s order and memorandum opinion of July 24, 2014 [Docket Nos. 273 and 272], Robert Lewis Adkins, Sr. (“Adkins”), the debtor, objects to McLoba’s request.
The appropriate court of appeals — here the Fifth Circuit Court of Appeals — may authorize a direct appeal from a final order of the bankruptcy court if the bankruptcy court, prior to docketing of the appeal in the district court, certifies that the order or judgment subject of the appeal involves:
(i) a question of law on which there is no controlling decision by the circuit court or the Supreme Court;
(ii) a matter of public importance;
(iii) an issue where there are conflicting decisions; or
(iv) a circumstance for which an immediate appeal may materially advance the progress of the case or proceeding in which the appeal is taken.
28 U.S.C. § 158(d)(2)(A). If any of the four conditions precedent are met, the bankruptcy court shall make the certification per § 158(d)(2)(B)(ii). Rule 8001(f) of the Federal Rules of Bankruptcy Procedure governs the procedure and directs that the bankruptcy court, as opposed to the district court, makes the certification if the matter is still pending in the bankruptcy court. A matter is pending in the bankruptcy court until the appeal is docketed in accordance with Rule 8007(b). Such rule provides that an appeal is formally docketed with the district court upon the clerk of the district court’s receipt and docketing of the record on appeal. This Court has confirmed that the appeal here has not yet been docketed with the district court.
McLoba submits that the issue presented on its appeal is “whether the Bankruptcy Court erred in holding that the automatic stay applied to a third-party action that McLoba filed against the Chapter 7 Debtor post petition, even though the third-party action was filed in the Debtor’s home bankruptcy court, even though the third-party action was brought purely as a defensive measure and sought no recovery from the Debtor or his bankruptcy estate, and even though the third-party action could not have been commenced before the commencement of the Debtor’s bankruptcy case.” McLoba’s Motion [Docket No. 284] ¶ 5.
As Adkins pointed out in his objection, two of the three “even thoughs” — that the third party action was brought purely as a defensive measure, and that the third party action could not have been commenced before Adkins’s bankruptcy case was filed — are factual matters that were resolved against McLoba and, as such, are not relevant to the question here of whether the Court must certify a direct appeal to the Circuit.
Adkins submits that the issue on appeal is a simple one: “whether McLoba’s filing of a third party complaint against an individual it knew was in a chapter 7 ... was an intentional and willful violation of the automatic stay.” Adkins’s Response [Docket No. 298] ¶ 3. Neither McLoba nor Adkins accurately frames the issue, however. By its order and memorandum opinion, the Court held that McLoba willfully violated the automatic stay and assessed damages against McLoba and in favor of Adkins. The stay violation arose from McLoba’s third party action against Ad*700kins in an adversary proceeding pending before this Court, but in connection with another bankruptcy case. Copies of the Court’s order and memorandum opinion are attached. The issue, therefore, that potentially implicates a direct appeal is whether the automatic stay was violated by McLoba’s third party action against Adkins in an adversary proceeding filed in another bankruptcy case that is also pending before this Court.
This issue potentially raises the broader question of whether any formal action against the debtor in the bankruptcy court implicates the automatic stay. McLoba relied upon the Fifth Circuit’s opinion in Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir.2008), in arguing that its filing of a third party action against Adkins was not a stay violation. McLoba looked specifically to the quoted language from Campbell — that “the automatic stay serves to protect the bankruptcy estate from actions taken by creditors outside the bankruptcy court forum, not legal actions taken within the bankruptcy court.” Id. at 356 (quoting In re Sammon, 253 B.R. 672, 681 (Bankr.D.S.C.2000)). McLoba makes the same argument on its appeal. As such, at least as couched by McLoba, there is a controlling decision from the Circuit on the issue. The issue on appeal would then go to whether this Court, the bankruptcy court, properly applied controlling circuit authority and would thus not then be properly subject of a direct appeal. 28 U.S.C. § 158(d)(2)(A). The other bases for a direct appeal are not at issue.
But as noted by this Court in its memorandum opinion, it determined that Campbell did not answer the question. Campbell held that the creditor there did not violate the stay by including, in its proof of claim, a statement that it intended to increase the mortgage payments as a way to recover a pre-petition claim. Campbell is thus a different case. The quoted language is dictum that, in the Court’s view, McLoba takes out of context. The issue as properly framed by the Court does, at least technically, make it one that the Fifth Circuit has not addressed. The Court therefore certifies the issue for direct appeal to the Fifth Circuit. In doing so, the Court recognizes that the issue is one that is highly dependent on particular and unusual facts — a third party action filed against a debtor, but in an adversary proceeding that is pending in another bankruptcy case before the Court — and thus arguably not properly subject of a direct appeal. See Weber v. U.S., 484 F.3d 154, 158 (2d Cir.2007). The Court believes that the violation of the automatic stay is clear under the statute. The appeal does, as stated above and as the quote from Campbell might intimate, arguably raise the broader, more important question of whether the automatic stay covers only those formal actions taken outside the bankruptcy court. Given the implications of this broader question, the Court believes it is compelled to certify this matter for direct appeal.
Attachment
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The following constitutes the ruling of the court and has the force and effect therein described.
Signed July 23, 2014
Isl
United States Bankruptcy Judge
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
ABILENE DIVISION
IN RE: ROBERT LEWIS ADKINS, SR. DEBTOR.
CASE NO. 12-10314-rlj-7
MEMORANDUM OPINION
On May 12, 2014, a hearing was held on the motion of the debtor, Robert Lewis Adkins, Sr. (“Adkins”), seeking damages for willful violation of the automatic stay by creditor McLoba Partners, Ltd. d/b/a U.S. Gold Firm (“McLoba”) [Docket No. 258] (the “Motion”). McLoba filed its response and objection to the Motion.
The Court has authority to decide this matter under 28 U.S.C. §§ 1334(b) and 157(b)(2); this matter constitutes a core proceeding as it concerns claims against the debtor, the automatic stay, property of the bankruptcy estate, and the administration of the bankruptcy estate. This memorandum opinion contains the Court’s find-
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ings of fact and conclusions of law. See Fed. R. Bankr.P. 7052 and 9014.
I.
The alleged stay violation here arises from a third party action filed by McLoba against Adkins during the pendency of Adkins’s present chapter 7 bankruptcy case. The third party action was brought in the styled adversary proceeding of Harvey L. Morton, as Liquidating Trustee of the R.L. Adkins Corp. Liquidating Trust, plaintiff, v. McLoba Partners, Ltd., d/b/a U.S. Gold Firm, Defendant, Adversary Case No. 13-01057 (“Morton Adversary”). The Morton Adversary was filed in the bankruptcy case of R.L. Adkins Corp. [Case No. 11-10241], which is also pending with this Court. The R.L. Adkins Corp. bankruptcy case and the Robert L. Adkins, Sr. individual case, along with yet a third case, Adkins Supply, Inc. [Case No. 11-10353], are all affiliated cases as Adkins was the principal of R.L. Adkins Corp. and Adkins Supply, Inc.
A.
In the Morton Adversary, Morton sought damages from McLoba on causes for usury and fraudulent transfers (under both federal and Texas law); Morton also requested subordination of McLoba’s claim in the R.L. Adkins Corp. bankruptcy case under equitable subordination. McLoba responded by filing its answer, counterclaim, and a third party action that is subject of the alleged stay violation here. *702See Exhibit B to the Motion. McLoba denied any liability; it affirmatively contended that R.L. Adkins Corp., Adkins Supply, Inc., and Adkins constituted a “single business enterprise and should be treated as the same entity for purposes of the claims ... raised.... Robert Adkins dominated R.L. Adkins Corp. and Adkins Supply Corp. [sic] and the corporate veil should be pierced and/or reverse pierced to treat the three as one with respect to McLoba.” Id. Adkins, according to McLo-ba, used the two corporate entities as shams to perpetrate a fraud against McLo-ba. As a result of these affirmative charges, McLoba, by its third party action, sued Adkins individually; John D. Spicer, in his capacity as chapter 7 trustee of Adkins’s bankruptcy estate; Kent Ries, as chapter 7 trustee of Adkins Supply, Inc. in the Adkins Supply, Inc. bankruptcy case; and Adkins Supply, Inc.
Adkins submits that McLoba’s third party action against him, filed during his chapter 7 case, is a clear and willful violation of the automatic stay under § 362 of the Bankruptcy Code. Adkins therefore seeks actual damages, including attorney’s fees and costs, and punitive damages.1
McLoba argues that the third party action did not implicate § 362 of the Bankruptcy Code and thus cannot constitute a stay violation. This is based on McLoba’s underlying contention that the third party action was “effectively a defense to a bankruptcy preference and fraudulent transfer action that was not and could not have been commenced before the filing of the debtor’s bankruptcy case, so by its very terms, this provision of § 362 does not apply.” McLoba’s Response to the Motion [Docket No. 266]. McLoba submits that it was seeking no recovery against Adkins or against any assets of his bankruptcy estate. As a result, McLoba contends that Adkins has suffered no damages as a result of the third party action, except perhaps for those self-imposed by Adkins and his lawyers (presumably for attorney’s fees incurred in bringing the Motion here). McLoba notes that it did not actually serve Adkins with the third party action and thus alternatively requests that in the event the Court finds a technical stay violation, that the stay be “relaxed to the extent necessary to permit its defensive actions in” this adversary proceeding. Id.
B.
On March 24, 2014, Jason Kathman, Adkins’s attorney, sent an email to McLoba’s counsel, Pete Holzer, stating that the third party action against Adkins constituted a stay violation and demanded that Adkins be dismissed from the suit. He also advised Holzer that if he failed to dismiss Adkins by 5 o’clock the next day, he would file a motion seeking sanctions for an intentional stay violation. See Exhibit C to the Motion. Holzer responded back on the same day, saying Kathman’s threat was “spurious” and that since the suit was filed in the bankruptcy court in which Adkins is a debtor, the stay does not apply. Id. He said, further, that even if there was a stay, he would get it lifted retroactively. McLoba therefore refused to dismiss the third party action, which then caused the filing of the Motion here.
II.
The automatic stay is the protection afforded to an individual or entity that seeks protection under our nation’s bankruptcy *703laws. The coverage of the automatic stay, by the provisions of the Bankruptcy Code, is both broad and specific. It stays the “commencement or continuation” of a “judicial, administrative, or other action or proceeding against the debtor”; it stays any similar actions to “recover a claim against the debtor”; it covers the attempted enforcement of a judgment against the debtor or the debtor’s property; it encompasses any acts that seek to “obtain possession” or “control” over estate property, including any act to “create, perfect, or enforce” any lien; and it covers any act to “collect, assess, or recover a claim” against the estate. See 11 U.S.C. § 362(a). The action stayed must, however, concern rights and claims that arose before the commencement of the bankruptcy case. Id. A suit filed against a person in chapter 7 that is based on a claim that accrued before the bankruptcy was filed — and for which permission for the filing was not first obtained from the bankruptcy court— is a clear stay violation. If done with knowledge of the bankruptcy, such action is deemed a willful stay violation for which a debtor who is an individual “shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k)(l).
A.
In assessing McLoba’s conduct here and whether it constitutes a stay violation, the Court begins with the basic set of underlying facts: McLoba sued Adkins by way of a third party action on facts and circumstances that arose prior to Adkins’s bankruptcy filing. As outlined above, McLoba contends the stay is not violated because, first, the third party action was brought in an adversary proceeding that was already pending before this Court, though in a different, but related, bankruptcy case; and, second, because the third party action was filed “purely as a defensive measure.” McLoba’s Response to the Motion [Docket No. 266]. In support of this second point, McLoba invokes the following legal theories: “veil piercing, reverse veil piercing and other ‘single business enterprise’ theories” and “joint enterprise.” Id. These “theories,” according to McLoba, created a defense to the bankruptcy preference and fraudulent transfer actions asserted in the Morton Adversary. McLoba also points out that it filed its proof of claim in this bankruptcy case, the Adkins case, to which no objection has been filed. McLoba then notes that the claims that were part of the third party action were not a part of the claims set forth in its proof of claim.
It is difficult to follow McLoba’s contention that the third party action was but a mere defense to preference and fraudulent transfer actions. It was brought as a third party action against Adkins. And they are not alleged as defenses to just these two bankruptcy-based causes of action. The Morton Adversary maintained claims against McLoba for usury (Counts I and II); fraudulent transfers under §§ 548 and 550 of the Bankruptcy Code (Counts III and V); fraudulent transfers under the Texas Uniform Fraudulent Transfers Act, and actual fraud (Counts IV and V); and equitable subordination under § 510(c) of the Bankruptcy Code (Count VI). The Court finds no preference claims; the causes are made under both the Bankruptcy Code and under state law. The Court fails to see how the third party action is not principally a prepetition-based cause.
McLoba’s answer, counterclaim, and third party complaint stated that Adkins, along with the corporate entities and the trustees, “should be treated as being one and the same person with respect to the Plaintiffs claims against McLoba,” and that all “constituted a single business enterprise and should be treated as the same *704entity for purposes of the claims and defenses raised in this lawsuit.” Exhibit B to the Motion. Continuing with the labeling, McLoba said, “Robert Adkins dominated R.L. Adkins Corp. and Adkins Supply Corp. [sic] and the corporate veils should be pierced and/or reverse pierced to treat the three as one with respect to McLoba.” Id. Finally, McLoba alleged that Adkins used the companies as shams to perpetrate fraud against McLoba. Id.
The Court has attempted to understand how the various legal theories asserted by McLoba might have affected the claims made against it in the Morton Adversary. The theories are, in effect, mere slogans which might have some meaning upon clarification or perhaps after discovery was conducted. For now, on the Motion before the Court, the Court returns to its characterization of the present facts and circumstances: McLoba’s third party action was an action against a chapter 7 individual debtor concerning facts and circumstances that arose before the bankruptcy case was filed. In arguing that this does not constitute a stay violation, McLoba relies upon the Fifth Circuit’s opinion in Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir.2008). The Campbell case concerned a statement made as part of a proof of claim by a mortgage company to the effect that the debtors’ post-petition payments would be increased to cover an arrearage claim that arose prior to the bankruptcy filing. The Fifth Circuit agreed with the bankruptcy court that the escrow arrearage was a prepetition claim and that the mortgage holder, Countrywide, was stayed from attempting to collect such amounts post-petition. In assessing whether this conduct constituted a stay violation, however, the court held that since such claim was asserted in a proof of claim, it did not constitute a stay violation. The Fifth Circuit pointed out the obvious: that the Bankruptcy Code and Rules allow creditors to file proofs of claim in which they assert claims, whether contingent, un-matured, or disputed, and sets forth the procedure for a debtor to object to the claim and for the bankruptcy court’s determination of whether the claim should be allowed or not. Id. at 356. “We find no precedence in which a court has held that asserting a right to payment in a Proof of Claim constitutes a violation of the automatic stay.” Id. The language from the opinion specifically relied upon by McLoba is as follows:
In fact, a number of courts, including the District of Columbia Circuit, have found that an automatic stay has no effect on actions that are expressly allowed under the Bankruptcy Code. United States v. Inslaw, Inc., 932 F.2d 1467, 1474 (D.C.Cir.1991). In a case similar to ours, the Bankruptcy Court for the District of South Carolina put a finer point on this more general principle:
[T]he automatic stay serves to protect the bankruptcy estate from actions taken by creditors outside the bankruptcy court forum, not legal actions taken within the bankruptcy court. The filing of a Proof of Claim before a bankruptcy court ... is the logical equivalent of a request for relief from the automatic stay, which cannot itself constitute a violation of the stay....
In re Sammon, 253 B.R. 672, 681 (Bankr.D.S.C.2000); see also Rogers v. B-Real, L.L.C. (In re Rogers), 391 B.R. 317, 324 (Bankr.M.D.La.2008) (adopting In re Sammon’s analysis and collecting other cases that have done so).
Id. (emphasis added).
B.
The precise holding of Campbell — that the creditor did not violate the automatic *705stay by including, in its proof of claim, a right to increased payments to cover a prepetition claim — does not resolve the issue here. Asserting a claim within a proof of claim is significantly different from filing a third party action. On the surface, the former is expressly authorized, the latter is expressly stayed. The above-quoted language concerning “legal actions taken within the bankruptcy court” does, however, get to the nub of the issue here. Campbell, 545 F.3d at 356. And it is the language upon which McLoba principally relies. Its other arguments miss the mark. How its single enterprise, veil piercing-type theories constituted a defense or defeated the causes against McLoba are, at least as pleaded, obscure. The Court is forced to extrapolate inferences about how such theories, if proved, affected McLoba’s defense to the Morton Adversary. These are also the type of theories or claims that may belong to the trustee as a representative of creditors generally. See In re S.I. Acquisition, Inc., 817 F.2d 1142, 1145 (5th Cir.1987) (holding that alter-ego claims against a debtor and other non-debtor defendants are property of the debtor’s bankruptcy estate and thus properly brought by the debtor) (citing In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir.1983) (holding that claims against debtor based on corporate trust fund doctrine, a charge of denuding the corporation, and fraudulent transfers under the Texas Fraudulent Transfers Act are each property of the bankruptcy estate, properly brought by the debtor)).
It is also not clear to the Court, as asserted by McLoba, how the assertion of such theories had no effect on the debtor, Adkins, or his bankruptcy estate. The Court assumes that Adkins had to defend the action in some fashion. A review of the pleadings confirms that, as alleged, these theories did arise out of the same set of facts and circumstances that were the subject matter of the Morton Adversary. Brought as a third party action, such theories and causes attempted to deflect potential liability to Adkins. Bringing such causes in the Morton Adversary identified when they were first raised; it did not resolve when they arose. Adkins could not simply ignore these charges.
The Fifth Circuit in Campbell, in holding that an assertion in a proof of claim of increased payments to cover a prepetition claim is not a stay violation, noted that many courts “have found that an automatic stay has no effect on actions that are expressly allowed under the Bankruptcy Code.” Campbell, 545 F.3d at 356 (citing U.S. v. Inslaw, Inc., 932 F.2d 1467, 1474 (D.C.Cir.1991)). To “put a finer point on this more general principle,” the court then quoted from the Sammon opinion. Id. The issue, then, is whether the holding of Campbell, which arose in connection with a claim made in a proof of claim, can be extended to a third party action filed in an adversary pending in a different bankruptcy case, but before the same bankruptcy court. This would seem, at least to this Court, to be stayed by the clear language of § 362(a) of the Bankruptcy Code.
The Campbell court looked to Sammon and the extensive analysis provided by the Sammon opinion. Its reliance on Sam-mon is understandable. The facts of Sam-mon are strikingly similar to the facts of Campbell. In Sammon, chapter 13 debtors, John and Judith Sammon, objected to the proof of claim of the Internal Revenue Service and sought damages and other relief against the IRS, contending the IRS violated the automatic stay by failing to credit a $13,600 payment made by the Sammons which, in effect, improperly increased the amount of its claim. The court, predictably, held such action was not a stay violation. In reaching its decision, *706the bankruptcy court there said that, first, the filing of a proof of claim, as well as the procedures for dealing with proofs of claim, are expressly provided for by the Bankruptcy Code and the Bankruptcy Rules. Next the court noted that the automatic stay “does not operate against the court with jurisdiction over the bankruptcy.” Sammon, 253 B.R. at 680 (citing Robert Christopher Assoc. v. Franklin Realty Group, Inc. (In re FRG, Inc.), 121 B.R. 710, 714 (Bankr.E.D.Pa.1990); In re Briarwood Hills Assoc., 237 B.R. 479, 480 (Bankr.W.D.Mo.1999); and In re Bird, 229 B.R. 90, 95 (Bankr.S.D.N.Y.1999)). The court relied upon further, even broader statements of this principle. It noted that the stay does not apply to proceedings in the bankruptcy court having jurisdiction over the debtor, and that it “implicitly does not bar a party from commencing a proceeding against the debtor in the court where the bankruptcy petition is pending.” Id. at 680-81. The court stated that the purposes of the automatic stay — to preserve assets and halt the race to the courthouse — “are not advanced by disallowing suits against the debtor in the court where the bankruptcy case is pending.” Id. at 681. These reasons were the lead-in to the quoted language — “the automatic stay serves to protect the bankruptcy estate from actions taken by creditors outside the bankruptcy court forum, not legal actions taken within the bankruptcy court” — from the Campbell opinion.
The third party action here was a “proceeding against the debtor in the court where the bankruptcy petition is pending”; it was a “legal action[ ] taken within the bankruptcy court” that has “jurisdiction over the debtor.” Sammon, 253 B.R. at 680-81. As such, its filing met these judicially created exceptions to the application of the automatic stay. Such actions, according to Sammon, do not encroach on the purposes of the automatic stay.
As stated, the Court does not construe the Fifth Circuit’s holding in Campbell to resolve the question here. And the Court does not agree with the broader statements of the exception set forth in Sam-mon, at least as applied here. Such an exception — i.e., allowing any action against a debtor in the bankruptcy court, without tripping the stay wire — fails to account for the most basic purpose of the automatic stay not mentioned in Sammon: the breathing room afforded a debtor from his creditors upon a bankruptcy filing. See GATX Aircraft Corp. v. M/V Courtney Leigh, 768 F.2d 711, 716 (5th Cir.1985); In re Fine, 285 B.R. 700, 702 (Bankr.D.Minn. 2002).2 The Court also disagrees with the argument that Adkins, as a chapter 7 debt- or, suffered no harm by being sued and made a party in the Morton Adversary. Such argument turns the automatic stay, the most basic protection afforded by a bankruptcy filing, on its head. McLoba’s decision not to serve Adkins served only to *707mitigate the harm. Had Adkins not demanded dismissal, McLoba would have no doubt pursued the litigation against Adkins; service would have been effected, thus forcing Adkins to respond, followed by discovery, trial, etc. (This assumes the suit did not settle.) Just because Adkins and his counsel proactively addressed the situation should not dim the automatic stay’s application.
C.
The Court concludes that McLoba violated the stay. The filing of the third party action against Adkins is a basic stay violation under § 362(a) of the Bankruptcy Code. Section 362(k) provides that a willful stay violation concerning an individual debtor mandates an assessment of damages against the violator. The question, then, is whether McLoba’s conduct was willful. McLoba certainly acted intentionally in filing the third party action, and it was certainly aware of Adkins’s bankruptcy filing. It was also provided an opportunity to dismiss the action against Adkins without further recourse. “Willfulness within the context of an alleged stay violation is almost universally defined to mean intentional acts committed with knowledge of the bankruptcy petition.” In re San Angelo Pro Hockey Club, Inc., 292 B.R. 118, 124 (Bankr.N.D.Tex.2003) (internal citations omitted). The Court is particularly troubled by McLoba’s refusal to dismiss Adkins upon demand by Adkins’s counsel. McLoba’s refusal shifted the burden on the issue to Adkins. Given the basic protection afforded a debtor by the automatic stay upon a bankruptcy filing, and given the clear facial violation of the automatic stay here, the Court finds that Adkins was damaged and should be compensated. His damages are the attorney’s fees and expenses incurred in vindicating the protections afforded by the automatic stay. The Court will therefore issue its order directing that Adkins’s counsel submit, by affidavit, the attorney’s fees and costs incurred by Adkins in prosecuting this Motion; McLoba may object to the reasonableness of the amount of fees and expenses.
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The following constitutes the ruling of the court and has the force and effect therein described.
Signed July 23, 2014
/s/
United States Bankruptcy Judge
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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
ABILENE DIVISION IN RE: ROBERT LEWIS ADKINS, SR., DEBTOR.
CASE NO. 12-10314-rlj-7
*708
ORDER
In accordance with the Memorandum Opinion issued this date, the Court will grant, in part, the motion of the debtor, Robert Lewis Adkins, Sr. (“Adkins”), seeking damages for willful violation of the automatic stay by creditor McLoba Partners, Ltd. d/b/a U.S. Gold Firm (“McLo-ba”) [Docket No. 258]. The Court finds that Adkins was damaged by McLoba’s actions and should be compensated for the amount of attorney’s fees and expenses incurred in prosecuting the motion. Adkins’s counsel shall submit, by affidavit, the attorney’s fees and costs incurred by Adkins in prosecuting the motion; such affidavit shall be filed with the Court within ten (10) days of entry of this order. McLoba may object to the reasonableness of the amount of fees and expenses in the affidavit by filing such objection with the Court within ten (10) days after the filing of Adkins’s counsel’s affidavit.
SO ORDERED.
. Adkins also sought dismissal of the third party action against him. Since the filing of the Motion here and the hearing on the Motion, the Morton Adversary has apparently been settled, with McLoba dismissing all claims against Adkins, as well as Spicer and Ries in their respective capacities.
. See also In re Halo Wireless, Inc., 684 F.3d 581, 586 (5th Cir.2012) ("The purpose of the automatic stay is to give the debtor a 'breathing spell' from his creditors....”) (quoting Matter of Commonwealth Oil Refining Co., Inc., 805 F.2d 1175, 1182 (5th Cir.1986)); S.E.C. v. Brennan, 230 F.3d 65, 70 (2d Cir.2000) ("The general policy behind [§ 362(a) ] is to grant complete, immediate, albeit temporary relief to the debtor from creditors...."); In re Siciliano, 13 F.3d 748, 750 (3d Cir.1994) ("The purpose of the automatic stay provision is to afford the debtor a 'breathing spell'-”); Winters By and Through McMahon v. George Mason Bank, 94 F.3d 130, 133 (4th Cir.1996) (“The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from its creditors.”) (citations omitted); Dean v. Trans World Airlines, Inc., 72 F.3d 754, 755 (9th Cir.1995) (one of two broad purposes of the automatic stay is that it gives the debtor a "breathing spell” from its creditors). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497544/ | MEMORANDUM OPINION
MARVIN ISGUR, Bankruptcy Judge.
Bluewater Industries, L.P.’s motion for partial summary judgment is granted in part and denied in part. (ECF No. 47).
Procedural Background
On January 3, 2014, Bennu Oil and Gas, LLC filed an Original Complaint against Bluewater Industries L.P. and Technip USA, Inc. relating to defendants’ contract work performed on the Clipper Project. (Case No. 14-3001, ECF No. 1).
*759On March 25, 2014, Bluewater filed a motion for partial summary judgment. (ECF No. 47). On April 15, 2014, Bennu filed an opposition to Bluewater’s motion. (ECF No. 59). On April 23, 2014, Bluewa-ter filed a reply in support of its motion for partial summary judgment. (ECF No. 60).
Facts
ATP Oil & Gas Corporation hired Blue-water as the general contractor on ATP’s Clipper Pipeline Project in the Gulf of Mexico. Prior to any work, Bluewater and ATP entered into several agreements, including an Amended and Restated Master Service Agreement (“ARMSA”) and a work order (“Work Order II”) issued on or about February 1, 2012. Under Work Order II, Bluewater was required to “design, engineer, fabricate, and/or procure, load out, transport, field erect, tie in and test” certain “well control system components.” (ECF No. 47-4 at 1). As part of the agreement, Bluewater was responsible for providing and installing an “electro-hy-draulic umbilical” to the floating production platform located in Green Canyon Block 338.
In connection with the construction of the Clipper Project, Bluewater entered into several subcontracts for performance of specific work. On March 31,2009, Blue-water entered into a subcontract agreement with Technip under which Technip agreed to perform certain obligations related to the Clipper Project, including installation of the umbilical.
The ARMSA expressly waived ATP and Bluewater’s rights to assert claims against each other for “consequential, special or indirect damages:”
21. Consequential Damages
21.1 Mutual Waiver:
[ATP] and [Bluewater] waive and release any claims against the other for consequential, special or indirect damages incurred by them (except those arising out of or in connection with pollution which are governed by Paragraph 8.5; or those which result from gross negligence, willful misconduct or intentional act of [ATP] or [Bluewater]), however and whenever arising under this [ARMSA] or as result of or in connection with the Work or Services, and whether based on negligence, unseaworthiness, breach of warranty, breach of contract, strict liability or other;
21.2 Definition:
Consequential damages shall include, but not be limited to, loss of revenue, profit or use of capital, production delays, loss of product, reservoir loss or damage, losses resulting from failure to meet other contractual commitments or deadlines and downtime of facilities or vessels. Consequential damages shall not include any liability imposed pursuant to the Oil Pollution Act of 1990, as it may be amended from time to time.
(Case No. 14-3001, ECF No. 47-1 at 2-3).
On October 14, 2013, ATP filed a notice of intent to assume and assign various executory contracts and leases, including all of the agreements between ATP and Bluewater related to the Clipper Project. On October 17, 2013, the Court approved, with modifications, the Asset Purchase Agreement (“APA”). (Case No. 12-36187, ECF No. 2706). Pursuant to the APA and Final Sale Order, ATP sold to Bennu ATP’s interest in the Clipper Project to Bennu.
Effect of Bennu Assumption
Bennu has stepped into ATP’s shoes with regard to the ARMSA and Work Order II, and it is bound by those agreements to the same extent that ATP was bound by them prior to its assignment to Bennu. “An executory contract ... must be assumed in its entirety. A debtor may not pick and choose those portions that it wishes to enforce and reject those *760that it does not deem desirable. That is black letter law engraved in stone.” In re Diamond Head Emporium, Inc., 69 B.R. 487, 494 (Bankr.D.Hawai’i 1987) (citations omitted). Accordingly, Bennu, as ATP’s assignee, is bound by all provisions of the contracts {e.g., the ARMSA and Work Order II) that ATP assigned to it.
Bennu’s Claims Against Bluewater
In its complaint, Bennu alleges that after the oil well located at the Clipper Project began producing, “the Umbilical lost electrical connectivity.” (ECF No. 1 at 11-12). Bennu claims that the umbilical is defective, not repairable, and needs to be replaced. {Id. at 11-12). Bennu has asserted claims for breach of contract and breach of warranty against Bluewater. (ECF No. 1).
For its breach of contract claim, Bennu seeks three broad categories of damages:
(a) expenses and damages associated with delay and increased cost of the Clipper Project that were a result of BWI’s breaches of the BWI Agreements, (b) expenses and damage suffered as the result of the failed Umbilical, including, but not limited to (i) the costs to position a ship to provide a secondary umbilical, (ii) remediation expenses, which are expected to total in excess of $13 million, for manufacture and installation of a new, functional and defect-free umbilical at the Clipper Project and (iii) lost revenue as the result of the failed Umbilical; (c) expenses and damage suffered by Bennu as the result of liens placed on the Clipper Project by BWI or its subcontractors, including the cost to defend against such liens and/or satisfy the liens of subcontractors (including, but not limited to, the costs associated with this lawsuit).
(ECF No. 1 at 16-17).
The two categories of damages relevant to Bluewater’s summary judgment motion include (a) damages associated with the delay and increased cost of the Clipper Project and (b) damages relating to the failed umbilical.
For its breach of warranty claim, Bennu only seeks damages relating to the failed umbilical. The three subcategories of damages relating to the failed umbilical include:
(i) expenses to position a ship and associated equipment and personnel at the Clipper Project to provide a secondary umbilical, (ii) remediation expenses expected to total in excess of $13 million for manufacture and installation of a new, defect-free umbilical at the Clipper Project, and (iii) lost revenue as a result of the failed Umbilical.
(ECF No. 1 at 17).
Bluewater’s Motion for Summary Judgment
Bluewater requests that the Court “grant summary judgment and order that Bennu may not seek at trial any “consequential, special or indirect” damages relating to Bluewater’s Work, including (i) damages associated with alleged delays in completing the Work or increased costs of the Clipper Project; (ii) lost revenue; or (iii) expenses associated with Bennu’s positioning of the Secondary Umbilical.” (ECF No. 47-1 at 8).
Bennu concedes that “If Bennu cannot show gross negligence, willful misconduct, or intentional acts, then the ARMSA does prevent the recovery of consequential, special or indirect damages.” (ECF No. 59). Bennu raises two arguments as to why the Court should deny Bluewater’s motion: (i) summary judgment is premature because Bennu should be allowed to conduct discovery to determine whether Bluewater’s gross negligence resulted in the umbilical’s failure; and (ii) properly characterizing *761damages as direct or consequential is a question of fact to be determined at trial.
Louisiana Law
The Outer Continental Shelf Lands Act (“OCSLA”) applies Louisiana law (as surrogate federal law) to the extent that it is “not inconsistent with this Act [OCSLA] or with other Federal laws.” 43 U.S.C. § 1333(a)(2)(A). No inconsistency has been shown. Accordingly, Louisiana law applies to this dispute.
The Court has identified three issues related to Bluewater’s motion for summary judgment: (i) whether Bennu successfully plead a claim for gross negligence, (ii) whether the consequential damages waiver provision is enforceable, and (iii) whether to characterize each of the four categories of damages as direct or consequential. There is Louisiana statutory law or case law that addresses issues (i) and (ii). For issue (iii), there is Louisiana statutory law to guide the Court in characterizing the two categories of damages that are expressly included in the definition of consequential damages in the parties’ agreement. However, there is no Louisiana statute or case law that directly addresses how to characterize the two categories of damages that are not mentioned in the agreement. Accordingly, the Court must provide an “Erie guess” as to how the Louisiana Supreme Court would characterize those two categories of damages. See Howe ex rel. Howe v. Scottsdale Ins. Co., 204 F.3d 624, 627 (5th Cir.2000) (“If the Louisiana Supreme Court has not ruled on this issue, then this Court must make an Erie guess and determine as best it can what the Louisiana Supreme Court would decide.”) (internal citations omitted).
Failure to Plead “Gross Negligence, Willful Misconduct, or Intentional Acts”
The ARMSA expressly precludes recovery of “consequential, special or indirect damages,” except those which result from “gross negligence, willful misconduct or an intentional act” or “out of or in connection with pollution ...” (ECF No. 47 at 23).
Bennu has failed to plead that the allegedly “defective” umbilical is the result of any gross negligence, willful misconduct or intentional act by Bluewater. Nor does Bennu allege that its purported damages arise out of or in connection with pollution. Accordingly, Bennu has failed to plead a theory of recovery that would entitle them to “consequential, special or indirect damages.”
It is well settled that a plaintiff is not “permitted to rely on an unpled theory of recovery to defeat summary judgment.” Allstate Ins. Co. v. Plambeck, 2012 WL 2130982, at *3 (N.D.Tex.2012) (refusing to consider a theory of recovery raised by counterclaimant in opposition to summary judgment). “[T]heories of liability must be pled in the Complaint.” Miller v. Monaghan, 2008 WL 821928, at *2 (N.D.Miss. 2008) (quoting De La Hoya v. Coldwell Banker Mex., Inc., 125 Fed.Appx. 533, 536 (5th Cir.2005)). “Therefore, only those claims made known in Plaintiffs complaint are viable in this case, and only those theories of recovery will be addressed here [in deciding summary judgment].” Id.
Bennu has only plead claims for breach of contract and breach of warranty in its complaint. The ARMSA specifically lists these causes of actions as examples of when the parties cannot recover consequential damages. (ECF No. 47-3 at 23) (stating that the parties cannot recover consequential, special, or indirect damages “... whether based on negligence, unseaworthiness, breach of warranty, breach of contract, strict liability or other.”) (emphasis added).
Bennu argues that the Court can “reasonably infer from the allegations of the Original Complaint that the Umbilical fail*762ure may have resulted from more than negligent conduct.” (Case No. 14-3001 ECF No. 59 at 3). The Court rejects this argument.
The words “gross negligence” are not mentioned in the complaint, much less a sufficiently plead claim for gross negligence. The Court will not infer a gross negligence claim just because Bennu’s breach of contract and breach of warranty claims include allegations that Bluewater engaged in negligent conduct. A claim for “gross negligence” is a separate theory of recovery than a claim for ordinary negligence. Indeed, the parties carved out an exception in the ARMSA that would allow the parties to recover consequential damages for gross negligence, while precluding consequential damages for ordinary negligence.
Accordingly, Bennu cannot recover “consequential, special or indirect damages” for its breach of contract and breach of warranty claims under its currently filed complaint.
Waiver of Consequential Damages
“For a waiver of recoverable damages to be effective, as with the waiver of warranties, it must be 1) written in clear and unambiguous terms; 2) contained in the contract; 3) brought to the attention of the parties against whom it is to be enforced.” Gulf Am. Indus. v. Airco Indus. Gases, 573 So.2d 481, 489 (La.Ct. App.1990) (citing Fontenot v. F. Hollier & Sons, 478 So.2d 1379 (La.Ct.App.1985). Bennu admits that the ARMSA unambiguously waives the parties’ rights to seek consequential, special or indirect damages for any reason other than one of the exceptions listed. (See ECF No. 59 at 1) (“Bennu does not dispute that by the plain terms of the Amended and Restated Master Service Agreement (the “ARMSA”), the parties waived their rights to seek “consequential, special or indirect damages” except those that result from “gross negligence, willful misconduct or intentional act[s]” of the parties.”). Moreover, Bennu does not dispute that the waiver was brought to its attention prior to entering into the agreement.
Nor does the provision violate the Louisiana Civil Code because it states that the waiver does not apply to claims for gross negligence, willful misconduct, or intentional acts. La. Civ. Code Ann. art. 2004 (“Any clause is null that, in advance, excludes or limits the liability of one party for intentional or gross fault that causes damage to the other party.”). Accordingly, the waiver provision is enforceable.
Characterizing Categories of Damages
Bluewater seeks summary judgment on four categories1 of damages: (i) lost revenues, (ii) damages associated with alleged delays in completing the Work (“production delays”), (iii) increased costs of the Clipper Project; and (iv) expenses associated with Bennu’s positioning of the vessel to provide the secondary umbilical. In the ARMSA, it states that “consequential damages shall include, but not be limited to, loss of revenue, profit or use of capital, production delays, loss of product, reservoir loss or damage, losses resulting from failure to meet other contractual commitments or deadlines and downtime of facilities or vessels ...” (ECF No. 1-3 at 23). The ARMSA does not preclude Bennu from recovering direct damages, but the agreement does not define the term direct damages. Accordingly, the Court must determine if each category of damages is direct or consequential.
*763The Court finds that categories (i) and (ii) are consequential as a matter of law, category (iv) is direct as a matter of law, and that there is a genuine issue of material fact as to whether category (iii) is direct or consequential. Accordingly, with regards to Bennu’s currently plead breach of contract and breach of warranty claims, the Court grants summary judgment as to categories (i), (ii), and denies summary judgment as to categories (iii) and (iv).
Damages Included in the Definition of “Consequential Damages” in the ARMSA
Categories (i) and (ii) are expressly included in the definition of consequential damages. Most courts agree that when the parties expressly define a category of damages as consequential, then they will be deemed consequential as a matter of law. See, e.g., McNally Wellman Co. v. N.Y. State Elec. & Gas Corp., 63 F.3d 1188, 1195 (2d Cir.1995); see also Roneker v. Kenworth Truck Co., 977 F.Supp. 237, 239-40 (W.D.N.Y.1997) (stating that “where the parties have gone a long way in defining the scope of consequential damages in the contract itself ... the court may find, as a matter of law, that the damages sought by the [plaintiff] ... constitute consequential damages, rather than direct damages.”) (internal citations omitted).
The Louisiana Civil Code provides that “ [interpretation of a contract is the determination of the common intent of the parties.” La. Civ.Code Ann. art.2045. “When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent.” La. Civ.Code Ann. art.2046. The ARMSA includes a definition of “consequential damages” and provides a non-exhaustive list of damages that are deemed consequential. It defines “consequential damages” as including, but not being limited to, “loss of revenue, profit or use of capital, production delays ...” (ECF No. 47-3 at 23). The agreement unambiguously defines consequential damages to include loss of revenue and damages relating to production delays.
(i) Lost Revenue
For its breach of warranty and breach of contract claims, Bennu seeks damages for lost revenues resulting from the failed umbilical.
“Lost profits may be in the form of direct damages, that is, profits lost on the contract itself, or in the form of consequential damages, such as profits lost on other contracts or relationships resulting from the breach.” A-Delta Overnight Legal Reprod. Servs. Corp. v. David W. Elrod, 2012 WL 5351265 (Tex.App.2012). In this case, Bennu seeks damages for the revenues it would have received from production had the umbilical worked properly. The alleged lost revenues therefore relate to other contracts. Accordingly, this category of damages constitutes consequential damages.
Damages for lost revenue fall within the express definition of “consequential damages” set forth in the ARMSA. (ECF No. 47-3 at 23). Bennu concedes that lost profits are not recoverable in the absence of “gross negligence, willful misconduct, or intentional acts.” (ECF No. 59 at 4). Accordingly, Bluewater’s motion for summary judgment is granted as to Bennu’s attempt to recover damages for lost revenue on its breach of contract and breach of warranty claims.
(ii) Production Delays
For its breach of contract claim, Bennu seeks “expenses and damages associated with delay.” The ARMSA defines consequential damages as including damages associated with “production delays” *764and “losses resulting from ... deadlines or downtime of facilities or vessels.” This language unambiguously waives damages related to production delays. Accordingly, Bluewater’s motion for summary judgment is granted to the extent that Bennu seeks damages related to production delays on its breach of contract claim.
Proper Characterization of Remaining Categories
The remaining two categories of damages (the increased costs of the Clipper Project and the costs associated with positioning a ship to provide a secondary umbilical) are not included as examples of consequential damages in the ARMSA. Without offering any explanation, Bluewa-ter asserts that “[i]t seems beyond doubt that such damages constitute consequential, special, or indirect damages and thus are not recoverable by Bennu here.” (ECF No. 60 at 5).
The first question is whether, at the summary judgment level, the Court can properly characterize these categories of damages. Bennu cites to several cases, from various jurisdictions, in support of its argument that properly characterizing these damages as direct or consequential is a question of fact not appropriate for resolution now. See, e.g., Farrell Constr. Co. v. Jefferson Parish, La., 86-4242, 1992 WL 210027 (E.D.La. Aug. 20, 1992); Hycel, Inc. v. Am. Airlines, Inc., 328 F.Supp. 190, 194 (S.D.Tex.1971) (equating consequential to special damages, holding that “what amounts to special damages is largely dependent on the circumstances of each case ... and is essentially a question of fact.”); Roneker v. Kenworth Truck Co., 977 F.Supp. 237, 239 (W.D.N.Y.1997) (“as a general matter the precise demarcation between direct and consequential damages is a question of fact ... ”) (internal citations omitted). However, none of the cases cited by Bennu supports the blanket proposition that the proper characterization of all categories of damages is necessarily a question of fact that cannot be decided on summary judgment.
Farrell Constr. Co. is the sole Louisiana case that Bennu cites to support its claim that the Court cannot resolve the issue of how to characterize these damages until trial. See Farrell Constr. Co. v. Jefferson Parish, La., 86-4242, 1992 WL 210027 (E.D.La. Aug. 20, 1992). However, the court merely stated that there were unresolved factual issues that prevented the court from properly characterizing the damages. See Farrell Constr. Co. v. Jefferson Parish, La., 1992 WL 210027 (E.D.La. Aug. 20, 1992). The Court does not interpret Farrell Constr. Co. to mean that the characterization issue is necessarily a question of fact that cannot be determined at summary judgment.
Erie Guess
This Court is unaware of any Louisiana statute or case that articulates a standard for determining whether a certain category of damages is direct or consequential when the parties’ agreement does not enumerate that category as either consequential or direct.
In a case dating back to 1851, the Louisiana Supreme Court mentions the difference between consequential and direct damages, and appears to adopt a broad definition of direct damages. In that case, a buyer sued a seller for breach of contract when the seller failed to deliver a suitable crank for the buyer’s steamboat. As a result of seller’s breach, buyer’s boat was detained. In dicta, the Court stated that the buyer’s costs related to detention of the boat constituted direct damages. Cable v. Leeds, 6 La. Ann. 293, 293 (1851) (“These damages were caused directly by the defendants by making a crank that could not be used, and they are therefore responsible for them. Greater direct damages are claimed, but not proved.”).
*765However, this decision provides little guidance because the Court did not consider the characterization issue in the context of when the parties waive rights to recover consequential damages, but not direct. Nor has the Louisiana Supreme Court considered whether the two categories of damages at issue in this case constitute direct or consequential damages in any other context.
Accordingly, the Court must predict, to the best of its ability, what the Louisiana Supreme Court would decide under the same circumstances. See Coastal Agric. Supply, Inc. v. JP Morgan Chase Bank, N.A., 759 F.Bd 498 (5th Cir.2014) (“The Texas Supreme Court has not considered whether several fraudulently indorsed and deposited checks constitute a single injury or multiple injuries. So, we must determine, to the best of our ability, what it would decide under the same circumstances. In making an Erie guess, we defer to intermediate state appellate court decisions, unless convinced by other persuasive data that the highest court of the state would decide otherwise.”) (internal citations omitted).
The Court has reviewed Louisiana appellate and district court decisions for guidance on the characterization issue. Due to the limited Louisiana case law on point, the Court primarily relied on (i) Williston on Contracts, a secondary source commonly cited by the Louisiana Supreme Court, and (ii) Texas law in making its Erie guess. See Stanley v. Trinchard, 500 F.3d 411, 423-24 (5th Cir.2007) (“As no Louisiana case is directly on point, we must make an “Erie guess” and predict how a Louisiana court would rule. In doing so, we may consult a variety of sources, including the general rule on the issue, and the rules in other states.”).
Louisiana Appellate Court Decision
The Court found one Louisiana Appellate Court to deal with the characterization issue when the parties agreed to waive consequential damages. In S. Hardware Co., the Court characterized a buyer’s damages incurred “due to failure or delay” in seller’s delivery of a computer system as direct damages. See S. Hardware Co. v. Honeywell Info. Sys., Inc., 373 So.2d 738, 741 (La.Ct.App.1979) (“... we find the damages actually sought by this petition are direct damages due to the Failure or Delay in performance by defendant.”). In that case, the appellate court made its decision based on its interpretation of the parties’ contract. The court believed that the language in the agreement treated “delay or failure damages” separately from “indirect, special, or consequential” damages. Id. Based on the court’s reading of the agreement, the parties considered “delay or failure damages” to be recoverable direct damages.
Accordingly, the S. Hardware Co. decision is only helpful insofar as indicating that the Court should try to ascertain whether the parties intended to characterize these categories of damages as direct or consequential. Unfortunately, the parties’ intent is unclear because these two categories of damages are not included as examples of damages under the definition of consequential. These categories of damages are not mentioned in the waiver provision. Nor is it fair to infer that exclusion of these damages in the definition necessarily means that the parties didn’t consider them to be consequential. The definition of consequential damages provides a non-exhaustive list of examples. However, the fact that neither of these categories fall under any of the seven fist-ed examples of consequential damages lends some support to the argument that the parties did not consider them to be consequential.
Williston on Contracts
The Louisiana Supreme Court commonly cites to Williston on Contracts. Clovelly *766Oil Co., LLC v. Midstates Petroleum Co., LLC, 2012-2055 (La.3/19/13), 112 So.3d 187, 196 (citing 11 Williston on Contracts § 32:13 (4th ed.)). Accordingly, this Court looks to Williston’s definition of direct (or general) and consequential damages for guidance:
General damages are considered to include those damages that flow naturally from a breach, that is, damages that would follow any breach of similar character in the usual course of events. Such damages are said to be the proximate result of a breach, and are sometimes called “loss of bargain ” damages, because they reflect a failure on the part of the defendant to live up to the bargain it made, or a failure of the promised performance itself. Consequential damages, on the other hand, include those damages that, although not an invariable result of every breach of this sort, were reasonably foreseeable or contemplated by the parties at the time the contract was entered into as a probable result of a breach.
24 Williston on Contracts § 64:12 (4th ed.) (emphasis added).
Other Jurisdictions
With little guidance from Louisiana courts, the Court will consider approaches taken by other jurisdictions. Many courts have found that the distinction between direct and consequential has to do with the degree to which the damages are foreseeable. See, e.g., Rexnord Corp. v. DeWolff Boberg & Assocs., Inc., 286 F.3d 1001, 1004 (7th Cir.2002) (stating that common law “distinguishes between direct and consequential damages, the difference lying in the degree to which the damages are a foreseeable (that is, a highly probable) consequence of a breach.”).
Although most courts adhere to the same general principles of distinguishing direct and consequential damages, courts vary considerably on how they apply these principles to characterize certain categories of damages.
The Texas Court of Appeals has issued two decisions that provide this Court with some guidance. See Stanley v. Trinchard, 500 F.3d 411, 424 (5th Cir.2007) (where the Fifth Circuit looked to Texas law in making its Erie guess and concluding that a Louisiana court would adopt the same rule as the one adopted by the Texas Supreme Court). In Tennessee Gas Pipeline Co., a Texas Court of Appeals dealt with the issue of distinguishing between direct and consequential damages under similar circumstances. Tennessee Gas Pipeline Co. v. Technip USA Corp., 2008 WL 3876141 (Tex.App.2008). In that case, Tennessee Gas Pipeline Company (“TGP”) hired Technip USA to construct improvements along an interstate gas pipeline owned by TGP. The parties agreement contained a nearly identical waiver of consequential damages that included a non-exhaustive list of damages that the parties enumerated as “consequential:”
Consequential Damages: Notwithstanding any other provisions of this Agreement to the contrary, in no event shall Owner or Contractor be liable to each other for any indirect, special, incidental or consequential loss or damage including, but not limited to, loss of profits or revenue, loss of opportunity or use incurred by either Party to the other, or like items of loss or damage; and each Party hereby releases the other Party therefrom.
Id.
After project delays occurred, TGP sued Technip to recover its additional expenses and for allegedly defective work. The jury awarded damages to TGP for several different categories of damages. The Texas Court of Appeals considered which of these categories were direct or consequential. The Court held that damages for (i) *767project delay costs (which were not listed as an example of consequential damages like in the Bennu-Bluewater agreement) and (ii) damages related to providing power were direct damages. The Court reasoned that these types of costs were conclusively presumed to be foreseen by Technip because these costs were discussed in the parties’ agreement. (Id.) (“Because TGP [was] expressly responsible for these costs under the Contract, it can be conclusively presumed to have been foreseen or contemplated by Technip that, as a consequence of its breach of the Contract by delay, TGP would have to continue paying these ongoing costs.”).
The Court held that the remaining categories of damages, such as loss of efficiency (i.e. excess gas, oil, and labor), the cost of renting a backup generator, interest that accrued on the amount that TGP invested in the project, and premature energy costs were consequential damages that were precluded by the terms of the contract. The Court. reasoned that these damages were “too remote to be conclusively presumed to have been foreseen or contemplated by Technip USA as a consequence of its breach.” Id.
In Powell, the Texas Court of Appeals held that the costs associated with repairing a transformer that failed due to the defendant’s breach of contractual and warranty obligations, were direct damages. Powell Elec. Sys., Inc. v. Hewlett Packard Co., 356 S.W.3d 113, 119 (Tex.App.2011). However, the Court concluded that Plaintiffs costs relating to the operation of a temporary transformer were consequential rather than direct damages. Powell Elec. Sys., Inc. v. Hewlett Packard Co., 356 S.W.3d 113, 121 (Tex.App.2011).
(iii) Increased Costs of the Clipper Project
In its response, Bennu makes a distinction between “delayed production” costs (included as consequential under the ARMSA) and the “increased costs of construction.” (ECF No. 59 at 6). In its complaint, Bennu describes the increased costs of the Clipper Project as follows:
As of August 28, 2012 — shortly after the Debtor’s bankruptcy filing — the Debtor projected the cost to complete the Clipper Project to be approximately $120 million. Although still being fully determined, taking into consideration the total amount of the asserted claims by BWI and Technip, the total cost of the Clipper Project would be in excess of $200 million (not including amounts described below that are being incurred as a result of the failed Umbilical).
(ECF No. 1 at 11).
Accordingly, Bennu appears to be seeking $80,000,000.00 in damages that may not be directly linked to the failed umbilical. It is unclear whether the “increased costs of construction” are entirely attributable to “delayed production” costs. To the extent that these damages relate to delayed production costs, these damages are consequential as a matter of law.
However, a portion of these increased costs may have been incurred as a result of Bluewater’s alleged “failure to adequately provide project management, coordination and inspection services to the Clipper Project as required in the BWI Agreements” or its “failure to submit Change Orders for approval by ATP covering additional costs and other charges that BWI is seeking to recover.” (ECF No. 1 at 16).
Increased costs incurred as a consequence of a breach are generally considered consequential damages. See e.g., Roneker v. Kenworth Truck Co., 977 F.Supp. 237, 239-40 (W.D.N.Y.1997) (“It is well-accepted that any items of increased costs incurred as a consequence of the breach *768will be considered as consequential damages.”) Roneker v. Kenworth Truck Co., 977 F.Supp. 237, 239-40 (W.D.N.Y.1997). However, in Tennessee Gas Pipeline, the Texas Appellate Court held that when certain costs are contemplated by the parties, evidenced by discussion of such costs in the contract, an increase in those costs may constitute direct damages.
Without knowing more about the nature and cause of the increased costs, the Court will not conclude that they are consequential as a matter of law. Direct damages are often referred to as “loss of bargain damages” because they reflect a failure on the part of the defendant to live up to the bargain it made. If the alleged increased costs incurred by Bennu relate to costs that Bluewater was contractually responsible for monitoring, then these might constitute “loss of bargain damages.”
Paragraph 1 of the Work Order states that the “Contractor [Bluewater] agrees to diligently perform and complete all work and furnish all equipment, vessels, tools, materials, supplies and personnel necessary and incidental to the following work activities,” which includes, for example, “Offshore hook up and Commissioning.” (ECF No. 1-4 at 1). Paragraph 3 of the Work Order, entitled “Cost Estimates & Preliminary Authorization,” includes costs estimates for various jobs that Bluewater was responsible for completing on the Clipper Project. (ECF No. 1-4 at 2). This paragraph indicates that ATP and Bluewater contemplated an estimate cost of $3,388,475.00 on “Offshore Hook-up and Commissioning.” Id.
If, for example, Bennu’s alleged increased costs were the result of Bluewa-ter’s failure to properly monitor the costs involved in performing its “Offshore Hookup and Commissioning” work, then this may constitute direct damages. These damages would be a part of Bennu’s expectation interest from the contract. See DaimlerChrysler Motors Co., LLC v. Manuel, 362 S.W.3d 160, 180 (Tex.App. 2012) (explaining that “[o]ne measure of the direct damages is the “benefit of the bargain” measure, which utilizes an expectancy theory and evaluates the difference between the value as represented and the value received.”).
A portion of this category of damages may relate to costs that Bluewater was obligated to monitor or may be the result of a breach of Bluewater’s warranty to work diligently. Accordingly, there is a genuine issue of material fact as to whether these damages are direct or consequential. Bluewater’s motion for summary judgment is denied as to Bennu’s attempt to recover damages for the increased costs of construction on its breach of contract and breach of warranty claims.
(iv) Bennu’s Positioning of the Vessel to Provide a Secondary Umbilical
Bennu seeks damages for expenses associated with the positioning of a vessel to provide the secondary umbilical. The Court finds that these damages are direct.
These damages are particular to Blue-water’s alleged failure to provide and install a properly functioning umbilical. Bennu claims that:
As a direct result of the failed Umbilical, ATP originally, and now Bennu, maintained a vessel and associated equipment and personnel at the Clipper well site with a secondary umbilical attached to the well at a cost of greater than $100,000 per day. Bennu was required to maintain such vessel and its associated equipment and personnel at the Clipper Project in order to operate the Clipper Gas Well in accordance with *769applicable laws until the defective Umbilical can be repaired and/or replaced.
(ECF No. 1 at 12).
Bluewater does not contend that Blue-water’s estimated $13,000,000.00 cost to replace the defective umbilical is a consequential damage. This is likely because replacement damages were not included as an example of consequential damages in the agreement. Providing and installing the umbilical was a substantial component of Bluewater’s obligations under the agreement. It is hard to imagine that these sophisticated parties did not contemplate the cost of replacing the umbilical in the event that the umbilical was damaged or defective.
This is consistent with the general rule that repair or replacement costs of defective equipment constitute direct damages. See, e.g., Wright Schuchart, Inc. v. Cooper Indus., Inc., 40 F.3d 1247 (9th Cir.1994) (finding that “any costs it incurred by directly contributing to the repair of defective Cooper or Magnetek equipment are recoverable as direct damages.”); see also 21st Century Props. Co. v. Carpenter Insulation & Coatings Co., 694 F.Supp. 148, 152 n. 2 (D.Md.1988) (stating, in breach of warranty case under Maryland law against building contractor for installation of faulty roofs, “the cost of replacing the allegedly defective roofs which plaintiffs seek to recover constitutes the direct damage, not incidental or consequential damages, caused by the wrongs alleged.”).
Bennu argues that “[a]s a form of temporary replacement, the costs incurred in positioning the vessel are akin to the costs Bennu has incurred to replace the Umbilical.” (ECF No. 59 at 5-6). This category is better characterized as replacement damages than any of the listed examples of consequential damages.
As mentioned above, in Powell, the Texas Court of Appeals held that costs assoei-ated with repairing a transformer were direct and that costs relating to the operation of a temporary transformer were consequential. Powell Elec. Sys., Inc. v. Hewlett Packard Co., 356 S.W.3d 113, 119 (Tex. App.2011). The Court reasoned that although Plaintiffs power substation was designed to run on a two-transformer system, the evidence demonstrated that it could run with only one transformer and that in fact the substation’s ability to run on one transformer was a necessary part of Defendant’s performance under the contract. Powell Elec. Sys., Inc. v. Hewlett Packard Co., 356 S.W.3d 113, 121 (Tex. App.2011). Accordingly, the Court held that they could not conclude that the parties may be “conclusively presumed to have foreseen” that defendant’s breach would necessitate the use of a temporary transformer. In the event that one transformer failed to work, the parties contemplated that the substation would operate fine with the other transformer.
This ease is different from Powell because the parties’ agreement demonstrates that (i) providing and installing the umbilical was a substantial component of Blue-water’s obligations; (ii) that both parties contemplated that the umbilical was necessary to complete the Clipper Project; and (iii) Bluewater warranted that “[a]ny and all defective or unsuitable Equipment of Goods shall be removed, replaced or corrected, as applicable by [Bluewater] without additional cost or risk to [ATP].” (ECF No. 1-3 at 6).
Bennu alleges that because Bluewater has refused to honor its contractual warranties by repairing and/or replacing the defective umbilical, Bennu has been forced to incur expenses to operate a temporary umbilical. (ECF No. 1 at 12-13). These are costs that Bennu was forced to incur due to Bluewater’s alleged failure to fulfill its contractual warranty to repair and or *770replace defective equipment. Accordingly, these damages relate to Bennu’s expectation interest and therefore constitute direct damages. Bluewater’s motion for summary judgment is denied as to Bennu’s alleged damages associated with positioning a vessel on its breach of contract and breach of warranty claims.
Conclusion
The Court will enter an Order consistent with this Memorandum Opinion.
. Although Bluewater’s motion for summary judgment lists three categories of damages, the Court considers the category for "damages associated with alleged delays in completing the Work or increased costs of the Clipper Projects” in separate categories. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497545/ | MEMORANDUM OPINION
GREGORY R. SCHAAF, Bankruptcy Judge.
Plaintiff James Rogan, the chapter 7 trustee (the “Trustee”), seeks to avoid mortgages granted to the Defendant, U.S. Bank, N.A., by the Debtor, James G. Par-tin. [Doc. 1] The mortgages affect three different properties in Jessamine County, Kentucky. The Trustee argues that the mortgages were improperly recorded under Kentucky law and do not provide constructive notice. Therefore, the Trustee has priority over and may avoid the mortgages as a hypothetical lien creditor or bona fide purchaser pursuant to 11 U.S.C. §§ 544, 550 and 551.
The Defendant asserts the mortgages were properly recorded pursuant to the applicable Kentucky recording statute. Even if not properly recorded, the Defendant claims the mortgages provided constructive notice to the Trustee as a hypothetical lien creditor or bona fide purchaser.
Interpretation of the underlying Kentucky statute is guided by instructions from the Kentucky Supreme Court to interpret statutes giving them their plain meaning. A plain meaning interpretation requires a decision that the mortgages were not in recordable form when they were accepted by the Jessamine County Clerk. Therefore, the mortgages did not provide constructive notice to the Trustee as a hypothetical lien creditor or bona fide purchaser. The Defendant’s Motion for Judgment on the Pleadings fails and the matter will come on for a status conference to determine the best way to proceed to judgment.
I. Facts & Procedural History.
There is no disagreement between the parties regarding the execution and recording of the three mortgages in Jessamine County, Kentucky. The mortgages are more particularly described as follows: (i) Mortgage dated November 14, 2005, and recorded December 10, 2005, in Mortgage Book 803, Page 90, covering property commonly known as 304 E. Brown St., Nicholasville, Kentucky 40356 (“Mortgage 1”); (ü) Mortgage dated November 2, 2005, and recorded December 28, 2005, in Mortgage Book 806, Page 560, covering property commonly known as 272 Gaines-ville Dr., Unit D, Nicholasville, Kentucky 40356 (“Mortgage 2”); and (iii) Mortgage dated May 17, 2006, and recorded June 13, 2006, in Mortgage Book 835, Page 462, covering property commonly known as 201 John Sutherland Dr., Nicholasville, Kentucky 40356 (“Mortgage 3”; collectively, Mortgage 1, Mortgage 2 and Mortgage 3 are referred to as the “Mortgages”). [Doc. 1, Exs. 3, 2 and 1, respectively]
The Mortgages were prepared using identical forms, modified by the insertion of information particular to the relevant transaction (e.g., the property description, *772relevant dates, and transaction numbers). [Doc. 1, Exs. 1-3] Section 4, titled “Secured Debt and Future Advances,” provided space to insert information describing the obligation secured by each Mortgage. [Doc. 1, Exs. 1-3] The form portion of Subsection 4(A) provides:
Debt incurred under the terms of all promissory note(s), contraet(s), guaranty(s) or other evidence of debt described below and all their extensions, renewals, modifications or substitutions. (When referencing the debts below it is suggested that you include items such as borrowers’ names, note amounts, interest rates, maturity dates, etc.)
[Doc. 1, Exs. 1-3]
Despite the parenthetical suggestion, the Defendant only provided the maturity date to identify the obligations secured by each Mortgage. The Mortgages contained the following handwritten information in Section 4.A (except as noted):
Mortgage 1: Maturity Date = 11-14-2035;
Mortgage 2: [stamped: MATURITY DATE] 11-2-2025; and
Mortgage 3: Mat Date 6/01/36.
[Doc. 1, Exs. 3, 2 and 1, respectively]
The Defendant initially filed this challenge as a Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6), arguing that the Trustee had failed “to state a claim upon which relief can be granted.” [Doc. 19] In a subsequent Agreed Order [Doc. 22], the parties agreed that the Motion is a request for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c). The Trustee filed his Response to the Motion [Doc. 27], and the Defendant filed its Reply [Doc. 29]. The Court heard oral argument on August 6, 2014, and took the matter under submission. This matter is now ripe for decision.
II. Standard for Judgment on the Pleadings.
The Defendant seeks judgment on the pleadings pursuant to Fed. R. Bankr.P. 7012, which incorporates Fed. R.Civ.P. 12(c). A Rule 12(c) motion for judgment on the pleadings is granted when no material issue of fact exists and the party making the motion is entitled to judgment as a matter of law. JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 581 (6th Cir.2007); In re J & M Salupo Development Co., 388 B.R. 795, 802 (6th Cir. BAP 2008). While a court does not have to accept the truth of legal conclusions or unwarranted factual inferences, a court must otherwise treat the opposing party’s well-pled material allegations in the pleadings as true. JPMorgan Chase Bank, 510 F.3d at 581.
III. Law & Analysis.
The Trustee may use his strong-arm powers under § 544 to avoid interests in property of the Debtor that are avoidable by a hypothetical lien creditor or bona fide purchaser under relevant Kentucky law. See, e.g., Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1024 (6th Cir.2001). The Trustee may rely on his status as a hypothetical lien creditor or bona fide purchaser “without regard to any knowledge of the trustee or of any creditor.” 11 U.S.C. § 544(a). Accordingly, if any such party would prevail over the Defendant’s Mortgages based on Kentucky law, the Trustee may pursue his claims.
The Trustee argues that the Defendant did not comply with Ky.Rev.Stat. § 382.330 because it failed to include the date of the underlying note, thus making the Mortgages improperly recorded. The Defendant contends that the statute only requires information regarding the maturity to identify the underlying indebtedness. If the Mortgages do not comply with Ky. *773Rev.Stat. § 382.330, the question then becomes whether the defective Mortgages nevertheless provide constructive notice to the Trustee because they were recorded anyway.
A. The Mortgages Were Not in Recordable Form When Filed with the Jessamine County Clerk.
1. The Plain Language of Ky.Rev.Stat. § 382.330 Requires Both the Date and the Maturity of the Underlying Obligation for Recordable Instruments.
As with any question of statutory interpretation, the words of the statute are always the starting point and “should also be the ending point if the plain meaning of that language is clear.” Thompson v. Greenwood, 507 F.3d 416, 419 (6th Cir.2007) (quoting United States v. Boucha, 236 F.3d 768, 774 (6th Cir.2001)); see also United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). Ky.Rev.Stat. § 382.330 provides:
382.330 Instrument not to be recorded unless date of maturity shown; exception
No county clerk shall record a deed or deed of trust or mortgage covering real property by which the payment of any indebtedness is secured unless the deed or deed of trust or mortgage states the date and the maturity of the obligations thereby secured which have been already issued or which are to be issued forthwith. In the case of obligations due on demand, the requirement of stating the maturity thereof shall be satisfied by stating that such obligations are “due on demand.”
Ky.Rev.Stat. § 382.330 (emphasis in text supplied).
“A fundamental canon of statutory construction is that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.” United States v. Plavcak, 411 F.3d 655, 660 (6th Cir.2005) (citing Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 314, 62 L.Ed.2d 199 (1979)). “Thus, we are to ascertain the intention of the legislature from words used in enacting statutes rather than surmising what may have been intended but was not expressed.” Hall v. Hospitality Resources, Inc., 276 S.W.3d 775, 784 (Ky.2008) (quoting Stopher v. Conliffe, 170 S.W.3d 307, 309 (Ky.2005)) (internal quotation marks omitted).
The relevant part of Ky.Rev.Stat. § 382.330 requires that an instrument state “the date and the maturity” of the underlying debt obligation the mortgage secures. Using the words of the statute, a mortgage must state “the date ... of the obligations thereby secured” and “the maturity of the obligations thereby secured.” The Defendant asks, however, that the Court not only ignore the conjunction “and,” but disregard the plain meaning of the words themselves. This is contrary to instructions from the Kentucky Supreme Court that “courts must interpret statutory provisions and give them effect according to their unambiguous language.” Trio Realty Co. v. Queenan, 360 S.W.2d 747, 749 (Ky.1962) (construing Ky.Rev.Stat. § 382.330).
The significance of the word “and” in Ky.Rev.Stat. § 382.330 is immediately apparent. When encountered in a statute, “and” is typically construed in its ordinary conjunctive sense. See, e.g., OfficeMax Inc. v. U.S., 428 F.3d 583, 588-90 (6th Cir.2005) (noting that “dictionary definitions, legal usage guides and case law compel us to start from the premise that ‘and’ usually does not mean ‘or’ ”); see also Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 116-25 (West 2012) (explaining the *774“Conjunctive/Disjunctive Canon”). Deviation from this rule (i.e., changing “and” to “or”), only occurs when required “to effectuate the obvious intention of the Legislature and to accomplish the purpose or object of the statute.” Duncan v. Wiseman Baking Co., 357 S.W.2d 694, 698 (Ky. 1961). There is nothing to suggest that Ky.Rev.Stat. § 382.330 merits such unusual treatment.
Further, considering the first and second sentences of Ky.Rev.Stat. § 382.330 together reinforces the conclusion that the statute imposes dual requirements on filers. The Kentucky Supreme Court has noted that “in expounding a statute, we must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole and to its object and policy.” Democratic Party of Kentucky v. Graham, 976 S.W.2d 423, 429 (Ky.1998) (quoting Wathen v. General Electric Co., 115 F.3d 400, 405 (6th Cir.1997)).
The second sentence of the statute provides that “the requirement of stating the maturity” for obligations due on demand is satisfied by saying just that: “due on demand.” Ky.Rev.Stat. § 382.330. The reference solely to the maturity plainly indicates that the maturity of a debt obligation is a standalone prerequisite to recordation. Likewise, then, the obligation to “state[] the date” of the “obligations thereby secured” in the prior sentence is a standalone obligation that remains a requirement for a due on demand note. Otherwise, the Kentucky legislature would have included both “the date and maturity” thereof in the second sentence.
The conclusion is that the plain language of Ky.Rev.Stat. § 382.330 requires the inclusion of both the date and maturity of the underlying debt obligation to make a mortgage recordable. The Mortgages do not include the date of the underlying note, so they do not comply with Ky.Rev. Stat. § 382.330. Moreover, there is nothing else on the face of the Mortgages from which one could discern the date of the notes.
The conclusion that an instrument that does not comply with Ky.Rev.Stat. § 382.330 is not recordable is consistent with the only Kentucky ease found that construes the statute. See Trio, 360 S.W.2d at 749. In Trio, Kentucky’s highest court determined that a county clerk properly refused to record a mortgage that did not comply with Ky.Rev.Stat. § 382.330. The mortgage in Trio purported to secure future advances on a line of credit, but did not reference any particular note or obligation since none existed when the mortgage was created.1 Id. at 748. The Trio court recognized that the Kentucky legislature could define an unrecordable instrument and courts should apply the statute according to its plain meaning. Id. at 749. The court concluded regarding Ky.Rev.Stat. § 382.330: “The language here is that a mortgage which does not reveal the date and maturity of the obligation secured thereby is not a recordable instrument.” Id. (emphasis supplied)
The Defendant argues that Trio only addressed the absence of a maturity date and that the lack of any Kentucky case construing Ky.Rev.Stat. § 382.330 to specifically require the date of an underlying debt obligation means that the statute must only require the inclusion of the maturity date. [See Doc. 29 at 4-6] Contrary to the Defendant’s suggestion, the emphasized language in the conclusion from Trio found a problem with the absence of “the *775date and maturity of the obligations secured.” See supra.
2. The Case Law That Addresses Ky.Rev.Stat. § 382.330 Does Not Alter the Analysis.
The only case found that addresses the precise issue raised in this case was an unreported decision that found in favor of a trustee. See Johnson v. American Founders Bank, Inc. (In re Owens), Case No. 08-52032, Adv. No. 08-5104, 2009 WL 939568 (Bankr.E.D.Ky. Mar.13, 2009). In Owens, as in this case, the trustee sought to avoid a mortgage because it omitted the date of the underlying debt obligation. The Court held that the absence of the note date violated Ky.Rev.Stat. § 382.330, which meant the mortgage was improperly recorded. Id. at *3-4. Therefore, the trustee could avoid the mortgage. Id.
The Defendant makes four interrelated arguments to avoid a similar holding in this case. First, the Defendant argues that “[u]nreported opinions are not precedent, and the opinions of one judge in the Eastern District are not binding on another judge of the same court.” [Doc. 29 at 8] It is true precedential value of an unreported decision is sometimes limited, but it does not follow that such opinions are devoid of persuasive authority. This is especially true where, as here, the unreported decision is the only prior case on point.
Second, the Defendant cites five additional unreported decisions by this court construing Ky.Rev.Stat. § 382.330 that it claims reached contradictory results. This argument fails on a fair inspection of these cases.
Three of the five cases found a lack of compliance with Ky.Rev.Stat. § 382.330 based on the challenged mortgages’ failure to include information regarding the maturity of the underlying debt obligations. See Burden v. Branch Banking & Trust Co. (In re Potter), Case No. 07-70176, Adv. No. 07-7040, 2008 WL 619410 (Bankr.E.D.Ky. Mar. 5, 2008); Gardner v. Green Tree Servicing, LLC (In re Bradley), Case No. 04-30622, Adv. No. 04-3030, 2005 Bankr.LEXIS 469 (Bankr.E.D.Ky. Mar. 24, 2005), aff'd Civil Action No. 05-25 (E.D.Ky. Oct. 5, 2005); and Gardner v. Century Bank of Kentucky, Inc. (In re Dennis), Case No. 04-30307, Adv. No. 04-3022, 2004 Bankr.LEXIS 1469 (Bankr. E.D.Ky. Sept. 29, 2004) (quoted at length in Owens). These cases support this decision, as they found that the failure to address one of the two stand-alone requirements of Ky.Rev.Stat. § 382.330 was not included (i.e., the maturity date), so the mortgages were not recordable. See supra at Section III.A.1.
The remaining two cases had unique facts that do not exist in this case. In Johnson v. Peoples Bank & Trust Co. (In re Funk), Case No. 08-51386, Adv. No. 09-5017, 2009 WL 1424518, *1 (Bankr.E.D.Ky. May 21, 2009), the mortgage described the maturity of its underlying obligation as “9 months after this date.” The Court determined the information allowed calculation of the maturity date so there was compliance with the statute. Id. In Spradlin v. Stump (In re Charles), Case No. 04-70204, Adv. No. 04-7017, 2004 WL 3622641 (Bankr.E.D.Ky. Oct. 19, 2004), the mortgage listed a maturity date that was off by one monthly payment. The Court did not believe this error made the mortgage un-recordable pursuant to Ky.Rev.Stat. § 382.330. Id. at *3.
Considered together, these five decisions do not indicate confusion as urged by the Defendant. Rather they stand for the proposition that, subject to limited exceptions, an instrument that does not indicate the maturity of an underlying obligation does not comply with Ky.Rev.Stat. § 382.330. Therefore, these cases support the decision in Owens and in this case.
*776The Defendant’s third point is that the decision in Funk implies that there is no statutory requirement that a mortgage provide the date of its underlying obligation. See Funk, 2009 WL 1424518 at *1. Funk involved a mortgage that described the maturity by stating “the debt secured hereby shall be fully payable and matured 9 months after this date.” The court found this complied with Ky.Rev.Stat. § 382.330 because the specified date was obvious and the end date easily calculated. Id. If the maturity date is easily calculated, “the date of the promissory note is also easily determined to be January 23, 2006.”2 Id. Unlike in Funk, there is nothing in the Mortgages here that allows determination of the note date.
The fourth argument points to three decisions from the Western District of Kentucky bankruptcy court that found compliance with Ky.Rev.Stat. § 382.330. Like the five cases discussed in the second argument, these cases are distinguishable because they are based on unique facts. The decision in In re Taylor, 18 B.R. 128 (Bankr.W.D.Ky.1982), relied on by this Court in Funk, stands for the proposition that a mortgage complies with Ky.Rev. Stat. § 382.330 if a maturity date is calculable from the information provided in the instrument.
The remaining Western District bankruptcy cases involved facially valid instruments that included both a note date and a maturity date, albeit with errors. In Citizens Fidelity Bank & Trust Co. v. Blieden (In re Blieden), 49 B.R. 386 (Bankr. W.D.Ky.1985), the court approved a mortgage that secured eleven notes, but only listed information for one note. Likewise in Flener v. Monticello Banking Co. (In re Estes), 429 B.R. 872, 875 (Bankr.W.D.Ky. 2010), the court found sufficient compliance with Ky.Rev.Stat. § 382.330 even though the note and maturity information was inaccurate.
Ultimately, there is no precedential authority that undermines the result compelled by the plain language of Ky.Rev. Stat. § 382.330, which requires the inclusion of both the date and maturity of the debt obligation underlying a mortgage. The Mortgages lacked the date of the underlying obligation, or any information that would have allowed parties to determine that date. Therefore, the Jessamine County Clerk should not have recorded the Mortgages.
B. The Filing of an Unrecordable Mortgage Does Not Provide Constructive Notice to the Trustee.
The Jessamine County Clerk did accept the Mortgages for recording, despite the lack of compliance with Ky.Rev.Stat. § 382.330. The Defendant argues that the Mortgages therefore are sufficient to provide notice to the Trustee as either a hypothetical lien creditor or bona fide purchaser. The Trustee is a party without actual knowledge of the lien. See 11 U.S.C. § 544(a) (a trustee in bankruptcy is afforded the status of a hypothetical lien creditor or bona fide purchaser, “without regard to any knowledge of the trustee or of any creditor.”). Therefore, the only concern is whether the improperly recorded Mortgages would still put the Trustee on constructive notice of their existence.
*777Kentucky courts have long recognized that constructive notice does not arise with respect to instruments that are not authorized by law for recording but are nevertheless legally acknowledged and filed of record. See Branaman v. Black Tam Mining Co., 446 S.W.2d 573, 575 (Ky.1969) (“Since it appears that certain ‘trust receipts’ held by appellants were not recordable instruments, the attempted recording was not constructive notice to other creditors. ...”); Sutcliffe Co. v. Babb’s Adm’r, 299 S.W.2d 117 (Ky.1957) (“[The title bond] was ... not a recordable instrument, and could not, therefore, operate to give constructive notice of the purchase to third parties.”); Eubanks v. Wilson, 252 Ky. 110, 66 S.W.2d 65, 66 (1933) (a written agreement between four realtors to divide profits from the resale of property was not legally recordable as a “contract for the sale of land” so as to provide constructive notice to subsequent purchasers); Vallandingham v. Johnson, 85 Ky. 288, 3 S.W. 173 (1887) (holding that an infant’s bond promising to convey a deed to real property was “not a recordable instrument, and could not, therefore, operate to give constructive notice of the purchase to third parties.”).
The Kentucky Supreme Court reiterated this basic rule in State Street Bank & Trust Co. of Boston v. Heck’s, Inc., 963 S.W.2d 626, 630 (Ky.1998), holding that a defectively acknowledged mortgage could not serve as constructive notice upon subsequent parties. The recordation of the Mortgages cannot, therefore, provide constructive notice of the Defendant’s interests to the Trustee given their status as unrecordable instruments. As one Kentucky District Court observed: “Were this Court to allow the recordation of an unre-cordable instrument to provide constructive or inquiry notice, the effect would be to remove the technical requirements of mortgages and leave subsequent creditors liable for the mistakes of those before them.” Thacker v. United Cos. Lending Corp. (In re Thacker), 256 B.R. 724, 730 (W.D.Ky.2000).
The only case that addressed the lack of the note date in the mortgage concluded that the document was not recordable pursuant to Ky.Rev.Stat. § 382.330. See the discussion of Owens, supra at Section III. A.2. The bankruptcy court also found in favor of the trustee because the improperly recorded mortgage did not provide third parties with constructive notice. Owens, 2009 WL 939568, at *4. Also, the cases from the Eastern District of Kentucky bankruptcy court that reached the same conclusion as Owens when the maturity date was missing each determined that the trustee was not charged with constructive notice. See Potter, 2008 WL 619410, at *2; Bradley, 2005 Bankr.LEXIS 469, at *3-4; and Dennis, 2004 Bankr.LEXIS 1469, at *3-4.
Support for this decision is also found in a recent change to another Kentucky recording statute, Ky.Rev.Stat. § 382.270. Several cases found problems with mortgage acknowledgements in recorded documents and determined they did not provide constructive notice to a bankruptcy trustee. See, e.g., Rogan v. Am.’s Wholesale Lender (In re Vance), 99 Fed.Appx. 25, 2004 WL 771484 (6th Cir.2004). In 2006, the Kentucky legislature amended Ky.Rev.Stat. § 382.270 to provide that an improperly acknowledged mortgage that was nonetheless filed of record would provide constructive notice of its contents. See FINANCIAL SERVICES — MORTGAGES, 2006 Kentucky Laws Ch. 183, sec. 16, § 382.270 (SB 45). A similar change might address the issue for the Defendant, but nothing of that nature is in Ky.Rev. Stat. § 382.330.
IV. Conclusion.
The plain language of Ky.Rev.Stat. § 382.330 requires the date of the underly*778ing obligation in a recordable mortgage. The Mortgages omitted this information or any information that would allow calculation of such date. Further, Kentucky law has long held that a bankruptcy trustee acting as a hypothetical lien creditor or bona fide purchaser is not charged with constructive notice of a mortgage that was not recordable pursuant to Kentucky statutes. Therefore, the Trustee has a valid argument and the Court will enter an order that DENIES the Defendant’s Motion for Judgment on the Pleadings.
. Kentucky now has a recording statute dealing with line-of-credit mortgages on real estate that specifically excludes such mortgages from the reach of Ky.Rev.Stat. § 382.330. See Ky.Rev.Stat. § 382.385(6).
. The Defendant is likely relying on the sentence immediately before this quote that provides: "The Trustee also complains that the mortgage does not state the date of the note secured by the mortgage, but she provides no statutory requirement for the date of the promissory note.” As the quoted language makes clear, the mortgage did include information regarding the note date, so this decision and the related language does not represent contrary authority or affect this decision. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497546/ | MEMORANDUM OPINION
GREGORY R. SCHAAF, Bankruptcy Judge.
This matter is before the Court on the Plaintiffs Motion for Default Judgment [Doc. 6]. The court held an evidentiary hearing on September 17, 2014. For the reasons stated on the record and set forth below, the Plaintiffs Motion is denied and judgment is entered for the Defendant.
FACTS
The Defendant filed for chapter 7 bankruptcy on February 7, 2014. On May 12, 2014, the Plaintiff filed this adversary proceeding seeking to declare a debt of approximately $18,900.00 non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), § 523(a)(4), and § 523(a)(6), and to revoke the Defendant’s discharge pursuant to § 727(a)(2), § 727(a)(3), § 727(a)(4), and § 727(a)(5).
The Court entered a scheduling order on May 14, 2014, setting pretrial deadlines and a trial date [Doc. 2], The Plaintiff thereafter certified the summons was executed on the Defendant [Doc. 4] but the Defendant failed to answer or otherwise respond to the Complaint.
The record reflects that no further activity occurred until the Court entered an order on August 26, 2014, setting the matter for a status conference [Doc. 5]. At that time, the pre-trial deadlines for discovery and the filing of dispositive motions, a joint settlement report, and exhibits for trial were expired. Subsequent to entry of the order setting a status conference, the Plaintiff filed a motion for default judgment [Doc. 6]. The Court thereafter struck the status hearing [Doc. 7] and the remaining pretrial deadlines and trial date [Doc. 9] and set the Motion for Default Judgment for evidentiary hearing [Doc. 8].
The Plaintiff filed an affidavit in support of his allegations with certain exhibits attached [Doc. 10]. The Defendant did not respond to the Motion for Default Judgment.
The Court conducted an evidentiary hearing on September 17, 2014. The Plaintiff and his counsel appeared. The Defendant also appeared pro se.1 Plaintiffs counsel informed the Court the Plaintiff would not proceed with any of his claims under § 727, but would seek judgment pursuant to § 523(a)(2)(A), § 523(a)(4), and § 523(a)(6). With no objection, the Plaintiffs affidavit and supporting documents are admitted into evidence. The Plaintiff did not offer any other additional evidence in support. The Defendant did not present any evidence and informed the Court that he did not file an answer because he could not afford legal representation.
DISCUSSION
I. Proof in Support of the Plaintiff’s Allegations is Required.
Default judgments are governed by Fed. R. BankrP. 7055, which incorporates Fed.R.Civ.P. 55 by reference. Pursuant to *781Rule 7055(a), when a party fails to plead or otherwise defend, then the party is in default. A party may then apply to the Court for a default judgment. Rule 7055(b) states that a court “may conduct hearings or make referrals — preserving any federal statutory right to a jury trial— when, to enter or effectuate judgment — it needs to ... (C) establish the truth of any allegation by evidence.”
Whether to enter a default judgment is .in the Court’s discretion and the Court may review the merits of the claim before entering judgment. See In re Young, Case No. 12-14808, 2013 WL 3992456 at *3 (Bankr.E.D. Tenn. Aug. 2, 2013). Once a default is established, the factual allegations of the Plaintiffs Complaint are deemed admitted, but the court must still consider whether the unchallenged facts support a legitimate cause of action. Id. at *3 (citing 10A Wright, Miller, & Kane, FedeRal Praotioe and Procedure § 2688, p. 63 (3d. 1998)).
The Defendant did not answer or otherwise respond to the Complaint, so he is in default. Consistent with Rule 7055(b), the Court issued an order setting the request for default judgment for evidentiary hearing and cautioned the Plaintiff of his duty to present affirmative evidence in support of his allegations based on the applicable law:
All facts properly pled will be deemed admitted. Pursuant to Fed. R. Bankr. P. 4004, 4007 and 7055, testimony and proof will be required for each requisite element when Plaintiff is objecting to a discharge or claiming that a particular debt is nondischargeable. See Grogan v. Garner, 498 U.S. 279 [111 S.Ct. 654, 112 L.Ed.2d 755] (1991) (creditor must prove each element of its claim by a preponderance of the evidence); FCC National Bank v. Johnny Mac Roberts (In re Johnny Mac Roberts), 193 B.R. 828, 831 (Bankr.W.D.Mich.1996) (fraudulent intent may not be inferred from allegations in a complaint); Fed. R. Bankr.P. 7055(b)(2) (the court may conduct hearings to establish the truth of any allegations by evidence).
As the party bearing the burden of proof, Plaintiff must produce evidence at the hearing sufficient to meet said burden. In re Roberts, 193 B.R. 828 (Bankr.W.D.Mich.1996). A default judgment will enter on the establishment of all necessary elements of proof. The Court will not grant relief unsupported by law simply because the Defendant did not oppose the adversary proceeding. In re Talbert, 268 B.R. 811, 813 n. 2 (Bankr.W.D.Mich.2001).
See Order Setting Evidentiary Hearing [Doc. 8].
II. The Plaintiff’s Proof is Insufficient to Find the Debt Non-Dischargea-ble.
The Plaintiff must prove by a preponderance of the evidence each element required to support a finding that the debt is non-dischargeable pursuant to § 523(a)(2), § 523(a)(4), and § 523(a)(6) to succeed on his Complaint. The Plaintiff relies on the Complaint and affidavit testimony in support of his allegations, but neither is sufficient to support a finding that the debt is non-dischargeable.
a. The Plaintiff did not Prove Fraudulent Intent under § 523(a)(2)(A).
The Plaintiff seeks a finding that the debt owed is non-dischargeable under § 523(a)(2)(A).2 To meet his burden of *782proof, the Plaintiff must show: (1) the Defendant obtained money through a material misrepresentation that, at the time, the Defendant knew was false or made with gross recklessness as to its truth; (2) the Defendant intended to deceive the Plaintiff; (3) the Plaintiff justifiably relied on the false representations; and (4) the Plaintiffs reliance was the proximate cause of his loss. Rembert v. AT & T Univ’s Card. Serv.’s, Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir.1998).
The Plaintiff alleges the following facts in his Complaint, which are deemed admitted:
• The Plaintiff loaned the Defendant $18,900.00 so the Defendant could purchase and customize' a 2008 Ford F-250 in exchange for an agreement to repay the debt within 45 days and assist the Plaintiff in starting an excavation business.
• The Defendant breached the agreement by failing to pay the debt or assist in the excavation business, causing damages to the Plaintiff.
• The Defendant made a materially false misrepresentation to the Plaintiff regarding his intention and ability to repay the $18,900.00 and assist the Plaintiff in the excavation business upon which the Plaintiff relied in loaning the Defendant the money.
• The Plaintiff commenced a civil action against the Defendant in the Pulaski Circuit Court seeking damages for fraud and breach of contract and when the Plaintiff filed a Motion for Summary Judgment and set it for hearing, the Defendant filed chapter 7 bankruptcy.
• The Defendant’s petition and schedules fail to list certain property that he owns, certain transfers made, and undervalues property that is listed.
See Complaint [Doc. 1].
The Plaintiff also offered uncontested affidavit testimony consistent with these factual allegations. See Supplement to Motion for Default Judgment [Doc. 10]. In summary, the Plaintiff testified that he contemplated doing some construction and excavation business with the Defendant in 2012 and advised the Defendant he had the ability to loan him $18,000.00 towards the purchase of a new truck as part of that endeavor. Affidavit of Eddie Merritt [Doc. 10] at ¶ 1. The Defendant represented that he could afford to repay the amount in 45 days. Id. at ¶ 2. The Plaintiff explained that based on his observations that the Defendant carried thousands of dollars of cash on his person and was currently employed in several construction and excavation projects, so he did not doubt Defendant’s representation about his ability to repay and relied upon it. Id. at ¶¶ 4-5.
On April 18, 2012, the Plaintiff loaned the Defendant $18,000.00, which the Defendant applied to the purchase of a 2008 Ford F-250 (the “Vehicle”) and titled the Vehicle in his name. The Plaintiff then loaned the Defendant an additional $900.00 to make upgrades to the Vehicle. The Defendant failed to repay the debt within 45 days. Id. at ¶¶ 6-7.
The Plaintiff testified that he commenced a civil action in Pulaski Circuit Court alleging fraud and breach of contract. Before a judgment could be entered, the Defendant filed chapter 7 bankruptcy, listing the debt owed to the Plaintiff as disputed on Schedule F. Id. at ¶¶ 8, 10-12.
The Plaintiff testified that the Defendant misrepresented his ability to repay *783the Plaintiff within 45 days because: (1) the Defendant’s Statement of Financial Affairs shows the Debtor’s net income for 2012 is only $866.00; and (2) the Defendant testified at the first meeting of creditors that he did not generate enough income to pay his bankruptcy attorney’s fee and his father loans him money from time to time. The Plaintiff further testified the Defendant did not disclose on his petition and schedules that the Defendant returned the Vehicle purchased with the loaned money or that his father loaned him money. Id. at ¶¶ 9, 13-15. As a result of this misrepresentation, the Plaintiff suffered not only $18,900.00 in damages, but also attorneys’ fees and costs total $4,675.75 and court costs of $446.00. Id. at ¶¶ 16-17.
The Plaintiffs evidence does not prove fraudulent intent. A failed promise to repay is the basis for every loan default. Evidence of a bankrupt debtor’s inability to pay a pre-petition debt based on information disclosed on his petition and schedules is not enough, by itself, for the Court to conclude there was intent to deceive. See In re Roberts, 193 B.R. 828, 831 (Bankr.W.D.Mich.1996) (holding intent cannot be implied from the mere fact that a debt is unpaid).
b. The Plaintiff Did Not Prove the Elements Required by § 523(a)(4).
The Plaintiff also seeks a finding that the debt is non-dischargeable under § 523(a)(4). To prove his case, the Plaintiff must show the Defendant procured the debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4).
The Plaintiffs evidence again falls short. There is no proof that the parties created a trust, express or implied. See, e.g., In re Stollman, 404 B.R. 244, 269-70 (Bankr.E.D.Mich.2009) (the defalcation provision applies to only those situations involving an express or technical trust relationship arising from placement of a specific res in the hands of the debt- or). There is also no evidence of fraudulent intent, which is required to find the Defendant embezzled funds. Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172-73 (6th Cir.1996) abrogated on other grounds as explained in National Development Servs. v. Denbleyker (In re Den-bleyker), 251 B.R. 891 (Bankr.D.Colo. 2000). Further, the Plaintiff testified he willingly gave the money to the Defendant, so there is no evidence of larceny even if there was evidence of fraudulent intent. See Graffice v. Grim (In re Grim), 293 B.R. 156, 166 n. 3 (Bankr.N.D.Ohio 2003) (defining larceny as requiring the fraudulent and wrongful taking and carrying away the property of another with intent to convert such property to the taker’s use without the consent of the owner).
c. The Plaintiff Did Not Prove Willful and Malicious Conduct under § 523(a)(6).
Finally, the Plaintiff seeks a judgment that the debt is non-dischargeable pursuant to § 523(a)(6). To succeed, the Plaintiff must prove the debt was incurred for “willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6).
To prove willful behavior, a plaintiff must show the debtor “believe[d] that the consequences [of his actions] are substantially certain to result from them.” Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir.1999). In other words, the Plaintiff must show the Defendant intended to do harm. Id. at 463. The term “malicious” requires a conscious disregard of one’s duties. JGR Associates, LLC v. Jefrey Howard Brown (In re Brown), 442 B.R. 585, 620 (Bankr. E.D.Mich.2011).
*784The Plaintiff provided no proof to support a finding that the Defendant intended to do harm in borrowing the money from the Plaintiff and failing to repay within 45 days.
III. The Plaintiff is Not Entitled to a Second Bite at the Apple.
At the conclusion of the Court’s oral ruling that judgment shall be entered for the Defendant and the case dismissed, Plaintiffs counsel orally requested the Court enter another scheduling order to allow the Plaintiff to attempt to conduct discovery to prove his case. This request is denied because it essentially asks for a “do over.”
The Plaintiff had a fair opportunity to present his proof. The Order for Trial provided the Plaintiff approximately 2$ months to complete discovery. The Defendant’s failure to file an answer or participate in the adversary proceeding does not prevent the Plaintiff from deposing the Defendant or compelling his appearance at trial. See, e.g., Fed. R. BaNkrP. 9016. The Plaintiff bears the burden of proof and the Order setting the evidentiary hearing made it clear the Plaintiff must present that proof to prevail.
In addition, it is a waste of judicial resources to allow a second trial without some showing of error or prejudice. The Plaintiff was provided a fair chance to present his case and has not shown any fault or injustice that might justify another chance.
CONCLUSION
A Plaintiff does not automatically obtain a judgment that a debt is non-dischargea-ble based on fraudulent conduct merely because a defendant is in default. The discharge is the ultimate goal in a bankruptcy case and an attempt to prevent discharge is a difficult task. The Plaintiff bears the burden of proof and must meet that burden to obtain a judgment of non-dischargeability. The Plaintiff failed to meet his burden, so judgment is entered for the Defendant and the case is dismissed with prejudice. A separate order will follow.
. The Defendant’s bankruptcy counsel appeared to explain prior attempts to negotiate a settlement in this matter, but stated on the record that he was not entering an appearance for the Defendant in this adversary proceeding.
. The Court presumes the Debtor is proceeding under § 523(a)(2)(A) rather than § 523(a)(2)(B) because the loan agreement between the parties was an oral agreement. The Plaintiff would not prevail under § 523(a)(2)(B) because there is no evidence of "a statement in writing.” Further *782§ 523(a)(2)(C) applies primarily to credit card debt, which is not at issue here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497549/ | MEMORANDUM ON MOTION OF TENNESSEE STATE BANK FOR RELIEF FROM THE AUTOMATIC STAY AND AMENDED FIRST APPLICATION FOR INTERIM COMPENSATION
RICHARD STAIR, JR., Bankruptcy Judge.
These contested matters are before the court upon (1) the Motion of Tennessee State Bank for Relief from the Automatic Stay (Motion for Stay Relief) filed by Tennessee State Bank on July 11, 2014, seeking relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1), (2), and/or (3) (2006); and (2) the Amended First Application for Interim Compensation (Amended Fee Application) filed by the Debtor’s attorneys, Lynn Tarpy and Tarpy, Cox, Fleishman & Leveille, PLLC, on July 22, 2014, asking the court for an award of interim compensation in the amount of $13,185.00 to be paid from a $20,000.00 retainer paid to the attorneys by the Debt- or out of Tennessee State Bank’s cash collateral. The evidentiary hearing was held on September 10, 2014. The record before the court consists of Stipulations filed by the parties on September 4, 2014, as supplemented by the Supplement to Stipulations filed after the trial concluded, twenty-four exhibits stipulated into evidence, and the testimony of four witnesses: Todd Flanders, Anil Merai, Shelly Spur-geon, and Taran Surtí.
This is a core proceeding. 28 U.S.C. § 157(b)(2)(G) and (M) (2006).
I
The Debtor owns real property and improvements known as the Comfort Inn located at 140 Cusick Road, Alcoa, Tennessee. It filed the Voluntary Petition commencing its Chapter 11 case on March 17, 2014, and continues to operate as a debtor-in-possession pursuant to 11 U.S.C. *815§ § 1107 and 1108 (2006). On May 29, 2014, the court entered an Order determining that the Debtor is subject to the single asset real estate provisions of 11 U.S.C. § 862(d)(3). Tennessee State Bank is a creditor of the Debtor by virtue of (1) a January 20, 2011 Promissory Note in the principal amount of $2,658,256.71 which is secured by the Comfort Inn, including the real property, all furniture, fixtures, and equipment (collectively, Comfort Inn); and (2) an April 24, 2012 Note in the principal amount of $200,000.00, which is secured by a second deed of trust encumbering the Comfort Inn. On April 3, 2014, Tennessee State Bank filed proofs of claim in the amounts of $2,726,986.50 and $200,089.80, respectively, representing the balances due under the Notes as of the petition date. TRIAL Ex. 1; Trial Ex. 2. The Debtor last made payment to Tennessee State Bank on January 31, 2014, representing the December 2013 installments, after which Tennessee State Bank called the Notes in default, as set forth in its letter dated February 3, 2014, and initiated foreclosure proceedings. Trial Ex. 4. Foreclosure was scheduled for March 18, 2014, but was stayed by the filing of the Debtor’s bankruptcy case.
The Order Granting Motion to Shivshan-kar Partnership, LLC to Approve the Use of Cash Collateral was entered on April 7, 2014, under the terms of which the Debtor was authorized to use revenues from the operation of the Comfort Inn and agreed to grant Tennessee State Bank a replacement lien and security interest together with an additional post-petition lien and security interest. Trial Ex. 5. The Debtor also agreed to pay a $7,000.00 monthly adequate protection payment to Tennessee State Bank. On June 10, 2014, the court entered its final Order Granting Motion to Shivshankar Partnership, LLC to Approve the Use of Cash Collateral (Cash Collateral Order), setting forth the same terms as the original.
Tennessee State Bank filed its Motion for Stay Relief on July 11, 2014, arguing that it is not adequately protected, that there is no reasonable likelihood that the Plan of Reorganization proposed on June 26, 2014, can be confirmed in a reasonable time, and that the proposed treatment of Tennessee State Bank’s claims is not fair and equitable. Trial Ex. 6. The Debtor filed its Reply to Motion for Relief from the Automatic Stay Filed by Tennessee State Bank on August 6, 2014, arguing that the Comfort Inn is necessary for an effective reorganization, that the Plan of Reorganization is fair and equitable, and that it is likely to be approved by at least one class of impaired creditors. Trial Ex. 7. Subsequently, the Debtor filed an Amended Plan of Reorganization on August 29, 2014. Trial Ex. 12. In its Amended Plan of Reorganization, the Debtor proposes payment to Tennessee State Bank on its allowed secured claims in the aggregate amount of $2,927,076.30 plus 5.25% interest as follows: monthly installment payments of $12,805.96 between September 1, 2014, and September 1, 2015, increasing to $16,163.42 from October 1, 2015 through September 1, 2019, with a balloon payment of the balance due on November 1, 2019. Trial Ex. 12 at 2-3. Tennessee State Bank will retain its lien, and the balloon payment will be funded through a refinancing of the debt presently encumbering the Comfort Inn. Trial Ex. 12 at 2-3. As stated in the pretrial Order entered on August 8, 2014, the issue to be resolved by the court with respect to the Motion for Stay Relief is whether Tennessee State Bank is entitled to relief from the automatic stay for cause under 11 U.S.C. § 362(d)(1), and/or pursuant to 11 U.S.C. § 362(d)(2) and/or (3).
On July 22, 2014, the Debtor’s attorneys filed their Amended Fee Application, asking for compensation in the amount of $13,185.00 with payment to be made from *816a $20,000.00 retainer paid by the Debtor and held in the attorneys’ trust account. Tennessee State Bank filed its Response of Tennessee State Bank to Amended First Application for Interim Compensation on August 20, 2014, objecting to payment of the fees from the retainer if the retainer was derived from rents and revenues from the Comfort Inn; i.e., cash collateral. Pursuant to the pretrial Order entered on August 28, 2014, the court is to resolve whether the $20,000.00 retainer held in the Debtor’s attorneys’ trust account represents cash collateral of Tennessee State Bank and, if so, whether Tennessee State Bank’s interest in the cash collateral is adequately protected by an equity cushion, or otherwise, thus permitting payment of the requested attorney fee to the Debtor’s attorneys.
II
The automatic stay provides debtors with “an opportunity to protect [their] assets for a period of time so that [their] resources might be marshaled to satisfy outstanding obligations[;]” Laguna Assocs. Ltd. P’ship v. Aetna Cas. & Sur. Co. (In re Laguna Assocs. Ltd. P’ship), 30 F.3d 734, 737 (6th Cir.1994), however, because creditors “should not be deprived of the benefit of their bargain” during the pendency of the automatic stay, they may seek relief from the automatic stay. In re Planned Sys., Inc., 78 B.R. 852, 860 (Bankr. S.D.Ohio 1987). Motions for relief from the stay are governed by 11 U.S.C. § 362(d), which provides, in material part:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; [or]
(2) with respect to a stay of an act against property under subsection (a) of this section, if—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization;
(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later—
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that—
(i) may, in the debtor’s sole discretion, notwithstanding section 362(c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nonde-fault contract rate of interest on the value of the creditor’s interest in the real estate[.]
11 U.S.C. § 362(d).
A
Tennessee State Bank first seeks relief from the stay under subsection (d)(1) *817“for cause.” “There is no definition of the term ‘cause’ as used in section 362(d)(1). The determination whether cause exists to lift the stay is a fact-intensive inquiry made on a case-by-case basis.” In re SSK Partners LLC, 2012 WL 4929019, at *3, 2012 Bankr.LEXIS 4896, at *7 (Bankr. N.D.Ill. Oct. 12, 2012) (citations omitted). Tennessee State Bank argues that because the Debtor has used its cash collateral without permission, including payment of the $20,000.00 retainer paid to its attorneys, has not maintained its real property taxes, and has not maintained the Comfort Inn, Tennessee State Bank’s interest in its collateral is not being 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’ to the protections afforded to the creditor outside of bankruptcy.” In re Bittwood Props. LLC, 473 B.R. 70, 74 (Bankr.M.D.Pa.2012) (citing among other authority 11 U.S.C. § 361 (2006)). In addition to the statutory forms found in § 361, adequate protection may also be accomplished through the existence of an equity cushion, or “ ‘value in the property, above the amount owed to the secured creditors ... that will shield that interest from loss due to a decrease in the property’s value during the time the automatic stay remains in effect.’ ” In re Norton, 347 B.R. 291, 298 (Bankr.E.D.Tenn.2006) (quoting Sumitomo Trust & Banking Co. v. Holly’s Inc. (In re Holly’s Inc.), 140 B.R. 643, 697 n. 87 (Bankr.W.D.Mich. 1992)) (brackets omitted). “With respect to § 362(d)(1), the purpose of providing adequate protection is to insure that a creditor receives the valúe for which it bargained pre-bankruptcy.” In re DB Capital Holdings, LLC, 454 B.R. 804, 816-17 (Bankr.D.Col.2011). A creditor may be entitled to relief from the stay “if there is insufficient equity in the property to adequately protect the creditor!;]” Martens v. Countrywide Home Loans (In re Martens), 331 B.R. 395, 398 (8th Cir. BAP 2005); however, “[w]hile an equity cushion is generally considered prima facie evidence of adequate protection, the absence of an equity cushion does not establish the converse.... The concept of adequate protection was not designed or intended to place an undersecured or minimally secured creditor in a better post-filing [position] that it was in before the stay.” Planned Sys., Inc., 78 B.R. at 862 (citations omitted).
The determination of whether a creditor’s interest is adequately protected is not an exact science nor does it involve a precise arithmetic computation. Rather, it is pragmatic and synthetic, requiring a court to balance all relevant factors in a particular case, including the value of the collateral, whether the collateral is likely to depreciate over time, the debt- or’s prospects for a successful reorganization and the debtor’s performance under the plan. Other considerations may include the balancing of hardships between the parties and whether the creditor’s property interest is being unduly jeopardized. A secured creditor retains the right to adequate protection of its collateral, which means it is entitled to have the value of its collateral maintained at all times, and it can obtain relief from the automatic stay and take back its collateral at any time if that interest is not adequately protected or for other cause.
In re Bushee, 319 B.R. 542, 551-52 (Bankr. E.D.Tenn.2004) (internal citations and quotation marks omitted).
As an initial matter, the parties have stipulated that there is no equity cushion, and Tennessee State Bank is undersecured because the amount of its claims— $2,927,076.30 at the time of the bankruptcy *818filing — plus the unpaid property taxes to Blount County and the City of Alcoa totaling more than $200,000.00 exceeds the most recent appraisal of $2,500,000.00 for the Comfort Inn as of September 2, 2014. The Debtor nevertheless argues that Tennessee State Bank is adequately protected because the real property is not declining in value and that even though there is no equity in the Comfort Inn, it is working with a new management consultant to reduce expenses and increase efficiency and has begun making repairs and renovation to the hotel post-petition in order to improve its business operations. The value of the property, argues the Debtor, is not declining as is reflected by the fact that the September 2, 2014 appraisal values the Comfort Inn at $2,500,000.00, the same value it was given as of February 25, 2014. The Debtor also argues that, under the terms of its Amended Plan of Reorganization, it will make interest-only payments to Tennessee State Bank for the next year which will increase in October 2015, and it will be paying its past due real estate taxes, both of which will increase Tennessee State Bank’s adequate protection.
Tennessee State Bank, however, argues the opposite, relying in large part on the February 2, 2014 appraisal by Woodford & Associates assigning a value for the property that is $1,250,000.00 less than a February 2013 appraisal of the same property also conducted by Woodford & Associates, which valued the Comfort Inn at that time at $3,750,000.00. Compare Trial Ex. 16 with Trial Ex. 15. Tennessee State Bank also argues that the Debtor’s revenues are declining based upon the Debtor’s 2012 Profit & Loss Statement which reflects Lodging Sales of $1,018,448.83, the Debt- or’s 2012 Form 1065 U.S. Return of Partnership Income which reflects “gross receipts or sales” in the amount of $915,598.00, and the Debtor’s Profit & Loss Statement for 2014 reflecting total income of $593,532.95 through August 17, 2014. Trial Ex. 8; Trial Ex. 9; Trial Ex. 10.
With respect to the value of the Comfort Inn, Todd Flanders, the certified appraiser who conducted both the February 2013 and the February 2014 appraisals, as well as the most recent September 2, 2014 appraisal, testified that the February 2013 appraisal, assigning a $3,750,000.00 value to the property, was an update to an appraisal originally made in January 2012, but that he did not actually visit the Comfort Inn in February 2013. See Trial Ex. 15. Instead, the $3,750,000.00 value reflected in the February 2013 appraisal report was based upon the following:
The client has requested the subject be valued based on profit/loss statements provided to the appraiser, as well as the Sales Comparison Approach. The client provided a profit/loss statement for 2012 and the appraiser (due to previous work performed for the client on this property) had profit/loss statements covering 2003 through 2011.
While no inspection was made on the property, an extraordinary assumption is made assuming the property to be in the same condition as when inspected by the appraisers for this client in January 2012.... Should the contrary be found, the appraiser reserves the right to review and alter, if necessary, any and all value conclusions contained herein.
Trial Ex. 15 at 5. Conversely, with respect to the February and September 2014 appraisals, Mr. Flanders testified that he visited the Comfort Inn as well as reviewed the Debtor’s actual financial records, and that the large reduction in value between February 2013 and February 2014 is based upon the Debtor’s declining revenues while its expenses have remained fairly stable. Trial Ex. 16; Trial Ex. 17.
With respect to the cost approach, Mr. Flanders determined that the Comfort Inn *819had an effective age of 16 years and an economic life of 45 years, yielding depreciation estimated at 86%, assigned a land value conclusion of $805,000.00 and valued the property with improvements at $2,175,000.00. TRIAL Ex. 17 at 59, 61, 64. Utilizing the sales comparison approach, Mr. Flanders compared seven similar properties and, based upon those properties’ net operating income and effective gross income multipliers, arrived at a value for the Comfort Inn of $2,750,000.00. Trial Ex. 17 at 80-81. Mr. Flanders’s testimony concerning value, however, focused primarily upon the income approach for which he found a value of $2,100,000.00. Trial Ex. 17 at 88. As reflected in the tables on pages 83 and 84 of the September 2, 2014 appraisal, the Debtor’s total effective gross income compared to total expenses since 2003 has been as follows: income of $991,986.00 and expenses of $588,854.00 in 2003, income of $924,524.00 and expenses of $640,371.00 in 2004, income of $1,018,782.00 and expenses of $696,752.00 in 2005, income of $1,087,212.00 and expenses of $651,074.00 in 2006, income of $1,010,857.00 and expenses of $715,068.00 in 2007, income of $1,045,600.00 with no data of total expenses in 2008, income of $847,681.00 with no data of total expenses in 2009, income of $884,135.00 and expenses of $718,036.00 in 2010, income of $1,021,841.00 and expenses of $788,681.00 in 2011, income of $1,018,499.00 and expenses of $744,448.00 in 2012, income of $927,884.00 and expenses of $742,797.00 in 2013, and a projected income of $946,024.00 and expenses of $664,312.00 in 2014 based upon annualized revenues and expenses through August 17, 2014. Trial Ex. 17 at 83-84. Mr. Flanders estimated an effective gross income of $15,750.00 per room, which rounds to $930,000.00, and an average room expense of $12,500.00 per room, which rounds to $740,000.00 for the 59 rooms, yielding, in his opinion, net income of $190,000.00 or $3,220.00 per room. Trial Ex. 17 at 83-84. Based upon the decreases in hotel revenues since 2012, Mr. Flanders testified on direct examination that he believed the value of the Comfort Inn to be declining; however, he also testified on cross-examination that the value of the property did not decline between February and September 2014, and that the $3,750,000.00 value assigned in February 2013 would have been lower if it had been based upon the Debtor’s actual revenues. In sum, Mr. Flanders testified that the value of this hotel property is dependent upon its revenues.
As for the hotel building, Mr. Flanders rated it, in his appraisal report, as “average” although he testified that the masonry construction quality is superior to those with wood frames. Trial Ex. 17 at 8. He testified that the exterior of the Comfort Inn, which is adjacent to several “newer” looking hotels — the LaQuinta Inn, the Country Inn & Suites, and Candlewood Suites — had needed updating, and the older looking exterior could have been a factor in the Debtor’s declining revenues, just as the Debtor’s recent efforts to update by painting the exterior to make the property more visually appealing could be a factor leading to increased revenues. With respect to the hotel’s interior, his report reflects that it needs to be updated as well, such as painting, new carpeting, and new light fixtures. Trial Ex. 17 at 8. This testimony was confirmed through photographs showing wear and tear on chairs in the hotel rooms, areas in need of repair in the maintenance and pool areas, and water damage spotting on the ceiling in some areas. Coll. Trial Ex. 18. Mr. Flanders also testified that the market as a whole in Blount County is good, with a general trend towards stability, and there is no new development on Alcoa Highway.
*820Based upon the record, although the court finds that the value of the Comfort Inn may not be decreasing in value based upon the most recent appraisals, the declining value of collateral is only one of the factors to be examined in making the determination whether to grant relief from the automatic stay for cause under § 362(d)(1). The Debtor has, as required by the Cash Collateral Order, made monthly payments to Tennessee State Bank of $7,000.00 of which $3,000.00 is to pay the interest accruing on the past due real property taxes with the $4,000.00 balance to be escrowed and used for payment of the 2014 taxes. The Debtor has also made one interest-only payment to Tennessee State Bank of $12,805.96, the amount provided for in the Amended Plan of Reorganization, which Tennessee State Bank refused to accept. This payment remains in escrow in the Debtor’s attorneys’ trust account. As discussed, Mr. Flanders testified that the value of the Comfort Inn has not decreased between February and September 2014, and that the total revenues for July and August 2014 have increased from the total revenues for the same months in 2013, as reflected in Trial Exhibit 14; however, he also testified that, in his opinion, the value of the property is decreasing based upon revenues. There was also evidence in the form of photographs, see Coll. Trial Ex. 18, and the testimony of Mr. Merai establishing that the hotel building has not been maintained as it should have been, and although both Mr. Flanders and Mr. Merai testified that the Debtor has recently painted the exterior of the hotel to make it look more appealing, has updated the bedding and televisions in the rooms, and is in the process of updating the marketplace area in the lobby, there are numerous areas, including the pool, that still require substantial work for which the Debtor does not have the funds at this time. Furthermore, the Debtor was required to update the bedding and televisions in order to maintain its franchise with Choice Hotels International, Inc., and it used cash collateral of Tennessee State Bank without obtaining permission or providing for such improvements in the budgets provided to Tennessee State Bank. Accordingly, the court finds cause to grant the Motion for Stay Relief pursuant to § 362(d)(1).
B
With respect to § 362(d)(2), Tennessee State Bank argues that there is no equity in the Comfort Inn and that it is not necessary for the Debtor’s effective reorganization. Because the parties have stipulated that there is no equity, the Debtor bears the burden of proof to satisfy the § 362(d)(2)(B) element by establishing that it is attempting to reorganize within a reasonable time, that reorganization is feasible, and that the Comfort Inn is necessary for its reorganization. United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76, 108 S.Ct. 626, 633, 98 L.Ed.2d 740 (1988).
“What this requires is not merely a showing that if there is conceivably to be an effective reorganization, [the] property will be needed for it; but that the property is essential for an effective reorganization that is in prospect.” If evidence indicates that a successful reorganization within a reasonable time is impossible, the court must then grant relief from the automatic stay.... [T]he use of the “sliding scale” burden of proof is intended to benefit debtors who have a realistic chance of reorganization but who have not had sufficient time to formulate a confirmable plan.... “[A] debtor must demonstrate that a successful reorganization within a reasonable time is ‘probable.’ ”
In re Rocky Mountain Land Co. LLC, 2014 WL 1338292, at *3-4, 2014 *821Bankr.LEXIS 1370, at *11-12 (Bankr. D.Col. Apr. 3, 2014) (quoting Timbers of Inwood Forest Assocs., Ltd., 484 U.S. at 376, 108 S.Ct. 626 and In re Gunnison Ctr. Apartments, LP, 320 B.R. 391, 402 (Bankr. D.Col.2005)). The burden of proof is fact-intensive and less stringent in the early stages of the bankruptcy case, and “a secured creditor may be expected to bear some reasonable delay while the debtor is moving meaningfully to propose a plan.” Holly’s, Inc., 140 B.R. at 699-701 (holding that a plan may be “somewhat obscure or vague as long as it is plausible that a successful reorganization may occur.”).
It is undisputed that the Debtor’s revenues are derived solely from its operation of its business, and the Comfort Inn is necessary for the Debtor to effectively reorganize. Likewise, there is no dispute that the Debtor filed an Amended Plan of Reorganization on August 29, 2014, that proposes to pay Tennessee State Bank monthly interest payments of $12,805.96 between September 1, 2014, and September 1, 2015, monthly interest and principal payments of $16,163.42 from October 1, 2015 through September 1, 2019, and a balloon payment of the balance on November 1, 2019. Accordingly, the issue with respect to stay relief pursuant to subsection (d)(2) is whether the Debtor’s attempts to reorganize through the Amended Plan of Reorganization are feasible. Tennessee State Bank argues that the Debtor cannot effectively reorganize because its figures reflect a projected loss for 2014 and do not actually support the proposed payments to creditors in the Amended Plan of Reorganization. In support of this argument, Tennessee State Bank relies on the figures in the Profit/Loss Statement for 2011 through 2014, which reflect net income of $57,339.34 for 2011, $9,192.67 for 2012, and $19,981.75 for 2013. Trial Ex. 8; Trial Ex. 10; Coll. Trial Ex. 13 at Ex. 3. Tennessee State Bank also offered into evidence the following breakdown of the monthly projected revenues compared to the Debtor’s actual revenues: for January, actual revenues of $53,608.00 were $1,192.00 below the $54,800.00 projection, for February, actual revenues of $52,000.00 were $3,792.00 below the $55,792.00 projection, for March, actual revenues of $65,582.00 were $10,924.00 below the $76,506.00 projection, for April, actual revenues of $85,428.00 were $7,091.00 above the $78,337.00 projection, for May, actual revenues of $101,322.00 were $12,439.00 below the $113,761.00 projection, for June, actual revenues of $90,546.00 were $8,749.00 below the $99,295.00 projection, for July, actual revenues of $101,834.00 were $10,358.00 above the $91,476.00 projection, and for August, actual revenues of $76,185.00 were $10,260.00 below the $86,445.00 projection, yielding, as of the end of August, actual revenues that are $29,907.00 below the Debtor’s projections for 2014. Trial Ex. 19. Additionally, as acknowledged by Mr. Merai, none of these include any debt service payments to Tennessee State Bank.
The Debtor, on the other hand, argues that its current revenues can, in fact, support the proposed plan payments, that it has cut expenses and is showing increased revenues from 2013, and it is making improvements and marketing the Comfort Inn in order to continue raising revenues. As stated in and attached to the Debtor’s First Amended Disclosure Statement filed on September 2, 2014, the Debtor bases its proposed plan payments and treatments for creditors on figures found in its monthly operating reports, its Profit/Loss Statement for 2011 to 2013, and a 2014 Pro Forma Projection, Coll. Trial Ex. 13 at Ex. 1, Ex. 3, Ex. 4, as well as the Profit/Loss Statement for January 1 through August 17, 2014. Trial Ex. 10. The Profit/Loss Statement for 2011 through 2013 reflects total income in the amount of $1,052,781.00 less total expenses of *822$995,441.46 for a net income of $57,339.54 for 2011, total income in the amount of $1,018,449.63 less total expenses of $1,009,256.96 for a net income of $9,192.67 for 2012, and total income of $927,884.31 less total expenses of $907,902.56 for a net income of $19,981.75 for 2013. Coll. TRIAL Ex. 13 at Ex. 3. The Profit/Loss Statement for January 1 through August 17, 2014 reflects total income of $593,532.95 less total expenses of $278,826.17 and total “other expenses” of $21,219.56 for a net income of $140,602.53. Trial Ex. 10. Finally, the Pro Forma reflects operating income of $80,630.00 for 2014, $67,957.00 for 2015, $66,169.00 for 2016, $124,251.00 for 2017, $148,429.00 for 2018, and $173,993.00 for 2019. Coll. Trial Ex. 13 at Ex. 4.
In additional support of its steps to reorganize, the Debtor offered the testimony of Tarun Surti, an experienced businessman, who has taken on management of the Debtor’s financials. Mr. Surti testified that he prepared the Pro Forma and the 2014 Profit/Loss Statement and that he has focused on raising revenues and cutting expenses, including trimming payroll, and making improvements in order to retain the Choice Hotels International, Inc. franchise. He testified that in an effort to attract more patrons, the Debtor has begun painting the exterior, changing out the bedding and televisions in the rooms, advertising at the airport and offering shuttle service, increased its internet presence by paying for an agreement with Expedia to promote the hotel, and been paying closer attention to customer comments and recommendations. Mr. Surti testified that there are also plans to change the colors and carpet in the lobby, to fix the pool, to get newer exercise equipment, to change bathroom fixtures and showerheads, and to update the individual rooms. Additionally, Mr. Surti testified that the Debtor can pay its real property taxes moving forward, as evidenced by the fact that it has been making its required monthly installments for taxes into escrow, that it has paid all payroll taxes, and that it has money available and ready to pay to Tennessee State Bank in accordance with its proposed Amended Plan of Reorganization, as reflected in Trial Exhibit 22, which shows the Debtor with bank balances, as of September 10, 2014, totaling $92,205.94, including $38,500.00 in escrow for property taxes. Mr. Surti also testified that he is personally willing to advance interest payments to Tennessee State Bank if necessary.
Although there may be some uncertainty concerning whether the Debtor’s Amended Plan of Reorganization can be confirmed as proposed, the Debtor is an ongoing business with actual revenue, and it is entitled to an opportunity to go through the confirmation process. Unquestionably, the Debtor’s revenues have been inconsistent over the past few years; however, even though Tennessee State Bank and Mr. Flanders down-played it as a serious factor, the court believes that the economic problems experienced in this country for the last several years must be considered, and although the market is stabilizing, it has been anything but stable for the last several years. Additionally, as acknowledged by Mr. Merai and Mr. Surti, the Comfort Inn has been in need of updating, the expenses have been too high, and the revenues have been too low, all of which has contributed to the problems and the need for reorganization. The Debtor is, through Mr. Surti’s assistance, taking positive steps to increase its cash flow, and although it has been required to expend money in order to make repairs and updates to the hotel property, these expenditures were necessary to retain the Choice Hotels International, Inc. flag under the franchise agreement and to also attract more business. The Debtor has shown an *823increase in revenues for July and August 2014 above those for the same months in 2013, and, as acknowledged by Mr. .Flanders, because of the Great Smoky Mountains and Tennessee football, among other draws, fall is a busy season for the hotel industry in this area. In sum, the Debtor deserves the opportunity to try and maximize its revenues during that time. The Debtor has also filed a disclosure statement that was determined by the court to be adequate and has begun the balloting process for its Amended Plan of Reorganization. For these reasons, the court will not grant Tennessee State Bank relief from the automatic stay pursuant to § 362(d)(2). The court also finds that Tennessee State Bank’s argument that the proposed interest only payments to it are not sufficient and the proposed 5.25% interest rate is not acceptable are not issues to be determined at this juncture and should be addressed in the normal course of confirmation. Likewise, Tennessee State Bank’s argument that it is entitled to stay relief under § 362(d)(3) — which applies exclusively to single asset real estate debtors — is also inappropriate at this time because the Debtor has, in fact, proposed a plan of reorganization that has the potential of being confirmed.
C
Nevertheless, because the court has determined that cause exists under § 362(d)(1), the Motion of Tennessee State Bank for Relief from the Automatic Stay filed on July 11, 2014, will be granted. “The court has discretion, however, to condition the automatic stay instead of lifting it outright[,]” In re Ivens Props., Inc., 2013 WL 5934654, at *2, 2013 Bankr.LEXIS 4550, at *6 (Bankr.E.D.Tenn. Oct. 31, 2013), and the stay will be conditioned on the following:
(1)The Debtor must obtain confirmation of its Amended Plan of Reorganization — or any subsequently filed amendment thereto — by March 31, 2015. Setting a deadline by which the Debtor must obtain confirmation of a plan, absent which termination of the stay will be granted, protects Tennessee State Bank while still allowing the Debtor an opportunity to try and reorganize. See, e.g., In re Trigee Foundation, Inc., 2013 WL 1401889, at *4, 2013 Bankr.LEXIS 1432, at *11 (Bankr. D.Col. Apr. 8, 2013). In the event the Debtor has not obtained confirmation by March 31, 2015, the automatic stay will be modified as to Tennessee State Bank to allow it to foreclose its liens encumbering the Comfort Inn without further notice or hearing.
(2) The Cash Collateral Order entered on June 10, 2014, will remain in effect and the Debtor must continue making the $7,000.00 monthly payment required under paragraph E of that Order.
(3) The Debtor shall continue paying monthly to Tennessee State Bank the $12,805.96 interest-only payments as provided in its Amended Plan of Reorganization. Tennessee State Bank may, at its discretion, direct that these payments be made directly to it or that they continue to be held in escrow by the Debtor’s attorneys. Receipt of these monthly interest payments directly by Tennessee State Bank shall in no way be deemed an acceptance of its treatment under the Amended Plan of Reorganization nor shall it in any way prejudice Tennessee State Bank from voting against the Amended Plan of Reorganization and objecting to confirmation for failure of the Amended Plan of Reorganization to meet the confirmation requirements of 11 U.S.C. § 1129(a) and/or (b) (2006).
(4) The Debtor will provide Tennessee State Bank, through its attorneys or designated representative, copies of all monthly bank statements and rental revenues, together with its monthly operating reports *824filed with the court by the 15th day of each month.
(5) The Debtor shall immediately apprise Tennessee State Bank of any inspection of the Comfort Inn by the franchisor, Choice Hotels International, Inc., and of any written or oral communication with the franchisor. Capital improvements to the Comfort Inn shall only be made by the Debtor after notice to Tennessee State Bank and with its approval. Shelly Spur-geon or her designee shall be the Debtor’s contact with Tennessee State Bank.
Notwithstanding the provisions of (1) above, upon motion of Tennessee State Bank certifying that any of the above conditions have not been met or that the value of its collateral has otherwise been placed in jeopardy, and after notice and an expedited hearing, the automatic stay may be modified at any time to allow Tennessee State Bank to foreclose its lien encumbering the Comfort Inn.
Ill
With respect to the Amended Fee Application through which the Debtor’s attorneys seek payment of their fees, because it is undersecured, Tennessee State Bank asks the court to prohibit the Debtor’s use of cash collateral for payment of those attorneys’ fees, arguing that it is not adequately protected. Cash collateral is governed by 11 U.S.C. § 363, which provides, in material part:
“cash collateral” means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title[J
11 U.S.C. § 363(a) (2006). Here, there is no dispute that the funds from which the retainer was paid to the Debtor’s attorneys were derived from the operation of the Comfort Inn and are property of the estate. There is likewise no dispute that Tennessee State Bank does not consent to the use of its cash collateral for this purpose.
Courts examining the issue of whether an undersecured creditor’s cash collateral may be used by a Chapter 11 debtor to pay its professional fees have held that “the relevant inquiry is whether there is adequate protection, not whether the creditor is receiving a quantifiable benefit.” In re Chatham Parkway Self Storage, LLC, 2013 WL 1898058, at *4, 2013 Bankr.LEXIS 1955, at *11 (Bankr.S.D.Ga. Apr. 25, 2013) (citing cases). Additionally, adequate protection as interpreted under § 362(d)(1) has been defined narrowly by the Supreme Court in Timbers of Inwood Forest Associates, Limited; however, adequate protection for the purposes of determining whether a debtor may use cash collateral is afforded a broader interpretation.
In order to encourage reorganization, the courts must be flexible in applying the adequate protection standard. This flexibility, however, must not operate to the detriment of the secured creditor’s interest. In any given case, the bankruptcy court must necessarily (1) establish the value of the secured creditor’s interest, (2) identify the risks to the secured creditor’s value resulting from the debtor’s request for use of cash collateral, and (3) determine whether the debtor’s adequate protection proposal protects value as nearly as possible *825against risks to that value consistent with the concept of indubitable equivalence.
First Sec. Bank & Trust Co. v. Vegt, 511 B.R. 567, 581 (N.D.Iowa 2014) (quoting Martin v. United States (In re Martin), 761 F.2d 472, 476-77 (8th Cir.1985)). In determining whether Tennessee State Bank is adequately protected, the court must determine whether the Debtor’s proposed use of cash collateral will impair the value of Tennessee State Bank’s interest therein. In re Dynaco Corp., 162 B.R. 389, 394 (Bankr.D.N.H.1993) (citing H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 339 (1977)). The Debtor, as the party seeking to use cash collateral, bears the burden of proof that Tennessee State Bank’s interests are adequately protected. Chatham Parkway Self Storage, LLC, 2013 WL 1898058, at *3, 2013 Bankr.LEXIS 1955, at *8.
It is undisputed that Tennessee State Bank is undersecured. As discussed, its claims total $2,927,076.30, the Blount County Trustee filed a claim in the amount of $113,053.37, and the Debtor owes taxes to the City of Alcoa in the aggregate amount of $98,252.32. The most recent appraisal for the Comfort Inn was $2,500,000.00, a value substantially less than the claims against the property. Nevertheless, the Debtor contends that Tennessee State Bank is adequately protected by the following: (1) the value of the Comfort Inn, which is not declining; (2) the monthly interest payments the Debtor will make to Tennessee State Bank under the Amended Plan of Reorganization; (3) the interest plus principal payments the Debtor will begin making to Tennessee State Bank in October 2015 pursuant to the Amended Plan of Reorganization; (4) the past due property taxes the Debtor will pay which will increase equity in the Comfort Inn; (5) the steps the Debtor has taken post-petition to repair and better maintain the hotel; (6) the reduced expenses and increased efficiency of the Debtor’s operations which have increased revenues; and (7) the fact that under the Amended Plan of Reorganization, Tennessee State Bank will be paid in full by November 2019.
Although each of the foregoing evidence the Debtor’s desire to move forward and reorganize, none constitutes the type of adequate protection contemplated by § 361 which provides, in material part: When adequate protection is required under section ... 363 ... 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 ... use ... under section 363 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 ... use ... 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. In fact, there is nothing in the record to establish that the Debtor has offered Tennessee State Bank any of the adequate protection remedies set forth in § 361, be it a replacement lien, allowance of an administrative expense, or periodic payments to the extent that the use of Tennessee State Bank’s cash collateral is decreasing.
*826The cash collateral the Debtor wishes to use is not the Comfort Inn, the value of which was at issue in making the determination of whether Tennessee State Bank was entitled to stay relief under § 362(d)(1). In this context, the cash collateral that the Debtor seeks to use is the revenues generated from room rentals. In cases where Debtors have sought to use cash collateral to pay professional fees, the majority of courts “have deemed a security interest in rents to be wholly separate from a creditor’s security interest in property, and therefore, requiring of separate adequate protection.” Chatham Parkway Self Storage, LLC, 2013 WL 1898058, at *5, 2013 Bankr.LEXIS 1955, at *12-13; see also Stearns Bldg. v. WHBCF Real Estate (In re Stearns Bldg.), 165 F.3d 28, 1998 WL 661071, at *4, 1998 U.S.App. LEXIS 22121, at *12-13 (6th Cir. Sept. 3, 1998) (unpublished table opinion) (holding that “it is clear that Debtor must provide adequate protection if it is to use the net rents. However, the record does not indicate that Debtor possesses any unencumbered assets with which it can offer WHBCF adequate protection.... Since Debtor cannot provide adequate protection for the net rents, it follows that Debtor cannot use these rents[.]”); Putnal v. Sun-Trust Bank, 489 B.R. 285, 289 (M.D.Ga. 2013) (holding that the value of the security interest in rents “should be measured by the actual rents that have accrued or will accrue.”); In re Buttermilk Towne Ctr., LLC, 442 B.R. 558, (6th Cir. BAP 2010) (holding that “a replacement lien is not adequate protection.”).
This case differs from the forgoing because there is nothing in the record to reflect that the Debtor has offered any form of adequate protection to Tennessee State Bank, be it cash payments to offset the amount of net rents that would be due Tennessee State Bank under its security agreement or even a replacement lien in the proceeds. Without providing Tennessee State Bank with any sort of concrete adequate protection, the Debtor is not entitled to use Tennessee State Bank’s cash collateral in the form of net rentals for expenses that are not authorized by Tennessee State Bank or the Cash Collateral Order, including payment of professional fees to its attorneys. The court will, therefore, grant the Debtor’s Amended First Application for Interim Compensation filed on July 22, 2014, as to the requested $13,185.00 amount — to which no party has objected — but will deny it as to the request that it be paid from the $20,000.00 retainer which represents cash collateral of Tennessee State Bank.
An Order consistent with this Memorandum will be entered.
ORDER
For the reasons stated in the Memorandum on Motion of Tennessee State Bank for Relief from the Automatic Stay and Amended First Application for Interim Compensation filed this date, containing findings of fact and conclusions of law as required by Rule 52(a) of the Federal Rules of Civil Procedure, made applicable to these contested matters by Rules 9014(c) and 7052 of the Federal Rules of Bankruptcy Procedure, the court directs the following:
1. The Motion of Tennessee State Bank for Relief from the Automatic Stay is GRANTED.
2. The automatic stay of 11 U.S.C. § 362(a) shall remain in effect as to Tennessee State Bank conditioned on the following:
A. The Debtor shall obtain confirmation of its Amended Plan of Reorganization — or any subsequently filed amendment thereto — by March 31, 2015. In the event the Debtor has not obtained confirmation by this date, the automatic stay will be modified as to *827Tennessee State Bank, without further notice or hearing, to allow it to foreclose its liens encumbering the real and personal property comprising the Comfort Inn at 140 Cusick Road, Alcoa, Tennessee.
B. The Cash Collateral Order entered on June 10, 2014, will remain in effect, and the Debtor will continue making the $7,000.00 monthly payment required under paragraph E of that Order.
C. The Debtor shall continue making monthly payments to Tennessee State Bank of $12,805.96 in interest-only payments as provided in its Amended Plan of Reorganization filed on August 29, 2014. Tennessee State Bank may, at its discretion, direct that these payments be made directly to it or that they continue to be held in escrow by the Debtor’s attorneys. Receipt of these monthly interest payments directly by Tennessee State Bank shall in no way be deemed an acceptance of its treatment under the Amended Plan of Reorganization nor shall it in any way prejudice Tennessee State Bank from voting against the Amended Plan of Reorganization and objecting to confirmation for failure of the Amended Plan of Reorganization to meet the confirmation requirements of 11 U.S.C. § 1129(a) and/or (b) (2006).
D. The Debtor will provide Tennessee State Bank, through its attorneys or designated representative, copies of all monthly bank statements and rental revenues, together with its monthly operating reports filed with the court by the 15th day of each month.
E. The Debtor shall immediately apprise Tennessee State Bank of any inspection of the Comfort Inn by the franchisor, Choice Hotels International, Inc., and of any written or oral communication with the franchisor. Capital improvements to the Comfort Inn shall only be made by the Debtor after notice to Tennessee State Bank of the nature and anticipated expense associated with such improvements and with its approval. Shelly Spur-geon or her designee shall be the Debtor’s contact with Tennessee State Bank.
F.Upon motion of Tennessee State Bank certifying that any of the above conditions have not been met or that the value of its collateral has otherwise been placed in jeopardy, and after notice and an expedited hearing, the automatic stay may be modified at any time to allow Tennessee State Bank to foreclose its lien encumbering the Comfort Inn.
3. The Amended First Application for Interim Compensation filed by the Debt- or’s attorneys, Lynn Tarpy and Tarpy, Cox, Fleishman & Leveille, PLLC, requesting interim compensation in the amount of $13,185.00 is GRANTED as to the amount but DENIED as to the request that the payment be made from the $20,000.00 retainer paid by the Debtor from Tennessee State Bank’s cash collateral.
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497550/ | MEMORANDUM OPINION ON MOTION OF RENATO CASALI TO DISMISS PARKWAY BANK & TRUST’S ADVERSARY COMPLAINT TO DETERMINE DIS-CHARGEABILITY OF DEBT
JACK B. SCHMETTERER, Bankruptcy Judge.
This Adversary Proceeding relates to the bankruptcy petition filed by debtor-defendant Renato Casali (“Casali”) under Chapter 7 of the Bankruptcy Code. Creditor-plaintiff Parkway Bank & Trust (“Parkway”) filed its complaint (Dkt. 1) on February 25, 2014 seeking a judgment that the debt due Parkway from Casali be held nondischargeable under 11 U.S.C. § 523(a)(2)(A).
The matter concerns a loan Parkway extended to Casali. In 2003, Casali obtained a personal line of credit from Parkway agreeing, among other conditions, to give Parkway a first mortgage on his personal residence located at 4547 Potawato-mie, Chicago, Illinois (“the Property”). At the time, Household Finance Company (“Household”) held the first mortgage on the Property. Allegedly, Casali promised to use the money advanced by Parkway to pay Household in full to obtain a release of Household’s first mortgage, thus giving Parkway the first mortgage. However, *839after Parkway advanced its loan, Casali continued to draw on his line of credit with Household leaving a balance still due, and the original first mortgage was not released by Household. Parkway alleges that Casali’s conduct amounted to false pretenses and false representations, and the entire debt is therefore nondischargeable under § 523(a)(2)(A).
Casali moved to dismiss Parkway’s complaint under Rule 12(b)(6) F.R.C.P. [Rule 7012 Fed. R. Bankr.P.] for failure to state a cause of action, for failure to allege fraud with particularity as required by Rule 9(b) F.R.C.P. [Rule 7009 Fed. R. Bankr.P.], and because judicial estoppel assertedly precludes Parkway from asserting its position in the Complaint.
Because Parkway has thus far failed to allege that Casali made false representations or had actual intent to defraud and deceive, the motion to dismiss will be allowed, but with leave to amend.
FACTS AS ALLEGED IN COMPLAINT
On a motion to dismiss under Rule 12(b)(6), all well-pleaded allegations in the complaint are taken as true and all reasonable inferences are drawn in favor of the non-moving party. Geinosky v. City of Chicago, 675 F.3d 743, 746 (7th Cir.2012). Documents attached to a complaint are considered part of the complaint. F.R.C.P. 10(c) [Rule 7010 Fed. R. Bankr. P.]; Bogie v. Rosenberg, 705 F.3d 603, 609 (7th Cir.2013) (citations omitted). Parkway’s complaint and exhibits allege the following facts:
In 2003, Casali obtained a line of credit from Parkway. (Complaint ¶ 8). Casali informed Parkway about an existing line of credit having a debt with Household then amounting to $80,000 secured by first mortgage on the Property. (¶ 6). Parkway informed Casali that any loan extended to him would be conditioned on: (1) closing Casali’s line of credit with Household, (2) using the proceeds of Parkway’s loan to pay off the line of credit with Household, (3) release of Household’s first mortgage on the Property, (4) and Parkway securing a first mortgage on the Property. (¶ 7).
Based on Casali’s agreement to those conditions, Parkway and Casali entered into a Credit Agreement and Disclosure on May 5 stating in part, “[y]ou acknowledge this Agreement is secured by 1st Mortgage on [the Property].” (¶ 7); (Exh. A). The mortgage signed by Casali and his wife on that same day and recorded shortly after states “[g]rantor shall maintain the Property free of any liens having priority over or equal to the interest of Lender under this Mortgage.... ” (Id. ¶ 9); (Exh. B). Casali also executed a Disbursement Request and Authorization form, acknowledging and agreeing that the purpose of receiving the loan was to pay off the “1st mortgage with Household ... of $80,000.00....” (¶ 10); (Exh. C).
On or about May 7, 2003, Household provided a payoff letter to Casali indicating $154,731.46 as the payoff amount due at that time, subject to a final audit, and with no waiver of Household’s rights to receive payment of any debt resulting from any recent advances and returned items. (¶¶ 10-13); (Exh. D).
On May 8, 2003, Casali and his wife signed the payoff letter authorizing cancellation of their account at Household. (¶ 15); (Exh. D). Parkway sent a check for $154,731.46, pursuant to the payoff letter, and a request for release of Household’s first mortgage. (¶ 16). Two days later, Household cashed that check. (¶ 17).
Without disclosing to Parkway, Casali continued to make new draws from his line of credit with Household even after signing the payoff letter. (¶¶ 18-19). As a result, Casali continued to owe Household for the new draws, and Household did not *840release its mortgage, leaving Parkway without a first mortgage on the Property. (¶¶ 20, 28).
On January 29, 2013, Casali defaulted on the new loan by failing to pay real estate taxes on the Property. (¶ 23). On February 11, 2013, Parkway discovered that Household had never released its mortgage. (¶¶ 24-25).
Parkway alleges that Casali made false representations and omissions of fact because he never intended to close his line of credit with Household but only represented that he would do so for the purpose of inducing Parkway to extend a loan to him. (¶ 29). Parkway asserts that it would not have extended credit to Casali had it known Casali’s line of credit with Household would remain open and not be completely paid off, leaving it without a first mortgage on the Property. (¶ 31).
Parkway’s complaint seeks a declaration that the entire debt Casali owes Parkway is nondischargeable under 11 U.S.C. § 523(a)(2)(A) because it is a debt “for money, property, services, or an extension, renewal, or refinancing of credit” obtained by “false pretenses, false representation, or actual fraud....” (¶¶26, 32). Casali moved to dismiss Parkway’s complaint under Rule 12(b)(6) [F.R.C.P. Rule 7012 Fed. R. Bankr.P.] for failure to state a claim upon which relief may be granted.
DISCUSSION
Jurisdiction
Jurisdiction lies to entertain this matter under 28 U.S.C. § 1334. This matter is an objection to dischargeability, and is therefore a core proceeding under 28 U.S.C. § 157(b)(2)(I). It is referred here by Internal Procedure 15(a) of the District Court for the Northern District of Illinois. An adversary proceeding seeking to determine dischargeability of a debt “stems from the bankruptcy itself.” Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011). This case only concerns the dischargeability of a debt. As such, a bankruptcy judge has constitutional authority to enter final judgment in this matter. Venue is proper under 28 U.S.C. § 1409(a).
Sufficiency of the Pleadings
A motion to dismiss under Rule 12(b)(6) [F.R.C.P., Rule 7012 F.R. Bankr.P.] tests the sufficiency of the complaint rather than the merits of the case. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir.1990). “The consideration of a 12(b)(6) motion is restricted solely to the pleading, which consist generally of the complaint, any exhibits attached thereto, and supporting briefs.” Thompson v. Illinois Dep’t of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir.2002); Rule 10(c) [F.R.C.P.; Rule 7010 F.R. Bankr.P.]. All well-pleaded allegations of the complaint are assumed true and read in the light most favorable to the plaintiff. United Indep. Flight Officers, Inc. v. United Air Lines, Inc., 756 F.2d 1262, 1264 (7th Cir.1985). If the complaint contains allegations from which a trier of fact may reasonably infer evidence as to necessary elements of proof available for trial, dismissal is improper. Sidney S. Arst Co. v. Pipefitters Welfare Educ. Fund, 25 F.3d 417, 421 (7th Cir.1994).
Under Rule 12(b)(6), a complaint will be dismissed unless it clears two “easy-to-clear hurdles.” EEOC v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir.2007).
First, the complaint must contain enough factual detail to give the defendant fair notice of the claim under Rule 8(a) F.R.C.P. [Rule 7008 Fed. R. Bankr.P.] “[A] formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Some pleaded facts must support the claim. Ashcroft v. Iqbal, 556 U.S. 662, 678-79, 129 *841S.Ct. 1937, 173 L.Ed.2d 868 (2009); McCauley v. City of Chicago, 671 F.3d 611, 616-17 (7th Cir.2011); Swanson v. Citibank, N.A., 614 F.3d 400, 405 (7th Cir.2010). But Rule 8(a) only requires a complaint to contain “a short and plain statement of the claim showing that the plaintiff is entitled to relief[.]” [F.R.C.P., Rule 7008 F.R. Bankr.P.]
Second, a complaint as thus pleaded must state a “plausible” claim, meaning the allegations must raise the plaintiffs right to relief above a “speculative level.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. 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.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. To establish plausibility, a plaintiff “must give enough details about the subject-matter of the case to present a story that holds together.” Swanson, 614 F.3d at 404. That the allegations underlying the claim “could be true is no longer enough to save it.” Estate of Miller ex rel. Bertram v. Tobiasz, 680 F.3d 984, 988 (7th Cir.2012).
These requirements apply equally to a mental state when that is an element of a plaintiff’s claim. Iqbal, 556 U.S. at 686-87, 129 S.Ct. 1937. The plaintiff must allege facts sufficient to raise a plausible inference of a required mental state. Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312, 1327 (Fed.Cir.2009); Radiation Stabilization Solutions LLC v. Accuray Inc., 11-CV-07700, 2012 WL 3621256, at *4 (N.D.Ill. Aug. 21, 2012). A mental state cannot be pleaded merely as a conclusion. Id.
While Rule 8’s standard governs most pleadings, allegations of fraud must also satisfy Rule 9(b) F.R.C.P. [Rule 7009 Fed. R. Bankr.P.]. Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir.2007). Under Rule 9(b), “the circumstances constituting fraud ... shall be stated with particularity.” Id. “This means the who, what, when, where, and how ...” DiLeo v. Ernst & Young, 901 F.2d 624, 626 (7th Cir.1990). This requirement ensures that defendants have fair notice of plaintiff’s claims and grounds, providing defendants an opportunity to frame their answers and defenses. Reshal Assocs., Inc. v. Long Grove Trading Co., 754 F.Supp. 1226, 1230 (N.D.Ill.1990). This heightened pleading standard applies to all “averments of fraud,” regardless of whether those averments pertain to a “cause of action” for fraud. Borsellino, 477 F.3d at 507. Allegations based on “information and belief’ do not comply with the specificity requirement unless accompanied by a statement of facts providing the basis for such belief. Interlease Aviation Investors II v. Vanguard Airlines, Inc., 254 F.Supp.2d 1028, 1040 (N.D.Ill.2003). The particularity requirement of Rule 9(b) applies equally to all claims based upon an underlying fraud, including fraud claims under § 523(a)(2)(A). In re Munson, 10 B 01559, 2010 WL 3768017 (Bankr.N.D.Ill. Sept. 17, 2010) (quoting In re Lane, 937 F.2d 694, 698 (1st Cir.1991)).
Nondischargeability Under 11 U.S.C. § 523(a)(2)(A)
§ 523(a)(2)(A) excepts from discharge any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition[.]” 11 U.S.C. § 523(a)(2)(A). That section describes three separate grounds for holding a debt to be nondischargeable: false pretenses, false representation, and actual fraud. In re Jairath, 259 B.R. 308, 314 (Bankr. N.D.Ill.2001), Each ground for excepting a debt from discharge under § 523(a)(2)(A) must be separately considered. In re Jar *842cobs, 448 B.R. 453, 470 (Bankr.N.D.Ill.2011).
To except debts from discharge for false pretenses or false representation, a creditor must show: (1) the debtor made a false representation of fact, a representation, (2) which the debtor, either (a) knew was false or made with reckless disregard for the truth or (b) that debtor possessed an intent to deceive or defraud (3) upon which the creditor justifiably relied. In re Davis, 638 F.3d 549, 553 (7th Cir.2011); Ojeda v. Goldberg, 599 F.3d 712, 716 (7th Cir.2010). All three elements must be proven to prevail on § 523(a)(2)(A) claim. In re Ardisson, 272 B.R. 346, 357 (Bankr. N.D.Ill.2001).
False pretenses under 11 U.S.C. § 523(a)(2)(A) “include implied misrepresentations of conduct intended to create or foster a false impression.” In re Morgan, BR 09 B 42248, 2011 WL 3651327, at *4 (Bankr.N.D.Ill. Aug. 18, 2011) (internal citation omitted); In re Sarama, 192 B.R. 922, 927 (Bankr.N.D.Ill.1996). A false pretense does not require overt misrepresentations. In re Sarama, 192 B.R. at 928. Rather, “omissions or a failure to disclose on the part of the debtor can. constitute misrepresentations where the circumstances are such that the omissions or failure to disclose create a false impression which is known by the debtor.” Id. False pretenses include:
[A] series of events, activities or communications which, when considered collectively, create a false and misleading set of circumstances, or false and misleading understanding of a transaction, in which a creditor is wrongfully induced by the debtor to transfer property or extend credit to the debtor....
In re Paneras, 195 B.R. 395, 406 (Bankr. N.D.Ill.1996)
By contrast, a false representation is an express misrepresentation demonstrated either by a spoken or written statement or through conduct. In re Morgan, at *4. A debtor’s silence concerning a material fact can also constitute a false representation. Id. (citing In re Westfall, 379 B.R. 798, 803 (Bankr.C.D.Ill.2007)). A false representation can be shown through conduct and does not require a spoken or written statement. In re Jairath, 259 B.R. at 314. Where the circumstances imply a specific set of facts, a debtor’s failure to disclose necessary information to correct a false impression may also constitute a false representation. In re Malcolm, 145 B.R. 259, 263 (Bankr.N.D.Ill. 1992). A false representation need not be an overt oral or written lie; it may be established by showing conduct intended deliberately to create and foster a false impression. In re Jairath, 259 B.R. at 314.
Complaint Meets the Rule 9(b) Standard
The complaint does plead fraud with sufficient particularity under Rule 9(b). Casali argues that Parkway’s complaint contains “no allegations about when, where, why and how those advances were allegedly taken.” DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990), but it does.
Who: “Casali made the false representation and omissions of fact....” (Complaint ¶ 28)
What: “In conjunction with the loan made by Parkway, Casali made false representations and omissions of fact, including but not limited to, failing to disclose Parkway that he continued withdrawing funds from Household’s line of credit before, during and after the issuance of the Payoff Letter and he did not close or intend to close Household’s line of credit.” (¶ 28). The complaint continues, “Casali’s false representations and omission of fact that he would close the line of credit with Household, use the proceeds of Parkway’s *843loan to pay off Household’s line of credit and grant Parkway a first mortgage on the Property in extending a loan to Casali.” (¶ 30).
When and where: “In April 2003, Casali approached Parkway to obtain a personal line of credit from Parkway. At the time Casali approached Parkway to obtain a loan, Casali informed Parkway that he had an existing line of credit with Household ...” and “[djuring its discussions with Casali, Parkway informed Casali .... ” about conditions on its loans. (¶¶ 6, 7) (emphasis added).
How: Casali promised to use the money advanced by Parkway to pay Household in full to obtain a release of Household’s first mortgage, thus giving Parkway the first mortgage. (¶¶ 7, 8) Instead of paying Household in full, Casali concealed from Parkway that he continued to draw on his line of credit with Household, resulting in Parkway not having a first mortgage on the Property. (¶¶ 20-21, 28).
Thus, the complaint pleads fraud with sufficient particularity to satisfy Rule 9(b).
However, although Rule 9(b) has been complied with sufficiently, the complaint will still be dismissed for failing to sufficiently allege facts from which the required intent may be inferred.
Complaint Fails to Adequately Plead False Pretenses or False Representation
1. Pleadings must support a showing of false representations of fact.
False pretenses and false representation under § 523(a)(2)(A) requires that “the debtor made false representation of fact_” Ojeda, 599 F.3d at 716. A false representation under § 523(a)(2)(A) must relate to a present or past fact, and a debtor’s false contractual promise will not typically support a § 523(a)(2)(A) claim. In re Hernandez, 452 B.R. 709, 723 (Bankr.N.D.Ill.2011). A promise constitutes a false representation under § 523(a)(2)(A) only if the debtor made the promise without an intention of ever keeping it. Gene Clarke v. Richard M. Swanson, 13 B 14970 (Bankr.N.D.Ill. Jul. 7, 2014) (citing Perlman v. Zell, 185 F.3d 850, 852 (7th Cir.1999); Chriswell v. Alomari (In re Alomari), 486 B.R. 904, 911-12 (Bankr.N.D.Ill.2013); In re Hernandez, 452 B.R. at 723.)
Although Casali is said to have broken his promises and agreement with Parkway, the factual allegations do not support an inference that Casali never intended to keep his promises when making those promises. (¶¶ 7-8,18, 28).
2. Pleadings do not show that Casa-li’s representations were made with actual intent to deceive and defraud
False pretenses, false representation, or actual fraud under § 523(a)(2)(A) requires proof that the debtor acted with intent to deceive. Pearson v. Howard, 339 B.R. 913, 919 (Bankr.N.D.Ill.2006).
Intent to deceive requires the debtor’s subjective intent to deceive when the debtor made the representations. In re Monroe, 304 B.R. at 356. Courts can infer actual intent from surrounding circumstances, since proof may be unavailable. In re Aguilar, 511 B.R. 507 (Bankr. N.D.Ill.2014) (quoting In re Kucera, 373 B.R. at 884 (Bankr.C.D.Ill.2007)). Courts may consider relevant circumstances that took place after the debtor incurred the debt if that conduct indicates the debtor’s state of mind when the debtor made asserted misrepresentations. In re Gelhaar, BR 09 B 07578, 2010 WL 4780314, at *7 (Bankr.N.D.Ill. Nov. 17, 2010) (Squires, J.).
As discussed before, while Parkway shows Casali did not fully keep his promises, Parkway does not yet show by plausi*844ble factual assertions that Casali made representations with actual intent to deceive and defraud when making those representations.
Thus, viewing the pleaded circumstances as a whole, there is no showing as yet of facts from which actual intent to defraud Parkway may be inferred. Therefore, Parkway’s complaint does not adequately plead actual intent to deceive, and must be dismissed. Since Casali also raises other grounds for dismissal, they are addressed below.
3. Was Parkway’s reliance justifiable?
Justifiable reliance by the creditor must be shown for false representations and false pretenses under § 523(a)(2)(A). This requires the creditor to 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.” Field v. Mans, 516 U.S. 59, 71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). The creditor’s duty to investigate arises when the falsity of the representation would have been readily apparent. Ojeda, 599 F.3d at 717 (citing Field, 516 U.S. at 70-71, 116 S.Ct. 437). However, it has sometimes been held that a creditor may be “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 (Bankr.N.D.Ill.1998) (quoting Field, 516 U.S. at 70, 116 S.Ct. 437).
Here, Parkway alleges that it “reasonably relied [on] Casali’s ... representations ... that he would close the line of credit at Household, [use] the proceeds of Parkway’s loan to pay off Household’s line of credit and grant Parkway a first mortgage on the Property in extending a loan to Casali.” (¶ 30). Further supporting reliance, Parkway stated that it “would not have extended a loan to Casali ...” knowing Casali would not fulfill the agreed conditions. (¶ 31). Nothing in the complaint supports an inference that the falsity of Casali’s representations were readily apparent. However, the complaint does not explain why Parkway did not protect itself by following sound lending procedure and close in escrow with the new loan paid only if release of the old mortgage was arranged. If a new complaint can be pleaded, Parkway will have the burden of showing at trial that it “justifiably” relied on any misrepresentation.
Dismissal now will be without prejudice
Paragraph 13 of Household’s answer to a verified mortgage foreclosure complaint attached to the motion to dismiss stated that Casali continued to draw from his line of credit with Household on May 29, 2003 for $30,000 and on July 29, 2003 for $20,000. Paragraph 14 stated that after Casali’s balance with Household reached $0.00 in 2005, he expressly instructed Household not to close his account after Household asked whether to close the account and release the lien. Paragraph 15 stated that Casali’s account balance as of June 2013 was $265,000. Those facts, if they were alleged by Plaintiff might show that Casali’s promises constitutes a false representation under § 523(a)(2)(A). If Casali continued to draw relatively large amounts of money from his line of credit with Household after making his promises to Parkway, that conduct may well show Casali’s plan from the beginning was to dupe Parkway into lending to him while still drawing on the Household credit line.
It would be improper to consider now an exhibit attached to Casali’s motion to dismiss because it is not part of the complaint or an exhibit to the complaint. Beam v. IPCO Corp. 838 F.2d 242 (7th *845Cir.1988). “If matters outside the pleading are presented to and not excluded by the court in connection with a motion to dismiss, the [trial] court must treat the motion as one for summary judgment ...” Trask v. Foster, 72 F.3d 132 (7th Cir.1995) (internal quotation omitted). If the motion to dismiss were converted into one for summary judgment, “All parties must be given a reasonable opportunity to present all the material that is pertinent to the motion.” Rule 12(d), F.R.C.P. [Rule 7012 F.R. Bankr.P.]. At this stage in the litigation, the better course is to simply confine consideration of the pending motion to the complaint and attachments and dismiss with leave to allow plaintiff to amend and attempt to show any more pertinent facts that may be available.
Judicial estoppel does not apply
Judicial estoppel does not apply to prevent Casali from filing this complaint because it is not inconsistent with his earlier position in state court litigation. Judicial estoppel is a preclusion principle applicable to bankruptcy. The Supreme Court has described judicial estoppel as “[w]here a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.” New Hampshire v. Maine, 532 U.S. 742, 749, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (quoting Davis v. Wakelee, 156 U.S. 680, 689, 15 S.Ct. 555, 39 L.Ed. 578(1895)).
As an equitable doctrine, judicial estoppel provides “that a party who prevails on ground in a lawsuit cannot turn around and in another lawsuit repudiate the ground.” McNamara v. City of Chicago, 138 F.3d 1219, 1225 (7th Cir.1998), cert. denied, 525 U.S. 981, 119 S.Ct. 444, 142 L.Ed.2d 398 (1998); see also Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420, 1427 (7th Cir.1993) (“A litigant is forbidden to obtain a victory on one ground and then repudiate that ground in a different case in order to win a second victory.”). Courts recognize that judicial estoppel serves “to protect the courts from being manipulated by chameleonic litigants who seek to prevail, twice, on opposite theories.” Levinson v. United States, 969 F.2d 260, 264 (7th Cir.1992); see also Ladd v. ITT Corp., 148 F.3d 753, 756 (7th Cir.1998) (“[T]he purpose of the doctrine ... is to reduce fraud in the legal process by forcing a modicum of consistency on a repeating litigant.”)
Judicial estoppel is “not reducible to any general formulation of principle.” In re Knight-Celotex, LLC, 695 F.3d 714, 721-22 (7th Cir.2012). However three factors have been seen as relevant.
Those factors are first, that “a party’s later position must be clearly inconsistent with its earlier position;” second, that “the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or second court was misled;” and third, that “the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.”
Id.
“[T]hese factors are not rigid requirements but ‘general guideposts that must be considered in the context of all the relevant equities in any given case.’ ” Gro-chocinski v. Mayer Brown Rowe & Maw, LLP, 719 F.3d 785, 795 (7th Cir.2013).
Casali contends that Parkway is “judicially estopped from taking conflicting legal positions in state and federal court.” *846(Motion to Dismiss p. 7). The pending motion to dismiss argues that Parkway’s state court complaint pleads only “for breach of contract, foreclosure and made no allegations whatsoever regarding fraud.” (Id.)
Casali’s argument bears on whether “a party’s later position must be clearly inconsistent with its earlier position.” Maine, 532 U.S. at 750-51, 121 S.Ct. 1808. Although Parkway’s complaint in state court alleges a breach of contract and not fraud, and Parkway’s complaint in federal court alleges fraud and not a breach of contract, these two causes of actions are not conflicting or inconsistent.
Moreover, the Cook County Circuit Court has not issued a judgment on the breach of contract issue, so Parkway has not “succeeded in persuading a court to accept that party’s earlier position.” Maine, 532 U.S. at 750-51, 121 S.Ct. 1808. Indeed, the motion does not show in any way that Parkway “would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” Id.
Therefore, judicial estoppel does not apply-
The Extent of Possible Nondischargeability
The complaint requests the court to declare the entire debt Casali owes Parkway nondischargeable under § 523(a)(2)(A). (Complaints 32). § 523(a)(2)(A) provides that a debt is not dischargeable “to the extent that” it is obtained by false pretenses, a false representation, or fraud. Principles of contract law damages may limit Parkway’s recovery to the amount necessary to restore Parkway to its expectations, perhaps the difference between the amount on the payoff letter and the amount of the Household loan still outstanding after Parkway paid Household, or perhaps the amount now necessary to pay off Household and obtain release of its mortgage so that Parkway may obtain a first mortgage position.
However, it appears that § 523(a)(2)(A) has been construed to have a much broader reach. “[T]he phrase ‘to the extent obtained by’ in § 523(a)(2)(A) ... does not impose any limitation on the extent to which ‘any debt’ arising from fraud is excepted from discharge.” Cohen v. de la Cruz, 523 U.S. 213, 218, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (involving a violation of New Jersey statute that allowed an award of attorney’s fees). However, § 523(a)(2)(A) “does not except from discharge every debt somehow connected with fraud.” In re Jahelka 442 B.R. at 669 (citing In re Reyes, 09 B 35198, 2010 WL 2757180, at *3 (Bankr.N.D.Ill. July 13, 2010)).
“The Supreme Court has held that Section 523(a)(2) is not limited to the actual amount transferred to the debtor in reliance on the fraud or misrepresentation” In re Jackowiak, 09-B-70190, 2009 WL 3930217 (Bankr.N.D.Ill. Nov. 18, 2009). The Supreme Court in Cohen v. de la Cruz, 523 U.S. 213, 223, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) held “ ‘any debt ... for money, property, services, or ... credit, to the extent obtained by1 fraud encompasses any liability arising from money, property, etc., that is fraudulently obtained, including treble damages, attorney’s fees, and other relief that may exceed the value obtained by the debtor.”
CONCLUSION
For the foregoing reasons, the court will by separate order grant Casali’s motion to dismiss with leave to amend. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497551/ | MEMORANDUM DECISION
TIMOTHY A. BARNES, Bankruptcy Judge.
The matter before the court is the Second Motion to Vacate Judgment and for Leave to File Response to Cervac’s Summary Judgment Motion (the “Motion to Vacate ”) brought by debtor Kimberly A. Littman (the “Debtor ”) seeking relief from the court’s Order Granting Plaintiffs Motion for Summary Judgment (the “Order Granting Motion”) and Rule 7058 Judgment Order (the “Judgment Order” and collectively with the Order Granting Motion, the “Orders ”) under Rules 59 and 60 of the Federal Rules of Civil Procedure *851(the “Civil Rules”) on the grounds that the underlying state court judgment has been satisfied. The matter before the court is whether and if so, to what extent, this court should set aside its previous grant of summary judgment in favor of Susan Kathleen Cervac (the “Plaintiff”) in adversary proceeding no. 12ap00155 (the “Adversary ”).
In short, the Debtor argues under Civil Rules 59 and 60 that the court’s grant of an unopposed motion for summary judgment was procedurally inappropriate given the existence of an affirmative defense of satisfaction of the obligation set forth in the Debtor’s answer. Further, the Debtor asserts arguments under Civil Rule 60(b)(5) based, essentially, on accord and satisfaction. The latter matter is not a typical, to the extent there is a typical, Civil Rule 60(b)(5) proceeding. This is primarily because the Debtor argues that the state court judgment upon which this court’s Orders were predicated was satisfied, at least in part, before that state court judgment was entered.
Upon a review of the parties’ respective filings and after holding a three-day evi-dentiary hearing on the matter, the court finds that the Debtor has failed to establish grounds to set aside or modify the Orders. Accordingly, the Motion to Vacate is denied.
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”).
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-chargeability of a particular debt may only arise in a case under title 11 and is specified as a core proceeding. 28 U.S.C. § 157(b)(2)(B) and (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.).
It follows, therefore, that motions for relief under Civil Rules 59 and 60 relating to the foregoing are also core proceedings. 28 U.S.C. § 157(b)(1) & (2). Accordingly, final judgment is within the scope of the court’s authority.
BACKGROUND
This is a dispute between sisters, the Plaintiff and the Debtor, over the assets of their deceased mother’s estate. Prior to the commencement of the Debtor’s chapter 7 bankruptcy case, an action in the Illinois courts (the “State Court Action ”) resulted in the entry of an agreed judgment order (the “State Court Judgment”) providing for restitution to the Plaintiff for funds that the Debtor had improperly disbursed from their mother’s estate, a loan that the *852Debtor had failed to repay to the Plaintiff and fees related thereto.
The State Court Judgment also provided that the Debtor would make total restitution to the Plaintiff within two years of its entry. On September 24, 2011 (the “Petition Date ”), just short of the two-year anniversary of the State Court Judgment and thus prior to the two-year restitution deadline set forth therein, the Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code. In that petition, the Debtor listed the Plaintiff as the holder of a disputed claim.
Thereafter the Plaintiff commenced the Adversary. The circumstances regarding this court’s grant of summary judgment in favor of the Plaintiff in the Adversary and the present Motion to Vacate are discussed in detail, below.
PROCEDURAL HISTORY
In considering these matters, the court first reflects upon the procedural posture of the matter. In the first instance, this matter arises out of an adversary complaint (the “Complaint ”) [Docket No. 1]1 dated January 31, 2012, wherein the Plaintiff sought to have a $49,541.60 claim against the Debtor resulting from the State Court Judgment deemed nondis-chargeable under 11 U.S.C. § 523(a)(2), (4) and (6).
The Debtor, who was initially represented by counsel other than those presently before the court in the Adversary, answered the Complaint with the assistance of that prior counsel on May 31, 2012 (the “Answer”) [Docket No. 17]. Prior counsel continued to represent the Debtor in the matter for a period of time thereafter, including in a series of. status hearings on the Adversary and two motions to dismiss filed by the prior counsel.
On April 3, 2013, after the court denied the Debtor’s second motion to dismiss the Adversary, the court authorized the withdrawal of the Debtor’s prior counsel and, in so doing, expressly advised the Debtor both of her pro se status and that she must comply with all procedural rules and deadlines. In that order, the court stayed proceedings for 21 days for the Debtor to obtain replacement counsel if she so desired. The Debtor, instead, elected to proceed pro se.
Nearly four months later and after a series of additional status hearings, the Motion of Plaintiff, Susan Kathleen Cer-vac, for Summary Judgment (the “Summary Judgment Motion”) [Docket No. 48], was filed on August 7, 2013. The court thereafter conducted an initial hearing on August 20, 2013 on the Summary Judgment Motion which was attended by both parties, where the court set briefing deadlines and again cautioned the Debtor that her compliance was required. Nonetheless, the Debtor failed to file any response to the Summary Judgment Motion.
On October 15, 2013, at a hearing following the conclusion of the briefing schedule, neither the Debtor nor any replacement counsel for the Debtor appeared. At that hearing, the court considered the merits of the Summary Judgment Motion and documents filed in support thereof, the Complaint and the Answer and ruled in favor of the Plaintiff on some, but not all, of the relief requested in the Summary Judgment Motion, thereafter entering the Orders. All remaining counts other than those on which summary judgment had been granted were dismissed.
The following day, and prior to the entry of the Orders, the Debtor’s newly retained and present counsel appeared in the Adversary. After the Orders were entered *853on October 17, 2013, on October 18, 2013, the Debtor’s new counsel promptly moved to vacate the nondischargeability judgment, alleging that the Debtor’s excusable neglect as a pro se litigant warranted relief from the Orders.
The court, after relying on the well-established precedent in the Seventh Circuit that the deference extended to pro se litigants does not include an abrogation of deadlines2 and the court’s express and repeated warnings to the Debtor to comply with the deadlines, and finding that the Debtor’s explanation for missing the deadline did not to establish excusable neglect, denied the Debtor’s first motion to vacate.
Shortly thereafter, and still within the time period to seek both Civil Rule 59 and Rule 60 relief,3 the Debtor asserted a new request to vacate or modify the Orders by filing the Motion to Vacate. Thereafter, the Debtor appealed the Orders.
In considering the Motion to Vacate, the court has considered the evidence and argument presented by the parties at the three-day evidentiary hearing that took place on March 11, 2014, March 12, 2014 and March 19, 2014 (the “Hearing”), has reviewed the Motion to Vacate [Docket No. 65], the attached exhibits submitted in conjunction therewith, and has reviewed and found each of the following of particular relevance:
(1) The Complaint;
(2) Debtor’s Answer;
(3) Summary Judgment Motion;
(4) Memorandum of Law of Plaintiff, Susan Kathleen Cervac, in support of Motion for Summary Judgment [Docket No. 54];
(5) Judgment Order [Docket No. 60];
(6) Order Granting Motion [Docket No. 61];
(7) Littman’s Motion to Vacate Judgment and for Leave to File Response to Cervac’s Summary Judgment Motion [Docket No. 63];
(8) Kimberly Littman’s Supplement to her Second Motion to Vacate Judgment and for Leave to File Response to Cervac’s Summary Judgment Motion [Docket No. 80];
(9) Plaintiff’s Response to Defendant’s Second Motion to Vacate Judgment and Defendant’s Supplement [Docket No. 89];
(10) Kimberly Littman’s Reply in Support of her Second Motion to Vacate Judgment and for Leave to File Response to Cervac’s Summary Judgment Motion [Docket No. 91];
*854(11) Plaintiff’s Sur-Reply to Defendant’s Reply to Plaintiff’s Response to Defendant’s Motion to Vacate Judgment and Defendant’s Supplement [Docket No. 95];
(12) Littman’s Motion for Leave to Reopen her Case-in-Chief [Docket No. 116];
(13) Littman’s Proposed Findings of Fact and Conclusions of Law [Docket No. 116];
(14) Plaintiff’s Proposed Findings of Fact and Conclusions of Law [Docket No. 119];
(15) Plaintiffs Response to Defendant’s Post Trial Brief [Docket No. 121];
(16) Littman’s Motion for Leave to File a Reply Brief [Docket No. 123]; and
(17) Order Denying Defendant’s Motion for Leave to File a Reply Brief [Docket No. 124].
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 docket in this matter. See Levine v. Egi-di 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.1989) (Goldgar, J.) (authorizing a bankruptcy court to take judicial notice of its own docket).
EVIDENTIARY RULINGS
At the Hearing, the majority of the evidence offered by the Debtor related to her theory that the State Court Judgment had been satisfied. The court took certain objections to evidence presented under advisement.
The first type of objection remaining open at the end of the Hearing related to alleged expert valuations of personal property (the “Property ”) that the Debtor had transferred (the “Transfer”) to the Plaintiff. These objections were, however, mooted by the Debtor’s decision not to produce her expert for cross-examination and not therefore to introduce the expert’s valuations into evidence. These objections are overruled as such.
The second type of objection remaining open was as to the admission of certain evidence regarding the value of the Property. After considering these objections, it is the court’s determination that the objections must be sustained.4
To put a finer point on it, the Debtor initially testified as to her opinion as to the value of the Property. Tr. 72-90, Mar. 11, 2014. That testimony was formed largely based on internet and other research, Tr. 73, 82-83, Mar. 11, 2014, and in part summarized in and in part formed by an Excel spreadsheet, DX 1, that had been prepared primarily by Edward Peck {“Peek”), a third-party who testified that he was in a relationship with the Debtor. Tr. 134, Mar, 11, 2014. The Plaintiff objected to both the Debtor’s testimony and to the admission of the spreadsheet. The Debt- or, apparently seeking to establish the foundation for the spreadsheet, then offered the testimony of Peck, who testified that he had prepared the spreadsheet based in part on the Debtor’s recollection, but primarily based on his own internet research. Tr. 140-142, Mar. 11, 2014 (“70% of this list was further research done by me.”). Again, the Plaintiff objected. These objections raise the question of both the Debtor’s and Peck’s lay opinion as to value, as well as the admissibility of the spreadsheet.
*855Layperson opinion is expressly limited by the Federal Rules of Evidence (the “FRE”s). Opinion is generally the province of experts. See FRE 702 (“A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise....”). Lay witnesses may offer opinion testimony under FRE 701, however, which provides that “a lay witness giving opinion testimony may only give opinion testimony which is rationally based on the perception of the witness and helpful to a clear understanding of the witness’ testimony or a determination of a fact in issue.” In re Syed, 238 B.R. 133, 144 (Bankr.N.D.Ill.1999) (Schmetterer, J.); see also Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 592, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993) (“Unlike an ordinary witness, see FRE 701, an expert is permitted wide latitude to offer opinions, including those that are not based on firsthand knowledge or observation”).
The Seventh Circuit has stated that “[t]he difference between an expert witness and an ordinary witness is that the former is allowed to offer an opinion, while the latter is confined to testifying from personal knowledge.” United States v. Williams, 81 F.3d 1434, 1442 (7th Cir.1996). While the latter is also an opinion, see FRE 701, as the Seventh Circuit has made clear, when a lay witness testifies as to an opinion which is based on a specific source other than the witnesses perception (e.g., research, another’s opinion, etc.), that testimony does not qualify for admission under FRE 701. Weinberger v. Anchor-Bank, FSB, No. 10-C-0996, 2011 WL 679343, at *3 (E.D.Wis. Feb. 16, 2011) (“[I]t would be impermissible hearsay to allow a lay witnesses to testify to the results of his internet searches and his review of pricing guides.”).
Viewed in light of the foregoing, even though FRE 701 speaks to “Opinion Testimony by Lay Witnesses,” it is not the same kind of opinion as that offered by the experts normally for testimony as to value. Nonetheless, FRE 701 is often used to permit owners of property to testify as to their opinion as to that property’s value. See, e.g., In re Smith, 313 B.R. 785, 791 (Bankr.N.D.Ind.2004); see also Barry Russell, Bankruptcy Evidence Manual § 701:2 (2013-14) (“Courts have generally held that an owner is competent to give his opinion on the value of his property, often without stating a reason.”). For some courts, this appears to be a rule of convenience, presuming the requirements of FRE 701 have been satisfied through that ownership. Nothing in FRE 701 speaks to the witness’s ownership, however, only to whether that testimony is “rationally based on the witness’s perception.” FRE 701(a); Syed, 238 B.R. at 144.
In this instance, neither the Debtor nor Peck testified wholly as their opinion based on personal knowledge, but rather the Debtor testified that her opinion was in part based on her recollection but also based on her independent research. Tr. 77, 82-83, Mar. 11, 2014. The Debtor also, at certain points, seemed to be forming her testimony based on the contents of the spreadsheet (not using it to refresh her recollection). Tr. 74-75, Mar. 11, 2014. Peck testified that he had prepared the spreadsheet based in part on the Debtor’s recollection, Tr. 140, Mar. 11, 2014, but primarily based on his own internet research. Tr. 140-142, Mar. 11, 2014.
Peck is neither the owner of the Property nor, presumably, could he have been qualified as an expert, and his testimony was not based on his personal knowledge. His testimony, which in the main consisted of his opinion as to value, is not admissible under FRE 701 and is therefore patently inadmissible. AnchorBank, 2011 WL 679343 at *3; Syed, 238 B.R. at 144 (a lay witness’s opinion testimony as to value *856“not based upon personal knowledge, but based upon a variety of different sources” is inadmissible). While the Debtor can lay claim to being the owner of the Property, to the extent that the Debtor’s opinion was formed based on Peck’s research (whether directly or through the spreadsheet prepared by Peck) and on her own research, that opinion is also not based on personal knowledge and is inadmissible under FRE 701. Id.
Finally, the spreadsheet itself is inadmissible. The spreadsheet primarily summarizes Peck’s research, Tr. 142, Mar. 11, 2014, which is inadmissible per the foregoing discussion. As such, it cannot qualify as a summary when what it summarizes is inadmissible. United States v. Oros, 578 F.3d 703, 708 (7th Cir.2009) (“1006 allows a party to present, and enter into evidence, a summary of voluminous writings, recordings, or photographs. This provision, however, is not an end around to introducing evidence that would otherwise be inadmissible; therefore, in applying this rule, we require the proponent of the summary to demonstrate that the underlying records are accurate and would be admissible as evidence.”).
FINDINGS OF FACT5
From the review and consideration of the procedural background, as well as the evidence presented at the Hearing (and in light of the court’s evidentiary rulings above), the court determines the salient facts to be as follows, and so finds that:
A.The Cervacs
(1)The Plaintiff and the Debtor are sisters, daughters of the late Norma E. Cervac (“Norma ”).
(2) In April 1999, Norma entered into a trust agreement (the “Trust Agreement ”) establishing Norma E. Cer-vac Living Trust (the “Trust Estate ”) and appointing the Debtor as trustee.
(3) The Trust Agreement provided that, upon Norma’s death, the Debtor, as trustee, would administer the Trust Estate for the benefit of Norma’s three children: the Debtor, the Plaintiff, and their brother, Joseph A. Cervac (“Joseph”).6
(4) Following Norma’s passing in 2006, the Debtor liquidated the Trust Estate, resulting in total receipts of $234,859.80.
(5) At some subsequent point, the Plaintiff and Joseph came to believe that the Debtor had failed to distribute to them their fair portion of the Trust Estate.
B. The State Court Action
(6) In 2009, the Plaintiff and Joseph acted on their belief, filing a complaint against the Debtor in the Circuit Court of the Nineteenth Judicial Circuit, Lake County, IL (the “State Court”), Case No. 09 CH 0062 (the “State Court Complaint ”).
(7) The State Court Complaint sought an accounting of the Trust Estate and damages stemming from the Debtor’s misappropriation of Trust Estate assets.
C. The Property and the Transfer
(8) At some point prior to the entry of the State Court Judgment, the *857Debtor took to storing items of personal property in storage units.
(9) There existed three storage units, containing personal property from the Debtor’s former home and consisting of items the Debtor’s family had accumulated, including artwork, furniture, various pieces of porcelain, silverware and flatware, and miscellaneous household goods.
(10) A sculpture (the “Highstein ”) by Jene Highstein, an American abstract sculptor, was also in the storage units. The Highstein was a 400 to 500 pound steel or iron sculpture that was displayed in the Debtor’s home before being placed in storage.
(11) The Debtor, however, defaulted on her rental payments for the three storage units.
(12) The Debtor’s daughter, Alison Dar-nay (“Damay ”), used money from her father to pay the back-due rent on the storage units.
(13) At that time, the storage units were transferred into Darnay’s name. The units stayed in Darnay’s name for approximately one week.
(14) During that week and before the entry of the State Court Judgment, possession of certain items in the storage units — the Property — was transferred to the Plaintiff.
(15) The Debtor was not present at the Transfer. Upon the decision of the Debtor, various family members including Samuel Littman, the Debt- or’s son, helped the Plaintiff move the Property out of the storage units and onto a moving truck. From there, the Property was taken to the Plaintiffs house and to a family friend’s house, where the Property was being staged for sale.
(16) The Highstein was not loaded onto the moving truck during the Transfer, and was, instead, left by a dumpster at the storage facility by Samuel Littman. What happened to the Highstein after that is unknown.
(17) After the Transfer was completed, the units were closed.
D. The State Court Judgment
(18) On December 10, 2009, the State Court Judgment was entered against the Debtor in the State Court Action.
(19) The State Court Judgment provided that the Debtor owed the Plaintiff $49,541.60.
(20) Per the State Court Judgment, this amount consists of “reimbursement for (a) improperly disbursed estate funds in the amount of $21,286.60, (b) attorney fees and costs in the amount of $13,955.00, (c) an outstanding loan in the amount of $14,000, and (d) $300.00 for landscaping services.”
(21) The State Court Judgment provides that the Debtor must make total restitution to the Plaintiff and Joseph within two years of the State Court Judgment’s entry.
(22) The State Court Judgment further provides that the Debtor must allocate twenty percent of her net monthly income to the restitution payment.
(23) The State Court Judgment further provides for the Debtor to sell, with certain delineated exceptions, whatever assets she may have to satisfy the terms of the State Court Judgment.
(24) The State Court Judgment makes no mention of the Transfer.
*858E. The Disposition of the Property
(25) After the Transfer, Leslie Hindman Auctioneers (“Hindman ”) was hired to conduct three auction sales of the Property.
(26) Hindman successfully sold virtually all of the Property taken to the family friend’s house that was staged for sale, upon which the Plaintiff received $3,493.68 in total net sales proceeds.
(27) The Plaintiff also sold some silverware and dishes, resulting in net proceeds of $1,000.00.
(28) The Plaintiff also received $1,527.00 from multiple garage sales of the Property.
(29) All dispositions took place prior to the Petition Date.
(30) What remains of the Property is stored at the Plaintiffs home. Though the Debtor seeks return of the remaining Property and the Plaintiff seeks to have the Debtor retrieve it, as of the date of the entry of this decision and for reasons unknown to the court, that transfer has not occurred.
F. Other Satisfaction of the State Court Judgment/Collection
(31) On January 18, 2011, the Debtor assigned her interest in two asbestos-related settlement agreements to the Plaintiff and Joseph.
(32) As a result, the Plaintiff received the Debtor’s one-third interest in a settlement with Fibreboard, in the amount of $1,759.89.
(33) As a result, the Plaintiff also received the Debtor’s one-third interest in a settlement with Pfizer, in the amount of $2,7011.11.
(34) The foregoing settlement payments were net of attorneys’ fees incurred.
(35) The Debtor has also paid to the Plaintiff directly, the following amounts:
a. $200 by cashier’s check on November 8, 2011;
b. $200 by cashier’s check on November 21, 2011; and
c. $300 by cashier’s check on December 30, 2011.
(36) Other than the preceding, the Debtor did not take the actions required by the State Court Judgment.
(37) Despite the Debtor’s failure to comply with the State Court Judgment, the Plaintiff did not attempt other collection from the Debtor in the nearly two years between the entry of the State Court Judgment and the filing of the underlying bankruptcy case.
ISSUES PRESENTED
The Debtor’s counsel in this matter have been presented with a difficult scenario. After their client, acting pro se, failed to abide by deadlines established by the court and failed to appear and defend the Motion for Summary Judgment, only then did she retain replacement counsel for counsel who had withdrawn months earlier. The Debt- or’s counsel has sought valiantly to avoid the consequences of their client’s actions, and in so doing, has been forced to “argue from the hip,” so to speak. Some of those arguments, while creative, do not evoke any cognizable legal claim. Those that do are addressed here. Those that do not are rejected, whether or not discussed herein.7
*859Given the pro se status of the Debtor at an integral part of this case, and given also the difficult task faced by the Debtor’s counsel, the court has done its best to identify cognizable claims in the Motion to Vacate. Those claims fall into two categories: Those that seek to invalidate this court’s grant of summary judgment on procedural or other grounds; and those that seek in the alternative to modify the court’s grant of summary judgment to offset against it by alleged satisfaction.
The court will consider each in turn, below.
AUTHORITY AND STANDARD OF REVIEW
A. Civil Rule 59 and Civil Rule 60(b)(1)
Civil Rule 59 provides that “[a]fter a nonjury trial, the court may, on motion for a new trial, open the judgment if one has been entered, take additional testimony, amend findings of fact and conclusions of law or make new ones, and direct the entry of a new judgment.” Fed.R.Civ.P. 59(a)(2). Civil Rule 59 also authorizes motions to alter or amend a judgment. Fed. R.Civ.P. 59(e).
Civil Rule 60(b) provides, in pertinent part, that “[o]n motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons: ... (1) mistake, inadvertence, surprise, or excusable neglect....” Fed.R.Civ.P. 60(b)(1).
Both Civil Rule 59(a)(2) and Civil Rule 60(b)(1) have as their essential purpose creating a way, other than by appeal, for the court to correct mistakes in a judgment entered. Russell v. Delco Remy Div. of Gen. Motors Corp., 51 F.3d 746, 749 (7th Cir.1995) (Rule 59 “essentially enables a district court to correct its own errors, sparing the parties and the appellate courts the burden of unnecessary appellate proceedings.”); Mendez v. Republic Bank, 725 F.3d 651, 659 (7th Cir.2013) (“Rule 60(b) allows a district court to correct its own errors that could be corrected on appeal, at least if the motion is not a device to avoid expired appellate time limits.”)
In order to succeed on a Civil Rule 59(e) motion, a party bears the burden of clearly establishing a manifest error of law or newly discovered evidence. LB Credit Corp. v. Resolution Trust Corp., 49 F.3d 1263, 1267 (7th Cir.1995). Civil Rule 59(e) is not the appropriate avenue for presentation of theories and arguments that could and should have been presented before the entry of the order that the party is now seeking to have altered. Id. A party seeking relief under Civil Rule 60(b) also bears the burden of establishing that the grounds for such relief exist. Nat’l Bank of Joliet v. W.H. Barber Oil Co., 69 F.R.D. 107, 109 (N.D.Ill.1975).
B. Civil Rule 60(b)(5)
Civil Rule 60(b)(5), however, is more express in its application. It provides, in pertinent part, that:
On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons:
(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable.
Fed.R.Civ.P. 60(b)(5).
Therefore, to obtain relief from a judgment under Civil Rule 60(b)(5), a party must prove that the judgment is completely satisfied, so that there is no need for the judgment to continue in effect, or “where a judgment has not been completely satisfied, equity may nonetheless coun*860sel in favor of relief under the final provision of Rule 60(b)(5).” Sierra Club v. U.S. Dep’t of Agric., 94-CV-4061-JPG, 2013 WL 811672, at *4 (S.D.Ill. Mar. 5, 2013) (citing Horne v. Flores, 557 U.S. 433, 454, 129 S.Ct. 2579, 174 L.Ed.2d 406 (2009)).
Under Civil Rule 60(b)(5), and upon a party’s motion, a court may relieve that party from judgment on the ground that the judgment has been satisfied, as one party may not receive double satisfaction. Sunderland v. City of Philadelphia, 575 F.2d 1089, 1090 (3rd Cir.1978). When a party is bound to pay a judgment entered against it, “the fact that such payment is made prior to the judgment should not operate to allow the plaintiff to recover twice.” Torres-Troche v. Municipality of Yauco, 873 F.2d 499, 501 (1st Cir.1989).
However, “[gjenerally, the only way in which a money judgment can be satisfied is by payment in money unless the parties agree otherwise.” Home State Bank/Nat’l Ass’n v. Potokar, 249 Ill. App.3d 127, 131, 187 Ill.Dec. 581, 617 N.E.2d 1302 (2d Dist.1993) (citing Heller v. Lee, 130 Ill.App.3d 701, 702, 85 Ill.Dec. 896, 474 N.E.2d 856 (3d Dist.1985)). “Whether an agreement to satisfy a judgment has been concluded is a question of fact for the trial court.” Id. (citing Russell v. Klein, 33 Ill.App.3d 1005, 1008, 339 N.E.2d 510 (1st Dist.1975)).
To modify the Judgment Order, based on the State Court Judgment, an agreed order, to avoid inequities, the mov-ant “bears the burden of establishing that a significant change in circumstances warrants revision of the decree.” United States v. Krilich, 303 F.3d 784, 789-90 (7th Cir.2002) (citing Rufo v. Inmates of Suffolk Cnty. Jail, 502 U.S. 367, 383, 112 S.Ct. 748, 116 L.Ed.2d 867 (1992)). The movant may meet this burden “by showing a significant change either in factual conditions or in law.” Id. (citing Rufo, 502 U.S. at 384, 112 S.Ct. 748).
DISCUSSION
As noted above, the Debtor’s arguments essentially fall into one of two categories: those that seek to invalidate this court’s grant of summary judgment on procedural or other grounds; and those that seek in the alternative to modify the court’s grant of summary judgment to offset against it alleged satisfaction. The court considers each, in turn.
A. Challenging the Propriety of the Orders
1. “Default” on Summary Judgment
As noted above, this is the second of the Debtor’s attempts at vacating the Orders. In the first, the Debtor sought to vacate the Orders solely on the grounds of excusable neglect. See Fed.R.Civ.P. 60(b)(1). For the reasons discussed above, that argument was not well taken.
Nonetheless, the Debtor renews that argument in the Motion to Vacate. Taken together, each of the motions appears to question whether the court’s action, in ruling on the uncontested Summary Judgment Motion, was authorized.
There is a both a conceptual and practical difference between defaulting a party and ruling on an unopposed motion. Defaulting a party involves accepting as true uncontroverted allegations in a complaint, see Fed.R.Civ.P. 8(b)(6), without further inquiry except perhaps by way of calculating judgment in a default judgment. See, e.g., Fed.R.Civ.P. 55(b)(2); In re Catt, 368 F.3d 789, 793 (7th Cir.2004). Summary judgment, on the other hand, involves a critical inquiry of the court into the facts, whether or not that summary judgment is opposed. See, e.g., Heinemann v. Satterberg, 731 F.3d 914, 916-17 (9th Cir.2013) (discussing in great detail the history of revisions to Civil Rule 56 and advisory notes to the same, and con-*861eluding that present Civil Rule 56 requires the court inquire into merits on unopposed summary judgment motions).
Even though the latter requires an independent inquiry, failing to respond is, however, not without consequences. Civil Rule 56 places affirmative obligations on a party opposing summary judgment. Fed. R.Civ.P. 56(e). Those parties may not simply rest on their answer, as the Debt- or’s argument implies. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (“[A] party opposing a properly supported motion for summary judgment may not rest upon the mere allegations or denials of his pleading, but ... must set forth specific facts showing that there is a genuine issue for trial.”) (quotations omitted).
While failure to oppose a summary judgment motion does not, as Heine-mann makes clear, result in an automatic win for the movant, Strong v. Wisconsin, 544 F.Supp.2d 748, 759-60 (W.D.Wis.2008) (“Even when a motion for summary judgment is unopposed and the facts are undisputed, the moving party must still show that he ‘is entitled to judgment as a matter of law.’ ”), it does mean that the court must conduct its critical inquiry without the benefit of the insight and argument of one of the parties.
In the matter at bar, the court did not default the Debtor. That is self-evident in the Orders themselves, wherein the court declined, based on the express terms of the State Court Judgment and the nature of the obligations in it, to grant summary judgment on all of the relief requested by the Plaintiff. That the Debt- or now raises a host of arguments as to how the court might have differently interpreted the facts and law before it on summary judgment is unavailing.8
These arguments do not meet the standard for relief under either Civil Rule 59 or 60. The Debtor has not proven that the court made a manifest error of law in granting summary judgment on an unopposed basis, that there was newly discovered evidence that justifies amending the Orders, or that there was a mistake in the Orders. Instead, the Debtor merely offers an alternative theory of factual interpretation, one that this court did not and does not adopt. See also U.S. Bank Nat. Ass’n v. Verizon Communications, Inc., No. 13-10752, 761 F.3d 409, 2014 WL 3746476, at *14-15 (5th Cir. July 30, 2014) (setting forth standards for a court to consider when asked to vacate a grant of summary judgment, none of which are satisfied here). Additionally, as the Debtor had not presented such theories of interpretation prior to the entry of the Orders, and be*862cause the Seventh Circuit has warned parties as to the use of Civil Rules 59 and 60 for new legal theories, the court will not indulge such theories. Caisse Nationale de Credit Agricole v. CBI Indus., Inc., 90 F.3d 1264, 1270 (7th Cir.1996).
2. Challenges to the State Court Judgment’s Validity
The Debtor challenges the validity of the Orders by challenging the validity of the State Court Judgment. This is done in two ways: First, the Debtor argued and presented testimony in the Hearing that the State Court Judgment was procured through duress. Second, the Debtor argues that the State Court Judgment was satisfied by the Transfer before the State Court Judgment was entered by the State Court.
Before considering these challenges, the court must address a more fundamental question that the parties did not address in their filings, the application of the Rooker-Feldman doctrine.
a. The Rooker-Feldman Doctrine
Whenever a party asks a federal court to consider the validity of a state court order, it is incumbent upon the federal court to consider the application of the Rooker-Feldman doctrine. Rooker v. Fid. Trust Co., 263 U.S. 413, 416, 44 S.Ct. 149, 68 L.Ed. 362 (1923); D.C. Court of Appeals v. Feldman, 460 U.S. 462, 476, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983) (together holding that federal courts do not have subject-matter jurisdiction to review state court decisions).9
Neither party has addressed Rooker-Feldman in their filings. As Rooker-Feld-man is, however, jurisdictional in nature, In re Fischer, 483 B.R. 877, 882 (Bankr. E.D.Wis.2012) (citing Long v. Shorebank Dev. Corp., 182 F.3d 548, 554 (7th Cir.1999)), the court must address it nonetheless.
If the Debtor’s arguments invite the bankruptcy court to consider elements that were either properly before the State Court or which should have been raised in that litigation before entry of the State Court Judgment, DeBenedictis v. Blitt & Gaines, No. 10 C 922, 2010 WL 2836804, at *3 (N.D.Ill. July 19, 2010) (“Rooker-Feld-man applies not only to claims that were directly raised in state court, but also to claims that are ‘inextricably intertwined’ with a state-court judgment.”) (citing Kelley v. Med-1 Solutions, LLC, 548 F.3d 600, 603 (7th Cir.2008)), those arguments may fall outside of this court’s jurisdiction.
The propriety of entering a judgment under the law before the trial court is unquestionably inextricably intertwined with the entry of the judgment by the trial court itself.10 As the district *863court in this District has made clear, arguments of this nature, essentially challenging the validity of a state court judgment, “cannot be separated from the state court’s judgment.” Manly v. Illinois Dept. of Healthcare and Family Services, No. 09 C 7298, 2010 WL 5157970, at *4 (N.D.Ill. Dec. 14, 2010).
Further, court orders, if plain on their face, are afforded their plain language meaning in enforcement. Grede v. FCStone, LLC, 746 F.3d 244, 256-57 (7th Cir.2014) (disagreeing with assertion that consideration of the transcript of court proceedings underlying order would assist in interpreting otherwise clear order text). As the Seventh Circuit stated:
Relying on the hearing transcript rather than the text of the resulting court order to decide what the order meant can raise serious problems. Parties and non-parties alike should be able to rely on the text of a court order where the text is clear, rather than having to dig through the docket and record to determine the order’s true meaning.
Id. at 257 (citation omitted); see also In re Rockford Prods. Corp., 741 F.3d 730, 734 (7th Cir.2013).
In Rockford Products, the Seventh Circuit went further, stating that “[t]he Supreme Court has told us to use simple, clear rules for jurisdictional boundaries. Treating ambiguous language in an opinion as the basis of a tea-leaf reading is some distance from a simple and clear rule.” Rockford Products, 741 F.3d at 734 (citing Hertz Corp. v. Friend, 559 U.S. 77, 94-95, 130 S.Ct. 1181, 175 L.Ed.2d 1029 (2010); FEC v. NRA Political Victory Fund, 513 U.S. 88, 99, 115 S.Ct. 537, 130 L.Ed.2d 439 (1994); Budinich v. Becton Dickinson & Co., 486 U.S. 196, 202, 108 S.Ct. 1717, 100 L.Ed.2d 178 (1988)).
Taken together, both Grede and Rockford Products direct the trial courts in the Seventh Circuit not to resort to parol evidence in interpreting unambiguous orders.11
With this in mind, the court considers each of the Debtor’s arguments.
b. Duress
Here, the Debtor argues that the State Court Judgment was the product of duress. The Debtor testified that she had been harassed by the Plaintiff to a point where she felt she needed to agree to the resolution in order to make the harassment stop. Tr. 45, Mar. 11, 2014.
As per the earlier discussion, however, this is a question that was properly before the State Court when it entered the judgment. The propriety of entering an order must be considered by a court at the time of entry. As such, the Debtor’s duress argument falls outside the court’s jurisdiction.
If the question of duress were within this court’s jurisdiction, the argument would nonetheless have failed for two essential reasons.
First, nothing filed by the Debtor prior to the Hearing gave any clear indication that the Debtor would seek to collaterally attack the State Court Judgment by arguing that it was procured through duress, but that is in fact what the Debtor did at the Hearing. Words such as “duress” and “bullying,” which were raised frequently in the Hearing, were conspicuously absent from the Debtor’s pre-Hearing filings.
*864In the court’s view, adding new arguments after briefing is essentially complete is inappropriate. It denies the opposing party a full and fair opportunity to respond, and is generally precluded by the applicable rules. See, e.g., Fed. R.Civ.P. 8(c)(1) (requiring a party to raise the affirmative defense of duress “in responding to a pleading”). The purpose of Civil Rule 8(c)(1) is to give the plaintiff adequate notice of the defenses so that the plaintiff may address them in trial. Super 8 Worldwide, Inc. v. Am. Lodging Partners, Inc., No. 08-CV-4514, 2011 WL 248447, at *4 (N.D.Ill. Jan. 25, 2011) (citing Fort Howard Paper Co. v. Standard Havens, Inc., 901 F.2d 1378, 1377 (7th Cir.1990)). Failure to include such affirmative defenses in an answer or to raise them in a timely manner so as prejudice the plaintiff results in a waiver of such defenses. Id. (citing Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 235 (7th Cir.1991)). As the Debtor failed to afford the Plaintiff a full and fair opportunity to consider and respond to this argument, the court would not have considered the argument even if it had the jurisdiction to do so.
Second, the duress argument was simply not developed sufficiently. While the Debt- or made much of the Plaintiffs silence for two years after the entry of the State Court Judgment, inviting the court to conclude that the alleged harassment had had its desired effect, the testimony was, at best, ambiguous regarding any duress the Debtor might have felt in entering into the State Court Judgment. Tr. 46-47, Mar. 11, 2014. And the existence of harassment is not necessary to explain the Plaintiffs actions. In the court’s view, the Plaintiffs silence was consistent with the terms of the State Court Judgment as it, by its terms, could not be enforced until such time as two years had passed with noncompliance. As such, had the court the jurisdiction to do so, it would have rejected the Debtor’s duress argument on its merits. Accord Mickelson v. Mickelson, No. 11 C 5061, 2013 WL 3774004, at *9-10 (N.D.Ill. July 18, 2013) (denying a defense on very similar arguments made without evidentiary support and subsequent acts to the contrary).
c. Accord and Satisfaction
Here, the Debtor argues that the Transfer itself was an accord and satisfaction of the underlying obligation between the Debtor and the Plaintiff.12
This argument is contrary to the plain language and logical import of the State Court Judgment. There is no logical interpretation of the State Court Judgment that does not result in the conclusion that on that date of the judgment, the Debtor owed the Plaintiff the amounts set forth therein. It would be meaningless for a court to enter an order memorializing an obligation that had previously been satisfied.
Put in other terms, what this argument and the duress argument invite this court to do is conclude that the State Court erred when it entered the State Court Judgment. Whether the State Court erred in entering the State Court Judgment despite the existence of the duress or the Transfer is “inextricably intertwined” with the State Court Judgment itself. Med-1 Solutions, 548 F.3d at 603. That is simply not reviewable in the federal courts, and the Debtor’s arguments in this regard are therefore rejected on jurisdictional grounds.
*865As was the case with the duress argument, even if the court were to consider this argument on its merit, it would fail. The essential doctrinal requirements of accord and satisfaction are missing in the matter at bar. Even the briefest of inquiries into the law of accord and satisfaction bears this out.
Under Illinois law, “an ‘accord and satisfaction’ is an agreement between parties which settles a bona fide dispute over an unliquidated sum.” In re W. Side Cmty. Hosp., Inc., 112 B.R. 243, 255 (Bankr.N.D.Ill.1990) (Schmetterer, J.). In order to prove an accord and satisfaction exist, a party must prove by a preponderance of the evidence: (i) “a dispute between the parties”; (ii) “a tender with the explicit understanding of both parties that it was in full payment of all demands”; and (iii) “an acceptance by the creditor with the understanding that the tender is accepted in full payment.” Id. (citing Polin v. Major, 150 Ill.App.3d 854, 856, 104 Ill.Dec. 92, 502 N.E.2d 355 (1st Dist.1986); Gord Industrial Plastics, Inc. v. Aubrey Manufacturing, Inc., 103 Ill.App.3d 380, 388-84, 59 Ill.Dec. 160, 431 N.E.2d 445 (2d Dist.1982); W.E. Erickson Construction, Inc. v. Congress-Kenilworth Corp., 132 Ill. App.3d 260, 269, 87 Ill.Dec. 536, 477 N.E.2d 513 (1st Dist.1985), aff'd, 115 Ill.2d 119, 104 Ill.Dec. 676, 503 N.E.2d 233 (1987)). The Debtor has not shown that there is an objective basis for either a factual or a legal dispute as to the validity of a debt. W. Sidle Cmty. Hosp., Inc., 112 B.R. at 253 (citing In re Busick, 831 F.2d 745, 750 (7th Cir.1987)). Mere assertion of the existence of a dispute, however, does not establish it. Sherman v. Rokacz, 182 Ill.App.3d 1037, 1045, 131 Ill.Dec. 523, 538 N.E.2d 898 (1st Dist.1989).
As such, had the court the jurisdiction to do so, it would also have rejected the Debtor’s accord and satisfaction argument on its merits.
B. Relief under 60(b)(5)
The Debtor’s argument that the post-Transfer, post-judgment dispositions of the Property were not appropriately credited by the Plaintiff to the State Court Judgment after its entry is not, however, similarly barred.
The question of satisfaction of judgments after their entry is frequently before this court. Such is not an inquiry regarding the propriety of a judgment itself, and asks only about a party’s compliance after the fact. Illinois law provides a mechanism similar to Civil Rule 60(b)(5) for just this purpose, and provides that such an inquiry “is not a continuation” of the prior proceeding. 735 ILCS 5/2-1401(b) (providing that in petitions for relief from judgments, “[t]he petition must be filed in the same proceeding in which the order or judgment was entered but is not a continuation thereof’). As such, the Rooker-Feldman doctrine does not prevent this court’s review.
As discussed above, the Debtor failed to show that the Transfer was an accord and satisfaction of the debt underlying the State Court Judgment. No alternative theory regarding the nature of the Transfer itself is proposed, and the court need not presume one here.13
*866It is clear from the parties’ actions toward the Property post-Transfer that the Debtor remained the owner of the Property. The State Court Judgment references that the Debtor “is ordered to sell whatever assets she may have to satisfy” the debt. The Plaintiff applied the proceeds of any sales of the Property to the obligations owed by the Debtor. Tr. 305, Mar. 12, 2014. Both parties accept that proceeds of the sales of the Property should be applied to the obligation. In so doing, both parties implicitly accept that the Property remains the Debtor’s, even though in the possession of the Plaintiff.
There remains only a few open questions, therefore with respect to this argument. First, how should the proceeds and other payments be applied? Second, should the Debtor’s arguments regarding the Highstein sculpture have any effect? Third, what should the court do, if anything, regarding the Debtor’s allegations that the sales of the Property were for less than appropriate value? And last, what remains owing?
1. Application of the Proceeds of the Sales/Prepetition Payments
As the effect of the Orders to is bifurcate the debt the Debtor owes to the Plaintiff into dischargeable and nondischargeable obligations, should the proceeds of the sale be applied to the nondischargeable portion of the debt, the dischargeable portion of the debt, or to each by some ratable method?
This is a question of state, not federal, law. In re Corradini, 276 B.R. 571, 575 (Bankr.W.D.Mich.2002) (“The Bankruptcy Code does not direct how payments are to be applied against a debt.”). When determining how to apply prepetition payments when a debtor has a nondis-chargeable claim and a dischargeable claim held by the same creditor, the court must therefore examine the state law regarding application of payments. Id.
Under Illinois law, a debtor may direct application of a payment to a certain portion of a debt before the payment is made. However, if a debtor fails to provide instructions regarding the payment, “[t]he doctrine of equitable application of payments allows a creditor to apply payments received from a debtor, without instructions on how to apply the payments, to any account the creditor chooses.” Horbach v. Kaczmarek, 915 F.Supp. 18, 24 (N.D.Ill.1996) aff'd, 288 F.3d 969 (7th Cir.2002).
Where multiple debts are owed and payment is made to a creditor without any direction from a debtor as to which debt to apply the payment to, the creditor has “a right to apply these payments in a way most beneficial to themselves and so as not to extinguish” any debt for which the debtor remains accountable. United States v. Giles, 13 U.S. 212, 241, 9 Cranch 212, 3 L.Ed. 708 (1815); Airtite, A Division of Airtex Corp. v. DPR Limited P’ship, 265 Ill.App.3d 214, 220, 202 Ill.Dec. 595, 638 N.E.2d 241 (4th Dist.1994) (allow*867ing application of payment to portion of unsecured debt rather than secured debt).
The court concludes therefore that the proceeds of the sale of the Property and the other prepetition payments must be first credited against dischargeable portion of the debt, as requested by the Plaintiff in her filings.
2. Effect of the Debtor’s Arguments with respect to the Highstein Sculpture
As noted in the court’s factual findings above, at the time of the Transfer, a potential valuable sculpture by Jene Highstein was mislaid. The Highstein was a 400 to 500 pound steel or iron sculpture that was displayed in the Debtor’s home before being placed in storage and was believed by the Debtor to be worth $75,000. Tr. 477, Mar. 19, 2014.14
The problem with this request is twofold. First, as noted above, the only logical conclusion regarding the Transfer is that it did not change the ownership of the Property. As such, the Highstein was the Debtor’s before, during and after the Transfer. Nothing in the Transfer evidences the Plaintiff taking on any responsibility for this item, and thus the court fails to see how the loss of the Highstein is on the Plaintiffs account.
Further, the record clearly reflects that it was the Debtor’s agent Samuel Littman (her son) that caused the Highstein to be mislaid. Tr. 247, 250, Mar. 12, 2014. He was at the Transfer representing the Debtor, not the Plaintiff. Tr. 169, Mar. 12, 2014. It was Mr. Littman who failed to load the Highstein and who left it next to the dumpster. While it was unclear who told him to do so, Tr. 175-176, Mar. 12, 2014, it was on the Debtor’s account, not the Plaintiffs, that he acted.
As such, it is the court’s conclusion that the Debtor is due no credit for the loss of the Highstein.
3. The Sales of the Property
In the Motion to Vacate, the Debtor also attempts to challenge the sales of the Property that took place after the Transfer. Nothing, however, offered by the Debtor, leads the court to equate her unhappiness with the result with any actionable right against the Plaintiff.
The testimony presented to the court made clear that both the retention of Hindman and the sales of the Property were, if not explicitly approved by the Debtor, never objected to at the time. Tr. 297, Mar. 12, 2014. While the Debtor casts aspersions at the qualifications of Hindman, nothing offered by the Debtor other than her opinion — one clearly founded in the result she seeks — calls into question Hindman’s credentials. Tr. 89, Mar. 11, 2014. In fact, Hindman is known to the court. To date, the court has not had cause to question Hindman’s qualifications or results and the Debtor gives the court no reason to here.
Further, the testimony made it clear that the Debtor was fully informed regarding the sales that took place. Tr. 90, Mar. 11, 2014. No evidence was offered that the *868Debtor objected to the method or results of those sales at the time. While the Debtor now wishes to rewrite history so that these dispositions of the Property are somehow revalued and credited against the obligation owed by the Debtor for more than the sales generated, the Debtor offers no legal theory on which such a revaluation would be based.
As such, the court finds no reason to question the results of the sales and will apply those results in the manner discussed above.
4. What Remains
What remains is twofold. First, the sale proceeds applied and other payments made must be applied to the obligation, first to the dischargeable portion and then, if applicable, to the nondischargeable portion. Second, the disposition of the Property remaining in the Plaintiffs possession must be determined.
a. Calculating the Remaining Obligations
As previously discussed, the Plaintiff in this case has the right to apply all prepetition payments and transfers to the dis-chargeable portion of the debt first, and then to the nondischargeable portion of the debt. As noted above, the State Court Judgment provided that the Debtor owed the Plaintiff $49,541.60, consisting of “reimbursement for (a) improperly disbursed estate funds in the amount of $21,286.60, (b) attorney fees and costs in the amount of $13,955.00, (c) an outstanding loan in the amount of $14,000, and (d) $300.00 for landscaping services.”
This court’s Judgment Order provided that the first two elements of the State Court Judgment were nondischargeable, in the total amount of $35,241.60. While the Judgment Order does not provide the amount of the dischargeable obligation, simple math dictates that that amount is $14,300.00. Given the foregoing, the court must therefore find that the value of the prepetition payments and transfers exceeded $14,300.00 in order for the court to amend the Summary Judgment Order.
The amounts found by the court to be received are as follows:
$8,493.68 Sale of Property at friend’s house
$1,000.00 Sale of silverware and dishes
$1,527.00 Garage sales
$1,759.89 Fibreboard settlement
$2,701.11 Pfizer settlement
$700.00 Checks of $200, $200 and $300
$11,181.68 Total:
The total of $11,181.68 is less than the $14,300 dischargeable portion of the Plaintiffs claim.15 There is therefore no amount to be applied against the nondis-chargeable obligation and, as such, the Judgment Order correctly finds that the Debtor owes the Plaintiff $35,241.60 as a nondischargeable obligation.
Last, what is also owed by the Plaintiff to the Debtor is the return of what re*869mains of the Property. The evidence offered by the Plaintiff is that she does not want the Property and her landlord wants it removed. Tr. 264, Mar. 12, 2014. Given the ruling of the court in this Memorandum Decision, that Property continues to be owned by the Debtor. Whatever Property remaining in the Plaintiffs possession must be claimed by the Debtor or the chapter 7 trustee on behalf of the estate, or deemed abandoned.16
Given what has transpired, 21 days from the date of entry of the order issued in conjunction herewith should be more than sufficient. Any Property not claimed by the Debtor or the chapter 7 trustee in that period will be deemed abandoned, and may be disposed of by the Plaintiff in any manner she sees fit without need of further order of this court.
CONCLUSION
The Debtor has failed to advance any theory under which this court’s previous orders should be vacated or otherwise modified. As such, the Motion to Vacate is not well taken.
A separate order will be issued concurrent with this Memorandum Decision, denying the Motion to Vacate and setting for the foregoing obligations regarding the return of the Property remaining in the Plaintiffs possession.
ORDER
The matter before the court is the Second Motion to Vacate Judgment (the “Motion to Vacate ”) brought by debtor Kimberly A. Littman (the “Debtor”) seeking relief from the court’s Order Granting Plaintiffs Motion for Summary Judgment (the “Summary Judgment Order”) and Rule 7058 Judgment Order (the “Judgment Order” and collectively with the Summary Judgment Order, the “Orders ”) under Federal Rule of Civil Procedure 60(b)(5) in the above-captioned adversary proceeding; the court having jurisdiction over the subject matter and all necessary parties appearing at the three-day eviden-tiary hearing that took place on March 11, 2014, March 12, 2014 and March 19, 2014 (the “Hearing”); 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 Hearing; and in accordance with the Memorandum Decision of the court in this matter issued on September 11, 2014, wherein the court found that the Debtor has failed to advance any theory under which this court’s previous orders should be vacated or otherwise modified;
NOW, THEREFORE, IT IS HEREBY ORDERED THAT:
(1) The Motion to Vacate is DENIED;
(2) Any personal property previously transferred to the Plaintiff from the Debtor that remains in the Plaintiffs *870possession (the “Remaining Property ”) belongs to the Debtor; and
(3) Within 21 days of the date of entry of this Order, the Debtor or the chapter 7 trustee must make arrangements to take possession of that Remaining Property. Any Remaining Property not claimed by the Debtor or the chapter 7 trustee in that period will be deemed abandoned, and may be disposed of by the Plaintiff in any manner she sees fit without need of further order of the court.
. Unless otherwise noted, all docket refer-enees contained herein are to the Adversary.
. Downs v. Westphal, 78 F.3d 1252, 1257 (7th Cir.1996) ("[B]eing a pro se litigant does not give a party unbridled license to disregard clearly communicated court orders. It does not give the pro se litigant the discretion to choose which of the court’s rules and orders it will follow, and which it will wilfully disregard.”); Jones v. Phipps, 39 F.3d 158, 163 (7th Cir.1994) (”[P]ro se litigants are not entitled to a general dispensation from the rules of procedure or court-imposed deadlines.”). Debtor's explanation for missing the deadline did not to establish excusable neglect, denied the Debtor’s first motion to vacate.
. Civil Rule 59 is made applicable in cases under the Bankruptcy Code by Bankruptcy Rule 9023. Fed. R. Bankr.P. 9023. Bankruptcy Rule 9023, however, requires that relief sought under Civil Rule 59 be brought within 14 days, not the 28 days contained in Civil Rule 59 itself. Id.
Civil Rule 60 relief is made applicable in cases under the Bankruptcy Code by Bankruptcy Rule 9024. Fed. R. Bankr.P. 9024. Bankruptcy Rule 9024 does not alter the time frame for seeking Civil Rule 60(b) relief in bankruptcy cases. Fed.R.Civ.P. 60(c)(1) ("A motion under Rule 60(b) must be made within a reasonable time — and for reasons (1), (2), and (3) no more than a year after the entry of the judgment or order or the date of the proceeding.”).
. In light of the court’s ruling on the legal issues raised at trial and discussed later in this Memorandum Decision, these evidentiary rulings are not necessarily outcome-determinative. See infra.
. 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.
. Joseph did not participate in filing the Complaint in this Adversary.
. In actuality, the Debtor continued to advance new arguments throughout the matter. At the Hearing and in her post-trial briefing, for example, the Debtor adduced an alternative theory that the State Court Judgment should not be respected as it was procured through moral duress. Tr. 164-68, Mar. 12, 2014. As evidence of this theory, the Debtor's counsel adduced testimony regarding the Plaintiffs ongoing harassment of the Debtor. Id. The duress defense is discussed in further detail, below.
. For example, the Debtor argues that the court erred, when taking together all that was before it (including, among others, the Complaint, Answer, the State Court Judgment and all of the affidavits and other documents submitted in support of the Summary Judgment Motion), in concluding that the defalcation required for § 523(a)(4) had been established, even though the Debtor admitted the same in the Answer itself. Though the Debtor argues that this is solely a legal conclusion and the Answer has no bearing, it is not. The question turns on the facts, and thus required opposition under Civil Rule 56(e). The un-controverted facts before the court overwhelmingly established that funds were not disbursed as required, and that failure was the result of the Debtor’s using those funds for her own personal use and benefit. Taken together, more than enough facts were extant for the court to reach the conclusion that the elements of § 523(a)(4) had been satisfied.
This argument, in the court’s view, is precisely the kind of argument that should have been advanced in opposition to the Summary Judgment Motion, and to allow this argument now would require the court to disregard uncontroverted facts, and would put paid to the requirements in Civil Rule 56(e) as applied by the Supreme Court in Liberty Lobby. Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106 S.Ct. 2505.
. Cf. 28 U.S.C. § 1738 ("The records and judicial proceedings of any court of any such State, Territory or Possession, or copies thereof, shall be proved or admitted in other courts within the United States and its Territories and Possessions by the attestation of the clerk and seal of the court annexed, if a seal exists, together with a certificate of a judge of the court that the said attestation is in proper form. Such Acts, records and judicial proceedings or copies thereof, so authenticated, shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken.”). "The Rooker-Feldman doctrine does not displace § 1738 and turn all disputes about the preclusive effects of judgments into matters of federal subject-matter jurisdiction.” Freedom Mortg. Corp. v. Burnham Mortg., Inc., 569 F.3d 667, 671 (7th Cir.2009).
. The fact that the State Court Judgment was an agreed order has no bearing on whether the Rooker-Feldman doctrine applies to it. Rooker-Feldman applies to default judgments as well as to judgments on the merits, In re Sabertooth, LLC, 443 B.R. 671, 683 (Bankr.E.D.Pa.2011), and thus it should not matter whether the State Court actually addressed the merits of the parties’ disputes, only whether those merits were properly before it.
. The parol evidence rule is a principle of contract interpretation that holds parties to the express language of a contract, without reference to oral or other extrinsic evidence, when the contract is unambiguous. River’s Edge Homeowners’ Ass’n v. City of Naperville, 353 Ill.App.3d 874, 878, 289 Ill.Dec. 310, 819 N.E.2d 806 (2d Dist.2004) ("[I]f the language is unambiguous, then the trial court interprets the agreement without resort to parol evidence.”).
. Unlike duress, the question of whether accord and satisfaction might apply was evident in the Debtor's filings made before the Hearing, in all but name. As a result, once the Debtor’s counsel articulated the theory in the Hearing, the court permitted both parties to address accord and satisfaction in subsequent supplemental briefing.
. One thing is clear that the Transfer itself was not a change in ownership. For it to be so, it would either have to be the accord and satisfaction the Debtor wishes (and which it clearly cannot be), or a payment by the Debt- or of her obligations, net of those contained in the State Court Judgment. As to the latter, if the court could conclude that the Debtor owed the Plaintiff much more that what was contained in the State Court Judgment, it might further conclude that after application of the Transfer, what remained was what was set forth in the State Court Judgment. This conclusion would have an elegant application to the disputes at bar, as it would allow the *866court to ignore the questions raised by the Debtor regarding the value of the Property. The court could reach this conclusion, find that the value is immaterial to any consideration before the court, deny the Motion to Vacate, and move on.
This conclusion, however, is not supported by the facts before the court. The total indebtedness alleged in the State Court Action would be, at least in the Debtor’s view, greatly exceeded by the value of the Property in the Transfer. Assuming that the State Court Judgment was net of the Transfer is as inconsistent with the facts as is the Debtor’s position that the Transfer satisfied the State Court Judgment prior to its entry. Nor does the subsequent sale of the Property and application of the proceeds to the obligation support the Debtor’s argument in this regard, as discussed above.
. The value of the Highstein sculpture was never established. In her proposed findings of fact and conclusions of law, the Debtor asserted that the Debtor was unable to testify as to the value of the Highstein sculpture because her counsel’s interrogation was interrupted by objections of Plaintiff's counsel. Regardless of the circumstances, it was the Debtor’s obligation to ensure that an essential element of her case was proven. Failing that, the Debtor then attempted to establish the $75,000 value via a motion to reopen the Debtor’s main bankruptcy case to file an affidavit from the Debtor as to the value. That motion was denied. Ultimately, given the court’s rulings on those objections in today’s decision, it matters not.
. It should be noted that the Debtor alleges that she should receive credit for the full amount of any of the sales and the full amount of the Asbestos Claims, without any reduction for the costs associated therewith. That is nonsense. The only way that would be appropriate is if the other parties had agreed to bear the Debtor's portion of the costs (or, perhaps, under the rejected accord and satisfaction theory). No evidence was offered in that regard and the Debtor has advanced no other cognizable theory under which she would be entitled to collect these amounts without paying the associated costs. As such, the Debtor is only entitled to credit for the net recoveries.
. While the Debtor has argued that certain of the Property has been put to personal use by the Plaintiff, the Debtor has failed establish her claim of conversion in this regard. "In order to recover for conversion in Illinois, a plaintiff must show: (1) a right to the property; (2) an absolute and unconditional right to the immediate possession of the property; (3) a demand for possession; and (4) that the defendant wrongfully and without authorization assumed control, dominion, or ownership over the property.” Van Diest Supply Co. v. Shelby County State Bank, 425 F.3d 437, 439 (7th Cir.2005) (citing Cirrincione v. Johnson, 184 Ill.2d 109, 234 Ill.Dec. 455, 703 N.E.2d 67 (1998)). The Debtor has not shown the third element of this cause of action. In fact, the evidence provided shows that the Debtor has refused to reclaim the Property. Tr. 37, Mar. 11, 2014; 264, Mar. 12, 2014. As such, all the Property remaining in possession of the Plaintiff is property of the Debtor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497554/ | MEMORANDUM OF DECISION AND ORDER DETERMINING ADVERSARY PROCEEDING
J. PHILIP KLINGEBERGER, Bankruptcy Judge.
This adversary proceeding was initiated by a complaint filed on December 13, 2013, by the plaintiff Martha L. Wischmeyer [“Wischmeyer”] which asserts that the defendant Steven D. Bobinski [“Bobinski”] is liable to her for a “domestic support obligation” as defined by the Bankruptcy Code, and that as a result the obligation alleged to be owed is excepted from discharge.
By its record number 8 order entered on March 20, 2014, the court directed the parties to file a stipulated record concerning the facts and legal issues to be presented in this adversary proceeding. As record entry number 10 filed on April 24, 2014, the parties filed their Joint Stipulation of Facts and Issues. The parties have respectively complied with the court’s order concerning the filing of legal memo-randa. This adversary proceeding is now submitted to the court for final determination, with the sole and exclusive factual/ev-identiary record to be considered by the court to be that stated in the record number 10 filing.
The court has complete Constitutional and statutory authority to determine all issues in this case and to enter a final judgment in the adversary proceeding.
The record submitted to the court by docket entry number 10 is, in full, the following:
1.This matter is before the court to determine whether guardian ad litem fees awarded to plaintiff are dischargea-ble in accordance with 11 U.S.C. § 523(a)(5), and, specifically, whether, under Indiana law, guardian ad litem fees meet the definition of “domestic support obligation” under 11 U.S.C. § 101(14A).
2. The state court orders for this court’s consideration were issued in a case in the Porter Superior Court styled as In Re: the Marriage of Julie R. Bobinski n/k/a Julie R. Thomas and Steven D. Bobinski, Cause Number 64D02-0508-DR-6463.
3. Ms. Wischmeyer was appointed guardian ad litem for Mr. Bobinski’s children by agreement of the parties in the “Agreed Order on Guardian as Li-tem” dated June 6, 2011. A certified copy of that order is attached hereto as “Attachment 1.”
4. In its June 6, 2011, order the state court directed both Mr. Bobinski and the children’s mother to each pay half of the guardian ad litem’s fees.
5. At a hearing on multiple post-dissolution of marriage issues, all of which were related to the parties’ minor children, Ms. Wischmeyer tendered exhibits demonstrating that $5,056.29 was due from both mother and father at that time. The hearing was held over three days, from February 4 through February 6, 2013. The parties agree and stipulate Ms. Wischmeyer’s exhibit recited what amount was due at the time of the hearing, but it did not include her time for attending that hearing.
6. The trial court’s Order of May 23, 2013, reasserts that Mr. Bobinski and his former wife are equally responsible for Ms. Wischmeyer’s guardian ad litem fees. A certified copy of that order is attached hereto as “Attachment 2.”
7. Ms. Wischmeyer’s affidavit is attached hereto as “Attachment 3” and she claims that $5,818.10 is due from Mr. Bobinski at this time.
8. Ms. Wischmeyer has not been removed from the state court case and *902remains the appointed guardian ad li-tem. However, no issues are pending in that case at this time.
The issue is controlled by the definition of “domestic support obligation” stated in 11 U.S.C. § 101(14A), which in its entirety states as follows:
(14A) The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable non-bankruptcy law notwithstanding any other provision of this title, that is—
(A) owed to or recoverable by—
(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or
(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankrupt-cy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.
If the obligation asserted by Wischmeyer against Bobinski is a “domestic support obligation”, it is excepted from discharge pursuant to 11 U.S.C. § 523(a)(5).
On page 4 of her legal memorandum (record number 12), Wischmeyer concedes “that under the Bankruptcy Code’s definition, a GAL (guardian ad litem) is not a spouse, former spouse, or a child’s parent, legal guardian, or responsible relative”. The stipulated record establishes that any liability of Bobinski to Wischmeyer is solely the obligation of Steven D. Bobinski to Wischmeyer and is not within the scope of a debt “recoverable by” a person defined in 11 U.S.C. § 101(14A)(A)(i).
In the court’s view, because Wischmeyer is not within the provisions of 11 U.S.C. § 101(14A)(A)(i), that is the end of the case.
Wischmeyer contends that she may be deemed to be a “governmental unit” within the provisions of 11 U.S.C. § 101(14A)(A)(ii). The term “governmental unit” is defined in 11 U.S.C. § 101(27), and that definition in no manner encompasses an individual within its scope. Wis-chmeyer’s contention is essentially that she is an extension of the court by reason of her appointment to represent a minor child in a matter before the court. Many positions are appointed by a court to perform specific functions in matters subject to the court’s ultimate decisional authority, among them the following:
(1) The personal representative of a decedent’s estate [I.C. 29 — 1—7—13(b) ];
(2) A replacement trustee in an assignment for the benefit of creditors [I.C. 32-18-1-Kc) ];
(3) A receiver [I.C. 32-30-5-1];
(4) A Chapter 11 trustee or examiner [I.C. 11 U.S.C. § 1104(a) ].
*903None of the foregoing can in any manner be deemed to be a “governmental unit”, and obviously the designation of “governmental unit” has nothing whatever to do with an appointment by a court to perform a specific task authorized by a statute. The intent of 11 U.S.C. § 101(14A)(A)(ii) is to include governmentally underwritten programs, such as the IV-D program, as a party within the scope of one to whom a “domestic support obligation” may be owed. Wischmeyer is not a “governmental unit”.
Wischmeyer advances a policy argument that the court’s determination that a guardian ad litem representing a child with respect to a child support matter is not within the provisions of 11 U.S.C. § 523(a)(5) will have a chilling effect on attorneys’ willingness to accept guardian ad litem appointments. First, this is the only case in which the court has been involved in over 11 years as a judicial officer in which a guardian ad litem asserted that an obligation was subject to 11 U.S.C. § 523(a)(5). More importantly, determining that the obligation owed by Bo-binski to Wischmeyer is not excepted from discharge will place Wischmeyer, as an attorney, in the same position as is any attorney performing services for an individual or other entity who/which then files bankruptcy and discharges an obligation for attorney’s fees. A parade of horribles policy argument is not a reason to construe a statute in a manner contrary to its express terms.
A highly instructive case — not binding on this court — with respect to the issue before the court is In Re Kassicieh, 425 B.R. 467 (Bkrtcy.S.D.Ohio, 2010). That case contains an excellent overview of the three lines of authority which have developed over the years which either limit, or expand, the concept of a “domestic support obligation” as that term is now defined, addressed as follows:
A review of both pre-and post-BAPCPA case law interpreting former and current § 523(a)(5) reveals that three lines of authority have emerged on the question of whether a debt that is in the nature of support and owed directly to a third party not listed among the entities identified in § 101(14A) (or former § 523(a)(5)) is excepted from discharge. These three lines are: (1) the “plain-meaning” approach, holding that the dis-chargeability of the debt turns on whether it is owed to a person/entity described in § 523(a)(5) (pre-BAPCPA) or payable to or recoverable by a person/entity described in § 101(14A) (post-BAPCPA); (2) the view that, if a debt is in the nature of support, it is nondis-chargeable even if payable directly to a third party and even if the debtor’s spouse, former spouse or parent of his/ her child would not be financially harmed if the debtor discharged the obligation; and (3) a more limited approach that requires some ongoing liability of the debtor’s spouse, former spouse, or parent of the debtor’s child on the support obligation owing to a third party (so that its non-payment might have a financial impact on those parties) before it may be excepted from discharge.
Ibid, at 472.
A discussion of the three lines of authority is stated in In Re Kassicieh, 425 B.R. 467, 472-481. This court is included within the group of courts which strictly adheres to the plain meaning of the Bankruptcy Code, and thus follows the directives of the United States Supreme Court, as stated in In Re Kassicieh, supra, footnote 3 at 472:
The Supreme Court has directed lower courts to apply the plain meaning when interpreting the Bankruptcy Code. See, e.g., Hartford Underwriters Ins. Co. v. *904Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (“[W]hen the statute’s language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms.” (internal quotation marks omitted)); Connecticut Natl Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) (“[I]n interpreting a statute a court should always turn first to one, cardinal canon before all others. We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. When the words of a statute are unambiguous, then, this first canon is also the last: judicial inquiry is complete.” (citations and internal quotation marks omitted)). See also Chase Manhattan Mortgage Corp. v. Shapiro (In re Lee), 530 F.3d 458, 470 (6th Cir.2008) (“The common theme in the Supreme Court’s bankruptcy jurisprudence over the past two decades is that courts must apply the plain meaning of the Code unless its literal application would produce a result demonstrably at odds with the intent of Congress.” (citing additional cases)); Brilliance Audio, Inc. v. Haights Cross Commc’ns, Inc., 474 F.3d 365, 371 (6th Cir.2007) (“As with any question of statutory interpretation, we must first look to the language of the statute itself. If the language of the statute is clear, then the inquiry is complete, and the court should look no further.” (citations omitted)).
In accord with the foregoing statement, in this court’s view there is no ambiguity whatsoever in 11 U.S.C. § 101(14A)(A)(i), and extension of the coverage of that provision beyond its express terms is forbidden by applicable law of the United States Supreme Court.1
Since the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the court has consistently adopted a strict construction approach in multiple situations in which attorneys have been involved in support-related matters and have asserted that obligations owed to them as a result of that involvement are excepted from discharge under 11 U.S.C. § 523(a)(5). The court has consistently construed 11 U.S.C. § 101(14A)(A)(i) to mean exactly what it says and has declined to depart from the express terms of the statute. This case is no different. A case essentially parallel to this one was decided by the Honorable Eugene R. Wedoff, Judge of the United States Bankruptcy Court for the Northern District of Illinois in In Re Greco, 397 B.R. 102 (Bkrtcy.N.D.Ill.2008), and this court entirely endorses Judge Wedoffs analysis of persons within the scope of 11 U.S.C. § 101(14A)(A). Although the United States District Court for the Northern District of Illinois reversed Judge Wedoffs decision, that reversal has no impact on this court: Judge Wedoff got it right.
Based upon the foregoing, the court determines that Martha L. Wischmeyer is not within the scope of persons/entities defined by 11 U.S.C. § 101(14A)(A): Wis-chmeyer is not the child, but rather is the legal representative/attorney for the child The court further determines that the obligation owed by Bobinski to Wischmeyer is not within the scope of obligations defined by 11 U.S.C. § 101(14A)(B): it is not an obligation “in the nature of alimony, maintenance or support”, but rather it is simply a fee for legal services to compensate Wis-*905chmeyer for her legal services in a court proceeding.
IT IS ORDERED, ADJUDGED AND DECREED that any obligation owed by Steven D. Bobinski to Martha L. Wis-chmeyer which is the subject of this adversary proceeding is not a “domestic support obligation” within the provisions of 11 U.S.C. § 101(14A).
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that any obligation owed by Steven D. Bobinski to Martha L. Wischmeyer which is the subject of this adversary proceeding is not excepted from discharge pursuant to 11 U.S.C. § 523(a)(5).
. The court is aware that the Honorable Judge John E. Hoffman, Jr., adopted a position contrary to the strict construction line of authority in In Re Kassicieh, 467 B.R. 445 (Bkrtcy.S.D.Ohio, 2012). The court does not agree with this ultimate determination. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497555/ | DECISION AND ORDER ON DEBTORS’ ATTORNEYS’ APPLICATION FOR COMPENSATION
SUSAN V. KELLEY, Bankruptcy Judge.
Robert and Julie Ryan (the “Debtors”) filed this Chapter 13 case on July 27, 2013. Debt Advisors, S.C. (“DA”) represents the Debtors. On August 7, 2013, DA filed its “Disclosure of Compensation of Attorney for Debtor” disclosing a fee of $3,500, of which $0.00 had been paid. (Docket No. 8 at 47.) This disclosure was false; prior to the petition, the Debtors paid $950 toward DA’s fee and $294 for the filing fee and credit counseling fee. (Docket No. 34-1 at 7.)
The Debtors filed a Chapter 13 plan on August 7, 2013, but the plan was not con-firmable. They filed a motion to modify the plan on February 12, 2014; the proposed modified plan contained a typographical error in the plan payment amount. The Debtors made plan payments of $1,336 per month from August through October 2013, but then stopped. (Docket No. 27 at 2.) On March 4, 2014, the Trustee filed a motion to dismiss the Debtors’ case. The parties resolved the motion by stipulating that if the Debtors missed a plan payment from April through September 2014, the Trustee could file an affidavit of default, and the case would be dismissed. (Docket No. 29.) When the Debtors made only a partial plan payment in May 2014, on June 13, 2014, the Trustee filed an affidavit of default. (Docket No. *90735.) Meanwhile, on May 29, 2014, DA filed an application for compensation in the amount of $2,359.56, and the Debtors objected. The Court dismissed the case on August 4, 2014, retaining jurisdiction in the dismissal order to consider and rule on DA’s fee application.
At the August 19, 2014 hearing on the application, the Debtors raised three main concerns with DA’s fees. First, it was very important to Julie Ryan to work with an attorney that she trusted. Mr. Ryan testified that, in response to her concerns, Chad Schomburg, DA’s principal, promised that he would be their attorney throughout the case. However, Attorney Schomburg did not appear at the meeting of creditors, work on plan amendments, or appear in court in response to motions to dismiss (or, the Court would add, respond to or appear at the hearing on the Debtors’ objection to DA’s fee application). Second, the Debtors allege that DA made an error in the modified plan that was filed with the Court. Mr. Ryan himself caught the discrepancy and contacted DA. DA lawyer Laurie Bigsby admitted the mistake, but took the position that since the case appeared headed for dismissal, there was no point in filing a corrected plan. Third, the Debtors contend that DA did not properly explain issues to them, especially the ever-increasing plan payments. In their meeting on July 17, 2013, DA estimated the plan payment at $998 per month. (Docket No. 48.) The payment increased to $1,336 in the initial plan filed August 7, 2013. When DA filed the modified plan on February 12, 2014, the proposed payment was $1,451 (or $1,541 — there is a discrepancy in the document) per month.
DA’s position is that the Debtors never complained about the fees until DA filed the fee application. DA’s office manager testified about the bill, stating that all entries were properly billed to the Debtors. Attorney Bigsby called Robert Ryan as a witness, but she abruptly ended her examination of Mr. Ryan when he contended that he complained to her about DA’s services, something she apparently disputes.
Two statutory provisions govern the allowance of DA’s request for compensation. Section 329 of the Bankruptcy Code requires all debtors’ attorneys to file a statement of their compensation and permits the Court to order the return of any compensation “to the extent excessive.” And § 330(a)(4)(B) provides that a court may allow reasonable compensation to a Chapter 13 debtor’s attorney “based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.” After considering the case docket, the fee contract between DA and the Debtors, and the testimony and argument at the hearing, the Court concludes that DA’s disclosure was deficient and its services for the most part did- not benefit the Debtors.
I. Violation of Disclosure Requirements
The disclosure requirements under § 329 are “mandatory, not permissive.” Jensen v. United States Tr. (In re Smitty’s Truck Stop), 210 B.R. 844, 848 (10th Cir. BAP 1997) (quoting Turner v. Davis, Gillenwater & Lynch (In re Inv. Bankers, Inc.), 4 F.3d 1556, 1565 (10th Cir.1993)). The case law and legislative history indicate that Congress was concerned that debtor’s counsel’s compensation presents both a “serious potential for evasion of creditor protection provisions” and “serious potential for overreaching by the debtor’s attorney.” In re Jackson, 401 B.R. 333, 339 (Bankr.N.D.Ill.2009). As a result, attorneys must disclose all compensation paid by or on behalf of the debtor, and the disclosure must be “precise and complete.” Id. (citing In re Berg, 356 B.R. *908378, 381 (Bankr.E.D.Pa.2006)). Negligence or inadvertence is not a valid defense to a failure to disclose. Smitty’s Truck Stop, 210 B.R. at 848 (citing Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 881 (9th Cir.1995)). An attorney who fails to fully comply with the disclosure requirements under § 329 and Rule 2016(b) forfeits any right to receive compensation for services provided to a debtor and may be ordered to return fees already retained. Id.; see also Jackson, 401 B.R. at 340-41 (“Many courts, perhaps the majority, punish defective disclosure by denying all compensation.”).
DA’s disclosure of compensation states that the fee is $3,500 of which $0.00 has been received. (Docket No. 8 at 47.) The Debtors’ statement of financial affairs repeats this information, when it states that DA was paid “$0 upfront; $3,500 to be paid in the plan.” (Id. at 41.) However, the fee contract shows that prior to the petition, the Debtors paid $950 plus the filing fee and credit counseling fee. (Docket No. 48.) DA’s fee application also reflects payments of $950 for fees and $294 for the filing and credit counseling fees. (Docket No. 34-1 at 7.) And Attorney Bigsby reiterated these payments at the hearing on August 19, 2014. Yet DA never amended its compensation disclosure form to correct the error. DA cannot escape responsibility for providing false information to the Court about its compensation. While the matter does not appear so egregious as to require disgorgement of the fees that DA already received, under the circumstances, DA has forfeited its right to further compensation from the Debtors or the bankruptcy estate.
II. Reasonableness of Compensation
Since DA’s false disclosure justifies disallowance of DA’s requested fees, the Court need not reach the Debtors’ objection to the reasonableness of the fees. However, under the “benefit to the debtor” standard set by § 330(a)(4)(B), disallowance of a substantial amount of DA’s fees would be appropriate even if DA had filed an accurate disclosure statement.
In In re Phillips, 291 B.R. 72, 82 (Bankr.S.D.Tex.2003), the bankruptcy court reduced a Chapter 13 debtor’s attorney’s fee when the plan was not confirmed, finding: “[W]hen cases are dismissed prior to plan confirmation, Counsel must provide an explanation in the fee application and evidence that counsel provided substantial, valuable professional services including investigation, evaluation, and counseling that was intended and designed to achieve an objective appropriate for chapter 13 cases.” Although careful to caution that the debtor’s attorney is not responsible to assure that the debtor makes the plan payments, the Phillips court observed that to justify more than a nominal fee, “[Cjounsel 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.” Id. at 83. See also In re Ward, 511 B.R. 909, 914 (Bankr.E.D.Wis. 2014) (“Given that the debtors’ plans were never confirmed, any benefit that counsel’s services provided to the debtors is not obvious.”).
DA’s fee application contains a detailed description of DA’s legal services, which could provide the requisite evidence of the benefit of DA’s services to the Debtors. However, the fee application falls short in at least three areas. First, the application gives an erroneous description of the fee *909arrangement. It begins with the statement that the Debtors agreed that $3,950 would be paid to DA through the plan for “pre-filing advice, petition and schedule preparation and representation at the Section 341 hearing (‘initial agreement’). All other legal services were to be bill (sic) at $250 per hour for services rendered by [DA’s] Attorneys and $50 per hour for services rendered by [DA’s] paralegals and assistants.” (Docket No. 34 at 1.) However, DA’s contract with the Debtors does not reflect a $3,950 fee; rather it suggests that the fee is $4,450. And DA’s Rule 2016(b) disclosure statement disclosed a fee of $3,500.
Second, it is simply not reasonable for DA to charge $3,500 or more for pre-filing advice, petition and schedule preparation, and attendance at the meeting of creditors. The fee application’s explanation of DA’s Chapter 13 flat fee implies that the fee does not even include preparation of the plan or dealing with objections to confirmation. While the Court can conceive of extraordinary cases in which the Court’s presumed reasonable fee of $3,500 could be expended without drafting and obtaining confirmation of a plan, this case is not one of them. DA’s own fee application shows that the fees charged for the “initial agreement” stage of the representation totaled $940, including $375 for attending the meeting of creditors and $250 for the meeting when the Debtors signed the documents to file the case. (Docket No. 34-1 at 1, 2.)
Third, services necessitated by DA’s clerical or legal errors do not benefit the Debtors, are not reasonable, and should not be compensated. For example, in the original plan, although DA recognized the IRS and Adams County tax claims as secured claims, DA failed to provide any interest for these claims, necessitating an amended plan. (Docket No. 9 at 4.) The amended plan then contained a clerical error in the amount of the plan payment, providing $1,451 in one section and $1,541 in another. (Docket No. 24 at 2, 3.) Also, the motion to modify the plan states that the original plan was dated July 27, 2013, when the original plan was actually dated August 7, 2013. (Id. at 3.) Creditors could have been misled or confused about which plan the Debtors were actually amending. And DA inserted a special provision into the original plan that proposed to limit notices to creditors who filed claims. (Docket No. 9 at 5.) The Trustee apparently required this provision to be amended as well, because the motion to modify the plan removed this provision, giving as its reason: “U.S. Bankruptcy Code provisions.” The charges for services related to the modified plan totaled over $670. These examples are not the only instances of questionable fee entries, but they amply demonstrate that DA’s requested compensation is not reasonable.
DA’s fee application does not provide any explanation of how its services benefited the Debtors, other than the unsupported conclusion that the services provided were necessary and beneficial toward the completion of the case. But the case did not complete successfully. As Attorney Bigsby candidly admitted, the case was heading for dismissal prior to confirmation. The major benefit that the Debtors experienced in this case was the operation of the automatic stay, and that benefit is insufficient to award compensation. “[T]he fact that 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. 238, 249 (Bankr.N.D.Okla.2001) (citing Bachman v. Pelofsky (In re Peterson), 251 B.R. 359, 365 (8th Cir. BAP 2000) (affirming refusal to award fee where “efforts resulted in no *910benefit to the debtor under § 330(a)(4)(B), other than to cause delay in payment.”)).
While it is true that the Debtors have a somewhat out of the ordinary Chapter 13 case, featuring IRS and county tax issues, the fee application does not reflect that DA spent any significant time working on these issues. DA did not provide for interest on the secured tax claims or adequately explain the plan payment changes to the Debtors, and DA compounded the problem by filing a modified plan with clerical errors in critical provisions. Meanwhile, Mr. Ryan testified that the Debtors were experiencing a loss of rental income in their duplex, and DA’s efforts should have been directed at determining whether a plan was feasible. DA’s work in this case did not include “valuable professional efforts to assess the prospects for confirming a chapter 13 plan” required under § 330(a)(4)(B). Phillips, 291 B.R. at 83. Instead, DA’s services involved supplying documents to the Trustee and correcting legal and clerical errors. Under the circumstances, DA’s services did not benefit the Debtors, and compensation for those services would not be reasonable.
III. Conclusion
The Debtors paid DA $950 plus the filing fee to begin this Chapter 13 case, with the understanding that an additional fee would be paid through the plan. DA did not accurately disclose this arrangement in its Rule 2016(b) statement and later filed a fee application alleging that the fee was $3,950, of which $950 had been paid by the Debtors prior to the petition. The false disclosure, of compensation justifies denial of DA’s fee request in this case. However, even if the disclosure was proper, DA failed to meet its burden of proof that the fees requested in this case, which was dismissed before confirmation, benefitted the Debtors.
IT IS THEREFORE ORDERED: DA’s application for compensation is denied; and
IT IS FURTHER ORDERED: the Trustee shall distribute all plan payments that she has been holding pending the outcome of this dispute directly to the Debtors. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497556/ | DECISION
CATHERINE J. FURAY, Bankruptcy Judge.
On March 24, 2014, Black River Country Bank (“BRCB”) filed a post-confirmation *913motion pursuant to 11 U.S.C. § 1142(b) requesting the Court to direct transfer of real estate according to the terms of a confirmed plan. The Debtors, J & B Haldeman Holdings, LLC, and James and Barbara Haldeman,1 object to the motion. For the following reasons, BRCB’s motion is GRANTED.
FACTS AND PROCEDURAL HISTORY
The Debtors’ plan was confirmed on March 22, 2013 (the “Plan”). With respect to BRCB’s secured claim, the Plan required monthly interest payments as well as principal reductions based on an annual schedule. The schedule included a $50,000 principal payment that was due by December 31, 2013. The Debtors failed to make this payment. In addition, the Plan provides that BRCB retains its mortgages on all property until the Debtors’ obligations are satisfied in full. Likewise, the Debtors’ “personal guaranties remain in full force and effect until the obligations are paid in full.”
The Plan also addresses the consequences of defaults by the Debtors. It permits the Debtors a 60-day cure period.2 If, by the end of the 60-day period, the Debtors fail to make any payment, the Plan provides the Debtors “will deed back the remaining secured property to the Black River Country Bank.” The Debtors failed to cure the payment default within the cure period.
The Plan also provides that “[t]he Bankruptcy Court shall retain jurisdiction on [sic] this confirmed Chapter 11 proceedings as it relates to the terms, conditions and provisions of this agreement as it relates to default, conditions, and any matter relating to the contract.” Further, it states that:
The Court shall retain jurisdiction of the Chapter 11 case pursuant to and for the provisions set forth in Section 1127 and 1142 of the Bankruptcy Code as follows:
1. To determine the allowance or dis-allowance of claims and interests.
2. To fix allowance of compensation and other administrative expenses.
3. To retain and determine any disputes arising under or relating to the Plan or arising under or relating to the Chapter 11 reorganization case.
4. To enforce all discharged provisions of the Plan.
5. To make such further orders and directions pursuant to 11 U.S.C. section 1127 and 1142 as may be necessary or appropriate.
In anticipation of their inability to make the $50,000 principal payment, the Debtors filed a proposed modified plan on December 31, 2013. The proposed modification sought to extend the due date for the initial principal payment through June 30, 2014. On March 10, 2014, the Court denied approval of the modified plan. The Court found that because a significant portion of the property to be distributed under the plan had not been conveyed to claim holders, the plan had not been substantially consummated as of the date of the hearing. The Court concluded that:
Based on the facts and based on the argument that has been presented for *914the purpose of this case, I will find that there has not been substantial consummation as of this date. And I will, for the purpose of this case, adopt that line of cases that says substantial consummation does require a significant portion of [the] property to be distributed or [the] payments to be made to have been distributed or paid. That does not mean for other purposes and in other circumstances the Court does not reserve its right to change its mind or apply a different definition. But based on the facts and record in front of me and the arguments of counsel, I will conclude that there has not been substantial consummation.
Excerpt of Proceedings at 11, In re J & B Haldeman Holdings, LLC, No. 11-11386-11 (Bankr.W.D.Wis. Mar. 10, 2014).
ARGUMENTS
BRCB argues the Debtors are in default under the specific provisions of the Plan addressing BRCB’s claim, and that pursuant to the default provisions the Debtors are obligated to deed certain property back to BRCB as a result of their failure to timely cure the default. BRCB contends the Plan provides that the Bankruptcy Court shall retain jurisdiction over the enforcement of the Plan. Accordingly, BRCB argues that section 1142(b) empowers the Court to order the Debtors to transfer the mortgaged property to BRCB as a result of the Debtors’ default.
The Debtors do not dispute the default or the failure to cure. Instead, they argue the Court’s post-confirmation authority is limited under 11 U.S.C. § 1142(b) to matters necessary for the consummation of the plan. They contend — mistakenly—that this Court previously concluded that their plan had been substantially consummated at the time of the March 10, 2014, hearing and that, as a result, the Court lacks jurisdiction to enter an order concerning their default under the confirmed plan.
DISCUSSION
Subject Matter Jurisdiction
Regardless of the terms of the Plan or the provisions of the Bankruptcy Code, the source of jurisdiction in cases under title 11 is 28 U.S.C. §§ 1334 and 157. U.S. Brass Corp. v. Travelers Ins. Grp., Inc. (In re U.S. Brass Corp.), 301 F.3d 296, 303 (5th Cir.2002) (citing United States Tr. v. Gryphon at the Stone Mansion, Inc., 216 B.R. 764, 769 (W.D.Pa.1997)). As a threshold matter, therefore, the Court must determine whether jurisdiction exists. Indeed, subject matter jurisdiction is “the first question in every case.” Illinois v. City of Chicago, 137 F.3d 474, 478 (7th Cir.1998). Without it, the Court “cannot proceed at all.” Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94, 118 S.Ct. 1003, 1012, 140 L.Ed.2d 210 (1998). Whether or not a confirmed plan purports to reserve jurisdiction to the bankruptcy court, the statutory requirements for subject matter jurisdiction must be met. Fed-eralpha Steel LLC Creditors’ Trust v. Fed. Pipe & Steel Corp. (In re Federalpha Steel LLC), 341 B.R. 872, 879-80 (Bankr.N.D.Ill. 2006) (citations omitted).
Pursuant to 28 U.S.C. §§ 1334 and 157, the federal district courts have “original and exclusive jurisdiction” over all cases under title 11 (“Bankruptcy Code” or “Code”) and “original but not exclusive jurisdiction” over all civil proceedings that arise under the Bankruptcy Code or that arise in or are related to cases under the Code. 28 U.S.C. §§ 1334(a)-(b). The district courts may, however, refer such cases to the bankruptcy judges within their district. In the Western District of Wisconsin, the district court has made such a reference. See Western District of Wisconsin Administrative Order 161 (July 12, 1984). By way of this reference, this Court “may hear and determine all cases under title 11 and all core proceedings *915under title 11, or arising in a ease under title 11 ... and may enter appropriate orders and judgments, subject to review under section 158 of this title.” 28 U.S.C. § 157(b)(1).
As an initial matter, 28 U.S.C. § 1334 governs bankruptcy court jurisdiction both before and after confirmation of a plan. Some courts refer to 11 U.S.C. § 1142(b) as a source of post-confirmation bankruptcy court jurisdiction. See, e.g., Zerand-Bernal Grp., Inc. v. Cox (In re Cary Metal Prods., Inc.), 152 B.R. 927, 931 (Bankr.N.D.Ill.1993), aff'd, 158 B.R. 459 (N.D.Ill.1993), aff'd, 23 F.3d 159 (7th Cir.1994) “Those courts, however, miss the point that the Bankruptcy Code does not confer jurisdiction.” U.S. Brass Corp., 301 F.3d at 306 n. 29. Section 1142(b) assumes that bankruptcy courts have post-confirmation jurisdiction over disputes concerning the implementation or execution of a confirmed plan. Id. However, 28 U.S.C. § 1334 is the source of this jurisdiction. Id.
To ascertain whether there is jurisdiction under section 1334, the Court must first determine whether BRCB’s motion arises under title 11, or whether it arises in or is related to a case under title 11. The fact that the Plan purports to reserve jurisdiction to the Court in certain circumstances does not dispose of the question of whether the Court has jurisdiction under 28 U.S.C. § 1334. See Zerand-Bernal Grp., Inc. v. Cox, 23 F.3d 159, 164 (7th Cir.1994); Federalpha Steel LLC, 341 B.R. at 879-80. “Cases under” title 11 refers to the bankruptcy petition itself. In re Combustion Eng’g, Inc., 391 F.3d 190, 225-26 n. 38 (3d Cir.2004) (citations omitted). The “case under” title 11 is simply “the umbrella under which all of the proceedings that follow the filing of a bankruptcy petition take place.” 1 Collier on Bank-mptcy ¶ 3.01[2] at 3-6 (16th ed. 2013).
A proceeding “arises under” title 11 if the cause of action in question is “created or determined by a statutory provision of title 11.” In re Spaulding & Co., 131 B.R. 84, 88 (N.D.Ill.1990) (citing Diamond Mortg. Corp. v. Sugar, 913 F.2d 1233, 1238-39 (7th Cir.1990); Barnett v. Stern, 909 F.2d 973, 981 (7th Cir.1990)). “ ‘[Aliasing under’ jurisdiction is analogous to 28 U.S.C. § 1331, which provides for original jurisdiction in district courts ‘of all civil actions arising under the Constitution, laws, or treaties of the United States.’” Stoe v. Flaherty, 436 F.3d 209, 216 (3d Cir.2006) (citations omitted).
The legislative history lists some examples of a proceeding arising under title 11:
The phrase “arising under” has a ... broad meaning in the jurisdictional context. ... For example, a claim of exemptions under 11 U.S.C. § 522 would be cognizable by the bankruptcy court, as would a claim of discrimination in violation of 11 U.S.C. § 525. Any action by the trustee under an avoiding power would be a proceeding arising under title 11, because the trustee would be claiming based on a right given by [title 11].
H.R.Rep. No. 595, 95th Cong., 1st Sess. 445 (1977), 1978 U.S.C.C.A.N. 5963, 6401, reprinted in 1 Collier ¶ 3.01[3][e][i] at 3-14. Further examples include confirmation of a plan and complaints objecting to a discharge, proceedings that “might generally be characterized as administrative matters, although they can be contested matters under Bankruptcy Rule 9014.... ” Id. at 3-15.
“Arising in” proceedings are generally defined as “administrative matters that arise only in bankruptcy cases.” Ortiz v. Aurora Health Care, Inc. (In re Ortiz), 665 F.3d 906, 911 (7th Cir.2011) (citations omitted). These claims would have “no existence outside of the bank*916ruptcy.” Id. Such administrative matters include allowance and disallowance of claims, orders in respect to obtaining credit, determining the dischargeability of debts, discharges, confirmation of plans, and orders permitting the assumption or rejection of contracts. See Stoe, 436 F.3d at 218; Kovalchick v. Dolbin (In re Kovalchick), 371 B.R. 54, 60 (Bankr.M.D.Pa. 2006). “In none of these instances is there a ‘cause of action’ created by statute, nor could any of the matters illustrated have been the subject of a lawsuit absent the filing of a bankruptcy case.” 1 Collier ¶ 3.01[3][e][iv] at 3-21.
Categories of “related to” proceedings include (1) causes of action owned by the debtor which become property of the estate pursuant to 11 U.S.C. § 541, and (2) suits between third parties which have an effect on the bankruptcy estate. Celotex Corp. v. Edwards, 514 U.S. 300, 307-08 n. 5, 115 S.Ct. 1493, 1498-99, 131 L.Ed.2d 403 (1995) (citing 1 Collier on Bankruptcy ¶ 3.01[1][c][iv], p. 3-28 (15th ed. 1994)). Once a court has determined that a proceeding falls into one of those two categories, it performs a second step of analysis. According to the Seventh Circuit Court of Appeals, the second inquiry is whether the dispute “affects the amount of property available for distribution or the allocation of property among creditors.” Elscint, Inc. v. First Wisconsin Fin. Corp. (In re Xonics, Inc.), 813 F.2d 127, 131 (7th Cir.1987); see also SG & Co. Northeast, LLC v. Good, 461 B.R. 532, 537-38 (Bankr. N.D.Ill.2011).
This test is narrower than that of other circuits. Seventh Circuit courts recognize that delineating the scope of “related to” jurisdiction is a balancing act. The scope should be broad enough to force claims by and against the debtor into one forum to promote efficiency. See Zerand-Bernal Grp., 23 F.3d at 161-62 (7th Cir.1994). However, it should be narrow enough “to prevent the expansion of federal jurisdiction over disputes that are best resolved by the state courts.” In re Fed-Pak Sys., Inc., 80 F.3d 207, 214 (7th Cir.1996) (citations omitted).
No statute shrinks a bankruptcy court’s jurisdiction upon confirmation of a plan. See Omega Corp. v. United States, IRS (In re Omega Corp.), 173 B.R. 830, 834 (Bankr.D.Conn.1994). Instead, as parties carry out the terms of the plan, fewer issues potentially affecting administration of the estate arise. Federalpha Steel, 341 B.R. at 880; Gray v. Polar Molecular Corp. (In re Polar Molecular Corp.), 195 B.R. 548, 555 (Bankr.D.Mass.1996). “For this reason, simple logic dictates that at this stage in a reorganization the bankruptcy court’s post-confirmation jurisdiction is reduced.” In re Polar Molecular Corp., 195 B.R. at 555. The focus of the court’s jurisdiction simply shifts to ensuring that reorganization plans are implemented, and “protect[ing] estate assets devoted to implement the confirmed Plan.” Schwinn Cycling & Fitness, Inc. v. Benon-is (In re Schwinn Bicycle Co.), 210 B.R. 747, 754 (Bankr.N.D.Ill.1997), aff'd, 217 B.R. 790 (N.D.Ill.1997) (citations omitted); see Spiers Graff Spiers v. Menako (In re Spiers Graff Spiers), 190 B.R. 1001, 1007 (Bankr.N.D.Ill.1996) (collecting cases); In re Polar Molecular Corp., 195 B.R. at 555.
Following this reasoning, even “related to” jurisdiction can extend to post-confirmation disputes. Cytomedix, Inc. v. Perfusion Partners & Assocs., Inc., 243 F.Supp.2d 786, 789-90 (N.D.Ill.2003); see S.N.A Nut Company v. Haagen-Dazs Co. (In re S.N.A. Nut Co.), 206 B.R. 495, 500 (Bankr.N.D.Ill.1997). Recognizing the tension between efficiency of administration and the need to guard against overly expansive federal court jurisdiction, infra p. 9, Seventh Circuit courts apply the same test to “related to” jurisdiction in a post-*917confirmation context as in a pre-confirmation context. Post-confirmation “related to” jurisdiction exists only where adjudication would affect the property available for distribution or the allocation of property among creditors. In re FedPak Sys., Inc., 80 F.3d at 214-15; Cytomedix, 243 F.Supp.2d at 789-90.
Courts agree that they in fact have jurisdiction to do what 11 U.S.C. § 1142(b) says they may do:
[Djirect the debtor and any other necessary party to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act, including the satisfaction of any lien, that is necessary for the consummation of the plan.
Indeed, the “plain text [of section 1142] leaves little doubt that post-confirmation jurisdiction exists to the extent necessary to consummate the plan.” Zerand-Bernal Grp., 152 B.R. at 931 (Bankr.N.D.Ill.1993). However, courts disagree about the jurisdictional basis for using section 1142(b) to enter orders. Some maintain that it arises because a motion seeking an order pursuant to section 1142 “arises under” title 11. Others state that it “arises in” a case under title ll.3
The Seventh Circuit Court of Appeals has said that section 1142(b)’s “language does not confer any substantive rights on a party apart from whatever the plan provides.” Village of Rosemont v. Jaffe, 482 F.3d 926, 935 (7th Cir.2007). “Instead, it [section 1142(b) ] ‘empowers the bankruptcy court to enforce the unperformed terms of a confirmed plan.’ ” Id. (quoting U.S. Brass Corp., 301 F.3d at 306 (5th Cir.2002)). The quoted Fifth Circuit Court of Appeals case went on to state that section 1142(b) proceedings “arise in” a ease under title 11. “[Section] 1142(b) does not confer substantive rights so much as it empowers the bankruptcy court to enforce the unperformed terms of a confirmed plan. Thus, proceedings within the contemplation of § 1142(b) are more appropriately viewed as ‘arising in’ a case under title 11.” U.S. Brass Corp., 301 F.3d at 306.
The case law addressing jurisdiction over post-confirmation motions reflects a certain tension. On the one hand, it has been well-accepted for decades that courts should resist the tendency “to keep reorganized concerns in tutelage indefinitely by orders purporting to retain jurisdic-tion_” N. Am. Car Corp. v. Peerless Weighing & Vending Mach. Corp., 143 F.2d 938, 940 (2d Cir.1944) (citations omitted). On the other hand, “it is important for a bankruptcy court to retain jurisdiction so that it can monitor property transferred in accordance with the terms of the plan of reorganization.” Zerand-Bernal Grp. v. Cox, 158 B.R. 459, 463 (N.D.Ill. 1993), aff'd, 23 F.3d 159 (7th Cir.1994).
The view in the Seventh Circuit is that post-confirmation jurisdiction in the bankruptcy court is appropriate when “adjudication has an impact on the estate or the recovery of the creditors.” In re S.N.A. Nut Co., 206 B.R. at 500 (citations omitted). Courts “exercise post-confirmation jurisdiction up to the point at which the creditor’s action will not affect the administration of the plan and prohibit the *918adjudication of complaints when the action has no impact on the estate or the recovery of its creditors.” Zerand-Bernal Grp., 158 B.R. at 463 (N.D.Ill.1993) (citing Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th Cir.1991); In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987)). “Thus, the critical consideration, when determining whether or not the bankruptcy court has jurisdiction, is whether the outcome of the pending complaint would affect the estate.” Id.
Section 1142(b)’s “language does not confer any substantive rights on a party apart from whatever the plan provides.” Village of Rosemont v. Jaffe, 482 F.3d 926, 935 (7th Cir.2007). The court’s power under section 1142(b) is premised on the existence of the plan. It is the plan itself that confers the relevant rights on parties, not the Bankruptcy Code. Therefore, a proceeding to enforce a term of the confirmed plan “arises in” a case under title 11. Moreover, enforcing a term of a confirmed plan falls precisely within the scope of narrowed post-confirmation jurisdiction that allows courts to enforce unperformed terms and protect assets necessary to implement the plan. See Schwinn Cycling & Fitness, 210 B.R. at 754; In re Spiers Graff Spiers, 190 B.R. at 1007; In re Polar Molecular Corp., 195 B.R. at 555. Thus, the Court has jurisdiction over this proceeding under 28 U.S.C. § 1334, and the Debtors’ argument that BRCB must bring a state law breach of contract claim to enforce the terms of the Plan fails.
There can be no doubt that BRCB’s motion, which seeks an order to compel the Debtor to transfer property in consequence of its default under the confirmed plan, would have a direct impact on the estate and on creditors’ recovery. The motion clearly asks this Court to monitor and enforce transfer provisions of the Plan. It requests, simply, that the Debtors be compelled to execute the provisions of the Plan. In light of these observations, and given that BRCB’s motion arises in a case under title 11, this Court has jurisdiction pursuant to 28 U.S.C. § 1334.
The Debtors’ contention that a court loses section 1142(b) power if a confirmed plan has been substantially consummated is incorrect. Section 1142(b) does not limit a court’s authority to enter orders necessary to effect substantial consummation of the confirmed plan; it merely limits the court’s authority to that which is “necessary for the consummation of the plan.” 11 U.S.C. § 1142(b). The bankruptcy court’s authority to enforce the terms of a confirmed plan therefore lapses only after the plan has been fully consummated. See Zerand-Bernal Grp., 152 B.R. at 931. Section 1142(b) should be contrasted with section 1127(b), which allows the court discretion to permit modification of a chapter 11 plan “at any time after confirmation of such plan and before substantial consummation of such plan....” 11 U.S.C. § 1127(b).
Statutory Authority to Order Transfer of Deed
Upon confirmation, “the provisions of a confirmed plan bind the debtor, ... any entity acquiring property under the plan, and any creditor....” 11 U.S.C. § 1141(a). Likewise, the confirmation process forces parties to “speak now or forever hold their peace,” because confirmation bars them from bringing new claims or raising issues that could have been entertained prior to confirmation. See Travelers Indem. Co. v. Bailey, 557 U.S. 137, 152-53, 129 S.Ct. 2195, 2205-6, 174 L.Ed.2d 99 (2009).
Once a plan is confirmed, “the debtor and any entity organized or to be organized for the purpose of carrying out the plan shall carry out the plan and shall comply with any orders of the court.” 11 *919U.S.C. § 1142(a). To facilitate this process, the Court “may direct the debtor and any other necessary party to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act, including the satisfaction of any lien, that is necessary for the consummation of the plan.” 11 U.S.C. § 1142(b). The scope of the authority granted to the Court under section 1142(b) is broad, and is commonly invoked to order the execution of bills of sale, the transfer of deeds to property, stock transfers, and other instruments related to title to property in the reorganized debtor. See In re Goldblatt Bros., Inc., 132 B.R. 736, 741 (Bankr.N.D.Ill.1991). 8 Collier ¶ 1142.03 at 1142-5. What is more, even after confirmation, a bankruptcy court with jurisdiction may “interpret and enforce its own prior orders,” particularly when such orders contain provisions that explicitly retain the court’s jurisdiction for enforcement purposes. Travelers Indem. Co., 557 U.S. at 151, 129 S.Ct. at 2205 (citing Local Loan Co. v. Hunt, 292 U.S. 234, 239, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)).
The authority is not limitless, however, because section 1142(b) “does not confer substantive rights so much as it empowers the bankruptcy court to enforce the unperformed terms of a confirmed plan.” U.S. Brass Corp. v. Travelers Ins. Grp., Inc. (In re U.S. Brass Corp.), 301 F.3d 296, 306 (5th Cir.2002); accord Village of Rosemont v. Jaffe, 482 F.3d 926, 935 (7th Cir.2007). Thus, the breadth of the Court’s authority to issue orders under section 1142(b) is confined to matters that are provided for in the Plan. See Village of Rosemont, 482 F.3d at 935.
The Debtors’ Plan clearly provides not only for a payment schedule, but for the consequences of a default. The provisions concerning BRCB’s treatment established relevant payment due dates— in this instance, by December 31, 2013. In the absence of payment by that date, the Debtors were in default. The Plan afforded the Debtors a 60-day period to cure the default. Failure to cure required the Debtors to deed back certain property to BRCB.
The Debtors’ arguments concerning notice obligations and the suggestion that default did not occur until the expiration of the 60-day extension period are not supported by the plain language of the Plan. Neither are the arguments relevant to the issue before the Court. The Debtors defaulted. Whether before or after the filing of the motion, the Debtors were aware of the default and that BRCB demanded return of the property or payment. Far more than 60 days has passed and the Debtors neither made the payment nor delivered the deed. It is undisputed there was no cure.
Likewise, the Debtors’ contention that section 1142 is inapplicable because the Plan has been substantially consummated is incorrect for several reasons. First, the Debtors mistakenly allege that the Court ruled at the hearing concerning the modified plan that the Plan had been substantially consummated. In fact, the Court’s decision was the opposite. What is more, section 1142(b) does not provide that the Court may enter orders directing the debt- or to perform “any other act” necessary to effect substantial consummation of the confirmed plan. It provides that the court may direct any other act “necessary for the consummation of the plan.” 11 U.S.C. § 1142(b) (emphasis added). The bankruptcy court’s authority to enforce the terms of a confirmed plan therefore lapses only after the plan has been fully consummated.
So long as BRCB’s treatment under the Plan remains incomplete, this Court re*920tains its section 1142(b) authority because the Plan will not be fully consummated so long as the estate continues to be administered. The question of consummation is one of fact, and in the absence of an evi-dentiary foundation to reverse the Court’s prior finding, there is no basis on which the Court can determine the Plan has been consummated. The Plan in this case has not been consummated nor has there been substantial consummation.
Abstention
Once a bankruptcy court determines it has jurisdiction, the court ought to then consider whether the resolution of the matter is better left to another court. This is particularly true in this case because, while not requesting abstention, the Debtors argue that the enforcement of Plan terms would be better left to a state court. The court has the option of discretionary abstention under 28 U.S.C. § 1334(c)(1), which provides that
[N]othing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
After finding that it had jurisdiction over a chapter 11 trustee’s complaint to recover income generated post-confirmation for distribution to unsecured creditors pursuant to the plan, the court in In re Polar Molecular Corp. discussed the factors that led it to exercise its jurisdiction. 195 B.R. at 557 (Bankr.D.Mass.1996). First, the plan contained clauses providing that the court would retain jurisdiction. Id. Second, “the issues at hand [went] to the heart of consummation of the Plan, involving enforcement of its terms and affecting the amount of future distributions to unsecured creditors.” Id. Third, there was no related proceeding in state court, so the bankruptcy court was in the best position to efficiently rule on the trustee’s complaint. Id. Finally, the court was familiar with the plan and the parties involved. Id. Consequently, the court declined to abstain. Id. Each of those factors are present in this case.
The Seventh Circuit Court of Appeals notes that “federal courts generally should exercise their jurisdiction if properly conferred.” Therefore, “abstention is the exception rather than the rule.” In re Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 6 F.3d 1184, 1189 (7th Cir.1993). However, because section 1334(c)(1) is “somewhat oblique,” the Seventh Circuit has identified twelve factors to provide guidance to courts in deciding whether to abstain. Id., see In re Federalpha Steel LLC, 341 B.R. at 882. The factors are:
(1) the effect of abstention on the efficient administration of the estate;
(2) the predomination of state law issues over issues of bankruptcy law;
(3) the difficulty or unsettled nature of the applicable law;
(4) the presence of a related proceeding in a state or other nonbank-ruptcy court;
(5) the federal jurisdictional basis other than 28 U.S.C. § 1334;
(6) the relatedness or remoteness of the proceeding to the main bankruptcy case;
(7) the substance rather than form of an asserted “core” proceeding;
(8) the feasibility of severing state law claims from core bankruptcy matters;
(9) the burden on the bankruptcy court’s docket;
(10) the likelihood of forum shopping;
(11) the existence of a right to a jury trial; and
(12) the presence of nondebtor parties.
*921In re Chicago, Milwaukee, St Paul & Pac. R.R. Co., 6 F.3d at 1189.
As indicated, jurisdiction is properly conferred. Abstention, therefore, should be the exception. Abstention will not advance the efficient administration of this case. The issue is enforcement of a confirmed plan and there is not a predomi-nation of state law issues over bankruptcy law, nor is there a related proceeding in any other court. The substance of the issue is the enforcement and interpretation of a confirmed plan and is clearly a core proceeding. The matter is not burdensome to the Court’s docket. The Plan and Code provide for continued jurisdiction. The issue presented by the motion goes to the heart of enforcement of the Plan’s terms. There are no related proceedings pending in another forum. Finally, this Court is familiar with the Plan and the parties.
In light of the foregoing, the Debtors’ arguments fail. The Court has jurisdiction because BRCB’s motion arises in a case under title 11 and directly affects the estate and the recovery of creditors. The issue is central to the enforcement of the Plan. The Court is empowered to interpret its own orders and the provisions of confirmed plans, and section 1142(b) authorizes it to issue additional orders necessary to consummation of the Plan. Because the Plan clearly provides for the Debtors’ deeding of property to BRCB upon the Debtors’ failure to cure the default in payments within 60 days, and because the Debtors failed to cure the default within that period, they are obligated to deed the property to BRCB.
CONCLUSION
For the foregoing reasons, BRCB’s motion is GRANTED.
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
A separate order consistent with this decision will be entered.
. The above-styled Chapter 11 cases have been jointly administered since April 13, 2012.
. The 60-day cure period is embodied in the Plan provision stating, "If Haldeman (debtors) fail to make any payment within 60 days of its due date, they will deed back the remaining secured property to Black River Country Bank.” Amended Plan, Article V, Class IV, p. 10, Docket No. 187.
. It should be noted that the present action does not fall into either of the two categories the Supreme Court identified as “related to” proceedings in Celotex. See 514 U.S. at 308 n. 5, 115 S.Ct. 1493. It is not a cause of action owned by the Debtors which became property of the estate pursuant to 11 U.S.C. § 541. Nor is it a suit between third parties which has an effect on the bankruptcy estate. Instead, it is a creditor asking for an order requiring the Debtors to do what the Plan provided they would do. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497557/ | FEDERMAN, Chief Judge.
The Chapter 7 Trustee appeals from the Order of the Bankruptcy Court1 overruling the Trustee’s objection to the Debtor’s claimed exemption in the portion of his state income tax refund which came from the Minnesota Education Credit, as “government assistance based on need” under § 550.37, subd. 14 of the Minnesota Statutes. For the reasons that follow, we AFFIRM.
FACTUAL BACKGROUND
Debtor Paul R. Dmitruk filed a Chapter 7 bankruptcy case on April 26, 2013. At the time of filing, the Debtor, his wife, and three minor children lived on his $1,250 monthly income and $900 monthly food stamp allowance. He chose to claim Minnesota exemptions2 and, in an amended Schedule B, he claimed exemptions in several separate components of his federal and state income tax refunds under § 550.37, subd. 14 of the Minnesota Statutes, as “government assistance based on need.” The Chapter 7 Trustee objected to the exemptions, some of which the Bankruptcy Court allowed, and some of which the Court denied. This appeal involves only one component of the claimed exemptions: the portion of the Debtor’s 2013 state income tax refund for the Minnesota K-12 Education Credit in the amount of $1,357. The Bankruptcy Court overruled the Trustee’s objection and allowed the Debtor to claim the exemption under *923§ 550.87, subd. 14. The Chapter 7 Trustee appeals.
STANDARD OF REVIEW
We review the Bankruptcy Court’s findings of fact for clear error and conclusions of law de novo.3 The Bankruptcy Court’s statutory interpretation is a question of law that is subject to de novo review.4 Likewise, the allowance or disal-lowance of an exemption is subject to de novo review.5
DISCUSSION
The Debtor claimed his Minnesota Education Credit exempt under § 550.37, subd. 14 of the Minnesota Statutes. That statute provides, in relevant part:
Subd. 14. Public assistance. All government assistance based on need, and the earnings or salary of a person who is a recipient of government assistance based on need, shall be exempt from all claims of creditors including any contractual setoff or security interest asserted by a financial institution. For the purposes of this chapter, government assistance based on need includes but is not limited to Minnesota family investment program, general assistance medical care, Supplemental Security Income, medical assistance, Minnesota-Care, payment of Medicare part B premiums or receipt of part D extra help, MFIP diversionary work program, work participation cash benefit, Minnesota supplemental assistance, emergency Minnesota supplemental assistance, general assistance, emergency general assistance, emergency assistance or county crisis funds, energy or fuel assistance, and food support. The salary or earnings of any debtor who is or has been an eligible recipient of government assistance based on need ... shall, upon the debtor’s return to private employment or farming after having been an eligible recipient of government assistance based on need, ... be exempt from attachment, garnishment, or levy of execution for a period of six months after ... all public assistance for which eligibility existed has been terminated. The burden of establishing that funds are exempt rests upon the debtor.... 6
The statute does not specifically mention education credits in the list of examples of the types of government assistance which are exempt. However, the list is not exclusive, and so the question is whether the education credit portion of the tax refund fits within the Minnesota legislature’s concept of “government assistance based on need.” 7
We have recently said, in addressing whether a Minnesota state property tax refund was exempt under § 550.37, subd 14:
When a debtor elects to exempt property pursuant to state statute, courts determine such eligibility by looking to state law. In Minnesota, the goal of statutory interpretation is to determine the intent of the legislature. When ascertaining legislative intent, courts interpreting Minnesota statutes may be guided by the presumptions detailed in *924Minn.Stat. § 645.17. That statute provides that “the legislature does not intend a result that is absurd, impossible of execution, or unreasonable” and “the legislature intends the entire statute to be effective and certain.” It is well-settled that exemption statutes must be construed liberally in favor of the debtor and in light of the purposes of the exemption.8
The Trustee asserts that the Bankruptcy Court erred in finding the Minnesota Education Credit was government assistance because: (a) the purpose of the Education Credit is not to provide relief for low income families; (b) treating the Education Credit refund as government assistance based on need leads to an unreasonable result; and (c) the language of the statute is clear that Education Credit refunds do not constitute government assistance based on need when compared to the payments and subsidies specifically listed in Minn.Stat. § 550.37 subd. 14. He also asserts that the caselaw does not support the Bankruptcy Court’s decision.
The Trustee has concisely summarized the Minnesota Education Credit: The Minnesota Education Credit was enacted in 1997 and is currently codified in § 290.0674 of the Minnesota Statutes. It is a refundable credit of up to 75 percent of education-related expenses for each qualifying child in kindergarten through grade twelve, with a maximum credit of $1,000 per child. The $1,000 maximum for one child phases out at a rate of $1 for each $4 of income over $33,500, and the maximum for more than one child ($1,000 multiplied by the number of qualifying children) phases out at a rate of $2 for each $4 of income over $33,500. The credit is fully phased out when income reaches $37,500 for families with two qualifying children; when income reaches $39,500 for families with three qualifying children; at $41,500 for families with four qualifying children; and so on.
Minnesota also allows a tax deduction (as opposed to a tax credit) for education related expenses of up to $2,500 for dependents in grades 7 to 12 and $1,625 for each dependent in kindergarten through grade 6.9
Eligible education expenses are the same for the deduction as they are for the credit, except that payment of nonpublic school tuition qualifies for the deduction, but does not qualify for the credit. Generally, eligible expenses for the credit include expenses related to transportation, textbooks, instructional materials, tutoring, academic summer school and camps, and up to $200 for computer or education related software.10 The credit is fully refundable, meaning that, if an individual’s Education Credit exceeds his or her tax liability, the excess is still paid to the individual in the form of a refund check.11 In addition, parents may assign payment of the credit to participating financial institutions and tax-exempt foundations, and in effect, receive a loan that is paid directly to a third party provider of educational *925services and programs.12 “This allows very low-income families to purchase educational products and services in anticipation of receiving a credit when they file their tax return the following year, with the credit paid directly to the financial institution or foundation that accepted the assignment.”13
As the Trustee points out, § 290.0674 does not have an express “purpose” section, and legislative history as to the purpose of that particular statutory provision is scant.14 In In re Johnson15 and In re Hardy,16 we looked at the characteristics of the different types of income tax refunds to determine whether the legislative purpose of the refunds was “based on need” under the plain and ordinary meaning of the concept. In doing so, we approved the analysis in a prior Minnesota bankruptcy court case determining that the federal Earned Income Tax Credit due a debtor was exempt.17 Without the benefit of clearly-stated legislative purpose, the same principles apply here.
Primarily, in order to be exempt, the refund must be intended to “address the basic economic needs of low-income recipients.”18 As outlined above, the Minnesota Education Credit at issue here is phased out at relatively low income levels, similar to the income thresholds applicable to the federal Earned Income Credit and the Minnesota Working Family Credit, which the Court in Tomczyk held fall within the § 550.37, subd. 14 exemption.19 In contrast, we have held that the Minnesota property tax refund is not “based on need” because it is available to people earning more than $100,000, and in some cases, people with unlimited income.20 Similarly, we held that the federal Additional Child Tax Credit was not “based on need” where it was available to individuals earning more than $75,000 per year and married individuals earning $110,000.21
The Trustee points to Mueller v. Allen,22 *926where the United States Supreme Court was called upon to determine whether the Minnesota education tax deduction was unconstitutional because people could claim the deduction for tuition at parochial schools.23 The Supreme Court there said that one of the reasons the deduction statute passed constitutional muster was that the tax deduction has “the secular purpose of ensuring that the state’s citizenry is well-educated,” as well as “assuring the continued financial health of private schools, both sectarian and nonsectarian.”24 The Trustee therefore argues that the purpose of both the deduction and the tax credit is to ensure education for the citizenry, not to provide assistance based on need.
Undoubtedly, giving children in Minnesota a quality education is one purpose of the Education Credit, as the Supreme Court said it was for the education deduction. But, the Supreme Court was not dealing with exemptions in Mueller v. Allen, nor was it dealing with the Education Credit, and so it was not called upon to determine whether the credit involved here is intended to assist low-income people obtain a quality education for their children.
The Trustee also relies on Bums v. Einess.25 In that case, the appellant asserted that his wages were exempt from garnishment under § 550.37, subd. 14 because he had been given in forma pauperis status in state court proceedings within the prior six months.26 In essence, he asserted that the IFP status was awarded “based on need,” and so the appellant fit within the exemption protecting income of those receiving assistance based on need within the prior six months. The Minnesota Court of Appeals rejected that argument, however, because, “[ajlthough IFP status is awarded based on need, its purpose is to provide access to the courts and not to address basic economic needs.”27 Moreover, the Court held, “the evaluation of an IFP application is significantly less rigorous than the evaluation of qualifications for the assistance programs listed in section 550.37, subd. 14,” which “provide direct payments or subsidies to address the basic economic needs of low-income recipients.”28 The Trustee asserts that, like IFP status, the Education Credit has an “economic component.” But, he asserts, it does not provide direct payments or subsidies to address the basic needs of low-income recipients; instead, it simply provides access to the courts.
Education — like food and medical care— is a basic need of all children in Minnesota, and we believe the Education Credit’s ultimate purpose is to assist people with low incomes in providing an education for their children. In contrast to being given IFP status, the Education Credit is in monetary form (like the federal EIC is) and, thus, does indeed provide “direct payments or subsidies to address the basic economic needs of low-income recipients” in obtaining quality education for their children.
*927The Trustee next asserts that, because payment of education-related expenses is “voluntary,” it is similar to an employed taxpayer overwithholding in order to receive a refund, and not need-based assistance. We disagree. As the Court in Tomczyk held with regard to the exempt federal EIC, and as we said in In re Johnson, it is significant that the Education Credit here is not, technically, a refund, inasmuch as a person is entitled to receive it regardless of whether they had any tax liability.29 Rather, as opposed to being a refund of an overpayment of taxes which have been paid by the taxpayer, the Education Credit is monetary assistance the Minnesota legislature has determined relatively low-income people should be given — whether they paid any taxes or not— to assist with their children’s education. As such, it is assistance “based on need,” not a voluntary pseudo-savings program.
Finally, the Trustee asserts that giving the Education Credit exempt status under § 550.37, subd. 14 leads to an absurd result because the income of anyone who receives such a credit is protected outside of bankruptcy for six months. In other words, someone wishing to protect their income or assets from collection outside of bankruptcy could do so by claiming the credit. But that is true of all kinds of need-based assistance, and that is one reason we believe the income thresholds are particularly important inasmuch as they hamper potential abuse.
In sum, we believe the Education Credit is more comparable to the federal EIC, which Tomczyk held to be exempt, than it is to the federal Additional Child Tax Credit, Minnesota’s property tax credit, or being granted IFP status in court proceedings. Because the Education Credit is available only to individuals with relatively low income, is a refundable credit (as opposed to a refund of overpayment of taxes) and because it is, in large part, intended to assist low-income individuals in obtaining quality education for their children, we conclude that it is a “direct payment[ ] or subsid[y] to address the basic economic needs of low-income recipients” in obtaining such quality education for their children. It is, therefore, government assistance based on need under § 550.37, subd. 14, and the Bankruptcy Court correctly concluded it is exempt under that statute.
CONCLUSION
Based on the foregoing, the Order of the Bankruptcy Court permitting the Debtor’s claimed exemption in the portion of his state income tax refund attributable to the Minnesota Education Credit as a “government assistance benefit” is AFFIRMED.
. The Honorable Kathleen H. Sanberg, United States Bankruptcy Judge for the District of Minnesota.
. Bankruptcy debtors in Minnesota may choose either the federal exemptions or the exemptions provided under Minnesota and other federal law. Manty v. Johnson (In re Johnson), 509 B.R. 213, 215 (8th Cir. BAP 2014) (citing Martin v. Bucher (In re Martin), 297 B.R. 750, 751-52 (8th Cir. BAP 2003)).
. Id. at 214 (citing Addison v. Seaver (In re Seaver), 540 F.3d 805, 809 (8th Cir.2008)).
. Id. at 214-15 (citing Graven v. Fink (In re Graven), 936 F.2d 378, 384-85 (8th Cir.1991)).
. Id. at 215 (citing Drenttel v. Jensen-Carter (In re Drenttel), 309 B.R. 320, 322 (8th Cir. BAP 2004)).
. Mmn.Stat. § 550.37, subd. 14 (emphasis added).
. In re Johnson, 509 B.R. at 215 (citing In re Tomczyk, 295 B.R. 894, 896 (Bankr.D.Minn. 2003)).
. Id. at 215-16 (citations omitted).
. Minn.Stat. § 290.01, subd. 19(b)(3).
. Minn.Stat. §§ 290.01, subd. 19(b)(3); 290.0674 subd. 1. See also Nina Manzi and Lisa Larson, The K-12 Education Deduction and Credit: An Overview, House Research Short Subjects (January 2014), found at http://www.house.leg.state.mn.us/hrd/pubs/ss/ sseducdc.pdf.
. Manzi and Larson, The K-12 Education Deduction and Credit: An Overview, House Research Short Subjects (January 2014). See also Nina Manzi & Lisa Larson, Income Tax Deductions and Credits for Public and Nonpublic Education in Minnesota, House Research Department (September 2011) at 11, found at http://www.house.leg.state.mn.us/ hrd/pubs/educcred.pdf.
. Id.
. Id.
. Hence, the Trustee points to the preamble to the overarching Act enacted by the Minnesota legislature in 1997 dealing generally with education issues, including § 290.0674:
An act relating to education; kindergarten through grade 12; providing for general education; special programs; lifework development; education organization, cooperation, and facilities; education excellence; academic performance; education policy issues; libraries; technology; state agencies; conforming and technical amendments; school bus safety; tax deduction and credit; appropriating money; amending Minnesota Statutes....
Education — K Through 12 — General Education, Special Programs, Technology, Libraries, Academic Performance, Bus Safety, Taxes, 1997 Minn. Sess. Law Serv. 1st Sp. Sess. Ch. 4.
. In re Johnson, 509 B.R. 213 (8th Cir. BAP 2014).
. Hardy v. Fink (In re Hardy), 503 B.R. 722 (8th Cir. BAP 2013).
. In re Tomczyk, 295 B.R. 894 (Bankr. D.Minn.2003).
. In re Johnson, 509 B.R. at 218-19 (quoting Burns v. Einess, 2011 WL 5829323 at *5 (Minn.Ct.App. Nov. 21, 2011) (not reported)).
. In re Tomczyk, 295 B.R. 894. By way of example, for the 2013 tax year, an individual’s adjusted gross income must be less than $37,870 ($43,210 for married filing jointly) with one qualifying child to qualify for the federal Earned Income Tax Credit. See http:// www.irs.gov/pub/irs-pdi/p596.pdf at p. 17. The Minnesota Working Family Credit tracks the federal EITC, so it is comparable as well. See Tomczyk, 295 B.R. at 897, n. 3.
. In re Johnson, 509 B.R. at 217, 219.
. In re Hardy, 503 B.R. at 725.
. 463 U.S. 388, 103 S.Ct. 3062, 77 L.Ed.2d 721 (1983) (analyzing the then-current statute, Minn.Stat. § 290.09(22), now codified at § 290.01, subd. 19b(3)).
. Note that, as mentioned above, in contrast to the deduction at issue in Mueller v. Allen, private school tuition is not a qualifying education expense for the Education Credit at issue here, so no one has asserted that the Education Credit violates the Establishment Clause of the First Amendment.
. 463 U.S. at 395, 103 S.Ct. at 3067.
. 2011 WL 5829323 (Minn.Ct.App. Nov. 21, 2011) (not reported).
. Recall, § 550.37, subd. 14 also protects "[t]he salary or earnings of any debtor who is or has been an eligible recipient of government assistance based on need ... for a period of six months after ... all public assistance for which eligibility existed has been terminated.”
. Id. at *5.
. Id.
. In re Tomczyk, 295 B.R. at 896; In re Johnson, 509 B.R. at 216. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497558/ | MEMORANDUM OF DECISION
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the “Motion of the Defendant, U.S. National Bank Association[1], to Dismiss Count I of Debt- or’s Complaint” (the “Motion to Dismiss”) filed by U.S. National Bank Association (“U.S. Bank”), the “Objection to Motion of U.S. Bank to Dismiss” (the “Objection”) filed by Safina Mbazira (the “Debtor”), and the “Motion by Defendant [U.S. Bank] for Certification of State Law Question to Massachusetts Supreme Judicial Court” (the “Motion to Certify Question”) filed by U.S. Bank. The question presented, as described by the Motion to Certify Question, is
*14Whether a mortgage encumbering registered land, whose certifícate of acknowl-edgement mistakenly omits the mortgagor’s name, but which mortgage was accepted by the Land Court for registration and is noted on the certificate of title of such registered land, provides constructive notice.2
Put another way, the parties seek a determination whether In re Giroux3 and In re Bower,4 which both held that such a defect rendered a mortgage recorded in the registry of deeds incapable of providing constructive notice, applies to an equally defective instrument registered in the Massachusetts Land Court and noted on the certificate of title. For the reasons set forth below, I will deny the Motion to Dismiss and the Motion to Certify Question.
II. BACKGROUND
For the purposes of a motion to dismiss, I must assume the truth of all well-pleaded facts set forth in the complaint.5 In any event, the facts are not in dispute and the parties agree that the Motion to Dismiss presents a pure question of law.
The Debtor is the sole owner of real property located at 977 Trapelo Road in Waltham, Massachusetts (the “Property”).6 The purchase of the Property was financed through Fremont Investment & Loan (“Fremont”) on July 25, 2005.7 As part of that transaction, the Debtor executed two promissory notes in favor of Fremont in the original principal amounts of $528,000.00 (the “First Note”) and $182,000.00 (the “Second Note”) and granted a first and second mortgage to Mortgage Electronic Registration Systems, Inc. (“MERS”), as nominee for Fremont, to secure the respective obligations under the notes (the “First Mortgage” and the “Second Mortgage,” respectively).8 On July 26, 2005, the deed transferring the Property to the Debtor was registered in the Middlesex South Registry District of the Land Court (the “Land Court”) and noted on certificate of title No. 234510 (the “Certificate of Title”), as were both the First Mortgage and Second Mortgage.9 On July 28, 2008, an assignment of the First Mortgage dated June 20, 2008, purporting to assign the First Mortgage from MERS to U.S. Bank as trustee, was registered in the Land Court and noted on the Certificate of Title (the “Assignment”).10
The Debtor filed her Chapter 11 petition on November 12, 2013. On “Schedule A— Real Property” (“Schedule A”), the Debtor listed a fee simple interest in the Property which she valued at $576,400.00, subject to secured claims in the amount of $770,182.60. On “Schedule C — Property Claimed As Exempt” (“Schedule C”), the Debtor claimed an exemption in the Property in the amount of $500,000.00 pursuant to Mass. Gen. Laws ch. 188, § 3.
*15On February 25, 2014, the Debtor commenced the present adversary proceeding, seeking, inter alia, a determination that the First Mortgage is invalid pursuant to 11 U.S.C. § 506(d) and thus preserved for the benefit of the estate pursuant to 11 U.S.C. § 551. As grounds therefor, the Debtor alleged that the certificate of ac-knowledgement (the “Acknowledgement”) affixed to the First Mortgage was materially defective because it failed to identify the Debtor as the person who executed the First Mortgage. The Acknowledgement, which was attached to the Motion to Dismiss, reads as follows:
Commonwealth of Massachusetts, County ss:
On this 25th day of July, before me, the undersigned notary public, personally appeared
proved to me through satisfactory identification, which was/were [illegible], to be the person(s) whose name(s) is/are signed on the preceding document, and acknowledged to me that he/she/they signed it voluntarily for its stated purpose
/s/ Patricia J. Stokes-Ramos
Patricia J. Stokes-Ramos
Notary Public
Commonwealth of Massachusetts
My Commission Expires
June 20, 200811
The blank space between “personally appeared” and “proved to me” is where the notary should have inserted the Debtor’s name. I further note that the Acknowl-edgement does not indicate the year in which it was executed.
After several extensions to file an answer, U.S. Bank instead filed the Motion to Certify Question on May 23, 2014, asserting that “the notice provided by a mortgage containing a purportedly defective acknowledgement noted on the certificate of title of registered land appears to be an issue of first impression,” making certification to the Supreme Judicial Court of Massachusetts appropriate.12 Reasoning that consideration of the Motion to Certify Question was premature in the absence of an answer, I continued it generally and ordered U.S. Bank to file a responsive pleading. On June 3, 2014, U.S. Bank filed the Motion to Dismiss accompanied by a supporting memorandum. The Debt- or filed the Objection on July 5, 2014. I heard the Motion to Dismiss on July 9, 2014, and, at the conclusion of oral arguments, took the matter under advisement. I have since consolidated my consideration of the Motion to Dismiss with the Motion to Certify Question.
III. POSITIONS OF THE PARTIES
A. U.S. Bank
U.S Bank asserts that the Debtor cannot prevail on her complaint because she cannot establish that the First Mortgage fails to give constructive notice. While U.S. Bank concedes that the nature of the defect in the Acknowledgement is the same as it was in In re Giroux and In re Bower, it nonetheless contends that the registered land system is governed by a *16distinct set of statutory provisions and principles that mandate a different result. Indeed, U.S. Bank notes that the analyses of both of those decisions was informed by reference to Mass. Gen. Laws ch. 183, §§ 4, 29, and 30, which do not apply to the registered land system.
U.S. Bank begins from the premise that the Massachusetts registered land system is designed to promote certainty of title and, unlike recorded land, has gone through an adjudication process to quiet title. This alone, it posits, suggests a very different result. Moreover, U.S. Bank asserts that pursuant to Mass. Gen. Laws ch. 185, §§ 46, 57, and 58, the act of registration of an instrument affecting registered land itself operates as constructive notice to third parties. Also, it states that pursuant to Mass. Gen. Laws ch. 185, § 67, a mortgage takes effect upon registration. Furthermore, relying on Doyle v. Commonwealth, 13 U.S. Bank argues that certificates of title are “ ‘conclusive as to all matters contained therein.’”14 U.S. Bank thus urges that a bona fide purchaser need only look at the certificate of title and would therefore be charged with constructive notice of the First Mortgage.
B. The Debtor
The Debtor asserts that the First Mortgage is unperfected in light of the material defect contained within the Acknowledgement, allowing her to avoid it pursuant to 11 U.S.C. §§ 544(a)(3) and 1107 as a bona fide purchaser regardless of actual knowledge. She argues that the distinction between registered land and recorded land makes no difference in this context and In re Giroux and In re Bower should control. The Debtor relies on Mass. Gen. Laws ch. 185, § 58 for the proposition that the provisions of law relative to recorded land also apply to registered land. As such, she contends registration is simply a procedure and cannot essentially repair a material defect. Although the Debtor concedes there is no Massachusetts case law on the subject, she cites In re Goheen15 as a case having a substantially similar fact pattern where the Chapter 13 trustee was able to avoid an unperfected mortgage noted on the certificate of title in Ohio.
IV. DISCUSSION
A. The Rule 12(b)(6) Standard
Pursuant to Fed.R.Civ.P. 12(b)(6), made applicable in adversary proceedings by Bankruptcy Rule 7012(b), a court must dismiss a complaint if it fails to state a claim upon which relief can be granted.16 “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.’ ”17 “In deciding a motion to dismiss, however, a court is not always limited to the facts alleged in the plaintiffs complaint.”18 To the contrary,
*17[i]n cases where “a complaint’s factual allegations are expressly linked to — and admittedly dependent upon — a document (the authenticity of which is not challenged), that document effectively merges into the pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6).”19
The Debtor does not contest the authenticity of the Acknowledgement attached to the Motion to Dismiss and agrees that it may be considered at this stage.
B. In re Giroux and In re Bower
To inform the present dispute, a brief discussion of In re Giroux and In re Bower is warranted. In In re Giroux, Judge Feeney of this district considered whether the failure to list the mortgagor’s name in a mortgage acknowledgement was a material defect that should have prevented the mortgage from having been accepted for recordation under Mass. Gen. Laws ch. 183, § 29.20 That section provides in relevant part:
No deed shall be recorded unless a certificate of its acknowledgment or of the proof of its due execution, made as hereinafter provided, is endorsed upon or annexed to it, and such certificate shall be recorded at length with the deed to which it relates ... 21
Recognizing there were no Massachusetts decisions directly on point, Judge Feeney relied on McOuatt v. McOuatt,22 a case in which the Supreme Judicial Court explained:
[0]rdinarily an acknowledgment is not an essential part of a deed; but if it is desired to record the deed in order to charge the world with notice of the conveyance, then it is necessary that the deed be acknowledged and that a certificate reciting this fact be attached to the deed. Doubtless, that is the principal function of a certificate of acknowledgment.23
She found that the Supreme Judicial Court signaled its adherence to the requirement of expressly stating that the execution of an instrument is the grantor’s free act or deed by holding:
[TJhere is no finding that McOuatt, after he signed the deed, ever said a word to the one who made out the certificate of acknowledgment. On the other hand, there is an express finding that he did not say anything indicating that he acknowledged the instrument as his free act and deed. The master has set forth all the subsidiary findings relative to this matter of acknowledgment. We are unable to discover anything in his report that would justify a conclusion that McOuatt acknowledged the instrument of conveyance to be his free act and deed. The only conclusion that can be reached from the report is that the deed was not duly acknowledged as required by the statute.24
In light of this authority, Judge Feeney reasoned that Massachusetts requires strict formality in the execution of mortgage acknowledgements, rendering the omission of the debtor’s name from the acknowledgement a patent and material *18defect.25
In the absence of such strict formality, Judge Feeney looked to Graves v. Graves26 to determine the consequences of the mortgage’s improvident recordation.27 In that case, the Supreme Judicial Court held that an
instrument of defeasance, not being acknowledged, was improvidently admitted to registration, and the record does not operate as constructive notice of the execution of the assignment of the equity of redemption, as against an attaching creditor of the equity; and therefore the title of the attaching creditor, though subsequent in time, takes precedence of the assignment.28
She also quoted Dole v. Thurlow29 where the Supreme Judicial Court similarly held:
[I]t appears to us, that the revised statutes do not alter the law in this respect. By the former St. of 1788, c. 37, and the decisions under it, the law was, that by the execution and delivery of a deed, the estate passed, as between grantor and grantee, and the grantee became seized. But to give it full effect, as against purchasers and creditors of the grantor, recording was necessary; and as a prerequisite to recording, acknowledgment, or proof by one or more subscribing witnesses, was necessary. Actual recording, without one of there prerequisites, would not give effect to the deed.30
With these cases in mind, Judge Feeney predicted that the Supreme Judicial Court would conclude that a mortgage containing a materially defective acknowledgement, though recorded, would not give constructive notice to a bona fide purchaser.31 Accordingly, she held that the Chapter 7 trustee, having the rights and powers of a bona fide purchaser under 11 U.S.C. § 544(a)(3) without regard to his actual knowledge, could avoid the mortgage.32
On appeal, the United States District Court for the District of Massachusetts affirmed, agreeing that because Massachusetts is a strict formality state, the Supreme Judicial Court would likely hold that the omission of the mortgagor’s name from the acknowledgement was not a purposeless formality.33 Approximately one year later, I was faced with the same question in In re Bower and reached the same conclusion as Judge Feeney in In re Giroux.34
C. Registered Land
In Massachusetts, real property may be either registered or unregistered, which is also referred to as recorded.35 Most real property in Massachusetts is unregistered land and is conveyed by the delivery of a deed.36 Even -without record*19ing the deed in the appropriate registry, the transfer of unregistered land is valid as between the parties, their heirs, devi-sees, and other persons with actual notice of the deed.37 If, however, the deed “is recorded in the registry of deeds for the county or district in which the land to which it relates lies,” third parties are then said to have constructive notice of the deed’s existence.38
In contrast, “[registered land is not recorded in the same manner as other real estate, but is governed by Massachusetts statutes codifying a version of what is commonly referred to as a ‘Torrens System’ for the registration of land titles.”39 The land registration system was enacted in 1898,40 “to provide a means by which the title to land may be readily and reliably ascertained.”41 “The intent of the statute was to simplify land transfer and to provide bona fide purchasers with conclusiveness of title.”42 To this end, “[rjegistered land has gone through an adjudication process in order to quiet title, and ‘the Commonwealth guarantees and insures the title to land that is registered.’ ” 43
Upon entry of the judgment of registration, a certified copy of the judgment is sent to the register of deeds so the judgment, including all encumbrances, can be transcribed in a registration book, creating an original certificate of title.44 Once a certificate of title is issued, “every subsequent purchaser of registered land taking a certificate of title for value and in good faith, shall hold the same free from all encumbrances except those noted on the certificate” with the exception of certain encumbrances specified by statute such as taxes, federal tax liens, betterment assessments, and leases for a term not exceeding seven years.45 As such, it is generally said that “a person examining a certificate of title in the land registry is entitled to the conclusion that the property is not encumbered by anything that does not show on the certificate.”46
The Supreme Judicial Court has recognized two exceptions to the general rule that subsequent purchasers take free from all encumbrances except those noted on the certificate. The first exception is straightforward&emdash;a purchaser takes subject to an unregistered interest, such as an easement or restriction, if the purchaser *20had actual knowledge of the unregistered interest.47 The second exception, which is more nuanced, applies when “there were facts described on [the] certificate of title which would prompt a reasonable purchaser to investigate further other certificates of title, documents, or plans in the registration system.”48 This exception has been applied in cases where a registration decree and certificate of title contained a general reference to rights granted by a recorded subdivision plan or deed, reasoning that even without specificity, a purchaser has notice of the unregistered interest and would investigate further.49
Once land is registered, an owner “may convey, mortgage, lease, charge or otherwise deal with it as fully as if it had not been registered,” and “may use forms of deeds, mortgages, leases or other voluntary instruments, like those now in use, sufficient in law for the purpose intended.” 50 Notably, however, these instruments, with few exceptions not relevant here, will not “take effect as a conveyance or bind the land, but shall operate only as a contract between the parties, and as evidence of authority to the recorder or assistant recorder to make registration.”51 Indeed, “[t]he act of registration only shall be the operative act to convey or affect the land.”52 If an owner desires to convey registered land, the owner must execute a deed of conveyance which either the grant- or or grantee must present to the assistant recorder, who will then make out a new certificate of title to the grantee and stamp the grantor’s surrendered certificate of title “canceled.”53
Similarly, Mass. Gen. Laws ch. 185, § 67, which applies to registering mortgages, provides:
The owner of registered land may mortgage it by executing a mortgage deed. Such deed may be assigned, extended, discharged, released in whole or in part, or otherwise dealt with by the mortgagee by any form of deed or instrument sufficient in law for the purpose. But such mortgage deed, and all instruments which assign, extend, discharge and otherwise deal with the mortgage, shall be registered, and shall take effect upon the title only from the time of registration.54
Registration of a mortgage or other encumbrance, however, does not trigger a *21new adjudication of the status of title. Instead, “the assistant recorder shall enter upon the certifícate of title a memorandum of the purport of the mortgage deed, the time of filing and the file number of the deed, and shall sign the memorandum.”55 Only when there is a question or dispute as to the proper memorandum to be made in pursuance of an instrument does the assistant recorder refer the matter to the Land Court for a full hearing.56
Unlike the recorded land system, there is no express requirement in the statutory provisions governing registered land that a deed must be acknowledged as a prerequisite to registration.57 Indeed, Chapter 185 only expressly mandates three documents be acknowledged: (1) a power of attorney for any person procuring land for another; (2) a revocation of such a power of attorney; and (3) a written instrument withdrawing land from the registration system.58 Nevertheless, Mass. Gen. Laws ch. 185, § 58, which is titled “Notice of registering, filing or entering,” provides:
Every conveyance, lien, attachment, order, decree, instrument or entry affecting registered land, which would under other provisions of law, if recorded, filed or entered in the registry of deeds, affect the land to which it relates, shall, if registered, filed or entered in the office of the assistant recorder of the district where the land to which such instrument relates lies, be notice to all persons from the time of such registering, filing or entering.59
Although this section is somewhat awkwardly phrased, it essentially states that an instrument that would legally affect land if recorded in the registry of deeds will provide notice to all persons if registered.60 Thus, Mass. Gen. Laws ch. 185, § 58 incorporates the filing standards for recorded land, including Mass. Gen. Laws ch. 183, §§ 29 and 30, into the land registration system as the condition for the act of registration to be notice to third parties.61
*22D. Avoidance of Unperfected Interest Pursuant to 11 U.S.C. § 511(a)(3)
Pursuant to 11 U.S.C. § 544(a)(8), a trustee is vested with the rights of a hypothetical bona fide purchaser of real property “without regard to the knowledge of the trustee or of any creditor.”62 These rights are defined by reference to state law.63 Section 1107(a) of the Bankruptcy Code grants these same rights to a Chapter 11 debtor in possession.64 Accordingly, whether the Debtor may avoid the First Mortgage depends solely on whether the Debtor had constructive notice.
In the present case, the Acknowl-edgement omits the Debtor’s name, as well as the year from the date. In In re Bower, I agreed with Judge Feeney’s conclusion in In re Giroux that the Supreme Judicial Court would hold that an acknowl-edgement that does not state the name of the mortgagor is materially defective.65 Therefore, I find that the Acknowledgement is materially defective.
I do not understand U.S. Bank to dispute the material defectiveness of the Acknowledgement&emdash;they do not address need to or requirements for acknowledgement at all&emdash;but instead urge that the land registration system is so different from the recorded land system that a different re-suit is warranted. Essentially, U.S. Bank posits that under a plain reading of Mass. Gen. Laws ch. 185, §§ 46, 57, and 58, all parties are charged with constructive notice of any encumbrances noted on the certificate of title of registered land. Therefore, U.S. Bank reasons, the Debtor has constructive notice of the First Mortgage because it appears on the Certificate of Title. Ultimately, this argument is flawed for several reasons.
As I noted above, U.S. Bank reads Mass. Gen. Laws ch. 185, § 58 wholly out of context.66 It does not provide that every registered instrument provides notice to all persons, but only those “which would under other provisions of law, if recorded, filed or entered in the registry of deeds, affect the land to which it relates.”67 Because a mortgage with a defective ac-knowledgement should not be accepted for recordation under Mass. Gen. Laws ch. 188, § 29, and, under the common law, does not give constructive notice if it is improvidently recorded, the registration of the First Mortgage does not, as a matter of law, provide notice to third parties under Mass. Gen. Laws ch. 185, § 58. In this way, unacknowledged instruments are treated the same in both the registered and unregistered (recorded) land systems.
*23The fact that the First Mortgage appears on the Certificate of Title does not change this result. While Mass. Gen. Laws ch. 185, § 46 provides that a “purchaser of registered land taking a certificate of title for value and in good faith, shall hold the same free from all encumbrances except those noted on the certificate,” 68 that must be read in conjunction with Mass. Gen. Laws ch. 185, § 58 which governs when a registered instrument is notice to third parties.69 The Supreme Judicial Court has recognized that “applicable rules of statutory construction require courts to ‘construe statutes that relate to the same subject matter as a harmonious whole and avoid absurd results.’”70 It would be absurd if, on one hand, the statute precluded the First Mortgage from giving notice of itself on account of its defective acknowledgement, but, on the other, treated its notation on the Certificate as notice to all parties. I concede, however, that this issue ultimately may be so abstract and esoteric that it could only exist as a practical matter in an avoidance action under 11 U.S.C. § 544(a)(3) where a Trustee or debtor in possession may cast off the burden of actual notice and adopt the persona of a bona fide purchaser who, by definition, lacks actual notice.
This result is also consonant with the purpose of the registered land system and time honored principles of Massachusetts law. While it is often said that “[t]he purpose of land registration is to provide a means by which the title to land may be readily and reliably ascertained,” 71 the Supreme Judicial Court has also stated that “[i]t is clear from the history of the Torrens system that the underlying purpose of title registration is to protect the transferee of a registered title.”72 Indeed, registration protects bona fide purchasers from unregistered interests, unless they have actual notice or the certificate of title contains facts that would prompt a further investigation of the registration system.73 Moreover, a contrary ruling would effectively mean that registered mortgages do not require an acknowledgement, the very proof that the mortgagor validly executed the encumbrance appearing on the certificate. Such a practice would hardly make “the title to land ... readily and reliably ascertained.” 74
In sum, because the First Mortgage cannot give constructive notice of itself, the Debtor has stated a plausible claim for relief and dismissal is unwarranted.75 *24Moreover, as resolution of the issue was apparent from the statutory text, certification to the Supreme Judicial Court is unnecessary.
V. CONCLUSION
In light of the foregoing, I will enter an order denying the Motion to Dismiss and the Motion to Certify Question.
. As Trustee relating to J.P. Morgan Mortgage Acquisition Corp. 2005-FRE1 Asset Backed Pass-Through Certificates, Series 2005-FRE1.
. Motion to Certify Question, Docket No. 22 at 2.
. Agin v. Mortg. Elec. Registration Sys. (In re Giroux), No. 08-14708, 2009 WL 1458173 (Bankr.D.Mass. May 21, 2009) aff'd Mortg. Elec. Registration Sys. v. Agin, No. 09-CV-10988, 2009 WL 3834002 (D.Mass. Nov. 17, 2009).
. Agin v. Mortg. Elec. Registration Sys. (In re Bower), 10-10993-WCH, 2010 WL 4023396 (Bankr.D.Mass. Oct. 13, 2010)
. See Banco Santander de Puerto Rico v. Lopez-Stubbe (In re Colonial Mortg. Bankers Corp.), 324 F.3d 12, 15 (1st Cir.2003).
. Complaint, Docket No. 1 at ¶ 12.
. Id. at ¶ 13.
. Id. at ¶¶ 18-19, 28.
. Id. at ¶¶ 12, 17, 28.
. Id. at ¶ 20.
. Exhibit B, Docket No. 31.
. Motion to Certify Question, Docket No. 22 at ¶ 3 (emphasis in original).
. Doyle v. Commonwealth, 444 Mass. 686, 830 N.E.2d 1074 (2005).
. Id. at 690-691, 830 N.E.2d 1074 (quoting Mass. Gen. Laws ch. 185, § 54).
. Burks v. Deutsche Bank Nat'l Trust Co. (In re Goheen), 490 B.R. 730, 741 (Bankr.S.D.Ohio 2012) aff'd, 10-16427, 2012 WL 2709802 (S.D.Ohio Jul. 6, 2012).
. See Hunnicutt v. Green (In re Green), BAP MB 13-061, 2014 WL 3953470, at *5 (1st Cir. BAP Aug. 6, 2014).
. Ashcroft v. Iqbal, 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Alantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
. Rederford v. U.S. Airways, Inc., 586 F.Supp.2d 47, 50 (D.R.I.2008).
. Machado v. Sanjurjo, 559 F.Supp.2d 167, 171-172 (D.P.R.2008) (quoting Beddall v. State St. Bank and Trust Co., 137 F.3d 12, 17 (1st Cir.1998)).
. In re Giroux, 2009 WL 1458173, at *8.
. Mass. Gen. Laws ch. 183, § 29.
. McOuatt v. McOuatt, 320 Mass. 410, 414, 69 N.E.2d 806 (1946).
. McOuatt v. McOuatt, 320 Mass, at 413-14, 69 N.E.2d 806,
. Id. at 414, 69 N.E.2d 806.
. In re Giroux, 2009 WL 1458173, at *8.
. Graves v. Graves, 72 Mass. 391 (1856).
. In re Giroux, 2009 WL 1458173, at *10.
. Graves v. Graves, 72 Mass. at 392-393.
. Dole v. Thurlow, 53 Mass. 157, 1846 WL 4099 (1846).
. In re Giroux, 2009 WL 1458173, at *10 (quoting Dole v. Thurlow, 53 Mass. 157, 1846 WL 4099 at *4 (citations omitted)) (emphasis in original).
.Id.
. Id.
. Mortg. Elec. Registration Sys., Inc. v. Agin, 2009 WL 3834002, at *2.
. In re Bower, 2010 WL 4023396, at *5-6.
. Bailey v. Wells Fargo Bank (In re Bailey), 468 B.R. 464, 477 n. 19 (Bankr.D.Mass.2012)
. Id.
. See Mass. Gen. Laws ch. 183, § 4.
. Id.
. In re Bailey, 468 B.R. at 477 n. 19 (citing The Torrens System, 25 Law. & Banker. Cent. LJ. 226 (1932)). See Kozdras v. Land/Vest Properties, Inc., 382 Mass. 34, 43, 413 N.E.2d 1105 (1980); McQuesten v. Commonwealth, 198 Mass. 172, 177, 83 N.E. 1037 (1908).
. Mass. Gen. Laws ch. 185, as inserted by St. 1898, c. 562, § 2. See Killam v. March, 316 Mass. 646, 648, 55 N.E.2d 945 (1944).
. State St. Bank & Trust Co. v. Beale, 353 Mass. 103, 107, 227 N.E.2d 924 (1967).
. Kozdras v. Land/Vest Properties, Inc., 382 Mass. at 43, 413 N.E.2d 1105. See Feinzig v. Ficksman, 42 Mass.App.Ct. 113, 116, 674 N.E.2d 1329 (1997) ("The purpose of the statute (G.L. c. 185) that establishes the Land Court and the land title registration system is to provide a method for making titles to land certain,, indefeasible, and readily ascertainable.").
. In re Bailey, 468 B.R. at 478 n. 19 (quoting 28 Mass. Prac., Real Estate Law § 22.1). See Mass. Gen. Laws ch. 185, §§ 26-45 (provisions relative to the original registration of land), 101 (grounds for recovery from assurance fund).
. Mass. Gen. Laws ch. 185, §§ 48, 49.
. Mass. Gen. Laws ch. 185, § 46.
. Feinzig v. Ficksman, 42 Mass.App.Ct. at 116, 674 N.E.2d 1329.
. See, e.g., Jackson v. Knott, 418 Mass. 704, 711, 640 N.E.2d 109 (1994); Killam v. March, 316 Mass. at 651, 55 N.E.2d 945.
. Jaclcson v. Knott, 418 Mass, at 711, 640 N.E.2d 109.
. See Myers v. Satin, 13 Mass.App.Ct. 127, 136-37, 431 N.E.2d 233 (1982) (finding that where the servient certificate of title contained a general reference to the existence of easements and an explicit reference to deeds containing beach rights and a right of way, the requirements of Mass. Gen. Laws ch. 185, §§ 46 and 47 were satisfied); Clark v. Planche, 09 MISC 406438 KFS, 2013 WL 5969042 (Mass.Land Ct. Nov. 7, 2013) (finding that a precise reference to a recorded deed and plan on a certificate of title put certificate holder on notice of rights granted under the deed); but see Jackson v. Knott, 418 Mass, at 712, 640 N.E.2d 109 (while certificate holders were required to review the subdivision plan referred to in their certificates of title, as well as the certificates of other lot holders in the subdivision, none of those documents would have put them on notice as to what parties were granted use of a right of way).
. Mass. Gen. Laws ch. 185, § 57.
. Id.
. Id. See Malaguti v. Rosen, 262 Mass. 555, 567, 160 N.E. 532 (1928) ("Registration is the act which passes title and is the act of the court.”).
. Mass. Gen. Laws ch. 185, § 64.
. Mass. Gen. Laws ch. 185, § 67.
. Mass. Gen. Laws ch. 185, § 68.
. Mass. Gen. Laws ch. 185, § 60.
. See Mass. Gen. Laws ch. 183, § 29.
. See Mass. Gen. Laws ch. 185, §§ 52, 110.
. Mass. Gen. Laws ch. 185, § 58 (emphasis added).
. In U.S. Bank’s memorandum of law in support of the Motion to Dismiss, U.S. Bank purportedly quotes Mass. Gen. Laws ch. 185, § 58 as follows:
Every conveyance, lien, attachment, order, decree, instrument or entry affecting registered land ... shall, if registered, filed or entered in the office of the assistant recorder of the district where the land to which such instrument relates lies, be notice to all persons from the time of such registering, filing or entering.
Memorandum in Support of [Motion to Dismiss], Docket No. 31 at 6-7. As is apparent, U.S. Bank omits all references to the recordation of the instrument in the registry of deeds, thus suggesting that all registered instruments give notice to all persons. While I concede the language is somewhat difficult to parse, U.S. Bank’s interpretation is wholly unsupportable as it simply strikes all language that interferes with its preferred reading. Worse, presenting it as a quotation is palpably misleading. U.S. Bank’s counsel would be well advised to exercise more care while quoting in the future.
.This is consistent with the Land Court’s application of the acknowledgement requirement of Mass. Gen. Laws ch. 183, § 29 to the land registration system notwithstanding its clear statutory reference to instruments being "recorded.” See Petrozzi v. Peninsula Council, Inc., 07 MISC. 349279 GHP, 2011 WL 1459694, at *16 (Mass.Land Ct. Apr. 14, 2011) (holding that ”[i]t is true that if the [instrument purporting to impose restrictions on various parcels] was to have been accepted for registration, and to be noted on the Certificate, it required some manner of acknowl*22edgment compliant with G.L. c. 183, § 30.”); Zona v. Zona, 22902-S-2005-06-001, 2008 WL 97425, at *3-6 (Mass.Land Ct. Jan. 9, 2008) (holding that a deed that was registered but not acknowledged by the grantor pursuant to Mass. Gen. Laws ch. 183, §§ 29 and 30 was defective); see also Commonwealth of Massachusetts Land Court Guidelines on Registered Land, 1 (Rev. Feb. 27, 2009), http:// www.mass.gov/courts/docs/courts-and-judges/ courts/land-court/guidelines-registered-land. pdf (requiring that deeds, including mortgage deeds, must be acknowledged in accordance with Mass. Gen. Laws ch. 183, § 29).
.11 U.S.C. § 544(a)(3).
. See In re Giroux, 2009 WL 1458173, at *10 (citing Gray v. Burke (In re Coletta Bros, of North Quincy, Inc.), 172 B.R. 159, 162 (Bankr.D.Mass.1994). See also Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)); Stern v. Continental Assurance Co. (In re Ryan), 851 F.2d 502 (1st Cir.1988).
. 11 U.S.C. § 1107(a).
. In re Bower, 2010 WL 4023396, at *4.
. See n. 60, supra.
. Mass. Gen. Laws ch. 185, § 58.
. Mass. Gen. Laws ch. 185, § 46.
. U.S. Bank’s reliance on the Certificate as being "conclusive to all matters contained therein," is actually a reference to Mass. Gen. Laws ch. 185, § 54, which states the eviden-tiary effect of the original and certified copies of a certificate of title. It is, in any event, expressly subject to the proviso: "except as otherwise provided in this chapter.” Mass. Gen. Laws ch. 185, § 54.
. Connors v. Annino, 460 Mass. 790, 796, 955 N.E.2d 905 (2011) (quoting Canton v. Commissioner of the Mass. Highway Dep’t, 455 Mass. 783, 791-792, 919 N.E.2d 1278 (2010)).
. State St. Bank & Trust Co. v. Beale, 353 Mass. at 107, 227 N.E.2d 924.
. Kozdras v. Land/Vest Properties, Inc., 382 Mass. at 44, 413 N.E.2d 1105.
. Jackson v. Knott, 418 Mass, at 711, 640 N.E.2d 109.
. State St. Bank & Trust Co. v. Beale, 353 Mass. at 107, 227 N.E.2d 924 (emphasis added).
. In fact, because the salient facts are not in dispute, the Debtor has done more than demonstrate a plausible claim — she has proven it. The Court cannot, however, enter judgment on the pleadings sua sponte. See Fed.R.Civ.P. *2412(c), made applicable to adversary proceedings by Fed. R. Bank. P. 7012(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497559/ | AMENDED DECISION RE: CLAIM OF DEFENDANT SCOTT OLSON DIGGING, INC.
CHARLES L. NAIL, JR., Bankruptcy Judge.
The matter before the Court is the allowance of Defendant Scott Olson Digging, Inc.’s claim. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). The Court enters these findings and conclusions pursuant to Fed.R.Bankr.P. 7052. As discussed below, the Court concludes Defendant Scott Olson Digging, Inc. holds a secured claim for $205,10^.07 against the bankruptcy estate of Debtor-Defendant Northern Beef Packers Limited Partnership, plus applicable interest to the petition *27date. Defendant Scott Olson Digging, Inc. may file a separate application for pre-petition attorney fees under S.D.C.L. § 44-9-42 and post-petition costs, including attorney fees and interest, under 11 U.S.C. § 506(b).
I.
Northern Beef Packers Limited Partnership (“Debtor”) filed a chapter 11 petition in bankruptcy. Debtor is not reorganizing. Most of Debtor’s assets were sold at auction. Limited funds remain to pay claims.
Two of Debtor’s secured creditors, SDIF Limited Partnership 6 and SDIF Limited Partnership 9, initiated this adversary proceeding, asking the Court to determine several claims and sort out the priority of various parties’ liens and other encumbrances against Debtor’s assets (doc. 1). The final major issue to be resolved in the adversary proceeding is the amount of the claim held by Defendant Scott Olson Digging, Inc. (“SOD”).1
SOD provided various earth-moving related services to Debtor as construction of Debtor’s beef processing plant began. Dennis Hellwig, one of Debtor’s founders and organizers, and Scott Olson, the president of SOD, executed four written contracts, one each on October 20, 2006,2 November 24, 2006,3 December 28, 2006,4 and July 13, 2007.5 SOD performed additional *28work, but the scope of and agreed price for the additional work is contested. SOD began its work at the construction site in early November 2006 and completed its work in late November 2007. After that time, Warren Barse, who had been employed by SOD during SOD’s tenure with Debtor, continued doing material-moving related services for Debtor as the construction project continued.
Though the record is not clear, it appears in the first several months of their relationship, SOD did not produce and Debtor did not require invoices that were tied to a particular written or oral agreement, and Debtor made rounded payments to SOD that did not necessarily match specific sums set forth in particular invoices. Later, Donald B. Ulmer, who served Debtor as a project engineer beginning in June 2007, kept a closer eye on Debtor’s payments to SOD. Debtor’s payments to SOD totaled $8,109,771.89 by the end of October 2007. The record does not reflect which particular invoices Debtor paid. Debtor has not made any more payments to SOD since October 2007.
Representatives for Debtor and SOD conferred in late 2007 and early 2008, attempting to reconcile accounts. SOD produced several invoices dated around the time of their meetings. An accord was not reached. SOD filed a mechanic’s lien on March 27, 2008, and Debtor and an affiliate started a state court action against SOD in 2008. The matter remained unresolved for a handful of years, carrying into Debtor’s 2013 chapter 11 bankruptcy case, Bankr. No. 13-10118 (D.S.D.), and this adversary proceeding.
In Debtor’s bankruptcy case, SOD filed a proof of claim for $3,311,417.00 (proof of claim 69-1). SOD stated its claim was comprised of $2,114,975.49 principal as of November 29, 2007 and $1,196,441.64 statutory pre-petition interest. SOD further indicated its claim was fully secured by the mechanic’s lien on Debtor’s real property. In addition to the interest, SOD also stated in its claim that it was entitled, under S.D.C.L. §§ 44-9-40, 44-9-41, and 44-9-2, to other costs, including attorney fees, but said it had not yet determined what those additional costs were.
As supporting documentation for its proof of claim, SOD attached its Answer and Counterclaim from the state court action. Attached to the state court pleadings was a Bill of Particulars, and attached to the Bill of Particulars was SOD’s Mechanic’s Lien Statement and 42 invoices. The invoices totaled $5,096,228.26. The Court was unable to find anything in the proof of claim or the several attachments that distinguished paid invoices from unpaid invoices or otherwise itemized SOD’s principal claim of $2,114,975.49. Though no party filed an objection to SOD’s proof of claim, challenges to SOD’s claim were raised through the adversary proceeding.
Through various motions and defaults in the adversary proceeding, and consistent with SOD’s counterclaim and cross-claim (doc. 38), it has been determined SOD’s secured claim, once the claim is liquidated, has priority over the mortgages held by *29Plaintiffs and Defendant White Oak Global Advisors, LLC and over the judgment liens and other encumbrances held by the other defendants, save one: Defendant Brown County, South Dakota’s lien for real estate taxes and special assessments has priority over SOD’s mechanic’s lien (doc. 200).
In its cross-claim against SOD, Debtor said SOD is not owed any more for its work and has actually been overpaid “by nearly $100,000.00” (doc. 53). Debtor asked the Court to disallow SOD’s claim and avoid SOD’s mechanic’s lien to the extent the claim is disallowed. Citing 28 U.S.C. § 2201, Debtor also asked the Court to disallow SOD’s mechanic’s lien because SOD filed a “false and exaggerated account in support of its mechanic’s lien statement!.]” Debtor did not ask that SOD be required to return any overpayment.
In its answer to SOD’s cross-claim, Debtor essentially agreed SOD holds a mechanic’s lien to the extent SOD has a valid claim and its mechanic’s lien has priority over Plaintiffs’ and the other defendants’ secured claims (doc. 92). Debtor then made numerous, generalized equitable arguments against SOD’s claim, and again argued SOD’s mechanic’s lien should be voided because it was fraudulently claimed.
In its answer to Debtor’s cross-claim, SOD reiterated many of its earlier allegations and essentially reminded Debtor that Debtor’s counsel, in a letter dated May 18, 2010, had conceded SOD had not been overpaid but instead was actually owed $182,682.00 (doc. 71). As with SOD’s proof of claim, the Court was unable to find anything in SOD’s various adversary proceeding pleadings or the attachments thereto that itemized SOD’s $2,114,975.49 principal claim.
The parties in interest6 stipulated to several facts before trial (doc. 254):
1. In 2005, Dennis Hellwig, who had owned and operated a large livestock auction business in the Aberdeen, South Dakota area, began efforts to build a beef packing plant in Aberdeen, South Dakota (the “Project”).
2. On or about October 31, 2006, Mr. Olson executed the parties’ first contract (“Contract 1”) on behalf of SOD, and Mr. Hellwig executed Contract 1 on behalf of the Debtor’s predecessor, Northern Beef Packers, Inc. (“NBPI”). Upon execution of Contract 1, Mr. Hellwig wrote SOD a check in the amount of $75,000.00 from his personal account. A true and correct copy of Contract 1 [was] attached [thereto] as Exhibit A.
3. After the execution of the Contract 1, the parties entered into the following written contracts:
a. Contract dated November 24, 2006 (“Contract 2”), a true and correct copy of which [was] attached [thereto] as Exhibit B;
b. Contract dated December 28, 2006 (“Contract 3”), a true and correct copy of which [was] attached [thereto] as Exhibit C; and
c. Contract dated on or about June 29, 2007 (“Contract 4”), a true and correct copy of which [was] attached [thereto] as Exhibit D.
4. Between November 1, 2006 and mid-January 2007, when work was halted for the season, SOD performed services and provided materials as contemplated under Contract 1, Contract 2, and Contract 3.
*305. According to the mechanic’s lien statement referenced below, the first item of SOD’s contribution to the Project was made on November 28, 2006, but the actual first day of work was on or about November 13, 2006.
6. From November 13, 2006 through October 31, 2007, SOD was paid a total of $3,109,771.89.
7. SOD’s last day of work on the Project was on or about November 29, 2007.
8. Pursuant to fifteen invoices dated December 10, 2007 and a single invoice dated January 11, 2008, SOD sought payment of a total of $892,702.04.7
9. Attached as Exhibit E [was] a summary of the above-referenced invoices and payments.8
10. The invoices described in the attached Exhibit F are accurate statements of work actually performed and the parties agree that SOD was entitled to payment of the invoiced amounts.
11. On March 27, 2008, SOD filed a mechanic’s lien statement with the Brown County Register of Deeds, asserting a lien and claim in the amount of $2,114,975.49 for work performed and materials provided between November 28, 2006 and November 29, 2007.
12. On or about May 9, 2008, the Debtor commenced an action against SOD in the Brown County District Court, styled Northern Beef Packers LP, et al. v. Scott Olson Digging, Inc. and Scott Olson, Case No. 06CIV08000990. On or about May 22, 2008, SOD served and filed an answer and counterclaim. The action in the Brown County District Court remained pending as of the commencement of the Debtor’s chapter 11 case.
As with SOD’s proof of claim and its pleadings in the adversary proceeding, the parties’ stipulated facts did not include an itemization of what comprised SOD’s principal claim of $2,114,975.49 as of November 29, 2007. According to Exhibits E and F attached to the stipulated facts, the disputed invoices bear several different dates and total $3,377,848.03, well in excess of SOD’s principal claim of $2,114,975.49.9 As with SOD’s proof of claim and its pleadings in the adversary proceeding, the parties’ stipulated facts did not set forth the dates and amounts of the payments Debtor made to SOD or link Debtor’s payments to particular invoices, either disputed invoices or undisputed invoices. The total of SOD’s 42 invoices, less the total of Debtor’s payments to SOD, did not equal the amount of SOD’s principal claim. Thus, the record was muddled and cumbrous from the get-go.
A four-day trial to determine the amount of SOD’s claim was held. As noted above, Debtor did not dispute several of SOD’s invoices. What remained for the *31Court’s consideration were the disputed invoices, including an undated invoice that seemingly first appeared at trial for $44,942.39 for reimbursement of some excise taxes. Post-trial, Debtor acquiesced to the payment of invoice 1227 for $32,653.12, yielding a total of $1,751,033.35 for the undisputed invoices. The remaining disputed invoices are addressed herein.
II.
If a creditor executes and files a proof of claim in compliance with the Federal Rules of Bankruptcy Procedure,10 the claim constitutes “prima facie evidence of the validity and amount of the claim.” Fed.R.Bankr.P. 3001(f). The claim is deemed allowed pursuant to 11 U.S.C. § 502(a) unless the debtor or other party in interest objects to the claim, through either an objection or an adversary proceeding. Fed.R.Bankr.P. 3007(a) and (b). If an objection to the claim is filed or an adversary proceeding related to the claim is commenced, the Court must determine the petition-date amount of the creditor’s claim as that claim arises from nonbank-ruptcy substantive law, subject to any qualifying or contrary provisions of the bankruptcy code. 11 U.S.C. § 502(a) and (b); Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000); Sears v. Sears (In re AFY, Inc.), 463 B.R. 483, 488 (8th Cir. BAP 2012). The objector must put forth substantial evidence rebutting the claim or, in other words, the objector must meet, overcome, or at a minimum, equalize the filed claim. F.D.I.C. v. Union Entities (In re Be-Mac Transport Co.), 83 F.3d 1020, 1025 n. 3 (8th Cir.1996) (citing In re Gridley, 149 B.R. 128, 132 (Bankr.D.S.D.1992)); Waterman v. Ditto (In re Waterman), 248 B.R. 567, 571 (8th Cir. BAP 2000) (citing inter alia Brown v. I.R.S. (In re Brown), 82 F.3d 801, 805 (8th Cir.1996), abrogated in part by Raleigh, 530 U.S. at 19-26, 120 S.Ct. 195111). If the Court finds the objector has rebutted the prima facie validity of the claim, then the creditor must go forward and, by a preponderance of the evidence, prove the allowability of its claim. Brown, 82 F.3d at 805; Kimmons v. Innovative Software Designs, Inc. (In re Innovative Software Designs, Inc.), 253 B.R. 40, 44 (8th Cir. BAP 2000); In re Somerset Apts., Ltd., No. 8:06CV678, Bankr.No. 04-84197, 2007 WL 552209, at *7 (D.Neb. Feb. 21, 2007).12
The parties do not dispute SOD’s claim arises from South Dakota law. In South Dakota, a contract, oral or written, is formed when the four essential elements exist: (1) the parties are capable of contracting; (2) they consent to the subject of the contract; (3) the object of the contract is lawful; and (4) there is sufficient cause or consideration. S.D.C.L. § 53-1-2. *32Mutual promises constitute sufficient consideration. Scotland Vet Supply v. ABA Recovery Service, Inc., 588 N.W.2d 884, 837 (S.D.1998). Though an oral agreement may stand on its own, only an executed&emdash;fully performed&emdash;oral agreement or a written agreement may modify a written agreement. S.D.C.L. § 53-8-7; Met-tel v. Gales, 12 S.D. 632, 82 N.W. 181, 183 (1900).
If a contract does not specify the amount of consideration or how it is to be determined, “the consideration must be so much money as the object of the contract is reasonably worth.” S.D.C.L. § 53-6-11.
It is a settled rule of law that where services are rendered by one for another which are knowingly and voluntarily accepted, without more, the law presumes that such services were given and rendered in the expectation of being paid and will imply a promise to pay what they are reasonably worth.
Schmidt v. Clark County, 65 S.D. 101, 271 N.W. 667, 669 (1937) (citing 28 R.C.L. 668).
Once a contract has formed, whether written or oral, the Court’s job, when interpreting it, is to give effect to the parties’ mutual intent by considering the entire contract. Mueller v. Cedar Shore Resort, Inc., 643 N.W.2d 56, 70 (S.D.2002); Chord v. Pacer Corp., 326 N.W.2d 224, 225-26 (S.D.1982). Only if a contract is ambiguous does the Court consider parol and extrinsic evidence to provide clarification. Hanks v. Corson County Bd. of County Com’rs, 727 N.W.2d 296, 301 (S.D.2007).
[A] contract is ambiguous only when it is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.
Ducheneaux v. Miller, 488 N.W.2d 902, 909 (S.D.1992) (quoting therein 17A Am. Jur. 2d Contracts § 338) (quoted in LaMore Restaurant Group, LLC v. Akers, 748 N.W.2d 756, 765 (S.D.2008)). Whether the language of a contract is ambiguous is a question of law. LaMore Restaurant Group, 748 N.W.2d at 765. If a contract is ambiguous, it is interpreted and construed against the scrivener, which here is SOD. Advanced Recycling Systems, LLC v. Southeast Properties Ltd. Partnership, 787 N.W.2d 778, 785 (S.D.2010).
If an express contract does not exist, the doctrine of quantum meruit implies one and awards restitution for the value of the services provided under the implied contract. Johnson v. Larson, 779 N.W.2d 412, 417 (S.D.2010); S.D.C.L. § 53-1-3 (distinguishing between express and implied contracts). In determining whether an implied contract exists, the Court objectively views the conduct of the parties, their language, their acts, and other pertinent circumstances attendant to the transaction. Cowan v. Mervin Mewes, Inc., 546 N.W.2d 104, 108 (S.D.1996) (quoting therein Lien v. McGladrey & Pullen, 509 N.W.2d 421, 423-24 (S.D.1993)). To recover under quantum meruit, the party performing the work must prove the other party requested it to perform the work and the party performing the work expected reasonable compensation for that work. Lindquist Ford, Inc. v. Middleton Motors, Inc., 557 F.3d 469, 477-78 (7th Cir.2009), cited in Johnson, 779 N.W.2d at 417-18. The party performing the work may recover even if the work conferred no benefit. Lindquist Ford, 557 F.3d at 477-78; Johnson, 779 N.W.2d at 417-18.
The doctrine of unjust enrichment is similar but distinct. To recover under this equitable doctrine, the party perform*33ing the work must prove there was a benefit conferred upon the other party, the other party acknowledged the benefit, and the other party accepted and retained the benefit “under circumstances such that it would be inequitable to retain the benefit without payment of the value thereof.” Lindquist Ford, 557 F.3d at 477, cited in Johnson, 779 N.W.2d at 418.
In South Dakota, a mechanic’s lien on property is created by statute when someone furnishes skill, labor, services, equipment, or materials for the improvement or development of that property, including the grading, filling in, or excavating of the property. S.D.C.L. § 44-9-1(1). An express or implied contract must underpin the lien. Randall Stanley Architects, Inc. v. All Saints Community Corp., 555 N.W.2d 802, 804-05 (S.D.1996). The mechanic’s lien does not substitute for the mechanic’s claim but provides security for it. Lytle v. Morgan, 270 N.W.2d 359, 361 (S.D.1978).13
The extent of the lien is determined by S.D.C.L. § 44-9-6.
It provides: If the contribution be made under a contract with the owner and for an agreed price, the hen as against him shall be for the sum so agreed upon together with the cost of any additional material or work agreed upon, otherwise, and in all cases as against others than the owner, it shall be for the reasonable value of the work done, and of the skill, material, and machinery furnished.
Thus, a mechanic’s lien is created for the contract price plus the cost of any additional material and work agreed upon. To the extent a contract — written or oral — did not include an agreed price or to the extent the party asserting the mechanic’s lien made a contribution other than by contract, that party has the burden under state law to establish the reasonable value of its work or the material or machinery furnished under the second provision of § 44-9-6. Action Mechanical, Inc. v. Deadwood Historic Preservation Com’n, 652 N.W.2d 742, 754 (S.D.2002).
III.
Burden of Proof. As discussed above, by application of federal bankruptcy law, SOD is presumed to have met its initial burden of proof upon its filing of a proper proof of claim. 11 U.S.C. § 502(a); Fed. R.Bankr.P. 3001(f); Be-Mac Transport Co., 83 F.3d at 1025-26. Debtor did not challenge the efficacy of SOD’s proof of claim, only its accuracy or truthfulness. Accordingly, at trial, Debtor had to come forward with substantial evidence rebutting the initial presumption of the validity and amount of SOD’s mechanic’s lien. Debtor did so.
As noted above, nothing in SOD’s proof of claim or the parties’ pre-trial stipulation set forth how SOD’s principal claim of $2,114,975.49 had been calculated, tied the four written contracts to particular invoices, or clarified what other express or implied contracts existed and then tied those express or implied contracts to particular invoices. It was even unclear whether the 42 invoices attached to SOD’s proof of claim were all the invoices SOD had ever submitted to Debtor. Thus, as the trial opened, there was little in the record supporting SOD’s claim as filed. Resultantly, the evidentiary knoll Debtor needed to level, to return the burden of persuasion to SOD, was low.
Debtor met its burden through the direct examination of Ulmer and the cross-*34examination of Olson. Ulmer discussed Debtor’s review of all the invoices after its dispute with SOD began in late 2007, and he stated why Debtor believed it could not pay the disputed invoices, including some for lack of contemporaneous documentary support and some for duplication of other invoices. Olson’s testimony, especially on cross-examination, punctuated SOD’s failure to clearly detail the services performed in several invoices and to tie each invoice to a particular agreement with Debtor. That the invoices were difficult to discern from one another underscored Debtor’s difficulty in deciphering which invoices to pay. Both men’s testimony, when coupled with SOD’s confusing proof of claim and the parties’ limited pre-petition stipulation, raised substantial doubt about the disputed invoices. Accordingly, SOD had to go forward and prove its claim by a preponderance of the evidence.
Disputed invoices regarding excavation,14 Under invoices 1137a, 1141, 1142, 1189, and 1221, SOD seeks payment for excavating 577,438 cubic yards of clay fill and placing it on Debtor’s building site. These are the most troublesome invoices to reconcile with the parties’ written and oral agreements, each other, and the undisputed invoices.
Much of SOD’s evidentiary presentation focused on its theory that the amount of clay it excavated should be calculated based on the number of truck loads SOD hauled from the borrow sites rather than on calculations from before and after surveys of either the borrow pits or the building site or based on the quantity of material for which SOD paid the borrow site owners. No reliable testimony or other evidence indicated SOD and Debtor ever agreed Debtor would pay SOD for clay fill based on a truck count method. There was no corroborating documentation for Olson’s testimony that this was their agreement. There was no evidence a truck count method of measuring is common in the industry for a large project like Debtor’s. Also problematic was the fact that written contracts 1 and 3 called for specific amounts of excavation at specific sums, not estimates, though both parties seemed to overlook this contract language. Further, while all the relevant testimony indicated the building plans were changed a few times to raise the finished elevation, including a significant addition following major flooding in the spring of 2007, little credible evidence established what the terms of SOD and Debtor’s agreements were related to the additional excavation, as to either the amount of fill to be provided or the cost. Therefore, based on the entire record presented, the Court may only conclude written contract 2 covered the extra fill placed in late 2006 and early 2007 and that it was modified or supplemented again in the spring of 2007 by executed oral agreements, as required by S.D.C.L. § 53-8-7, to cover the extra fill needed to raise the project elevation after the major spring flooding. What remains to be determined is whether SOD’s five invoices reflect the parties’ modified agreements and whether the compensation sought is reasonable. Registered land surveyor Randy D. Bacon calculated a total of 309,513 cubic yards of fill were placed on site, based on before and after surveys of the building site. His figure did not distinguish between the types of fill and may not have accounted for the topsoil that was removed before the fill was placed.
Civil engineer and registered land surveyor Derek McTighe calculated 495,988 cubic yards of compacted fill were placed on site by SOD based on before and after surveys of the building site; he rounded *35the figure to 500,000. To this he added a shrinkage factor of 30%, for a total of 650,000 cubic yards that SOD delivered on site (SOD Exhibit 57). McTighe’s calculation assumed substantial topsoil was removed before the clay fill was placed on site by SOD, as reported to him by Olson. McTighe calculated a similar total using Debtor’s proposed truck count method. His two calculations exceeded the 577,438 total cubic yards set forth in SOD’s five invoices.
Civil engineer and registered land surveyor Randall V. Hoscheid calculated, based on surveys of the borrow pits owned by the Young family and Dean Rogers,15 between 243,031 cubic yards of fill (his calculation) and 264,949 cubic yards of fill (Brosz Engineering’s calculation) were removed from the borrow pits and placed on the building site (Debtor Exhibit 19). To these calculations another 9,606 cubic yards from the John Braun borrow pit and another 46,394 cubic yards from the Young family borrow piles (not the Young family borrow pits) need to be added; both additions reflect figures the parties accepted.16 This results in a final tally by Hoscheid of between 299,031 and 320,949 cubic yards of clay fill.
Another available computation was the amount of excavation SOD reported to the borrow pit owners when it paid them. Based on these figures, SOD excavated 314,429 cubic yards of fill from the Braun, the Young family, and the Rogers properties.17 There was no evidence SOD used any other properties to acquire clay fill.
*36In its post-trial brief, Debtor argued the figure should be 242,938 cubic yards of clay fill, based on before and after surveys of the building site, a subtraction of materials placed on the site other than clay, and the amount of topsoil removed based on the observations of Debtor’s construction manager, Robert Breukelman. In its brief, Debtor also concedes SOD has a claim for all clay it excavated in excess of 200,000 cubic yards.
In its post-trial brief, SOD argued McTighe’s at-trial calculation of 650,000 cubic yards should be accepted. SOD argued this figure was an accurate reflection of both its own “truck count” method and the “as-built” survey by Helms & Associates.
For three reasons, the Court finds the most reliable figure to be the calculation of yardage based on SOD’s actual payments to the Young family and Rogers and the agreed yardage from the Braun pit.18 First, while Olson testified SOD had not paid the borrow pit owners in full because Debtor had not paid SOD in full, the present record does not support that testimony. Olson never quantified what SOD still owed the borrow pit owners, and SOD never produced any documents acknowledging it remains obligated to them. Olson testified SOD received lien waivers from the Young family and Rogers.19 Most important, SOD did not report in its own bankruptcy case, Bankr. No. 11-40680 (D.S.D.), that it owed anyone for excavated materials. SOD will not be heard advancing a contrary position here. See, e.g., E.E.O.C. v. CRST Van Expedited, Inc., 679 F.3d 657, 678-80 (8th Cir.2012) (citing New Hampshire v. Maine, 532 U.S. 742, 749-51, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001)). The second reason the Court finds this calculation to be the most reliable of the several offered is the amounts given to the borrow pit owners were produced by SOD itself and are not impacted by various soil density, compaction, or shrinkage factors or the parties’ widely divergent figures regarding the amount of topsoil removed. Third, the 314,429 figure is consistent with other calculations summarized above, excluding McTighe’s. Accordingly, the *37Court concludes that from disputed invoices 1137a, 1141, 1142, 1189, and 1221, SOD is entitled to payment for 314,429 cubic yards of clay fill; this total includes the 200,000 cubic yards to which Debtor acquiesced in its post-trial brief.
One caveat to the Court’s conclusion is neither party’s calculations regarding the clay fill were reconciled with the total fill of 365,000 cubic yards set forth in written contracts 1 and 3, which were both signed well before the elevation was raised again in the spring of 2007. However, when the record is considered as a whole, it appears both Debtor and SOD operated with the understanding the amount of fill in these two contracts included sand, gravel, and other materials — not just clay — and the stated amounts were no longer, if ever, “fixed” but only estimates. Further, with the exception of invoice 1243 for apparent additional fill from the Braun pit,20 none of the undisputed invoices clearly reflect clay fill. Thus, while the record is muddier than the Court would like regarding the relationship of the disputed invoices for clay excavation to written contracts 1 and 3 and the undisputed invoices, the record is what SOD made it, and the 314,429 calculation is the most reliable one produced on the record.21
Finally, the record only yielded one figure for the amount Debtor was to pay SOD for the clay fill: $4.50 per cubic yard. This figure was reflected in written contracts 1 and 3, and Debtor never seriously challenged the $4.50 as being unreasonable in light of the work actually performed or industry standards. Thus, the Court concludes Debtor is obligated to pay SOD, under invoices 1137a, 1141, 1142, 1189, and 1221, for 314,429 cubic yards of clay fill at $4.50 per yard for a total cost of $1,414,930.50.
Disputed invoices 1137b and 1142a regarding stripping of topsoil. That SOD removed topsoil from at least the building site and that it is entitled to payment from Debtor for that work is undisputed. What is disputed is whether the removal of topsoil was covered by written contract 1, how much topsoil was actually removed or should have been removed, and what is the compensation to which SOD is entitled.
Disputed invoice 1137b is for $74,571.56, including excise tax. On it, SOD described its work as “Black Dirt stripped — Main *38Building.” The quantity listed is “29,232” and the “Price Each” or unit price is “2.50.” The invoice is dated December 15, 2006 and has a “Ship” date of December 15, 2006, which would have been contemporaneous with the work performed. While the “P.O. Number” section is blank, the “Item Code” is “Excavation.” Disputed invoice 1142a is for $231,316.74, including excise tax. On it, SOD described its work as “Black dirt stripped — Outside premiter [sic ].” The quantity listed is “90,676” and the unit price is “2.50.” The invoice is dated January 15, 2007, and the “Ship” date is also January 15, 2007; the date appears to be somewhat contemporaneous with when the work would have been performed. While the “P.O. Number” is blank, the “Item Code” is “Excavation.”
Based on the language used in written contract 1, the Court concludes removal of topsoil was not covered thereunder. “Topsoil” is not referenced in the document’s ten items of work to be completed. The contract terms are not ambiguous. Further, neither party offered any evidence a particular descriptive term used in the contract specifically included or excluded the removal of topsoil based on industry-wide usage of that term. Debtor’s argument that the invoices were not received by Debtor contemporaneous with their dates is well taken, but neither party presented any reliable evidence regarding when SOD presented a particular invoice or when Debtor actually received it. And it certainly would have made sense that removal of topsoil be in a separate contract that preceded written contract 1 or that removal of topsoil be a separate line item in written contract 1, as Breukelman testified, but neither happened. Accordingly, based on the record presented, the Court finds written contract 1 did not include the removal of topsoil.
The record also did not establish the particular terms of an oral contract the parties made for the removal of the topsoil. The parties’ witnesses offered discrepant testimony on who authorized what and when. The record only showed Debt- or and SOD had an understanding SOD would remove topsoil for Debtor in preparation for construction of the packing plant buildings and related work areas and parking lots. Thus, the Court must determine a reasonable compensation for the work performed under quantum meruit, as discussed above.
SOD contended it removed an average of two feet of topsoil from the entire work site; Debtor contended only six to seven inches was — or needed to be — removed from the approximately 19 acres where construction actually took place. Aerial photographs that were offered were skewed by prior flooding, and who took the photos and when were never clearly discussed. The aerial photographs, as well as the various maps and drawings offered, and the testimony about them never produced a definitive answer concerning what areas were stripped and how deep.
Based on the record before it, the Court finds SOD is entitled to compensation for removing 12 inches of topsoil from 19 acres for a total of 30,65322 cubic yards. Though SOD may in fact have removed topsoil from a wider area or more deeply, the record does not establish Debtor requested any additional stripping than what was set forth in Debtor’s grading and excavation plans. SOD also did not establish Debtor acknowledged and benefited from any stripping outside the main construction area such as would entitle SOD to compensation under the doctrine of unjust enrichment. Further, the 12 inches fairly reflects Soil Technologies, Inc.’s soil bor-*39ings and its April 27, 2006 “Soil Exploration Program,” wherein it recommended SOD “expose native soils” and remove one to two feet of “topsoil” for the main level footings and, if Debtor were acting conservatively, also for the main level floor slabs or “at least the top 6 inches” for the main level floor slabs if the site were raised four to five feet. The 12 inches and the 19 acres are also consistent with SOD employee Cliff Glanzer’s credible testimony that he personally operated a scraper “for about a week” and removed topsoil that “average[d] out to 10 to 12 inches” and later “12 inches or better” “more or less where the building site was.” The area is also consistent with the testimony of Debt- or’s initial surveyor and civil engineer Francis Brink, who said sod was removed from “about 50 feet outside of the building.” 23 It is also consistent with Barse’s testimony. Barse said the stripping took place at “[t]he main part of the budding, part of the parking area, and all of the roadway” and, later, in the stockyards area, though he did not quantify these areas by acre.
As to the cost of removal, Debtor did not challenge the $2.50 per cubic yard set forth by SOD on its invoices as unreasonable or outside the industry norm. The charge is, therefore, accepted by the Court as reasonable, and the claim allowance under invoices 1137b and 1142a is $76,632.50.
Disputed, invoice regarding flooding abatement. Disputed invoice 1226 is for $35,714.35, including excise tax. On it, SOD described its work as “Blade, level, pump water, and keep subcontractors going in out of project.” The date or dates of service are not included. A “1” was listed in the “Quantity” column, and the unit price is “35,000.00.” The Item Code is “lump sum.” The invoice is dated December 10, 2007 and has a “Ship” date of December 10, 2007. The “P.O. Number” section is blank.
Based on Barse’s testimony and when comparing the date of and the services listed on disputed invoice 1226 to undisputed invoice 1211, the Court finds the services rendered on invoice 1226 are duplica-tive of those on invoice 1211. SOD offered no supporting documentation for invoice 1226 but only claimed, through Olson’s testimony, these charges related to prolonged rain in October 2007. Twenty-five dates in October, however, are already covered in invoice 1211. Accordingly, SOD is allowed nothing under invoice 1226.
Disputed invoice regarding 2007 mobilization. On invoice 1228, SOD described its work as “2007 Spring Mobilization” for $75,000.00, plus excise tax. The invoice is dated December 10, 2007 and has a “Ship” date of December 10, 2007. The “P.O. Number” section is blank.
While Olson testified he negotiated this payment with Hellwig when SOD began working again at the plant site in the spring of 2007, Hellwig flatly denied asking SOD to return to the work site. Hell-wig’s testimony was more credible, and Olson had no supporting evidence of an agreement with Debtor for the mobilization reimbursement. Olson also acknowledged SOD first returned to the site only to pump flood water; agreements for SOD to do more earth moving followed thereafter. Further, the invoice was not generated by SOD contemporaneous with the “work” performed. Finally, SOD did not establish Debtor benefited from the “work” performed. Accordingly, SOD’s al*40lowed claim will not include payment under invoice 1228 since SOD did not establish an express or implied agreement was made or demonstrate Debtor was unjustly enriched.
Disputed invoice 1231. This invoice is for $3,571.44, including excise tax. On it, SOD described its work as “Haul rock and sand around project.” The invoice is dated December 10, 2007 and has a “Ship” date of December 10, 2007. The “P.O. Number” section is blank. The dates of service are not set forth on the invoice.
Olson testified he talked to Hellwig about this work. He did not state the dates the work was done or state what consideration was agreed to; he only testified at trial that, “[w]e hauled rock around to the other part, the other side of the basement, and other places on the — on the site, or if it was muddy or if they needed it by the basement or something.” His testimony during an earlier deposition was more limited; at that time he could not remember what he and Hellwig had discussed, and he stated the $4.25 per cubic yard charge may have just been what he thought the work was worth.
Without more reliable evidence, the Court cannot conclude an express or implied contract was reached. Moreover, SOD did not demonstrate Debtor was unjustly enriched. Accordingly, SOD’s allowed claim will not include payment for invoice 1281.
Disputed invoices regarding black dirt. Disputed invoice 1232 is for $14,285.74, including excise tax. On it, SOD described its work as “Blade Black dirt in front of project site.” The invoice is dated December 10, 2007 and has a “Ship” date of December 10, 2007. The “P.O. Number” section is blank.
Hellwig initially testified Debtor accepted this invoice. Other witnesses, in particular Barse and Breukelman, pointed out the work itemized on invoice 1232 was already covered by undisputed invoice 1175. Barse testified the deal he had negotiated between SOD and Debtor encompassed both moving a pile of black dirt, putting it “north of the parking lot” in the lower area, and leveling it out for $2.50 per cubic yard, which is reflected on invoice 1175. His testimony was more definitive and credible than Olson’s testimony about making a deal with Hellwig for the work in front of Debtor’s lot that is reflected in invoice 1232. Accordingly, payment for invoice 1232 is not included in SOD’s allowed claim.
Disputed invoice 1235 is for $10,612.26, including excise tax. On it, SOD described its work as “2,500 Cu. yds. Black Dirt put on site.” The quantity is listed as “2,500” and the unit price is listed as “4.00.” The invoice is dated December 11, 2007 and has a “Ship” date of December 11, 2007, but when the service was performed is not stated. The “P.O. Number” section is blank. The “Item Code” is “Dirt.”
The record on invoice 1235 was very limited. Hellwig and Barse testified they were not aware of the work listed on this invoice. Breukelman testified that $4.00 per cubic yard to move black dirt from one place to another and level it was not a reasonable charge. He too did not have a specific recollection of the invoice or any agreement with SOD to do this work. Ul-mer testified he did not authorize the payment of this invoice on Debtor’s behalf because there was “nothing here that justifies that payment.” Olson testified the black dirt referenced in invoice 1235 was “put on behind the curve around where Red [Wilk, the road builder] worked.” Olson said he made the deal for it with Hellwig.
For three reasons, SOD’s allowed claim will not include payment of invoice 1235. *41First, as noted by Ulmer, the invoice did not include adequate information to assess what work was done when. Second, SOD did not establish it had an oral agreement with Debtor for this work. Third, as acknowledged by Olson, the placement of this black dirt was related to Wilk’s road work, and the Court is unable to distinguish it from work on invoice 1227, which is being allowed in full.
Disputed invoice regarding the screening of sand. Invoice 1233 is for $87,857.30, including excise tax. On it, SOD described its work as “41,000 tons of screening sand.” The invoice is dated December 10, 2007 and has a “Ship” date of December 10, 2007. The “P.O. Number” section is blank, and the Item Code is “Misc.” The quantity listed is “41,000” and the unit price listed is “2.10.” The date the work was performed is not listed.
Barse credibly testified he negotiated, between Olson and Breukelman, for SOD to screen the sand for $1.00 per ton. While Olson cursorily testified he negotiated a higher rate with Hellwig, he had no supporting documentation to aid his self-serving testimony. Accordingly, the Court finds SOD is entitled to payment of $41,000.00 under invoice 1233 for screening sand.
Disputed invoice 123k~ This invoice is for $179,935.78, including excise tax. On it, SOD described two claims. The first was for “Cu. yrd. Dir1>-Place, level and pack out of rendering” for $37,825.00. SOD listed this quantity as “8,900” and the unit price as “4.25.” The second was for “Cu. yrd. Dirt-Place, level and pack out of basement” for $138,511.75. SOD listed this quantity as “32,591” and the unit price as “4.25.” The “Item Code” for each claim was “Dirt.” The invoice is dated December 10, 2007 and has a “Ship” date of December 10, 2007. The “P.O. Number” is blank. The date or dates these services were performed are not on the invoice.
As testified to by Barse, invoice 1234 is duplicative of undisputed invoices 1176 and 1177. Olson said they represented separate work. Barse’s testimony was more credible, especially where SOD had no supportive evidence for Olson’s testimony and where SOD did not establish the December 2007 date on invoice 1234 was somewhat contemporaneous with when the particular services would have been performed by SOD. Accordingly, SOD’s allowed claim will not include payment for invoice 1234.
Disputed invoice regarding excise tax. SOD produced an unnumbered invoice to get reimbursed for some excise tax that it paid the state but that Debtor owed (SOD Exhibit 32).24 The amount of the claim is $44,942.39. As acknowledged by SOD, Debtor already paid it $44,942.39 on February 21, 2007. Accordingly, SOD is not entitled to increase its claim by that amount, even if the unnumbered invoice is denominated “unpaid” on its internal records.
Total allowed claim. The undisputed invoices identified by the parties before trial totaled $1,718,380.23. Debtor conceded post-trial to the inclusion of $32,653.12 from previously disputed invoice 1227, resulting in an undisputed total of $1,751,033.35. Based on this decision, that sum is increased by $1,532,563.00, plus a 2.041 °to excise tax of $31,279.61,25 for a *42total of $3,314,875.96. After Debtor’s payments of $3,109,771.89 are subtracted, the Court finds Debtor owed SOD $205,104.07 on the petition date, plus pre-petition statutory interest, which the parties may confer and calculate.
The Court further concludes SOD’s claim remains secured by its pre-petition mechanic’s lien. The record was insufficient for the Court to find SOD intentionally and willfully filed a false or exaggerated claim. See R & L Supply, Ltd. v. Evangelical Lutheran Good Samaritan Society, 462 N.W.2d 515, 518-19 (S.D.1990). The record only shows Debtor and SOD’s loose working agreements, Debtor’s indistinct chain of command, and Debtor’s changing construction requirements resulted in less than ideal bookkeeping on both sides.
IV.
As part of its proof of claim and as argued in its closing brief in this adversary proceeding, SOD wants pre-petition attorney fees under S.D.C.L. § 44-9-42 and postpetition costs on its fully secured claim under 11 U.S.C. § 506(b).26 SOD, however, did not quantify and itemize its request under § 44-9-42 or § 506(b) in its proof of claim or present an itemized request until trial. Consequently, Debtor and other parties in interest have not had an opportunity to consider them and respond with any appropriate objections.
So the matter may be fully and fairly presented, SOD may, in Debtor’s main bankruptcy case, file and give notice of an application for its request for attorney fees under § 44-9-42 and, separately but in the same application, its request for post-petition costs under § 506(b). See Bankr. D.S.D. R.2016-3. The Court will cross-docket the application on the claims register as a supplement to SOD’s proof of claim and resolve any timely filed objections. Any allowances under the application will be added to SOD’s allowed secured claim of $205,104.07 plus the pre-petition statutory interest the parties will calculate.
In a chapter 11 case a § 506(b) allowance is generally calculated to the effective date of a plan. See, e.g., 11 U.S.C. §§ 506(b) and 1129(b)(2)(A)(I) and In re DeQueen General Hosp., 418 B.R. 289, 295-96 (Bankr.W.D.Ark.2009). However, there will be no plan in this case, and the Court has heard loud whispers Debtor may soon seek voluntarily conversion to chapter 7. Thus, unless SOD can establish law in this circuit to the contrary, SOD’s request under § 506(b) should be calculated to the date of the trial on its claim in this adversary proceeding.
V.
SOD and Debtor shall confer to calculate pre-petition statutory interest on SOD’s allowed principal claim of $205,104.07. After SOD has filed and given notice of an application as discussed above, the Court will consider SOD’s entitlement to pre-petition attorney fees under S.D.C.L. § 44-9-42 and post-petition costs, including post-petition interest and attorney fees, under 11 U.S.C. § 506(b). Once those figures are known, an order will be entered establishing the amount of SOD’s secured claim. The order will then be *43reflected in the adversary proceeding’s final judgment.
. Defendant RockTenn CP LLC’s claim remains unresolved. Another status conference on it is being scheduled by separate order.
. Contract 1 is entitled “AGREEMENT” and was signed by Hellwig and Olson on October 20, 2006. It states:
This agreement is between Northern Beef Packers, Inc. and Scott Olson Digging, Inc. Scott Olson Digging, Inc. will perform the following work:
• Load and haul 200,000 cubic yards out of pile approximately I'/i miles to site
• Doze to plan grades
• Shape lagoon
• Compaction complete to 92%-95% (testing done by others)
• Install culverts
• Buy and install gravel on site road
• Install silt fence (supplied by owner)
• Supply and pay for fill at owner's site, 1 '/i mile from site.
• Install signs for traffic control
• Not responsible for damage to roads, but will maintain in and out of site area
• Approximate start date will be November 1, 2006.
Lump Sum Price $900,000.00
Due upon start of project: $75,000.00
Progress payments will be due every 2 weeks from start date.
. Contract 2 is entitled "AGREEMENT” and was signed by Hellwig and Olson on November 24, 2006. It provides:
This agreement is between Northern Beef Packers, Inc. and Scott Olson Digging, Inc. Scott Olson Digging, Inc. will perform the following work:
• 31,000 cubic yards of sand: delivered, stockpiled and moved on building site @ $9.42 per ton
• 23,000 cubic yards of gravel: delivered, stockpiled and moved on building site @ 13.85 per ton
. Contract 3 is entitled "Phase 3-AGREE-MENT” and was signed by Hellwig and Olson on December 28, 2006. It provides:
This agreement is between Northern Beef Packers, Inc. and Scott Olson Digging, Inc. Scott Olson Digging, Inc. will perform the following work:
• 165,000 cubic yards — Site 2 Grading at $4.50 per cubic yard, totaling $742,500.00.
• Progress payments to be made every 2 weeks from start date.
. Contract 4 is dated June 29, 2007, is entitled "Phase 4 — AGREEMENT,” and was signed by Hellwig on July 13, 2007 and Olson on July 16, 2007. It provides:
This agreement is between Northern Beef Packers, Inc. and Scott Olson Digging, Inc. Scott Olson Digging, Inc. [is] to perform the following work:
• Sand to job from Jeff Hall pit at $8.00 per ton — 4,500 ton
*28• South Dakota base course delivered @ $14.90 per ton — 20,000 ton
• 3" minus open graded crushed aggregate SD DOT Spec installed at basement at $28.52 per ton — minimum 10,000 ton (follow SD DOT spec 2004 Standard Specifications for Roads and Bridges)
• Basement Excavation approximately 32,-591 cubic yards at $3.50 per cubic yard
• Progress payments to be made every 2 weeks from start date.
There is a handwritten note beside the line that references “South Dakota base course.” The note says “Lay in place[J” The handwritten note does not appear to be initialed by either party.
. Only Debtor and SOD actually litigated SOD’s claim at trial, although Plaintiffs and some other defendants had filed pleadings regarding SOD’s claim.
. The import of stipulated fact no. 8 is unclear, except perhaps to show what invoices SOD submitted to Debtor after their late 2007 and early 2008 meetings to reconcile accounts. It is true SOD’s fifteen invoices dated December 10, 2007 and a single invoice dated January 11, 2008 total $892,702.04. However, Debtor has agreed six of the December 10, 2007 invoices and the lone January 11, 2008 invoice are payable.
. The Court was unable to locate anything in this exhibit that set forth the amounts or dates of Debtor’s payments to SOD. They were included in SOD Exhibit 88, at 2.
.Attached to SOD’s pre-trial brief was an exhibit that included as one column a "running” total of the disputed invoices (doc. 262). SOD presented the same document as SOD Exhibit 88, at 1. Near the bottom of the column, it appears disputed invoice 1234 was not included in the total. When invoice 1234 is included, the total of the disputed invoices is $3,377,848.03.
.A creditor's proof of claim must substantially conform to Official Form 10 and be signed by the creditor or the creditor's authorized agent. Fed.R.Bankr.P. 3001(a) and (b). The creditor must attach to the proof of claim certain writings on which the claim or interest in property is based and evidence of the perfection of any security interest. Fed. R.Bankr.P. 3001(c)(1) and (d). The claim must be filed timely, Fed.R.Bankr.P. 3003(c)(3) and Bankr. D.S.D. R. 3003-1 (chapter 11 cases), and the filing must comport with a court’s particular filing requirements, Fed.Rs.Bankr.P. 3002(b) and 5005(a).
. Claims for taxes by a governmental entity may be subject to a different allocation of burdens. Raleigh v. Ill. Dept. of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000).
. The parties presented several witnesses out of order, which made challenging the Court’s task of determining each party’s success in meeting its evidentiary burden.
. On part "2.” of the proof of claim form, SOD erroneously referred to its mechanic’s lien as the basis for its claim rather than its written and oral agreements with Debtor.
. This is how both SOD and Debtor categorized these five disputed invoices.
. SOD expended a great deal of time and energy discounting an earlier calculation of fill Hoscheid had made before he had the original pre-excavation survey from Helms & Associates. Hoscheid freely acknowledged his calculations based on the Helms & Associates survey were more accurate than his earlier calculation, where the original elevations for the "north” and "middle” borrow areas had to be estimated. SOD's repeated challenges to Hoscheid’s earlier computation offered little value, except perhaps to show Debtor's own expert's calculations have indicated, since the middle of 2008, Debtor owes SOD for more clay fill.
. Bacon calculated the 9,606 cubic yards were taken from the John Braun pit. His calculation was not challenged by either party. The 46,394 cubic yards was extrapolated from Debtor’s payments to the Young family for the borrow piles, where SOD and the Youngs had agreed a truck count method would be used to determine what SOD owed the Youngs. While Olson testified more than 46,394 cubic yards of fill was taken from the Young piles, SOD did not identify anything else in the record to support that statement.
. SOD’s payments to the borrow site owners are set forth in SOD Exhibit 40. The exhibit shows SOD paid Braun for 26,273 cubic yards of fill at a cost of $15,763.60. However, during the trial, witnesses for both parties agreed only 9,606 cubic yards were taken from the Braun property (the slightly less figure of 9,598 cubic yards was also occasionally used). SOD Exhibit 17, which the parties indicated, at the beginning of the trial, SOD intended to offer but never formally did, included a copy of SOD's check to Braun. The check was dated November 30, 2006 and was for the full $15,763.60. Adding to the mystery, Debtor accepted SOD’s invoice 1243, with its cryptic description “Additional Pay Jon [sic] Braun Pit” for $10,000.00. Robert Breukelman, Debtor's construction manager, was the only person to testify regarding undisputed invoice 1243. While he indicated the $10,000.00 in invoice 1243 was for the 9,606 cubic yards of clay fill taken from the Braun pit, his testimony was nondescript and did not reflect the "Additional” language in the invoice’s description. There was no specific discussion by Breukelman regarding whether the agreed 9,606 cubic yards from Braun’s borrow pit and Braun's charge per cubic yard to SOD equaled the sum on SOD’s invoice 1243. Further, the January 11, 2008 date on SOD's invoice 1243 does not conform with the November 30, 2006 date on the check SOD wrote to Braun.
If SOD's payment to Braun is calculated based on 9,606 cubic yards, SOD’s check to Braun should have been for $5,763.60 — exact*36ly $10,000.00 less than what is reflected on SOD Exhibit 40. Because there has been no explanation in the record for the extra $10,000.00, the Court’s calculation reflects only the agreed 9,606 cubic yards from the Braun pit at SOD’s agreed price of $5,763.60. SOD's $10,000.00 payment to Braun on November 30, 2006, and Debtor’s apparent agreement to reimburse SOD for it, remains a mystery.
. See supra note 17.
. Borrow pit owner Harlan Young testified Olson told him, a few months before the trial, that SOD had more checks for Young and his family apparently back in late 2007 and 2008 but did not give the checks to them then because "things fell apart with Hellwig.” However, during the conversation, Olson did not tell Young the amount of these checks or associate the checks with a particular quantity of unpaid-for fill. SOD did not produce these particular uncashed checks at trial or provide other documentation of what SOD still owed the borrow pit owners.
Young also testified Debtor paid him and his family another $35,000.00 — half of an apparent agreed $70,000.00 — in part for fill and in part for an unspecified "contract change.” However, neither SOD nor Debtor elicited testimony from Young or produced an exhibit that established what portion of this side agreement was for actual fill SOD removed from the borrow pits or piles and placed on site. Young only stated,
We came to an agreement for $70,000 additional, but a lot of that was really for the contract change.... Some of it was [for dirt], but there was never — it was never split out completely which was for dirt or which was for contract change.
Thus, the record was insufficient to allow the Court to factor this additional payment into its calculation of total clay fill based on what the borrow pit owners were paid.
. See supra note 17.
. One other troublesome issue for the Court was invoices 1137a, 1189, and 1221 do not appear to have been produced contemporaneous with the services rendered. Invoice 1137a is dated November 28, 2006, but the "Ship” date is not until January 11, 2008. Invoice 1 189 is dated September 18, 2007 and has a "Ship” date of September 18, 2007. Invoice 1221 is dated December 10, 2007 and has a "Ship” date of December 10, 2007. Olson testified SOD delayed some invoices because Debtor was not timely paying them. This testimony was not credible, however, because the record does not support Olson’s testimony: SOD's first invoice in 2007 was dated January 15, 2007 for $231,316.74, and Debtor paid SOD $450,000.00 two days later. SOD did not generate any more invoices in 2007 until late July 2007, when it gave Debtor eight invoices totaling $413,052.95 for work other than placing clay fill on the building site. Debtor was, in fact, slow in paying these invoices in full, with $300,000.00 paid to SOD over the next two months, but this happened well after SOD finished bringing in the clay fill. Moreover, there was no explanation why SOD would send Debtor several invoices in July 2007 for other work and materials but exclude invoices related to the clay fill. Olson also testified SOD may have sent Debtor some invoices more than once or SOD may have amended some invoices, but he offered no written verification from SOD’s or Debtor's records. The issue is unresolvable on this record, however, because neither party presented any reliable evidence regarding when invoices 1137a, 1189, and 1221 were actually prepared and presented by SOD and actually received by Debtor.
. This number was calculated by civil engineer Kim Stoecker at trial.
. Brink's testimony on cross-examination regarding the stripping "to about 50 feet outside of the building” was more assured than when he stated during earlier cross-examination that it was "a fair assumption” sod was removed from the area within either the silt fence or the "Phase 1 construction limits.”
. The Court was unable to find SOD's claim for reimbursement of the excise tax in its proof of claim.
. Five of the eight invoices that are allowed, in whole or in part, under this decision included a 2.041% excise tax. Only two included sales tax. Because no meaningful record was made regarding the applicable taxes on *42the disputed invoices, the Court has included the excise tax in its allowance based on the majority of the invoices.
. The Court was unable to find where SOD referenced 11 U.S.C. § 506(b) in its proof of claim in Bankr. No. 13-10118 or in its counterclaim or cross-claim in this adversary proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497560/ | MEMORANDUM DECISION ON DEBTOR’S REQUEST FOR RELIEF FROM FORFEITURE AND ON DEBTOR’S MOTION TO ASSUME THE MASTER LEASE ON PREMISES AT 5500 WILSHIRE BOULEVARD, LOS 7USTGELES, CALIFORNIA
ROBERT KWAN, Bankruptcy Judge.
The above-captioned bankruptcy case came on for trial before the undersigned United States Bankruptcy Judge on April 23, May 7 and 14, 2014, pursuant to the judgment of the United States District Court for the Central District of California (the “District Court Judgment”), entered on January 15, 2014, on the appeal of AERC Desmond’s Tower LLC (“Landlord”), reversing the court’s prior decision granting the motion of Debtor Art and Architecture Books of the 21st Century (“Debtor”) to assume the Master Lease (NNN), 5500 Wilshire Blvd., Los Angeles, California (“Lease”) and remanding for proceedings consistent with the District Court Judgment, specifically, to determine Debtor’s request for relief from forfeiture of the terminated Lease pursuant to state law (i.e., the District Court “concluded that, with respect to Debtor’s eligibility for *45relief from forfeiture, it would permit the Bankruptcy Court to address the full scope of the arguments and potential factual issues on remand.”)- See District Court Judgment at 3; see also, In re Windmill Farms, Inc., 841 F.2d 1467, 1471-1472 (9th Cir.1988). The Official Committee of Unsecured Creditors in this bankruptcy case (“Creditors’ Committee”) supports Debtor’s request for relief from forfeiture of the Lease and assumption of the Lease. Landlord opposes the request and motion. The background facts are discussed in the prior rulings of the court and the District Court, and because the parties are familiar with them, they need not be generally described here.
For the reasons set forth below, the court determines that Debtor contractually waived its right to relief from forfeiture of the Lease under both California Code of Civil Procedure § 1179 and California Civil Code § 3275 and therefore it may not assume the Lease after its termination. Accordingly, Debtor’s request for relief from forfeiture and motion to assume the Lease should be denied.
Discussion
I. Debtor Waived its Right to Seek Relief from Forfeiture under California Code of Civil Procedure § 1179 and California Civil Code § 3275
A. There is No Statutory Prohibition of a Waiver of the Right to Seek Relief from Forfeiture under California Code of Civil Procedure § 1179 or California Civil Code § 3275 in a Commercial Lease, and the Waiver in a Commercial Lease Does Not Contravene a Public Purpose
In this case, Debtor seeks to invoke California law to request relief from forfeiture of the Lease after its termination, specifically, California Code of Civil Procedure § 1179 and California Civil Code § 3275. Landlord argues that Debt- or may not rely upon these provisions for relief from forfeiture because Debtor had expressly waived all of its rights to request relief from forfeiture of the Lease after termination in Section 23.1 of the Lease. Thus, the issue before the court is whether or not Debtor had waived its rights to relief from forfeiture of the Lease as argued by Landlord. Waiver is generally understood as “the intentional relinquishment or abandonment of a known right.” Bickel v. City of Piedmont, 16 Cal.4th 1040, 1048, 68 Cal.Rptr.2d 758, 946 P.2d 427 (1997) (citations omitted), abrogated with regard to its construction of the Permit Streamlining Act as noted in DeBerard Properties, Ltd. v. Lim, 20 Cal.4th 659, 668, 85 Cal.Rptr.2d 292, 976 P.2d 843 (1999). As stated by the Supreme Court of California, under California law, a party may waive a statutory provision “if a statute does not prohibit doing so,” the statute’s “public benefit ... is merely incidental to [its] primary purpose,” and “waiver does not seriously compromise any public purpose that [the statute was] intended to serve.” DeBerard Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843 (citations omitted).
1. No Other Statute Prohibits Waiver of the Right to Seek Relief from Forfeiture in a Commercial Lease
The court will need to first address whether any statute prohibits the waiver of rights under California Code of Civil Procedure § 1179 or California Civil Code § 3275. Landlord argues that no California statute prohibits a commercial lease tenant from waiving any right to seek relief from forfeiture under California Code of Civil Procedure § 1179 and California Civil Code § 3275, or otherwise, and that this is indicative of the California Legislature’s express intent. Landlord’s Proposed Findings of Fact and Conclusions of Law ¶ 49. The court agrees with Landlord that no California statute specifically prohibits a commercial lease tenant from *46waiving its right to seek relief from forfeiture under either California Code of Civil Procedure § 1179 or California Civil Code § 3275. If the California Legislature had intended either of these provisions to be nonwaivable for reasons of public policy, it could have adopted a statute expressly prohibiting waivers of either or both of these provisions, but it did not. See Pearl v. General Motors Acceptance Corp., 13 Cal.App.4th 1023, 1030, 16 Cal.Rptr.2d 805 (1993). The court notes that the Creditors’ Committee has specifically conceded that “[t]he Committee is aware that no statute expressly states that the right to redeem a commercial lease may not be waived.” Memorandum of the Official Committee of Unsecured Creditors in Support of Debtor’s Request for Relief from Forfeiture of Master Lease with AERC Desmond’s Tower, LLC, filed on March 21, 2014, at 14:21-22. Neither the court nor any of the parties were able to identify an express statutory prohibition of any waiver of rights under either California Code of Civil Procedure § 1179 or California Civil Code § 3275.
Accordingly, the court determines that there is no express statutory prohibition of the right to waive California Code of Civil Procedure § 1179 or California Civil Code § 3275. Thus, the first of the three requirements enunciated by the Supreme Court of California in DeBerard Properties permitting a party to waive a statutory provision “if a statute does not prohibit doing so” is met here. DeBerard Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843 (1999) (citations omitted).
2. Debtor’s Waiver of Its Rights Under California Code of Civil Procedure § 1179 and California Civil Code § 3275 as a Commercial Tenant Does Not Contravene Public Policy
The issue of whether the waiver provision in Section 23.1 of the Lease is unenforceable as against settled California public policy is one that can be decided as a matter of law. Health Net of California, Inc. v. Department of Health Services, 113 Cal.App.4th 224, 232, 6 Cal.Rptr.3d 235 (2003) (“[T]he issue of whether a contractual provision is contrary to public policy, or a statute which embodies such public policy, is a question of law that we may independently determine”).
“Two provisions in the [California] Civil Code [i.e., §§ 3268 and 3513] appear to allow waivers of statutory provisions, provided such waivers are not against public policy.” Pearl v. General Motors Acceptance Corp., 13 Cal.App.4th at 1029, 16 Cal.Rptr.2d 805.
California Civil Code § 3268 provides:
Except where it is otherwise declared, the provisions of the foregoing titles of this part, in respect to the rights and obligation of parties to contracts, are subordinate to the intention of the parties, when ascertained in the manner prescribed by the chapter on the interpretation of contracts; and the benefit thereof may be waived by any party entitled thereto, unless such waiver would be against public policy.
California Civil Code § 3268 (emphasis added). However, Civil Code § 3268 by its terms is only applicable to “the provisions of the foregoing titles of this part” (i.e., Titles 1 through 15 of Part 4 (Obligations Arising from Particular Transactions) of Division 3 (Obligations) of the Civil Code, §§ 1738 through 3267), and does not apply to Code of Civil Procedure § 1179 and Civil Code § 3275, as neither of these provisions is included in Titles 1 through 15 of Part 4 of Division 3 of the Civil Code. Thus, the court determines that Civil Code § 3268 is not applicable *47here because any waiver described therein refers to only Civil Code §§ 1738 through 3267, and does not refers to the provisions relied upon by Debtor, i.e., Code of Civil Procedure § 1179 and Civil Code § 3275.
The other provision permitting waiver of statutory rights, California Civil Code § 3513, provides:
Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.
California Civil Code § 3513. The court in Azteca Construction, Inc. v. ADR Consulting, Inc., 121 Cal.App.4th 1156, 1166, 18 Cal.Rptr.3d 142 (2004) summarized the method of analysis for whether a waiver of statutory rights is permitted under California Civil Code § 3513 based on public policy concerns:
The full text of Civil Code section 3513 provides: “Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” As our state Supreme Court pointed out, a literal construction of this statute would be unreasonable, for “it is difficult to conceive of a statutory right enacted solely for the benefit of private individuals that does not also have an incidental public benefit.” (Bickel v. City of Piedmont (1997) 16 Cal.4th 1040, 1049, fn. 4, 68 Cal.Rptr.2d 758, 946 P.2d 427). Therefore, a party may waive a statutory right where its “ ‘public benefit ... is merely incidental to [its] primary purpose,’ ” but a waiver is unenforceable where it would “ ‘seriously compromise any public purpose that [the statute was] intended to serve.’” (DeBerard Properties, Ltd. v. Lim (1999) 20 Cal.4th 659, 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843, quoting Bickel, at pp. 1049-1050, 68 Cal.Rptr.2d 758, 946 P.2d 427.) Stated another way, Civil Code section 3513 prohibits a waiver of statutory rights where the “public benefit [of the statute] is one of its primary purposes.” (DeBerard, at p. 669, 85 Cal.Rptr.2d 292, 976 P.2d 843.)
Azteca Construction, Inc. v. ADR Consulting, Inc., 121 Cal.App.4th at 1166, 18 Cal.Rptr.3d 142 (emphasis in original).
i. Whether Public Benefit Was a Primary Purpose of Statutes
First, the court examines whether Debt- or’s statutory rights under California Code of Civil Procedure § 1179 and California Civil Code § 3275 are not waivable on grounds that the public benefit of these statutes is one of their primary purposes. Id., citing, DeBerard Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843. In other words, as stated in Azteca Construction, “a party may waive a statutory right where its public benefit ... is incident to its primary purpose.” Id. Thus, the court examines whether the public benefit of the statutes waived by Debtor in Section 23.1 of the Lease under California Code of Civil Procedure §§ 1174 and 1179 and California Civil Code § 3275 was incidental to the purposes of those statutes, or whether the public benefit of those statutes was one of their primary purposes. Bickel v. City of Piedmont, 16 Cal.4th at 1048-1049, 68 Cal.Rptr.2d 758, 946 P.2d 427; see also DeBerard Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843.
Landlord argues that the second waiver requirement under Bickel and DeBerard is met here because the statutory provision granting the right at issue exists for the benefit of the waiving party rather than for a public purpose. Landlord’s Proposed Findings of Fact and Conclusions of Law § 47, citing, Bickel v. City of Piedmont, 16 Cal.4th at 1049, 68 Cal.Rptr.2d *48758, 946 P.2d 427. In support of its position, Landlord argues that Debtor has not met its “ ‘heavy burden of proof to avoid its waiver by showing that the waiver would be violation of the settled public policy of this state, or injurious to the morals of its people.’ ” Landlord’s Proposed Findings of Fact and Conclusions of Law § 51-54, citing inter alia, Brisbane Lodging, LP v. Webcor Builders, Inc., 216 Cal.App.4th 1249, 1261, 157 Cal.Rptr.3d 467 (2013). However, this argument does not precisely address the question of whether the public benefit of the statutes waived were incidental to their primary purposes or one of their primary purposes. Neither does Debtor address this precise question because it argues that the public policy of California against permitting forfeitures is no less important than the public policy to enable and enable freedom of contract by parties to commercial real property leases. Debtor’s Proposed Findings of Fact and Conclusions of Law § 25.
The court analyzes the purpose of the statutes which were the subject of Debt- or’s waiver in order to determine whether or not the public benefit of those statutes was one of their primary purposes, or incidental to those purposes. Bickel v. City of Piedmont, 16 Cal.4th at 1048-1049, 68 Cal.Rptr.2d 758, 946 P.2d 427; see also DeBerard Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843. A leading commentary on real estate law, Miller and Starr, California Real Estate 3d, has described the purpose of these statutes as follows:
Under appropriate circumstances, a person can be relieved from a forfeiture. There are three separate statutes that may justify equitable relief to a tenant who has defaulted under the terms of the lease. Each of these statutes applies after a judgment has been rendered in favor of the landlord that declares a termination of the lease.
Miller and Starr, California Real Estate 3rd, § 19:240 (Database updated September 2014) (footnote omitted) citing California Code of Civil Procedure §§ 1174 and 1179 and California Civil Code § 3275;1 see also, 12 Witkin, Summary of California Law, Real Property, Landlord Tenant Relationship, Relief from Forfeiture, § 670 at 786 (10th ed. 2005 and 2014 Supp.) (“The general statutory declaration of the right to relief from forfeiture (C.C.3275) is supplemented by C.C.P. 1179, establishing a special proceeding for the relief of a defaulting tenant.”). As such, the primary beneficiary of these statutes is a tenant in a real property lease, and not the general public, and the primary purpose of these statutes is to mitigate the private harm to a real property tenant upon forfeiture of a lease upon termination.2 In this case, Debtor as a commercial lease tenant might have benefitted under these statutes to relieve its forfeiture of its tenancy after termination of the lease, which would be a private benefit rather a benefit to the gen*49eral public. See Debtor’s Proposed Findings of Fact and Conclusions of Law ¶¶ 15-16 (Debtor’s art gallery and headquarters are located on the premises governed by the Lease, and forfeiture would impose financial hardship on Debtor in losing the valuable Lease and related purchase option and its headquarters, gallery and subleasing business). Based on these circumstances, the court determines that because the primary purpose of the relief from forfeiture statutes was to mitigate private harm from such forfeitures, the public benefit was not the primary purpose of the statutes, and any benefit to the general public was incidental at most.
ii. Whether the Waiver Seriously Compromises the Public Purpose of a Statute
Determination of whether the provision in Section 28.1 in the Lease for waiver of Debtor’s statutory rights to request relief from forfeiture violates “a law established for a public reason” under California Civil Code § 3513 also depends on whether the waiver “seriously compromise^] any public purpose that [the statute was] intended to serve.” California Civil Code § 3513; Azteca Construction, Inc. v. ADR Consulting, Inc., 121 Cal.App.4th at 1166, 18 Cal.Rptr.3d 142, citing, DeBerard Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843. This determination requires the court to consider two apparently competing and long-standing California public policies: the policy in favor of freedom of contract in commercial real property leases and the policy that equity abhors forfeiture. This is not a novel situation, and tension between these policies has been considered by the courts in the past. See, e.g., Harbor Island Holdings, L.L.C. v. Kim, 107 Cal.App.4th 790, 799, 132 Cal.Rptr.2d 406 (2003). The California Court of Appeal in Harbor Island Holdings, L.L.C. v. Kim summarized the problem well when it noted that “[i]t is the public policy of the state and fundamental to the commerce and economic development of the state to enable and facilitate freedom of contract by the parties to commercial real property leases ... it is no less the policy of this state that any provision for the forfeiture of money or property without regard to the actual damage suffered constitutes an unenforceable penalty.” 107 Cal.App.4th at 799, 132 Cal.Rptr.2d 406, citing, Ridgley v. Topa Thrift & Loan Association, 17 Cal.4th 970, 977-978, 73 Cal.Rptr.2d 378, 953 P.2d 484 (1998).
Freedom of contract in commercial real property leases is well established in California law. The California legislature enacted Civil Code § 1995.270(a)(1) to declare it the public policy of the State of California to “enable and facilitate freedom of contract by the parties to commercial real property leases.” California Civil Code § 1995.270(a)(1); see also, 250 L.L.C. v. Photopoint Corp. (USA), 131 Cal.App.4th 703, 718, 32 Cal.Rptr.3d 296 (2005) quoting, California Civil Code § 1995.270(a)(1).3 Consistent with this public policy, California courts have gener*50ally held that commercial tenants may waive their rights under the California Civil Code. 250 L.L.C. v. Photopoint Corp. (USA), 131 Cal.App.4th at 718, 32 Cal.Rptr.3d 296, citing, e.g., Lee v. Placer Title Co., 28 Cal.App.4th 503, 512-513, 33 Cal.Rptr.2d 572 (1994) (right to quiet enjoyment) and Folberg v. Clara G.R. Kinney Co., 104 Cal.App.3d 136, 140, 163 Cal.Rptr. 426 (1980) (right to notice of rent default).
The public policy that equity abhors forfeiture is also well represented in California law. California Civil Code § 1442; Petersen v. Hartell, 40 Cal.3d 102, 112, 219 Cal.Rptr. 170, 707 P.2d 232 (1985); Reed v. South Shore Foods, Inc., 229 Cal.App.2d 705, 40 Cal.Rptr. 575 (1964); Deutsch v. Phillips Petroleum Co., 56 Cal.App.3d 586, 128 Cal.Rptr. 497 (1976). California Civil Code § 1442 specifically provides: “A condition involving a forfeiture must be strictly interpreted against the party for whose benefit it is created.” The policy of abhorring forfeitures has been followed in the case law wherein courts have strictly construed the language of contracts to avoid forfeiture. See, e.g., Randol v. Scott, 110 Cal. 590, 595-596, 42 P. 976 (1895) (strictly construing language of a contract calling for forfeiture of a lease upon the assignment by the co-lessees not to be triggered upon an assignment by operation of law by the bankruptcy of one co-lessee; opinion stating that forfeiture clauses are to be “restrain[ed] ... to the most technical limits of the terms and conditions upon which the right is to be exercised”).
However, courts have also held that California Civil Code § 1442 does not warrant a strained or overly technical construction or artificial distinction where forfeiture is plainly required by the express language of a written instrument. In In re Kitchen, 192 Cal. 384, 220 P. 301 (1923), the California Supreme Court upheld a provision in a decedent’s will requiring forfeiture of a bequest to a specific legatee who sued the executor or any other legatee from recovering or enjoying their gifts under the will, despite the specific legatee’s claim that the provision violated California public policy against forfeitures. Id., at 387-391, 220 P. 301. The specific legatee who had sued the estate for payment of a claim under an alleged oral contract and lost nevertheless asserted her right to a bequest under the will, which according to the forfeiture provision went instead to the residuary legatee. Id. The trial court rejected the specific legatee’s argument that another will provision for payment of all the deceased’s “just debts” overrode the forfeiture provision and enforced the forfeiture of the bequest pursuant to the express provisions of the will. Id. at 391-392, 220 P. 301. As to the effect of the rule to strictly construe a forfeiture provision in an instrument, the California Supreme Court in Kitchen said:
The rule that a forfeiture clause is to be strictly construed means simply that no wider scope is to be given to the language employed than is plainly required. It does not require the court to put a strained or overtechnical construction upon the language employed, ignoring the essence of the condition imposed upon the legacy and refusing to give effect to the lawful intention of the testatrix, to enable a legatee to affirm a will so far as it is to her own profit and at the same time repudiate the validity of its provisions which are for the benefit of others. No artificial distinctions are to be taken advantage of or quibbling indulged in to the end that a person plainly and palpably coming with the scope of the forfeiture clause may by “some hook or crook” escape the penalty of forfeiture.
Id. at 389-390, 220 P. 301. Thus, the court in Kitchen upheld the trial court’s judgment holding that the specific legatee forfeited her bequest under the terms of the *51will “for the reason that the intent of the testatrix is so clearly and definitively expressed in the forfeiture clause as to allow no room for any other construction than it was her intent, in the event any suit were brought by a legatee under the will, for any purpose whatsoever, including even the collection of a ‘just debt’, that the legacy of such beneficiary should thereby become fully and utterly void.” Id. at 391-392, 220 P. 301. To hold otherwise, as the California Supreme Court said in Kitchen, “would be allowing the plain intent of the testatrix to be overthrown by indulgence in an overrefinement of reasoning.” Id. at 391, 220 P. 301. The language from the California Supreme Court’s opinion from Kitchen regarding the effect of the California rule that a forfeiture clause is to be strictly construed was quoted at length by the Ninth Circuit in a case upholding the express language of a commercial lease setting forth conditions of forfeiture over the general California public policy abhorring forfeitures embodied in California Civil Code § 1442 in Urban Properties Corp. v. Benson, Inc., 116 F.2d 321, 323 (9th Cir.1940), quoting, In re Kitchen, 192 Cal. at 389, 220 P. 301.
i. Application to the Waiver Clause
Section 23.1 of the Lease contains the so-called Waiver Clause and provides:
Tenant hereby waives for Tenant and all those claiming under Tenant all right [sic] now or hereafter existing including, without limitation, any rights under California Code of Civil Procedure Sections 1174 and 1179 and Civil Code Section 1950.7 to redeem by order or judgment of any court or by any legal process or writ, Tenant’s right of occupancy of the Premises after any termination of this Lease.
Lease § 23.1 (emphasis added). The admissibility of the Lease into evidence is not disputed. Trial Exhibit 1, Lease.
Landlord argues that no public purpose prevents a commercial tenant from voluntarily waiving any right to relief from forfeiture in a commercial lease. Landlord’s Proposed Findings of Fact and Conclusions of Law ¶ 51. Landlord further argues that there is a long established policy in California in favor of freedom of contract in commercial leases. Landlord’s Proposed Findings of Fact and Conclusions of Law ¶ 53. In opposition, Debtor argues that the public policy of California against permitting forfeitures is set forth in California Code of Civil Procedure § 1179, California Civil Code §§ 1670, 1671, 3275, 3294, 3369, and applicable case law. Debtor’s Proposed Findings of Fact and Conclusions of Law ¶ 25. As noted previously, the California Supreme Court in DeBerard Properties stated that a waiver is permitted if it “does not seriously compromise any public purpose that [the statute was] intended to serve.” DeBerard Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843 (citations omitted).
Although it is a rule of equity that forfeitures are abhorred and a court has a duty to interpret an agreement to avoid forfeiture where it is reasonable to do so, it would not be reasonable for the court to interpret Section 23.1 of the Lease to avoid forfeiture in this case because the court also has the duty to interpret the Lease as a contract in accordance with the rules of contractual interpretation under applicable California law. Specifically, California Civil Code § 1638 provides: “The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.” See also, Pierce v. Merrill (1900) 128 Cal. 464, 472, 61 P. 64 (1900); Apra v. Aureguy, 55 Cal.2d 827, 830, 13 Cal.Rptr. 177, 361 P.2d 897 (1961); 1 Witkin, Summary of California Law, Contracts, § 741 (Na*52ture of Interpretation) (10th ed. 2005 and 2014 Supp.).
In this court’s judgment, the language employed in Section 23.1 of the Lease is clear and explicit and it would not create an absurdity to determine that Debtor has given up its right to avoid forfeiture after termination of the Lease through an express waiver of the right to avoid forfeiture (“Tenant hereby waives for Tenant and all those claiming under Tenant all right [sic] now or hereafter existing including, without limitation, any rights under California Code of Civil Procedure §§ 1174 and 1179 and Civil Code § 1950.7 to redeem, by order or judgment of any court or by any legal process or writ, Tenant’s right of occupancy of the Premises after any termination of this Lease ”) (emphasis added).
This express contractual waiver of the right to relief from forfeiture in Section 23.1 of the Lease, not just the specific California Code of Civil Procedure or Civil Code sections cited, is not inconsistent with the public policy declared by the state legislature in Civil Code § 1995.270 encouraging freedom of contract in commercial real property leases and the general public policy to allow contractual waivers of statutory rights as part of the freedom to contract in California as set forth in Civil Code §§ 3268 and 3513. In this court’s view, strict construction of the Lease as a contract under California Civil Code § 1442 to nullify the effect of the Waiver Clause in Section 23.1 of the Lease would effectively read it out of the contract made by the parties and goes beyond what is required by Section 1442 in furtherance of the public policy of abhorring forfeitures, which would be inconsistent with the principle of California Civil Code § 1638 to interpret a contract in accordance with its clear and explicit language. In re Kitchen, 192 Cal. at 389-891, 220 P. 301; In re Urban Properties Corp. v. Benson, Inc., 116 F.2d at 323.
Short of listing each section of the California Code of Civil Procedure and Civil Code which mention forfeiture, it would be difficult or impossible for parties to more comprehensively waive the right to relief from forfeiture. The use of the phrase “including, without limitation ” shows that the waiver of the right to relief from forfeiture of the lease is without limitation, and the statutes cited in Section 23.1 of the Lease, including California Code of Civil Procedure § 1179, are illustrative rather than limiting. Thus, the absence of a reference to California Civil Code § 3275 in Section 23.1 does not prevent the court from determining that Debtor also waived that, or any other, statutory provision which would otherwise provide a basis for relief from forfeiture of the Lease.
California case law further supports that a specific citation to the particular statute in the language of a contractual waiver is not necessarily required for an enforceable waiver, that is, a specific statement of the right being waived would be enough to waive the statutory right. Pearl v. General Motors Acceptance Corp., 13 Cal.App.4th at 1030, 16 Cal.Rptr.2d 805. As the court in Pearl v. General Motors Acceptance Corp. explained,
On its face, this provision makes no mention of section 2815 by name. [Citations omitted]. Further, it does not specifically state Pearl may not revoke the continuing security interest at any time as to future advances made by GMAC to Palomar. [Citations omitted]. Such a specific provision presumably would have effectively waived the rights afforded Pearl by section 2815.
Id. at 1031-1032, 16 Cal.Rptr.2d 805 (em*53phasis added).4 Based on the circumstances recited above, the court determines that the waiver is permitted here because “waiver does not seriously compromise any public purpose that [the statute was] intended to serve.” DeBerard, Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 848 (citations omitted). As discussed above, the public policy of abhorring forfeitures set forth in California Civil Code § 1442 and the case law is not an absolute and would not be seriously compromised here because there are other public policies which may be recognized as governing here to enable and facilitate freedom of contract among private parties on matters generally concerning private benefit as here. California Civil Code § 3513; DeBerard Properties, Ltd. v. Lim, 20 Cal.4th at 668-669, 85 Cal.Rptr.2d 292, 976 P.2d 843 (citations omitted); see also, In re Kitchen, 192 Cal. at 389-391, 220 P. 301; In re Urban Properties Corp. v. Benson, Inc., 116 F.2d at 323.
Citing Indusco Management Corp. v. Robertson, 40 Cal.App.3d 456, 114 Cal.Rptr. 47 (1974), the Creditors’ Committee argues that the phraseology relied upon by Landlord, i.e., “all right[s]” and “including, without limitation” does not mean that rights under California Civil Code § 3275 were waived, “particularly when that statute is not included among those listed in the Waiver Clause and given the need for narrow — not broad — construction of the clause.” Responsive Supplemental Brief of Creditors’ Committee, filed on May 6, 2014, at 6. In Indusco Management Corp., the court addressed whether a guarantor waived the right to assert a defense under the anti-deficiency provisions of California Code of Civil Procedure § 580d in a real estate loan contract providing for a waiver of “all suretyship defenses and defenses in the nature thereof’ before the lender made the election of the remedy of nonjudicial foreclosure of the security, thereby destroying the guarantor’s subrogation rights and right to proceed against the principal obligor for reimbursement. 40 Cal.App.3d at 461-462, 114 Cal.Rptr. 47. The court in Indusco Management Corp. held that such waiver was not specific enough to waive the defense based on the anti-deficiency provisions of California Code of Civil Procedure § 580d as to the guarantor, stating that “[i]n the absence of an explicit waiver, we will not strain the instrument to find that waiver by implication.” Id. As observed by the court in Cathay Bank v. Lee, 14 Cal.App.4th 1533, 1537-1538, 18 Cal.Rptr.2d 420 (1993), the analysis in Indusco Management Corp. on why the waiver was not sufficiently specific was rather limited, and offered little elaboration to explain the court’s reasoning. The Indusco court only stated that the language employed in the waiver could not “fairly be construed to be a specific waiver of the guarantor’s defense” and footnoted its conclusion with a quotation from a CEB (i.e., California Continuing Education of the Bar) treatise which stated the necessity for a “creditor’s standard form waiver [to] contain a specific waiver based on the creditor’s creation of a CCP 580d deficiency bar in favor of the debtor.” Cathay Bank v. Lee, 14 Cal.App.4th at 1537-1538, 18 Cal.Rptr.2d 420, citing, Indusco Management Corp. v. Robertson, 40 Cal.App.3d at 459-462 and n. 4, 114 Cal.Rptr. 47. As the court in Cathay Bank v. Lee put it, the task is to determine whether or not the purported waiver provision constitutes an *54“express” or “explicit” waiver of the defense involved. 14 Cal.App.4th at 1537, 18 Cal.Rptr.2d 420. That is, the court must answer the question “what is it, precisely, that the [waiving party] is being asked to waive?” 14 Cal.App.4th at 1538, 18 Cal.Rptr.2d 420. As discussed in detail above, Debtor’s waiver in Section 23.1 of the Lease in this case was explicit enough to constitute an effective waiver of its rights to request relief from forfeiture of the lease, and the answer to the question of what it was being asked to waive is precisely that it was waiving all rights to redeem occupancy of the premises after termination of the lease. Thus, Indusco Management’s holding that a waiver of the guarantor’s defense of estoppel where the lender elected the nonjudicial foreclosure remedy with no recourse against the principal obligor under the anti-deficiency provisions of California Code of Civil Procedure § 580d was insufficiently explicit is factually and legally distinguishable from this case, and thus inapplicable here.
In objecting to Landlord’s proposed findings of fact and conclusions of law asserting that California Civil Code § 3513 provides that waiver of relief from forfeiture is enforceable and citing Civil Code § 3509 (“The maxims of jurisprudence hereinafter set forth are intended not to qualify any of the foregoing provisions in this code, but to aid in their just application.”), Debtor argues that Civil Code § 3513 “is a mere maxim to aid in the construction of California’s statutes, and does not qualify these other anti-forfeiture statutes” (e.g., Civil Code § 3275 and Code of Civil Procedure § 1179). Debtor’s Objections to Landlord’s Proposed Findings of Fact and Conclusions of Law, filed on May 20, 2014, at 6 (Civil Code § 3513 cited incorrectly as “Section 3515”). The language of § 3513 is fairly close to the statement of the California Supreme Court in Bickel v. City of Piedmont describing the California jurisprudence of the doctrine of waiver:
The term “waiver” means the intentional relinquishment or abandonment of a known right. A person may waive the advantage of a law intended for his or her benefit, but “a law established for a public reason cannot be waived or circumvented by a private act or agreement.” “The doctrine of waiver is generally applicable to all of the rights and privileges to which a person is legally entitled, including those conferred by statute unless otherwise prohibited by specific statutory provisions.”
Bickel v. City of Piedmont, 16 Cal.4th at 1048-1049 and n. 4, 68 Cal.Rptr.2d 758, 946 P.2d 427, citing and discussing inter alia, California Civil Code § 3513 and California case law, including Covino v. Governing Board, 76 Cal.App.3d 314, 322, 142 Cal.Rptr. 812 (1977) and Outboard Marine Corp. v. Superior Court, 52 Cal.App.3d 30, 41, 124 Cal.Rptr. 852 (1975). Debtor’s characterization and discounting of California Civil Code § 3513 as a “mere maxim” does not change the analysis here, and as discussed herein, it is this court’s view that under the applicable California jurisprudence on the doctrine of waiver, Debtor expressly and validly waived its rights to request relief from forfeiture of the Lease after its termination.
The court notes that none of the cases cited by Debtor or the Creditors’ Committee held that a waiver of redemption rights is per se invalid as contrary to public policy in California. Moreover, as discussed herein, there is no express statutory prohibition against waivers of rights to relief from forfeiture of leases under California Code of Civil Procedure § 1179 and California Civil Code § 3275. As such, and in addition to the reasoning herein, the court determines that Debtor has not shown that the public welfare *55would be adversely affected by allowing waivers of Code of Civil Procedure § 1179 and Civil Code § 3275 between parties to a commercial lease. As it is the expressed public policy of the State of California to “enable and facilitate freedom of contract by the parties to commercial real property leases” as set forth in California Civil Code § 1995.270(a)(1), the court determines that parties to a commercial lease should generally be free to contract with each other upon such terms as they agree, and accordingly, the court further determines that if two contracting parties in a commercial lease desire to waive specific provisions of the Civil Code, as is the case here, they generally should be free to do so.5 Pearl v. General Motors Acceptance Corp., 13 Cal.App.4th at 1030, 16 Cal.Rptr.2d 805; 250 L.L.C. v. Photopoint Corp. (USA), 131 Cal.App.4th at 718, 32 Cal.Rptr.3d 296, quoting, California Civil Code § 1995.270(a)(1).
Based on the above analysis, the court determines that in Section 23.1 of the Lease, Debtor expressly waived all of its rights to redeem its occupancy after termination of the Lease, and was not waiving only its rights under the statutory provisions specifically cited in Section 23.1.
in. A Grammatical Analysis Further Supports that Debtor Waived its Right to Seek Relief from Forfeiture
Analyzing the waiver clause of Section 23.1 of the Lease in terms of grammar, it is evident to the court that Debtor had waived all rights to redeem its right of occupancy after termination of the Lease. As discussed in In re Arnold, 471 B.R. 578 (Bankr.C.D.Cal.2012), the court has found grammatical analysis to be a useful aid in statutory interpretation, and similarly, in this case, grammatical analysis would be an aid in interpreting the language of a contract. In this regard, the court had said about looking at the grammatical structure of a sentence in Arnold:
“To be a sentence, a group of words must [h]ave a subject (noun or pronoun), [h]ave a predicate (verb or verb phrase) [and e]xpress a complete thought.” Laurie Rozakis, English Grammar for the Utterly Confused at 116 (2003). (italics in original). “A sentence has two parts: a subject and a predicate. The subject includes the noun or pronoun that tells what the subject is about.” Id. (italics in original). “The predicate includes the verb that describes what the subject is doing.” Id. (italics in original).
In order to understand a subject and a predicate, parts of speech, i.e., noun or pronoun, and verb, must be defined: “A noun is a word that names a person, place, or thing.... A pronoun is a word used in place or a noun or another pronoun. ... Verbs name an action or describes a state of being.” Id. at 8-9, 12. (italics in original). One type of verb is an action verb, which “tell[s] what the subject does.” Id. at 12. “An action verb can be transitive or [intransitive]. Transitive verbs need a direct object. ... Intransitive verbs do not need a direct object.” Id. (italics in original). “A direct object is a noun or pronoun that receives the action.” Id. at 21.
In re Arnold, 471 B.R. at 599-600.
Using this method of grammatical analysis in this case, the court determines the *56subject of the sentence in the so-called Waiver Clause in Section 23.1 of the Lease is “Tenant.” An adjectival phrase modifying “Tenant” is the phrase “for Tenant and all those claiming under Tenant.” The court next determines the verb of the sentence as part of the predicate of the sentence is “waives.” According to the Merriam-Webster Online Dictionary, the word “waive” is a transitive verb, and two of its meanings relevant here are: “4 a: to relinquish voluntarily (as a legal right) <waive a jury trial” and “[4] b: to refrain from pressing or enforcing (as a claim or rule): FORGO <waive the fee>.” Merriam-Webster Online Dictionary, www.merriam-webster.com/dictionary/waive (2014); see also, Cathay Bank v. Lee, 14 Cal.App.4th at 1539, 18 Cal.Rptr.2d 420 (“Waiver is the intentional relinquishment of a known right.”) (emphasis in original; citation omitted). As noted in Arnold, a transitive verb requires a direct object, or the thing that receives the action/verb, which is here: “All right[s] ... to redeem by order or judgment of any court or by any legal process or writ, Tenant’s right of occupancy of the Premises after any termination of this Lease.” The adjectival phrase “now or hereafter existing” modifies the direct object. The adjectival phrase “including, without limitation, any rights under California Code of Civil Procedure §§ 1174 and 1179 and Civil Code Section § 1950.7” also modifies the direct object. Thus, boiled down to its essence, the sentence with the Waiver Clause in the Lease may be understood to read as follows: “Tenant (the subject), hereby waives (predicate), all right[s] ... to redeem ... tenant’s right of occupancy of the Premises after any termination of [the] lease (thus, expressing a complete thought).”
Debtor does not disagree with the method of grammatical analysis as it had at trial submitted two charts analyzing the structure of the sentence containing the Waiver Clause in a similar manner, but reached a different conclusion in reading the sentence as not constituting a waiver of its rights to redeem its right of occupancy on grounds that the adjectival phrase of “including, without limitation, any rights under California Code of Civil Procedure §§ 1174 and 1179 and Civil Code § 1950.7” which modifies the direct object in the sentence, i.e., all rights to redeem occupancy (shortened here), was ambiguous. The court finds that this adjectival phrase and the sentence as a whole are not ambiguous. As discussed in this decision, the sentence is clear that Debtor as Tenant waived all rights to redeem occupancy of the premises upon termination of the Lease, whether specifically enumerated or not.
Thus, a grammatical analysis of the contractual language in Section 23.1 of the Lease reinforces the court’s interpretation of the Waiver Clause in Section 23.1 of the Lease that Debtor clearly and explicitly waived all rights to redeem its right of occupancy of the leased premises after termination of the Lease, and not just the rights under the specifically listed California code provisions.
iv. The Scope of Lease Section 23.1 Does Not Relate Only to Debtor’s Right of Occupancy of the Premises, But Also to Debtor’s Right to Relief from Forfeiture of the Lease
Debtor argues the scope of waiver language in Section 23.1 of the Lease at most relates to its right to redeem its right of occupancy of the premises, but it does not relate to its right to relief from forfeiture of the Master Lease. Debtor’s Proposed Findings of Fact and Conclusions of Law ¶ 19. However, the court does not agree with Debtor’s argument that there is a difference between the right to occupancy and the right to relief from forfeiture. As *57discussed above, Section 23.1 of the Lease expressly provides that in the event of any termination of the Lease, Debtor is precluded from seeking to redeem its prior right of occupancy under the Lease. This waiver of Debtor’s right to redeem its occupancy logically extends to its right to any relief from forfeiture. Definitions of the terms, “occupancy” and “forfeiture,” are set forth in Black’s Law Dictionary as follows:
forfeiture n. (14c) 1. The divestiture of property without compensation. 2. The loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty. Title is instantaneously transferred to another, such as the government, a corporation, or a private person. 3. Something (esp. money or property) lost or confiscated by this process; a penalty. — forfeit, vb. — forfeita-ble, adj.
occupancy. (16c) 1. The act, state, or condition of holding, possessing, or residing in or on something; actual possession, residence, or tenancy, esp. of a dwelling or land. In this sense, the term denotes whatever acts are done on the land to manifest a claim of exclusive control and to indicate to the public that the actor has appropriated the land. Hence, erecting and maintaining a substantial enclosure around a tract of land usually constitutes occupancy of the whole tract, constructive occupancy. A manifest intent to occupy property physically, followed within a reasonable time by actual occupancy. 2. The act of taking possession of something that has no owner (such as abandoned property) so as to acquire legal ownership. See adverse possession. 3. The period or term during which one owns, rents, or otherwise occupies property. 4. The state or condition of being occupied. 5. The use to which property is put.
Black’s Law Dictionary, at 722 and 1184 (9th ed. 2009). To seek relief from forfeiture is to seek redress from the “divestiture of property” or the “loss of a right ... or property.” Id. The right of occupancy is the “act, state, or condition of holding, possessing, or residing in or on something; actual possession, residence, or tenancy esp. of a dwelling or land.” Id. When Debtor waived its right to redeem its right of occupancy in Section 23.1 of the Lease (thus meaning its right to tenancy of a dwelling or land), the waiver of such right consequently extended to any request by Debtor to seek relief from forfeiture (meaning redress from this loss of a right/property). Id.; Trial Exhibit 1, Lease, § 23.1.
Moreover, California Code of Civil Procedure § 1179, which was specifically cited in Section 23.1 of the Lease is a provision for relief from forfeiture, not a provision for the right to redeem a right of occupancy. Section 1179 provides:
The court may relieve a tenant against a forfeiture of a lease or rental agreement, whether written or oral, and whether or not the tenancy has terminated, and restore him or her to his or her former estate or tenancy, in case of hardship, as provided in Section 1174. The court has the discretion to relieve any person against forfeiture on its own motion.
California Code of Civil Procedure § 1179. (emphasis added). The express inclusion of Section 1179 of California Code of Civil Procedure in Section 23.1 of the Lease thus undermines Debtor’s argument that there is a distinction to be drawn between the right to occupancy and the right to relief from forfeiture. Accordingly, the court must reject Debtor’s argument that the scope of waiver language in Section *5823.1 only “at most” relates to its right to redeem its right of occupancy of the premises, and not to its right to relief from forfeiture of the Lease.
v. California Civil Code § 3268 Does Not Support Debtor’s Argument that California Code of Civil Procedure § 1179 and California Civil Code § 3275 are Non-Waivable
Finally, Debtor argues that California Code of Civil Procedure § 1179 and California Civil Code § 3275 are non-waivable because while California Civil Code § 3268 expressly provides that certain Civil Code lease-related provisions are ones that may be waived or modified by agreement, it did not similarly provide that California Code of Civil Procedure § 1179 or California Civil Code §§ 1670, 1671, 3275, 3294, and 3369 are waivable. Debtor’s Proposed Findings of Fact and Conclusions of Law ¶ 26. Thus, it appears that Debtor is arguing that because the California legislature designated certain commercial lease-related statutes as waivable pursuant to California Civil Code § 3268 and did not similarly provide that other provisions, such as Code of Civil Procedure § 1179 and Civil Code § 3275 are waivable, such provisions are not waivable as a matter of public policy. However, the court’s reading of Civil Code § 3268 does not support Debtor’s argument.
Civil Code § 3268 states: “Except where it is otherwise declared, the provisions of the foregoing titles of this part, in respect to the rights and obligation of parties to contracts, are subordinate to the intention of the parties, when ascertained in the manner prescribed by the chapter on the interpretation of contracts; and the benefit thereof may be waived by any party entitled thereto, unless such waiver would be against public policy.” California Civil Code § 3268 (emphasis added). As previously noted, Section 3268 applies to the “foregoing titles of this part,” which refers to statutes preceding that provision (i.e. Titles 1 to 15 of Part 4 of Division 3 of the Civil Code, §§ 1738 through 3267), but the legislature’s silence as to statutes following Section 3268 does not necessarily mean the rights conferred by statutes following Section 3268 or in a different state code, i.e., California Code of Civil Procedure § 1179, are non-waivable. In this court’s view, given the wording of Section 3268 as being applicable to the “foregoing titles of this part,” this only means that the section is only applicable to the statutes in those titles and has no applicability to other statutes. Thus, the court is compelled to reject Debtor’s argument that the rights conferred by Code of Civil Procedure § 1179 and Civil Code § 3275 are not waivable because Civil Code § 3268 did not specifically provide that the rights under those statute are waivable as not supported by the express language of the section.
vi. Conclusion
Accordingly, the court concludes that Debtor’s rights under California Code of Civil Procedure § 1179 and California Civil Code § 3275 to seek relief from forfeiture of the Lease are waivable because: (1) no statute prohibits waiver of such rights, (2) a waiver of such rights does not contravene public policy, and (3) the public policy of freedom of contract in commercial leases declared in Civil Code § 1995.270(a)(1) supports that the rights to relief from forfeiture of a lease under Code of Civil Procedure § 1179 and Civil Code § 3275 are waivable. Although the court recognizes the general equitable principle that forfeiture clauses must be strictly interpreted against the party for whose benefit it is created, it would not be reasonable for this court to interpret Section 23.1 of the Lease as not expressly waiving *59Debtor’s right to relief from forfeiture of the Lease under both California Code of Civil Procedure § 1179 and California Civil Code § 3275 based on the language of the parties’ contract and the absence of any statutory prohibition or public policy against such waiver. Because the court concludes that Debtor’s waiver of its rights to relief from forfeiture of the Lease is not prohibited by statute and does not contravene public policy, the court must next determine whether the waiver of such rights was “knowing and intelligent” in order to be valid and enforceable.
B. Debtor’s Waiver of the Right to Relief from Forfeiture Was a “Knowing and Intelligent” Waiver.
As previously noted, waiver has been defined as “the intentional relinquishment or abandonment of a known right.” Bickel v. City of Piedmont, 16 Cal.4th at 1048, 68 Cal.Rptr.2d 758, 946 P.2d 427 (citations omitted). ‘Waiver requires a voluntary act, knowingly done, with sufficient awareness of the relevant circumstances and likely consequences” and “[t]he burden is on the party claiming a waiver to prove it by evidence that does not leave the matter doubtful or uncertain and the burden must be satisfied by clear and convincing evidence that does not leave the matter to speculation.” In re Marriage of Moore, 113 Cal.App.3d 22, 27, 169 Cal.Rptr. 619 (1980). “To constitute a waiver, there must be an existing right, knowledge of the right, and an actual intention to relinquish the right.” Bickel v. City of Piedmont, 16 Cal.4th at 1053, 68 Cal.Rptr.2d 758, 946 P.2d 427 (citation omitted). “The waiver may be either express, based on the words of the waiving party, or implied, based on the conduct indicating an intent to relinquish the right.” Id. (citation omitted).
Landlord argues that Debtor’s waiver of its rights to relief from forfeiture was both knowing and voluntary because numerous drafts of the Lease were exchanged prior to its execution, Section 23.1 of the Lease was among the provisions that were revised by Debtor’s counsel in the various drafts of the Lease, and the Lease was signed by Debtor’s principal, Douglas Chrismas. Landlord’s Proposed Findings of Fact and Conclusions of Law ¶ 58. In response, Debtor argues that Landlord has failed to prove that it understood its rights under California Code of Civil Procedure § 1179 and § 3275. Debtor’s Proposed Findings of Fact and Conclusions of Law ¶ 23, citing, Trial Transcript, August 30, 2013, at page 124, lines 11-14, page 125, lines 8-22;6 Debtor’s Proposed Findings of Fact and Conclusions of Law ¶ 22.
*60The court finds that Landlord has established by clear and convincing evidence, and thus meeting its burden, in showing that Debtor made a “knowing and intelligent” waiver of all of its rights to redeem its right of occupancy of the premises after any termination of the Lease, including California Code of Civil Procedure § 1174 and 1179 and California Civil Code § 3275. The court specifically observes that there is no factual dispute that the Lease “was heavily negotiated by the Debtor and the Landlord, both of whom were represented by their respective experienced and sophisticated real estate counsel in connection with such negotiations” and “[njumerous drafts of the Master Lease were exchanged prior to its execution.” Landlord’s Proposed Findings of Fact and Conclusions of Law ¶ 58; Debt- or’s Proposed Findings of Fact and Conclusions of Law ¶ 3; see also, Trial Exhibit 1, Lease, § 31.7 (“The parties hereto acknowledge and agree that each has participated in the negotiation and drafting of this Lease.... ”). Thus, because the Lease was a commercial lease negotiated by the parties represented by experienced and sophisticated real estate counsel, there were numerous drafts of the Lease circulated among the parties, including numerous revisions to Section 23.1, the specific provision at issue in this matter, and the Lease was signed by Mr. Chrismas, Debt- or’s principal, the court finds that Landlord has met its burden in showing that Debtor’s waiver of its right to redeem its right of occupancy of the premises after any termination of the Lease was knowing and voluntary. Landlord’s Proposed Findings of Fact and Conclusions of Law ¶58, citing inter alia, Trial Exhibit 1, Lease, § 31.7, Terms and Headings (“The parties hereto acknowledge and agree that each has participated in the negotiation and drafting of this Lease;_”), Stipulated Joint Pre-Trial Order re: Motion to Assume Master Lease, ECF 305 at 24 (“The Master Lease was heavily negotiated by the Debtor and the Landlord, both of whom were represented by their respective experienced and sophisticated real estate counsel in connection with such negotiations. Numerous drafts of the Master Lease were exchanged prior to its execution.”), Direct Testimony of Bradley A. Van Auken in Support of Landlord’s Opposition to Debtor’s Motion to Assume Master Lease, ECF 272 at 7-8, ¶¶ 19-20 (testifying as Landlord’s representative in negotiations of the Lease that Debtor made changes in Section 23.1 of the Lease, but executed the Lease with the Waiver Clause in Section 23. 1), Declaration of Sidney P. Levinson in Support of Landlord’s Opening Brief on Remand, ECF 500, ¶ 4, Exhibit B, Excerpt of Trial Exhibit 102 (redlined draft of Lease showing changes in Section 23. 1), Trial Exhibit 1, Lease, at 27 and Trial Testimony of Douglas Chrismas, August 19, 2013, ECF 332 at 122:24-123:12 (testimony of Douglas Chrismas that he had experience negotiating real estate leases and was personally involved in the negotiation of the Lease and was represented by a lawyer in that negotiation); see also, Debtor’s Proposed Findings of Fact and Conclusions of Law ¶ 3 (“The Master Lease was heavily negotiated by the Debtor and the Landlord, both of whom were represented by their respective experienced and sophisticated real estate counsel in connection with such negotiations. Numerous drafts of the Master Lease were exchanged prior to its execution.”). In this regard, the court notes that the public policy concerns that *61may apply to the unequal bargaining positions of residential tenants and landlords do not apply to a commercial lease. See, e.g., California Civil Code § 1953 (declaring certain lease provisions void as contrary to public policy in residential leases, including a residential tenant’s waiver of statutory, procedural and other rights); Schulman v. Vera, 108 Cal.App.3d 552, 561, 166 Cal.Rptr. 620 (1980) (stating that under a commercial lease, “parties are more likely to have equal bargaining power” than is the case under a residential lease). The evidentiary record of the history of this commercial lease and its negotiation and approval by experienced and sophisticated business parties (including Debtor by its principal, Mr. Chrismas), which negotiated and signed the lease with the assistance of specialized real estate counsel, and after exchanging numerous drafts, is ample to show by clear and convincing evidence that Debtor’s waiver of the rights to request relief from forfeiture of the lease was both knowing and intelligent.
The technical requirements of a waiver as stated by the California Supreme Court in Bickel v. City of Piedmont are: (1) there must be an existing right; (2) knowledge of the right, and (3) an actual intention to relinquish the right. Bickel v. City of Piedmont, 16 Cal.4th at 1053, 68 Cal.Rptr.2d 758, 946 P.2d 427 (citation omitted). “The waiver may be ... express, based on the words of the waiving party....” Id. Here, these requirements are met and shown primarily by the written expression of Debtor in negotiating and signing the Lease, which included the waiver provision in Section 23.1. Trial Exhibit 1, Lease, § 23.1 and Signature Pages; Trial Exhibit 1, Lease, § 31.7, Terms and Headings (“The parties hereto acknowledge and agree that each has participated in the negotiation and drafting of this Lease;.... ”), Stipulated Joint Pre-Trial Order re: Motion to Assume Master Lease, ECF 305 at 2 ¶ 4 (“The Master Lease was heavily negotiated by the Debt- or and the Landlord, both of whom were represented by their respective experienced and sophisticated real estate counsel in connection with such negotiations. Numerous drafts of the Master Lease were exchanged prior to its execution.”); see also, Palmquist v. Mercer, 43 Cal.2d 92, 98, 272 P.2d 26 (1954) quoting, Smith v. Occidental & Oriental Steamship Co., 99 Cal. 462, 470-471, 34 P. 84 (1893) (“The general rule is that when a person with the capacity of reading and understanding an instrument signs it, he is, in the absence of fraud and imposition, bound by its contents, and is estopped from saying that its provisions are contrary to his intentions or understanding”).
The express language of Section 23.1 of the Lease demonstrates that Debtor as the tenant under the Lease had the rights to redeem by order or judgment of any court or by any legal process or writ its right of occupancy of the premises after termination of the Lease, including without limitation, any rights under California Code of Civil Procedure §§ 1174 and 1179 and California Civil Code § 1950.7. Id. As previously discussed herein, the court has determined that Debtor also had rights to redeem occupancy of the premises after termination of the Lease pursuant to California Civil Code § 3275. Debtor’s knowledge of its rights to redeem occupancy of the premises after termination of the Lease is demonstrated by the express reference to these rights in the Lease, which Debtor negotiated and signed, in Section 23.1. Trial Exhibit 1, Lease, §§ 23.1 and § 31.7, Stipulated Joint Pre-Trial Order re: Motion to Assume Master Lease, ECF 305 at 2 ¶4. Debtor’s actual intention to relinquish these rights is manifested and shown in the Lease, which it negotiated *62and signed, in Section 23.1 as indicated in the words employed in that section, specifically the words, “Tenant hereby waives for Tenant and all those claiming under Tenant.” Id. The facts that both parties, Landlord and Tenant, were represented in the negotiations by experienced and sophisticated real estate counsel, that numerous drafts were exchanged in the negotiations and that Debtor’s principal, Mr. Chrismas, who signed the Lease for Debt- or, had experience negotiating leases and had personally participated in the negotiation of the Lease further supports the court’s determination that the waiver in Section 23.1 was knowing and intentional. Stipulated Joint Pre-Trial Order re: Motion to Assume Master Lease, ECF 305 at 2 ¶ 4; Direct Testimony of Bradley A. Van Auken in Support of Landlord’s Opposition to Debtor’s Motion to Assume Master Lease, ECF 272 at 7-8, ¶¶ 19-20; Declaration of Sidney P. Levinson in Support of Landlord’s Opening Brief on Remand, ECF 500, ¶ 4, Exhibit B, Excerpt of Trial Exhibit 102; Trial Exhibit 1, Lease, at 27 and Trial Testimony of Douglas Chris-mas, August 19, 2013, ECF 332 at 122:24-123:12. Based on these circumstances, the court determines that Landlord has established by clear and convincing evidence, and thus meeting its burden, in showing that Debtor made a “knowing and intelligent” waiver of all of its rights to redeem its right of occupancy of the premises after any termination of the Lease, including California Code of Civil Procedure § 1174 and 1179 and California Civil Code § 3275.
1. The Waiver of California Code of Civil Procedure § 1179 Is Not an Unenforceable Penalty
An additional argument made by the Creditors’ Committee, but not made by Debtor, is that the Waiver Clause of Section 23.1 of the Lease is invalid and unenforceable because it is an illegal penalty. Specifically, the Creditors’ Committee argues that the Waiver Clause is an unenforceable penalty because: (1) it is designed simply to secure payment of rent; (2) it compels forfeiture; and (3) it purports to take effect under all circumstances, without regard to the basis for termination, the nature of the default, or the actual damages suffered by the aggrieved party. Memorandum of the Official Committee of Unsecured Creditors in Support of Debtor’s Request for Relief from Forfeiture of Master Lease with AERC Desmond’s Tower, LLC, filed on March 21, 2014, at 10-14.
In response, Landlord responds that the Creditors’ Committee’s argument confuses the termination of the Lease with the waiver of the right to relief from forfeiture — the waiver is not itself a forfeiture, penalty or other consequence of termination, but rather a waiver of a right to seek relief from forfeiture; thus, the law applicable to penalties is inapposite. Landlord’s Responsive Brief on Remand, filed on April 8, 2014, at 11-12. On this point, the court agrees with Landlord and concludes that the Waiver Clause is an unenforceable penalty. The Waiver Clause itself does not impose any monetary penalty upon Debtor as a consequence of its default under the Lease, and its purpose and effect are not to secure payment of rent, but to insure termination of the Lease on the tenant’s default. Moreover, the Waiver Clause did not compel any forfeiture by Debtor; rather, the forfeiture in this case was caused by Debtor’s default under the Lease, which constituted grounds for termination of the Lease as reflected in the District Court Judgment and related orders.
C. Conclusion
Accordingly, for the foregoing reasons, the court determines that the Debtor val*63idly and expressly waived its rights to seek relief from forfeiture of the Lease under both California Code of Civil Procedure § 1179 and California Civil Code § 3275.
II. The Court Need Not Reach the Issues of Whether Debtor is Substantively Entitled to Relief from Forfeiture Under California Code of Civil Procedure § 1179 or California Civil Code § 3275 or Whether Debtor Can Satisfy 11 U.S.C. § 365(b)(1).
Because Debtor validly waived its rights under California Code of Civil Procedure § 1179 and California Civil Code § 3275 to request relief from forfeiture of the Lease, the court need not determine Debtor’s claims that it is substantively entitled to relief from forfeiture under those provisions. Thus, because it is the law of the case as set forth in the District Court Judgment that the Lease was terminated on Debtor’s default and this court has now determined on remand that Debtor may not obtain relief from forfeiture under either California Code of Civil Procedure § 1179 and California Civil Code § 3275, the court does not reach Debtor’s claim that it may assume the Lease if it cures the rent arrearages and provides adequate assurance of future performance as required by 11 U.S.C. § 365. See, In re Windmill Farms, Inc., 841 F.2d at 1469, 1471-1472 (if a lease is terminated under California law, there is nothing to assume unless it can be saved from forfeiture under the anti-forfeiture provisions of California law). Accordingly, Debtor’s motion to assume the Lease under 11 U.S.C. § 365 should be denied.
III. Conclusion
For the foregoing reasons, Debtor’s request for relief from forfeiture of the Lease and its motion to assume the Lease under 11 U.S.C. § 365 should be denied. This memorandum decision constitutes the court’s findings of fact and conclusions of law. Counsel for Landlord is ordered to submit a proposed judgment consistent with this decision.
IT IS SO ORDERED.
. Although California Code of Civil Procedure § 1174 was specifically listed as one of the provisions in Section 23.1 of the Lease as was California Code of Civil Procedure § 1179, Debtor does not argue that § 1174 was not waived in its proposed findings of fact and conclusions of law. Debtor’s Proposed Findings of Fact and Conclusions of Law ¶¶ 18-26. Although not specifically argued, the analysis in this memorandum decision applicable to § 1179 applies to § 1174.
. This analysis is similar to the somewhat brief analysis done by the California Supreme Court in Bickel, there determining that any public benefit from a statute which expedited government decisions on permit applications was merely incidental to the legislation’s primary purpose because the “primary beneficiary” of the legislation was the applicant. Bickel v. City of Piedmont, 16 Cal.4th at 1048, 68 Cal.Rptr.2d 758, 946 P.2d 427.
. Although the contract in Photopoint involved an assignment of a lease and California Civil Code § 1995.270 is located in a chapter of the California Civil Code entitled "Assignment and Sublease,” the court can see no good reason to limit the broad policy language in Civil Code § 1995.270 to govern only lease assignments and subleases, e.g. Gregory v. Albertson’s, Inc., 104 Cal.App.4th 845, 855, 128 Cal.Rptr.2d 389 (2002) (applying the language of Civil Code § 1995.270(a)(1) to a commercial lease in general in the situation not involving a lease assignment or a sublease where a third party community member asserted claims for urban blight based on California’s unfair business practice law against a landlord and a tenant for leaving vacant a large retail space in a shopping mall).
. Because the provision at issue in Pearl did not include a specific statement of the right being waived, and did not mention Civil Code § 2815 by name, the court was required to consider whether an implicit waiver could be found under the agreement and concluded that it could not so find. Id. at 1032-1033, 16 Cal.Rptr.2d 805.
. The court expresses no opinion on the ability to waive provisions of the Civil Code in non-commercial leases, which are not the subject of California Civil Code § 1995.270(a)(1). cf. California Civil Code § 1953 (declaring certain lease provisions void as contrary to public policy in residential leases, including a residential tenant’s waiver of statutory, procedural and other rights).
. The court has reviewed the transcript from the trial conducted on August 30, 2013, and the pages Debtor cited to in paragraph 23 of its proposed findings of fact and conclusions of law relate to testimony regarding Debtor’s receipt of subtenant rents on its monthly operating report for March 2013, not to any testimony regarding the negotiations of the Lease and waiver of rights to request relief from forfeiture California Code of Civil Procedure § 1179. See Trial Transcript of August 30, 2013 at 124-125, ECF 334 at 128-129. Upon further research, it turns out that the citation should have been to the Trial Transcript of August 19, 2013 at 124 — 125, ECF 332 at 129-130. The court has reviewed the transcript of Mr. Chrismas' testimony on his experience in negotiating real estate leases, including the Lease which is the subject of this litigation, and his familiarity with Section 23.1 of the Lease, including the Waiver Clause. Trial Transcript of August 19, 2013 at 122-125, ECF 332 at 127-130 (cited correctly in Debtor’s Objections to Landlord’s Proposed Findings of Fact and Conclusions of Law at 7). Mr. Chrismas testified that when he signed the Lease on behalf of Debtor, he did not have familiarity with the rights that exist under Sections 1174 and 1179 of California Code of Civil Procedure, and upon further examination of counsel, his recollection was not refreshed on that point. Id. The court *60does not give much weight to this testimony in isolation because the totality of the circumstances as discussed herein indicate that Debtor’s waiver of rights set forth in Section 23.1 was knowing and voluntary by clear and convincing evidence. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497562/ | MEMORANDUM OPINION
DAVID T. THUMA, Bankruptcy Judge.
Benjamin Bates (“Bates”) seeks a declaration that the amounts owed by Raymond D. Siggins (“Siggins”) are nondisehargeable under § 523(a)(2). The Court tried the dispute on August 27-28, 2014. The Court will deny the requested relief but grant alternative relief.
I. FACTS
Bates is a very experienced professional team roper. In 2009 he contacted Siggins about buying a horse to use in team roping rodeo events. Bates travelled from his home in Sun City, California to Siggins’s ranch in Hondo, New Mexico and purchased a horse named “IV,” paying $11,500. Siggins signed a bill of sale stating:
I Ray Siggins sell one ten yr old chestnut gelding to one Mr. Ben Bates of Sun City CA. This horse has a freeze brand of a IV on the left hip. This horse is paid in full by ck #4576. This horse was sold and bought with the guarantee to be free of any vice or soundness issues. The sum of the purchase is 11,-500. /s/ Ray Siggins.
Bates rode IV at Siggins’s ranch before deciding to buy him. While riding and roping steers atop IV, Bates noticed that IVs front hooves seemed tender. Bates told Siggins that IV seemed “off in front.”1 Bates testified that Siggins responded that a farrier had trimmed IVs hooves too short.2 Siggins, on the other hand, testified he did not recall saying that, although he did recall Bates mentioning something about IV being sore or tender. At the time of sale IV was being ridden in rodeos and doing well at the time, and had never been examined or treated for navicular disease3 or other *87causes of lameness. Today IV is owned by a roper in Hobbs, New Mexico, and is being ridden in college rodeos.
Bates returned to California with IV on November 9, 2009. He rode IV once shortly thereafter, roping eight or nine steers. Due to travel and personal illness, Bates did not ride IV again for more than six weeks. When he next rode IV, Bates thought IV was still “off in front.” Bates took IV to a veterinarian, who diagnosed IV with navicular disease.
Bates called Siggins, asking to return IV. Siggins disputed that there was anything wrong with the horse and requested that x-rays of IVs hooves be sent to his veterinarian, Dr. Wheeler.4 Siggins refused to refund Bates’s money, but instead offered to exchange IV for another horse. Bates reluctantly agreed to the exchange, and Siggins sent an exchange horse (the “Bay Horse”) to a rendezvous point in Buckeye, Arizona. Bates’s son, Brandon Bates,5 chose the Bay Horse for his father.
Bates contacted Siggins a few days after exchanging IV for the Bay Horse, complaining that the horse “had no withers.”6 Bates demanded to return the Bay Horse for a refund. Siggins disputed Bates’s complaint about the Bay Horse but agreed to allow Bates to exchange him for another horse. Siggins did not agree to refund Bates’s money.
Bates returned to Siggins’s ranch later in June with the Bay Horse. Bates looked at several horses. The meeting was tense, as both men were frustrated.
Bates looked at a horse named Calvin. Calvin had pads on his hooves when Bates examined and rode him.7 According to Bates, he asked Siggins about the pads and was told, like with IV, that Calvin’s hooves had been trimmed too short. Bates alleges Siggins’s statement misrepresented Calvin’s condition and that Sig-gins knew Calvin had navicular disease at the time of the exchange. Siggins disputes that this conversation took place.
Bates rode Calvin and roped four or five steers before deciding he was suitable. After riding and examining Calvin, Bates agreed to take him in exchange for the Bay Horse. The parties signed a handwritten document which stated:
I Ray Siggins sell one sorrel gelding branded with U on the right hip. I gaurntee [sic] this horse to be free of any defect. If for any reason Mr. Bates is not satisfied with this horse he can bring him back and trade for another one of equal or lesser value, /s/ Ray Siggins /a/ Ben Bates
The exchange was acrimonious. Bates took Calvin back to California on June 16, 2010.
Around July 15, 2010, Calvin became ill and would not eat or drink. Bates took Calvin to a veterinarian, Dr. Hoge, who determined that Calvin had a tumor or abscess.
An abscess can be caused by “Strangles,” a streptococcus infection that affects horses. A horse infected with Strangles is *88unlikely to show symptoms until 14 days after exposure. An abscess on the colon caused by Strangles would not be apparent until more than a month after the initial infection. Strangles infections are treated with antibiotics such as penicillin.
During Calvin’s illness, which was severe, Bates contacted Siggins, alleging Calvin was defective. At the time, Bates believed Calvin had a tumor and would die. Bates wanted a refund. Siggins disagreed that anything was wrong with Calvin.
Bates treated Calvin successfully with penicillin and took him to New Mexico to try and return him to Siggins. When Bates arrived at Siggins’s ranch on July 27, 2010, Siggins refused to let Bates unload Calvin from the trailer. Siggins continued to refuse to refund Bates’s money, again offering an exchange for another horse. At the time of the visit Siggins’s arena was muddy, preventing Bates from trying out any other horses. Siggins asked Bates to come back when the arena was dry to try some horses and exchange Calvin. Bates, agitated by Siggins’s refusals, contacted the Lincoln County Sheriff. A deputy sheriff came out to the ranch but told Bates the dispute was a civil matter and there was nothing he could do. Bates left with Calvin.
Bates hired a lawyer, who sent a July 30, 2010 letter to Siggins demanding a refund and alleging that Calvin had an incurable tumor. When Siggins did not refund his money, Bates brought an action in New Mexico state court to recover his purchase price and other alleged damages.8 During the litigation Bates still claimed Calvin had a tumor.
Siggins and Bates agreed to have Calvin evaluated by the San Luis Rey Equine Hospital in California to determine whether he had a tumor. On the day of the procedure, May 27, 2011, Siggins called off the test because Bates disclosed Calvin did not have a tumor.
Calvin’s abscess likely resulted from a Strangles infection. It is unclear when Calvin caught the illness. Calvin was not treated for Strangles while Siggins owned him and showed no symptoms when Bates chose him.
Bates first told Siggins about Calvin’s lameness issues in June, 2011, a year after taking delivery. Bates first had Calvin’s hooves evaluated by Dr. Hoge in November of 2010. Dr. Hoge did not take x-rays or diagnose Calvin with navicular disease until January 11, 2011. On May 27, 2011, Bates had Calvin’s hooves evaluated by San Luis Rey Equine Hospital. Dr. Sandra Valdez evaluated Calvin for lameness, took x-rays, and determined he had navi-cular disease. Dr. Valdez’s evaluation and the x-rays were reviewed by Dr. Norman Rantanen, an equine radiograph expert, who reached the same diagnosis as Drs. Hoge and Valdez.
Bates and Siggins settled the state court action on May 31, 2011 and a stipulated order (the “Order”) was entered. The Order called for Bates to return Calvin to Siggins on June 1, 2011 and for Siggins to pay Bates $13,000. The Order required Bates to deliver Calvin “in the same condition that [Bates] had represented to [Sig-gins] at their meeting on May 31, 2011.” The Order called for interest of 10% per month if Siggins failed to pay by July 1, 2011.
Bates returned Calvin to Siggins on June 1, 2011. Siggins’s understanding of the settlement was that Bates agreed to return Calvin in the same condition he was in on June 16, 2010. Calvin had lost 150 pounds since leaving Siggins’s ranch in 2010. His hooves were long and unshod, *89and he was not in good condition. As a result, Siggins thought Bates had not performed his end of the bargain, so Siggins did not owe Bates the $13,000. The presiding judge disagreed and entered a judgment against Siggins for $13,000.00, plus interest accruing after July 1, 2011 at 10% per month. Siggins’s requests for reconsideration were denied. Siggins has not paid the judgment.9
To prepare for trial of this adversary proceeding, Bates obtained records (the “Subpoenaed Records”) from Dr. Wheeler’s veterinary practice, Equine Sports Medicine. Bates’s subpoena requested “any and all [of Calvin’s] veterinarian and hospital records, from January 1, 2008 to [March 1, 2013].” In response to Bates’s request, Equine Sports Medicine sent a document titled “Patient History” and two sets of x-rays. The Patient History lists the patient name as “[Calvin(Steve) ]” and includes a summary of services provided by Dr. Wheeler and hand written line-item entries of the summarized treatments. The Patient History for [Calvin(Steve) ] includes one entry marked “data entry error” which refers to treatment of Sig-gins’s wife’s horse, “Hotie.” The two sets of x-rays, one from 2009 and one from 2011, include various angles of a horse’s hoof, but do not indicate the name of the horse being x-rayed.
The x-rays included in the Subpoenaed Records were discussed extensively at trial. Dr. Springstead, Bates’s expert, testified that both sets of x-rays demonstrated evidence of navicular disease, although the problem is much more evident in the 2011 x-rays. Dr. Springstead also testified that the Subpoenaed Records showed that Sig-gins had a horse treated for navicular disease in September of 2009. There was significant dispute as to whether Calvin was the horse Dr. Wheeler had x-rayed and treated for navicular disease in 2009.10
Siggins testified that the Subpoenaed Records, and specifically the 2009 x-rays, were of a horse named Steve, not Calvin. Steve is owned by Calvin Taylor (“Taylor”). Siggins regularly took Steve for veterinary treatment in exchange for services Taylor provided to Siggins. Steve has had navicular disease for years. It is unclear if the Subpoenaed Records refer to Steve, to Calvin, or partly to both.
Calvin was being ridden and placing highly in rodeos in the months before he was traded to Bates. Seth Hall (“Hall”) rode Calvin in rodeos from January to late May of 2010. Hall grew up with Siggins’s children and worked on Siggins’s ranch. Siggins loaned Calvin to Hall in the beginning of 2010 to ride in rodeos. Hall said Calvin did not have any lameness issues, Strangles, or symptoms of an abscess while in his possession. Hall kept pads on Calvin at all times to protect Calvin’s feet from bruises or other hoof injuries common in an active rodeo horse.
Siggins maintains that he has always been willing to give Bates a horse that meets his needs. At trial Siggins again said he was still willing, despite his bankruptcy filing, to give Bates a horse in honor of their original transaction and agreement.
II. DISCUSSION
A. Section 523(a)(2)(A) Standards. Bates’s claim is brought under § 523(a)(2)(A). A creditor seeking to ex*90cept its debt from a debtor’s discharge under § 523(a)(2)(A) must prove, by a preponderance of the evidence that the debtor made a false representation; with the intent to deceive the creditor; the creditor relied on the representation; the reliance was reasonable; and the representation caused the creditor to sustain a loss. Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 789 (10th Cir.2009) (quoting Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996)).
Exceptions to discharge are “narrowly construed [such that] doubt as to the meaning and breadth of a statutory exception is to be resolved in the debtor’s favor.” Cobra Well Testers, LLC v. Carlson (In re Carlson), 2008 WL 8677441, at *2 (10th Cir.2008) (quoting Bellco First Fed. Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10th Cir.1997)).
The Tenth Circuit construes § 523(a)(2)(A) narrowly to limit the harsh result of nondischargeability to “frauds involving moral turpitude or intentional wrong.” DSC National Properties, LLC v. Johnson (In re Johnson), 477 B.R. 156, 169 (10th Cir. BAP 2012) (quoting Driggs v. Black (In re Black), 787 F.2d 503, 505 (10th Cir.1986) (abrogated on other grounds by Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991))). To avoid discharge based on false pretenses, false representation, or actual fraud, the creditor must prove the debtor “acted with the subjective intent to deceive the creditor.” Johnson, 477 B.R. at 169.
As a creditor seeking to avoid discharge, Bates bears the burden of proving the elements of § 523(a)(2)(A). Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996).
B. The Initial Sales Transaction. Bates first argues that Siggins defrauded him when Siggins sold IV, knowing the horse had navicular disease. The only alleged fraudulent statement was that Sig-gins attributed IVs soreness to having his hooves trimmed too close.
To prove Siggins knew IV had navicular disease at the time of sale, Bates testified that his veterinarian diagnosed IV with navicular disease. On the other hand, IV had been ridden successfully before the sale to Bates, IV was not lame before the sale, and had never been treated for navi-cular disease. None of TV’s veterinary bills or records were introduced. Siggins also disputes that an x-ray showing some sign of a navicular condition necessarily means that the horse is lame or otherwise unsound. Today, IV is being ridden in rodeos today.
Based on the conflicting and sparse evidence, the Court concludes that Bates did not carry his burden of proof on the issue of Siggins’s knowledge of IV’s alleged lameness when Siggins sold IV to Bates.
C. Exchange for the Bay Horse. Bates does not allege Siggins made any misrepresentations concerning the Bay Horse.
D. Calvin. Siggins reluctantly agreed to trade Calvin for the Bay Horse, and Bates reluctantly agreed to take Calvin rather than get his money back. After the parties agreed in principle to the trade, they signed a short agreement, in which Siggins guaranteed that Calvin was free from any defect or vice, and that Siggins would trade Calvin for a horse of equal or lesser value if Bates was dissatisfied for any reason.
Bates argued at trial that Siggins made two misrepresentations about Calvin: Sig-gins hid the fact that Calvin had Strangles, and Siggins lied about Calvin’s navicular disease.
*91i. Knowledge of Strangles. Bates argued that Siggins knew Calvin had Strangles or an abscess at the time of the trade. However, it is undisputed that Calvin had no symptoms of Strangles at the time of the trade. Calvin was healthy in appearance and was being ridden competitively at the time. He was not being treated for Strangles. Bates did not prove Siggins knew Calvin had Strangles or an abscess before the sale.
ii. Knowledge of Navicular Disease. Bates also argued Siggins knew Calvin had navicular disease at the time of the trade. Bates relies on veterinary records, June 2009 x-rays, and the pads on Calvin’s hooves to support his argument. Bates’s expert testified that one of the 2009 x-rays demonstrated navicular disease. The Subpoenaed Records show a horse being treated with injections consistent with treatment for navicular disease. Bates’s expert testified that pads may be used to counteract the symptoms of navicular disease. Siggins owned Calvin when the x-rays were taken and the records were made.
In response, Siggins presented evidence that Calvin was not the horse x-rayed in 2009 or referred to in the records. Siggins presented evidence that Taylor’s horse, Steve, was the horse x-rayed and treated in 2009. Siggins also presented evidence that he had Calvin examined for navicular disease in June, 2011, which he would not have done had he known about the problem. Siggins also presented evidence that pads are used for reasons other than navi-cular problems. Finally, Siggins presented credible, uncontradicted evidence that Calvin was being ridden and doing well in rodeos at the time of sale, and appeared to be sound in all respects.
Based on the conflicting evidence and the fact that some type of navicular issue is common in quarter horses, the Court concludes that Bates did not carry his burden of proving that Siggins knew Calvin was unsound when he was traded for the Bay Horse in June, 2010.
E. Siggins’s Post-Petition Offer to Give Bates a Horse. Several times during the trial Siggins testified that it was always his intent to allow Bates to exchange horses until Bates was satisfied. Further, Siggins offered during the trial to allow Bates to select a horse of equal or lesser value at any time, bankruptcy or no. The Court relies on this testimony and offer in finding that Siggins dealt honestly with Bates and did not make any intentional misrepresentations or omissions.
The Court will enter an order giving Brandon Bates one year to select a horse for Bates, from Siggins’s horses held for sale at a reasonable retail value of $15,000 or less. The horse shall be delivered “as is, where is,” and “with all faults.” Before making a final selection, Bates may have a horse examined by a veterinarian, at his expense. Bates may try out a horse at Siggins’s ranch if Siggins agrees; otherwise Bates’s son may take the horse to another site in Lincoln County, New Mexico for a trial. Once a horse has been selected by Bates’s son, the transaction will be final, with no right of refund or exchange. Siggins will sign any necessary paperwork to transfer title of the horse to Bates.
III. CONCLUSION
Siggins’s pre-petition obligations to Bates are dischargeable. Siggins’s post-petition obligation to Bates (i.e. providing a horse as described above) shall survive entry of the general discharge order in this case. A separate judgment shall be entered.
. "Off in front” describes a horse that is not solidly carrying its weight on its front hooves, favoring them because of pain. An experienced rider can feel a horse’s response to this pain while riding. In more serious cases, an observer can see a horse responding to hoof pain, often indicated by the horse bobbing its head when it walks.
. When a horse’s hooves are trimmed too short, it is common for the horse to have some pain in its hooves. An experienced rider may notice that such a horse is "off in front.” Horses recover from having hooves trimmed too short within about six weeks.
.Navicular disease is a chronic, degenerative condition affecting the navicular bone in a horse’s foot, which can cause soreness and/or lameness. Siggins testified that navicular problems are common in Quarter Horses, and that "80 percent of the horses x-rayed will have signs of navicular.” This is Siggins’ unscientific view based on his extensive experience buying, selling, and riding Quarter Horses. It is supported by Bates's expert witness, Dr. Springstead, who testified that the modern Quarter Horse is bred to weigh 1,000 pounds and have hooves "the size of a teacup,” which, in Dr. Springstead’s opinion, makes them prone to navicular problems.
. It is unclear whether Siggins ever saw the x-rays or discussed them with Dr. Wheeler. The x-rays of IV’s hooves were not presented at the final hearing.
. Brandon Bates is good friends with Siggins and an experienced, competitive team roper.
. A horse's withers are between its shoulder blades. The shape of a horse’s withers affects whether a saddle will sit properly on the horse or shift when the horse changes direction quickly.
.Pads are pieces of plastic or metal placed between a horse's hoof and the horseshoe. Pads protect the bottom of a horse's foot and are placed on a horse for various reasons.
. See Benjamin Bates v. Raymond Siggins, D-1226-CV-201000295 filed August 31, 2010.
. The judgment amount has increased dramatically from the original $13,000, due to the very high interest rate. Bates now claims he is owed more than $400,000. If interest is not compounded, the amount would be about $62,400.
. There is no question the 2011 x-rays from Equine Sports Medicine are of Calvin. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497563/ | OPINION AND ORDER
JOHN S. DALIS, Bankruptcy Judge.
This matter came on for trial on the Complaint to Determine Dischargeability of Debt filed by Pioneer Construction, Inc. (“Plaintiff’) against Jeffery A. May (“Debtor”). (ECF No. 16; A.P. ECF No. 1.)1 The Complaint contends that a February 7, 2012, Consent Judgment (“Consent Judgment”) entered against the Debtor by the Superior Court of Bulloch County, Georgia, held the Debtor liable for willful conversion of payments for real property improvements under O.C.G.A. §§ 16-8-15 and 51-10-6. (A.P. ECF No. 1 ¶¶ 9, 10.) According to the Plaintiff, the Consent Judgment conclusively determines that the Debtor’s actions constitute a willful and malicious injury to the property of another and therefore establishes the Plaintiffs claim as nondischargeable under 11 U.S.C. § 523(a)(6). (Id. ¶ 11.)
A trial was held on April 21, 2014, after which I took the matter under advisement. I have considered the stipulated facts, testimony, documentary evidence, and oral arguments presented by the parties. For the reasons that follow, I find that Plaintiffs claim does not fall within the exception of 11 U.S.C. § 523(a)(6) and that debt is therefore dischargeable.
FINDINGS OF FACT
The Debtor is the former CEO and CFO of May Specialty Fabricators, Inc. (“May Specialty”), a structural and miscellaneous steel fabrications subcontractor. (Stip., Att. A of A.P. ECF No. 49 at 9, ¶ 4.) The Plaintiff is a general contractor that regularly engages in public works construction. The Plaintiffs claim against the Debtor arises from May Specialty’s failure to pay one of its suppliers for materials used in a public construction project. (See May 16, 2011, Superior Court Compl., Pioneer Construction, Inc. v. May Specialty Fabricators, Inc. and Jeffery A. May, Civil Action No. 1B11CV-284-W, Pl.’s Ex. 17.)
On May 15, 2008, the Plaintiff entered into a contract with the Georgia Ports Authority to provide construction materials and labor to real property known as Container Berth Eight Reefer Racks, Garden City, Georgia (“Reefer Racks Project”). (Stip., Att. A of A.P. ECF No. 49 at 9, ¶ 1.) On July 21, 2008, the Plaintiff entered into two contracts with May Specialty for work on the Reefer Racks Project: a construction subcontract (“Subcontract”) and a separate purchase order (“Purchase Order”). (See Stip., Att. A of A.P. ECF No. 49 at 9, ¶ 3.) The Debtor did not personally guarantee May Specialty’s performance under either agreement.
*105Under the Subcontract, May Specialty would be paid $160,000.00 for “Labor, Materials and Supervision for the erection of structural steel, steel stairs & railings and miscellaneous steel fabrication as per contract plans and specifications dated April 3, 2008.” (July 21, 2008, Subcontract Agreement between Pioneer Construction, Inc. and May Specialty Fabricators, Inc., PL’s Ex. 7 at 24.) The Subcontract also obligated May Specialty to broadly indemnify the Plaintiff:
16.1 SUBCONTRACTOR’S PERFORMANCE: The Subcontractor shall indemnify and save harmless the Owner and the Contractor, including their officers, agents, employees, affiliates, parents and subsidies, and each of them, of and from any and all claims, demands, causes of action, damages, costs, expenses, actual attorney’ fees, losses or liabilities arising out of or in connection with the Subcontractor’s operations to be performed under this Agreement for, but not limited to:
16.1.4 Claims and liens for labor performed and materials used and furnished on the job, including all incidental and consequential damages resulting to the Contractor or Owner from such claims or liens.
16.2 CLAIMS DEFENSE PROCEDURES: Should any claims, demands, causes of action, damages, costs, expenses, actual attorneys’ fees, losses or liabilities arising out of or in connection with the Subcontractor’s operations, as defined in Article 16, Paragraph 16.1, the Subcontractor shall:
16.2.1.At the Subcontractors own cost, expense and risk, defend all claims, as defined in Article 16, Section 16.1, that may be brought or instituted by third persons, including but not limited to government agencies or employees of the Subcontractor, against the Contractor or the Owner or their agents or employees or any of them.
16.2.2. Assume, satisfy and pay all costs associated with any judgment or decree that may be rendered against the Contractor or the Owner or their agents or employees, or any of them, arising out of any such claim; and/or:
16.2.3. Reimburse the Contractor or the Owner or their agents of employees for any and all legal expenses incurred by any of them in connection herewith or in enforcing the indemnity granted in this Article 16.
(Subcontract, Pl.’s Ex. 7 at 18-19) (emphasis added.)
The Purchase Order provided that May Specialty would be paid $953,500.00 to “Furnish, F.O.B. Project Site, all structural steel, miscellaneous steel fabrications, anchor belts, metal decking, epoxy kits, steel pipe bollards, metal fasteners and all other materials required for a 100% complete operational system.” (July 21, 2008, Purchase Order Agreement between Pioneer Construction, Inc. and May Specialty Fabricators, Inc., Pl.’s Ex. 6 at 5.)
May Specialty subcontracted with The Haskell Company (“Haskell”) to supply a portion of the construction materials due under the Purchase Order (“Supplier Contract”). (Stip., Att. A of A.P. ECF No. 49 at 9, ¶ 3.) The injury at issue in this case arose when May Specialty failed to pay Haskell with the proceeds from the Plaintiffs final payment on the Purchase Order. Since the Reefer Racks Project was a public construction contract, Georgia law required the Plaintiff to post a payment bond to ensure the payment of all parties con*106tributing to the construction. (See Stip., Att. A of A.P. ECF No. 49 at 9, ¶ 2.) May Specialty’s failure to pay the full amount due on the Supplier Contract allowed Has-kell to make a claim against the payment bond.
Plaintiffs Payment Bond
On May 20, 2008, the Plaintiff obtained a bond from The Ohio Casualty Insurance Company (“Surety”) for the full amount due on the Reefer Racks Project, $1,968,900.00. (See Stip., Att. A of A.P. ECF No. 49 at 9, ¶ 2.) In compliance with O.C.G.A. § 18-10-63, the payment bond provided that any supplier or subcontractor who had not been paid in full for materials furnished or labor provided “shall have the right to sue on such payment bond for the amount, or the balance thereof, unpaid at the time of commencement of such action and to prosecute such action to final execution and judgment for the sum or sums due to him.” See O.C.G.A. §§ 13-10-60, et seq.; (The Ohio Casualty Insurance Company Payment Bond 3-913-375, Pl.’s Ex. 5 at 7.)
The payment bond did not require potential bond claimants to have a contractual relationship with the Plaintiff in order to collect on the bond. (See id.) In order to maintain an action on the payment bond, Georgia law only requires a bond claimant to provide:
[Wjritten notice to the contractor within 90 days from the day on which such person did or performed the last of the labor or furnished the last of the material or machinery or equipment for which such claim is made, stating with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was performed or done.
O.C.G.A. § 13-10-63(a)(l).
However, a general contractor may significantly limit this otherwise broad exposure to remote bond claimants by complying with O.C.G.A. § 13-10-62(a), which requires the general contractor to, within 15 days after physical construction begins, 1) post a Notice of Commencement at the public works construction site and 2) file the same Notice of Commencement with the Superior Court in the county in which the site is located. O.C.G.A. § 13-10-62. Compliance with O.C.G.A § 13-10-62(a) bars all parties without a direct contractual relationship to the general contractor from proceeding against the bond, unless the potential bond claimant provides written notice detailing its contribution to the project “within 30 days from the filing of the notice of commencement or 30 days following the first delivery of labor, material, machinery, or equipment, whichever is later.” See O.C.G.A. § 13-10-63(a)(2).
On June 5, 2008, the Plaintiff recorded a Notice of Commencement for the Reefer Racks Project in the Superior Court of Chatham County, Georgia. (See Jan. 11, 2010, Order on Motions for Summary Judgment, The Haskell Company v. Pioneer Construction, Inc., et al., Civil Action No. CV09-171BA, Def.’s Ex. 12 at 2.) However, the Plaintiff failed to post a Notice of Commencement at the job site. (Id.) This oversight allowed parties without a contractual relationship to the Plaintiff, such as Haskell, to proceed against the payment bond under the more relaxed notice requirements of O.C.G.A. § 13-10-63(a)(l)-90 days from the claimant’s last work on the project — instead of the more stringent requirements of O.C.G.A. § 13-10-63(a)(2)-30 days from the claimant’s first work on the project. (See id.) Has-kell made its first delivery to the job site on July 28, 2008. (See Pl.’s Ex. 8.) It made its last delivery on September 29, 2008. (See id.) Haskell provided written notice *107of its intent to state a claim against the payment bond to the Plaintiff on November 24, 2008. See Jan. 11, 2010, Order on Motions for Summary Judgment, The Has-kell Company v. Pioneer Construction, Inc., et al, Civil Action No. CV09-171BA, Def.’s Ex. 12 at 3.) Thus, had the Plaintiff posted a Notice of Commencement at the jobsite, Haskell’s claim would have been time-barred under O.C.G.A. § 13 — 10— 63(a)(2). (Id. at 7-8.)
May Specialty’s Strained Relationship with Haskell
May Specialty had an established relationship with Haskell, having worked almost exclusively as a subcontractor or supplier to Haskell for the previous two years. (See MSF, Inc./Haskell-Quotes v. Budget Pricing, Def.’s Ex. 3.) According to the Debtor, Haskell had considered buying May Specialty in August of 2007, but had ultimately passed after seeing the Debtor’s financials. (See Debtor Dep. 48:8-48:16, June 12, 2013, A.P. ECF No. 63.)
The working relationship between Has-kell and May Specialty was not always a happy one. According to the Debtor, Has-kell had developed a pattern of using its leverage as a general contractor to pressure May Specialty into charging less than its quoted price; the Debtor maintains that this practice effectively left May Specialty without a profit:
They continuously contracted with me to do projects based on 50 percent completed drawings. I would quote the project from 50 percent drawings. They would later issue a purchase order and start sending me 100 percent complete drawings where a tremendous amount of additional work had been added. In trying to bill and modify the purchase orders from Haskell, promises were made on more profitable projects. They even at one time offered to buy me out. But at no time did they ever try to make up my losses and any kind of settlement despite all my pleadings since June of '08.
(Debtor Dep. 33:4-33:14, June 12, 2013, A.P. ECF No. 63.)
According to the Debtor, Haskell’s bidding practices forced May Specialty into a losing contract with the Plaintiff. (See Joint Ex. 1.) May Specialty relied on Has-kell’s verbal quote to bid the Reefer Racks Project. (See Joint Ex. 1; Pl.’s Exs. 1, 2). Before bidding the Reefer Racks Project, one of Haskell’s project managers gave May Specialty a verbal quote of $2,500.00 to $3,000.00 per ton of steel. (See Joint Ex. 1.) Based on that estimate, May Specialty’s quote to the Plaintiff assumed a cost of $2,750.00 per ton. (See id.) May Specialty submitted its bid on May 1, 2008. (See Pl.’s Ex. 1.) On May 7, 2008, Haskell finalized its price at $3,250 per ton. (See PL’s Ex. 2.)
May Specialty’s quote to the Plaintiff specifically provided: “All material is predicated on current day mill prices. Any increase in price of material, freight or labor, additional costs including applicable overhead plus profit would have to be assumed by the owner/general contractor.” (PL’s Ex. 1.) Work on the Reefer Racks Project did not begin until the Plaintiff gave May Specialty notice to proceed on May 16, 2008. The Purchase Order was not executed until July 25, 2008. (See PL’s Ex. 7.)
Despite the ample opportunity to negotiate an increased price with the Plaintiff, May Specialty chose to absorb the costs of the increased price based on the hope it would lead to more work with Haskell even though the increase cost provision was under the Purchase Order with the Plaintiff, not Haskell:
Q: So at the time you entered in to the purchase order you were already fully *108aware of any issue with varying quotes by Haskell, correct?
A: Yes, sir.
Q: Did you tell Pioneer that you weren’t going to be able to afford to do the job based on bad quotes from a supplier?
A: No, sir. I had ... within the context of what you’re describing, Haskell made up 95 percent of my income whether they worked for me or I worked for them. All negotiations to try to clear up discrepancies was done on numerous projects, future projects, promised projects.
(Debtor Dep. 45:23-46:10, Sept. 12, 2013, A.P. EOF No. 63.)
On June 17, 2008, the Debtor emailed Haskell with an issue regarding the quoted price of an unrelated construction project in New Jersey (“New Jersey Project”). (See June 17, 2008, Email, Joint Ex. 1.) Haskell had subcontracted May Specialty to fabricate steel stairs for the New Jersey Project. (See id.) May Specialty quoted its work for the New Jersey Project at $292,000.00 based on incomplete shop drawings. (See Nov. 21, 2008, Letter from Jeff May to Steve Gibson and Boyd Wors-ham, Def. Ex. 2 at 1-2.) After May Specialty made its first shipment, Haskell responded that the work had been budgeted for only $150,000.00. (See id.)
Although the tone of the email was conciliatory, the Debtor clearly expressed his grievances with Haskell’s business practices:
I have gotten very comfortable working within the Haskell budget. I am not getting rich because we know what this stuff costs to build. You guys have always been fair to me. Sometimes you add money to some jobs I quote but most of the time I trim my price to your budgetary number. This process for 2 years has been extremely fair and I have come to consider my company as the northern extension of Haskell Steel. [The New Jersey Project] however is an exception.
The trend has been to get me to quote your work from partial sets of [drawings], contract [drawings] or not approved [drawings]. Nestle is a good example. I did not get the pipe bollards and goal posts [drawings] until I had fabricated, shipped and gotten paid for the entire job. The material cost was in excess of $12,000 dollars. From the time Guy gave me the job until I got the fast release, pipe had basically doubled in price, I did not complain I just ordered the material knowing I would make it up down the road, but my profitability on that project was shot.
When I got Bill to look at [the Reefer Racks Project] for a verbal range for the structural we discussed 2,500-3,000 per ton. I plugged in $2750 as my price per ton. I wanted this job for the stair & rail work and felt it would be a great fab job for Haskell. After a complete review of the [drawings] a quoted price of $3,250 was given. Granted it included other items that brought it closer to my budget but still I had to cut my stair & rail price to make the bid work with Haskell’s number.
My point is that I cannot meet the budget number of $150,000 for [the New Jersey Project]. I believe rising steel prices from bid day until now coupled with a misunderstanding of the volume of prep work required for these TS stairs has over-run the budget number. I do not need to lose this relationship but I also don’t need to lose my behind either. Please discuss this project and my quote based on the mutual exchange of work between our companies and let me know what my options are.
*109I would like to point out that these problems would not be an issue if myself and my guys were Haskell employees.
(June 17, 2008, Email, Joint Ex. 1.)
The New Jersey Project continued to be problematic for May Specialty. There were issues with the shipping and installation of the handrails May Specialty had fabricated. (See Aug. 8-11, 2008, Emails, Def.’s Ex. 1 at 2-8.) The installation problems at the New Jersey Project continued to accumulate until the Debtor was forced to travel to New Jersey to address them. The Debtor blamed Haskell for much of the cost May Specialty incurred in doing so:
The union erection company had a clause in their contract. This clause stated that if during handrail installation if the pipe joint could not be damped with a jewel clamp and welded, the erector would be paid extra to fix the joint. In the steel business that is a license to steal, and that is what happen. Everyone in this business knows that I should have been made aware of that clause. I would have either opted not to do the job or asked that I be allowed to install my own work.
[A New Jersey Contractor] took me inside the existing building during my 2nd jobsite visit. While looking at the same problems with the bowed rails in the existing building I commented on why I was being thrown under the bus when the existing building had the same conditions. He stated that Haskell Steel fabricated the first job and we had the same problems with the erectors and inspectors.
(Nov. 21, 2008, Letter from Jeff May to Steve Gibson and Boyd Worsham, Def. Ex. 2 at 2) (emphasis in original).
The tensions came to a head in August 2008 when Haskell awarded a large steel fabrication subcontract to another subcontractor despite, according to the Debtor, having implied the contract would be awarded to May Specialty. (See id.)
In an email dated August 8, 2008, the Debtor expressed his frustration in a decidedly more aggressive tone than that of the June email:
Like probably many other subcontractors before me, I am out!!! I cannot keep the pace. In a conversation with Boyd a few weeks ago I was told that Haskell just wanted “High Quality work at Cheap Prices delivered in Record Time without any Mistakes.” I laughed about it then, it’s not funny anymore .... Iam one man with 14 employees. I wear all the hats necessary to keep a small company afloat and the bills paid. I have bared my soul numerous times to Haskell employees about small company issues working for a company the size of Haskell. I have kissed more ass than I care to remember.
(Aug. 8-11, 2008, Emails between Jeff May and Boyd Worsham, Def.’s Ex. 1.) The email also threatened to end May Specialty’s relationship with Haskell: “I have no other work booked because I was told not to chase other work, that Gulfstream was my job. I am very grateful for past work. I simply cannot continue this relationship any further under the present terms it is not worth it to me any longer.” (Id.)
In response, Haskell called May Specialty’s bluff: “If you want to divorce us simply quit pricing our work.” (Id.) The Debtor immediately backtracked and attempted to smooth over his previous threats:
All this being said about money, no one at Haskell can ever say I have been hard to work with on the issue of being a team player. I always look to make it *110up down the road. The problem is that I am not making it up. Since the time that you and Steve visited my shop around Labor Day of last year I have not retired any additional debt working with Haskell. Now with the Reefer Racks job I am on a break-even pace for 2008.
It does not take a rocket scientist to see that I need this relationship. For basically two years I have provided quality work at an affordable price. Now it seems no matter which way I turn I am only making the problem worse. Stop for a moment and put yourself in my shoes. The pressure of keeping up from my perspective can be crushing. Steve once told me that when they consider me for a job, that he takes the mise, budget, factors out the cost of dealing, keeps the profit margin as a management fee and gives the balance to me as a price. If you guys keep the profit margin for the work that I do and then you keep the profit margin for the work that you do for me THERE IS NO PROFIT LEFT!!!!
(Aug. 8-11, 2008, Emails between Jeff May and Boyd Worsham, Def.’s Ex. 1.)
May Specialty and Haskell agreed to meet and resolve their differences. (See id.) There is no evidence in the record regarding the discussion at the meeting or the nature and terms of any resulting resolution. However, in an email sent on August 19, 2008, the Debtor extended his apologies to the Haskell officers who were not present at the meeting, and indicated the issues between May Specialty and Haskell had been completely addressed. (See Aug. 19, 2008, Email, PL’s Ex. 21.)
May Specialty’s Failure to Pay Haskell’s Last Invoice
Over the course of the Reefer Racks Project, May Specialty ordered three shipments of structural steel from Haskell, totaling $575,855.00. (See Aug. 14, 2008, Haskell Steel Fabrication Invoice, Pl.’s Ex. 8.) May Specialty paid Haskell’s first two invoices, totaling $353,851.00, with progress payments made by the Plaintiff. Haskell sent its last invoice for $222,004.00 to May Specialty on September 29, 2008. (See id.)
On November 7, 2008, the Plaintiff made its final payment of $384,250.00 to May Specialty. (See Apr. 30, 2008-Feb. 28, 2009, Bank Account Statement of May Specialty Fabricators, Inc., Joint Ex. 6 at 19-21.) Unbeknownst to the Plaintiff, May Specialty was insolvent when it received the final payment for the Reefer Racks Project. (See id.; Debtor Dep. 50:01-52:10, Sept. 12, 2013, A.P. EOF No. 63.) On November 5, 2008, May Specialty’s operating account had a negative balance of $70,880.67. (See Debtor Dep. at 29:24-30:02.)
From when it received its final payment on November 7 to November 15, May Specialty paid out approximately $283,840.45 to various accounts payable. (See Joint Ex. 6 at 19-21.) Of this amount, May Specialty paid $245,072.55 on November 11 alone. (See id. at 19-20.) This boom and bust payment cycle was consistent with May Specialty’s prior business practices. (See Joint Ex. 6 at 1-3, 7-9,14.)
At trial, neither the Debtor nor the Plaintiff could positively identify which creditors had provided goods or services for the Reefer Racks Project. The Debtor testified that, although he did not keep a record of which accounts payable were connected with which project, he was confident the majority of the accounts payable contributed to the Reefer Racks Project:
Q: Now, were all of these payments made for supplies, materials or work *111that was done in connection with the [Project]?
A: That was primarily the only significant project I had at the time.
(Debtor Dep. 37:06-37:10, Sept. 10, 2013, A.P. ECF No. 63.)
Despite this uncertainty, the record clearly establishes that May Specialty used the vast majority of the funds to pay its business debts and expenses:
Percentage of $384.250.00 (Plaintiff’s Final Payment) Percentage of $395,136.26 (May Specialty’s Post -11/7 Income) Balance on 11/7 $370,079.33
73.87% 71.83% Accounts Payable ($283,840.45)
14.70% 14.29% Business/Overhead Expenses ($56,473.00)
9.77% 9.50% Payments to Wife’s Business ($37,536.47)
Medical Expenses ($5,255.02) b-1 CO CO l — 1 CO -q
Personal (Ex-Wife, Gifts, Travel, and Food) ($12,031.32) CO © ^ CO Í-A CO
Income $25,056.93
102.83% 100.00% Total $0.00
(See Joint Ex. 6.) The record also establishes that May Specialty preferred its other creditors to the detriment of Haskell:
Q: How did you decide who to pay out of the funds received from Pioneer?
A: All of my accounts payable at that time, it was — I paid everybody that I owed at that time.
Q: Everybody but Haskell?
A: Yes, sir.
(Debtor Dep. 36:25-37:05, Sept. 10, 2013, A.P. ECF No. 63.)
May Specialty’s Dispute with Haskell
As of November 15, 2008, less than $23,000.00 remained in May Specialty’s operating account. (Joint Ex. 6 at 19-21.) On November 18, May Specialty emailed Haskell that it was withholding final payment on the Reefer Racks Project until Haskell paid $40,200.00 owed on two other purchase orders. (Nov. 18, 2008, Email, PL’s Ex. 34.) On November 21, Haskell responded by giving May Specialty everything it had asked for in its November 18 demand email. (Nov. 21, 2008, RE: Current Status Email, Joint Ex. 3.) After offsetting the $40,200.00 demanded and crediting May Specialty with $1,834.00 for touch-up repairs on the Reefer Racks Project, Haskell offered to settle for $180,000.00. (Id.)
In an email dated November 21, 2008, May Specialty revised its demand upward; the email expanded the scope of May Specialty’s issues by outlining the significant disparities between the quotes May Specialty accepted and Haskell’s eventual budget on various projects. (Nov. 21, 2008, Current Payment Status w/ Haskell Email, PL’s Ex. 35.) According to the email, May Specialty had suffered $282,664.00 in combined losses on Haskell projects in the previous year. (Id.) The letter added the combined losses to May Specialty’s initial demand for $40,200.00 in unpaid invoices, then offset that amount by the $220,040.00 due to Haskell on the Reefer Racks Project for a total demand of $100,660.00. (Id.)
In a letter to Haskell, also dated November 21, 2008, the Debtor again revised his settlement offer; this time factoring in *112profit made off sales to Haskell, for a total due of $76,905.00. (Def.’s Ex. 8.) The Debtor also advised Haskell that any suit against May Specialty would be fruitless:
If you choose to come after me then that is your choice. I will save you the time and expense of legal fees. Twice in 2007 I provided Boyd everything he needed to present my company to management for purchase. Everyone in the Haskell organization knew I was upside down in my financials. I even got my bank on the 2nd presentation to agree to a write down of my debt. Still Haskell was not compelled to buy me out. So there is nothing here. Spend the additional money if you want, but it will accomplish nothing.
I have one final request. In the past when we have gotten to a similar point like this the calls and emails are incessant. I am broke so there is no need to continue to try and get me to discuss this. I was discussing for months without help. The point of discussion is over. Do as you seem right. I would add that an honorable company would concede that I have been treated unjust and concede that my attached settlement is fair. You decide.
(Id.) The Debtor’s decision to rekindle his grievances against Haskell just as May Specialty’s financial situation was spiraling out of control was clearly not coincidental. It is particularly clear in retrospect that, to some extent, May Specialty embellished its claims against Haskell:
Q: As of August 1 of 2008 you were not in a dispute with Haskell or claiming that Haskell owed you money, were you?
A: That can’t be answered yes or no.
Q: Okay.
A: Haskell was a — is a massive company. They had already made a bid to purchase me where I bared my soul to them, financials, everything. They knew more about my business than I did myself I think. In construction leading up to November of '08 everybody was trying to survive by any means possible. Did I brag on them to try to salvage a David and Goliath relationship, absolutely. Was it the truth, it was salesmanship to try to get out of them what I needed to survive.
Q: Fine. But as of that time period, August 1 of 2008 you weren’t saying, Haskell, you owe me money and I’m not going to pay you if you don’t — if you don’t come clean with me?
A: No. No, sir.
(Debtor Dep. 48:08-48:21, Sept. 12, 2013, A.P. ECF No. 63.)
Debtor’s Communications with the Plaintiff Regarding the Dispute
The Debtor was less than forthcoming with the Plaintiff regarding the dismal financial state of May Specialty. The Debt- or kept the Plaintiff in the dark to secure May Specialty’s final progress payment:
Q: In any correspondence with Has-kell that you’ve mentioned, prior to depositing the Pioneer check on November 7, did you tell Haskell that you were going to withhold funds from their last payment?
A: Not that I remember.
Q: But you know that had you told them that then they would have communicated that to Pioneer and you wouldn’t have gotten your last payment, right?
A: Can you restate that again, please?
Q: Well, if you had — you knew good and well if you told Haskell I’m not going to pay you that they would have gone straight to Pioneer, correct?
A: I’m sure.
*113Q: So you wouldn’t have gotten the payment that you deposited on November 7, correct?
A: Yes.
(Debtor Dep. 41:08-41:23, Sept. 12, 2013, A.P. ECF No. 63.)
After receiving the final progress payment, the Debtor continued to lie to the Plaintiff. On November 16, despite having only a tenth the amount due to Haskell available, the Debtor assured the Plaintiff that he had been advised by a lawyer to withhold Haskell’s payment until their dispute could be resolved:
I have had a storm brewing between me and Haskell since June 08. I am holding their last payment for the [Reefer Racks Project] under advice of legal counsel. I have a meeting Wednesday at 4:00 with my attorney to discuss the final outcome of Haskell & [May Specialty] for over 2 years of work between the 2 companies. Sort of a David v. Goliath problem.
(Nov. 16, 2008, Email, Joint Ex. 2.)
Whether the Debtor ever actually received advice from an attorney to this effect is unclear. (See Craig S. Bonnell Dep. 13:17-21:24, July 17, 2013, A.P. ECF No. 62. William A. White Dep. 6:19-9:20, Sept. 10, 2013, A.P. ECF No. 64.) However, the point is irrelevant. Even if the Debtor had been advised to withhold payment from Haskell until a settlement could be negotiated, such advice would have no effect on the outcome of this proceeding because the Debtor did not follow it. He was not holding the last payment; he was using those funds to pay May Specialty’s preferred creditors. (See Debtor Dep. 36:25-37:10, Sept. 10, 2013, A.P. ECF No. 63.)
The Plaintiff was unaware of the true scope of the dispute between May Specialty and Haskell until November 24, 2008, when Haskell served the Plaintiff with a notice of its intent to pursue a claim against the Payment Bond if not paid within thirty days. (See Nov. 24, 2008, Bond Notice Letter to Pioneer, Pl.’s Ex. 36; Nov. 25, 2008, Haskell v. MSF, Inc. Email, Pl.’s Ex. 39.) Despite having received an offer to settle on November 21, the Debtor told the Plaintiff that Haskell was intentionally avoiding his attempts to resolve their dispute. (See Nov. 25, 2008, Haskell v. MSF Inc. Email, Pl.’s Ex. 39; Nov. 21, 2008, RE: Current Status Email, Joint Ex. 3.) The Debtor assured the Plaintiff that the dispute remained between May Specialty and Haskell:
They are trying to avoid dealing with me directly. Haskell employs 1200 employees. They had Steve Gibson GM of the Steel Division who is way down their food chain to write this letter as a warning shot at me. If they wanted to come after [Plaintiff’s] Bond they would not have given you 30 days.
(Nov. 25, 2008, Haskell v. MSF Inc. Email, Pl.’s Ex. 39.) The Debtor explained his motivation:
Q: And by November 12th you had spent all but $26,000 of the money, right; is that correct? You can look at the exhibit.
A: No. Yes, sir, you are exactly correct. My state of mind at that time was I knew May Specialty Fabricators’ tenure in business was over. I had already sought counsel from two different attorneys and basically, for lack of a better explanation, I was buying time for the demise of my business.
(Debtor Dep. 49:23-50:06, Sept. 10, 2013, A.P. ECF No. 63.)
Haskell’s Claim against the Plaintiffs Payment Bond
On November 24, 2008, within ninety days of its last delivery, Haskell sent no*114tice to the Plaintiff that it had not been paid the amount due on its Supplier Contract with May Specialty and stated it would seek to enforce its rights under the payment bond if not paid by December 24, 2008. (See November 25, 2008, Bond Notice Email.)
On January 22, 2009, May Specialty again revised its claim against Haskell, this time offering to settle for $51,624.00. (Jan. 22, 2009 Letter from Debtor to Boyd Worsham, Def.’s Ex. 6.) One week later, on January 29, 2009, Haskell filed suit against the Plaintiff and the Surety for payment of the $222,004.00 outstanding on its Supplier Contract. (PL’s Ex. 12.)
The Plaintiff challenged Haskell’s claim against the payment bond on the grounds that Haskell did not have a contractual relationship with the Plaintiff, had not provided it with written notice within 30 days of its last work on the Project, and was therefore not entitled to payment from the bond. See O.C.G.A. § 13-10-63(a)(2). The Superior Court did not agree:
The Court finds that O.C.G.A. 13-10-62(a) required that the contractor post the Notice of Commencement on the public works construction site and file it with the Clerk of the Superior Court in the county in which the site is located. There is no factual dispute that the Notice of Commencement was filed with the Clerk of the Superior Court of Chat-ham County. There is additionally no dispute that the Notice of Commencement was not posted on the public works construction site.
Therefore, the Court finds since Defendant Pioneer failed to comply with the Notice of Commencement requirements provided for in O.C.G.A. § 13-10-62(a), [Haskell] was not required to file a Notice to Contractor. It may seek payment under the payment bond pursuant to O.C.G.A. § 13-10-63(a)(l) since the contractor did not comply with the notice of commencement requirements and since [Haskell] provided written notice to Pioneer on November 24, 2008, within 90 days from the last day material was furnished that it had not been paid for labor and materials it supplied to the project.
(Jan. 11, 2010 Order on Motions for Summary Judgment, The Haskell Company v. Pioneer Construction, Inc., et al., Civil Action No. CV09-171BA, Def. Ex. 12 at 6-7.)
Haskell was awarded a judgment against the Plaintiff in the principal amount of $222,004.00, plus pre- and post-judgment interest. (Stip., A.P. ECF No. 49 at 9, ¶ 8.) After appealing the judgment and losing, the Plaintiff paid Haskell $200,000.00 in full satisfaction of its claim against the payment bond. (General Release Executed by The Haskell Company, Pl.’s Ex. 15; May 17, 2011 Satisfaction of Judgment, The Haskell Company v. Pioneer Construction, Inc. and The Ohio Casualty Insurance Company, Civil Action No. CV09-0171-BA, PL’s Ex. 16.)
On May 16, 2011, the Plaintiff brought suit against May Specialty and the Debtor in the Superior Court of Bulloch County, Georgia. (May 16, 2011 Superior Court Compl., Pioneer Construction, Inc. v. May Specialty Fabricators, Inc. and Jeffery A May, Civil Action No. 1B11CV-284-W, PL’s Ex. 17.) The complaint alleged that the Debtor had willfully converted the plaintiffs payments, causing the plaintiff damages, including the $200,000.00 paid to Haskell, plus attorney’s fees and litigation costs of $22,480.24 incurred in defending Haskell’s suit and appealing the judgment rendered for Haskell therein. (See Superior Court Compl., PL’s Ex. 17 at 2-3.) The Plaintiffs complaint also alleged that the Debtor had acted in bad faith entitling the Plaintiff to recover attorney’s fees. (See *115id. 1113.) May Specialty and the Debtor filed an answer denying the allegations in the Plaintiffs complaint on July 5, 2011. (July 5, 2011 Answer, Pioneer Construction, Inc. v. May Specialty Fabricators, Inc. and Jeffery A. May, Civil Action No. 1B11CV-284-W, Pl.’s Ex. 18.)
Although the initial answer was filed by an attorney, the Debtor eventually proceeded pro se as he could no longer afford legal representation. (See Def. Posh-Trial Br., A.P. ECF No. 70, at 3.) On February 7, 2012, the Superior Court entered the parties’ “Consent Judgment” finding the Debtor and May Specialty jointly and severally hable for the Plaintiffs damages:
By consent of the parties hereto, it is hereby ORDERED and ADJUDGED that the plaintiff have and recover of the defendants, jointly and severally, the principal sum of $222,480.24 plus attorney’s fees of $4,336.97, together with post-judgment interest at the legal rate and all costs of this action.
SO ORDERED AND ADJUDGED, this 7th day of February, 2012.
(Feb. 7, 2012 Consent Judgment entered in Pioneer Construction, Inc. v. May Specialty Fabricators, Inc. and Jeffery A. May, Civil Action Number IB11CV-284-W, PL’s Ex. 19.)
Bankruptcy
The Debtor filed for chapter 7 relief on July 10, 2012. (ECF No. 1.) May Specialty effectively ceased doing business in early 2009; to date, May Specialty has not filed for bankruptcy protection. (Debtor Dep. 13:12-13:14, Sept. 12, 2013, A.P. ECF No. 63.) The Plaintiff filed its Complaint to Determine the Dischargeability of Debt on September 7, 2012. (ECF No. 16; A.P. ECF No. 1.) The Plaintiff characterized its claim in the same terms it used in its Superior Court complaint:
9. The payments received by debtor from plaintiff were subject to a constructive trust in favor of the plaintiff, and the debtor’s failure to pass through payments received by the debtor from plaintiff, instead converting said payments to the debtor’s own use, constitutes prima facie evidence of debtor’s intent to defraud pursuant to O.C.G.A. section 16 — 8—15(b).
10. Having violated O.C.G.A. section 16-8-15, pursuant to O.C.G.A. section 51-10-6, the debtor is liable to the plaintiff in tort for conversion for all damages suffered as a result of said violation.
11. The debtor’s failure to pass through payments received by the debt- or from the owners, instead converting said payments to the debtor’s own use, constitutes willful and malicious conversion of the plaintiffs funds pursuant to 11 U.S.C. § 523(a)(6).
(A.P. ECF No. 1, ¶¶ 9-11; cf. PL’s Ex. 17, ¶¶ 11-15.)
CONCLUSIONS OF LAW
“A Chapter 7 debtor is generally entitled to a discharge of all debts that arose prior to the filing of the bankruptcy petition.” Kane v. Stewart Tilghman Fox & Bianchi Pa. (In re Kane), No. 13-10560, 2014 WL 2884603 (11th Cir. June 26, 2014) (quoting United States v. Mitchell (In re Mitchell), 633 F.3d 1319, 1326 (11th Cir.2011) (internal quotations omitted)). However, “this ‘fresh start’ policy is only available to the ‘honest but unfortunate debt- or.’ ” In re Mitchell, 633 F.3d at 1326 (quoting United States v. Fretz (In re Fretz), 244 F.3d 1323, 1326 (11th Cir.2001)).
“To ensure that only the honest but unfortunate debtors receive the benefit of discharge, Congress enacted several exceptions to § 727(b)’s general rule of discharge.” Id. Any debt that results from *116“willful and malicious injury by the debtor to another entity or to the property of another entity” is one such exception. 11 U.S.C. § 523(a)(6).
I. The Preclusive Effect of the State Court Consent Judgment
At the trial on April 24, 2014, it became apparent that much of the Plaintiffs case depended upon the Court finding that the Consent Judgment entered in State Superior Court preclusively established the Debtor’s liability for willful conversion.
Bankruptcy courts have exclusive jurisdiction over issues of nondischarge-ability; thus, it would not be possible for a state court judgment to have a res judicata (claim preclusion) effect in discharge proceedings. See St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 675-76 (11th Cir.1993)(“While collateral estoppel may bar a bankruptcy court from relitigating factual issues previously decided in state court, however, the ultimate issue of dis-chargeability is a legal question to be addressed by the bankruptcy court in the exercise of its exclusive jurisdiction to determine dischargeability.”); Ga. Lottery Co. v. Kunkle (In re Kunkle), 462 B.R. 914, 922 (Bankr.N.D.Ga.2011) (state court consent judgment does not create a res judicata defense).
However, the Supreme Court has determined that collateral estoppel principles (issue preclusion) apply in discharge exception proceedings. See Grogan v. Garner, 498 U.S. 279, 284-85, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “Collateral estoppel prohibits the relitigation of issues that have been adjudicated in a prior action. The principles of collateral estoppel apply in discharge exception proceedings in bankruptcy court.” Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319, 1322 (11th Cir.1995).
In St. Laurent, the Eleventh Circuit stated: “If the prior judgment was rendered by a state court, then the collateral estoppel law of that state must be applied to determine the judgment’s pre-clusive effect....” 991 F.2d at 676. Thus, Georgia law applies to determine the effect of the state court Consent Judgment. See Hebbard v. Camacho (In re Camacho), 411 B.R. 496, 501-02 (Bankr.S.D.Ga.2009); NBA Props., Inc. v. Moir (In re Moir), 291 B.R. 887, 891 (Bankr.S.D.Ga.2003).
In Georgia, a party seeking to assert collateral estoppel must demonstrate that (1) an identical issue, (2) between identical parties, (3) was actually litigated and (4) necessarily decided, (5) on the merits, (6) in a final judgment, (7) by a court of competent jurisdiction. See Cmty. State Bank v. Strong, 651 F.3d 1241, 1264 (11th Cir.2011); Body of Christ Overcoming Church of God, Inc. v. Brinson, 287 Ga. 485, 486, 696 S.E.2d 667 (2010).
As the Eleventh Circuit noted in Halpern v. First Ga. Bank, (In re Halpern), judgments entered by consent alter the typical issue preclusion analysis:
The requirements that issues be actually litigated and necessary to the judgment in order for issue preclusion to apply are altered somewhat in the context of consent decrees. As we stated in Barber v. International Brotherhood of Boilermakers, 778 F.2d 750, 757 (11th Cir.1985), “[t]he very purpose of [consent] decrees is to avoid litigation, so the requirement of actual litigation necessary to preclusion always will be missing.” Instead, the central inquiry in determining the preclusive effect of a consent judgment is the intention of the parties as manifested in the judgment or other evidence.
810 F.2d 1061, 1063-64 (11th Cir.1987).
Likewise, the Georgia Supreme Court has held that the preclusive effect of a *117consent judgment entered in state court does not depend on the legal or factual issue having been actually litigated:
[A] consent judgment differs from a judgment rendered on the merits in that it results from an affirmative act of the parties rather than the considered judgment of the court following litigation of the issues. A consent judgment is one entered into by stipulation of the parties with the intention of resolving a dispute, and generally is brought to the court by the parties so that it may be entered by the court, thereby compromising and settling an action. (Footnote omitted.) City of Centerville v. City of Warner Robins, 270 Ga. 183, 184(1), 508 S.E.2d 161 (1998).
Although a consent judgment is brought about by agreement of the parties, it is accorded the weight and finality of a judgment. Thus, a consent decree is an enforceable judgment and can be accorded preclusive effect. See Rufo v. Inmates of Suffolk County Jail, 502 U.S. 367, 378(II), 112 S.Ct. 748, 116 L.Ed.2d 867 (1992) (consent judgment is agreement that parties desire and expect will be enforceable as judicial decree subject to rules applicable to other judgments and decrees). However, it is also a contract and, therefore, it must be interpreted like any other contract. See City of Centerville, supra at 186, 508 S.E.2d 161; Wright, Miller & Cooper, 18A Federal Practice and Procedure: Jurisdiction 2d § 4443, p. 262 (contractual “nature of consent judgments has led to general agreement that preclusive effects should be measured by the intent of the parties” (footnote omitted)).
Brown, etc. Corp. v. Gault, 280 Ga. 420, 423-24(3), 627 S.E.2d 549 (2006).
Thus, a state court consent judgment is preclusive only to the extent that the parties intended the judgment to be a final adjudication of the factual and legal issues. See id.; Gutherie v. Ford Equip. Leasing Co., 231 Ga.App. 350, 351, 498 S.E.2d 797 (1998). “A consent judgment cannot constitute collateral estoppel unless the party pleading collateral estop-pel proves from the record of the prior case or through extrinsic evidence that the parties intended the consent judgment to operate as a final adjudication of a particular issue.” Balbirer v. Austin, 790 F.2d 1524, 1528 (11th Cir.1986).
A. The Consent Judgment Preclusively Establishes the Debtor’s Liability for the Debt.
The parties’ resolution of their lawsuit, titled simply “Consent Judgment,” is notably devoid of both factual findings and legal conclusions:
By consent of the parties hereto, it is hereby ORDERED and ADJUDGED that the plaintiff have and recover of the defendants, jointly and severally, the principal sum of $222,480.24 plus attorney’s fees of $4,336.97, together with post-judgment interest at the legal rate and all costs of this action.
SO ORDERED AND ADJUDGED, this 7th day of February, 2012.
(Consent Judgment, Pl.’s Ex. 19.)
The Consent Judgment does not cite to a specific Georgia statute, incorporate either party’s pleading by reference, or establish a theory of recovery. See In re St. Laurent, 991 F.2d at 676. There is no evidence, either according to the terms of the Consent Judgment or from other extrinsic sources, that would indicate that the parties intended the Consent Judgment as a final adjudication of any issue other than the debt owed to the Plaintiffs. {See Consent Judgment, PL’s Ex. 19).
Rather, the Consent Judgment merely establishes the debt for which the Debtor *118and May Specialty are jointly and severally liable. See In re St. Laurent, 991 F.2d at 676. Absent proof the parties necessarily applied a particular theory of recovery to determine the debt, the Consent Judgment has no preclusive effect regarding the willful or malicious nature of the injury to the Plaintiff. See id.; Terhune v. Houser (In re Houser), 458 B.R. 771, 781 (Bankr.N.D.Ga.2011)(refusing to apply collateral estoppel when plaintiff’s state court award of punitive damages was based on one or more disjunctive options: “willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences”).
B. The Consent Judgment Does Not Bar the Debtor’s Arguments Regarding Dischargeability.
The Plaintiff argues that res judicata bars any defenses the Debtor may raise with regard to liability for conversion or for the dollar amount of that liability. (See Pl.’s Post-Trial Br., A.P. ECF No. 71, at 2.) Specifically, the Plaintiff objects to two of the Debtor’s arguments that could have been asserted in the state court proceeding but were not. First, the Debtor argues that the Plaintiff caused its own injury by failing to comply with the notice requirements of O.C.G.A. § 13-10-62: “The order of the Superior Court of Chat-ham County makes it clear that had [the Plaintiff] posted the Notice Haskell’s complaint would not have been timely and would have been dismissed.” (Def.’s Proposed Findings of Fact and Conclusions of Law, A.P. ECF No. 60, at 5.) Second, the Debtor argues that May Specialty paid a majority of the funds to its suppliers on the Project; had May Specialty chosen to pay Haskell, then those unpaid suppliers could have made claims against the Plaintiff. (See id. at 4.)
The Plaintiff is correct to object to these arguments in one respect. The Consent Judgment precludes the Debtor from re-litigating the validity of the debt. See Kerr v. Meadors (In re Knott), 482 B.R. 852, 854 (Bankr.N.D.Ga.2012) (“general rule is that a party cannot re-litigate in bankruptcy court a state court’s determination of the amount of a claim.”) Had these defenses been presented at the Superior Court, they would have addressed the validity and amount of the Plaintiff’s claims; the Consent Judgment bars the Debtor from re-litigating these issues now. To the extent these arguments are offered to reduce or challenge the validity of the underlying debt, the Debtor is barred from raising them in bankruptcy court.
However, to the extent that these arguments address the discharge-ability of the debt under 11 U.S.C. § 523(a)(6), these otherwise precluded arguments fall within the exclusive jurisdiction of the bankruptcy court. See In re St. Laurent, 991 F.2d at 675. In exercising this exclusive jurisdiction, bankruptcy courts look beyond the record of a state court proceeding in which a consent judgment was entered to determine if the underlying debt is dischargeable. See In re Kunkle, 462 B.R. at 922 (quoting Brown v. Felsen, 442 U.S. 127, 138-39, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979)) (“[T]he mere fact that a conscientious creditor has previously reduced his claim to judgment should not bar further inquiry into the true nature of the debt.”).
Both of the arguments to which the Plaintiff objects would, if accepted by the Court, mitigate the malicious element of his actions. See Wolfson v. Equine Capital Corp. (In re Wolfson), 56 F.3d 52, 55 (11th Cir.1995); Thompson v. Barbee (In re Barbee), 479 B.R. 193, 209 (Bankr.S.D.Ga.2012).
*119Under circumstances analogous to the Plaintiffs failure to comply with O.C.G.A. § 13-10-62, the Eleventh Circuit has found a Debtor’s willful conversion of collateral was not malicious when the creditor failed to take reasonable steps to protect its property from injury. See In re Wolfson, 56 F.3d at 55. Likewise, if the Debt- or had in fact made proper payment to other creditors, his actions would not be malicious. See In re Barbee, 479 B.R. at 209 (finding the Debtor’s use of loaned funds to obtain reimbursement to which he was arguably entitled from lender was not malicious when Plaintiffs failed to sufficiently establish that the Debtor was not entitled to the compensation for legitimate business expenses); Mason Lumber Co. v. Martin (In re Martin), 70 B.R. 146, 152-53 (Bankr.M.D.Ala.1987) (finding debt- or/home-contractor’s conversion of funds assigned to lumber company was not “malicious” where substantially all of converted funds were used to pay materialmen and labor, costs necessary to continue operations in effort to preserve business, and the debtor expected to be able to pay lumber company out of profits from other homes).
C. The Consent Judgment Does Not Establish a Constructive Trust in Favor of the Plaintiff for the Debtor’s Willful Conversion Under O.C.G.A. §§ 16-8-15 and 51-10-6.
The Plaintiff argues that the Consent Judgment was intended to establish the Debtor’s liability for “conversion of funds paid to the Debtor by [Plaintiff], pursuant to OCGA §§ 51-10-6 and 16-8-15, by virtue of Debtor’s ... failure to pass those payments through to Haskell.” (See Superior Court CompL, PL’s Ex. 17; A.P. ECF No. 1.) According to the Plaintiff, the Debtor has violated O.C.G.A. § 16-8-15 and therefore, pursuant to § 51-10-6:
The payments received by Debtor from plaintiff were subject to a constructive trust in favor of the plaintiff, and the Debtor’s failure to pass through payments received by the Debtor from plaintiff, instead converting said payments to the Debtor’s own use, constitutes prima facie evidence of Debtor’s intent to defraud pursuant to O.C.G.A. Section 16-8-15(b).
(Pl.’s Ex. 17 at 3-4) (emphasis added.)
Section 51-10-6 provides: “Any owner of personal property shall be authorized to bring a civil action to recover damages from any person who willfully damages the owner’s personal property or who commits a theft as defined in Article 1 of Chapter 8 of Title 16 involving the owner’s personal property.” O.C.G.A. § 51-10-6 (emphasis added.)
Section 16-8-15 is a criminal statute that makes it a felony for a contractor who, with the intent to defraud, uses the “proceeds of any payment made to him on account of improving certain real property for any other purpose than to pay for labor or service performed on or materials furnished by his order for this specific improvement.” O.C.G.A. § 16-8-15. Subsection (b) of § 16-8-15 provides that evidence of non-payment is prima facie evidence of an intent to defraud. Id.
The Plaintiffs application of O.C.G.A. § 16-8-15 is problematic for a number of reasons.
First, the Plaintiff has not established the elements necessary for a violation of § 16-8-15 and there is no evidence the Debtor has been charged with or found guilty of a violation. See Thompson v. State, 233 Ga.App. 792, 793, 505 S.E.2d 535 (1998) (finding evidence was insufficient to prove a contractor/defendant violated O.C.G.A. 16-8-15 when the contractor unequivocally testified that he withheld mon*120ey as “off-set” bill). In order to convict a contractor under § 16-8-15, “it is necessary to show the creation of the trust described in the indictment and fraudulent breach of that trust in the manner alleged.” Teston v. State, 194 Ga.App. 324, 325, 390 S.E.2d 437 (1990) (quoting Davis v. State, 122 Ga.App. 311, 315-316, 176 S.E.2d 660 (1970)). The Plaintiff has not demonstrated that the funds paid to May Specialty were explicitly entrusted to it for the specific purpose of paying Haskell. Neither the Subcontract nor the Purchase Order between May Specialty and the Plaintiff require May Specialty to pay its suppliers before itself. (See Purchase Order, PL’s Ex. 6; Subcontract, Pl.’s Ex. 7.)
Second, O.C.G.A. § 16-8-15 does not create a property right in the misappropriated funds that would entitle the Plaintiff to recovery. Under 11 U.S.C. § 523(a)(6), “the injury must invade the creditor’s legal rights ... ‘in the technical sense, not simply harm to a person.’ ” In re Barbee, 479 B.R. at 208 (citing Musilli v. Droomers (In re Musilli), 379 Fed.Appx. 494, 498 (6th Cir.2010) (listing conversion as a type of misconduct that satisfies willful and malicious injury)).
In Doyle Dickerson Co. v. Durden, a subcontractor used O.C.G.A. § 16-8-15 to allege that funds received by a bankrupt general contractor “as payment for the improvement of real property were subject to a trust in favor of those who furnished labor and materials used in completing the improvements.” 218 Ga.App. 426, 426-27, 461 S.E.2d 902 (1995). Like the present case, the subcontractor’s complaint also alleged that the president and sole shareholder of the defunct general contractor had “knowingly converted the trust funds including those sums that were due plaintiff.” Doyle Dickerson Co., 218 Ga.App. at 427, 461 S.E.2d 902. The Georgia Appeals Court found that the subcontractor had failed to state a claim. The Court explicitly stated that O.C.G.A. § 16-8-15 does not give rise to a civil cause of action, nor does it create a property right in the allegedly misappropriated funds. See Doyle Dickerson Co., 218 Ga.App. at 428, 461 S.E.2d 902; see also Rolleston v. Huie, 198 Ga.App. 49, 400 S.E.2d 349 (1990) (denying a violation of O.C.G.A. § 16-8-16, theft by extortion, creates a private cause of action for those injured absent explicit statutory language to the contrary).
Third, the Plaintiffs reliance on O.C.G.A. § 51-10-6 to address these issues is misplaced. The Plaintiff argues that the application of O.C.G.A. § 51-10-6 provides an explicit right to a civil action to remedy the harm done by the Debtor’s violation of O.C.G.A. § 16-8-15. (PL’s Posh-Trial Reply Br., A.P. ECF No. 72, at 5.) However, Georgia case law makes it clear that § 51-10-6 does not create a private right of action for every property crime. See Anthony v. Am. Gen. Fin. Servs., Inc., 287 Ga. 448, 455-59, 697 S.E.2d 166 (2010) (citing Doyle Dickerson Co. v. Durden for the proposition that criminal violations will not create a civil action absent explicit statutory language); Murphy v. Bajjani, 282 Ga. 197, 201, 647 S.E.2d 54 (2007) (“There is no indication that the legislature intended to impose civil liability in addition to the criminal sanctions set forth in a statute where, as here, nothing in the provisions of the statute creates a private cause of action in favor of the victim purportedly harmed by the violation of the penal statute.”)
Moreover, O.C.G.A. § 51-10-6 was in effect when Doyle Dickerson Co. v. Durden was decided. Compare Doyle Dickerson Co. v. Durden, 218 Ga.App. 426, 428, 461 S.E.2d 902 (1995) with § 51-10-6 Code 1981, § 51-10-6, enacted by Ga. L.1988, p. 404, § 1; Ga. L.1991, p. 1126, §§ 1-3; Ga. L.2000, p. 1589, § 3. Nevertheless, the *121Dickerson court held that “the violation of a penal statute does not automatically give rise to a civil cause of action on the part of one who claims to have been injured thereby since reference must be made to the applicable provisions of tort law.” See Doyle Dickerson Co., 218 Ga.App. at 427, 461 S.E.2d 902 (citing Rolleston v. Huie, 198 Ga.App. at 50, 400 S.E.2d 349).
Even assuming O.C.G.A. § 51-10-6 did create a private right of action in favor of the Plaintiff, there is no reason that right would also include the evidentiary presumption of a prima facie intent to defraud when evidence of nonpayment is produced. The scope of O.C.G.A. § 51-10-6 encompasses “theft as defined by Article 1 of Chapter 8 of Title 16.” It does not import every standard or presumption of that portion of Georgia’s Criminal Code.
Finally, even if O.C.G.A. §§ 16-8-15 and 51-10-6 did apply, the Plaintiff would still not be entitled to a constructive trust. See Hudspeth v. A & H Constr., Inc., 230 Ga.App. 70, 71, 495 S.E.2d 322 (1997) (“Money can be the subject of a conversion claim as long as the allegedly converted money is specific and identifiable.”) In Georgia, a constructive trust requires the existence of a trust res; a beneficiary of a constructive trust is entitled to payment from trust assets only if the trust assets are traceable. See Bethlehem Steel Corp. v. Tidwell, 66 B.R. 932, 941 n. 12 (M.D.Ga.1986). Here, the Plaintiff has made no effort to trace any assets that might constitute a res for a constructive trust. (See A.P. ECF No. 61.)
Finally, bankruptcy courts in Georgia have refused to apply § 16-8-15 to create a constructive trust in favor of an unpaid subcontractor, much less in favor of a fully paid general contractor one step removed from the offending transaction. See Wachovia Bank of Ga. v. Am. Bldg. Consultants, Inc. (In re Am. Bldg. Consultants, Inc.), 138 B.R. 1015, 1018 (Bankr.N.D.Ga.1992); see also Hensler & Beavers Gen. Contr., Inc. v. Sanford (In re Sanford), Case No. 11-43035-PWB, A.P. No. 11-4063, 2011 WL 7090746, at n. 1 (Bankr.N.D.Ga. Dec. 22, 2011) (finding plaintiff failed to state a claim for which relief could be granted under § 523(a)(2)(A) when its complaint merely alleged defendant violated O.C.G.A. § 16-8-15, a criminal statute); Golden Isles Drywall, Inc. v. Stone (In re Stone), No. 95-20239, A.P. No. 95-2033, 1996 WL 34579205 (Bankr.S.D.Ga. Jan. 29, 1996) (refusing to apply O.C.G.A. § 16-8-15 to impose a fiduciary duty on contractors to pay their suppliers).
Accordingly, contrary to the Plaintiffs assertions, the funds paid to May Specialty by the Plaintiff were not “as a matter of law earmarked for and required to be passed through for payment of suppliers on the Reefer Racks project.” (PL’s Post-Trial Reply Br., A.P. ECF No. 72, at 5.)
D. The Amount Awarded to the Plain-tiffin the Consent Judgment is Consistent with an Award for Breach of Contract; Therefore, the Measure of Damages is Insufficient to Establish the Debtor’s Liability for Willful Conversion.
According to the Plaintiff, as the Consent Judgment was in the precise amount of its alleged compensatory damages for willful conversion, the only basis upon which the state court could have approved the Debtor’s consent to liability is that alleged in the Plaintiffs complaint. (Pl.’s Post-Trial Reply Br., A.P. ECF No. 72, at 5.)
However, this is not necessarily the case. See Branton v. Hooks (In re Hooks), 238 B.R. 880, 886 (Bankr.S.D.Ga.1999). An issue is “necessarily decided” if, in the absence of a determination of the issue, the judgment could not have been *122validly rendered. Henderson v. Woolley (In re Woolley), 288 B.R. 294, 300-01 (Bankr.S.D.Ga.2001). A court may “infer facts for purposes of collateral estoppel if the finding is necessarily implied from the nature of the claim and award.” Schlenkerman v. Goldbronn (In re Goldbronn), 263 B.R. 347, 360 (Bankr.M.D.Fla.2001) (internal quotation marks omitted)(finding, in absence of factual findings by arbitration panel, that award itself established “those facts necessary to support a violation under [the relevant state statute]”).
The “compensatory damages” awarded to the Plaintiff by the Consent Judgment consists of amounts the Plaintiff paid to Haskell to satisfy its bond claim plus legal expenses incurred in defense of that claim. (Compare Compl. filed in The Haskell Company v. Pioneer Construction, Inc. and The Ohio Casualty Insurance Company, Civil Action Number CV09-0171-BA, Pl.’s Ex. 12 with Consent Judgment, Pl.’s Ex. 19.) Under the terms of the Subcontract, May Specialty was obligated to broadly indemnify the Plaintiff for damages of exactly this kind:
16.1 SUBCONTRACTOR’S PERFORMANCE: The Subcontractor shall indemnify and save harmless the Owner and the Contractor, including their officers, agents, employees, affiliates, parents and subsidies, and each of them, of and from any and all claims, demands, causes of action, damages, costs, expenses, actual attorneys’ fees, losses or liabilities arising out of or in connection with the Subcontractor’s operations to be performed under this Agreement for, but not limited to:
16.1.4 Claims and liens for labor performed and materials used and furnished on the job, including all incidental and consequential damages resulting to the Contractor or Owner from such claims or liens.
(Subcontract, PL’s Ex. 7 at 18-19) (emphasis added.)
Accordingly, the measure of damages alone is insufficient to establish the Debt- or’s liability for willful conversion under O.C.G.A. § 16-8-15. See McMahon v. State, 284 Ga.App. 192, 195, 643 S.E.2d 236 (2007) (Defendant acquitted of three of ten counts under O.C.G.A. § 16-8-15 could be ordered to pay restitution of full amount based on breach of contract theory as civil action corresponding to § 16-8-15 is breach of contract). As the Eleventh Circuit has previously noted: “[I]f the judgment fails to distinguish as to which of two or more independently adequate grounds is the one relied upon, it is impossible to determine with certainty what issues were in fact adjudicated, and the judgment has no preclusive effect.” In re St. Laurent, 991 F.2d at 676 (internal citations omitted).
E. The Award of Attorneys’ Fees Does Not Establish Malice.
Finally, the Plaintiff maintains that the Consent Judgment’s award of attorneys’ fees establishes the Debtor’s actions were taken in bad faith and are therefore malicious. See O.C.G.A. § 13-6-11. In Georgia, attorneys’ fees are recoverable as special damages flowing from the underlying intentional tort when the Defendant’s tortious conduct falls within the scope of O.C.G.A. § 13-6-11. See Kasper v. Turnage (In re Turnage), 460 B.R. 341, 347-48 (Bankr.N.D.Ga.2011). Section 13-6-11 provides:
The expenses of litigation generally shall not be allowed as a part of the damages; but where the plaintiff has specially pleaded and has made prayer therefor and where the defendant has acted in *123bad faith, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble and expense, the jury may allow them.
O.C.G.A. § 13-6-11 (emphasis added).
The Plaintiff correctly asserts that an award of attorneys’ fees under O.C.G.A. § 13-6-11 may establish malice under 11 U.S.C. § 523(a)(6). See In re Demps, 506 B.R. 163, 171 (Bankr.N.D.Ga.2014) (arbitration award of attorneys’ fees under O.C.G.A. § 13-6-11 was sufficient to establish maliciousness for purpose of non-dis-ehargeability).
However, as with the compensatory damages previously discussed, there are multiple theories of recovery upon which the Plaintiff might have been entitled to attorneys’ fees that do not require a finding of bad faith. See In re St. Laurent, 991 F.2d at 676.
First, the Plaintiff may have been entitled to attorneys’ fees under its contracts with May Specialty. In addition to the broad indemnification discussed above, Section 15.8 of the Subcontract provides:
ATTORNEYS’ FEES: Should the Subcontractor [May Specialty] default in any of the provisions of this Agreement and should the Contractor [Plaintiff] employ an attorney to enforce any provision hereof or to collect damages for material breach of this Agreement the Subcontractor and his Surety agree to pay the Contractor such reasonable attorneys’ fees as he may expend therein.
(Subcontract, Pl.’s Ex. 7 at 18.) Unlike O.C.G.A. § 13-6-11, the terms of the contract that entitle the Plaintiff to attorneys’ fees do not require a finding of bad faith.
Second, the Plaintiff may have been entitled to its attorneys’ fees under O.C.G.A. § 13-11-8 of Georgia’s Prompt Pay Act:
In any action to enforce a claim under the Georgia Prompt Pay Act, the prevailing party is entitled to recover a reasonable fee for the services of its attorney, including but not limited to, trial, appeal, and arbitration in an amount to be determined by the court or the arbitrators, as the case may be.
O.C.G.A. § 13-11-8.
Georgia’s Prompt Pay Act governs “[performance by a contractor ... in accordance with the provisions of his or her contract and the satisfaction of the conditions of his or her contract precedent to payment entitles such person to payment from the party with whom he or she contracts.” O.C.G.A. § 13-11-3; (see also Pl.’s Posh-Trial Reply Br., A.P. ECF 72, at 5) (Georgia’s Prompt Pay Act determines rights of the parties). Like the Plaintiffs contractual right to attorneys’ fees, an award of attorneys’ fees under O.C.G.A. § 13-11-8 does not require a finding of bad faith. See Elec. Works CMA Inc. v. Baldwin Technical Fabrics, LLC, 306 Ga.App. 705, 708, 703 S.E.2d 124 (2010) (electrical contractor was entitled to attorney fees under Prompt Pay Act even if contractor did not produce any evidence of bad faith as entitlement to attorney fees under the Prompt Pay Act does not require a showing of bad faith); Hampshire Homes v. Espinosa Constr. Servs., 288 Ga.App. 718, 723(2)(b), 655 S.E.2d 316 (2007).
Absent an indication which of these independent grounds supported the award of attorneys’ fee in the Consent Judgment, the award itself has no preclusive effect. See In re St. Laurent, 991 F.2d at 676.
II. The Plaintiff Has Not Established that the Debtor’s Actions Amounted to a Willful and Malicious Injury Under 11 U.S.C. § 523(a)(6).
A debt “for willful and malicious injury by the debtor to another entity or to the property of another entity” is *124excepted from discharge. 11 U.S.C. § 528(a)(6). The burden is on the creditor to prove the exception to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. at 287-88, 111 S.Ct. 654; In re St. Laurent, 991 F.2d 672, 680 (11th Cir.1993). A presumption exists that all debts owed by the debtor are dischargea-ble unless the party contending otherwise proves non-dischargeability. See 11 U.S.C. § 727(b); In re Turnage, 460 B.R. at 345. Thus, courts narrowly construe exceptions to discharge in favor of the debtor in order to give effect to the fresh start policy of the Bankruptcy Code. See Hope v. Walker (In re Walker), 48 F.3d 1161, 1164-65 (11th Cir.1995); Equitable Bank v. Miller (In re Miller), 39 F.3d 301 (11th Cir.1994); In re St. Laurent, 991 F.2d at 680.
“Willful and malicious injury includes willful and malicious conversion.” In re Wolfson, 56 F.3d at 54. Under Georgia law, “conversion consists of an unauthorized assumption and exercise of the right of ownership over personal property belonging to another, in hostility to his rights; an act of dominion over the personal property of another inconsistent with his rights; or an unauthorized appropriation.” In re Moir, 291 B.R. 887, 892 (Bankr.S.D.Ga.2003) (quoting Adler v. Hertling, 215 Ga.App. 769, 772, 451 S.E.2d 91 (1994)). In the context of § 523(a)(6), “the injury must invade the creditor’s legal rights ... ‘in the technical sense, not simply harm to a person.’ ” In re Barbee, 479 B.R. at 208 (Bankr.S.D.Ga.2012) (quoting In re Musilli, 379 Fed.Appx. at 498).
Here, the Plaintiff has not established that it retained a property interest in its final payment to May Specialty. The Plaintiff based its conversion claim on its property interest in funds it was contractually obligated to pay May Specialty: “[T]he payments received by debtor from plaintiff were subject to a constructive trust in favor of the plaintiff.” (Pl.’s Ex. 17, ¶ 9.) However, as previously discussed, neither the Consent Judgment nor Georgia law establishes that the Plaintiff retained a property interest in its Final Progress Payment to May Specialty. A violation of O.C.G.A. § 16-8-15 does not grant its victims an equitable property interest in the fraudulently obtained funds. See Doyle Dickerson Co. v. Durden, 218 Ga.App. at 427, 461 S.E.2d 902. The Consent Judgment does nothing more than establish the debt; it does not establish the nature of the debt, nor does it recognize a constructive trust in favor of the Plaintiff. Indeed, looking to the Consent Judgment itself, the damages could have been based either on a breach of contract or a financial tort. Simply put, the Plaintiff did not have a property interest in the progress payments that the Debtor could convert.
The Plaintiff has done nothing to differentiate its damages from those to which it would be entitled on a simple breach of contract claim. Although debts for breach of contract typically fall outside the scope of 11 U.S.C. § 523(a)(6), “a knowing breach of a clear contractual obligation that is certain to cause injury may prevent discharge under Section 523(a)(6), regardless of the existence of separate tor-tious conduct.” In re Kane, 2014 WL 2884603, at *9 (quoting Williams v. Int’l Brotherhood of Elec. Workers Local 520 (In re Williams), 337 F.3d 504, 510 (5th Cir.2003)).
However, the kind of contract breaches that satisfy the requirements of 11 U.S.C. § 523(a)(6) is severely limited. See Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (rejecting an interpretation of § 523(a)(6) that would render any knowing breach of contract nondischargeable). Decisions *125finding breach of contract damages within the scope of 11 U.S.C. § 523(a)(6) typically fall into two fact patterns. First, courts often find contract breach claims nondis-chargeable when the damages are based on a security agreement granting the creditor a legal property interest in collateral that is then converted by the debtor for a non-business purpose. See In re Barbee, 479 B.R. at 208-09 (debtor’s conversion of creditor’s security interest was non-dis-chargeable when the debtor “consciously chose to use the accounts receivable to pay a business debt of [the Corporation] for which he was personally liable”); Legendary Loan Link, LLP v. Glatt (In re Glatt), 315 B.R. 511, 521-22 (Bankr.D.N.D.2004)(finding required malice was not present when debtor used the proceeds of creditor’s collateral to continue operating his business); Auto. Fin. Corp. v. Penton (In re Penton), 299 B.R. 701, 707 (Bankr.S.D.Ga.2003)(finding damages for debtor’s violation of a security agreement were non-dischargeable when debtor willfully converted creditor’s collateral, knowing that his actions would cause the creditor loss).
Alternatively, damages for a breach of contract may be non-dischargea-ble when the contract’s terms are sufficiently restrictive regarding the use of specified funds to impose a fiduciary duty on the debtor. See Citizens Bank of Washington Cnty. v. Wright (In re Wright), 299 B.R. 648, 661-62 (Bankr.M.D.Ga.2003) (quoting Ford Motor Credit Co. v. Owens, 807 F.2d 1556, 1559 (11th Cir.1987) (finding creditor’s claim was non-dischargeable when the “floor plan agreement specified that [the dealership] had a duty to hold in trust all proceeds of any sale or other disposition of all merchandise subject to [the creditor’s] purchase money security interest and to remit such proceeds promptly to [the creditor]”)).
Unlike the present case, these fact patterns involve a violation of the creditor’s legal rights in property that goes beyond a mere contractual obligation. See In re Barbee, 479 B.R. at 208. Comparatively, here, neither the Subcontract nor the Purchase Order granted the Plaintiff a security interest in progress payments. (See Pl.’s Ex. 6, 7.) Furthermore, May Specialty’s use of the progress payment funds was not earmarked or specifically restricted to paying off suppliers. See Fiandola v. Moore (In re Moore), 508 B.R. 488, 499 (Bankr.M.D.Fla.2014)(finding a plaintiffs judgment debt dischargeable when there was no evidence that the debtor was prohibited from depositing plaintiffs’ deposits into its business’s general operating account and using those funds to pay for general business expenses); see also Rentrak Corp. v. Neal (In re Neal), 300 B.R. 86, 95 (Bankr.M.D.Ga.2003) (“[W]here a debtor is not required to isolate funds in a separate account and has unrestricted use of the funds, the creditor is merely an unpaid creditor rather than a victim of embezzlement”). Here, the Debtor was under no special obligation to use the progress payments to pay Haskell. See Ford Motor Credit Co. v. Moody (In re Moody), 277 B.R. 865, 871 (Bankr.S.D.Ga.2001) (finding injury caused by debtor’s use of sale-out-of-trust proceeds did not fall within 11 U.S.C. § 523(a)(6) when “Plaintiff was aware of the commingling of funds and never required a separate account be maintained for the proceeds”).
Finally, the Plaintiffs failure to take reasonable steps to protect itself from claims against its payment bond prevents the application of 11 U.S.C. § 523(a)(6). See In re Wolfson, 56 F.3d at 55. As the Superior Court noted in its January 11, 2010, Order, Haskell’s claim would have been barred under O.C.G.A. § 13-10-63 if the Plaintiff had complied with the Notice *126of Commencement requirements of O.C.G.A. § 13-10-62(a). (See Def. Ex. 12 at 6-7.) The Debtor had no control over the Plaintiffs compliance with O.C.G.A. § 13-10-62(a). Any injury resulting from the Plaintiffs failure to comply is not the Debtor’s responsibility.
ORDER
Based on the foregoing Findings of Fact and Conclusions of Law, I find that the Plaintiff has failed to meet its burden of proof under 11 U.S.C. § 523(a)(6). Accordingly, judgment is ORDERED entered for the defendant, Jeffery A. May, finding the debt due to the Plaintiff, Pioneer Construction, Inc., discharged in the defendant’s bankruptcy case # 12-60371.
. References to the docket of the underlying chapter 7 case appear in the following format: "(ECF. No.-.)” References to the docket of this adversary proceeding appear in the following format: "(A.P. ECF No.-.)” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497564/ | OPINION
EDWARD J. COLEMAN, III, Bankruptcy Judge.
Since 2006, a husband and wife team have owned and operated a premier bed and breakfast located in the heart of Savannah’s historic district, the Foley House Inn, through an entity named Wetdog, LLC {“Wetdog” or “Debtor”). After the 2008 recession led to a sharp decline in revenue and consequently a default on its secured obligations. Wetdog filed for bankruptcy protection to stop a pending foreclosure sale of its real estate. The Debtor now seeks confirmation of its reorganization plan over the objections of Belle Resources. Ltd. {“Belle”) who holds a first-lien position on its real estate. Despite being oversecured by nearly $1 million, Belle objects primarily to the feasibility of the Debtor’s plan, claiming that cash flows will be insufficient to eover necessary repairs and other expenses. Because the Court finds that the plan is feasible under § 1129(a)(ll) of the Bankruptcy Code and the other confirmation requirements are met, the Court will confirm the Debtor’s plan.
*128Before the Court is the Debtor’s Second Amended Chapter 11 Plan Proposed January 27, 2014 {“Plan”) (dckt. 102) as amended on March 18, 2014 (dckt. 138) and Belle’s Objection to Confirmation of Second Amended Plan of Reorganization (dckt. 122). Belle objects to confirmation on the grounds that the Plan is not feasible under § 1129(a)(ll) and violates the absolute priority rule. The Court held contested confirmation hearings on February 26, 2014 and April 2, 2014.
I. JURISDICTION
This Court has jurisdiction pursuant to the following sources: sections 151. 157(a). and 1334(b) of Title 28 of the United States Code and the United States District Court for the Southern District of Georgia’s Order dated July 13, 1984, which refers all cases under Title 11 of the United Slates Code to the bankruptcy judges in the district. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(L). Furthermore, venue is proper. See 28 U.S.C. §§ 1408-1409. In accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure, I make the following Findings of Fact and Conclusions of Law.
II. FINDINGS OF FACT
At the February 26, 2014 and April 2, 2014 hearings, several witnesses testified and numerous exhibits were entered into evidence. The following facts were either proven or are the proper subject of judicial notice.1
A. Introduction
Grant and Allisen Rogers were pursuing separate careers in New York City when they decided to start a business by purchasing a bed and breakfast located in Borrego Springs, California in 2001. (Pre-Trial Stipulation, dckt. 126, at 1.) The Rogers acquired and operated the inn through their newly formed California limited liability company. Wetdog, LLC, (Id.) The Rogers own all of the membership interests in Wetdog.
The Rogers’ California investment proved successful. As a result, they were able to sell the inn for a substantial profit in 2006. (Id.) To postpone paying taxes on a capital gain of approximately $1 million, the Rogers, acting through Wetdog, acquired the Foley House Inn (“Foley House ” or “Inn ”) in September 2006 and received like-kind exchange treatment under § 1031 of the Internal Revenue Code. (Id.) The Rogers paid $3.8 million for the Foley House, a nineteen-room bed and breakfast on Chippewa Square2 in the heart of the historic district of Savannah, Georgia. To finance this purchase. Wet-dog borrowed $1,940,000.00 from Sterling Bank, $1,322,500.00 from Community National Bank, and $200,000.00 in seller financing from the Foley House on Chippewa, Inc. (Belle Exs. 1-2.4.)
The Foley House is located at 14 West Hull Street and 16 West Hull Street and is comprised of three structures. (Dckt. 126. at 2.) According to Chatham County public records, the building located at 14 West Hull Street is a four-story structure built around 1896, and 16 West Hull Street is a three-story structure built around 1870 along with a two-story carriage house built or renovated in 1983. (Belle Ex. 12. all.) About two years after acquiring the Inn. Wetdog began to have financial difficulties after a devastating recession caused a significant decline in its revenues. (Dckt. 126, at 2.)
*129Beginning around May 2012, Wetdog failed to make certain scheduled mortgage payments. In February 2013, its first-lien holder, which was then Comeriea Bank (after its merger with Sterling Bank in July 2008). initiated foreclosure proceedings on the Foley House. (Dckt. 122. at 2.) On April 5, 2013. Wetdog responded by filing a voluntary Chapter 11 petition in this District. The Debtor has enjoyed the rights and duties of a debtor in possession throughout this case. See 11 U.S.C. §§ 1107(a), 1108.
In August 2013, Belle purchased the Debtor’s note from Comeriea Bank. (Dckt. 47; dckt. 126. at 2.) Due to this transfer. Belle holds a $1,882,320.14 secured claim, and the Debtor has neither objected to the claim nor characterized it as contingent, unliquidated, or disputed. (Claim 3.)
B. Procedural History
The Debtor’s Chapter 11 petition indicates that the nature of its business is “single asset real estate” as defined in 11 U.S.C. § 101(51B). (Dckt. 1.) The petition further designates that the Debtor is not a small business debtor as defined in 11 U.S.C. § 101(51D).
On August 30, 2013, the Debtor filed its first plan of reorganization, together with its disclosure statement (“Disclosure Statement”). (Dckts. 48-49.) The Court held a hearing on October 9, 2013 to consider approval of the Disclosure Statement, to determine the secured status of parties claiming liens on property of the estate, and to determine the value of such property pursuant to 11 U.S.C. § 506. (Dckt. 50.) The Disclosure Statement was approved by the Court on October 31, 2013. (Dckt. 70.) On December 12, 2013, the Debtor amended its plan. (First Amendment to Chapter 11 Plan Proposed Aug. 30, 2013, dckt. 83.) The Court held a confirmation hearing on December 17, 2013, which was continued to February 4, 2014. Subsequently, the Debtor filed an amended plan. (Debtor’s Amended Chapter 11 Plan Proposed Jan. 6, 2014, dckt. 93.)
Then, on January 27, 2014, the Debtor filed yet another amended plan, which is the Plan now under the Court’s consideration. (Dckt. 102.) On February 18, 2014, the U.S. Trustee filed an objection to the Plan; however, that objection was withdrawn on April 1, 2014. (Dckts. 119, 154.) Belle filed its Objection to the Plan on February 21, 2014. (Dckt. 122.) The Court then held a confirmation hearing on February 26, 2014. Next, the Debtor amended the Plan on March 11, 2014; however, it later withdrew that amendment. (Dckt. 137.) On March 13, 2014, the Debtor amended the Plan for the last time. (Dckt. 138.) The confirmation hearing was concluded on April 2, 2014, and the Court took the matter under advisement.
C. The Proposed Plan and Voting
The Foley House Inn is the Debtor’s principal asset, along with furnishings, fixtures, equipment, and cash on hand. For purposes of this case, the value of the Inn is $2,939,401.00. (Dckt. 48, at 10; dckt. 70.) The Plan creates the following four classes: Class 1 containing the allowed tax claims of governmental units entitled to priority under § 507(a)(8) of the Bankruptcy Code including the Chatham County Tax Commissioner’s and Internal Revenue Service’s claims; Class 2 containing the allowed secured claim of Belle; Class 3 containing the allowed secured claim of the U.S. Small Business Administration (“SBA”);3 and Class 4 containing all unsecured claims. (Dckt. 102, at 2-3.)
*130The Plan impairs all classes. Class 1 (taxes) voted to accept the Plan. (Dckt. 107.) Class 2 (Belle) voted to reject the Plan. (Dckt. 147.) Class 3 (SBA) voted to accept the Plan. (Dckt. 87.) Class 4 (unsecured claims) voted to accept the Plan. (Dckts. 92,113,152.)
Under the Plan, Class 1 claims will be paid in full by monthly payments of $454.00 over a five-year period starting thirty days after the Plan’s effective date. (Belle’s Ex. 11.) Belle’s secured claim in Class 2 will be paid in full by 228 monthly payments of $11,279.764 starting the first day of the month after the Plan becomes effective in addition to a final balloon payment due nineteen years after the first payment. (Dckt. 102, at 4.) The secured portion of the SBA’s claim in Class 3 will be paid in full by monthly payments of $4,610.255 until the claim is satisfied. (Dckt. 102, at 6.) The Plan further provides that Class 4 claimants will receive a pro rata share of quarterly payments of $3,000.00 for five years. Additionally, on or before seven years after the Plan’s effective date, these claimants will receive a pro rata share of $190,000.00. (Dckt. 138, at 1.)
D. Objections to the Plan
The U.S. Trustee filed an objection to the Plan on the grounds that it violated the absolute priority rule and no exception applied. (Dckt. 119.) The Foley House on Chippewa, LLC holds a large unsecured claim and likewise initially rejected the Plan.6 It changed its vote to accept the Plan because the last amendment to the Plan provides that the Debtor will pay an additional $190,000.00 to the unsecured class within seven years after the effective date of the Plan. (See dckt. 138.) After this creditor changed its vote, the U.S. Trustee withdrew its objection to confirmation because the unsecured class now accepted the Plan. As a result, the U.S. Trustee takes the position that the absolute priority rule is no longer at issue.
At the continued confirmation hearing held on April 2, 2014, only Belle’s objections to the Plan remained. In its written objection, Belle contends that confirmation should be denied for three reasons: (1) the Plan lacks good faith under 11 U.S.C. § 1129(a)(3); (2) the Plan is not feasible under 11 U.S.C. § 1129(a)(ll); and (3) the Plan violates the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B)(ii). (Dckt. 122.)
At the close of the confirmation hearing, Belle withdrew its § 1129(a)(3) objection. (Dckt. 122-1, at 8.) For the reasons set forth in Part III.C below, the absolute priority rule does not apply. Therefore, the sole remaining issue in this case is whether the Debtor’s proposed plan of reorganization is feasible under § 1129(a)(ll).
E. The Hearings on Plan Confirmation
The Court conducted evidentiary hearings on plan confirmation on February 26, 2014 and April 2, 2014. The following witnesses testified for the Debtor: Allisen Rogers; Gordon Allred (hotel industry expert); Bradley Lucas (the Debt- or’s accountant); and Jason Somers (contractor/expert). The following witnesses *131testified for Belle: Austin York (accountant/expert) and Michael Thomas (engineer/expert). The witnesses were allowed to testify out of order. Below, the Court will summarize its findings from the relevant testimony of each witness.
1. Allisen Rogers
The Debtor called Allisen Rogers as its first witness. Allisen holds an MBA in finance and worked for a number of years in New York’s financial markets. She is responsible for keeping the Debtor’s books, paying its bills, and managing its payroll. Also, she puts together the Debt- or’s financial statements and assists a local accounting firm in preparing the Debtor’s tax returns. In addition to the Rogers, the Debtor has nine employees including one salaried assistant manager.
Most of Allisen’s testimony related to the financial summaries attached to the Disclosure Statement. Based on this information. Table 1 reflects the projected cash How available to fund the plan payments, with modest surpluses remaining.
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To make income projections for the Disclosure Statement, Allisen used the Debt- or’s historical figures, which were not seriously questioned, and added a two-percent growth rate for revenues. She did not strictly follow generally accepted accounting principles. Her projected total monthly expenses of $61,369.00 remained unchanged for the three-year period, reflecting no adjustment for inflation or pay raises for employees. Her projections for repairs were $2,000.00 per month for that same period.
Allisen testified about a $238,805.00 entry in Schedule L of the Debtor’s 2011 tax return that Belle alleged represents capital improvements that should have been included as part of the Debtor’s budget. In response to a discovery request, Allisen prepared a list of asset purchases, which totaled much less. She suggested that the $238,805.00 entry may have something to do with writing off bad debt from the like-kind exchange transaction used to sell the California inn and purchase the Foley House.7 Allisen’s testimony was credible in all respects.
2. Gordon Allred
Next, the Debtor called Gordon Allred as an expert in the hotel industry to provide evidence that the Debtor’s revenues would likely increase in the foreseeable future based on industry trends and the ongoing economic recovery as a whole. Allred is the First Vice President and Senior Director of the National Hospitality Group for the firm Marcus & Millichap where he has worked for twenty-one years. Allred specializes in helping clients buy and sell hotels around the country. (Hr’g Tr. Feb. 26, 2014, dekt. 142, at 10.) He acted as the broker in the Debtor’s acqui*132sition of the California inn. Although the extent to which he had specialized knowledge about bed and breakfasts specifically was uncertain, he clearly had substantial experience in the hotel industry generally. Allred was qualified as an expert on the trends in the hotel industry and market. (Dckt. 142, at 27.) Allred characterized the Foley House as a boutique inn, in contrast to a bed and breakfast, because its revenues were sufficient to allow additional staff to be employed besides the typical husband and wife team of most bed and breakfasts. (Dckt. 142, at 15.)
Allred testified that people in his field rely on Smith Travel Research, which is a third-party reporting agency that collects data voluntarily submitted by hotels around the country. He also consults the AAA rating data, as well as online services such as TripAdvisor. Allred testified that 2008 represented a catastrophic year for the industry, but that the trends in recent years were much improved:
The Savannah market for hotels bottomed out forty to forty-two months ago and has been increasing steadily since then. So in other words, occupancy has been increasing in Savannah at about ten percent per year occupancy growth for the past forty plus months. And ADRs (average daily rates of hotels) have been increasing for the past forty months as well as RevPar, which is a combination of occupancy and ADR.... [T]he average in the country right now is about a six percent growth in revenue annually. And, that’s taking into account every market across the country, including some markets that are still declining from the recession. But you take a national average, and the growth is about six percent. And Smith Travel reports that for the foreseeable future, three to five years out, we should continue about the same rate.
(Dckt. 142, at 30-32.)
The Court finds Alfred’s testimony credible and that his projections demonstrate how conservative both Allisen Rogers and Austin York were in using projected growth rates of only two percent. If the revenue projections were closer to six percent, feasibility of the Plan would be less debatable.
3. Austin York
On the issue of feasibility, the Debtor’s financial projections were of course the focus of the greatest attention by both parties. Belle called Austin York as an expert witness. York is a Certified Public Accountant and Certified Financial Planner with Dabs, Hickman, Hill, and Cannon in Savannah, Georgia. York also spent two years after college working for the international accounting firm KPMG, LLP. York was retained by Belle to review the Debtor’s financial records and projections for the three-year period after confirmation reflected in the Disclosure Statement. York undertook to create his own projections by using some of the Debtor’s figures and making various adjustments along the way. In other words, he started from scratch so that he could make his own calculations. York did a much better job of analyzing expense categories, accounting for inflation, and otherwise cleaning up the Debtor’s calculations. For example, York added as an expense line item a payroll service fee of $46.00 per month. He also tied utility expenses to the growth in sales and factored in the same increases. Perhaps most importantly, York added a line item for distributions that the Debtor will likely need to make to the owners to pay the personal taxes they will owe on the projected taxable income generated by the business. See infra Table 2.
*133It is important to note that York’s financial analysis of the Debtor’s projected expenses and net cash flow were greatly influenced by the substantial repairs to the three buildings comprising the Foley House Inn that Belle’s engineering expert, Michael Thomas, advised must be made in the coming months and years. As discussed later in this opinion, Thomas prepared a report that provides a wide range of cost estimates ($230,000.00 to $500,000.00) for the various repairs he found would need to be made to the Foley House. (Belle Ex. 12.) He labeled one group of repairs “Immediate Attention Items” and the other “Longer Term Maintenance Items.” (Id.) York adopted these estimates for purposes of preparing his projected expenses. In other words, York built these repair estimates provided by Thomas back into the projected cash flows. Because Thomas presented ranges of repair estimates, York prepared three scenarios corresponding to low, middle, and high repair cost estimates. Scenario 1 uses the lowest cost estimates from Thomas’s report; Scenario 2 uses costs from the middle of the range provided; and Scenario 3 uses the highest cost estimates for each category of expenses.
York’s report sets forth these three sets of projections that differed only with respect to the amount of the projected costs associated with making the repairs recommended by Thomas. Because York’s Scenario 1, based on the lower end of Thomas’s repair estimates, actually supports a finding that the plan is feasible, the Court will focus on those projections. See infra Table 2.
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While the Court’s summary of Scenario 1 set forth in Table 2 reflects annual figures *134for simplicity, York’s analysis and testimony revealed that in some months there will be insufficient cash flow to make the scheduled debt payments. But. these shortfalls do not take into account cash on hand of $63,956.66 as of April 1, 2014, which would more than cover the required disbursements. (Dckt. 158, at 3.) Further, if York had adopted a six-percent growth in revenue figure as Allred suggested would be appropriate, his Scenario 1 would provide even greater support for feasibility.
York’s testimony was credible in every respect, but the Court finds that he misinterpreted the Schedule L change in basis of $238,805.00 in the Debtor’s 2011 Form 1120S. This misinterpretation caused him to include a significant expense ($33,333.00 per year) in his projections for capital improvements that may be substantially overstated. On the other hand, he was not aware of the additional $190,000.00 that the Plan, as amended, proposes to be paid to unsecured creditors after seven years when he made his projections.
York’s report concludes with opinions that correspond to his treatment of Thomas’s repair estimates:
In our opinion based on the projections calculated at CPA Projection Scenario 1, the Debtor appears to have the cash flow ability to make loan payments to creditors as listed in the proposed plan for years 2014 through 2016. Year-to-date projected totals for each of the 3 years indicate positive cash flow after servicing debt.
In our opinion based on the projections calculated at CPA Projection Scenario 2, the Debtor does not appear to have sufficient cash flow ability to make loan payments to creditors during 2014. Year-to-date projected totals for 2014 indieates[sic] negative cash flow after servicing debt. Years 2015 through 2016 indicate positive cash flow after servicing debt.
In our opinion based on the projections calculated at CPA Projection Scenario 3, the Debtor does not appear to have sufficient cash flow ability to make loan payments to creditors during 2014. Year-to-date totals for 2014 indi-eates[sic] negative cash flow after servicing debt. Years 2015 through 2016 indicate positive cash flow after servicing debt.
(Belle’s Ex. 11, at 3 (emphasis in original).) York’s projections support a finding of plan feasibility, at least with respect to Scenario 1.
4. Bradley Lucas
When the confirmation hearing resumed on April 2, 2014, the Debtor called its accountant, Bradley Lucas, as a fact witness largely to answer the mystery of the $238,805.00 change in basis that appeared in the 2011 tax return. Lucas explained that part of the original sales price from the sale of the California inn was a note from the buyers of the property. Those buyers subsequently defaulted, and it appeared in 2011 that the note was uncollectible. Accordingly, Lucas made an adjustment to the Debtor’s tax basis in the Foley House as follows:
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(Debtor’s Ex. 12.) Belle’s counsel conceded in closing argument that Belle has no grounds to refute this explanation, so the Court has taken that into consideration in evaluating York’s projections. By decreasing the capital improvements figure in York’s three scenarios, the Debtor’s projected cash flow increases.
5. Michael Thomas
As reflected in the testimony and calculations of York, Belle’s main argument regarding the Plan’s feasibility is the alleged failure of the Plan to adequately allocate funding for necessary repairs to the Inn. As observed previously, York’s financial analysis adopted the repair estimates of Belle’s engineer, Michael Thomas. Called as an expert witness, Thomas testified that on January 21, 2014, he spent a little more than one hour inspecting and photographing various areas of the Foley House that concerned him. A few days later, he prepared a written report containing seventy-five photographs, recommendations for repairs to be made in the near term (within twelve months), and recommendations to be made over a longer period. He estimated that it would cost $230,000.00 to $500,000.00 to make his recommended repairs.
Although it is clear that Thomas is well-qualified by education and experience to testify about such matters, the Court is troubled by two things. First, because his inspection lasted only one hour and he took no measurements, his cost estimates for repairs were not particularly enlightening. For example, he estimated that it would cost $10,000.00 to $100,000.00 to replace a beam in the basement of the carriage house, but he gave no details about what materials or labor would be required for that project. Secondly, Thomas speculated about the condition of the Inn. For example, he found evidence of leaks from the roof both in the attic and in the lower floors. Yet, he was unable to determine whether the leaks were active. Thomas also testified that cracks in the brick walls could be allowing water to leak through the wall, leading to the continuous deterioration of the wooden structures inside, but he was unable to confirm this was happening because of the thickness of the walls. Testimony that the exterior brick walls were two or three courses thick makes it difficult to give this concern much weight. *136The Court was left to speculate about the existence and extent of moisture issues.
6. Jason Somers
To counter Thomas’s report and testimony, the Debtor offered the report and testimony of its own expert, Jason Somers, whose analysis of the condition of the Debtor’s buildings reflected a more practical approach based on his experience as a contractor. (Dckt. 146.) Somers’s report listed what needed to be fixed, indicating no cost for repairs that the owners could make (e.g., removing a pile of debris from the roof that looked like it could fit in a trash can). He estimated that it would cost $15,412.00 to $16,912.00 to make all necessary repairs. (Dckt. 165-2.)
The divergent approaches taken by Thomas and Somers in assessing what repairs were necessary represent two ends of a spectrum. One example demonstrates this difference. In the Foley House’s courtyard, Thomas and Somers both discovered an area where the brick pavers were sunk down in a small area. Thomas testified that this condition might be caused by a sinkhole or an exposed sewer line that was washing away the dirt, two scenarios that could represent enormous structural or foundational problems. Som-ers, on the other hand, guessed that a decomposing root (from a tree that was cut down long ago) could be creating a cavity that is causing the bricks to sink. Thomas estimated that it would cost $2,000.00 to $25,000.00 to fix the sunken paver condition. In contrast, Somers estimated that it would cost $2,500.00 to $4,000.00.
It was a strategic choice for the objecting creditor to use an expert who would emphasize the need for safety, erring on the side of caution and recommending that exploratory work be performed to determine the extent of problems that were not readily apparent from a visual inspection. Time will tell, but these two approaches reflect an exacting (and expensive) analysis of needed repairs versus a more practical view of the needed repairs. The correct measure of necessary repairs that should be incorporated into the projections lies somewhere between these two extremes. By focusing on York’s Scenario 1, which incorporates Thomas’s lower range of repair estimates, the Court finds that these projected repairs will still support feasibility.
F. Debtor’s Monthly Operating Reports
By agreement of the parties, the Court has taken notice of the actual receipts figures reported in the Debtor’s monthly operating reports since March 2014. These figures compare Favorably to the projections of both Allisen Rogers and Austin York.
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*137In short, the Debtor’s revenues are outpacing projections. (Monthly Operating Reports, dekts. 157-59,164,179.)
III. CONCLUSIONS OF LAW
A. Feasibility of the Plan
Section 1129 of the Bankruptcy Code provides a list of requirements that a court must find to confirm a Chapter 11 plan. 11 U.S.C. § 1129(a). One of these requirements is commonly referred to as feasibility. More specifically, the statutory standard for feasibility is that “[cjonfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.” 11 U.S.C. § 1129(a)(ll).
Courts have interpreted this statutory standard to mean that a plan proponent, which is the Debtor in this case, has the burden to prove that the proposed plan has a reasonable prospect of success and is workable. In re Chapin Revenue Cycle Mgmt., LLC, 343 B.R. 722, 725 (Bankr.M.D.Fla.2006); see also United States v. Haas (In re Haas), 162 F.3d 1087, 1090 (11th Cir.1998). To make this determination, courts often consider the following factors: (1) the earning power of the business; (2) its capital structure; (3) the economic conditions of the business; (4) the continuation of present management; (5) the efficiency of management in control of the business after confirmation; and (6) any other related matters which determine the prospects of a sufficiently successful operation to enable performance of the provisions of the plan. E.g., In re Chapin, 343 B.R. at 725; In re 222 Liberty Assocs., 108 B.R. 971, 986 (Bankr.E.D.Pa.1990).
Chapter 11 of the Bankruptcy Code does not require a plan proponent to prove that a plan is guaranteed to succeed. Instead, the proponent must show that the plan has a “reasonable assurance of commercial viability.” In re Sentinel Mgmt. Grp., Inc., 398 B.R. 281, 318 (Bankr.N.D.Ill.2008) (internal quotation marks omitted). Stated differently, the feasibility requirement involves “a finding of reasonable probability of actual performance of the plan.” In re Oaks Partners, Ltd., 141 B.R. 453, 458 (Bankr.N.D.Ga.1992).
Based on the Court’s careful consideration of all of the testimony and other evidence presented, I conclude that the Debtor has met its burden of proof that the Plan has a reasonable prospect of success and is workable. Therefore, I find that the Plan complies with § 1129(a)(ll). Below, I will address each factor relevant to the feasibility determination in turn.
1. The Debtor’s Earning Power
As required by Rule 2015 of the Federal Rules of Bankruptcy Procedure, the Debt- or has submitted monthly operating reports. See Fed. R. Bankr.P.2015(b). As shown in Table 4 above, the Debtor’s actual revenues for March 2014 through July 2014 have exceeded the projections that it made in the Plan by $123,231.34. (Dckt. 179, at 3.) Also, Allisen gave detailed testimony about the historical income of Wet-dog, which explained the seasonal variation in the Debtor’s business, and showed a recent trend of revenue growth. The Court’s analysis of the Debtor’s earning power takes into account the fairly simple business model of a bed and breakfast. The Foley House is located in center of an extremely popular tourist destination, the historic district of Savannah, Georgia. As long as the condition and appearance of the Inn is maintained to the satisfaction of the rating agencies and advertising is ade*138quate, at least the revenue side of earnings is virtually automatic. Accordingly, the Court finds that the earning power of the Debtor weighs in favor of finding that the Plan is feasible. Cf. In re HSD Partners, LLC, No. 10-10295, 2011 WL 7268051, at *3 (Bankr.S.D.Ga. Sept. 12, 2011) (Davis, J.) (finding that a plan was not feasible where the debtor’s actual sales were below projections).
2. The Debtor’s Capital Structure
As Belle points out in the parties’ joint pretrial stipulation, the Debtor does not have any measurable equity in the Foley House based on the $2,939,401.00 value set in the Disclosure Statement in relation to the claims secured by the Inn. (Dckt. 126, at 5.) Also, the Rogers have filed a joint Chapter 13 case. Therefore, the Debtor’s access to additional capital is likely to be extremely limited. On the other hand, the Debtor had at least $45,000.00 in its bank accounts at the time of the April 2, 2014 hearing. Overall, this factor does not weigh in favor of feasibility. But, the Debtor’s situation is not unusual for a debtor that has no equity in its principal asset.
3. Economic Conditions Affecting the Debtor
As described elsewhere in this opinion, the recession that began in 2008 appears to be the major cause of the Debtor’s decline in revenues. The only evidence of future market conditions, which are by definition somewhat ■ speculative, came from the uncontradicted testimony of All-red regarding the anticipated six-percent growth in hotel revenues over the next three to five years. This figure is very significant because both the Debtor’s projections and those of York were based on the much more conservative growth rate of two percent. Therefore, this factor supports the Court’s finding that the Plan is feasible.
4. The Continuation of the Debtor’s Management
Under the Plan, the Rogers will continue in their respective roles at the Foley House. This operation is currently their only source of income, and the successful reorganization of the Debtor is the only way for them to recoup their life savings that they have poured into the business. The Court has been presented with no evidence that the Rogers’ dedication to the Debtor will falter during the life of the Plan. This factor weighs in favor of feasibility.
5. The Efficiency of the Debtor’s Management Postconfirmation
Despite the Debtor’s financial difficulties, the Rogers’ management of the Foley House appears to be competent and reasonable. They are both sophisticated businesspersons dedicated to the success of this venture, and they have proven their ability to manage the Inn while participating in this case as well as their personal bankruptcy case. Like the last factor analyzed, this factor weighs in favor of finding that the Plan is feasible.
6. Other Considerations Affecting Plan Feasibility
The core of Belle’s feasibility argument, as a factual matter, can be summarized as follows: the Debtor will need to make substantial repairs over the next few years; the Debtor does not have an adequate cash reserve to fund these repairs; and the Debtor’s income will not be sufficient to cover the cost of these repairs. (See dckt. 122, at 8-9.)
To begin, the Debtor is exceeding its financial projections and reports that it has substantial cash reserves in its accounts. *139Even if the Court assumed that the repairs recommended by Thomas will be necessary within the next few years and will cost within the ranges that he identified, York’s report, which uses financial projections that have already been proved overly conservative, shows that the Debtor will have positive cash flow for the next few years unless the worst case scenario from Thomas’s report happens. Belle misunderstands the standard for feasibility. The Debtor is not required to show that there is a 100% chance that the Plan will succeed. Instead, the Debtor is only required to show the Plan has a “reasonable prospect of success,” and the Debtor has met its burden in that regard. In re Chapin, 343 B.R. at 725.
To find otherwise, the Court would be imposing an extraordinary duty on the Debtor that is simply not mandated by the Code. Belle is an oversecured creditor with about $1 million of value protecting its interest in the Foley House, and the Court is not aware of any obligation on the Debt- or, inside or outside of bankruptcy, to restore every inch of this historic property to a pristine, new-construction-like condition. Furthermore, the fact that the Foley House continues to receive high ratings and attract customers refutes Belle’s assertion that the Inn is in disrepair in the first instance.
Based on a review of all of these factors, the Court finds that the Debtor has amply met its burden under § 1129(a)(ll).
B. Other Section 1129(a) Requirements
The Court finds that all of the other requirements in § 1129(a), including the requirement that the Plan has been proposed in good faith, have been met except § 1129(a)(8). That provision is not met because the class containing only Belle’s secured claim is impaired under the Plan, and Belle voted to reject the Plan. Therefore, the Plan must satisfy the requirements of § 1129(b) — commonly referred to as the cramdown provisions — to be con-firmable. See 11 U.S.C. § 1129(b).
C. Cramdown Requirements
Despite failing to satisfy § 1129(a)(8), the Plan may still be confirmed if it does not discriminate unfairly and is fair and equitable with respect to each impaired class that votes to reject it. 11 U.S.C. § 1129(b)(1); In re Chapin, 343 B.R. at 726. Importantly, the requirements of § 1129(b) only apply to a class and only to a class that is both impaired and votes to reject the plan. Dissenting creditors within a class that casts an affirmative vote for reorganization are afforded no additional protections by § 1129(b).
The class containing solely Belle’s secured claim is the only impaired class that has not accepted the Plan. Section 1129(b)(2)(A) provides a non-exhaustive list of what it means for a plan to be fair and equitable with respect to a class of secured claims. The Court finds that the Plan’s treatment of Belle’s claim complies with that provision and that the Plan does not discriminate unfairly with respect to Belle’s claim. Belle does not argue otherwise in its objection to the Plan. (See dckt. 122, at 9-14.)
Instead, Belle argues that the Plan violates the absolute priority rule and that the Rogers $25,000.00 personal contribution to pay the Debtor’s tax obligations is insufficient to satisfy the elements of the new value exception. This argument is completely without merit. The statutory source of the absolute priority rule is contained in § 1129(b)(2)(B), which provides a non-exhaustive list of what it means to be fair and equitable with respect to a class of unsecured claims that does not accept a proposed plan. The only class of unsecured claims in this case voted to accept *140the Plan. Therefore, the fair and equitable requirement of § 1129(b) does not apply to that class and the absolute priority rule of § 1129(b)(2)(B)(ii) is not implicated by extension. See In re Adelphia Commc’ns Corp., 544 F.3d 420, 426 (2d Cir.2008) (noting that a plan does not need to satisfy the absolute priority rule with respect to an impaired class that votes to accept the plan). The Court will enter a separate order consistent with these Findings of Fact and Conclusions of Law.
. See Fed.R.Evid. 201; In re Henderson, 197 B.R. 147, 156 (Bankr.N.D.Ala.1996).
. Chippewa Square was made famous in popular culture as the site of the bus stop scenes in the movie Forest Gump.
. The SBA is successor in interest to the Debt- or’s note to Community National Bank.
. This payment amount is based on a twenty-five year amortization period at 5.25% interest.
. This payment amount is based on a twenty-five year amortization period at 2.25% interest.
.Foley House on Chippewa, LLC’s claim arises from its sale of the Inn to Wetdog where it financed $200,000.00 of the purchase price. Its lien is third-in-priority with respect to the Foley House; however, the value of Belle’s and the SBA’s secured claims exceed the value of the Inn.
. Allisen's inference was correct as Bradley Lucas's testimony later revealed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497565/ | OPINION AND ORDER GRANTING AMENDED APPLICATION FOR REIMBURSEMENT OF ADMINISTRATIVE EXPENSE
EDWARD J. COLEMAN, III, Bankruptcy Judge.
Byron Jarriel’s (“Debtor ”) most valuable assets are farming equipment and land. A few months before the Debtor filed his Chapter 12 petition, he allowed his insurance coverage to lapse on a 1990 John Deere Combine Model 9600 (“Combine”) and a 1994 John Deere Flex Header Model 920 (“Flex Header ”). After filing his petition, the Debtor continued to fail to insure the equipment. Acting under its loan documents with the Debtor, Tippins Bank and Trust (“Bank”) obtained forced-place insurance on the Combine and Flex Header. Due to an inadvertent error, the Bank released its lien on all of its collateral, including the Combine and Flex Header, without first being reimbursed for the insurance expenses. Because the cost of insuring this equipment postpetition is among “the actual, necessary costs and expenses of preserving the estate” within the meaning of 11 U.S.C. § 503(b)(1)(A), the Court will allow the Bank’s request for payment of an administrative expense as modified below.
Before the Court is the Amended Application for Reimbursement of Administrative Expense (“Application”) (dckt. 117) filed by the Bank. On April 15, 2014, the Court held a hearing on the original version of the Application (dckt. 96). At the hearing, the Debtor objected to the Bank’s request on the grounds that the amount of the insurance premiums are unreasonably high; the insurance coverage was unnecessary because the Bank’s collateral exceeded the amount of its loan by a large margin; and the Bank cannot now seek reimbursement of the expenses because it has released its collateral. The Court heard testimony from the Debtor and the Bank’s President, C. Paul Eason. After the hearing, the Bank amended its administrative expense request to reduce the amount sought by the amount of premium refunds that it had received. (Dckt. 117.) Both parties have submitted briefs on the issues raised at the hearing. (Dckts. 121-22.)
I. JURISDICTION
This Court has jurisdiction pursuant to the following sources: sections 151, 157(a), and 1334(b) of Title 28 of the United States Code and the United States District Court for the Southern District of Georgia’s Order dated July 13, 1984, which refers all cases under Title 11 of the United States Code to the bankruptcy judges in the district. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(B). Furthermore, venue is proper. See 28 U.S.C. §§ 1408-1409. In accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure, I make the following Findings of Fact and Conclusions of Law.
II. FINDINGS OF FACT1
A. Introduction
The Bank was an oversecured creditor in this Chapter 12 case and had every expectation that its debt would be paid in full. Indeed, the Debtor’s original con-*143finned plan provided that the Bank’s claims of $38,806.62 and $9,666.08, which were cross-collateralized by 43.85 acres of land (“Tattnall Property ”), a mobile home, the Combine, and the Flex Header, would be paid in full plus interest over a nine-year period. (Dckt. 61, at 6-7.) After the plan was confirmed, the Debtor instead elected to sell, with the Court’s approval, the Tattnall Property, which should have extinguished the Bank’s debt entirely. (Dckts. 82, 90.) Unfortunately, when the closing took place, the Bank neglected to include the cost of the forced-place insurance premiums for the Combine and Flex Header when it quoted its loan payoff figure. The Bank now seeks to be reimbursed for those premiums as an administrative expense, and the Debtor opposes that request.
B. The Bank’s Claims and Collateral
The Debtor filed this Chapter 12 case on February 2, 2013. (Dckt. 1.) In his schedules, the Debtor listed the Bank as a creditor with a fully secured claim of $37,759.74. (Dckt. 11, at 11.) In Schedule D, the Debtor lists the following property as collateral securing the Bank’s claim: the Tattnall Property, the Combine, and the Flex Header. According to Schedule A, the value of the Tattnall Property is $55,200.00. (Dckt. 11, at 4.) According to Schedule B, the value of the Combine is $40,000.00 and the Flex Header is worth $8,000.00. (Dckt. 11, at 8.)
The Bank has filed two proofs of claim in this case, and the Debtor did not object to either claim. The first claim is for $38,806.62 and is secured by the Tattnall Property and a UCC-1 on a the Combine and Flex Header. (Claim 2.) The second claim is for $9,665.08 and is secured by 1.85 acres and a double-wide mobile home owned by the Debtor’s son as reflected in the commercial security agreement attached to the proof of claim. (Claim 3.)
C. The Debtor’s Obligation to Insure Collateral
On February 17, 2012, the Debtor executed a promissory note and security agreement in the original principal amount of $35,837.75. (Bank’s Ex. 1.) The note was secured by the Tattnall Property, the Combine, the Flex Header, and equipment attached thereto or later acquired. The Security Agreement also included the following provision regarding the Debtor’s obligation to insure the equipment:
19. INSURANCE. I agree to obtain the insurance described in this Loan Agreement.
B. Property Insurance. I agree to keep the Property Insured against the risks reasonably associated with the Property. I will maintain this insurance in the amount you require. This insurance will last until the Property is released from this Loan Agreement....
I will immediately notify you of cancellation or termination of Insurance. If I fail to keep the Property Insured, you may obtain insurance to protect your Interest in the Property and I will pay for the Insurance on your demand. You may demand that I pay for the Insurance all at once, or you may add the Insurance premiums to the balance of the Secured Debts and charge interest on it at the rate that applies to the Secured Debts. This insurance may include coverages not originally required of me, may be written by a company other than one I would choose, and may be written at a higher rate than I could obtain if 1 purchased the insurance....
*144(Bank’s Ex. 1.)
Counsel for the Debtor stated that the Debtor insured the Combine and Flex Header until August 20, 2012 but failed to do so after that date.2 The Bank did not dispute this statement. At the § 341 meeting of creditors held on March 7, 2013, counsel for the Debtor told Eason that the Debtor would obtain the required insurance. But, for some reason not explained, he never did.
D. The Bank’s Acquisition of Insurance and Payment of Premiums
The Bank spent $4,132.00 on insurance premiums for the Combine and Flex Header. (Dckt. 117, ¶ 2.) More specifically, on March 13, 2013 (after the petition date), the Bank paid (as reflected in the Bank’s debit transaction form) $1,553.00 to insure the Combine and $513.00 to insure the Flex Header, or a total of $2,066.00 for the period of August 12, 2012 to August 12, 2013. (Bank’s Exs. 3-5.) Similarly, on October 22, 2013, the Bank paid the insurance premiums again, in the same amounts, or a total of $2,066.00 for the period of August 12, 2013 through August 12, 2014. (Bank’s Exs. 6-9.)
E. The Bank’s Release of Collateral
On January 22, 2014, the Debtor filed the Motion to Sell (dckt. 84), which sought the Court’s approval to sell the Tattnall Property and the mobile home for $70,000.00. The Bank had a first-priority lien, so the proceeds should have satisfied its debt in full. The sale was approved by this Court’s Order of February 25, 2014 (“Sale Order ”) (dckt. 90). The Sale Order provided for the disbursement of proceeds as follows:
(a) Payment to Tippins Bank and Trust in the amount of $51,775.31 as of 1-17-14 with interest accruing at the rate of $6.97/day each day thereafter through the date of closing;3
(b) Payment of all real estate taxes due through 12-31-13 in the amount of $926.12 including any penalties and interest through the date of closing;
(c) Payment to Crop Production Services, Inc. in the amount of $5,000.00;
(d) Payment of all remaining net proceeds to A. Stephenson Wallace, Chapter 12 Trustee.
(Dckt. 90, at 1 (footnote added).) The Sale Order further provided: “Upon receipt of the funds from the sale, [the Bank] shall cancel its security deeds, and otherwise release any interest it has upon the real property described in the attached Sales Agreement and release any of Debtor’s personal property which may be collateral to [the Bank].” (Dckt. 90, at 1 (emphasis added).) The Sale Order was consented to by the Bank’s attorney of record. (Dckt. 90, at 2.)
The sale apparently occurred some time prior to March 26, 2014 because the Debt- or’s amended plan reflects that “all principal and interest owing to [the Bank] has been paid in full” from the sale of the Tattnall Property and the mobile home. (Dckt. 107, at 6-7.)
After receiving its payment from the Tattnall Property sale, the Bank held up its end of the bargain by cancelling its *145security interests in all of its collateral. The Bank also cancelled its insurance coverage on the Combine and Flex Header once the Tattnall Property sale occurred, and it was refunded portions of the premium amounts.4 The Bank contends, and the Debtor does not dispute, that the $51,775.31 payoff figure that was disbursed to the Debtor did not include the insurance premiums that are the subject of the Application. Simply put, the Bank made a mistake.
III. CONCLUSIONS OF LAW
Section 503 of the Bankruptcy Code controls what may be allowed and paid as an administrative expense. For the most part, administrative expenses are expenses incurred by the estate postpetition and are given priority over most prepetition claims. See Paul R. Hage & Patrick R. Mohan, Recent Developments in Section 50S — Administrative Expenses and Key Employee Retention, Incentive and Severance Plans, 2014 Ann. Surv. Bankr. L. 617, 617 (William L. Norton, Jr. et al. eds., 2014). “Section 503 gives priority to creditors who incur costs in the preservation of a bankrupt business, such as rent or compensation for ongoing, post-petition operations. This encourages parties to conduct business with a post-petition debtor because such administrative claims are accorded the first level of priority and are paid in full before claims in a lower category.” Park Nat'l Bank v. Univ. Centre Hotel, Inc., No. 1:06-cv-00097-MP-AK, 2007 WL 604936, at *5 (N.D.Fla. Feb. 22, 2007).
Under § 503(b)(1)(A), administrative expenses include the “actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A). One reason that these expenses are awarded priority is to prevent the unjust enrichment of the bankruptcy estate. See In re Sanjeev and Rajeev, Inc., 411 B.R. 480, 482 (Bankr.S.D.Ga.2008) (Davis, J.). “Despite the expansiveness with which the administrative expense category may be treated, such judicial construction is limited by the countervailing doctrine that section 503 priorities should be narrowly construed in order to maximize the value of the estate preserved for the benefit of all creditors.” Varsity Carpet Servs., Inc. v. Richardson (In re Colortex Indus., Inc.), 19 F.3d 1371, 1377 (11th Cir.1994) (citing Otte v. United States, 419 U.S. 43, 53, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974)).
Regarding the timing of an administrative expense request, Bankruptcy Code § 503 provides in relevant part:
(a) An entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.
11 U.S.C. § 503(a). Therefore, the Bank must first show that it filed a timely request for an administrative expense or be excused from the timeliness requirement “for cause.” 11 U.S.C. § 503(a). The parties acknowledge that the Court has not *146set a bar date for administrative expense claims and no such bar date was ever requested.5 Accordingly, the Application will be deemed timely for purposes of § 503(a).
A. The Two-Prong Test
“Courts generally apply a two-prong test to determine whether a claim qualifies as an administrative expense: (1) the expense must have arisen from a post-petition transaction between the creditor and the debtor, and (2) the expense must have been ‘actual and necessary’ to preserve the estate.” In re New Century TRS Holdings, Inc., 446 B.R. 656, 661 (Bankr.D.Del.2011). “There must be an actual concrete benefit to the estate before a claim is allowable as an administrative expense.” Broadcast Corp. of Ga. v. Bro-adfoot (In re Subscription Tel. of Greater Atlanta), 789 F.2d 1530, 1532 (11th Cir.1986). The Bank, as the movant, has the burden to prove by a preponderance of the evidence that the administrative expense request should be allowed. See In re Sports Shinko (Florida) Co., Ltd., 333 B.R. 483, 492 (Bankr.M.D.Fla.2005).
Regarding the first prong, the Court finds that the expense arose, in part, out of a postpetition transaction, as shown by the dates on the insurance certificates obtained by the Bank. That is, the period of the insurance coverage paid for by the Bank was August 12, 2012 to August 12, 2014, which included a prepetition period. (Dckts. 4-5, 8-9.) Moreover, the Court finds that the transaction was between the creditor and the Debtor because the security agreement contemplated the Bank purchasing this insurance if the Debtor decided to keep the Bank’s collateral without obtaining insurance himself.
As to the second prong, the Court has no difficulty finding that the cost to insure these valuable estate assets are an actual and necessary expense. With exceptions not relevant here, a Chapter 12 debtor in possession has the rights and powers and must perform the “functions and duties ” of a Chapter 11 trustee, “including operating the debtor’s farm.” 11 U.S.C. § 1203 (emphasis added). The necessity of insuring estate property, as a general matter, cannot be seriously questioned. See Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 226 F.3d 237, 243 (3d Cir.2000) (“If one is appointed, a trustee is an officer of the Court having certain fiduciary duties. If a trustee is not appointed, the debtor-in-possession assumes those fiduciary duties the same as would an appointed trustee. Included among the fiduciary duties of a debtor-in-possession is protecting and conserving estate assets for the benefit of creditors. This is a paramount duty of a trustee or, as the case may be, of a debtor-in-possession.” (citations omitted)); Campbell-Erskine Apothecary, Inc., 302 B.R. 169, 174 (Bankr.W.D.Pa.2003) (“Insuring estate property against loss or destruction is one of the fundamental aspects of this fiduciary duty. Failure to do so can have ‘dramatic consequences,’ including dismissal of the bankruptcy case for cause in accordance with § 1112(b) of the Bankruptcy Code.” (quoting In re Ind. Walnut Prods., Inc., 136 B.R. 522, 525 (Bankr.N.D.Ind.1991))). In *147this case, insuring the Combine and Flex Header was especially important because the loss of those significant assets would have had severe economic consequences to the bankruptcy estate and the postpetition failure to insure the equipment would have likely constituted cause for stay relief under § 362 of the Bankruptcy Code. Therefore, when the Bank took action to insure property of the bankruptcy estate, it was doing something that the Debtor clearly should have done. Further, it is immaterial that the Debtor never made a claim under the insurance policies; the actual benefit it received was the protection from risk of loss during the coverage period.6
For those reasons, the Court finds that the second prong of the test is satisfied and that the insurance premiums were actual and necessary expenses to preserve the estate. However, as explained more thoroughly in Part III.B.4 below, a portion of the premiums related to a prepetition period.7 Expenses attributable to that period are not necessary to preserve estate property because the bankruptcy estate was not yet in existence. See 11 U.S.C. § 541(a).
B. The Debtor’s Objections
In his brief, the Debtor argues that the Bank’s request for an administrative expense should not be allowed because (1) the Bank failed to prove it actually paid the premiums; (2) it was unnecessary to purchase insurance because the Bank was oversecured and the amount paid for the insurance was unreasonable; (3) the amount requested includes prepetition amounts; and (4) the request is precluded by the Sale Order or the plan confirmation order due to estoppel or res judicata. The Court will address each of these objections in turn.
1. Actual Expenses
The Debtor’s counsel argued at the conclusion of the hearing that the Bank failed to prove that it had actually paid the premiums. The Court finds that the certificates of insurance were issued and that the Bank’s records show the payments for the insurance. This is sufficient proof that the payments were actually made. As discussed below, however, not all of the premiums paid may qualify to be an allowed administrative expense.
2. Necessity and Reasonableness of the Expenses
Regarding the necessity of the expenses incurred in this case, the Debtor questions both the amount of the premiums incurred and the need to obtain insurance when the Bank had other collateral that was sufficient to cover its notes. As to the amount of the premiums, the Court is not persuaded that the premiums were unreasonable. Eason acknowledged that forced-place insurance is more expensive, but the Court is left to speculate as to the reasons that might be true. The Debtor testified about a policy he had been offered that seemed to reflect substantially lower premiums for the two pieces of collateral at issue. (Debtor’s Ex. 1.) But, as the Bank’s counsel pointed out, the policy quote covered numerous items (raising the question of whether a quantity discount was at work), and the deductible was $1,000.00 per loss on the Debtor’s policy quote compared to the $175.00 deductible under the Bank’s policies.
*148The Debtor misunderstands the aim of “necessary” regarding administrative expenses. What matters is that what the expense is used for is necessary to preserve the bankruptcy estate, which is clearly met. See supra Part III.A. It is immaterial whether the insurance coverage was necessary to protect the Bank’s secured claim; that is an adequate protection argument. Accordingly, the Court concludes that the premiums are necessary expenses of preserving estate property.
3. Expenses After the Commencement of the Case
The Bank asserts that these insurance expenses are compensable under § 508(b)(1)(A). Section 503(b)(1)(A) expenses are limited to postpetition expenses. In this case, the Bank requests administrative expense status for insurance premiums paid postpetition but for insurance coverage that extended prepetition. It is unclear how (or why) coverage issued on March 26, 2013 was made retroactive to August 12, 2012, but only the insurance coverage relating to the postpe-tition period may qualify as an administrative expense under § 503.
Nevertheless, the Court can allocate the total premium between the prepetition and postpetition periods to arrive at the correct figure. See In re Payless Cashways, Inc., 305 B.R. 303, 308 (Bankr.W.D.Mo. 2004) (calculating a per diem value of the insurance coverage by dividing the value of the services provided by the total number of days covered by the policy). The total cost to insure the Combine and Flex Header was $2,066.00 for the period of August 12, 2012 to August 12, 2013. Therefore, the per diem value of the insurance was about $5.66.8 Because I find that 174 days of the policy period were attributable to prepetition coverage, I calculate the total amount the insurance expenses attributable to prepetition coverage to be $984.84.
4. Preclusive Effect of the Sale Order and the Plan Confirmation Order
The premiums paid by the Bank represent a component of the debt owed by the Debtor. When the bank quoted its payoff amount for purposes of the sale closing, which was incorporated into the Court’s Sale Order, the Bank forgot to include the cost of insurance; however, the Sale Order does not preclude the Bank from requesting the allowance of an administrative expense. The Sale Order only limits the Bank’s rights in one way. It requires the Bank to cancel its security deeds upon the real property and release its security interests in the Debtor’s personal property. The Sale Order does not recite that the Bank will forfeit all right to be reimbursed for past expenses or claim that it is still owed money by the Debtor due to consenting to the Sale Order.
Similarly, confirmation of the Debtor’s amended plan did not remove the Bank’s right to seek reimbursement for these expenses. Paragraph 8(i) of the Debtor’s confirmed plan provides that “Administrative expenses shall be paid in full as may be approved by the Court.” (Dckt. 107, at 2.)
Stated plainly, the doctrines of collateral estoppel and res judicata are not applicable in this case. The issue of whether the premiums may be an allowed administrative expense was never litigated or otherwise presented to the Court until the Bank filed the Application, and the Bank has never taken a position “clearly inconsistent” with its request to be paid an admin*149istrative expense. Perry v. Blum, 629 F.3d 1, 9 (1st Cir.2010).
IV. CONCLUSION
Under the facts and circumstances of this case, the Court will not penalize the Bank for being proactive and doing what the Debtor should have done. Cf. Tavormina v. Weiner (In re Alchar Hardware Co.), 759 F.2d 867, 868-69 (11th Cir.1985) (reversing a lower court’s administrative expense award to the debtor’s lessor for the debtor’s electrical utility deposit because it did not arise postpetition and not for the reason that the expense was incurred by the lessor on the debtor’s behalf). As an equitable matter, the Debtor continued to enjoy possession of the Combine and Flex Header and, therefore, had postpetition obligations with respect to that collateral. See In re Trimurti Investments, Inc., No. 6:12-bk-5071, 2012 WL 3061159, at *2 (Bankr.M.D.Fla. July 26, 2012). It is important to note that the Court is not holding that the Bank is entitled to an administrative expense because it held a note that gave it the right to obtain forced-place insurance. The Court does hold that the insurance premiums in this case are administrative expenses under § 503(b)(1)(A) in light of the fact that the Bank acted in good faith and released its liens, the Debtor had a duty as a debtor in possession to insure the Combine and Flex Header, and the Bank, as a previously oversecured creditor, only seeks reimbursement for what it would have already received if not for its error. After taking into account refunds and the amount of the premiums attributable to prepetition coverage, the actual and necessary expenses of preserving the estate totals $2,208.16 ($3,193.00 minus $984.84).
ORDER
The Application (dckt. 117) is GRANTED as modified above. The Bank shall be ALLOWED administrative expense claim of $2,208.16.
. The Court takes judicial notice of certain facts in the docket of this case. See Fed. R.Evid. 201. The following facts were either proven or are the proper subject of judicial notice.
. The Bank tendered an exhibit, which was a letter from Georgia Farm Bureau Mutual Insurance Company to the Bank, that suggested the insurance coverage may have been canceled on January 8, 2012. (Bank’s Ex. 2.) That letter also stated that specific information concerning the cancellation had been provided to the insured. (Id.)
. The Motion to Sell reflected a payoff of $50,904.23 as of January 17, 2014 with the same per diem of $6.97. (Dckt. 82, at 2.)
. At the April 15, 2014 hearing, the Bank’s counsel announced that certain premium refunds would be credited against this amount. The Court instructed counsel to amend its application to show a more detailed calculation of the premiums paid and the refunds for unearned premiums. The relevant paragraph that was added to the Application reads:
Following the sale of the Bank’s real estate collateral, the Bank released the combine and the flex header and received a refund of $706.00 on the combine and $233.00 on the flex header. When these amounts are credited to the force-place insurance premiums, the amount owing to the Bank is $3,193.00.
(Id., ¶ 3.) As will be addressed below, only a portion of the $3,193.00 represents postpetition expenses paid by the Bank.
. See Hall Fin. Grp. v. DP Partners, Ltd. P’ship (In re DP Partners Ltd. P’ship), 106 F.3d 667, 672 (5th Cir.1997) ("[Section 503(a)] appears intentionally vague and broad. Legislative history reveals that Congress intended to leave the setting of specific filing deadlines to the Rules of Bankruptcy Procedure. The Rules of Bankruptcy Procedure, in turn, largely defer that duty to the bankruptcy judges. As a result, bankruptcy judges have, for some time, been accorded discretion in setting administrative-claim bar-dates.” (footnotes omitted)).
. Eason testified that the Combine had actually "burned” once before under a prior policy.
. In the Application, the Bank acknowledges that $986.58 may be "apportioned” to a pre-petition time period. (See dckt. 117, ¶4.)
. The Court assumes that the cost of the insurance roughly equals its value because no persuasive evidence was presented to rebut this assumption. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497566/ | HOFFMAN, Bankruptcy Judge.
Noreen Wiscovitch-Rentas, the chapter 7 trustee, appeals from a bankruptcy court order granting summary judgment (the “Order”) in favor of the defendant-appel-lee, PDCM Associates, S.E. (“PDCM”), on her preference complaint. For the reasons discussed below, we REVERSE the Order, VACATE the judgment, and REMAND to the bankruptcy court for further proceedings, consistent with this opinion.
BACKGROUND
On March 18, 2009, the debtor, PMC Marketing Corp. (the “Debtor”), filed a petition for relief under chapter 11 of the Bankruptcy Code.1 On the petition date the Debtor operated a chain of pharmacies leasing stores in shopping centers including three owned by PDCM at the Corozal Plaza Shopping Center, in Corozal, Puerto Rico, the Victory Shopping Center in Bay-amón, Puerto Rico, and the Rio Grande Plaza in Rio Grande, Puerto Rico.
In May 2010, the bankruptcy court converted the Debtor’s chapter 11 case to chapter 7 and Ms. Wiscovitch-Rentas was appointed as the chapter 7 trustee. In March 2012, the trustee filed a single-count complaint against PDCM pursuant to § 547, seeking to avoid as preferential transfers certain payments from the Debt- or to PDCM totaling $99,061.78.
Included in the trustee’s claim were two payments made by the Debtor for rent on its Corozal store. The payments were by check, each in the amount of $15,128.99. Each check covered one month’s rent.2 *152The Debtor issued the first cheek on October 31, 2008, and the second on November 28, 2008. PDCM cashed both checks on February 3, 2009.
After answering the complaint, PDCM filed a motion for summary judgment. In its accompanying memorandum of law, PDCM explained that the challenged transfers were all lease payments which the Debtor had made in connection with its store leases at the Corozal, Victory and Rio Grande shopping centers. PDCM argued that the lease payments in connection with the Victory and Rio Grande leases were not preferences because those leases had been assumed by the Debtor in the chapter 11 case pursuant to § 365 which required all pre- and post-petition rent arrearages to be paid in full. As for the two $15,128.99 lease payments for the Co-rozal store, PDCM argued that the trustee could not recover those payments as preferences because the Debtor’s continued post-petition occupancy of the Corozal store constituted “new value” within the meaning of § 547(c)(4), the Debtor’s receipt of which relieved PDCM of the obligation to return the otherwise avoidable transfers.
The trustee opposed PDCM’s motion and filed a cross-motion for summary judgment. In her opposition, she conceded that any lease payments made by the Debtor on account of the Victory and Rio Grande leases were not recoverable, as the Debtor had assumed those leases. In her cross-motion for summary judgment, the trustee asserted that the challenged Corozal rent payments satisfied all of the requirements for a preferential transfer under § 547.3 With respect to the two payments made in connection with the Co-rozal store, she argued that the § 547(c)(4) new value defense was unavailable to PDCM because for the defense to apply, the creditor must have provided the alleged new value prior to the filing of the bankruptcy petition and the new value must not have been repaid with an “otherwise unavoidable transfer.” The trustee maintained that: (1) PDCM supplied new value “mostly post-petition;” and (2) the Debtor paid for any new value conferred by PDCM post-petition with “otherwise unavoidable transfers,” namely, twelve post-petition rent payments totaling $150,539.49. Alternatively, she asserted that if PDCM could be said to have given new value, it had not given sufficient new value to offset those payments in full. Rather, she claimed, PDCM was entitled to a partial offset of $21,855.22, and that she should recover at least $8,372.75, representing the difference between the voidable preferential transfers and the new value conferred by PDCM.4
The bankruptcy court granted PDCM’s motion for summary judgment, without a hearing, on December 23, 2013. In its Opinion and Order the court stated:
The motion for summary judgment before this Court presents us with the question: Can the continued use of a real property after the lessee fails to comply with his payment obligation be understood to be “new value” under ... § 547(c)(4)? This Court finds that Southern Technical College, Inc. v. Hood, 89 F.3d 1381 (8th Cir.1996) is persuasive. There, the debtor, a college *153institution, failed to timely make its payments for the lease of nonresidential real property. Said payments were made one month later. After it sought bankruptcy relief, the debtor college filed a complaint to seek out the avoidance of the late payments made to the lessor during the preferential period. The court granted summary judgment to the defendant, holding that, even though the payments sought to avoid [sic] were indeed preferential transfers, the debtor had received subsequent new value for the payments for which avoidance was sought. The District Court affirmed the bankruptcy court and the issue was further appealed to the Court of Appeals for the 8th Circuit. The Court of Appeals determined that a lessee receives new value from its lessor when it continues to use and occupy the rented property. The subsequent late payment of the rent owed will not be avoidable, even when it is a preferential transfer, if the continued use occurred before the filing for bankruptcy relief and after the preferential transfer.
The factual similarity between Hood and the case at bar enables this Court to apply the same legal analysis that was employed there. In the instant case, the Debtor received two months of continued use, in essence rent free, of the leased property even when it failed to pay the required rent and maintenance fees. Afterwards, but still pre-petition, the Debtor tardily paid the rent and maintenance owed to the lessor. The Trustee’s avoidance action ensued. Being as there is no trial-worthy issue of law, this Court determines that the transfers made as late payment of rent and maintenance fees by the Debtor, where it remained in continued use of the property, are unavoidable transfers even though they were made during the preferential period. The Debtor received subsequent new value as defined in [§] 547(c)(4), consisting of the continued use of the nonresidential real property. This, in turn, benefit[t]ed the Debtor by allowing it to continue its business operations in the property.
On the same date, the bankruptcy court entered judgment in favor of PDCM and dismissed the trustee’s complaint with prejudice.5
One week later, the trustee filed a motion for reconsideration, asserting that the bankruptcy court erred in failing to acknowledge that: (1) the alleged new value provided by PDCM did not exceed $21,855.22; and (2) the alleged new value was wholly repaid by otherwise unavoidable transfers totaling $150,589.49. The trustee also urged the bankruptcy court to “take into account that the December 23, 2013 Opinion and Order [wa]s in direct opposition to a previous Opinion and Order entered in a related, but nearly identical case. See PMC v. BPP Retail Properties, LLC, Case No. 12-0093, Dkt. No. 47.”6 As an alternative to reconsideration, the trustee asked the court to issue further *154findings pursuant to Fed.R.Civ.P. 52(b), including but not limited to the following:
1. “The transfers occurred on February 3, 2009.”
2. “There are only forty-four (44) days between the date of the payments and the date of the filing of the petition.”
3. “Any possible new value accumulated by the Plaintiff would be for the 44 days of rent accumulated between the date of the payments and the date of the filing of the petition.”
4. “A quick calculation of the rent accrued during the aforementioned dates shows that the rent for the 44 days is approximately $21,885.22.”
5. “The difference between the amount of the transfer and the alleged new value is $8,372.75.”
6. “The transfers were to a creditor of the Debtor, on account of an antecedent debt, during the 90-day period prior to the filing of the petition, while the Debt- or was insolvent and which would allow the creditor to receive more than it would under a Chapter 7 liquidation.”
7. “Debtor made twelve (12) payments for a total amount of $150,539.49 in payments on account of rent for the Property after the filing of the petition.”
PDCM opposed reconsideration, reiterating that the Debtor received new value after making the alleged preference payments in the form of its continued use and occupancy of the Corozal store for the months of February and March 2009, for which rent remained unpaid as of the petition date. The court denied reconsideration in an order entered on March 4, 2014. This appeal ensued.
In her notice of appeal, the trustee indicated that she was appealing the order granting PDCM’s summary judgment motion as well as the order denying her reconsideration motion. However, because both her statement of issues and her brief on appeal are silent regarding the denial of reconsideration, we consider the appeal of the March 4, 2014 order denying reconsideration waived. Garcia-Ayala v. Lederle Parenterals, Inc., 212 F.3d 638, 645 (1st Cir.2000) (holding that failure to brief an argument constitutes waiver); City Sanitation, LLC v. Allied Waste Servs. of Mass., LLC (In re Am. Cartage, Inc.), 656 F.3d 82, 91 (1st Cir.2011) (holding that issue omitted from statement of issues is waived).7
The trustee identifies two issues on appeal:
I. Whether the Bankruptcy Court erred in granting the Defendant’s Motion for Summary Judgment, in as much as [sic] the “new value” defense does not apply because the alleged “new value” provided by the Defendant was later paid by an otherwise unavoidable transfer.
II. In the alternative, whether the Bankruptcy Court erred in granting the Defendant’s Motion for Summary Judgment and dismissing the complaint in full, in as much as [sic] the amount of the alleged “new value” provided by the defendant does not cover the whole of the preferential transfer.
On appeal, the parties largely reiterate the arguments presented in the bankruptcy court. PDCM amplifies its § 547(c)(4) defense in its brief, asserting that “[t]here is no evidence of subsequent payment for the Corozal Shopping Center premises ... by an ‘otherwise unavoidable transfer,’ ” and that there is no evidence of any post-*155petition payment toward the new value in question, namely two months of unpaid pre-petition rent. PDCM also rejects the trustee’s argument that PDCM gave only 44 days of new value, newly asserting that the lease for the Corozal store was not subject to proration on a daily basis and thus two full months of new value should be applied.
JURISDICTION
A bankruptcy appellate panel is “duty-bound” to determine its jurisdiction before proceeding to the merits even if not raised by the litigants. Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724, 725-26 (1st Cir. BAP 1998) (internal quotations and citation omitted). 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) (internal quotations, citation, and footnote omitted). An order “granting summary judgment is a final order for purposes of appeal.” Cadle Co. v. Andersen (In re Andersen), 476 B.R. 668, 671 (1st Cir. BAP 2012) (internal quotations and citation omitted).
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. Lessard v. Wilton-Lyndeborough Coop. Sch. Dist., 592 F.3d 267, 269 (1st Cir.2010) (citation omitted). A factual 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. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (internal quotations and citation omitted).
DISCUSSION
I. The Legal Standards
A. Summary Judgment
“In bankruptcy, summary judgment is governed in the first instance by Bankruptcy Rule 7056.” Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 762 (1st Cir.1994); see also Soto-Rios v. Banco Popular de P.R., 662 F.3d 112, 115 (1st Cir.2011). “By its express terms, the rule incorporates into bankruptcy practice the standards of Rule 56 of the Federal Rules of Civil Procedure.” In re Varrasso, 37 F.3d at 762 (citations omitted); see also Soto-Rios v. Banco Popular de P.R., 662 F.3d at 115; Fed. R. Bankr.P. 7056; Fed. R.Civ.P. 56.8 “It is apodictic that summary judgment should be bestowed only when no genuine issue of material fact exists and the movant has successfully demonstrated an entitlement to judgment as a matter of law.” In re Varrasso, 37 F.3d at 763 (citation omitted). “As to issues on which the nonmovant has the burden of proof, the movant need do no more than aver an absence of evidence to support the nonmoving party’s case.” Id. at 763 n. 1 (internal quotations and citation omitted). “The burden of production then shifts to the nonmovant, who, to avoid summary judgment, must establish the existence of at least one question of fact that is both genuine and material.” Id. (inter*156nal quotations and citation omitted). The “mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “The inquiry performed is the threshold inquiry of determining whether there is the need for a trial — whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party.” Id. at 250, 106 S.Ct. 2505.
B. Preferences and the § 547(c)(4) Defense
“Payments by a debtor to a creditor ‘for or on account of an antecedent debt’ made during the ninety days immediately preceding the filing of a bankruptcy petition (and that meet other criteria) are preferential transfers or ‘preferences.’ ” Bogdanov v. Avnet, Inc., No. 10-CV-543-SM, 2011 WL 4625698, at *2 (D.N.H. Sept. 30, 2011) (quoting 11 U.S.C. § 547(b)). “In unofficial ... terms, a preference is a transfer of the debtor’s property on the eve of bankruptcy to satisfy an old debt.” Id. (internal quotations and citations omitted).
“Preferences may be avoidable (i.e., voidable) by the trustee.” Id. at *3 (citing 11 U.S.C. § 547(b)). “If a preference is avoided, ‘the trustee may recover, for the benefit of the estate, the property transferred.” Id. (quoting 11 U.S.C. § 550(a)). “Avoiding preferences generally puts creditors on equal footing with each other for the purpose of distributing the debtor’s estate, and discourages ‘creditors from hastily forcing troubled businesses into bankruptcy.’ ” Id. (quoting Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 40 (2d Cir.1996)). “The trustee carries the burden of proof on all elements of a preference listed in § 547(b).” Phoenix Rest. Grp., Inc. v. Proficient Food Co. (In re Phoenix Rest. Grp., Inc.), 373 B.R. 541, 546 (M.D.Tenn.2007) (citing 11 U.S.C. § 547(g)).
“The preference defendant may raise one or more of eight statutory defenses, which are listed in § 547(c), and the preference defendant carries the burden of proof on each defense.” Id. (citing 11 U.S.C. § 547(g)). “[T]he exceptions enumerated in [§] 547(c) [are] designed to rescue from attack in bankruptcy those kinds of transactions, otherwise fitting the definition of a preference, that are essential to commercial reality and do not offend the purposes of preference law, or that benefit the ongoing business by helping to keep the potential bankrupt afloat.” Official Comm. of Unsecured Creditors of Maxwell Newspapers, Inc. v. Travelers In-dem. Co. (In re Maxwell Newspapers, Inc.), 192 B.R. 633, 635 (Bankr.S.D.N.Y.1996) (internal quotations and citation omitted).
In this case, PDCM does not dispute that the two overdue Corozal store rent payments were preferential transfers. The issue is the availability of the “subsequent new value defense” set forth in § 547(c)(4), which provides:
(c) The trustee may not avoid under this section a transfer—
(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an other*157wise unavoidable transfer to or for the benefit of such creditor[.]
11 U.S.C. § 547(c)(4).
The subsequent new value defense has two interrelated purposes, first, “to encourage trade creditors to continue dealing with troubled businesses, and second, ... to treat fairly a creditor who has replenished the estate after having received a preference.” Wahoski v. Am. & Efrid, Inc. (In re Pillowtex Corp.), 416 B.R. 123, 130 (Bankr.D.Del.2009) (citing N.Y.C. Shoes, Inc. v. Bentley Int'l, Inc. (In re N.Y.C. Shoes, Inc.), 880 F.2d 679, 680-81 (3d Cir.1989)). To prevail in asserting the § 547(c)(4) defense, a creditor bears the burden of proving three elements. Friedman’s Liquidating Trust v. Roth Staffing Cos. (In re Friedman’s Inc.), 738 F.3d 547, 552 (3d Cir.2013) (citing Schubert v. Lucent Techs. Inc. (In re Winstar Commc’ns, Inc.), 554 F.3d 382, 402 (3d Cir.2009)); In re N.Y.C. Shoes, Inc., 880 F.2d at 680.
1. New Value
The first element requires that “new value was extended after the preferential payment sought to be avoided.” Laker v. Vallette (In re Toyota of Jefferson, Inc.), 14 F.3d 1088, 1093 n. 2 (5th Cir.1994) (citation omitted); see also In re Pillowtex Corp., 416 B.R. at 129 (citation omitted). The Bankruptcy Code defines the term “new value” as:
[MJoney or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation[.]
11 U.S.C. § 547(a)(2); see also Bogdanov v. Avnet, Inc., 2011 WL 4625698, at *10.
“Whether something is new value presents a question ... of fact.” Bogdanov v. Avnet, Inc., 2011 WL 4625698, at *10 (internal quotations and citation omitted). “The extension of new value need not be directly connected to the preceding preferential transfer in order to shelter it ..., but the determination of new value is still based upon the premise that an augmentation or material benefit to the debt- or’s estate has occurred that offsets the reduction in the estate caused by the preferential transfer.” Moser v. Bank of Tyler (In re Loggins), 513 B.R. 682, 713 (Bankr.E.D.Tex.2014) (internal quotations and citations omitted). “[T]he vast majority of courts that have considered this issue have concluded that new value advanced after the petition date should not be considered in a creditor’s new value defense.” In re Friedman’s Inc., 738 F.3d at 557 (citations omitted). One reason given is that “the specific language ‘to or for the benefit of the debtor’ [implies] that the subsequent advances of new value are only those given pre-petition, because any post-petition advances are given to the debtor’s estate, not the debtor.” Clark v. Frank B. Hall & Co. of Colo. (In re Sharoff Food Serv., Inc.), 179 B.R. 669, 678 (Bankr.D.Colo.1995) (citing Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1284 (8th Cir.1988)). Put another way, “the defense of new value is available where the new value effectively repays the earlier preference, and offsets the harm to the debtor’s other creditors.” Moltech Power Sys., Inc. v. Truelove & Maclean, Inc. (In re Moltech Power Sys., Inc.), 326 B.R. 179, 184 (Bankr.N.D.Fla.2005) (internal quotations and citation omitted). As one court stated, “the creditor is entitled to a dollar-for-dollar offset.” Wheeling Nat’l Bank v. Meredith (In re Meredith Manor, Inc.), *158103 B.R. 118, 120 (S.D.W.Va.1989), aff'd, Crichton v. Wheeling Nat’l Bank (In re Meredith Manor, Inc.), 902 F.2d 257 (4th Cir.1990).
“Most courts addressing [the] issue have held that where a debtor is a lessee on an unexpired real property lease, ‘new value’ is created by the debtor’s right to continue a leasehold estate in exchange for the rental payment.” Gen. Time Corp. v. Schneider Atlanta, L.P. (In re Gen. Time Corp.), 328 B.R. 243, 247 (Bankr.N.D.Ga.2005)9 (citations omitted); see also S. Technical Coll., Inc., 89 F.3d at 1384 (holding “[e]ach month, a lessee receives new value from its lessor when it continues to use and occupy the rented property”); Brown v. Morton (In re Workboats Nw., Inc.), 201 B.R. 563, 567 (Bankr.W.D.Wash.1996) (holding that debtor’s continued occupancy of building despite delinquency of rent payments constituted new value extended by the landlord).10
2. Not Secured with Otherwise Unavoidable Security Interest
The second element of the § 547(c)(4) defense requires that “the new value is not secured with an otherwise unavoidable security interest[J” In re Toyota of Jefferson, Inc., 14 F.3d at 1093 n. 2 (citation omitted); see also Appalachian Oil Co. v. Va. State Lottery Dep’t (In re Appalachian Oil Co.), A.P. No. 10-5064, 2012 WL 4754675, at *8 (Bankr.E.D.Tenn. Oct. 4, 2012) (internal quotations and citation omitted); In re Pillowtex Corp., 416 B.R. at 129 (citation omitted). Here, neither party contends that any new value conferred by PDCM was secured by a security interest in any property.
3. Otherwise Unavoidable Transfer
The third element, set forth in subsection (B) of § 547(c)(4), requires the creditor to establish that “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)(4)(B). The proper application of this subsection, with its contorted, double-negative prose, has bedeviled many a reader. Professor Yern Countryman offers a clear and concise elucidation of § 547(c)(4)(B) in a Vanderbilt Law Review article:
If the debtor has made payments for goods or services that the creditor supplied on unsecured credit after an earlier preference, and if these subsequent payments are themselves voidable as preferences (or on any other ground), then under section 547(c)(4)(B) the creditor should be able to invoke those unsecured credit extensions as a defense to the recovery of the earlier voidable preference.
Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand. L. Rev. 713, 788 (May 1985) (footnote omitted). In other words, payment by a debt- or for new value only neutralizes the creditor’s new value defense if that payment is unavoidable.
Perhaps reflecting § 547(c)(4)(B)’s challenging language, courts are in disagreement as to § 547(c)(4)(B)’s application. In re Pillowtex Corp., 416 B.R. at 126-27. *159Published decisions in the early years following enactment of the Bankruptcy Code concluded that § 547(c)(4)(B) requires simply that “the new value must remain unpaid.” See, e.g., In re N.Y.C. Shoes, Inc., 880 F.2d at 680; In re Jet Fla. Sys., Inc., 841 F.2d at 1088; and In re Prescott, 805 F.2d 719, 728 (7th Cir.1986) (all holding new value must remain unpaid). For many years, this was considered to be the “ ‘majority rule.’ ” Responsible Person of Musicland Holding Corp. v. Best Buy Co. (In re Musicland Holding Corp.), 462 B.R. 66, 70 (Bankr.S.D.N.Y.2011) (quoting Mosier v. Ever-Fresh Food Co. (In re IRFM, Inc.), 52 F.3d 228, 231 (9th Cir.1995)). Although the United States Court of Appeals for the First Circuit has not weighed in on this issue, an “emerging trend” among other courts, consistent with Professor Countryman’s interpretation, is that “the new value defense is available, despite payment, if the payment was an avoidable transfer.” In re Musicland Holding Corp., 462 B.R. at 70-71; see, e.g., In re IRFM, Inc., 52 F.3d at 231; In re Toyota of Jefferson, Inc., 14 F.3d at 1093 n. 2; Bogdanov v. Avnet, 2011 WL 4625698, at *4-5; In re Pillowtex Corp., 416 B.R. at 129 n. 7; and In re Maxwell Newspapers, Inc., 192 B.R. at 638-40 (all holding that for § 547(c)(4)(B) to apply, new value may be paid so long as the payment is avoidable).11
II. The Legal Standards Applied
As the preference defendant, PDCM had the burden of proof with respect to each element of its § 547(c)(4) defense. In re Phoenix Rest. Grp., Inc., 373 B.R. at 546 (citing 11 U.S.C. § 547(g)). To prevail on summary judgment, PDCM was required to adduce such evidence as to each element of its defense as would permit PDCM at trial to withstand a motion for directed verdict under Fed.R.Civ.P. 50. Anderson v. Liberty Lobby, 477 U.S. at 250, 106 S.Ct. 2505. We may not affirm the grant of summary judgment if there is the “slightest doubt” as to an issue of fact. Morrissey v. Procter & Gamble Co., 379 F.2d 675, 677 (1st Cir.1967) (internal quotations and citations omitted).
Upon the record before us, we conclude that PDCM has not met its burden. With respect to the critical first element of the § 547(c)(4) defense, the giving of new value, the parties disagree as to the timing and extent of new value. The trustee maintains that PDCM provided the alleged new value “mostly postpetition,” thereby rendering the defense unavailable according to the majority of court decisions, or, alternatively, that the new value received pre-petition was insufficient to cover the full amount of the preferential transfers. PDCM counters that the new value was provided pre-petition and that it is entitled to a full offset. As to the third element of the § 547(c)(4) defense, the trustee asserts that payments for new value were unavoidable post-petition transfers while PDCM claims those payments were not applied to the new value it extended. These factual disputes, which the bankruptcy court ignored in its Opinion and Order, are material.
Having determined that there exist genuine issues of material fact as to the availability of the subsequent new value defense in this case, we conclude that the *160bankruptcy court erred in granting PDCM’s motion for summary judgment.
CONCLUSION
Based on the foregoing, the Opinion and Order is hereby REVERSED and the judgment is VACATED. We REMAND to the bankruptcy court for further proceedings consistent with this opinion.
. Unless otherwise indicated, the terms "Bankruptcy Code,” "section” and “§” refer to Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq., as amended.
. The record indicates that these checks were *152for overdue rent payments, although it is unclear which months were intended to be covered by the payments.
. PDCM did not file a response to the trustee's cross-motion for summary judgment.
. According to the trustee’s calculations, the "new value” totaling $21,885.22 represented the lease cost for the 44 days intervening between the date of issuance of the two rent checks and the petition date.
. The bankruptcy court did not address the trustee’s cross-motion for summary judgment in the December 23, 2013 Opinion and Order or in its subsequent judgment.
. The trustee's reference is to another adversary proceeding arising out of the Debtor’s chapter 11 case, Rentas v. BPP Retail Props. LLC (In re PMC Mktg. Corp.), Adv. No. 12-00093, 2013 WL 5741826 (Bankr.D.P.R. Oct. 23, 2013). There, the bankruptcy court ruled in favor of the trustee on her preference claim on the grounds that the lessor had failed to satisfy its burden under § 547(c)(4), including that the payment for the subsequent new value was itself an avoidable transfer. See id. at *6-7. The BPP case involved a different defendant and different facts and has no binding effect on our analysis here.
. In her notice of appeal, statement of issues, and her brief, the trustee is also silent regarding the bankruptcy court’s failure to address her cross-motion for summary judgment. That issue, therefore, is not before us.
. Fed.R.Civ.P. 56(a) provides, in pertinent part, that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and file movant is entitled to judgment as a matter of law. The court should state on the record the reasons for granting or denying the motion.” Fed.R.Civ.P. 56(a).
. In General Time, the issue of whether continued occupancy pursuant to a lease constitutes "new value" arose in the context of § 547(c)(1) and the creditor’s assertion of the "contemporaneous exchange” defense.
. But see Charisma Inv. Co., N.V. v. Airport Sys., Inc. (In re Jet Fla. Sys., Inc.), 841 F.2d 1082, 1084 (11th Cir.1988) (holding lessor’s forbearance in terminating lease following debtor's default did not constitute "new value” for purpose of subsequent advance exception where debtor did not continue to use the leased property).
. Courts are also divided as to whether the debtor’s payment toward the new value must be made pre-petition or whether post-petition payments defeat a creditor's new value defense. In re Friedman’s Inc., 738 F.3d at 554-57 (discussing cases and holding “numerous contextual indicators in the Code ... point to the petition date as a cutoff for analysis of the new value defense”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350241/ | Lewandowski v Edna Louise Liquidations, LLC (2022 NY Slip Op 07405)
Lewandowski v Edna Louise Liquidations, LLC
2022 NY Slip Op 07405
Decided on December 23, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on December 23, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, CURRAN, AND OGDEN, JJ.
1051 CA 21-01637
[*1]CYNTHIA M. LEWANDOWSKI AND ANTHONY J. LEWANDOWSKI, PLAINTIFFS-APPELLANTS-RESPONENTS,
vEDNA LOUISE LIQUIDATIONS, LLC, DEFENDANT-RESPONDENT, AND MYRA S. RAZIK, DEFENDANT-APPELLANT.
ZDARSKY, SAWICKI & AGOSTINELLI LLP, BUFFALO (GERALD T. WALSH OF COUNSEL), FOR PLAINTIFFS-APPELLANTS-RESPONDENTS.
LAW OFFICES OF ROBERT L. HARTFORD, GETZVILLE (JENNIFER V. SCHIFFMACHER OF COUNSEL), FOR DEFENDANT-APPELLANT.
LAW OFFICE OF DESTIN C. SANTACROSE, LLP, BUFFALO (LISA M. DIAZ-ORDAZ OF COUNSEL), FOR DEFENDANT-RESPONDENT.
Appeals from an order of the Supreme Court, Erie County (Donna M. Siwek, J.), entered October 22, 2021. The order granted the motion of defendant Edna Louise Liquidations, LLC, for summary judgment, dismissed the complaint against said defendant and denied the cross motion of defendant Myra S. Razik for summary judgment.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs for reasons stated in the decision at Supreme Court.
Entered: December 23, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 12-23-2022 |
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