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https://www.courtlistener.com/api/rest/v3/opinions/9350392/ | COURT OF APPEALS FOR THE
FIRST DISTRICT OF TEXAS AT HOUSTON
ORDER WITHDRAWING MEDIATION ORDER
Court of Appeals Number: 01-22-00878-CV
Style: Awad Mustafa v. HTS Services, Inc. and Tarek Morsi, Misel
Repak, Mahmoud Hassan, Shafi Mohamed and Yewande Adelaja
Trial Court Case Number: 2022-54542
Trial Court: 80th District Court of Harris County
Type of Motion: Objection to Mediation
Party Filing Motion: Appellee
Appellee has objected to mediation. The Court’s mediation order dated December
15, 2022 is withdrawn.
Judge's signature: /s/ Amparo Guerra
Acting individually
Date: December 21, 2022
* Absent emergency or a statement that the motion is unopposed, must wait ten days before acting on motion except for
motion to extend time to file a brief. See TEX. R. APP. P. 10.3(a).
Note: Single justice may grant or deny any request for relief properly sought by motion, except in a civil case a single justice
should not: (1) act on a petition for an extraordinary writ or (2) dismiss or otherwise determine an appeal or a motion
for rehearing. TEX. R. APP. P. 10.4(a). | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350393/ | COURT OF APPEALS FOR THE
FIRST DISTRICT OF TEXAS AT HOUSTON
ORDER
Appellate case name: In the Interest of P.M. & E.M
Appellate case number: 01-22-00753-CV
Trial court case number: 2021-01374J
Trial court: 313th District Court of Harris County
On December 13, 2022, Appellant J.S.M.R. a/k/a J.M. filed an Unopposed Second
Motion for Extension of Time to File Appellant’s Brief, requesting an extension from December
13, 2022 to December 30, 2022. We grant the motion.
Appellant J.S.M.R. a/k/a J.M’s brief is due December 30, 2022.
It is so ORDERED.
Judge’s signature: /s/ Veronica Rivas-Molloy
Acting individually
Date: December 20, 2022 | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498298/ | FINAL JUDGMENT
Karen S. Jennemann, Chief United States Bankruptcy Judge
This adversary proceeding came on for trial on April 2, 2015, on the Complaint filed by the Plaintiff, Martha Walls, seeking to determine dischargeability of certain debts of the Debtor/Defendant, Gary Robert Hick's, under 11 U.S.C. §§ 523(a)(5) and 523(a)(15). Consistent with the findings of fact and conclusions of law entered contemporaneously, it is
ORDERED:
1. Judgment is entered in favor of the Plaintiff, Martha Jeanette Walls, and against the Debtor/Defendant, Gary Robert Hicks.
2. The debt the Defendant owes to the Plaintiff for his failure to remit 10% of his military retirement pay to the Plaintiff between the entry of the Divorce Decree and his bankruptcy filing is not dis-chargeable pursuant to § 523(a)(15) of the Bankruptcy Code.
3. The appropriate state court is authorized to determine and issue judgment *923for the exact amount of the nondis-chargeable debt due to the Plaintiff for the Defendant’s failure to remit 10% of his military retirement pay to the Plaintiff between the entry of the Divorce Decree and his bankruptcy filing.
4. The alimony debt is nondis-chargeable under 11 U.S.C. § 523(a)(5).
5. The debt for attorney’s fees, the marital residence debt, and “all remaining debt” in Paragraph 6(B) of the Divorce Decree is nondischargeable under 11 U.S.C. § 523(a)(15).
6. Plaintiffs award of 60% of the Defendant’s military retirement pay is not dischargeable because it is not a debt owed to the Plaintiff, but rather is the Plaintiffs sole and separate property.
7. Defendant’s direct liability to the third-party creditors relating to the marital residence debt and “all remaining debt” in Paragraph 6(B) of the Divorce Decree is discharged.
8. Defendant further has a continuing obligation to remit the Plaintiffs share of his military retirement pay to her as a constructive trustee.
ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498299/ | MEMORANDUM OPINION AND ORDER SUSTAINING IN PART AND OVERRULING IN PART THE RESCAP LIQUIDATING TRUST’S OBJECTION TO PROOFS OF CLAIM FILED BY DUNCAN K. ROBERTSON
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is the ResCap Liquidating Trust’s (the “Trust”) objection (the “Objection,” ECF Doc. #8072) to Claim Numbers 2385, 2386, 2387, 2388, and 2389 (the “Claims,” id. Ex. 1) filed by Duncan K. Robertson (“Robertson”). The Objection is supported by the declaration of Kathy Priore (the “Priore Declaration,” ECF Doc. # 8072-7). Robertson filed an opposition to the Objection (the “Opposition,” ECF Doc. # 8238)1 and the Trust filed a Reply (the “Reply,” ECF Doc. # 8279). The Court held a hearing on the Objection on March 12, 2015 (the “Hearing”) and took the matter under submission.2 This Opinion sustains in part and overrules in part the Objection to Robertson’s Claims.
I. BACKGROUND
A. Claims-Related Background
1. The First Priority Loan
Old Kent Mortgage Company d/b/a National Pacific Mortgage (“Old Kent”) originated a residential mortgage loan (the “First Priority Loan”) to Linda Nicholls on November 1, 2009. (Obj-¶ 8.) The $100,000 First Priority Loan is evidenced by a note (the “Note,” Priore Decl. Ex. A) and secured by a deed of trust (the “First Priority DOT,” id. Ex. B) on real property located at 12002 Fourth Avenue SW, Seattle, Washington 98146 (the “Property”). (Obj-¶ 8.) The First Priority DOT named N.P. Financial Corporation as trustee and was recorded on November 5, 2009. (Id.)
Debtor Residential Funding Company, LLC (“RFC”) purchased the First Priority Loan from Old Kent and subsequently sec-uritized it; Bank One National Association (“Bank One”) was appointed as trustee for the securitization trust. (See id. ¶ 9.) On January 20, 2000, Old Kent assigned the First Priority DOT to Bank One, as trustee (the “Bank One Assignment,” Priore Deck Ex. C).3 (Obj-¶ 10.) Bank One merged into JPMorgan Chase Bank, National Association (“JPM”) in 2004. (See id.) The Bank of New York Trust Compa*8ny, N.A. (“BONY”) succeeded JPM’s interest as trustee and owner of the First Priority Loan on October 1, 2006, as a result of JPM exchanging its trustee business with BONY. (Id. ¶ 11.) On February 17, 2007, BONY appointed First American Title Insurance Company (“First American”) as successor trustee of the First Priority DOT (the “First American Appointment,” Priore Decl. Ex. D)4 (Obj-¶ 12.)
In January 2009, the beneficiary of the First Priority DOT caused the trustee to initiate a non-judicial foreclosure as a result of Nieholls’s default.5 (Id. ¶ 13.) On January 9, 2009, First American executed a notice of trustee’s sale (the “Notice of Sale,” Priore Decl. Ex. E) that identified an initial sale date of April 17, 2009.6 (Obj-¶ 13.) The trustee’s sale was subsequently continued until June 12, 2009. (Id.) On May 7, 2009, Nicholls filed for bankruptcy, thereby staying the trustee’s sale. (Id. ¶ 14.)
On February 16, 2010, Debtor Residential Funding Real Estate Holdings, LLC (“RFREH”) appointed LSI Title Agency (“LSI”) as successor trustee under the First Priority DOT (the “LSI Appointment,” Priore Decl. Ex. F).7 (Obj.1t 15.) On July 28, 2010, JPM assigned its interest in the First Priority DOT to RFREH (the “RFREH Assignment,” Priore Decl. Ex. G).8 (Id. ¶ 16.) On July 13, 2012, the RFREH Assignment was corrected to indicate Bank of New York Mellon, N.A. (formerly BONY), and not JPM, as assign- or, and RFC, and not RFREH, as the assignee (the “RFC Corrected Assignment,” Priore Decl. Ex. H).9 (Obj.H 16.) RFC transferred its interest in the First Priority Loan to 21st Century Mortgage Corporation (“21st Century”) on January 30, 2013. (Id. ¶ 17.) On July 9, 2013, RFC assigned the First Priority DOT to 21st Century (the “21st Century Assignment,” Priore Decl. Ex. I).10 . (Obj.H 17.)
Debtor Homecomings Financial, LLC (“Homecomings”) serviced the First Priority Loan from September 22, 2000 until transferring servicing rights to Debtor GMAC Mortgage, LLC (“GMACM”) on July 1, 2009. (Id. ¶ 18.) GMACM serviced the First Priority. Loan until transferring servicing rights to Ocwen Loan Servicing, LLC (“Ocwen”) on February 16, 2013. (Id.) No Debtor foreclosed on the First Priority DOT prior to the servicing transfer to Ocwen. (Id. ¶ 19.)
2. The Second Priority Loan
In 2006, Robertson recorded a second deed of trust (the “Second Priority DOT”) against the Property to secure an $82,000 second priority loan (the “Second Priority Loan”) that Robertson extended to Nic-holls. (Id. ¶ 20.) Robertson acknowledges that the Property was subject to the previously recorded First Priority DOT at the *9time the Second Priority DOT was recorded. (Id.) Robertson became the owner of the Property after foreclosing on the Second Priority DOT and successfully credit bidding at a trustee’s sale held on September 26, 2008, subject to the First Priority DOT. (Id.) He was issued a trustee’s deed on October 3, 2008 that was recorded on October 7, 2008. (Id.) Robertson never executed an assumption of the Note. (Id.)
3. The Robertson Action
On June 5, 2012, Robertson filed a verified complaint (the “Complaint”)- in the Superior Court of Washington, County of King (the “Washington Court”) against Debtors GMACM, Executive Trustee Services, LLC (“ETS”), RFREH, RFC, and Homecomings (collectively, the “Debtor Defendants”), as well as other non-debtor defendants (the “Robertson Action”).11 (Id. ¶ 21.) The Complaint asserted the following causes of action against the Debtor Defendants: (i) declaratory judgment; (ii) quiet title; (in) trespass; (iv) misrepresentation; (v) fraud and deception; (vi) conspiracy; (vii) intentional and negligent infliction of emotional distress; (viii) violation of the Washington Criminal Profiteering Act; and (ix) violations of the Washington Consumer Protection Act (the “WCPA”). (Id. ¶ 22.) The Complaint alleges that after Robertson obtained ownership of the Property, he attempted to obtain clear title by ascertaining, paying, and extinguishing all valid existing liens and encumbrances recorded against the Property. (Id.) Robertson alleges that one or more of the Debtor Defendants failed to provide pay-off instructions, initiated foreclosure proceedings, and/or improperly executed documents relating to the attempted foreclosure and/or the First Priority DOT. (Id.)
The Robertson Action was stayed against the Debtor Defendants after the Debtors’ chapter 11 cases were filed, except for Robertson’s claims for wrongful foreclosure and quiet title (the “Permitted Causes of Action”), as to which the automatic stay was modified pursuant to the July 13, 2012 Supplemental Servicing Order (EOF Doc. # 774).12 (Id. ¶¶ 3, 23.) On November 15, 2012, the defendants removed the Robertson Action to the United States District Court for the Western District of Washington (the “District Court”). (Id. ¶ 24.) On January 30, 2013, the Debt- or Defendants filed a notice of bankruptcy in the District Court, identifying all claims except the Permitted Causes of Action as being subject to the automatic stay. (Id. ¶ 25.)
Ocwen took over the defense of the claims against the Debtor Defendants after servicing of the First Priority Loan was transferred to Ocwen in February 2013. (Id. ¶ 26.) On June 27, 2013, the Debtor Defendants filed a motion for summary judgment of the Permitted Causes of Action; the District Court granted the motion on November 14, 2013 (the “Summary Judgment Order,” Priore Decl. Ex. N). (Obj-¶¶ 27-28.) Robertson filed a notice of appeal of the Summary Judgment Order *10and other District Court orders on August 11, 2014; the appeal remains pending in the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”). (See id. ¶ 29; “Notice of Appeal,” Priore Decl. Ex. 0.) On August 20, 2014, the District Court entered a final judgment dismissing with prejudice all of Robertson’s claims against the non-Debtor Defendants. (Obj-¶ 30.)
A The Claims
On November 5, 2012, Robertson timely filed the following Claims: (i) Claim No. 2365, a $237,623 general unsecured claim against GMACM (the “GMACM Claim,” id. Ex. 1 — A); (ii) Claim No. 2366, a $178,218 general unsecured claim against ETS (the “ETS Claim,” id. Ex. 1-B); (iii) Claim No. 2367, a $118,812 general unsecured claim against RFREH (the “RFREH Claim,” id. Ex. 1-C); (iv) Claim No. 2368, a $118,812 general unsecured claim against RFC (the “RFC Claim,” id. Ex. 1-D); and (v) Claim No. 2369, a $118,812 general unsecured claim against Homecomings (the “Homecomings Claim,” id. Ex. 1-E). (ObjASl.)
B. The Objection
The Trust seeks to disallow and expunge the Claims, asserting two primary arguments: (1) the Permitted Causes of Action are barred by res judicata because the Summary Judgment Order operates as a final judgment on the merits in the Robertson Action, notwithstanding the pen-dency of an appeal; and (2) each of the remaining causes of action against the Debtor Defendants lacks merit. {See id. ¶¶ 36-75.)
C. The Opposition
Robertson argues that the District Court lacked subject matter jurisdiction. This argument is the basis for his pending Ninth Circuit appeal; ' Robertson asserts that the District Court lacked subject matter jurisdiction because the removal of the Robertson Action from state court was proeedurally erroneous, since the defendants did not establish the existence of diversity jurisdiction. (Opp.¶ 9.) Robertson states that he had intended to file a motion for relief from the automatic stay in this Court to permit him to litigate his causes of action against the Debtor Defendants in the Washington Court, but he did not file the lift stay motion because he did not want to waive his objection to the improper removal of the Robertson Action. (See id. ¶¶ 11-12.)
Robertson further argues that the Objection violates the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) because the Objection addresses his five Claims, and Bankruptcy Rule 3007(c) provides that “objections to more than one claim shall not be joined in a single objection.” (Id. ¶ 14 (internal quotation > marks omitted) (quoting Fed. R. Bankr.P. 3007(c)).) Additionally, Robertson contends that the Trust cannot rely on res judicata to bar his Claims because (i) no dismissal with prejudice or final order as to the Debtor Defendants was entered by the District Court; and (ii) the dismissals with prejudice as to the non-debtor defendants cannot be invoked to bar the Claims against the Debtor Defendants on res judicata grounds. (See id. ¶¶ 18-19.) Robertson asserts that it is improper for him to be compelled to “prove his [Cjlaims” in this forum and states that he may file additional proofs of claims based on the Debtors’ post-petition actions. (See id. ¶¶ 29-30.) Robertson further argues that he anticipates filing a motion for relief from the automatic- stay with the Court upon final order from the Ninth Circuit on his appeal, (id. ¶ 31), and he requests that the Court overrule the Objection and impose a stay to any further objections to his *11Claims pending the Ninth Circuit’s ruling on his appeal, (id. ¶ 32).
D. The Reply
The Trust argues, first, that Robertson fails to rebut the Trust’s arguments that the Claims lack merit, and therefore, he has failed to establish his Claims by a preponderance of the evidence. (Reply^ 3.)
Second, the Trust argues that its Objection to multiple claims is proeedurally proper because the “Claim Objection Procedures Order,” (see ECF Doc. #3294), entered in this case authorizes the Trust to file omnibus objections to claims on various grounds, including on the basis that “the Claims seek recovery of amounts for which the Debtors’ estates are not liable. (Id. ¶ 5.)
Third, the Trust reiterates its argument that res judicata bars the Permitted Causes of Action. (Id. ¶ 6.) According to the Trust, res judicata applies notwithstanding a pending appeal. (Id. ¶ 7.) The Summary Judgment Order was a final judgment on the merits notwithstanding Robertson’s challenge to subject matter jurisdiction. (Id. ¶ 8.)
Fourth, the Trust argues that the Court has jurisdiction to rule on the merits of the Claims despite Robertson’s assertion that he cannot be compelled to prove his claims in this Court. (Id. ¶ 9.) The Trust asserts that Robertson “is only entitled to receive a distribution from the Debtors’ estates on account of his claims if he proves them before this Court.” (Id. ¶ 10 (emphasis omitted).)
Finally, the Trust argues that the Court should deny Robertson’s request to stay proceedings pending the outcome of his appeal because Robertson “has the full opportunity to litigate the merits of his claims before this Court.” (Id. ¶ 11.) According to the Trust, Robertson can request reconsideration of an order disallowing his Claims if he prevails in his Ninth Circuit appeal. (Id.)
II. DISCUSSION
A. Claims Objections
Correctly filed proofs of claim “constitute prima facie evidence of the validity and amount of the claim.... To overcome this prima facie evidence, an objecting party must come forth with evidence which, if believed, would refute at least one of the allegations essential to the claim.” Sherman v. Novak (In re Reilly), 245 B.R. 768, 773 (2d Cir. BAP 2000). By producing “evidence equal in force to the prima facie case,” an objector can negate a claim’s presumptive legal validity, thereby shifting the burden back to the claimant to “prove by a preponderance of the evidence that under applicable law the claim should be allowed.” Creamer v. Motors Liquidation Co. GUC Trust (In re Motors Liquidation Co.), No. 12 Civ. 6074(RJS), 2013 WL 5549643, at *3 (S.D.N.Y. Sept. 26, 2013) (internal quotation marks omitted). If the objector does not “introduce! ] evidence as to the invalidity of the claim or the excessiveness of its amount, the claimant need offer no further proof of the merits of the claim.” 4 Collier on Bankruptcy ¶ 502.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.2014).
Bankruptcy Code section 502(b)(1) provides that claims may be disallowed if “unenforceable against the debtor and property of the debtor, under any agreement or applicable law.” 11 U.S.C. § 502(b)(1). To determine whether a claim is allowable by law, bankruptcy courts look to “applicable nonbankruptcy law.” In re W.R. Grace & Co., 346 B.R. 672, 674 (Bankr.D.Del.2006).
*12Federal pleading standards apply when assessing the validity of a proof of claim. See, e.g., In re Residential Capital, LLC, 518 B.R. 720, 731 (Bankr.S.D.N.Y.2014); In re DJK Residential LLC, 416 B.R. 100, 106 (Bankr.S.D.N.Y.2009) (“In determining whether a party has met their burden in connection with a proof of claim, bankruptcy courts have looked to the pleading requirements set forth in the Federal Rules of Civil Procedure.” (citations omitted)). Accordingly, a claimant must allege “enough facts to state a claim for relief that is plausible on its face.” Vaughn v. Air Line Pilots Ass’n, Int’l, 604 F.3d 703, 709 (2d Cir.2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). “Where a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citation and internal quotation marks omitted). Plausibility “is not akin to a probability requirement,” but rather requires “more than a sheer possibility that a defendant has acted unlawfully.” Id. (citation and internal quotation marks omitted). The court must accept all factual allegations as true, discounting legal conclusions clothed in factual garb. See, e.g., id. at 677-78, 129 S.Ct. 1937; Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111, 124 (2d Cir.2010) (stating that a court must “assum[e] all well-pleaded, noncon-clusory factual allegations in the complaint to be true” (citing Iqbal, 556 U.S. at 678, 129 S.Ct. 1937)). The court must then determine if these well-pleaded factual allegations state a “plausible claim for relief.” Iqbal, 556 U.S. at 679, 129 S.Ct. 1937 (citation omitted).
Courts do not make plausibility determinations in a vacuum; it is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. (citation omitted). A claim is plausible when the factual allegations permit “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citation omitted). A claim that pleads only facts that are “merely consistent with a defendant’s liability” does not meet the plausibility requirement. Id. at 678, 129 S.Ct. 1937 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do.” Id. (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955) (internal quotation marks omitted). “Threadbare recitals of the elements of a cause of action, supported by mere conclu-sory statements, do not suffice.” Id. (citation omitted). “The pleadings must create the possibility of a right to relief that is more than speculative.” Spool v. World Child Int’l Adoption Agency, 520 F.3d 178, 183 (2d Cir.2008) (citation omitted).
To support claims grounded in fraud, Federal Rule of Civil Procedure (“FRCP”) 9(b) requires the claimant to “state with particularity the circumstances constituting fraud or mistake.” Fed. R.Civ.P. 9(b). FRCP 9(b) is grounded in the purpose “to protect the defending party’s reputation, to discourage meritless accusations, and to provide detailed notice of fraud claims to defending parties.” Silverman v. Arctrade Capital, Inc. (In re Arctrade Fin. Technologies Ltd.), 337 B.R. 791, 801 (Bankr.S.D.N.Y.2005) (internal quotation marks and citation omitted).
Although “[claims] drafted by pro se [claimants] are to be construed liberally, [ ] they must nonetheless be supported by specific and detailed factual allegations sufficient to provide the court and the defendant with ‘a fair understanding of *13what the [claimant] is complaining about and ... whether there is a legal basis for recovery.’ ” Kimber v. GMAC Mortgage, LLC (In re Residential Capital, LLC), 489 B.R. 489, 494 (Bankr.S.D.N.Y.2013) (ellipsis in original) (quoting Iwachiw v. New York City Bd. of Elections, 126 Fed.Appx. 27, 29 (2d Cir.2005)).
B. Res Judicata
“The preclusive effect of a judgment is defined by claim preclusion and issue preclusion, which are collectively referred to as ‘res judicata.’ ” Taylor v. Sturgell, 553 U.S. 880, 892, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008). The doctrine of res judicata precludes the same parties from litigating claims “whenever there is ‘(1) an identity of claims, (2) a final judgment on the merits, and (3) identity or privity between parties.’ ” Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 713 (9th Cir.2001) (quoting W. Radio Servs. Co. v. Glickman, 123 F.3d 1189, 1192 (9th Cir.1997)).
Here, the parties do not dispute that the parties and claims in the Robertson Action are identical to the parties and Claims subject to the Objection. The crux of Robertson’s argument that res judicata does not partially preclude his Claims is that the Summary Judgment Order was not a final judgment on the merits. (See Opp. ¶¶ 17-28.) The Robertson Action is based on state law claims and was removed to federal court on the basis of diversity jurisdiction; the Court must therefore apply Washington state law for res judicata purposes. See Harrison v. Diamonds, No. 14-CV-484 (VEC), 2014 WL 3583046, at *2 (S.D.N.Y. July 18, 2014) (“A federal court sitting in diversity jurisdiction determines the preclusive effect to be given a prior judgment by applying the res judicata law of the state in which the court that entered the prior judgment sat.” (citing Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508, 121 S.Ct. 1021, 149 L.Ed.2d 32 (2001))); see also In re Morweld Steel Prods. Corp., 8 B.R. 946, 955 (W.D.Mich.1981) (“In a diversity case, State law determines the applicability of collateral estoppel.” (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938))).
Under Washington law, the pendency of an appeal “does not suspend or negate the res judicata aspects of a judgment entered after trial in the superi- or courts.” Riblet v. Ideal Cement Co., 57 Wash.2d 619, 358 P.2d 975, 977 (1961) (citations omitted); see Puget Sound Elec. Workers Health & Welfare Trust v. Lighthouse Elec. Grp., No. C12-276 (RAJ), 2014 WL 1350788, at *3 (W.D.Wash. Apr. 3, 2014) (“The fact that the case is on appeal is irrelevant for purposes of determining whether res judicata applies.” (citation omitted)). However, the Summary Judgment Order does not constitute a final judgment on the merits because no. judgment was entered by the District Court after entry of the Summary Judgment Order with respect to the Debtor Defendants. See generally Robertson v. GMAC Mortg., No. 2:12-ev-02017 (MJP) (W.D. Wash.); see also Fed.R.Civ.P. 58(a) (providing that every judgment must be set out in a separate document, subject to certain inapplicable exceptions). Accordingly, the Permitted Causes of Action are not barred by res judicata. The Objection is therefore OVERRULED to the extent it seeks disal-lowance of the Permitted Causes of Action on res judicata grounds.
C. Declaratory Judgment
Robertson argues that he is entitled to a declaratory judgment that (i) the defendants, including RFREH, have never held and do not hold an interest in the First Priority DOT; (ii) the defendants, includ*14ing RFREH, have never held and do not hold any legal or equitable interest in the Property; (iii) all of the defendants’ nonjudicial foreclosure actions against the Property have been unlawful; and (iv) no defendant or other party is entitled to hold a trustee’s sale of the Property based on the First Priority DOT. (Comply 6.14.) According to the Trust, Robertson cannot establish a basis for declaratory relief because (1) there is no justiciable controversy arising from any attempt by the Debtors to foreclose on the First Priority DOT, (see Obj. ¶ 41); (2) the wrongful foreclosure claim underlying Robertson’s request for declaratory relief fails because no foreclosure has occurred, (see id. ¶ 42); and (3) Robertson lacks standing to challenge the validity of foreclosure-related documents to which he is not a party, including the First Priority DOT and any appointments of trustee made pursuant to the First Priority DOT, (see id. ¶ 43).
The Court will apply federal procedural law to Robertson’s request for declaratory relief because the Robertson Action is based on state law claims and was removed to federal court on the basis of diversity jurisdiction. See Douglass v. Bank of Am. Corp., No. CV-12-0609 (JLQ), 2013 WL 2245092, at *5 (E.D.Wash. May 21, 2013) (“Because declaratory judgment acts are procedural in nature and do not affect underlying substantive rights, the Erie doctrine ... mandates that federal courts sitting in diversity apply federal procedural law, i.e. the Declaratory Judgment Act, ... to Plaintiffs’ request for declaratory relief (originally pleaded based on state law).” (internal citations omitted)). The Declaratory Judgment Act provides that “[i]n a case of actual controversy within its jurisdiction ... any court of the United States ... may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 2201 (2010). In providing relief under the Declaratory Judgment Act, “the district court must first inquire whether there is an actual case or controversy within its jurisdiction.” Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 669 (9th Cir.2005) (citing Am. States Ins. Co. v. Kearns, 15 F.3d 142, 143 (9th Cir.1994)). “The requirement that a case or controversy exist under the Declaratory Judgment Act is ‘identical to Article Ill’s constitutional case or controversy requirement.’ ” Id. (quoting Kearns, 15 F.3d at 143).
Because Article III of the United States Constitution limits the jurisdiction of federal courts to cases or controversies, a plaintiff must establish that he or she has standing. See Raines v. Byrd, 521 U.S. 811, 818, 117 S.Ct. 2312, 138 L.Ed.2d 849 (1997) (“One element of the case-or-controversy requirement is that appellees, based on their complaint, must establish that they have standing to sue.” (citation omitted)). “To establish Article III standing, a [p]laintiff must establish an invasion of a legally protected interest which must be ‘concrete, particularized, and actual or imminent; fairly traceable to the challenged action; and redressable by a favorable ruling.’ ” Douglass, 2013 WL 2245092, at *5 (quoting Monsanto Co. v. Geertson Seed Farms, 561 U.S. 139, 149, 130 S.Ct. 2743, 177 L.Ed.2d 461 (2010)). The Trust has submitted evidence that the Debtors no longer have any interest in the First Priority DOT (see Priore Decl. Ex. I (assignment of First Priority DOT from RFC to 21st Century, dated July 9, 2013)) and no longer service the First Priority Loan (Priore Decl. ¶ 16 (indicating that GMACM transferred servicing rights to the First Priority Loan to Ocwen on February 16, 2013)). Because the Debtors no longer have any interest in the First Prior*15ity Loan, Robertson has failed to establish how a favorable ruling against the Debtors would redress any invasion of a legally protected interest. Accordingly, the Objection is SUSTAINED as to Robertson’s claim for declaratory relief.
D. Quiet Title
Section 7.28.010 of the Revised Code of Washington (the “RCW”) provides that a quiet title action may only be brought against a tenant in possession or “if there is no such tenant, then against the person claiming the title or some interest thereinWash. Rev.Code. Ann. § 7.28.010 (West 2011). RCW section 7.28.010 provides that “[t]he plaintiff in [a quiet title] action shall set forth in his complaint the nature of his estate, claim or title to the property, and the defendant may set up a legal or equitable defense to plaintiffs claims; and the superior title, whether legal or equitable, shall prevail.” Id. As set forth above, because the Debtors no longer have any interest in the First Priority Loan, Robertson has failed to adequately allege that any Debtor claims any title or interest in the Property. See Evans v. BAC Home Loans Servicing LP, No. C10-0656 (RSM), 2010 WL 5138394, at *4 (W.D.Wash. Dec. 10, 2010) (“Absent an allegation that Defendant has asserted any title interest in the disputed property, Defendant is not a proper party to this action.” (citation omitted)). Thus, the Objection is SUSTAINED with respect to Robertson’s quiet title claim.
E. Trespass
Robertson asserts that the Debtors are liable for trespass pursuant to RCW sections 4.24.630 and 59.12.010.13 (See Compl. ¶ 8.2 (citations omitted).) Robertson alleges that in December 2008, Homecomings, through an agent, trespassed on the Property. (See id. ¶ 8.2.) Robertson further alleges that on May 24, 2010, Homecomings, through an agent, unlawfully entered the Property “and took possession, changing the locks and disabling [Robertson]’s deadbolts, thereby excluding [him] from entry into the dwelling structure located on the Property and rendering the Property vulnerable to break-in.” (Id. ¶8.3.) Robertson also asserts that in April 2011, the Property was broken into as a result of the disabled deadbolts. (Id. ¶ 8.4.)
According to the Trust, Robertson’s trespass cause of action fails for multiple reasons. (Obj-¶ 48.) First, the Trust argues that his trespass claim is time-barred under Washington’s applicable three-year statute of limitations, since the claim arose in December 2008, more than three years before the Debtors filed for bankruptcy. (Id. ¶ 49.) Second, the Trust asserts that Robertson’s trespass claim fails because a party against whom such a claim is asserted must know or have reason to know that it lacks authorization to enter a property, and the First Priority DOT expressly authorizes the Debtors to make “reasonable entries upon and inspection of the Property.” (Id. ¶ 50 (quoting Priore Decl. Ex. B, ¶ 7).) Finally, the Trust argues that “Robertson has failed to allege with sufficient specificity that he suffered any losses resulting from actions by Homecomings to preserve the value of the Property, or that Homecomings owes liability to Robertson for any such losses.” (Id. ¶ 51.)
RCW section 4.24.630(1) provides:
Every person who goes onto the land of another and who removes timber, *16crops, minerals, or other similar valuable property from the land, or wrongfully causes waste or injury to the land, or wrongfully injures personal property or improvements to real estate on the land, is liable to the injured party for treble the amount of the damages caused by the removal, waste, or injury. For purposes of this section, a person acts “wrongfully” if the person intentionally and unreasonably commits the act or acts while knowing, or having reason to know, that he or she lacks authorization to so act.
Wash. Rev.Code. Ann. § 4.24.630(1). “[A] plaintiff may establish a claim for treble damages for wrongful trespass under RCW 4.24.630 only by showing that defendants intentionally and unreasonably committed one or more acts for which they knew or had reason to know they lacked authorization.” Clipse v. Michels Pipeline Constr., Inc., 154 Wash.App. 573, 225 P.3d 492, 493 (2010). A three year statute of limitations applies to “[a]n action for waste or trespass upon real property ...” Wash. Rev.Code. Ann. § 4.16.080.
Robertson’s trespass cause of action is time-barred to the extent it seeks damages for Homecomings’s alleged trespass in December 2008. See id. But Robertson is not time-barred from asserting a trespass claim for Homecomings’s alleged trespass on May 24, 2010; it occurred less than three years before the Debtors’ chapter 11 cases were filed on May 14, 2012. See 11 U.S.C. § 108(c) (extending period for asserting claim against the debtor if applicable nonbankruptcy law provides a limitations period “and such period has not expired before the date of the filing of the petition”).
On the merits, Robertson has alleged facts sufficient to state a claim for trespass against Homecomings. In support of the Objection, the Trust submitted the First Priority DOT; it provides that the “Lender” under the First Priority DOT may “do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under [the First Priority DOT],” including “entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off.” (Priore Deck Ex. B, ¶ 9.) However, the First Priority DOT’s chain of assignments is confused by the erroneous RFREH Assignment,14 and the facts alleged by Robertson support a reasonable inference that Homecomings knew or had reason to know it lacked authority to enter the Property and make repairs because it was acting on behalf of a beneficiary with a dubious interest in the First Priority DOT.
The Trust contends that BONY was the beneficiary of the First Priority DOT when foreclosure proceedings were initiated in January 2009, notwithstanding that the beneficiary of record at the time was Bank One.15 (See Priore Decl. ¶ 11 n.2.) However, at the time of the alleged May 24, 2010 *17trespass, RFREH held itself out as the beneficiary of the First Priority DOT, even though it had not been assigned the First Priority DOT. (See Priore Deck Ex. F (LSI Appointment, signed by RFREH as beneficiary).) Indeed, the RFC Corrected Assignment makes clear that RFREH never was assigned an interest in the First Priority DOT. (See id. Ex. H.) Whether Homecomings knew or had reason to know that it lacked authority to enter the Property under the First Priority DOT because RFREH was not the beneficiary of the First Priority DOT requires resolving factual issues that cannot be done at this stage in the pleadings. Accordingly, the Objection is OVERRULED with respect to Robertson’s trespass cause of action.
F. Fraud and Deception
Robertson’s Complaint alleges that the Debtors are liable for fraud, deception, and conspiracy.16 First, Robertson alleges that ETS is liable for fraud, deception, and conspiracy for its role in preparing and recording allegedly fraudulent Loan documents, refusing to stop a foreclosure it allegedly knew was unlawful, and failing to meet the Washington Deed of Trust Act requirements to act as a trustee. (See Compl. ¶¶ 12.2-12.4; see also id. 14.4-14.5.)
Second, Robertson alleges claims for fraud, deception, and conspiracy against RFREH and GMACM for their alleged attempts to “steal the Property from Robertson via improper nonjudicial foreclosure proceedings.” (Id. ¶ 13.5; see id. ¶ 14.4-14.5.) Robertson argues that RFREH had no authority to issue the LSI Appointment because RFREH’s purported acquisition of the Note and the First Priority DOT on July 28, 2010 occurred five months after RFREH executed the LSI Appointment. (See id. 13.3-13.4.) Additionally, Robertson asserts that RFREH does not constitute a beneficiary of the First Priority DOT “and therefore ha[d] no authority or standing to appoint a trustee, exert control, or direct that nonjudicial foreclosure proceedings or other adverse actionfs] be taken against the Property.” (Id. ¶ 13.3.) Many of Robertson’s fraud allegations against GMACM relate to news headlines concerning alleged actions unrelated to the Property or Robertson in any way. (See id. ¶ 14.3.) With respect to GMACM’s actions specific to Robertson, he alleges that GMACM essentially controlled the other Debtor Defendants “in efforts to intimidate [him] into submission ... or hav[e] the Property clouded indefinitely through the recordation of invalid instruments in the Official Public Records of King County.” (Id. ¶¶ 14.4-14.5.)
Third, Robertson alleges that Homecomings is liable for fraud, deception, and self-dealing by refusing to cooperate with his efforts to bring pay off the Loan beginning in September 2008 and refusing to release the lien under the First Priority DOT upon his offer to pay off the First Priority Loan. (Id. ¶¶ 5.17, 9.1-9.3.) According to Robertson, “the only purpose of Homecomings’ refusal ... was to continue generating ser-vicer fees and income, and/or [to acquire] the Property, for itself and related persons and entities.... ” (Id. ¶ 9.4.) Robertson asserts that he had a right to pay off the Loan by virtue of his purchase of the Property and under the Uniform Commer*18cial Code (the “UCC”), the Washington State Constitution, Washington common law, and RCW section 61.24.090. (Id. ¶ 9.2.) In support, Robertson cites to MGIC Financial Corp. v. H.A. Briggs Co., 24 Wash.App. 1, 600 P.2d 573 (1979), which he asserts stands for the proposition that a junior lienor has the right to pay off the debt secured by a senior mortgage. (Id. ¶ 9.2 n.34 (citing MGIC Fin. Corp., 600 P.2d at 576).)
The Trust argues that Robertson’s reliance on MGIC Financial Corp. is misplaced because, following his purchase of the Property after foreclosing on the Second Priority DOT, he “was no longer a junior lienor, and a foreclosure sale under the First Priority DOT never took place.” (Obj-¶ 53.) According to the Trust, the First Priority DOT provides Nicholls, as “Borrower,” the right to cure any default under the Note, and also sets forth that a successor in interest to the Borrower “shall obtain all of Borrower’s rights and benefits under the First Priority DOT only if such party ‘assumes Borrower’s obligations under [the First Priority DOT] in writing, and is approved by Lender.’ ” (Id. ¶ 54 (alterations in original) (quoting Priore Decl. Ex. B, ¶ 13).) According to the Trust, Robertson never assumed the obligations under the First Priority DOT and therefore had no right to cure any default or otherwise make payments on the Note. (Id.)
The Trust asserts that Washington law provides Robertson a potential right to redeem the Property by curing the default on the First Priority DOT at a trustee’s sale, (id. ¶ 55 (citing Wash. Rev.Code. Ann. §§ 61.24.090, 61.24.130(1)); however, Robertson did not cure any such default and a trustee’s sale pursuant to the First Priority DOT never took place, (see id.). The Trust further argues that Homecomings was not required to release the lien under the First Priority DOT upon Robertson’s offer to pay $90,000 to discharge the First Priority Loan under the Washington UCC because (i) his mere offer did not amount to tender; and (ii) the amount offered was insufficient to discharge the full amount of the debt secured by the First Priority DOT at the time. (Id. 56-57.) Specifically, the Trust asserts that the section of the Washington UCC governing negotiable instruments to which Robertson cites provides:
If tender of payment of an obligation to pay an- instrument is made to a person entitled to enforce the instrument and the tender is refused, there is discharge, to the extent of the amount of the tender, of the obligation of an indorser or accommodation party having a right of recourse with respect to the obligation to which the tender relates.
(Id. ¶56 (citing Wash. Rev.Code. Ann. § 62A.3-603 (2014)).) However, “[c]ase law establishes that, as a general matter, a mere offer of payment is insufficient to establish tender.” (Id. ¶ 57 (collecting cases).) A debt will be extinguished only after a party tenders payment of an obligation by actually presenting funds and such tender is refused, (see id. (citation omitted)); “Robertson merely offered to tender partial payment, [and therefore] the debt would not have been discharged even if Robertson had actually tendered payment,” (id.). Moreover, section 62A.3-603 only provides for the discharge of an obligation of an “indorser” or “accommodation party,” neither of which Robertson constitutes.17 (See id. ¶ 58.)
*19With respect to Robertson’s fraud, deception, and conspiracy claims against ETS, RFREH, and GMACM, the Trust argues that these claims fail because, as set forth in the Summary Judgment Order, the District Court held that “Robertson is not a party to the Note or the First Priority DOT and therefore lacks standing to challenge any aspect of the Debtor Defendants’ past efforts to foreclose on the Property under those instruments.” (Id. ¶ 59.) Finally, the Trust argues that Robertson fails to adequately allege the elements of fraud or conspiracy to commit fraud with requisite specificity. (Id. ¶ 60.)
Under Washington law, a plaintiff must allege the following elements to state a claim for fraud:
(1) representation of an existing fact; (2) materiality; (3) falsity; (4) the speaker’s knowledge of its falsity; (5) intent of the speaker that it should be acted upon by the plaintiff; (6) plaintiff’s ignorance of its falsity; (7) plaintiffs reliance on the truth of the representation; (8) plaintiffs right to rely upon it; and (9) damages suffered by the plaintiff.
Stiley v. Block, 130 Wash.2d 486, 925 P.2d 194, 204 (1996) (en banc). Accordingly, a claim for fraud “requires a false statement that plaintiffs relied upon.” Schanne v. Nationstar Mortg., LLC, No. CIO-5753 (BHS), 2011 WL 5119262, at *3 (W.D.Wash. Oct. 27, 2011) (citing Stiley, 925 P.2d at 204).
Robertson’s fraud claim against Homecomings is premised on his allegation that he attempted to pay off the First Priority Loan and thereby become subrogated to the rights held by the beneficiary of the First Priority DOT, but Homecomings refused to cooperate with his payoff attempts.18 (See Compl. ¶¶ 5.17, 9.1-9.3.) It is unclear what false statements Homecomings made to Robertson based on the facts alleged in the Complaint. Indeed, Robertson alleges that Homecomings “failed to respond in any way” to his $90,000 offer to pay off the First Priority Loan. (Compl. ¶ 5.19; see id. ¶ 5.17.) Therefore, Robertson fails to state a claim for fraud against Homecomings and the Objection is SUSTAINED with respect to this claim.
Additionally, Robertson does not sufficiently allege facts to state a claim for fraud against GMACM, as his allegations generally relate to GMACM’s actions allegedly taken in matters unrelated to Robertson, (see id. ¶ 14.3), or are premised on GMACM’s alleged control of the other Debtor Defendants, (see id. ¶¶ 14.4-14.5). Robertson does not plead facts regarding GMACM’s alleged actions with specific detail required under FRCP 9(b). Consequently, the Objection is SUSTAINED with respect to Robertson!s fraud cause of action against GMACM.
By contrast, Robertson does state a claim for fraud against RFREH. Robertson alleges that RFREH recorded the “legally defective” LSI Appointment, pur*20porting to appoint LSI as substitute trustee five months before RFREH was assigned the First Priority DOT. (See id. ¶¶ 11.13-11.14.) Robertson is correct that RFREH had no authority to execute the LSI Appointment before it was assigned the First Priority DOT pursuant to the RFREH Assignment, and RFREH misrepresented that it was a beneficiary of First Priority DOT in executing the LSI Appointment. (See Priore Decl. Ex. F.) While the fact that the RFC Corrected Assignment was later executed to correct the RFREH Assignment may belie any allegedly knowing misrepresentation made on the part of RFREH, (see Priore Decl. ¶ 14; id. Ex. H), whether RFREH knowingly made misrepresentations raises factual issues that cannot be resolved at this time. The Objection is therefore OVERRULED with respect to Robertson’s fraud cause of action against RFREH.
Robertson also states a claim for fraud against ETS. Robertson alleges that ETS drafted and recorded the January 12, 2009 notice of trustee’s sale, the LSI Appointment, and the First American Appointment. (See id. ¶¶ 5.24, 12.3.) According to Robertson, ETS “usurp[ed] the role of [b]eneficiary through unilaterally issuing foreclosure directives with no authority from a valid deed of trust [b]enefi-ciary or trustee,” (id. ¶ 12.2(a)), and “usurp[edj the trustee’s function of making the critical decisions that are reserved by law to the authorized and qualified trustee ... while failing to meet the [Washington Deed of Trust Act] requirements to act as a trustee,” (id. ¶ 12.2(b)). Robertson further alleges that on June 10, 2009, ETS represented to Robertson’s counsel that GMACM was the holder of the Note at that time. (Id. ¶ 5.35.) As set forth above, the LSI Appointment contained misrepresentations to the extent it (i) purported to appoint LSI as substitute trustee at a time when RFREH had no interest in the First Priority DOT; and (ii) indicated that RFREH was the beneficiary of the First Priority DOT when it was not. Robertson states a claim for fraud against ETS for its alleged role in drafting and recording the LSI Appointment. Additionally, Robertson states a claim for fraud against ETS for its alleged misrepresentation that GMACM was the holder of the Note in June 2009. (See Compl. ¶ 5.35.) Robertson alleges sufficient facts indicating that he relied on this misrepresentation in attempting to pay off the First Priority Loan. (See id. 5.36-5.38.) Accordingly, the Objection is OVERRULED with respect to Robertson’s fraud cause of action against ETS to the extent set forth above.
G. Intentional and Negligent Infliction of Emotional Distress
Under Washington law, the elements of a cause of action for intentional infliction of emotional distress (i.e.outrage) are: “(1) extreme and outrageous conduct; (2) intentional or reckless infliction of emotional distress; and (3) actual result to the plaintiff of severe emotional distress.” Birklid v. Boeing Co., 127 Wash.2d 853, 867, 904 P.2d 278 (1995) (en banc) (citations and internal quotation marks omitted). “The conduct in question must be ‘so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community.’ ” Id. (emphasis omitted) (quoting Grimsby v. Samson, 85 Wash.2d 52, 530 P.2d 291, 295 (1975) (en banc)). Whether alleged conduct is sufficiently outrageous to support a claim for intentional infliction of emotional distress “is ordinarily for the jury, but it is initially for the court to determine if reasonable minds could differ on whether the conduct was sufficiently extreme to result in liability.” Lyons v. *21U.S. Bank Nat’l Ass'n 181 Wash.2d 775, 336 P.3d 1142, 1151 (2014) (en banc) (citations and internal quotation marks omitted). Several Washington courts have dismissed claims for intentional infliction of emotional distress on a motion to dismiss for a plaintiffs failure to plead facts supporting a reasonable inference of sufficiently outrageous conduct relating to the foreclosure process. See, e.g., Thepvongsa v. Reg’l Tr. Servs. Corp., No. 00-1045(RSL), 2011 WL 307364, at *4 (W.D.Wash. Jan. 26, 2011) (dismissing plaintiffs claim for intentional infliction of emotional distress for conduct relating to foreclosure); Schanne, 2011 WL 5119262, at *5 (same); cf. Bhatti v. Guild Mortg. Co., No. C11-0480 (JLR), 2011 WL 6300229, at *11 (W.D.Wash. Dec. 16, 2011) (denying plaintiffs’ motion to amend complaint to add a claim for intentional infliction of emotional distress because amendment would be futile based on facts alleged).
Under Washington law, the elements of a cause of action for negligent infliction of emotional distress are: “(1) the defendant engaged in negligent conduct; (2) the plaintiff suffered serious emotional distress; [and] (3) the defendant’s negligent conduct was the cause of the plaintiffs serious emotional distress.” Algaier v. CMG Mortg, Inc., No. 13-CV-0380 (TOR), 2014 WL 3965180, at *4 (E D.Wash. Aug. 13, 2014) (citing Hegel v. McMahon, 136 Wash.2d 122, 960 P.2d 424, 431 (1998) (en banc); Hunsley v. Giard, 87 Wash.2d 424, 553 P.2d 1096 (1976) (en banc)). “A plaintiff may recover for negligent infliction of emotional distress if she proves negligence, that is, duty, breach of the standard of care, proximate cause, and damage, and proves the additional requirement of objective symptomatology.” Strong v. Terrell, 147 WashApp. 376, 195 P.3d 977, 982 (2008) (citations omitted).
The Trust argues that “Robertson has not alleged (nor could he) that the Debtors made physical threats, or caused him to suffer any emotional abuse or other personal indignities that would give rise to an [intentional infliction of emotional distress] claim.” (Obj-¶ 63.) The Trust also contends that Robertson’s negligent infliction of emotional distress claim fails because the Debtors owed him no duty. {See id. ¶ 64.) Finally, the Trust argues that both emotional distress claims are subject to a two-year statute of limitations and are therefore time-barred to the extent they are based on events that occurred prior to May 14, 2010, the date two years before the Debtors filed for bankruptcy. (Id. ¶ 65.)
Assuming, without deciding, that the Robertson’s emotional distress claims are timely, he fails to state a claim for intentional or negligent infliction of emotional distress against any of the Debtors. Robertson has not alleged facts supporting a reasonable inference that the Debtors engaged in any conduct sufficiently outrageous to support a claim for ..intentional infliction of emotional distress. Robertson generally alleges wrongful conduct on the part of the Debtors with respect to their efforts to foreclose on the Property, and their refusal to negotiate with Robertson, but he only alleges in a conclusory fashion that he suffered emotional distress as a result. (See Compl. ¶¶ 17.2, 17.4.) Furthermore, the Trust rebutted the prima facie validity of Robertson’s intentional infliction of emotional distress claim by the Objection, and Robertson did not respond by arguing that such claim is meritorious. Thus, the Objection is SUSTAINED with respect to Robertson’s intentional infliction of emotional distress claim.
Robertson also does not state a claim for negligent infliction of emotional distress against any Debtor. Under *22Washington law, the general rule “is that a lender is not a fiduciary of its borrower; a special relationship must develop between a lender and a borrower before a fiduciary duty exists.” Miller v. U.S. Bank of Wash., N.A., 72 Wash.App. 416, 865 P.2d 536, 543 (1994) (citations omitted). While some Washington courts have held that “[t]rustees have obligations to all of the parties to the deed, including the homeowner,” Bain v. Metro. Grp., Inc., 175 Wash.2d 83, 285 P.3d 34, 39 (Wash.2012) (en banc) (citations omitted), Robertson does not allege that ETS is a trustee of the First Priority DOT. To the contrary, Robertson contends that ETS “[u]surp[ed] the trustee’s function ... while failing to meet the [Washington Deed of Trust Act] requirements to act as a trustee.” (Comply 12.2(b).) Moreover, while a “trustee or successor trustee has a duty of good faith to the borrower, beneficiary, and grantor” of a deed of trust, Wash. Rev.Code Ann. § 61.24.010(4), “[t]he trustee or successor trustee shall have no fiduciary duty or fiduciary obligation to the grantor or other persons having an interest in the property subject to the deed of trust,” id. § 61.24.010(3). Accordingly, Robertson has failed to adequately allege any duty owed to him by any of the Debtors. The Objection is SUSTAINED with respect to Robertson’s negligent infliction of emotional distress claim.
H. The Washington Criminal Profiteering Act
The Washington Criminal Profiteering Act, Wash. Rev.Code. Ann. § 9A.82.001 et seq., provides civil remedies for a person injured by a pattern of criminal profiteering. See Winchester v. Stein, 135 Wash.2d 835, 959 P.2d 1077, 1083-84 (1998) (en banc). “Criminal profiteering” is defined to “included the commission, or attempted commission, for financial gain, of any one of a number of crimes listed in the statute.” Id. at 1083. The Washington Criminal Profiteering Act defines a “pattern of criminal profiteering” as “engaging in at least three acts of criminal profiteering within a five-year period.” Id. “In order to constitute a pattern, the three acts must have had the same or similar intent, results, accomplices, principals, victims, or methods of commission, or be otherwise interrelated by distinguishing characteristics including a nexus to the same enterprise, and must not be isolated events.” Wash. Rev.Code. Ann. § 9A.82.010(12).
In his Complaint, Robertson generally alleges that the Debtors violated the Washington Criminal Profiteering Act by, among other things, recording fraudulent instruments relating to the Property, attempting to commit theft of the Property through foreclosure, and “employing extortionate means to extract payments from property owners including [Robertson] “ (Compl. ¶ 15.2.) In support, Robertson cites to a number of felony statutes allegedly violated by the Debtors. (See id. ¶ 15.3.) According to the Trust, Robertson’s claim for violations of the Washington Criminal Profiteering Act fails because “[h]e alleges neither the elements of fraud nor any of the felonies listed in the statute.” (Obj. ¶ 67 (citation omitted).) Moreover, the Trust argues that Robertson does not identify any criminal enterprise of which any Debtor is a part. (See id.)
Robertson does not sufficiently plead the elements of any felony enumerated in the Washington Criminal Profiteering Act and therefore fails to adequately plead any act of criminal profiteering, let alone “pattern of criminal profiteering.” Therefore, the Objection is SUSTAINED with respect to Robertson’s .claims under the Washington Criminal Profiteering Act.
*23I. The WCPA
The WCPA, Wash. Rev.Code. Ann. § 19.86.010 et seq., prohibits “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce ...” Id. § 19.86.020. There are five elements to a private right of action under the WCPA: (1) an unfair or deceptive act or practice; (2) in trade or commerce; (8) which affects the public interest; (4) injures the plaintiff in his business or property; and (5) a showing of a causal link between the unfair or deceptive act or practice and the plaintiffs injury. Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wash.2d 778, 784-85, 719 P.2d 531 (1986) (en banc).
An act constitutes an unfair or deceptive act or practice if it “had the capacity to deceive a substantial portion of the public.” Id. (emphasis omitted) (citations omitted). “Implicit in the definition of ‘deceptive’ under the [W]CPA is the understanding that the practice misleads or misrepresents something of material importance.” Holiday Resort Cmty. Ass’n v. Echo Lake Assocs., LLC, 134 WashApp. 210, 135 P.3d 499, 507 (2006) (citation omitted). According to the Trust, “Robertson’s WCPA claim is premised on the notion that: ‘[d]espite repeated requests, ... no Defendant or any representative thereof has ever provided the October 2008 payoff amount on the Note or produced any evidence or ownership thereof, or been willing to exhibit any valid authority for their actions.’ ” (Obj. ¶¶ 70 (quoting Compl. ¶ 16.4).) Among other things, Robertson also alleges that the Debtor Defendants drafted and recorded invalid First Priority Loan documents and engaged in robo-signing and unfair debt collection activities. (CompLITO 16.2, 16.6-16.8.)
Robertson asserts that the RFREH Assignment was fraudulently executed by Thomas Strain, an allegedly notorious robo-signer. (See Compl. ¶¶ 5.66-5.67.) However, the RFREH Assignment was executed by JPM, not by any Debtor. (See Priore Decl. Ex. G.) To the extent Robertson states a claim under the WCPA for the allegedly robo-signed RFREH Assignment, such claim is not properly asserted against RFREH.
Robertson also does not adequately allege any debt collection efforts on the part of the Debtors, and his allegations that the Debtors refused to provide him with pay-off information regarding the First Priority Loan are specific to his interactions with the Debtors and do not support a reasonable inference that such practice extends beyond this particular instance. See Mickelson v. Chase Home Fin., LLC, No. C11-1445 (MJP, 2012 WL 3240241, at *6 (W.D.Wash. Aug. 7, 2012) (dismissing WCPA claim where plaintiffs pleaded “no factual allegations that th[e] practice extends beyond th[e] particular instance or that it has a capacity to deceive a large portion of the population”).19
However, Robertson does state a WCPA claim against RFREH and ETS for their alleged execution of the LSI Appointment. “[T]he Washington Supreme Court has found that characterizing a non-holder (in this case, MERS) as the beneficiary in the deed of trust when it did not have actual possession of the note has the capacity to deceive for purposes of a CPA claim.” Thepvongsa v. Reg’l Tr. Servs. Corp., 972 F.Supp.2d 1221, 1231 (W.D.Wash.2013) (citing Bain, 285 P.3d at 50). “The Supreme Court also found that *24the third element, public interest, was presumptively met because MERS ‘is involved with an enormous number of mortgages in the country (and our state), perhaps as many as half nationwide.’ ” Id. (quoting Bain, 285 P.3d at 51). Additionally, “if there have been misrepresentations, fraud, or irregularities in the [foreclosure] proceedings, and if the homeowner borrower cannot locate the party accountable and with authority to correct the irregularity, there certainly could be injury under the [W]CPA.” Bain, 285 P.3d at 51. RFREH executed the LSI Appointment prior to having any interest in the First Priority DOT but executed the LSI Appointment as beneficiary of the First Priority DOT. As discussed above, Robertson also alleges that ETS drafted and recorded the LSI Appointment. (See Compl. ¶ 12.3.) The Objection is therefore OVERRULED with respect to Robertson’s WCPA claim against RFREH and ETS in connection with their execution of the LSI Appointment. The Objection is SUSTAINED with respect to Robertson’s WCPA claims against the other Debtors.
J. Conspiracy
“Under Washington law, a plaintiff proves a civil conspiracy by showing ‘by clear, cogent and convincing evidence that (1) two or more people contributed to accomplish an unlawful purpose, or combined to accomplish a lawful purpose by unlawful means; and (2) the conspirators entered into an agreement to accomplish the object of the conspiracy.’ ” Gossen v. JPMorgan Chase Bank, 819 F.Supp.2d 1162, 1171 (W.D.Wash.2011) (quoting Wilson v. State, 84 Wash.App. 332, 929 P.2d 448 (1996)). “Because the conspiracy must be combined with an unlawful purpose, civil conspiracy does not exist independently—its viability hinges on the existence of a cognizable and separate underlying claim.” Id. (citingN.W. Laborers-Employers Health & Sec. Trust Fund v. Philip Morris. Inc., 58 F.Supp.2d 1211, 1216 (W.D.Wash.1999)). Robertson does not plead facts supporting a reasonable inference that any of the Debtors entered into any agreement to accomplish any unlawful purpose or a lawful purpose by unlawful means. Accordingly, the Objection to Robertson’s conspiracy claims is SUSTAINED.
III. CONCLUSION
The Objection is SUSTAINED in part and OVERRULED in part. Robertson’s Homecomings Claim may proceed to an evidentiary hearing with respect to his trespass cause of action, as set forth above; his ETS Claim may proceed to an evidentiary hearing with respect to his fraud and WCPA causes of action, as set forth above; and his RFREH Claim may proceed to an evidentiary hearing with respect to his fraud and WCPA causes of action, as set forth above.
The Trust’s counsel shall confer with Robertson within fourteen (14) days from the date of this Opinion to discuss possible settlement of the remaining issues in this dispute. Additionally, counsel shall confer regarding the scheduling of any discovery and an evidentiary hearing, as well as further briefing before trial. Following such conference, counsel shall promptly file a status letter advising the Court of the proposed schedule. The Trust’s counsel shall also set this matter for a further status conference during the next available Omnibus Hearing date; Robertson may participate in the conference by telephone. The Court will enter a scheduling order following that conference.
IT IS SO ORDERED.
. Robertson also filed a declaration in support of the Opposition.
. Robertson appeared at the Hearing by telephone.
.The Bank One Assignment was recorded on August 3, 2000. (Obj-¶ 10.)
. The First American Appointment was recorded on February 23, 2007. (See id.)
. According to the Trust, the beneficiary of record for the First Priority DOT at this time was Bank One, notwithstanding the prior merger of Bank One into JPM and the subsequent transfer of JPM's interests in the First Priority Loan to BONY. (Id. ¶ 13 n.4.) However, the Trust asserts that under Washington law, no assignment is necessary for the note holder to have the right to enforce the note, even if the note holder is not the beneficiary of record. (Id.)
. The Notice of Sale was recorded on January 12,2009. (See id.)
. The LSI Appointment was recorded on February 17, 2010. (See id.)
. The RFREH Assignment was recorded on August 12, 2010. (See id.)
. The RFC Corrected Assignment was recorded on July 27, 2012. (See id.)
. The 21st Century Assignment was recorded on July 23, 2013. (See id.)
. A copy of the Complaint is attached to the Claims, annexed to the Objection as Exhibits 1-A through 1-E. (Priore Decl. ¶ 19; see id. Exs. 1-A-l-E.)
. Among other things, the Supplemental Servicing Order modified the automatic stay with respect to foreclosure actions and nonjudicial foreclosures initiated by the Debtors to permit borrowers, mortgagors, or lienhold-ers to assert claims and counter-claims relating exclusively to the subject property for the purposes of defending, enjoining, or precluding foreclosure. (See id. ¶ 14.) The Supplemental Servicing Order further provided that claims and counter-claims seeking monetary relief remained subject to the automatic stay absent further order of the Court. (See id. ¶ 14(b).)
. RCW section 59.12.010 defines “forcible entry” as used in Washington's statutes governing landlord/tenant laws. See Wash. Rev. Code. Ann. § 59.12.010. Because there is no landlord/tenant relationship between Robertson and any Debtor, this section of the RCW is irrelevant to Robertson's Claims.
. The matter is further confused by the fact that RFREH appointed LSI as substitute trustee of the First Priority DOT months before RFREH ever purported to obtain a beneficial interest in the First Priority DOT. Moreover, the RFC Corrected Assignment clarified that RFREH never actually obtained any interest in the First Priority DOT.
. Robertson alleges claims for fraud and deception together, and to the extent his allegations are properly construed as sounding in fraud, they are addressed in this section. To the extent Robertson alleges violations of the WCPA, the allegations are addressed in the relevant section below. Robertson’s conspiracy allegations are also addressed in a separate section below.
. According to the Trust, “the Washington Deed of Trust Act defines beneficiary as [n]ote holder ... and no assignment is necessary for the note holder to have the right to enforce the note, even if the note holder is not the beneficiary of record.” (Priore Decl. ¶ 11 n.2 (internal citation omitted).) BONY was the beneficiary of the First Priority Loan by succeeding to JPM's interests therein on October 1, 2006, (see id. ¶ 9); JPM succeeded Bank One’s interests in the First Priority Loan by merger in 2004, (see id. ¶ 8).
. "Indorser” is defined as “a person who makes an indorsement.” Wash. Rev.Code. Ann. § 62A.3-204(b). In turn, " '[i]ndorsement’ means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made *19on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser’s liability on the instrument.” Id. § 62A.3-204(a). An "accommodation party” is defined, in relevant part, as a party who "signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument I'd. § 62A. 3-419(a).
. Subrogation is an equitable doctrine "extending to parties who, although not personally bound to pay a debt, are compelled to do so in order to protect their property interest.” MGIC Fin. Corp., 600 P.2d at 576 (citations omitted). "Subrogation entitles the party paying the debt to all of the rights, priority, liens and securities which the senior mortgagee had against the mortgagor.” Id. (citations omitted).
. For the same reason, Robertson does not allege facts indicating that ETS’s alleged misrepresentation of GMACM as the holder of the Note is anything but an isolated incident. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498300/ | MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT’S MOTION TO DISMISS
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
Before the Court is Defendant Wells Fargo Bank, N.A.’s (“Wells Fargo”) mo*30tion (the “Motion,” ECF Doc. # 9) to dismiss the complaint (the “Complaint,” ECF Doc. # 1) in the above-captioned adversary proceeding (the “Adversary Proceeding”) filed by Plaintiff Ally Financial Inc. (“AFI”), the non-debtor parent company of the former debtor Residential Capital, LLC (“ResCap”). AFI filed an opposition (the “Opposition,” ECF Doc. # 16) and Wells Fargo filed a reply (the “Reply,” ECF Doc. # 17).
This Adversary Proceeding arises out of deposit accounts opened by AFI and certain of its debtor and non-debtor affiliates and subsidiaries with Wells Fargo. The parties entered into the contract to open the accounts in January 2012. Two months later, apparently in anticipation of the bankruptcy filings by ResCap, Wells Fargo used the “change of terms” provision in the account agreement and unilaterally amended the agreement with AFI. The amendment expanded the indemnification provision in the agreement, making AFI liable as a guarantor for any debts to Wells Fargo of ResCap and its debtor affiliates (collectively, the “Debtors”). The notice of the unilateral amendment gave AFI 37 days to close the accounts or the amendment was deemed accepted. (The account agreement required that Wells Fargo give AFI 30 days’ notice of any change of terms.) AFI’s Complaint alleges that it was unable to close all of the accounts by the deadline (because of the extensive use of the accounts and the number of checks outstanding) and the amendment became effective before the Debtors filed their bankruptcy petitions approximately three weeks later. Wells Fargo thereafter debited funds from AFI’s accounts to satisfy amounts Wells Fargo claimed were owed by the Debtors, allegedly incurred before and during the Debtors’ bankruptcies. These amounts (approximately $500,000) primarily related to attorneys’ fees that Wells Fargo incurred in monitoring the Debtors’ bankruptcy cases.
AFI alleges that Wells Fargo’s unilateral amendment of the account agreement and debiting of AFI’s account were improper, giving rise to damages claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and conversion. AFI also requests declaratory relief. Wells Fargo’s Motion to dismiss argues that the plain language of the contract permitted the amendment and, therefore, as a matter of law, AFI’s claims must be dismissed.
AFI and Wells Fargo were both obviously sophisticated parties. The change of terms contract language is clear and unambiguous and is enforceable under applicable New York law.1 While the Court believes that Wells Fargo engaged in what can only be described as “sharp practices,” *31Wells Fargo acted in accordance with the terms of the parties’ contract. AFI cannot rewrite the terms of the contract with the benefit of hindsight.
Therefore, as set forth below, Wells Fargo’s Motion is GRANTED and AFI’s Complaint is DISMISSED with prejudice as to the breach of contract, conversion, and part of the breach of the implied covenant of good faith and fair dealing claims. AFI’s remaining theory of breach of the implied covenant — that Wells Fargo acted uncooperatively in carrying out its own requisite procedures for closing accounts— is DISMISSED without prejudice and AFI is GRANTED leave to amend to bet- • ter allege this claim.
I. BACKGROUND
A. The Parties’ Original Contractual Relationship
AFI, directly or through its subsidiaries, is one of the largest providers of automotive financing, and leasing products and services in the United States. (Compl.ll 14.) The Debtors were separate and independent legal entities that were direct or indirect subsidiaries of AFI and were engaged in the mortgage loan origination, securitization, and servicing businesses. (Id. ¶ 16.)
On January 3, 2012, AFI and certain of its affiliates and subsidiaries, including the Debtors, executed a commercial deposit agreement (the “CDA,” Compl. Ex. A) with Wachovia Bank and Wachovia Bank of Delaware. (Comply 17.) Both Wacho-via entities were succeeded by Wells Fargo. (Id.) The CDA sets forth terms and conditions relating to commercial deposit accounts that AFI, the Debtors, and the other signatories maintained with Wacho-via, and later Wells Fargo. (Id. ¶¶ 15, 17(citing CDA).) Approximately 30 of these accounts were checking accounts relating to AFI’s auto financing and services business (the “Ally Auto Services Accounts”). (Id.) One of the accounts (the “AFI Funding Account”) was a main funding account that was used to transfer funds to cover checks issued from the Ally Auto Services- Accounts. (Id.) The Debtors’ accounts were not used in AFI’s auto services business. (Id.)
In its original form, the CDA contained the following relevant provisions:
Throughout this deposit agreement, Wa-chovia Bank and Wachovia Bank of Delaware, each a division of Wells Fargo Bank, N.A., as applicable, are referred to as “we” or “us,” the commercial deposit accounts we offer are referred to as the “accounts,” the treasury management services that we offer are referred to as the “treasury services,” this deposit agreement and the other documents described below are together referred to as the “agreement;” and: 1) each entity maintaining an account or using any of the services listed on Exhibit A hereto; and 2) each such entity is individual referred to herein as “you.”
(the “Defining Terms Provision,” CDA at l);
When you open an account and accept service from us, you agree to be bound by the terms and conditions of the agreement.
tid.>,
We may amend this agreement and any documentation referred to herein and the rules related to your account at any time. We will provide you 30 days prior notice of any such changes' or amendments if they are not in your favor. If you continue to use such services after such notice you will be deemed to have accepted such changes. Notwithstanding the forgoing, we may make such changes immediately where required to do so including amendments required by *32changes in law, regulation, applicable clearinghouse rule or in any other circumstance that prohibits the giving of such prior notice.
(the “Amendment Provision,” id.);
In the event that any provision of the agreement is held to be invalid, illegal or unenforceable for any reason, the remaining provisions of the agreement will remain in full force and effect.
(id. § 16);
Except as may be limited by applicable law and except to the extent losses, claims, and expenses are finally determined by a court or arbitrator having proper jurisdiction have been caused by our negligence or our willful misconduct or by our breach of our obligations under the agreement, you agree to indemnify and hold us ... harmless from (or at our election and where appropriate to reimburse us for) any and all losses, costs and expenses (including attorneys’ reasonable fees and costs) resulting from:
(a) claims brought against us by any person or entity arising in connection with any of the services or treasury services provided under the agreement ...;
(d) obligations, losses or expenses we incurred in connection with any legal process, dispute or third-party claim related to you or your accounts;
These indemnification obligations will survive the termination of any treasury services in whole or in part or the termination of the agreement.
(the “Indemnification Provision,” id. § 21);
If you ever owe us money as a customer, borrower, guarantor or otherwise including any obligation owed to us for services provided pursuant to this agreement or owed to a financial institution that we acquire, then you agree that, in addition to any other remedies we may have, we have the right to deduct and set off amounts you owe us from any accounts you hold with us or our affiliates.
By accepting services, you also grant us a consensual security interest in your accounts and to the funds held in them as collateral to secure your present and future obligations to us.
With the exception of charging an account for items that may be returned against it, we will not set-off against - and you do not grant us a security interest in - any account for money owed us where the account name indicates, and you actually do, hold the funds in such account in a representative capacity.
(the “Setoff Provision,” id. at 17);
The CDA contains three signature pages, with authorized signatures for AFI and each of AFI’s subsidiaries and/or affiliates that opened accounts. (See id. at 23-25.) For each of the entities, the same individual or individuals signed on behalf of the entity, executing and accepting the terms of the CDA. (See id.) The CDA attaches a list as Exhibit A of each of the AFI entities to which the CDA applies: AFI, Ally Servicing LLC, Motors Insurance Corp., ResCap, Debtor Residential Funding Co., LLC, Debtor Passive Asset Transactions LLC, Debtor RFC Asset Holding II, LLC, Debtor Residential Mortgage Real Estate Holdings, LLC, Debtor Residential Funding Real Estate Holdings, Debtor Homecoming Financial Real Estate Holding, Debtor GMACM Mortgage, LLC, Debtor Ditech, LLC, and Debtor Residential Consumer Services, LLC (together, the “Depositors”). (See id. Ex. A.)
*33B. Wells Fargo’s Amendment to the CDA
Wells Fargo sent the Depositors, including the Debtors and AFI, a letter dated March 19, 2012, stating that it was amending the CDA (the “Amendment”). (See generally Compl. Ex. B.) The Amendment included amended and/or new provisions, including a guarantee provision, which states in pertinent part:
a. GUARANTY; DEFINITIONS. In consideration of [Wells Fargo’s] continued provision of treasury management services to the Ally/ResCap Entities under this agreement, notwithstanding the right of [Wells Fargo] to cease the provision of such services, and for other valuable consideration, ALLY FINANCIAL, INC. (“Guarantor”), jointly and severally unconditionally guarantee and promise to pay [Wells Fargo], or order, on demand in lawful money of the United States of America and in immediately available funds, any and all Indebtedness of any Subsidiary [“Subsidiaries being defined as a variety of the Debtor entities] to [Wells Fargo] arising out of or relating in any way to any deposit account maintained by Subsidiary with [Wells Fargo], or any treasury management service offered by [Wells Fargo] which is purchased or otherwise utilized by Subsidiary ... The term “Indebtedness” is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Subsidiary, or any of them....
f. [Wells Fargo’s] RIGHTS WITH RESPECT TO GUARANTOR’S PROPERTY IN [Wells Fargo’s] POSSESSION. In addition to all liens upon and rights of setoff against the monies, securities or other property of Guarantor given to [Wells Fargo] by law, [Wells Fargo] shall have a lien upon and a right of setoff against all monies, securities and other property of Guarantor now or hereafter in the possession of or on deposit with [Wells Fargo], whether held in a general or special account or deposit or for safekeeping or otherwise, and every such lien and right of setoff may be exercised without demand upon or notice to Guarantor. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of [Wells Fargo], or by any neglect to exercise such right of setoff and lien shall continue in full force and effect until such right of setoff or lien is specifically waived or released by [Wells Fargo] in writing.
(Id. at 4 (emphasis in original).) The Amendment also indicated that continued use by the Depositors of the accounts covered by the CDA after April 25, 2012 (37 days after the letter was dated) would be deemed consent to the amendments. (Compl. ¶ 25; id. Ex. B at 2.) The Amendment changed other provisions of the CDA, such as the subordination of AFI’s claims against the Debtors to any claims of Wells Fargo against the Debtors and a modification of the indemnity obli-gátions with AFI agreeing to indemnify Wells Fargo for any losses incurred in connection with accounts that were the source or recipient of funds transferred to or from AFI. (Motion at 5 n.2 (citing Compl. Ex. B).)
C. AFI’s Closure of Its Accounts with Wells Fargo
After receiving the March 19, 2012 letter, AFI sought to reject the Amendment and initiated the process of closing its ac*34counts with Wells Fargo. (Comply 29.) The Complaint alleges that AFI made diligent efforts to close all of its accounts with Wells Fargo as soon as commercially reasonable. (Id.) The Complaint alleges that AFI informed Wells Fargo that closing the Ally Auto Services Accounts within the allotted 30-day time period posed a serious business risk to AFI because AFI had issued thousands of checks drawn on those accounts that remained unpaid at the time the Amendment was sent and AFI could only close each account after the checks drawn had been paid, escheated, or reissued; AFI did not want to risk those checks being returned unpaid or otherwise unable to clear due to the closing of the accounts. (Id.) The Complaint further alleges that AFI had to establish accounts at a new bank for its auto services business, a process that would take more than 37 days to accomplish given the complexity of the accounts, a fact Wells Fargo allegedly knew. (Id. ¶ 30.) The Complaint also alleges that closing the Wells Fargo accounts required Wells Fargo’s approval in accordance with its internal administrative process. (Id. ¶ 31.) AFI alleges that Wells Fargo therefore controlled the timing of the closing of any account upon AFI’s request for account closure. (Id.) The Complaint alleges that Wells Fargo was fully aware of the processes required to close such accounts and open new ones and the time needed to do so. (Id.) AFI alleges that it sought to work amicably with Wells Fargo to transition the accounts from Wells Fargo to a new bank, but Wells Fargo was uncooperative and unresponsive. (Id. ¶ 32.) Despite AFI’s efforts, AFI was unable to close the more than 30 accounts by the April 25, 2012 deadline. (Id. ¶ 33.)
D. The Debtors’ Bankruptcy
The Debtors filed chapter 11 bankruptcy petitions beginning on May 14, 2012. (Id. ¶ 34.) Wells Fargo’s attorneys from Winston & Strawn LLP (“W & S”) appeared at several hearings before this Court. (Id. ¶35.) Throughout the bankruptcy proceedings, Wells Fargo’s counsel argued that counsel needed to protect Wells Fargo’s interest during the Debtors’ bankruptcy proceeding, but when pressed by the Court, its counsel was unable to articulate exactly what that.interest was and in fact admitted that Wells Fargo was not “aware of any claims [it had against the Debtors] as of [June 18, 2012].” (Id. ¶¶ 35-36 (citing id. Ex. D) (quoting June 18, 2012 Hrg. Tr. at 56:8, 57:12-13, ECF Doc. # 472; Nov. 19, 2013 Hrg. Tr. 245:18-21, ECF Doc. #5971).) Wells Fargo’s counsel filed multiple proofs of claim, asserting unliquidated claims with no articulated basis, but attaching the CDA, the Amendment, and other related account documents and service descriptions. (Id. ¶ 37 (citing id. Ex. E).)
W & S charged Wells Fargo legal fees in connection with the Debtors’ bankruptcy cases even though all of the Debtors’ Wells Fargo accounts were officially closed on or before June 12, 2012. (Id. ¶ 38 (citing ECF Doc. # 6019-1).)
E. Wells Fargo Debits Funds from the AFI Funding Account
In a letter dated May 4, 2012, Wells Fargo requested payment from AFI of $88,159.39 in legal fees for services rendered by W & S from December 27, 2011 through February 29, 2012. (Id. ¶ 40.) The services were allegedly rendered “in connection with the implementation and administration of this agreement, including amendment” and before the Amendment became effective. (Id.)
On November 29, 2012, Wells Fargo requested payment by AFI in the amount of $384,486.01 for the reimbursement of fees *35charged for services allegedly related to Wells Fargo’s participation in the Debtors’ bankruptcy involving the Debtors’ accounts. (Id. ¶ 41.)
After AFI contested the requests for payment of legal fees, Wells Fargo provided AFI with redacted invoices of the legal expenses. (Id. ¶ 42.) The Complaint alleges that the redacted invoices contained no description of the alleged work for which Wells Fargo sought to hold AFI responsible beyond stating that the work was for “Res/Cap.” (Id.)
On December 18, 2012, after reviewing the redacted invoices, AFI’s counsel wrote to Wells Fargo’s counsel questioning the reasonableness and propriety of the fees and counsel’s billing practices. (Id.) Wells Fargo responded by letter dated December 21, 2012 (received by AFI on December 24, 2012), stating that Wells Fargo planned to debit AFI’s accounts to pay the Debtors’ alleged obligations for Wells Fargo’s legal fees. (Id. ¶ 43.) The letter asserted that Wells Fargo had the right to debit the account pursuant to the Amendment to the CDA. (Id.) On December 26, 2012, one business day after AFI received the letter, Wells Fargo took $472,619.57 from the AFI Funding Account in satisfaction of the Debtors’ alleged obligation to pay Wells Fargo’s legal fees. (Id. ¶44.)
AFI requested that Wells Fargo return the funds and desist from further conversion of AFI’s money. (Id. ¶ 45.) On December 10, 2013, Wells Fargo agreed to return $100,000 to AFI subject to a release agreement (the “December 10, 2013 Release Agreement”). (Id. ¶ 46; see Motion Ex. 1).) In accepting this payment, AFI specifically reserved its claim to the remaining $372,619.57 taken from AFI’s account. (Comply 46.) The December 10, 2013 Release Agreement also provides the following release of:
any and all known or unknown, asserted or unasserted, derivative or direct, foreseen or unforeseen, existing or hereinafter arising claims and Causes of Action arising from or related to the Deposit Agreement or the Purported Amendment, including Winston’s fees and expenses incurred in representing [Wells Fargo] regarding the Debtors and Ally.
(Motion Ex. 1 ¶ 2.) On December 12, 2013, Wells Fargo returned the agreed upon $100,000 to AFI. (Id.)
AFI has since demanded that Wells Fargo return the remaining funds debited from the AFI Funding Account, but Wells Fargo has refused to do so. (Id. ¶ 47.)
F. Causes of Action
The Complaint asserts three causes of action and a request for a declaratory judgment. The first cause of action sounds in breach of contract. (Id. ¶¶ 48-57.) According to AFI, the CDA did not provide Wells Fargo with the right to (1) unilaterally amend the agreement to make AFI guarantor of any of the Debtors’ liabilities with respect to the Debtors’ accounts with Wells Fargo, (2) take funds from AFI’s accounts to satisfy the Debtors’ alleged debts to Wells Fargo, or (3) impose liens on AFI’s property. (Id. ¶ 49.) The Complaint asserts that the Amendment (1) was commercially unreasonable and unconscionable, (2) was purportedly made with no consideration provided in exchange, (3) purports to create, without AFI’s consent, a new obligation on AFI’s part that was not contemplated by the parties or the original CDA, and (4) did not provide AFI with enough time to close the accounts if it sought to reject the amendments. (Id. ¶¶ 50-53.) The Complaint alleges that Wells Fargo breached the CDA when it sought to impose the third party guarantor obligation on AFI and when it debited money from the AFI *36Funding Account without AFI’s consent, for purposes not permitted by the CDA. (Id. ¶ 55.) The Complaint further alleges that Wells Fargo breached the CDA when it debited funds from the AFI Funding Account to pay Wells Fargo’s legal fees purportedly relating to the Debtors because the fees were unnecessary and unreasonably incurred. (Id. ¶ 56.) For this cause of action, AFI seeks $372,619.57 in damages — the amount withdrawn from the account less the $100,000 returned — plus interest. (Id. ¶ 57.)
Second, AFI asserts a claim for breach of the implied covenant of good faith and fair dealing. (Id. ¶¶ 58-63.) The Complaint asserts that the CDA contains an implied promise that Wells Fargo would act in good faith and deal fairly with AFI and that Wells Fargo’s conduct in attempting to unilaterally amend the CDA lacked good faith, constituted unfair dealing, and was arbitrary and irrational. (Id. ¶¶ 59-60.) The Complaint alleges that this claim is separate from the breach of contract claim, but is also asserted in the alternative. (Id. ¶ 61.) AFI asserts that it was injured when Wells Fargo wrongfully took funds from the AFI Funding Account under the purported Amendment and is therefore entitled to damages in the amount of $372,619.57 plus interest. (Id. ¶¶ 62-63.)
Third, the Complaint pleads a conversion claim. (Id. ¶¶ 64-67.) The Complaint asserts that the money in the AFI Funding Account belonged to AFI, Wells Fargo took funds from the account without AFI’s consent and without contractual authority to do so, and Wells Fargo thereby exercised dominion over and interference with AFI’s funds in derogation of AFI’s rights. (Id. ¶¶ 65-66.) AFI asserts that it is entitled to damages in the amount of $372,619.57, plus interest. (Id. ¶ 67.)
The Complaint further seeks a declaratory judgment that Wells Fargo’s attempted Amendment to the CDA is illegal and invalid. (Id. ¶¶ 68-71.)
G. The Motion
Wells Fargo’s Motion seeks to dismiss the Complaint in its entirety. According to Wells Fargo, the breach of contract, conversion, and declaratory judgment claims must be dismissed because the CDA expressly permitted Wells Fargo to take the actions it took. (Motion ¶¶ 13-25.) Wells Fargo argues that each of these claims requires a finding that Wells Fargo was not entitled to amend the CDA; Wells Fargo submits that the CDA expressly gave Wells Fargo the right to amend the agreement and provided that AFI was deemed to have accepted the Amendment since AFI continued to use the Wells Fargo account services after 30 days’ notice of the Amendment. (Id. ¶ 14.) Wells Fargo compares the Amendment Provision of the CDA to a termination provision. (Id. ¶¶ 15-17.) According to Wells Fargo, courts uphold termination provisions in contracts that include the same 30 day notice provision, regardless whether the exercise of the provision makes the contract onerous or whether the power is exercised in good faith. (Id. ¶ 16 (citing Bushwick-Decatur Motors, Inc. v. Ford Motor Co., 116 F.2d 675, 677 (2d Cir.1940) (applying Michigan law); Joseph Victori Wines, Inc. v. Vina Santa Carolina S.A., 933 F.Supp. 347, 353 (S.D.N.Y.1996); Alco Standard Corp. v. Schmid Bros., Inc., 647 F.Supp. 4, 7 (S.D.N.Y.1986)).) Wells Fargo advocates for a similar treatment of the Amendment Provision and also contends that AFI’s position is hollowed by the fact that the parties are sophisticated and specifically agreed to completely terminate the agreement on thirty days’ notice or amend the agreement upon the same notice subject to the *37Depositor’s right to discontinue service. (Id. ¶¶ 17-20, 24.) Wells Fargo also asserts that at least one other court has upheld a similar amendment provision. (Id. ¶ 24.) Wells Fargo further argues that this issue of contract interpretation is appropriately resolved as a matter of law on a motion to dismiss where, as here, the contract is clear and unambiguous — Wells Fargo acted within its right under the CDA to amend the contract. (Id. ¶¶ 21-22.) As a result, Wells Fargo argues that the' contract, conversion, and declaratory judgment claims cannot survive the Motion to dismiss. (Id. ¶ 25.)
Wells Fargo additionally argues that AFI cannot use the implied covenant of good faith and fair dealing to override the express terms of the CDA. (Id. ¶¶ 26-30.) Wells Fargo asserts that courts interpret and enforce the plain meaning of contracts and the fact that literal enforcement of a contract term may lead to a mismatch between the parties’ expectations or an “unreasonable” exercise of the contracted for powers does not allow the courts to rewrite the plain terms of a contract under the guise of the implied covenant. (Id. ¶¶ 27-29 (citing Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir.1990); MJ Partners Rest. Ltd. P’ship v. Zadikoff, 995 F.Supp. 929, 933 (N.D.Ill.1998); Gen. Aviation Inc. v. Cessna Aircraft Co., 703 F.Supp. 637, 644 (W.D.Mich.1988), aff'd 915 F.2d 1038 (6th Cir.1990)).) Wells Fargo argues that the CDA clearly sets forth Wells Fargo’s ability to amend the agreement on 30 days’ notice; Wells Fargo’s actions therefore cannot constitute a breach of the implied covenant of good faith and faith dealing. (Id. ¶ 30.)
Wells Fargo concludes by asserting that the December 10, 2013 Release Agreement bars AFI from challenging the reasonableness of the actions taken by Wells Fargo pursuant to the Amendment. (Id. ¶¶ 31-37.) According to Wells Fargo, the December 10, 2013 Release Agreement provided for a partial settlement under which Wells Fargo was released from all claims that AFI might assert against Wells Fargo, except for a claim that the amendment to the CDA was invalid. (Id. ¶ 33 (citing id. Ex. 1).) Wells Fargo argues that the reasonableness of the W & S fees is beyond argument and cannot be litigated before the Court. (Id. ¶ 35.) Wells Fargo contends that the December 10, 2013 Release Agreement is unambiguous and must be enforced according to its terms. (IdA 36.) Wells Fargo therefore asserts that any claim AFI asserts that the attorney’s fees were unreasonable and should not have been deducted even if the Amendment were valid, must be dismissed. (1&¶ 37.)
H. The Opposition
AFI first argues that the Amendment is void under New York law because it violates the Statute of Frauds codified in New York General Obligations Law (“NY-GOL”) section 5-701(a). (Opp. at 7-10.) AFI asserts that the Amendment is a special promise to answer for a debt of another and is not capable of being performed within a year; although the Amendment is in writing in the letter, AFI never executed the letter, and the Amendment is therefore unenforceable. (Id.) AFI similarly asserts that the Amendment violates NYGOL section 5-1103, which governs the modification of a security interest provision and requires that the party against whom it is sought to be enforced sign the written modification. (Id. at 10-11.) Since AFI did not sign the letter contemplating the Amendment, AFI contends that the Amendment is invalid under this New York statute. (Id.)
*38AFI further asserts that, contrary to Wells Fargo’s assertions, the Amendment constitutes a breach of the implied covenant of good faith and fair dealing. (Id. at 11-15.) AFI argues that the Amendment Provision in the CDA is a discretionary provision that should be read to encompass the implied covenant of good faith and fair dealing and should also be interpreted narrowly, such that only terms that already existed in the agreement can be amended and new terms on extraneous subject matter cannot be added. (Id. at 11-12.) AFI contends that to find otherwise would allow Wells Fargo to use the amendment process arbitrarily and to impose terms that were never contemplated by the consent that the depositor gave upon signing the CDA. (Id. at 12.) Moreover, AFI argues that such a broad reading of the Amendment Provision would place AFI “at the mercy of’ Wells Fargo’s whims to impose whatever terms Wells Fargo wants, which would be “against the general policy of the law.” (Id. at 12-13 (quoting Fair Pavilions, Inc. v. First Nat’l City Bank, 19 N.Y.2d 512, 518, 281 N.Y.S.2d 23, 227 N.E.2d 839 (1967)).)
The fact that AFI never affirmatively agreed to the Amendment should alone defeat its validity and effect. (Id. at 13 (citing Discover Bank v. Shea, 362 N.J.Super. 200, 827 A.2d 358, 364-65 (2001); Badie v. Bank of Am., 67 Cal.App.4th 779, 79 Cal.Rptr.2d 273, 290 (1998)).) According to AFI, Wells Fargo’s argument that AFI’s failure to close all of its accounts during the 37-day period constitutes consent is without merit because such closure in such a short amount of time was not a viable option for AFI. (Id. at 13-14.) AFI argues that the 37 day period was grossly inadequate, demonstrating that (1) the extreme nature of Wells Fargo’s alleged Amendment was not mutually contemplated by the parties as being within the Amendment Provision when the parties signed the CDA approximately two months before receiving the Amendment, and (2) Wells Fargo did not act in good faith or deal fairly with AFI with respect to the Amendment. (Id. at 14.)
AFI further argues that the Amendment is commercially unreasonable, renders the CDA. illusory, and is unconscionable. (Id. at 15-24.) First, AFI argues that the Amendment is commercially unreasonable and unenforceable because the Amendment sets forth entirely new obligations not contemplated originally by the parties, unilaterally gives Wells Fargo a security interest in all AFI property in breach of covenants AFI owes to others, and was clearly outside the scope of the Amendment Provision. (Id.) Second, AFI argues that if the Amendment Provision permits Wells Fargo to make such unfettered changes to the CDA, courts have held that such provisions for unilateral amendment renders a contract illusory. (Id. at 19 (citing Sears Roebuck & Co. v. Avery, 163 N.C.App. 207, 593 S.E.2d 424, 432 (2004); Badie, 79 Cal.Rptr.2d at 284-85).) Third, AFI asserts that a contractual notice period must be reasonable to be effective; the notice provision in the Amendment Provision was misused by Wells Fargo and unreasonable, and as such does not effectively provide AFI’s consent to the Amendment. (Id. at 20-1.) Fourth, AFI contends that the Amendment is unconscionable. (Id. at 21-24.) AFI argues that Wells Fargo anticipated the. Debtors’ bankruptcy and immediately attempted to shift the burden for any expense Wells Fargo might incur as a result upon AFI. (Id. at 21.) Substantively, AFI argues that the Amendment is unconscionable because the terms of the Amendment are unreasonably favorable to Wells Fargo. (Id. at 22-23.) Moreover, AFI asserts that the Amendment is procedurally unconscionable because AFI did not have *39“any ability to bargain for the terms,” or an “opportunity to engage in that process.” (Id. at 24.)
AFI acknowledges that the December 10, 2013 Release Agreement prevents AFI from taking discovery concerning the reasonableness of W & S’s fees without the Court’s permission. However, AFI states if the Complaint survives it will seek dis-. covery on Wells Fargo’s motivation for making the Amendment in connection with the breach of the covenant of good faith and fair dealing and the unreasonable nature of the Amendment, as well as whether the CDA was breached because some part' of the charged fees had no connection with the Debtors’ accounts. (Id. at 21-22 n*.)
I. The Reply
Wells Fargo argues that AFI’s failure to plead the Statute of Frauds and other NYGOL defenses in the Complaint precludes their assertion in the Opposition. (Id. ¶¶ 5-6 (citing Ryan v. Kellogg Partners Inst. Servs., Index No. 601909/05, 2010 N.Y. Slip. Op. 33771[U], at *8-10, 2010 WL 8566417 (N.Y.Sup.Ct. Jan. 8, 2010); 23/23 Commc’ns Corp. v. GMC, 257 A.D.2d 367, 367, 683 N.Y.S.2d 43 (N.Y.App.Div.1999)).) In any event, Wells Fargo argues that the Statute of Frauds and other NYGOL defenses have no application in this case because the parties entered into a signed agreement that expressly provides for the way in which amendments to that agreement will be evidenced. (Id. ¶¶ 7-5.) Further, the Statute of Frauds may be satisfied through a combination of writings, only one of which need be signed while others need not be signed. (Id. ¶ 12.) Wells Fargo also as- • serts that AFI’s defense that the Amendment was made without consideration is unpersuasive because where the original contract allows one party to change the terms pursuant to ascertainable standards, an amendment does not require additional consideration. (Id. ¶ 13.) Wells Fargo asserts that AFI fails to point to a single case on point that involves a contract with an express change of terms provision. (Id. ¶ 14.)
Wells Fargo also reiterates its argument that AFI cannot use the implied covenant of good faith and fair dealing to override the express terms of the CDA. (Id. ¶¶ 15-22.) Wells Fargo relies on Valle v. ATM National, LLC, No. 14-cv-7993 (KBF), 2015 WL 413449, at *5 (S.D.N.Y. Jan. 30, ' 2015), which holds that a customer accepts the revised terms of its account agreement, whether the terms were originally contemplated or not, by continuing to use such accounts after receiving notice of the revised terms. (Id. ¶¶ 15-17.) According to Wells Fargo, AFI’s continued use of the accounts past the notice period constituted more than mere passive use and therefore manifested acceptance of the Amendment. (Id.) Wells Fargo further asserts that this acceptance makes it irrelevant whether the Amendment was within the. reasonable contemplation of the parties. (Id. ¶ 18.) Wells Fargo also asserts that even if the question of reasonable expectations were relevant, the CDA did contemplate reimbursement and indemnification. (Id. ¶ 20 (citing CDA at 8 § 21; id. at 17; id. Ex. B at 3-8).) Wells Fargo contends that the expansion of the indemnification and reimbursement obligations to encompass the obligations of AFI’s co-signatories was also within reasonable expectations because AFI and all of the AFI affiliates had the same signatory to the CDA, which contained a broad indemnification and reimbursement obligation for losses related to the accounts. (Id. ¶ 21.)
Wells Fargo further argues that the Amendment was neither procedurally nor substantively unconscionable. (Id. ¶¶23-27.) First, the Amendment was not proce*40durally unconscionable because AFI received notice of the Amendment (and received seven extra days). (Id. ¶¶ 24-25.) According to Wells Fargo, AFI’s attempt to argue that the 30 day notice period was insufficient is a belated attempt to renegotiate the change of terms provision in the contract. (Id. ¶ 25.) Wells Fargo submits that this should end the inquiry; in order to prove unconscionability without procedural unconscionability, the plaintiff must show that the contract provision at issue is so outrageous that it falls within the very limited number of “exceptional cases” that warrant holding the provision unenforceable solely on the ground of substantive unconscionability, which AFI cannot prove here. (/¿¶ 26.) Wells Fargo argues that AFI cannot argue the Amendment was substantively unconscionable because parent companies routinely indemnify and guarantee their subsidiaries’ obligations and subordinate their claims. (Id. ¶ 27.)
Wells Fargo concludes by asserting that AFI has not refuted the fact that the December 10, 2013 Release Agreement precludes its claims challenging the reasonableness of the attorneys’ fees and requires dismissal of such claims. (Id-¶ 28.)
II. DISCUSSION
A. Standard on a Motion to Dismiss
To survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”), made applicable here by Rule 7012 of the Federal Rules of Bankruptcy Procedure, a complaint need only allege “enough facts to state a claim for relief that is plausible on its face.” Vaughn v. Air Line Pilots Ass’n, Int'l, 604 F.3d 703, 709 (2d Cir.2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). “Where a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citation and internal quotation marks omitted). Plausibility “is not akin to a probability requirement,” but rather requires “more than a sheer possibility that a defendant has acted unlawfully.” Id. (citation and internal quotation marks omitted).
Courts use a two-prong approach when considering a motion to dismiss. Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgmt., 712 F.3d 705, 717 (2d Cir.2013) (stating that motion to dismiss standard “creates a ‘two-pronged approach’ ... based on ‘[t]wo working principles’ ” (quoting Iqbal, 556 U.S. at 678-79, 129 S.Ct. 1937)); McHale v. Citibank, N.A. (In re The 1031 Tax Grp., LLC), 420 B.R. 178, 189-90 (Bankr.S.D.N.Y.2009). First, the court must accept all factual allegations in the complaint as true, discounting legal conclusions clothed in factual garb. See, e.g., Iqbal, 556 U.S. at 677-78, 129 S.Ct. 1937; Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111, 124 (2d Cir.2010) (stating that a court must “assum[e] all well-pleaded, nonconclusory factual allegations in the complaint to be true” (citing Iqbal, 556 U.S. at 678, 129 S.Ct. 1937)). Second, the court must determine if these well-pleaded factual allegations state a “plausible claim for relief.” Iqbal, 556 U.S. at 679, 129 S.Ct. 1937 (citation omitted).
Courts do not make plausibility determinations in a vacuum; it is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. (citation omitted). A claim is plausible when the factual allegations permit “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citation omitted). A complaint that pleads only facts that are “merely consistent with a defendant’s liability” does not meet the plausibility requirement. Id. at 678, 129 *41S.Ct. 1937 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not do.’ ” Id. (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955) (internal quotation marks omitted). “Threadbare recitals of the elements of a cause of action, supported by mere conelu-sory statements, do not suffice.” Id. (citation omitted). “The pleadings must create the possibility of a right to relief that is more than speculative.” Spool v. World Child Int’l Adoption Agency, 520 F.3d 178, 183 (2d Cir.2008) (citation omitted).
On a motion to dismiss, in addition to the complaint, a court may consider written instruments, such as a contract, that is either attached to the complaint or incorporated by reference. See, e.g., Fed. R.Civ.P. 10(c) (“A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.”); In re Lois/USA, Inc., 264 B.R. 69, 89 (Bankr.S.D.N.Y.2001) (“In addition to the complaint itself, a court may consider, on a motion to dismiss, the contents of any documents attached to the complaint or incorporated by reference.... ”). Courts may also take judicial notice of settlement agreements in order to determine whether claims are barred by a previous settlement. See, e.g., Rolon v. Henneman, 389 F.Supp.2d 517, 519 (S.D.N.Y.2005); see also Johns v. Town of E. Hampton, 942 F.Supp. 99, 104 (E.D.N.Y.1996) (“[W]hen a [party] fails to introduce a pertinent document as part of his pleading, [the other party] may introduce the exhibit as part of his motion attacking the pleading.” (quoting CHARLES A. WRIGHT & ARTHUR R. Miller, Federal Practice AND Procedure: Civil 2d § 1327, at 762-63 (2d ed.1990)) (internal quotation marks omitted)).
B. Breach of Contract, Conversion, and AFI’s Request for Declaratory Relief
The dismissal of AFI’s breach of contract and conversion claims and its request for declaratory relief turns on whether the Complaint sufficiently alleges that Wells Fargo breached and/or acted beyond the express terms of the CDA. The Complaint alleges two breaches: (1) Wells Fargo breached the CDA by enacting the Amendment; and (2) Wells Fargo breached the CDA by debiting funds from the AFI Funding Account. The first theory of breach relies on the invalidity of the Amendment Provision of the CDA, rendering unenforceable Wells Fargo’s act of unilaterally amending the CDA upon 37 days’ notice. Alternatively, if the Amendment Provision is valid and enforceable, the first theory relies on the allegation that Wells Fargo acted beyond the terms of the Amendment Provision in enacting the Amendment because terms were added that were not contemplated in the parties’ original CDA. The second theory relies on the purported unconscionability of the Amendment, resulting in the original CDA being the only enforceable agreement governing the parties’ contractual relationship; Wells Fargo’s actions debiting the funds in the account to pay legal fees would then be in breach of that agreement.
The Court addresses each of AFI’s theories of breach in turn below and concludes that AFI fails to sufficiently allege that Wells Fargo breached the CDA under either of its two theories. As such, the Motion is GRANTED to the extent it seeks dismissal of the breach of contract and conversion claims and AFI’s request for declaratory relief.
1. Wells Fargo Did Not Breach the CDA by Enacting the Amendment
“Under New York law, which governs this contract, ‘the initial interpre*42tation of a contract is a matter of law for the court to decide.’ ” Compania Financiera Ecuatoriana de Desarollo, S.A. v. Chase Manhattan Bank, No. 97 Civ. 5724 (JGK), 1998 WL 74299, at *3 (S.D.N.Y. Feb. 19, 1998) (quoting K. Bell & Assocs., Inc. v. Lloyd’s Underwriters, 97 F.3d 632, 637 (2d Cir.1996) (quoting Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 299 (2d Cir.1996)) (citing Curry Road Ltd. v. K Mart Corp., 893 F.2d 509, 511 (2d Cir.1990); Metro. Life Ins. Co. v. RJR Nabisco Inc., 906 F.2d 884, 889 (2d Cir.1990)). On a motion to dismiss where the terms of the contract are brought into question, the court is “ ‘not constrained to accept the allegations of the complaint in respect of the construction of the Agreement,’ although all contractual ambiguities must be resolved in the plaintiffs favor.” Id. at *1 (quoting Int’l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir.1995)). A contract must be “construed in accordance with the parties’ intent as evidenced by [its] written terms.” Filho v. Safra Nat'l Bank of N.Y., 797 F.Supp.2d 289 (S.D.N.Y.2011), rev’d in part, 489 Fed. Appx. 483 (2d Cir.2012) (finding that a disputed issue of fact regarding whether the defendant followed the notice provision in the change of terms provision of the relevant contract precluded dismissal of breach of contract claim). If the terms of the contract are “ ‘complete, clear and unambiguous on [their] face, [they] must be enforced according to the plain meaning of [their] terms,’ and a breach of contract claim may be dismissed on a [FRCP] 12(b)(6) motion.” Wurtsbaugh v. Banc of Am. Secs. LLC, No. 05 CIV. 6220(DLC), 2006 WL 1683416, at *5 (S.D.N.Y.2006). Such a contract “ ‘has “a definite and precise meaning, unattended by danger of misconception in the purport of the [contract] itself, and concerning which there is no reasonable basis for a difference of opinion.” ” ’ Compania Financiera de De-sarollo, 1998 WL 74299, at *3 (quoting Sayers v. Rochester Tel. Corp. Supplemental Mgmt. Plan, 7 F.3d 1091, 1095 (2d Cir.1993) (quoting Breed v. Ins. Co. of N. Am., 46 N.Y.2d 351, 355, 413 N.Y.S.2d 352, 385 N.E.2d 1280 (1978)) (citing United Nat’l Inc. Co. v. Waterfront N.Y. Realty Corp., 994 F.2d 105, 109 (2d Cir.1993); Metro. Life Ins. Co., 906 F.2d at 889).
By contrast, when a provision of a contract is “material to the breach of contract claim” and is ambiguous, a FRCP 12(b)(6) motion will fail. Wurtsbaugh, 2006 WL 1683416, at *5 (citing Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 187 (2d Cir.2004)). “ ‘Ambiguity exists where a contract term could suggest 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.” Id. (quoting Eternity Global Master Fund Ltd., 375 F.3d at 178 (citation omitted)); see also Buena Vista Home Entm’t, Inc. v. Wachovia Bank, N.A. (In re Musicland Holding Corp.), 374 B.R. 113, 120 (Bankr.S.D.N.Y.2007). To determine whether a contract provision is ambiguous, the court must “ ‘consider the entire contract to “safeguard against adopting an interpretation that would render any individual provision superfluous.” ’ ” In re Musicland, 374 B.R. at 120 (quoting RJE Corp. v. Northville Indus. Corp., 329 F.3d 310, 314 (2d Cir.2003) (quoting Sayers, 7 F.3d at 1095)) (citing Galli v. Metz, 973 F.2d 145, 149 (2d Cir.1992) (quoting Garza v. Marine Transp. Lines, Inc., 861 F.2d 23, 27 (2d Cir.1988); Bailey v. Fish & Neave, 8 N.Y.3d 523, 837 N.Y.S.2d 600, 603, 868 N.E.2d 956 (2007))). Only where the contract provision is ambiguous may the court consider extrinsic *43evidence of the parties’ intent, if available. See id.; see also Compania Financiera de Desarollo, 1998 WL 74299, at *3.
Here, AFI attempts to suggest ' that there is an ambiguity in the Amendment Provision such that Wells Fargo’s arguments rely on an interpretation that the Amendment Provision gives Wells Fargo an unfettered unilateral right to amend the contract, while AFI reads the provision to mean that Wells Fargo may only amend the CDA by changing or adding terms that were contemplated in the original agreement. Wells Fargo’s arguments, however, do not entirely rely on the broader interpretation that AFI suggests.2 Moreover, the Amendment Provision does not, by its terms, lend itself to the broader interpretation. First, the Amendment Provision includes express limitations to Wells Fargo’s unilateral right to amend; that is, Wells Fargo may only amend the CDA if it provides at least 30 days’ notice to AFI and the opportunity to close its accounts within the notice period should AFI seek to reject the amendment.3 (See CDA at 1.) Second, the Amendment Provision should also be read, as other similarly broad change of terms provisions, to include the implied limitation that Wells Fargo may only exercise its unilateral right to amend the terms of the agreement to the extent that the amended terms were contemplated in or germane to the original agreement. See Filho, 797 F.Supp.2d at 296 (“The [contract] includes a broadly worded ‘change of terms’ clause in which Defendant reserves the right ‘to change these Terms and Conditions.’ By its own terms, the contract’s ‘change of terms’ clause only allows Defendant to impose changes to these Terms and Conditions, meaning those pre-existing provisions in the [contract].”); In re Musicland, 374 B.R. at 121 (“Thus, the provisions of the [contract] were sufficiently broad on their face to encompass the incorporation of the [loan with a different term lender], and to allow the parties to amend or supplement the existing definitions and other terms of the Revolving Credit Agreement to accomplish that end.”); see also Sears Roebuck & Co., 593 S.E.2d at 434 (“We hold that the parties did not intend that the ‘Change of Terms’ provision in the original agreement would allow Sears to unilaterally add completely new terms that were outside the universe of the subjects addressed in the original cardholder agreement.”). The Court therefore concludes that the Amendment Provision is clear and unambiguous.
The Court also concludes that the Amendment Provision is valid and enforceable, contrary to AFI’s assertions. First, AFI fails to demonstrate that the Amendment Provision is illusory due to its breadth. While the power to unilaterally amend contractual provisions without limitations could give rise to an illusory contract, see Sears Roebuck & Co., 593 S.E.2d at 432, courts will “examine the reason*44ableness of a defendant’s behavior before holding a contract to be illusory,” see Valle, 2015 WL 413449, at *5, or read the provision to include an implied limitation, see Bassett v. Elec. Arts, Inc., No. 13-CV-4208 (MKB), — F.Supp.3d —, —, 2015 WL 1298632, at *8 (E.D.N.Y.2015) (“The Court agrees with Judge Gold’s conclusion that the arbitration provision was not invalid as illusory simply because [the defendant] had the unilateral right to modify the agreement. Under New York and California law, the fact that one party to an arbitration agreement has the unilateral right to modify that agreement does not automatically render the agreement illusory, as ‘the discretionary power to modify or terminate an agreement carries with it the duty to exercise that power in good faith and fairly.’ ” (quoting John v. Hanlees Davis, Inc., No. 12-CV-2529, 2013 WL 3458183, at *6 (E.D.Cal. July 9, 2013) (applying 24 Hour Fitness, Inc. v. Super. Ct., 66 Cal.App.4th 1199, 78 Cal.Rptr.2d 533, 541-42 (1998))) (citing Lebowitz v. Dow Jones & Co., 508 Fed.Appx. 83, 84-85 (2d Cir.2013); Fishoff v. Coty Inc., 634 F.3d 647, 653 (2d Cir.2011) (quoting Dalton, 87 N.Y.2d at 389, 639 N.Y.S.2d 977, 663 N.E.2d 289); Serpa v. Cal. Sur. Investigations, Inc., 215 Cal.App.4th 695, 155 Cal.Rptr.3d 506, 514 (2013)). As indicated above, the Amendment Provision is clear and unambiguous and includes both express and implied limitations upon Wells Fargo’s unilateral right to amend the CDA. Accordingly, the Amendment Provision is not illusory.
Second, AFI fails to show that the 30 day notice period in the Amendment Provision is unconscionable, commercially unreasonable, and/or impracticable. In terms of unconscionability, AFI fails to rebut the presumption of conscionability in the CDA because both Wells Fargo and AFI are sophisticated business entities that had equal bargaining power at the time the CDA was negotiated, agreed upon, and executed. See Am. Dredging Co. v. Plaza Petroleum Inc., 799 F.Supp. 1335, 1339 (E.D.N.Y.1992) (“When the contract is between two commercial entities, unconscionability must be viewed ‘in light of the general commercial background and the commercial needs of the particular trade or case,’ and there is a presumption of conscionability when the contract is between business in a commercial setting. Courts have rarely found a clause to be unconscionable in a commercial contract.”). Moreover, the cases upon which AFI relies are inapposite because: (1) they involve adhesion contracts, which inherently involve unequal bargaining power, (2) notice and time to opt-out was not properly afforded to the plaintiff(s),4 (3) other states’ law was applied, and (4) each involved the addition of an arbitration provision waiving the constitutional right to a jury trial to a contract that did not discuss dispute resolution. See, e.g., Badie, 79 Cal.Rptr.2d at 280-81 (1998) (applying California law); Follman v. World Fin. Network Nat’l Bank, 721 F.Supp.2d 158, 161-66 (E.D.N.Y.2010) (applying Ohio law); Stone v. Golden Wexler & Sarnese, P.C., 341 F.Supp.2d 189, 196-98 (E.D.N.Y.2004) (applying Virginia law); Shea, 827 A.2d at 362-65 (applying New Jersey and California law); Sears Roebuck & Co., 593 S.E.2d at 426-34 (applying Arizona law).
*45As to AFI’s argument that the 30 day notice period is commercially unreasonable and impracticable because AFI could not have closed all of its accounts within that time period, the Court is unpersuaded. AFI cannot now renegotiate the terms of the contract for which it bargained simply because things did not turn out favorably for it. See Indus. Representatives, Inc. v. CP Clare Corp., 74 F.3d 128, 130 (7th Cir.1996) (“The terms on which the parties would part ways were handled expressly in this contract, and IRI got what it bargained for. Contracts allocate risks and opportunities. If things turn out well, the party to whom the contract allocates the upper trail of outcomes is entitled to reap the benefits.”). Nor can AFI convince the Court “to rewrite the contract to fulfill [its] unspoken expectation” that Wells Fargo would give AFI more time to close its accounts or would not amend the CDA in the way that it did. In re Musicland, 374 B.R. at 121. If AFI wanted more time to close its accounts in order to timely reject a future amendment of the CDA, AFI should have negotiated for more time before it executed the CDA.
Having found that the Amendment Provision is clear, unambiguous, valid, and enforceable, the Court must now examine whether Wells Fargo acted in accordance with the terms of the Amendment Provision when it enacted the Amendment. Proeedurally, Wells Fargo clearly acted within the terms of the Amendment Provision. Wells Fargo provided 37 days’ notice (even though it was only required to provide 30 days’ notice) to AFI of the Amendment before it went into effect and advised AFI that it had 37 days to close its accounts if it sought to reject the amended terms. AFI thereafter failed to close all of its accounts within the 37 days and was deemed to have accepted the changes to the CDA. Substantively, Wells Fargo also acted within the terms of the Amendment Provision by only adding or changing terms that were germane to the original CDA. AFI points to the indemnity, guarantee, and security interest provisions of the Amendment, arguing that the parties never contemplated AFI’s guarantee of any of the other Depositor’s obligations to Wells Fargo.5 The Court disagrees. The CDA includes the Indemnification Provision and Setoff Provision discussing the parties’ obligations to one another, including the Depositor’s obligation to indemnify Wells Fargo, Wells Fargo’s ability to set off such obligations by drawing from the accounts, Wells Fargo’s ability to obtain a security interest in the funds in the accounts, and the Depositor’s potential liability as a guarantor. (See CDA § 16; id. at 17.) The Amendment then expressly *46refers back to these provisions in adding the very language AFI argues was never contemplated. (See generally Amendment.)
AFI unpersuasively emphasizes the fact that AFI is held liable as the guarantor for the other Depositors’ obligations under the Amendment. In doing so, AFI highlights the Defining Terms Provision, which refers to each Depositor as “you,” in connection with the references to “you” in the Indemnification and Setoff Provisions (and elsewhere in the CDA). According to AFI, as a result of these singular or individual Depositor references, it is completely outside the parties’ expectations to group the Depositors together in some way under the CDA’s terms; or more specifically, to hold one Depositor accountable for the liabilities of another Depositor. This interpretation, however, conflicts with the nature of the CDA and the conduct of AFI and the other Depositors in negotiating and executing the CDA. “You,” in this context, can just as easily refer to the plural as well as the singular. Each of the Depositors signed the same CDA agreement on three signature pages; each of the entities has the same exact signatory that signed the CDA; each of the entities to which the CDA applies is listed in Exhibit A to the CDA;6 each of the Depositors received the benefits of Wells Fargo’s services pursuant to the CDA in opening one or more accounts with Wells Fargo; and each of the Depositors are bound by the obligations of a Depositor defined as “you” in the CDA. (See CDA at 23-25; id. Ex. A.) That the CDA governed all of the entities by the same terms by referring to each individually does not necessarily preclude Wells Fargo from amending the agreement to have one of those entities (here the parent) held liable for the obligations of another. Indeed, the Setoff Provision of the CDA expressly contemplates the possibility that a Depositor may be a guarantor: “If you ever owe us money as a customer, borrower, guarantor or otherwise including any obligation owed to us for services provided pursuant to this agreement....” ' (Id. at 17 (emphasis added).) AFI’s argument is therefore a nonstarter — a Depositor in these circumstances cannot be a guarantor of its own account.
In sum, the Court finds and concludes that the Amendment Provision is clear, unambiguous, valid, and enforceable. The Court further finds that Wells Fargo, by enacting the Amendment, acted within the terms of the Amendment Provision. As a matter of law, the Court concludes that AFI fails to establish that AFI breached or acted outside the terms of the CDA. Consequently, AFI’s breach of contract and conversion claims and its request for declaratory relief, each of which inherently relies on Wells Fargo’s breach or conduct beyond the express terms of the CDA, are insufficiently pled under this theory of breach. Wells Fargo’s Motion in this regard is GRANTED and AFI’s breach of contract and conversion claims, in addition to its request for declaratory relief, are DISMISSED to the extent they are based on this theory of breach.
2. Wells Fargo’s Actions Pursuant to the Amendment Did Not Constitute a Breach of the CDA Because the Amendment Is Valid and Enforceable
In support of AFI’s second theory of breach, AFI asserts that the Amendment itself is invalid because' it violates the Statute of Frauds and other provisions of the NYGOL and is unconscionable. AFI further asserts that since the Amendment is invalid, by withdrawing funds from AFI’s *47account pursuant to the terms of the Amendment, Wells Fargo breached the CDA, which did not provide such a right to Wells Fargo. By contrast, Wells Fargo argues that the Amendment is valid and enforceable because it falls outside the Statute of Frauds and the asserted NY-GOL provisions and AFI fails to rebut the presumption of conscionability in the Amendment.
As set forth below, the Motion to dismiss is GRANTED to the extent it seeks dismissal of the breach of contract and conversion claims and the request for declaratory relief based on this theory of breach.7 The Statute of Frauds and NY-GOL are inapplicable in this instance and AFI fails to sufficiently allege unconsciona-bility.
a) The Statute of Frauds and Other Asserted Provisions of the NYGOL Are Inapplicable
AFI’s first attempt at establishing the invalidity of the Amendment relies on the New York Statute of Frauds and certain other provisions of the NYGOL. According to AFI, the Amendment contemplates a guarantee obligation and is unable to be performed within one year. In order to avoid violation of the Statute of Frauds codified in NYGOL sections 5-701(a)(l) and (a)(2), such an agreement must be in writing and signed by the party against whom enforcement is sought (here AFI). AFI similarly argues that the Amendment violates N.Y. GOL section 5-1103, which requires that modifications to a contract relating to security interests be in writing and contemplate separate consideration in support of the modification. See N.Y. Ger Oblig. Law § 5-1103. According to AFI, no additional consideration was provided in exchange for the amended terms.
Putting aside the fact that not one of these statutory arguments was raised in AFI’s Complaint, these arguments are misguided. AFI ignores that the parties *48had a written agreement to begin with that included the Amendment Provision, expressly providing Wells Fargo with the right to amend its terms. See Alken Indus., Inc. v. Toxey Leonard & Assocs., Inc., Index No. 17304-11, 2013 N.Y. Slip Op. 31864(U), 2013 WL 4211031 (N.Y.Sup.Ct. Aug. 2, 2013) (“The defendant’s arguments in support of General Obligations Law section 5 — 701(a)(1) ignore the fact that the parties had a written agreement. The written agreement continued to govern the parties’ relationship even after the purported modification. In fact, when Aiken terminated the agreement in 2009, it gave Leonard 30 days’ written notice in accordance with the written agreement. Accordingly, General Obligations Law section 5 — 701(a)(1) does not apply.”); Filho, 797 F.Supp.2d at 297 (“First, he argues that the 2005 change was a contract modification requiring separate consideration under New York law. [citing N.Y. Gen. Oblig. Law § 5-1103.] This argument completely ignores the ‘change of terms’ clause in the IBTC. Indeed, as the Court has found that the contractual change was properly implemented through an agreed-upon ‘change of terms’ provision, it is not a contract modification as contemplated by New York’s General Obligations Law at all.”). Moreover, the Statute of Frauds may be satisfied through a combination of writings, only one of which need be signed by the party against whom enforcement of the contractual relationship is sought. See 23/23 Commc’ns Corp., 257 A.D.2d at 367, 683 N.Y.S.2d 43 (“[T]he various writings [only one of which was executed by the party against whom enforcement is sought] can be pieced together to establish a single contractual relationship.”); Antares Mgmt. LLC v. Galt Global Capital, Inc., No. 12-CV-6075 (TPG), 2013 WL 1209799, at *10 (S.D.N.Y. Mar. 22, 2013) (“A sufficient writing under the statute of frauds may be established by a combination of signed and unsigned documents, letters or other writings provided at least one writing, the one establishing a contractual relationship between the parties, must bear the signature of the party to be charged (or his authorized agent), while the unsigned document must on its face refer to the same transaction as that set forth in the one that was signed.” (citation and internal quotation marks omitted)); see also Elias v. Serota, 103 A.D.2d 410, 415, 480 N.Y.S.2d 344 (NY.App.Div.1984) (“While the Statute of Frauds requires that certain types of contracts be evidenced by a writing [citing N.Y. Gen. Oblig. Law § 5-703] it does not require that each stage of the future performance provided in a contract be supported by additional signed writings that memorialize the performance.”).
Here, the CDA was executed by AFI and the' other Depositors, the CDA provided Wells Fargo with the unilateral right to amend the CDA, the Amendment was an exercise of that right, and the Amendment is therefore not void under the Statute of Frauds or N.Y. GOL section 5-1103 for want of consideration. To the extent AFI’s allegation that the Amendment is invalid and unenforceable relies on these statutory provisions, the Motion to dismiss is GRANTED.
b) The Amendment Is Not Unconscionable
AFI further argues that the Amendment is invalid and unenforceable because it is commercially unreasonable and unconscionable. Under New York law, an unconscionable contract “is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforceable according to its literal terms.” Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 10, 537 N.Y.S.2d 787, 534 N.E.2d 824 (1988) (citation and internal *49quotation marks omitted). A finding of unconscionability as to a term or provision of a contract may not necessarily render the entire contract void; rather, a court may hold that only that unconscionable term or provision is void and unenforceable. See RESTATEMENT (SECOND) OF CONTRACTS § 208 (1981) (“If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.”).
To prove that a contract is unconscionable, a party must meet two prongs: procedural and substantive. Gillman, 73 N.Y.2d at 10, 537 N.Y.S.2d 787, 534 N.E.2d 824. “The procedural element of unconscionability requires an examination of the contract formation process and the alleged lack of meaningful choice.” Id. at 11, 537 N.Y.S.2d 787, 534 N.E.2d 824. Courts examining this element focus on, for example, “the size and commercial setting of the transaction, whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability, and whether there was a disparity in bargaining power.” Id. The substantive element requires the court to conduct “an analysis of the substance of the bargain to determine whether the terms were unreasonably favorable to the party against whom uncon-scionability is urged.” Id. at 12, 537 N.Y.S.2d 787, 534 N.E.2d 824. Findings of unconscionability are usually based upon the satisfaction of both of these elements; however, in “exceptional cases” courts have found that “a provision of the contract is so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone.” Id.
For contracts entered into by two businesses in a commercial setting, there is a presumption of conscionability “ ‘in light of the general commercial background and the commercial needs of the particular trade or case’ ” and unconscion-ability is rarely found. Am. Dredging Co., 799 F.Supp. at 1339 (quoting Rubin v. Telemet, 698 F.Supp. 447 (S.D.N.Y.1988)) (citing Cayuga Harvester, Inc. v. Allis-Chalmers Corp., 95 A.D.2d 5, 465 N.Y.S.2d 606 (N.Y.App.Div.l983)). However, “each case must be decided on its own facts” and “if it appears from the record before the court that unconscionability may exist, and the issue is not free from doubt, then the court must hold a hearing where the parties may present evidence with regard to the circumstances of the signing of the contract and the disputed terms’ setting, purpose and effect.” New York v. Wolowitz, 96 A.D.2d 47, 68, 468 N.Y.S.2d 131 (N.Y.App.Div.1983).
AFI argues that the Amendment is both procedurally and substantively unconscionable. First, AFI argues that the Amendment is procedurally unconscionable because Wells Fargo purported to unilaterally amend the CDA such that AFI did not have the ability to bargain for the terms and had no opportunity to engage in the negotiation process. (Opp. at 24.) Second, AFI asserts that the Amendment is substantively unconscionable because the terms, which impose without consent or further consideration guarantee and indemnification obligations and a security interest in AFI’s property (purportedly unlimited in scope) to secure the debts of third parties, are unreasonably favorable to Wells Fargo and potentially cause AFI to breach covenants made to others. (Id. at 22-23.)
In terms of the procedural element, AFI fails to sufficiently allege that it did not have a “meaningful choice” with respect to *50the Amendment. While AFI alleges that it was not afforded an opportunity to engage in the negotiation of the terms of the Amendment, AFI cannot allege that it did not engage in the contract formation process before executing the CDA, which includes the Amendment Provision granting Wells Fargo its unilateral right to make the Amendment. Indeed, the Court indicated above that the Amendment Provision was not unconscionable; a finding that an Amendment made pursuant to the procedures prescribed by the Amendment Provision is procedurally unconscionable would be inconsistent. AFI also fails to allege that there were “high-pressured” or “deceptive” practices or any “use of fine print.” Wells Fargo followed the procedures for unilaterally amending the CDA that AFI bargained for and bolded and emphasized certain new terms in the Amendment, highlighting the changes made, not hiding them. Lastly, AFI fails to allege that there was a disparity in bargaining power amongst itself and Wells Fargo. Both AFI and Wells Fargo are sophisticated business entities of equal bargaining power. To be sure, contracts between such entities are presumed to be conscionable for that very reason. See Am. Dredging Co., 799 F.Supp. at 1339. AFI’s arguments with respect to the procedural aspects of the Amendment’s un-conscionability hardly rebut this presumption.
In any event, AFI falls even farther short in its argument that the Amendment is substantively unconscionable. Each of the provisions of the Amendment that AFI challenges relate to provisions that were germane to the CDA.8 AFI cannot use the doctrine of unconscionability as a means to circumvent the effect of the Amendment Provision it bargained for in the CDA. Moreover, even though AFI correctly points out that the Amendment’s waiver of AFI’s benefit from statutes of limitations is unconscionable and void under New York law, see Bayridge Air Rights, Inc. v. Blitman Constr. Corp., 80 N.Y.2d 777, 779, 587 N.Y.S.2d 269, 599 N.E.2d 673 (1992) (discussing N.Y. Gen. Oblig. Law § 17-103(1)), the invalidity of this one provision in the Amendment does not render the entire Amendment void, see Restatement (Seoond) on CONTRACTS § 208. The fact that the statutes of limitations remain intact should not affect the other provisions addressing indemnity, guarantees, and security interests.
Thus, the Court concludes that AFI fails to sufficiently allege that the Amendment is invalid, unenforceable, or unconscionable. The Motion to dismiss on this basis is therefore GRANTED.
C. Breach of the Implied Covenant of Good Faith and Fair Dealing
AFI’s only remaining claim asserted in the Complaint is for Wells Fargo’s alleged breach of the implied covenant of good faith and fair dealing in the CDA. All contracts governed by New York law are read to include the implied covenant of good faith and fair dealing in the course of performance. 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153, 746 N.Y.S.2d 131, 773 N.E.2d 496 (2002) (citation omitted); Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389, 639 N.Y.S.2d 977, 663 N.E.2d 289 (1995); see also Restatement (Second) on ContRacts § 205 (1981) (“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement”).
*51This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promise would be justified in understanding were included.
511 W. 232nd Owners Corp., 98 N.Y.2d at 153, 746 N.Y.S.2d 131, 773 N.E.2d 496 (citations and internal quotation marks omitted); see also Dalton, 87 N.Y.2d at 389, 639 N.Y.S.2d 977, 663 N.E.2d 289 (citations omitted). A breach of the implied duty of good faith and fair dealing primarily arises when the contract at issue provides an exercise of discretion; such a discretionary act must not be exercised “arbitrarily or irrationally.” Dalton, 87 N.Y.2d at 389, 639 N.Y.S.2d 977, 663 N.E.2d 289; Citibank, N.A. v. United Subcontractors, Inc., 581 F.Supp.2d 640, 645-46 (S.D.N.Y.2008). But “[t]he parties’ contractual rights and liabilities may not be varied, nor their terms eviscerated, by a claim that one party has exercised a contractual right but has failed to do so in good faith.” Nat’l Westminster Bank, U.S.A. v. Ross, 130 B.R. 656, 680 (S.D.NY.1991) (citation omitted).
“Having failed to state a viable claim for breach of the [express terms of the CDA], [AFI] may not manufacture a breach through invoking the duty of good faith and fair dealing.” Wurtsbaugh, 2006 WL 1683416, at *6. The Complaint alleges in pertinent part:
29.Immediately after receiving the Purported Amendment, AFI rejected the amendment and initiated the process of closing its accounts. AFI made diligent efforts to close all of its accounts with Wells Fargo as soon as commercially possible. However, as Wells Fargo knew, AFI’s accounts were not simple checking accounts where funds could be moved promptly to another institution. Rather, the Ally Auto Servicing Accounts had issued thousands of checks drawn on those accounts that remained unpaid at the time of Wells Fargo’s Purported Amendment (as an illustration of the magnitude of checks, in 2011, approximately 63,000 checks per month were drawn on those accounts and issued). AFI could close each account after the checks drawn on it had been paid, escheated, or reissued. Moreover, as AFI informed Wells Fargo, immediately closing those accounts with so many checks outstanding posed a serious business risk to AFI in the event those checks were returned unpaid or otherwise did not clear because the account had been closed.
30. In addition, AFI had to establish accounts at a new bank to service its auto servicing business, and that, too, Wells Fargo knew, would take more than 37 days to accomplish, given the complexity of the accounts.
31. Finally, the closing of any AFI account required Wells Fargo to approve such closure in accordance with its internal administrative processes. As such, Wells Fargo controlled the timing of the closing of any account upon a request for account closure. Wells Fargo was fully aware of the processes required to close such accounts and open new ones and the time that this would require.
32. AFI sought to work with Wells Fargo in closing its accounts and transitioning its banking relationship to another bank, but Wells Fargo repeatedly was uncooperative with and unresponsive to AFI’s efforts to accomplish this.
*5233. Thus, despite AFI’s efforts, it was impossible to close the more than 30 accounts AFI held with Wells Fargo by Wells Fargo’s unreasonable, unilateral deadline.
(CompLIffl 29-33.) The crux of AFI’s breach of the implied covenant claim is paragraph 32, stating that Wells Fargo was “uncooperative” in and “unresponsive” to AFI’s efforts to close its accounts and transition to a new bank. (Id. ¶ 32.) The problem with this allegation is that AFI fails to specifically allege how Wells Fargo was “uncooperative” and “unresponsive.” (See id.)
To the extent AFI seeks to link the allegation in paragraph 32 to the allegations in paragraphs 29 and 30 — that Wells Fargo had knowledge and/or was put on notice that AFI’s accounts were complex and that several checks were drawn on the accounts' — -the breach of the implied covenant of good faith and fair dealing claim fails and is DISMISSED with prejudice. AFI presumably had knowledge at the time it entered into the CDA with Wells Fargo that the commercial deposit accounts it sought to open would be complex and that AFI would draw several checks on those accounts. Since AFI had knowledge of such facts, AFI also had knowledge, as it alleges Wells Fargo should have had after AFI notified it, that AFI would likely require more than 30 days to close such accounts when it executed the CDA. To hold Wells Fargo liable for the breach of the implied covenant on the basis of these allegations, would be to hold that Wells Fargo had an obligation that it did not otherwise have under the express terms of the CDA (i.e. to take into account AFI’s ability to abide by the 30 day opt-out term of the CDA when making its business determination to amend the agreement within its rights). See id. (“In order to find that the defendant has breached its duty it would be necessary to read into the Agreement an obligation that the defendant make business choices with the growth of the [plaintiff] in mind. Implying such an obligation under the Agreement would be inconsistent with the limiting language of the [relevant provision of the original contract] and is thus beyond the scope of the duty of good faith and fair dealing.”). AFI did not bargain for that obligation to be imposed upon Wells Fargo in exercising its rights under the Amendment Provision and cannot use the implied covenant to read that obligation into the provision. Rather, AFI should have bargained for more than 30 days to close its accounts under the change of terms provision prior to executing the CDA. AFI cannot use this theory of breach of the implied covenant of good faith and fair dealing to circumvent the terms it contracted for.
To the extent, however, AFI’s breach of the implied covenant claim seeks to link paragraph 32 with the allegation in paragraph 31, AFI’s claim may be viable. Paragraph 31 alleges that Wells Fargo had certain procedures in place that had to be followed in order for AFI, or any Depositor, to close an account with Wells Fargo; such procedures included Wells Fargo’s prior approval of the closure and the timing of which were (allegedly) subject to Wells Fargo’s control. (Comply 31.) Once AFI notified Wells Fargo, as alleged in the Complaint, that it sought to reject the Amendment and close its accounts, Wells Fargo was under an obligation to act in good faith and deal fairly. If Wells Fargo was “uncooperative” and “unresponsive” with respect to carrying out its required procedures for closing the accounts, AFI may be able to prove that Wells Fargo breached its implied duty. As currently alleged, however, the Complaint does not adequately plead this theory of breach. The Court therefore GRANTS the Motion and DISMISSES without prejudice the *53breach of the implied covenant of good faith and fair dealing claim to the extent it is based on Wells Fargo’s conduct in carrying out its account closure procedures. The Court further GRANTS AFI leave to amend its Complaint to more sufficiently allege this claim.
D. The December 10, 2013 Release Agreement Issue Is Moot
In its Motion, Wells Fargo asserts that to the extent any of AFI’s claims rely upon the allegation that the attorneys’ fees incurred by Wells Fargo were unreasonable, such claims are precluded by the December 10, 2013 Release Agreement. AFI does not dispute this preclusion in its Opposition. As such, the issue is moot and need not be resolved by the Court.
III. CONCLUSION
For the foregoing reasons, Wells Fargo’s Motion is GRANTED and the Complaint is DISMISSED’ in its entirety. AFI’s request for declaratory relief, and claims for breach of contract, conversion, and breach of the implied covenant of good faith and fair dealing claim, to the extent it is based on Wells Fargo’s “uncooperative” or “unresponsive” behavior after having been notified of the complexity of and amount of cheeks drawn on the accounts, are DISMISSED with prejudice. AFI’s breach of the implied covenant of good faith and fair dealing claim, to the extent it is based on Wells Fargo’s conduct in carrying out its account closure procedures, is DISMISSED without prejudice and the Court GRANTS AFI leave to amend. AFI may amend its Complaint, subject to the holding of this Opinion, within thirty days from the date of this Order. Wells Fargo shall file a response to any further amended complaint within thirty days after an amended complaint is filed.9
IT IS SO ORDERED.
. The relevant contract includes the following applicable law clause:
Our relationship with you is governed primarily by the agreement. However, it is also governed by the laws of The United States of America; applicable state law, the rules and regulations of the Board of Governors of the Federal Reserve System and various Federal Reserve Banks; and the rules and regulations of other bank supervisory authorities and other governmental agencies having jurisdiction over us. To the extent that State law applies to our relationship with you, the applicable law is the law of the State in which your account was opened as identified in our records.
(Compl. Ex. A § 18.) Due to the number of the accounts that were opened pursuant to the agreement, which may or may not have been opened in different states, this provision did not provide a clear answer as to which states’ laws apply to this Adversary Proceeding. After the Motion was filed, but before the Opposition was filed, the parties stipulated that New York law would apply to the adjudication of this case. (See ECF Doc. #13.) As such, this Opinion applies New York law to resolve the Motion.
. Wells Fargo’s argument with respect to the validity of the Amendment Provision is twofold. First, Wells Fargo asserts that under New York law, a change of terms provision that provides an unfettered right to amend is valid and enforceable so long as the amending party provided the requisite notice of the amendment and provided the other party the opportunity to opt-out. Second, Wells Fargo argues that even if the Amendment Provision must be read as AFI suggests, the Amendment Provision is clear and unambiguous and Wells Fargo acted in accordance with such terms by enacting an Amendment relating directly to pre-existing terms of the CDA and giving AFI the requisite notice and opportunity to close its accounts to opt-out.
. While these express limitations may be sufficient to validate the Amendment Provision under Valle, 2015 WL 413449, at *5, as Wells Fargo suggests, the Court need not reach this specific issue at this time.
. At least one court, applying New York law to a case involving a unilaterally amended contract in which new terms were added that were not germane to the original contract, has held that the same cases AFI cites in its Opposition were inapplicable because the amending party provided the other party notice and an opportunity to opt-out — procedural terms that are expressly provided in the Amendment Provision and were followed by Wells Fargo. See Valle, 2015 WL 413449, at *4-6.
. In the Opposition, AFI asserts that the Amendment grants Wells Fargo a security interest in AFI's assets held worldwide. At the Hearing on the Motion, however, AFI was not able to point to any provision in the Amendment that provided for such a security interest; nor does the Court read the Amendment to provide such a broad security interest. Instead, the security interest provision of the Amendment appears to be almost exactly the same as that granted in the CDA&emdash;the collateral is limited to the funds in the Depositors’ accounts with Wells Fargo. Compare CDA at 17 ("By accepting services, you also grant us a consensual security interest in your accounts and to the funds held in them as collateral to secure your present and future obligations.”), with Compl. Ex. B ("Your obligations and our right to set off expressly include any obligation sowed to us for services provided pursuant to this agreement, whether provided to you or any direct or indirect subsidiary of yours; you further agree that we have the right to deduct setoff amounts that any of your subsidiaries owe us from any accounts that you hold with us, and you also grant us a consensual security interest I yoür accounts and to the funds held in them as collateral to secure your present and future obligations to us, and your subsidiaries' present and future obligations to us under this agreement." (emphasis added)).
. The Defining Terms provision also provides that all of the documents (i.e. including Exhibit A to the CDA) constitute the “agreement.” (See CDA at 1.)
. As indicated above, AFI’s conversion claim alleges that Wells Fargo acted beyond the express terms of the CDA when ■ it debited funds from the AFI Funding Account. Under New York law, ‘‘[a] conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person's right of possession.” Colavito v. N.Y. Organ Donor Network, Inc., 8 N.Y.3d 43, 49-50, 827 N.Y.S.2d 96, 860 N.E.2d 713 (2006) (citing New York v. Seventh Regiment Fund, 98 N.Y.2d 249, 746 N.Y.S.2d 637, 774 N.E.2d 702 (2002)) (emphasis added). The Complaint rests the conversion claim on the allegation that Wells Fargo lacked authority to debit the funds from the AFI Funding Account pursuant to the terms of the CDA; in other words, AFI's conversion claim depends upon a finding that Wells Fargo breached the CDA. In addition to the Complaint's failure to sufficiently allege that Wells Fargo breached the CDA under either of the two theories of breach, the conversion claim is DISMISSED because it is "predicated on a mere breach of contract.” See Hui Qun Zhao v. Yu Qi Wang, 558 Fed. Appx. 41, 43 (2d Cir.2014) ("Because [the conversion] claim turn entirely on the issue of breach, it sounds in contract,- not conversion.” (citing MBL Life Assurance Corp. v. 555 Realty Co., 240 A.D.2d 375, 376-77, 658 N.Y.S.2d 122 (N.Y.App.Div. 1997) ("It is settled, however, that a claim of conversion cannot be predicated on a mere breach of contract. Because the plaintiff failed to submit evidence demonstrating a wrong independent from the contract claim, the defendants are entitled to dismissal of the third cause of action to recover damages for conversion.” (citations omitted)))); see also Karmilowicz v. Hartford Fin. Servs. Grp., Inc., 494 Fed.Appx. 153, 158 (2d Cir.2012) ("[A] claim to recover damages for conversion cannot be predicated on a mere breach of contract. Since the appellant’s conversion claim does not stem from a wrong which is independent of the alleged breach of [contract], it was properly dismissed.” (quoting Wolf v. Nat’l Council of Young Israel, 264 A.D.2d 416, 417, 694 N.Y.S.2d 424 (N.Y.App.Div.1999) (citations omitted))).
. As indicated above, AFI's allegation that the Amendment grants Wells Fargo a security interest in AFI's assets held worldwide is incorrect and unsubstantiated by the terms of the Amendment.
. At this stage in the Adversary Proceeding, the parties have not consented to this Court entering a final order or judgment, raising a potential issue under Stern v. Marshall, 564 U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Because this Opinion provides AFI with leave to amend one of its claims and does not dismiss the Complaint with prejudice in its entirety, this Opinion is an interlocutory order, not a final judgment on the merits and the Court need not address the Stern v. Marshall issue at this time. See O’Toole v. McTaggart (In re Trinsium Grp., Inc.), 467 B.R. 734, 740-41 (Bankr.S.D.N.Y.2012) ("After Stem v. Marshall, the ability of bankruptcy judges to enter interlocutory orders in non-core proceedings, or in core proceedings as to which the bankruptcy court may not enter final orders or judgments consistent with Article III absent consent, has been reaffirmed by the courts that have had occasion to address the issue.” (citations omitted)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498302/ | MEMORANDUM
ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE
I. INTRODUCTION
Debtor Franklin Bennett (“the Debtor”) filed a voluntary chapter 7 bankruptcy petition on April 21, 2014. Upon the Debt- or’s request, the case was converted to chapter 13 on May 2, 2014. (Bky No. 14-13143, Doc. # 23).
On October 22, 2014, Bank of America, N.A. (“Bank of America”) filed a proof of claim asserting a claim of $404,625.07 secured by the Debtor’s interest in the real property located at 4712 Castor Avenue, Philadelphia, PA (“the Property”). On November 26, 2014, the Debtor filed an objection to Bank of America’s proof of-claim (“the Objection”). (Id., Doc. '# 77). In the Objection, the Debtor disputed the amount of the claim. Then, on November 30, 2014, the Debtor filed this adversary proceeding against Bank of America and The Bank of New York Mellon (“BNYM”). In his multi-count Complaint, the Debtor attacked the validity of the mortgage against the Property held by each Defendant and requested a determination that the mortgages are void. By order dated January 14, 2015, I consolidated for all purposes the contested matter arising from the Objection and the adversary proceeding. (Adv. No. .14-666, Doc. # 7).
On December 29, 2014, Bank of America filed a Motion to Dismiss the Complaint (“the Motion”) (Doc. # 3) under Fed. R.Civ.P. 12(b)(6) (incorporated by Fed. R. Bankr.P. 7012). In the Motion, Bank of America asserts that the Complaint should be dismissed for lack of standing and legal insufficiency. Bank of America also asserts that the statute of limitations has expired on several claims. See generally Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir.2014) (statute of limitations defense may be raised in Rule 12(b)(6) motion if the facts alleged in the complaint show that the action is untimely).
On February 17, 2015, the Debtor filed his response to the Motion. (Doc. # 15).1
As explained more fully below: (1) the Motion will be granted in part and denied in part; and (2) the dismissed counts will be dismissed without leave to amend.
II. LEGAL STANDARD
A motion under Fed.R.Civ.P. 12(b)(6) tests the legal sufficiency of the factual allegations of a complaint, see Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993), and determines “whether the plaintiff is entitled to offer evidence to support the claims,” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563 n. 8, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
*72A defendant is entitled to dismissal of a complaint only if the plaintiff has not pled “enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 547, 127 S.Ct. 1955. A claim is facially plausible where the facts set forth in the complaint allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
In evaluating the plausibility of the plaintiffs claim, the court conducts a context-specific evaluation of the complaint, drawing from its judicial experience and common sense. See, e.g., Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir.2009); In re Universal Marketing, Inc., 460 B.R. 828, 834 (Bankr.E.D.Pa.2011) (citing authorities); In re Olick, 2011 WL 2565665, at *1-2 (Bankr.E.D.Pa. June 28, 2011). In doing so, the court is required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, viewing them in the light most favorable to the plaintiff. See, e.g., Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Taliaferro v. Darby Township Zoning Board, 458 F.3d 181, 188 (3d Cir.2006). But, the court is not “bound to accept as true a legal conclusion couched as a factual allegation.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955).
The Third Circuit Court of Appeals has condensed these principles into a three (3) part test:
• First, the court must take note of the elements a plaintiff must plead to state a claim.
• Second, the court should identify allegations that, because they are no more than conclusions, are not entitled to the assumption of truth.
• Third, where there are well-pled factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.
Santiago v. Warminster Twp., 629 F.3d 121, 130 (3d Cir.2010) (quotations and citations omitted).
Finally, in assessing a Rule 12(b)(6) motion, the court may “consider the allegations in the complaint, exhibits attached to the complaint and matters of public record ... [as well as,] ‘undisputedly authentic documents’ where the plaintiffs claims are based on the documents and the defendant has attached a copy of the document to the motion to dismiss.” Unite Nat’l Ret. Fund v. Rosa Sportswear, Inc., 2007 WL 2713051, at *4 (M.D.Pa. Sept. 14, 2007) (citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.1993)); see also In re Angulo, 2010 WL 1727999, at *12 n. 1 (Bankr.E.D.Pa. Apr. 23, 2010).
II. THE COMPLAINT
A.
The Complaint set out eight (8) claims as follows:
• Count I — Quiet Title
• Count II — Slander of Title
• Count III — Unjust Enrichment
• Count IV — Civil Conspiracy
• Count V — Aiding and Abetting
• Count VI — Fraud
• Count VII, RICO, 18 U.S.C. §§ 1961-1968; and
• Count VIII — Valuation of Property.2
*73The Debtor has withdrawn Counts V and VII. (See Debtor’s Am. Response at 4).
B.
In support of his claims, the Debtor makes the following factual assertions.
Dolores M. Snyder owned the real property at 4712 Caster Avenue, Philadelphia, Pennsylvania (“the Property”). (Complaint ¶¶ 5-8). Mrs. Snyder died intestate on August 16, 2004. (Compl.lffl 9-10). The Register of Wills for Philadelphia County granted Ms. Snyder’s son, Richard M. Snyder (“Snyder”), Letters of Administration on August 30, 2004 with respect to the decedent’s estate (“the Estate”). (Compl. ¶¶ 11-13; Exhibit B).
Thereafter, Snyder entered into four (4) transactions that affected title to the Property.
The first transaction was a deed transfer that occurred on October 10, 2005 (“the 1st Deed Transfer”). Snyder, acting as administrator of the Estate, deeded the property from his mother’s Estate to himself, individually, for $1.00. (Compl. ¶ 15; Ex. C). In connection with the 1st Deed Transfer, Snyder filed a Philadelphia Real Estate Transfer Tax Certification. In the Tax Certification, he claimed an exemption from the real estate transfer tax based upon “Will or intestate succession,” and as “Administrator of Estate to himself.” (Compl.Ex. C). Snyder did not seek court approval of the 1st Deed Transfer. (Comply 16). See generally 20 Pa.C.S. § 3356 (requiring court approval for purchases by personal representative).
In the second transaction, Snyder encumbered the Property by executing a promissory note and mortgage in favor of America’s Wholesale Lender (“the 1st Mortgage”) on October 10, 2005. (Comply 25, Ex. P). The 1st Mortgage was recorded December 1, 2005. (Id. Ex. Q). The Debtor alleges that through a series of assignments, the 1st Mortgage was assigned to Defendant Bank of America. (Id. ¶¶ 38-41). The various assignments were filed with the Philadelphia Recorder of Deeds on May 31, 2007, April 14, 2010, April 23, 2012 and July 22, 2013, with the last assignment purporting to correct the “assignor and assignee name[s]” on the April 14, 2010 assignment. (Compl. ¶¶ 38-41; Exs. L-O).3
*74Third, Snyder also took out a second mortgage against the Property (“the 2nd Mortgage”) on May 22, 2006 in favor of Countrywide Bank, N.A. (Id. ¶ 27). Countrywide subsequently assigned all of its rights under the 2nd Mortgage to Defendant BNYM. {Id. ¶ 28).
The final transaction affecting title to the Property occurred on July 23, 2011 (“the 2nd Deed Transfer”). Snyder, in his capacity as administrator of the Estate (and not in his individual capacity, despite the 1st Transfer), executed a deed transferring the Property to the Debtor.4 (Ex. K).5 The Debtor claims he made significant improvements to the Property with the knowledge of the Defendants. {Id. ¶¶ 53-55).
C.
The Complaint also is based, in part, on certain actions that Bank of America took in enforcing its rights as mortgagee.
Bank of America filed a foreclosure action against the Property in the Pennsylvania Court of Common Pleas, Philadelphia County (“the C.P. Cohrt”). (/¿¶56). Bank of America obtained a default judgment and the Property was sold at a sheriffs sale on July 1, 2008. {Id. ¶¶ 58-59). Fannie Mae was the purchaser at the sale. (Id. ¶ 63). However, on November 23, 2009, Bank of America sought to “undo” the sheriffs sale by filing a motion to set aside the sale and strike the sheriffs deed on the ground that it had reached an agreement with Snyder to resolve the de*75linquency and cure the default. (Id. ¶ 60, Ex. G).6 The C.P. Court granted the motion to set aside the sheriffs sale by order dated December 17, 2009. (Id. ¶62, Ex. H).
D.
The Debtor does not claim that he was a party to any of the Snyder transactions other than the 2nd Deed Transfer. Nonetheless, the Debtor bases some of his claims on injuries he alleges that Snyder suffered during the course of the mortgage transactions and the subsequent assignments.- The Debtor asserts that the mortgage lenders charged Snyder exorbitant fees and engaged in fraudulent activity in connection with the mortgage loans. (Id. ¶¶ 30-31, 33). The Debtor also alleges irregularities in Bank of America’s actions to have the sheriffs sale set aside. (Id. ¶¶ 61, 63, 67).
IV. DISCUSSION
A. Count I — Quiet Title
1.
Under Pennsylvania law, an action to quiet title is a civil action that may be brought, inter alia:
where an action of ejectment will not lie, to determine any right, lien, title or interest in the land or determine the validity or discharge of any document, obligation or deed affecting any right, lien, title or interest in land; [or], to compel an adverse party to file, record, cancel, surrender or satisfy of record, or admit the validity, invalidity or discharge of, any document, obligation or deed affecting any right, lien, title or interest in land.
Pa. R. Civ. P. 1061(b); see also Bruker v. Carlisle Borough, 376 Pa. 330, 334, 102 A.2d 418 (Pa.1954). It is considered an action at law, not equity. See Standard Pennsylvania Practice § 120:139 (West 2015) (“SPP”).
To prevail in an action to quiet title, the plaintiff must make a prima facie showing that he holds title to the property and that such title is better title than that of the adverse party. E.g., Poffernberger v. Goldstein, 776 A.2d 1037, 1041 (Pa.Super.Ct.2001) (internal quotations and citations omitted). The burden of proof is on the plaintiff. E.g., Cox’s Inc. v. Snodgrass, 372 Pa. 148, 92 A.2d 540, 541-42 (1953); Montrenes v. Montrenes, 355 Pa.Super. 403, 513 A.2d 983, 405 (1986).
2.
The Debtor contends that Bank of America’s mortgage is invalid and seeks quiet title relief to remove what he asserts is a cloud on his'title to the Property.
The initial premise of the Debtor’s legal theory is that the 1st Deed Transfer (from Snyder as Administrator to Snyder, individually) was void. According to the Debt- or, Snyder had no ownership interest in the Property (in any capacity) and therefore, no authority to encumber the Property with mortgages, thus rendering void the subsequent 1st Mortgage and successive assignments leading to the assignment to Bank of America.
The Debtor bases his attack of the 1st Deed Transfer on § 3356 of the Pennsylvania Decedents, Estates, and Fiduciaries Code, 20 Pa.C.S. § 3356. Section 3356 provides in relevant part:
§ 3356. Purchase by personal representative.
*76In addition to any right conferred by a governing instrument, if any, the personal representative, in his individual capacity, may bid for, purchase, take a mortyage on, lease, or take by exchange, real or personal property belonging to the estate, subject, however, to the approval of the court, and under such terms and conditions and after such reasonable notice to parties in interest as it shall direct.
(emphasis added).
Section 3356 of the Pennsylvania Probate Code requires the administrator of an estate to obtain court approval prior to any sale of estate property to the administrator himself. The Debtor alleges that Snyder never received court approval prior to or after the 1st Deed Transfer, and therefore, the deed is void and a legal nullity. (Debtor Response 9-10).
Bank of America claims that the deed is valid because the 1st Deed Transfer was a distribution from the Estate, not a purchase by Snyder that required court approval. (Motion at 911).
3.
For the Debtor to prevail based upon § 3356, the Debtor must establish that the 1st Deed Transfer was either void or, at least, “voidable”.7 The Debtor has not pled facts sufficient to support the claim for two (2) independent reasons.
First, the Debtor has not alleged facts supporting the essential determination under 20 Pa.C.S. § 3356: that the transaction was a “purchase” from, rather than a distribution by, the Estate. The Debtor alleges only that Snyder, as administrator of the Estate, transferred the Property to himself, in his personal capacity. The Complaint is devoid of facts regarding the *77identities of heirs other than Snyder.8 (Compl.lffl 11,13). Further, Snyder claimed an exemption from the real estate transfer tax under the will or intestate succession exception. (See Ex. C, Philadelphia Real Estate Tax Certification). Thus, the facts alleged and the documents attached to the Complaint are consistent with a transfer in the nature of a distribution to an heir of the Estate. See 20 Pa.C.S. § 3352 (a personal representative may distribute property of a decedent’s estate without court approval).9
Based on the facts as pled and the supporting documentation, there is no plausible basis to conclude the 1st Deed Transfer was a sale under 20 Pa.C.S. § 3356. See Twombly, 550 U.S. at 547, 127 S.Ct. 1955.
While this first flaw in the Complaint potentially could be cured by pleading additional facts in an amended complaint, there is a second flaw that is incurable. Even assuming that the 1st Deed Transfer was a § 3356 “purchase,” the Debtor has not pled facts suggesting he has the requisite standing to invoke the statute to attack the validity of the 1st Deed Transfer and the subsequent mortgage conveyances.
The doctrine of standing requires a plaintiff to establish that (1) he has suffered an injury in fact; (2) there is' a causal connection between the injury and the conduct complained of; and (3) it is likely that the alleged injury will be redressed by the relief sought. E.g., Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992); In re Global Indus. Technologies, Inc., 645 F.3d 201, 210 (3d Cir.2011). An injury in fact is the “invasion of a legally protected interest which is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical.” Berg v. Obama, 586 F.3d 234, 239 (3d Cir.2009) (quoting Lujan, 504 U.S. at 560, 112 S.Ct. 2130 (internal citations and quotations omitted)).
The defect in the Debtor’s claim is the lack of any allegation that he has a legally protectable interest covered by 20 Pa.C.S. § 3356 in connection with the Estate of Dolores M. Snyder. The § 3356 requirement of court approval of a self-dealing transaction by the fiduciary of a decedent’s estate is designed to protect the heirs and creditors of the decedent’s estate. Accord In re Estate of Frey, 693 A.2d 1349, 1354 (Pa.Super.Ct.1997). Therefore, only those who have a right of inheritance or distribution from the estate may challenge a transaction by an estate fiduciary based on the failure to comply with § 3356. In re Estate of Drummond-Poles, 2011 Phila. Ct. Com. Pl. LEXIS 211, at *5 (Pa.C.P.2011).
The Debtor has not alleged (nor is there any reason to believe that he could allege) that he was an heir or a creditor of the Estate. Section 3356 does not confer standing on third parties to collaterally attack the validity of property transfers from a decedent’s estate. Id. at *5-6. As a stranger to the Estate, the Debtor has no legally protectable interest affected by the requirements of § 3356.10
*78B. Slander of Title
1.
Slander of title is “is the false and malicious representation of the title or quality of another’s interest in goods or property.” Pro Golf Mfg. v. Tribune Review Newspaper Co., 570 Pa. 242, 809 A.2d 243, 246 (2002); Deve Dev., Inc. v. Gargiulo, 2006 Phila. Ct. Com. Pl. LEXIS 31, 4-5 (Pa.C.P.2006); accord Lincoln v. Magnum Land Servs., LLC, 2013 WL 2443926, at *5 (M.D.Pa. June 5, 2013).
The elements of slander of title are:
(1) a false statement;
(2) the publisher either intends the publication to cause pecuniary loss or reasonably should recognize that publication will result in -pecuniary loss;
(3) pecuniary loss does in fact result; and
(4) the publisher either knows that the statement is false or acts in reckless disregard of its truth or falsity.
Pro Golf Mfg., 809 A.2d at 246 (citing Restatement (Second) of Torts § 623(A) (1977) (“Restatement”)); accord Lincoln v. Magnum Land Servs., LLC, 2013 WL 2443926, at *5 (M.D.Pa. June 5, 2013).11 The burden of proof to establish these elements is on the plaintiff. See Restatement § 651.12
*792.
The Debtor bases his slander of title claim on the invalidity of the 1st Deed Transfer, ie., his title to the Property was slandered when the 1st Mortgage was recorded, with that slander being republished each time a holder assigned the 1st Mortgage to another entity.13 However, this claim for slander of title fails for at least two (2) reasons.
First, as explained earlier, the Debtor has no standing to claim that the 1st Deed Transfer is void or avoidable; Snyder had the authority to enter into the 1st Mortgage transaction. Accordingly, there was nothing false in the publication/recordation of Bank of America’s mortgage and its existence and subsequent assignment cannot impair the Debtor’s title to the Property.
Second, the Complaint lacks facts to support the scienter element of a claim for slander of title: an intent to cause financial loss and knowledge or a reckless disregard of the falsity of the recordation and assignment of the 1st Mortgage. See n.11, supra & accompanying text.14
*80C. Unjust Enrichment
Count III of the Complaint asserts a cause of action for unjust enrichment.
Unjust enrichment is an equitable doctrine in which the law implies a contract between parties and requires one party to compensate the other for a benefit conferred. See, e.g., Villoresi v. Femminella, 856 A.2d 78 (Pa.Super.Ct.2004); Mitchell v. Moore, 729 A.2d 1200, 1203-1204 (Pa.Super.Ct.1999).
The elements necessary to prove unjust enrichment are:
(1) benefits conferred on defendant by plaintiff;
(2) appreciation of such benefits by defendant; and
(3) acceptance and retention of such benefits under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value.
Mitchell, 729 A.2d at 1203-04; Schenck v. K.E. David, Ltd., 446 Pa.Super. 94, 666 A.2d 327, 328 (1995). Application of the doctrine rests on the factual circumstances in a given case. Schenck, 666 A.2d at 328. Thus, the “focus is not on the intention of the parties, but rather on whether the defendant has been unjustly enriched.” Id.
The Debtor claims that Bank of America has been unjustly enriched by the renovations he performed on the Property that allegedly increased its value by $25,000.00 to $100,000.00. The Debtor argues that Bank of America should not retain the benefits of the increase in value to the Property (and security interest) without a corresponding payment to the Debtor.
The Complaint falls far short of stating a claim for unjust enrichment.
There are no allegations in the Complaint that support a claim that it would be inequitable for Bank of America to realize the benefit of any appreciation in the value of the Property resulting from improvements made by the Debtor (in the event that Bank of America must look to its collateral for payment of its outstanding claim rather than from a stream of payments from the Debtor). The Complaint alleges only that Bank of America knew that the Debtor was making improvements in the Property before it commenced foreclosure. There are no allegations that Bank of America induced the Debtor to do so nor are there any other allegations that distinguish what occurred here from the run-of-the-mill risk any property owner incurs when expending money to improve a property that is subject to a mortgage.15
D. Civil Conspiracy
1.
The Debtor asserts a civil conspiracy claim based on his contentions that Bank of America (or its predecessors), along with MERS and Fannie Mae, conspired to charge exorbitant fees in connection with the loan to Snyder from America’s Wholesale Lender and that Bank of America lied to the C.P. Court in connection with the motion to set aside the sheriffs sale in order to realize increased proceeds from the Property through a subsequent sheriffs sale.
“A civil conspiracy is a combination of two or more persons to do an unlawful or criminal act or to do a lawful *81act by unlawful means or for an unlawful purpose.” Landau v. Western Pennsylvania Natal Bank, 445 Pa. 217, 224, 282 A.2d 335 (Pa.1971). “Proof of malice, ie., an intent to injure, is essential in proof of a conspiracy.” Thompson Coal Co. v. Pike Coal Co., 488 Pa. 198, 211, 412 A.2d 466 (Pa.1979). Conspiracy is actionable when it produced an overt act which injures the complaining party. Auld v. Mobay Chemical Co., 300 F.Supp. 138, 142 (W.D.Pa.1969) (citing Helmig v. Rockwell, 389 Pa. 21, 131 A.2d 622 (Pa.1957)).
The statute of limitations for civil conspiracy is the same as that for the underlying action which forms the basis of the conspiracy. Kingston Coal Co. v. Felton Mining Co., 456 Pa.Super. 270, 690 A.2d 284, 287 n. 1 (1997). The statute of limitations runs from the commission of each overt act which is alleged to have caused the damage. Auld, 300 F.Supp. at 142. The statute of limitations in Pennsylvania for fraud or any other action for damages based on “tortious conduct” is two (2) years. 42 Pa.C.S. § 5524(7).
2.
Bank of America offers several grounds for dismissal of the civil conspiracy claims:
(1) the Debtor’s lack of standing;
(2) failure to state a plausible claim for civil conspiracy; and
(3) expiration of the statute of limitations.
I agree with all three (3) of Bank of America’s arguments.
The Complaint focuses on the loan transaction between Snyder and America’s Wholesale Lender and contains no allegations that the Debtor was a party to any loan or mortgage agreement which the Debtor claims were affected by a civil conspiracy. Thus, the Debtor is complaining of acts allegedly committed against a third party (Snyder) and has not pled any injury to himself. He has no legally protectable interest in shielding Snyder from tortious conduct by Snyder’s lender; he cannot sue for harms allegedly suffered by Snyder. He lacks standing to sue for alleged harms suffered by a third party.
Further, the Debtor failed to set forth facts suggesting that Bank of America committed an overt act done in pursuit of a common purpose that is unlawful or that Bank of America acted with malice or an intent to injure the Debtor in any way.
Lastly, the civil conspiracy claim is time-barred. The Snyder mortgage loan transaction occurred on October 10, 2005, and no action was taken to redress any injury within the two-year statute of limitations. Bank of America’s motion to set aside the sheriffs sale was filed November 23, 2009 with the C.P. Court. (Compl., Ex. G). The statute has also run on that purported fraudulent filing.
E. Fraud
The Debtor’s Count VI fraud claims are grounded in the same allegations as his civil conspiracy claims, i.e., that Bank of America (or its predecessors) along with MERS and Fannie Mae committed fraud by charging exorbitant fees in connection with the loan to Snyder from America’s Wholesale Lender and that Bank of America’s motion to set aside the sheriffs sale in the C.P. Court was fraudulent.
A plaintiff must prove the following elements to recover on a claim of fraud:
(1) a misrepresentation;
(2) which is material to the transaction at hand;
(3) made falsely, with knowledge of its falsity or recklessness as to whether it is true or false;
(4) with the intent of misleading another into relying on it;
*82(5) justifiable reliance on the misrepresentation; and
(6) the resulting injury was proximately caused by the reliance.
E.g., Gibbs v. Ernst, 538 Pa. 193, 207, 647 A.2d 882 (Pa.1994); SPP § 21:65.
The statute of limitations for fraud under Pennsylvania law is two (2) years. 42 Pa.C.S. § 5524(7).
The Debtor’s fraud claims have the same defects as the civil conspiracy claims. The Debtor lacks standing to sue for alleged frauds committed against Snyder and the applicable two (2) year statute of limitations has run. Further the Complaint’s allegations do not support at least two (2) essential elements of a fraud claim: the Complaint describes neither any factual misrepresentations allegedly made by Bank of America nor facts to support an inference that the factual misrepresentations were made with the intent to mislead or deceive.
F. Valuation of Property
The Debtor seeks to modify the allowed secured claim and value the Property at $100,000.00. The Debtor bases this request on 11 U.S.C. § 506(a)(1), which provides:
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 [11 USCS § 553], 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 set off 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.
Presumably, this claim is the Debtor’s fall-back. If he cannot avoid Bank of America’s mortgage, he hopes to reduce its allowed secured claim from $404,625.07 to $100,000.00 and provide for payment of the allowed secured claim in his chapter 13 plan pursuant to 11 U.S.C. § 1325(a)(5).
Bank of America contests the Debtor’s valuation and asserts that the value is in excess of the Debtor’s estimate. Bank of America also argues that the Debtor’s request to reduce the secured claim must fail because the Debtor cannot prove that he has the ability to make payments on the reduced secured claim. (Motion at 21). According to Bank of America, the Debt- or’s schedules establish that he has no source of funding to make payments on the 1st Mortgage.16
I will deny the Motion as to this claim. While Bank of America’s contention that the Debtor lacks the ability to fund a chapter 13 plan to provide for a $100,000.00 allowed secured claim might be a valid objection to confirmation or a basis *83for dismissal of the chapter 13 case, it is unrelated to the Debtor’s request for a determination under 11 U.S.C. § 506(a).17
G. Leave to Amend
After granting a motion to dismiss a complaint under Rule 12(b)(6), a court should grant the plaintiff leave to amend “unless an amendment would be inequitable or futile.” Alston v. Parker, 363 F.3d 229, 235 (3d Cir.2004). “ ‘Futility’ means that the complaint, as amended, would fail to state a claim upon which relief could be granted,” Shane v. Fauver, 213 F.3d 113, 115 (3d Cir.2000) (citing In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir.1997)), or the amended complaint would not withstand a renewed motion to dismiss, Jablonski v. Pan American World Airways, Inc., 863 F.2d 289, 292 (3d Cir.1988). For instance, if there is an obvious meritorious defense, such as the statute of limitations, then dismissal with prejudice would be proper as no amendment could cure the defect. See e.g., Massarsky v. General Motors Corp., 706 F.2d 111, 125 (3d Cir.1983); Jablonski, 863 F.2d at 292. The same is true of claims that have no arguable basis in law. Harrison Beverage Co. v. Dribeck Importers, Inc., 133 F.R.D. 463, 468 (D.N.J.1990).
In this proceeding, any proposed amendment to the dismissed claims would be futile; the amended claims would not withstand a renewed motion to dismiss.18 Leave to amend is not granted. Counts I, II, III, IV, and VI will be dismissed with prejudice.
V. CONCLUSION
For the reasons set forth above, Bank of America’s Motion to Dismiss is granted in part and denied in part. Counts I, II, III, IV, and VI will be dismissed with prejudice.
An appropriate order follows.
ORDER
AND NOW, upon consideration of Defendant Bank of America National Association’s Motion to Dismiss (“the Motion”) and the Debtor’s response thereto, and for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that:
1. The Motion is GRANTED IN PART AND DENIED IN PART.
2. The Motion is GRANTED as to Counts I, II, HI, IV, and VI and those Counts of the Complaint are DISMISSED WITH PREJUDICE.
3. The Motion is DENIED as to Count VIII.
4. A status conference is SCHEDULED on May 27, 2015, at 10:00 a.m., in Bankruptcy Courtroom No. 1, 2d floor, U.S. Courthouse, 900 Market Street, Philadelphia, PA to consider: (a) the status of the Complaint with respect to Defendant Bank of New York Mellon and (b) the establishment of appropriate pretrial deadlines with respect to Count VIII and the Debtor’s Objection to Bank of America’s Proof of Claim.
. BYNM has yet to file any response to the Complaint.
. Fed. R. Bankr.P. 7008 requires that a complaint state whether the claims are core or non-core. See 28 U.S.C. § 157(b)(2). Fed. R. Bankr.P. 7012(b) requires that a "responsive pleading” admit or deny that a proceeding is core or non-core and, if non-core, whether *73the responding party consents to the entry of a final judgment by the bankruptcy court. Neither the Complaint nor the Motion addressed whether the Debtor’s claims are core or non-core. Consequently, by Order dated March 31, 2015, I directed both parties to do so. (Doc. # 16).
The Debtor filed a statement asserting that all of his claims are core. (Doc. # 18). Bank of America took the position that all of the claims are non-core, but then consented to the entry of a final judgment by the bankruptcy court. (Doc. #19). See generally Wellness Intern. Network Ltd. v. Sharif, — U.S. —, 134 S.Ct. 2901, 189 L.Ed.2d 854 (2014) (certiorari granted to consider question whether the bankruptcy court may enter a final order in a non-core matter with the parties’ consent).
. The mortgage assignments were as follows:
*74Date Recorded 5/31/07 Assignor MERS as nominee for America’s Wholesale Lender Assignee Countrywide Home Loans
4/14/10 Countrywide Home Loans, Inc. BAC Home Loans Servicing, LP
4/23/12 BAC Home Loans Servicing, LP Battle of America, N.A.
7/22/13 Bank of America, N.A. Countrywide Home Loans, Inc.
. Neither Bank of America nor the Debtor discussed this anomaly. After transferring the Property from himself as administrator, to himself in his personal capacity, Snyder, again as administrator, later transferred the Property to the Debtor. But presumably, he no longer had title to the Property as administrator when he transferred the Property to the Debtor. What is the consequence of this apparent defect in the chain of title? Does it mean that the Debtor’s own title to the Property is defective? Or, did the parties to the 2nd Deed Transfer intend to refer to the grantor as Snyder individually rather than ¶ 51). The deed is dated July 23, 2011.Snyder as administrator — which might be a correctable, clerical error that would not impair the Debtor's title? At the motion to dismiss stage, I will make the inference favorable to the Debtor and assume the latter.
. The Complaint alleges that the transfer occurred on or about July 11, 2011. (Compl.
. The Debtor claims no agreement ever existed between Bank of America and Snyder. (Comply 61).
. If the 1st Deed Transfer was a void transaction, the 1st Mortgage would be invalid. See generally Harris v. Harris, 428 Pa. 473, 239 A.2d 783, 784-85 (1968) (transfer based on forged deed cannot pass title, even to a good faith purchaser); see also Bennerson v. Small, 842 F.2d 710, 714 (3d Cir.1988) (same).
If the 1st Deed transfer is merely "voidable,” the issue is more complicated. The Commonwealth Court of Pennsylvania has stated:
The difference between a void transaction and a voidable one is noteworthy. Void acts have no legal effect whatsoever. They are absolute nullities. Voidable acts, however, are valid until annulled. Where, as here, third parties become involved before an attempt at avoidance, the difference between a void transaction and a voidable one is critical.
See Vine v. State Employees’ Retirement Bd., 956 A.2d 1088, 1094 (Pa.Cmwlth.Ct.2008) (citations omitted), rev'd on other grounds, 607 Pa. 648, 9 A.3d 1150 (2010).
There are no Pennsylvania court decisions that provide guidance as to the effect of the avoidance of a transfer due to the grantor’s failure to comply with 20 Pa.C.S. § 3356 on a third party that engaged in a transaction with the transferee prior to the avoidance. Analogous areas of the law suggest that the outcome may depend on whether the third party (in this adversary proceeding, that would be Bank of America) was a bona fide purchaser for value without notice of the defect in their title. See In re Fowler, 425 B.R. 157, 196 (Bankr.E.D.Pa.2010) (citing cases involving the rights of subsequent purchasers as against the holders of prior, unrecorded interests); see also 11 U.S.C. § 550(e)(1) (after avoidance of a transfer, a good faith transferee may retain its lien in certain circumstances).
The point here is that if the Debtor made out a prima facie case that the 1st Deed Transfer was avoidable, Bank of America might have had to rely on an affirmative defense to protect its mortgage position, thus making it inappropriate to dismiss the Debt- or’s claim under Rule 12(b)(6). However, it is unnecessary to decide whether a violation of 20 Pa.C.S. 3356 gives rise to any type of avoidance power (or is remediable only by surcharging the offending estate fiduciary) or whether a good faith transferee can defeat an avoidance claim. As explained below, the Debtor has no legally cognizable claim for the avoidance of the 1st Deed Transfer and the 1st Mortgage.
. If Snyder is the sole heir of the Estate, it would be highly unlikely that Snyder would have purchased the Property as opposed to transferring the Property under the state intestate laws.
. 20 Pa.C.S. § 3532 provides:
A personal representative, at his own risk and without the filing, audit or confirmation of his account, may distribute real or -personal property and such distribution shall be without liability to any claimant against the decedent, unless the claim of such claimant is known to the personal representative....
.The Debtor's lack of standing also is illustrated by the Pennsylvania decisions holding that violations of § 3356 may result in the *78imposition of a surcharge on the offending fiduciary. See In re Estate of Aiello, 993 A.2d 283, 289 (Pa.Super.Ct.2010) (citing Frey, 693 A.2d at 1353 and In re: Estate of Dobson, 490 Pa. 476, 417 A.2d 138 (1980)); see also Pomeroy v. Bushong, 317 Pa. 459, 177 A. 10, 11 (1935) (executor liable for surcharge to estate). The purpose of the surcharge is to compensate estate beneficiaries for damages suffered as a result of the fiduciary’s inadequate conduct. Accordingly, there is nothing in the nature of the surcharge remedy that suggests that § 3356 may be invoked by anyone other than an estate beneficiary.
. Pro Golfs citation of Restatement § 623A 'creates some ambiguity. Like Pro Golf, the text of Restatement § 623A suggests that two (2) types of scienter are required to state a claim: (1) an intent to cause harm or an objectively reasonable likelihood that the publication will cause harm and. (2) knowledge of the falsity of the publication or reckless disregard of its truth or falsity. However, Restatement § 623A also includes the following "Caveat:”
The Institute takes no position on the questions of:
(1) Whether, instead of showing the publisher’s knowledge or reckless disregard of the falsity of the statement, as indicated in Clause (b), the other may recover by showing that the publisher had either
(a) a motive of ill will toward him, or
(b) an intent to interfere in an unprivileged manner with his interests; or
(2) Whether either of these alternate bases, if not alone-sufficient, would be made sufficient by being combined with a showing of negligence regarding the truth or falsity of the statement.
. In stating this principle, § 651 of the Restatement further breaks out the elements of the claim into twelve (12) parts:
(1) the existence and extent of the legally protected interest of the plaintiff affected by the falsehood;
(2) the injurious character of the falsehood;
(3) the falsity of the statement;
(4) publication of the falsehood;
(5) that the circumstances under which the publication was made were such as to make reliance on it by a third person reasonably foreseeable;
(6) the recipient’s understanding of the communication in its injurious sense;
(7) the recipient’s understanding of the communication as applicable to the plaintiff's interests;
(8) the pecuniary loss resulting from the publication;
(9) the defendant’s knowledge of the falsity of the statement or his reckless disregard as to its truth or falsity;
(10) the defendant’s motivation of ill will;
(11) the defendant’s intent to affect plaintiff’s interests in an unprivileged manner; and
(12) abuse of a conditional privilege.
Accord Deve Dev., Inc. v. Gargiulo, 2006 Phila. Ct. Com. Pl. LEXIS 31, at *5 n.l (2006).
. Without any elaboration, the Debtor also claims that the motion to vacate the sheriffs sale in November 2009 was a slander on his title because Bank of America knew the underlying reason for the motion was false (i.e., because it was "based [on] a false statement that there [w]as an agreement between Snyder [and] Defendant when there was no such agreement”). (Debtor's Reply at 14) (Doc. # 15). It escapes me how a representation that an agreement existed between Snyder (the then-record title holder of the Property) and a mortgagee (the servicing agent for Bank of America or its predecessor in interest) to set aside a sheriff's sale of the Property could possibly arise to a slander of the Debtor’s title in the Property because the agreement was made before the Debtor even purchased the property. Indeed, had the sheriff's sale not been set aside, it is inconceivable- that Snyder would have transferred the Property to the Debtor via the 2nd Deed Transfer on July 11, 2011. This component makes Count II implausible.
. Bank of America also argues that this claim is untimely. The statute of limitations for slander of title is one (1) year, see 42 Pa.C.S. § 5523; Pro Golf Mfg., 809 A.2d at 246, and the last alleged slander was the last assignment on July 11, 2013, recorded on July 22, 2013. (The Debtor’s bankruptcy case was filed on April 21, 2014 and the adversary proceeding was filed on November 30, 2014). While I am not dismissing the slander of title claim based on Bank of America’s statute of limitations defense, I do point out that the claim may well be vulnerable to that defense.
Accepting the questionable proposition that the recordation of a mortgage assignment constitutes a republication of the recordation of the allegedly slanderous mortgage, it is patently clear from the facts in the Complaint that the Debtor’s slander of title claims with respect to the 1st Mortgage transaction and the first three (3) mortgage assignments are barred by the statute of limitations. The limitations periods with respect to the 1st Mortgage, and 2007 and 2010 assignments expired before the Debtor purchased the Property on July 11, 2011. Even if the limitations periods were tolled until the Debtor purchased the Property, they expired on July 11, 2012, almost two (2) years before the Debtor filed this bankruptcy case or this adversary proceeding.
The statute of limitations defense as to the last assignment recorded on July 22, 2013 is more complicated. The assignment occurred less than one (1) year before the filing of the Debtor's bankruptcy case on April 21, 2014, but more than one (1) year before the commencement of the adversary proceeding on November 30, 2014. Under 11 U.S.C. § 108(a), the limitations period for a debtor's claim that has not expired as of the commencement of the case is extended to the later of the limitations period under applicable nonbankruptcy law or two (2) years after the order for relief. If § 108(a) applies, the Debt- or’s claim is timely filed with respect to the last assignment. However, there is a division of authority whether a chapter 13 debtor may invoke the benefits of 11 U.S.C. § 108(a). Compare In re Johnson, 2009 WL 2259088, at *2-3 (Bankr.S.D.Ill. July 29, 2009), with In re McConnell, 390 B.R. 170, 180 (Bankr.W.D.Pa.2008); In re Gaskins, 98 B.R. 328, 330 (Bankr.E.D.Tenn.1989). I do not decide that issue because I dismiss this claim on other grounds.
. This claim also would fail if the Debtor’s avoidance claim were meritorious. In that event, Bank of America would lose its lien position and would not benefit by the improvements the Debtor made increasing the Property's value. An unjust enrichment claim requires a benefits conferred on the defendant by the plaintiff.
. Bank of America also notes that valuation of the Property need not be by adversary proceeding and the Debtor should file a motion under Fed. R. Bankr.P. 3012.
Fed. R. Bankr.P. 3012 provides:
The court may determine the value of a claim secured- by a lien on property in which the estate has an interest on motion of any party in interest and after a hearing on notice to the holder of the secured claim and any other entity as the court may direct.
In filing the adversary proceeding, Bank of America was provided with more formal process and procedural safeguards than a mere motion. It would exalt form over substance to dismiss this action and compel the Debtor file a motion under Rule 3012.
. In denying the Motion, I have not considered the effect, if any, of 11 U.S.C. § 1322(b)(2) on this claim. See Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993).
. The only possible amendment that would revitalize the Debtor's claims would be an allegation that the Debtor was a beneficiary of Dorothy M. Snyder’s Estate. There is no reason to believe that the Debtor can make that allegation. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498303/ | *88Opinion
STEPHEN RASLAVICH, UNITED STATES BANKRUPTCY JUDGE.
Introduction
Gary F. Seitz, Trustee of the above-captioned estate, has filed a sixteen count complaint against Peter Frorer, Frorer Partners, L.P., Frorer Associates, LLC, Tripartite, LLC, and the Prothonotary of the Montgomery Court of Common Pleas. The complaint seeks to recover property and asks for other relief. Two motions to dismiss the complaint have been filed. The first motion was filed by Tripartite, and the second by Frorer, Frorer Partners and Frorer Associates (collectively, “the Frorer Defendants”). Hearings on the matters were held on March 4, 2015 and March 18, 2015 respectively. The Court thereafter took the matters under advisement. For the reasons which follow, both Motions (with the exception of Count II) will be denied in their entirety.1
The Complaint
The Trustee seeks affirmative and in-junctive relief. First and foremost, he seeks to recover property transferred by the Debtor to the Defendants before the bankruptcy filing. The property in question consists of shares of common stock in a company known as Pet360. It is alleged that in 2013 the Debtor transferred to the Defendants 5 million shares of such stock. In 2014, the Debtor deposited another.2.8 million shares with the Montgomery County Court of Common Pleas, but those shares have since been deposited into an escrow account pending the outcome of this litigation.2
The Trustee seeks to avoid those transfers under express Bankruptcy Code provisions as well as under applicable state law. In addition to recovery of the stock (or its value), the Trustee asks the Court to either disallow or subordinate the Defendants’ proofs of claim and to grant other equitable and injunctive relief.
Grounds for Dismissal
The Defendants seek dismissal of 13 of the 16 counts.3 The basis for dismissal is twofold: first, that the counts fail to state a claim upon which relief may be granted; and second, that the complaint fails to join necessary parties.
Pleading Standard
To state a claim under Rule 8 of the Federal Rules of Civil Procedure, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” F.R.C.P. 8(a)(2) (made applicable by B.R. 7008). However, “recitals of the elements of a cause of action, supported by mere conclu-sory statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Rather, “a complaint must contain suffi*89cient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Id. at 678, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). Where, as here, fraud is among the causes of action, the rules require the complaint to include specificity as to the “circumstances constituting fraud” such as the “who, what, when, where, and how.” In re Dulgerian, 388 B.R. 142, 147 (Bankr.E.D.Pa.2008) (citing In re Rockefeller Center Properties, Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir.2002)).
Order of Analysis
The Motions were filed separately. However, because they are based on a common core of facts, and because they involve related defendants, it will be more efficient to analyze them together. To that end, the Court will address the sustainability of each count seriatim
Count I — Preferential Transfers
The first count alleges that Tripartite is the recipient of an avoidable preference.4 Section 547(b) of the Bankruptcy Code authorizes a trustee in bankruptcy to avoid certain payments made within ninety days before the debtor files for bankruptcy as “preferential transfers.” This section states, in pertinent part:
[A]trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition;
(5)that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b) (emphasis added). A complaint to avoid preferential transfers must include the following information in order to survive a motion to dismiss:
(a) an identification of the nature and amount of each antecedent debt; and
(b) an identification of each alleged preference transfer by
(i) date,
(ii) name of debtor/transferor,
(iii) name of transferee and
(iv) the amount of the transfer. .
In re Universal Marketing Inc., 460 B.R. 828, 835-836 (Bkrtcy.E.D.Pa.2011)
Transfer
The complaint alleges that on September 11, 2014 William Fretz, a principal of the Debtor, transferred the Debtor’s remaining 2.7 million stock shares (the 2014 Transfer) in Pet360 to the Prothonotary of Montgomery County. ¶ 168
To Or For The Benefit Of a Creditor
Next, the Complaint alleges that the “2014 Transfer (of stock) to the Prothono-tary was for the benefit of Tripartite.” *90¶ 173. Tripartite is alleged to be the holder of a $2.5 million judgment against the Debtor (¶¶ 160-165), and is therefore, a creditor.
Antecedent Debt
The Complaint next alleges that the “2014 Transfer was made for or on account of an antecedent debt owed by the Debtor to Tripartite before the 2014 Transfer was made.” ¶ 176. The judgment which Tripartite held against the Debtor was originally held by the Commonwealth of Pennsylvania and was entered on April 8, 2013. ¶ 26. Again, the 2014 Transfer is alleged to have been made on September 11, 2014. ¶ 168. The judgment thus preceded the transfer of the shares to the Prothonotary and constitutes a debt antecedent to the transfer.
Insolvency
The complaint next alleges that the Debtor was insolvent on the date the 2014 Transfer was made. ¶ 177. In challenging the sufficiency of this allegation, Tripartite concedes that the Trustee enjoys the presumption of insolvency for the 90 days prior to bankruptcy, but then argues that the evidence will prove otherwise. Tripartite’s Brief, 12 That may turn out to be the case; however, at this stage of the proceedings, the evidence is not considered. What matters is what is plead by the Trustee.
Timing
The complaint alleges that the 2014 Transfer was made within ninety 90 days of the bankruptcy filing. ¶ 173. The bankruptcy was filed on September 19, 2014. ¶ 170 The 2014 Transfer occurred on September 11, 2014. ¶ 168. That date is within the 90 day preference period.
Greater Recovery Than Under Chapter 7
Finally, the complaint alleges that the 2014 Transfer enabled Tripartite to receive more than it would have received if its recovery were limited to what it would receive in a Chapter 7 distribution. ¶ 178
All five elements of preferential transfer having been plead, the Court finds that Count I sufficiently alleges a prima facie case against Tripartite.
Count II — Recovery of Avoided Preference
Having alleged a prima facie ease for the avoidance of a transfer, the Trustee requests the recovery of that property. The Prothonotary was alleged to be the initial transferee of the stock shares. ¶ 182. The relevant statute provides that “the trustee may recover ... from (1) the initial transferee of such transfer.” 11 U.S.C. § 550(a)(1). Since this suit was filed, however, the parties’ stipulated that the 2014 Transfer should be placed in escrow until judgment is entered. That moots the recovery claim and Count II will be dismissed on that basis.
Count TV
Count IV alleges actual fraud against the Frorer Defendants based on § 548 of the Bankruptcy Code. That section provides, in pertinent part:
(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debt- or in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after *91the date that such transfer was made or such obligation was incurred, indebted;
11 U.S.C. § 548(a)(1)(A) (emphasis added).
To state a claim for avoidance of a transfer based upon actual fraud under the Bankruptcy Code, 11 U.S.C. § 548(a)(1)(A), a plaintiff must allege that the debtor made the transfer with the actual intent to hinder, delay or defraud a creditor. The pleading requirements for such claims are set out by Rule 9(b), which requires a trustee to “plead the circumstances constituting the alleged fraudulent conveyances with particularity.” Bratek v. Beyond Juice, LLC, 2005 WL 3071750, at *6 (E.D.Pa. Nov. 14, 2005). Nevertheless, a trustee may plead intent generally under the second sentence of the rule. River Road Dev. Corp. v. Carlson Corp.-Ne., 1990 WL 69085, at *10 (E.D.Pa. May 23, 1990). The requirements of Rule 9(b) are generally relaxed and interpreted liberally where a trustee is asserting the fraudulent transfer claims. In re APF Co., 308 B.R. 183, 188 (Bankr.D.Del.2004). Nonetheless,. even afforded such latitude, the plaintiff must provide more than mere legal conclusions and cannot simply repeat the elements of the cause of action. Mervyn’s LLC v. Lubert-Adler Grp. IV (In re Mervyn’s Holdings, Inc.), 426 B.R. 488, 494 (Bankr.D.Del.2010)
With regard to the Debtor’s principals’ state of mind, the Complaint alleges generally an intent to defraud. ¶ 197. It is well recognized, however, that a transferor will rarely admit to acting with a fraudulent purpose, so the circumstances surrounding the transfer become material. In re American Rehab & Physical Therapy, Inc., 2006 WL 1997431, at *16 (Bankr. E.D.Pa. May 18, 2006) Those circumstances consist of the common law “badges” of fraud. See In re Valley Bldg. & Const. Corp., 435 B.R. 276, 285-86 (Bkrtcy.E.D.Pa.2010) They include:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer'was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
In re Pinto Trucking, Inc., 93 B.R. 379, 386 (Bkrtcy.E.D.Pa.1988)
The Complaint sets forth at least four of the above-cited badges: Nos. 4, 5, 8 and 9. The transfer of the stock shares was prompted by Frorer’s repeated threats to sue the Debtor and its principals (#4). ¶¶ 65, 72-81) 96. The stock is alleged to be the Debtor’s principal asset (# 5). ¶¶ 133, 134. The value of stock is alleged to be worth well in excess of what the Debtor owed Frorer and the partners (# 8). Compare ¶ 27 with ¶ 157. After the stock was transferred, the Debtor would *92be left with nothing to pay creditors (# 9). ¶¶ 133-134. It might be argued that these allegations, while serious, tend to bear on what Frorer was intending than on what the principals were thinking at the time of the transfers.
Viewed in the context of the Debtor’s history, however, the allegations provide a sense of the principals’ state of mind when the stock was transferred. The Debtor was a private equity fund run by Messrs. Fretz and Freeman. ¶ 16. Their alleged mismanagement of the fund was the subject of a state attorney general’s lawsuit. ¶ 24. That suit resulted in a $2.5 million judgment entered against the principals in April 2013. Id. Their contemporaneous and subsequent5 transfers of the Debtor’s most valuable asset for little consideration raise valid questions as to their bona fides with respect to the entities’ limited partners. Taking all of the alleged circumstances together, therefore, the Court finds that Count IV states a claim for actual fraud.
Constructive Fraud
Counts V and VII also charge the Frorer Defendants with fraud, but the fraud alleged is of a different type. In these two counts, the fraud is not based on the actor’s state of mind; rather, it arises from circumstances under which transfers of the property were made. Referred to as “constructive” fraud, it is provided for in the Bankruptcy Code:
(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debt- or in property, ... if the debtor voluntarily or involuntarily—
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
11 U.S.C. § 548(a)(1)(B) That is the legal basis for Count V. Its state law counterpart provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
12 P.S. § 5105. That is the legal basis for Count VIL Like a claim alleging actual fraud, a claim for constructive fraud is also subject to the higher standard of specificity. See In re The Harris Agency, LLC, 465 B.R. 410, 417 n.12 (Bkrtcy.E.D.Pa. 2011) (noting the split of authority within this District, that the Third Circuit has not yet ruled on the question, and concluding that requiring the higher pleading standard is within the court’s discretion).6
*93
Reasonably Equivalent Value
The first element of a constructive fraud claim is that the debtor received less than a reasonably equivalent value in exchange for what was transferred. Image Masters, Inc. v. Chase Home Finance, 489 B.R. 375, 386-387 (E.D.Pa.2013) Both Counts V and VII allege that in exchange for the stock the Debtor received less than reasonably equivalent value. ¶¶ 203, 220. The consideration which the Debtor received was the forgiveness of the balance on a $300,000 loan. ¶ 2 It is alleged that the loan balance was $175,000 when the Debtor transferred the stock to the Frorer Defendants. ¶¶ 30, 97. The total number of shares given in exchange was 7.8 million.7 The value of the stock is alleged to be $1 per share. ¶ 157. That makes the total value of the stock transferred well in excess of what the Debtor owed the Defendants. Insolvency or Other Financial Impairment
In addition to one-sidedness or imbalance in the exchange, it must also be alleged that the debtor’s financial state was compromised at the time. Unlike a preference action, fraudulent transfer law does not presume insolvency and so it must be plead. See In re The Brown Publishing Company, 2014 WL 1338102, at *5 (Bkrtcy.E.D.N.Y. Apr. 3, 2014). Counts V and VII allege that the Debtor was insolvent when the 2013 transfers were made. ¶¶ 204, 219. While no specific financial information is alleged on this point, the Court can reasonably infer that the Debtor’s financial health was either tenuous at the time of, or irreparably harmed by, the transfers of the stock. For example, the Trustee begins with the allegation that Frorer threatened the Debtor’s principals with a coming “train wreck” should they not transfer additional stock to him. ¶ 131. A somewhat clearer allusion to financial straits appears three paragraphs later: Frorer is alleged to have written that he should be the one to offer to buy the Attorney General’s $2.5 million judgment because “there is little inside [the Debtor].” ¶ 134. That suggests that the Debtor had insufficient assets to satisfy the judgment. The clearest indication of the Debtor’s financial condition appears two paragraphs after that: the Trustee quotes a memo wherein Frorer writes that total claims are well in excess of what the Debtor is worth. ¶ 136. These allegations suffice for alleging insolvency of the Debtor for the four years prior to bankruptcy.
Having alleged both that the Debtor received less than reasonably equivalent value in exchange for the stock, and that the Debtor was either insolvent when the stock was transferred or rendered insolvent as a result, Counts V and VII state a claim for constructive fraud under both the Bankruptcy Code and its state law counterpart.
Recovery of Fraudulent Transfers
Because the Trustee has plead that the Defendants received a transfer avoidable under the constructive fraud provisions of both the Bankruptcy Code and the PUFTA, he is entitled to recover these transfers under § 550(a)(1) of the Code. In response, Defendants raise the defense that they are good faith transferees under § 550(b)(2). At this juncture, that is premature. An affirmative defense such as good faith should be raised later. See In *94re Bressman, 327 F.3d 229, 235-36 (3d Cir.2003) (placing the burden of proof of good faith upon the transferee)
Aiding and Abetting a Fiduciary Breach
Count IX charges the Frorer Defendants with aiding and abetting the Debtor’s principals in breaching their fiduciary duties. This cause of action has been recognized by Pennsylvania courts. See Official Comm. of Unsecured Creditors of Allegheny Health Educ. & Research Foundation v. PWC, LLP, 605 Pa. 269, 989 A.2d 313, 327 n. 14 (2010) (observing that the Commonwealth Court has recognized the cause of action) To establish this cause of action, a plaintiff must show: (1) a breach of fiduciary duty owed to another; (2) knowledge of the breach by the aider or abettor; and (3) substantial assistance or encouragement by the aider or abettor in effecting that breach. Adena, Inc. v. Cohn, 162 F.Supp.2d 351, 357-358 (E.D.Pa.2001). As a breach of fiduciary claim is subject to a notice pleading standard, see In re Total Containment, 335 B.R. 589, 611 (Bankr.E.D.Pa.2002), that standard will similarly govern a claim that one aided and abetted another breaching such duty.8
Underlying Fiduciary Duty
Because the Debtor is a Delaware limited partnership, the existence of fiduciary duties cannot be assumed. That state’s limited partnership law provides that the partners may agree that no such duties arise. See 6 Del. Ch. 17&emdash;1101(d) (providing that the limited partnership agreement may waive fiduciary duties). Here, however, the Complaint does not reference or cite from the Debtor’s operating agreement, and so the Court is not informed as to whether the partners opted to forego fiduciary responsibilities. In such an instance, those duties arise by default. See Auriga Capital Corp v. Gatz Properties, 40 A.3d 839, 851 (Del.Ch.2012) (concluding that where limited partnership agreement is’ silent as to whether fiduciary duties apply, such duties will be presumed to apply). That leaves three issues: first, what specific duties are owed; second, who is charged with such duties; and third, to whom are the duties owed.
Fiduciary Duties Under Delaware Law
Delaware law recognizes two general categories of fiduciary duties: care and loyalty.9 TVI Corp. v. Gallagher, 2013 WL 5809271, at *13 (Del.Ch. Oct. 28, 2013). In the case of a limited partnership, the general partner of a Delaware limited partnership owes the traditional duties of care and loyalty to the limited partners. Gotham Partners LP v. Hallwood Realty Partners LP, 2000 WL 1476663, at *10 (Del.Ch. Sept. 27, 2000)
Having established the requisite fiduciary duties owed to limited partners and who must exercise them, the Court must determine who the general partner is in this case. This is necessary because of the Debtor’s rather convoluted ownership structure. The complaint identifies Covenant Capital Management LP (CCM LP) as the Debtor’s general partner. ¶ 17. Yet because CCM LP is a limited partnership, *95it must itself have a general partner. The general partner of CCM LP is identified as Covenant Capital Management, Inc. (CCM Inc.) Id. CCM Inc, in turn, is alleged to be owned and controlled by Messrs. Fretz and Freeman. Id. As the individuals who control the general partner of the limited partnership which is the general partner of the Debtor, Messrs. Fretz and Freeman owed fiduciary duties to the Debtor’s limited partners. See also Lewis v. Aimco Properties, L.P., 2015 WL 557995, at *5 (Del.Ch. Feb. 10, 2015) (individuals and entities who control general partner owe to the limited partners a duty of loyalty); Lake Treasure Holdings, Ltd v. Foundry Hill GP, LLC, 2014 WL 5192179, at *10 (Del.Ch. Oct. 10, 2014) (same)
Duty of Care
The duty of care entails the management of the company with the “care which ordinary, careful, and prudent persons would use in similar circumstances.” In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 749 (Del.Ch.2005) aff'd 906 A.2d 27 (Del.Ch.2006). Implicated here is the business judgment rule which presumes that a “director’s business judgement is made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” In re Reliance Sec. Litig., 91 F.Supp.2d 706, 732 (D.Del.2000). The threshold for finding a breach of that duty is relatively high. Smith v. Van Gorkom, 488 A.2d 858, 881 (Del.1985), overruled on other grounds, Gantler v. Stephens, 965 A.2d 695 (2009)
The Complaint, however, alleges a potential instance of gross negligence which would satisfy even a high standard. That is to say that it is questionable, to say the least, why Fretz and Freeman would transfer stock of so much value in exchange for the satisfaction of relatively little debt. ¶¶ 228, 229. Given the circumstances alleged, this decision on its face is inexplicable. Accordingly, this element of the cause of action is sufficiently plead.
Duty of Loyalty
Those same allegations, if proven, would easily go beyond mere misjudgment and arguably constitute self-dealing. Under the duty of loyalty, fiduciaries owe a duty to avoid financial or other cognizable fiduciary conflicts of interest. Stone ex rel, supra, 911 A.2d at 370. The Complaint alleges that Messrs. Fretz and Freeman breached that duty when they saddled the Debtor with their personal debts and then used partnership property (the Pet360 stock) to pay them off. ¶¶ 228, 229. The complaint thus sets forth two ways in which Messrs. Fretz and Freeman failed in discharging their fiduciary responsibilities.
Knowledge
To charge the Frorer Defendants with aiding or abetting those breaches, the Complaint must first set forth the requisite mental state on their part. The complaint imputes knowledge of the principals’ wrongdoing to Frorer. It is alleged that when Frorer attempted to consolidate all three loans and collateralize them with the Pet360 stock (¶¶ 36, 80) he was aware of this impropriety because he offered to give the Debtor a buy back option. ¶¶ 36, 70, 78. Further, he is alleged to have acknowledged the possibility of such arrangement being illegal but stated that it was not his problem. Rather, it was the Debtor’s. ¶ 82. Finally, he is alleged to have further conceded that if he were to take the Pet360 stock, the Debtor’s limited partners might object. ¶ 117. As the complaint relates it, Frorer was aware that in taking the stock, questions of propriety would arise.
*96
Assistance or Encouragement
Along with the Frorer Defendants’ knowledge of the fiduciaries’ breach, the complaint must also allege that they “substantially] assisted] and encourage[d]” such conduct. Those terms have not been specifically defined by Pennsylvania courts in this context. However, in an analogous context, they have been. Pennsylvania law recognizes the tort of “concert of action.” Charan Trading Corp. v. Uni-Marts, LLC (In re Uni-Marts, LLC), 399 B.R. 400, 412 (Bankr.D.Del.) It derives from the Restatement of Torts and provides:
For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he
(a) does a tortious act in concert with the other or pursuant to a common design with him, or
(b) knows that the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or
(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.
Restatement (Second) of Torts § 876 (emphasis added). This is instructive for present purposes because it has as its elements (knowledge, substantial assistance or encouragement) the same two elements found in aiding and abetting a fiduciary breach. The Comment to Clause (b) of § 876 provides that “[i]f the encouragement or assistance is a substantial factor in causing the resulting tort, the one giving it is himself a tortfeasor and is responsible for the consequences of the other’s act.” The Court finds these interpretations reasonable and will employ them to assess the sufficiency of what this count alleges.
As the complaint alleges it, the Frorer Defendants rendered more than substantial assistance to the principals in breaching their duties. They are portrayed'as having initiated the fraudulent transfer of the Debtor’s most valuable asset. The complaint alleges that Frorer prepared sham documents to recharacterize their transaction from what was originally an unsecured loan to a secured obligation. In addition, the extent of the Debtor’s responsibility for such loans was likewise increased. See ¶¶ 104-111. On the strength of this, the complaint sufficiently states a claim for aiding and abetting a breach of fiduciary duty against the Frorer Defendants.
Gist of Action
Counts X, XI and XII plead two common law tort counts (fraud and conversion) and one equity action (unjust enrichment). The Frorer Defendants challenge these counts on two separate bases. In addition to arguing that each is insufficiently plead, they maintain that the essence of each count belies the characterization of the claim as sounding in tort or equity. They refer here to the “gist of the action” and “economic loss” doctrines. The gist of the action doctrine precludes tort claims “1) arising between the parties; 2) when the alleged duties breached were grounded in the contract itself; 3) where any liability stems from the contract; and 4) when the tort claim essentially duplicates the breach of contract claim or where the success of the tort claim is dependent on the success of the breach of contract claim.” Reardon v. Allegheny Coll., 926 A.2d 477, 486 (Pa.Super.Ct.2007).10 The economic loss doctrine *97“precludes recovery in tort if the plaintiff suffers a loss that is exclusively economic, unaccompanied by an injury to either property or person.” Bouriez v. Carnegie Mellon Univ., 430 Fed.Appx. 182, 187 (3d Cir.2011). Accordingly, “a claim should be limited to a contract claim when the parties’ obligations are defined by the terms of the contracts, and not by the larger social policies embodied by the law of torts.” Bohler-Uddeholm Am., Inc. v. Ellwood Grp., Inc., 247 F.3d 79, 104 (3rd Cir.2001) (internal quotation omitted).
No fraud claim lies here, say the Frorer Defendants, because the parties’ legal relationship is defined by a Collateral Release Agreement. They maintain that under that agreement, the Pet360 stock was transferred to them for consideration. That, they say, refutes any claim of fraud (or, for that matter, conversion or unjust enrichment). Frorer Defendants’ Brief, 14-16
The Trustee’s response is that the Collateral Release Agreement is not the basis of his suit, but is, instead, an indicia of the fraud which is its legal premise. The Collateral Release Agreement, says the Trustee, is a sham: it is a manufactured transaction intended to imbue with legitimacy the wrongful transfer of the Debtor’s most valuable asset. These transfers, the Trustee alleges, were not made pursuant to that agreement because they occurred both before and after the agreement. The Trustee asserts that neither of the tort claims, nor the equity claim, is a disguised augmentation of the damages arising from a breach of contract. Each is, instead, an independent cause of action supported by allegations of wrongdoing. Trustee’s Brief in Opposition to Frorer Defendants’ Motion (Tr. Br. Frorer) 29-33.
From its review of the pleadings, the Court agrees that the gist of the action and economic loss arguments are not well made. The Trustee’s characterization of the true nature of the Collateral Release Agreement will at this stage be given deference. Moreover, where the cause of action is fraud in the inducement, Pennsylvania case law has not applied the gist of the action doctrine. Etoll, Inc. v. Elias/Savion Adver., Inc., 811 A.2d 10, 19 (Pa.Super.2002) (applying the gist of the action doctrine to fraud in the performance). It must be, and is, acknowledged that the parties signed the Collateral Release Agreement, which leaves open the ultimate question of whether the Agreement governed the parties’ relationship. However, a definitive ruling on the gist of the action/economic loss arguments would not be appropriate at this time. See Weber Display & Packaging, 2003 WL 329141, at *4 (E.D.Pa. Feb. 10, 2003) (“Often times, without further evidence presented during discovery, the court cannot determine whether the gist of the claim is in contract or tort.”); see The Knit With v. Knitting Fever, Inc., 2009 WL 3427054, at *7 (noting that “courts in this district have shown some reluctance to dismiss claims for fraud in the inducement or negligent misrepresentation early in the litigation”). For that reason, the Court rejects these arguments at this time.
Common Law Fraud
Leaving aside questions of characterization, the Court turns to the legal viability of the tort and equity claims. Count X charges the Frorer Defendants with a claim of common law fraud.11 *98Pennsylvania common law defines a prima facie case of fraud as: (1) a representation; (2) that is material; (8) that is made falsely with knowledge or reckless indifference of its falsity; (4) with intent to mislead another; (5) justifiable reliance; and (6) resulting injury proximately caused by the reliance. Blumenstock v. Gibson, 811 A.2d 1029, 1034 (Pa.Super.2002).
Representation
The Count alleges that Frorer represented to the Debtor that the Pet360 shares transferred by the Debtor to him would be returned when the loan was repaid. ¶ 238. It is further alleged that such representation was false as Frorer had no intention of returning the shares. ¶ 234. Later, the Complaint alleges that Frorer indicated his intention to keep the Pet360 shares once he learned of an imminent buyout of Pet360 at five times the existing stock price. ¶ 143.
Reliance
The Complaint must next allege that the Debtor’s principals relied on the misrepresentation when they agreed to transfer the stock. The level of reliance must be justifiable. See Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 446, 133 L.Ed.2d 351 (1995). The complaint does not explicitly aver what precisely prompted Fretz and Freeman to transfer the Pet360 shares to Frorer, other allegations, however, clearly allow a reasonable inference that they relied on his promise to return the shares once his problems with his auditors were resolved. Frorer is alleged to have made that representation, and on more than one occasion. ¶¶ 70, 71, 88. That the shares would ultimately be returned is alleged to be the Debtor’s principals’ understanding as well. ¶ 98. The complaint, accordingly, sufficiently alleges reliance on Frorer’s representation, which reliance appears justified based on existing circumstances. Finding all five elements to be adequately plead, the Court finds that Count X states a claim for common law fraud.
Conversion
Count XI charges the Frorer Defendants with having converted the Debtor’s Pet360 stock. The classic definition of conversion under Pennsylvania law is “the deprivation of another’s right of property in, or use or possession of, a chattel, or other interference therewith, without the owner’s consent and without lawful justification.” McKeeman v. Corestates Bank, N.A., 751 A.2d 655, 659 n. 3 (Pa.Super.2000). Although the exercise of control over the chattel must be intentional, the tort of conversion does not rest on proof of specific intent to commit a wrong. Id.
The Complaint alleges that the Frorer Defendants kept the stock shares which were intended to secure the loan to the Debtor and its principals. ¶¶ 147-148. The value of those shares is alleged to be well in excess of the loans. Compare ¶¶ 27, 30, 93 with ¶ 157. Frorer himself is alleged to have admitted to a plan whereby he would sell the foreclosed shares to a special purpose entity, which would in turn sell them to a Costa Rican entity, which would then place the shares in trust for Frorer and his spouse. ¶ 143 These allegations are sufficient to support a conversion claim.
Unjust Enrichment
Count XII is based in equity. Specifically, it attempts to plead a case of unjust enrichment. Pennsylvania courts *99have held that “‘[u]njust enrichment’ is essentially an equitable doctrine.” Styer v. Hugo, 422 Pa.Super. 262, 267, 619 A.2d 347, 350 (Pa.Super.Ct.1993). In Pennsylvania, a party seeking to plead unjust enrichment must allege the following elements: “(1) a benefit conferred on the defendant by the plaintiff; (2) appreciation of the benefit by the defendant; and (3) the defendant’s acceptance and retention of the benefit ‘under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value.’ ” Giordano v. Claudio, 714 F.Supp.2d 508, 530 (E.D.Pa.2010) (quoting Filippi v. City of Erie, 968 A.2d 239, 242 (Pa.Commw.Ct.2009)). Under these circumstances, “the law implies a contract between the parties pursuant to which the plaintiff must be compensated for the benefits unjustly received by the defendant.” Styer, 422 Pa.Super. at 268, 619 A.2d at 350. The existence of such a contract “requires that the defendant pay the plaintiff the value of the benefits conferred .... ” AmeriPro Search Inc. v. Fleming Steel Company, 787 A.2d 988, 991 (Pa.Super.2001).
Having rejected the Defendants’ argument that the Trustee’s claims are “most fundamentally contractual,” the Court turns to the substantive allegations of Count XII. It is alleged that the Debtor conferred a benefit on the Frorer Defendants by transferring the Pet360 shares to them. ¶ 246 Further, that they have retained this benefit whose value is elsewhere alleged to be well in excess of what was owed to the Defendants. ¶¶ 148, 248. It is alleged that the Defendants’ retention of that benefit would be inequitable. These allegations are sufficient and the Court will deny the Defendants’ request to dismiss this count.
Equitable Subordination
Count XIV of the Complaint seeks equitable subordination of the Defendants’ Proofs of Claim. In that regard, § 510 provides:
(c) Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may—
(i) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest
11 U.S.C. § 510(c)(1). The Third Circuit has explained that “[b]efore ordering equitable subordination most courts have required a showing involving the following three elements: (1) the claimant must have engaged in some type of inequitable conduct, (2) the misconduct must have resulted in injury to the creditors or conferred an unfair advantage on the claimant, and (3) equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Code.” Citicorp Venture Capital Ltd. v. Committee of Creditors Holding Unsecured Claims (In re Paper craft Corp.), 160 F.3d 982, 986-987 (3d Cir.1998) citing U.S. v. Noland, 517 U.S. 535, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996) (describing existing case law as consistent with the three-part test identified in In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir.1977)).
The Frorer Defendants maintain that the complaint fails to allege any acts of fraud, spoliation or over-reaching as against any other creditor. Neither, they say, is there any allegation that they acted in any egregious or severely unfair manner. Frorer Br. 58. The Trustee’s response is that the allegations in the Complaint set forth exactly such conduct. It is alleged, he counters, that the Defendants *100have caused the Debtor’s principals to advantage the Defendants over other creditors. ¶¶ 122, 133. This was alleged to have been done without excuse or other justification. ¶ 148. The effect was to deprive the Debtor of its most valuable assets; i.e., the Pet360 stock shares. ¶ 169. Considering that the purpose of equitable subordination is “to undo or to offset any inequality in the claim position of a creditor that will produce injustice or unfairness to other creditors in terms of the bankruptcy results,” Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims (In re Papercraft Corp.), 323 F.3d 228, 233 (3d Cir.2003), the allegations, taken as true for purposes of this motion, support subordination of the Defendants’ claims.
Claim Disallowance
Count XV of the Complaint asks the Court to disallow the Proofs of Claim of the Defendants because they are recipients of unreturned avoidable transfers. This request is based on Code § 502 which provides, in pertinent part:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under ' section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.
11 U.S.C. § 502(d). The Defendants’ rejoinder is that such a cause of action is premature. Until an adjudication of the avoidance claim is made in the Trustee’s favor, the request to disallow the claims on that basis is unripe. Frorer Def. Br. 59-60; Tripartite Br. 32-33. Trustee’s response is that a plaintiff may request joint related relief even if one is contingent on the other. Tr. Br. Frorer 37 citing F.R.C.P. 18(b) made applicable by B.R. 7018.
There is a split of authority on whether it is premature to plead a § 502(d) claim before an adjudication of an avoidance and recovery claim. Compare In re Damon’s Int., Inc., 500 B.R. 729, 739 (Bkrtcy. W.D.Pa.2013) quoting In re Odom Antennas. Inc., 340 F.3d 705, 708 (8th Cir.2003) (citing In re Davis, 889 F.2d 658, 661-62 (5th Cir.1989)) (explaining that “the purpose of section 502(d) is to ensure compliance with judicial orders,” and holding that the statute’s language “indicates section 502(d) should be used to disallow a claim after the entity is first adjudged liable; otherwise, the court could not determine if the exception applies.”); and In re Parker N. Am. Corp., 24 F.3d 1145, 1155 (9th Cir.1994) (“Section 502(d) operates to disallow claims of transferees who do not surrender their avoidable transfers. It does not compel the surrender, nor permit affirmative relief of any kind.”) with In re TMST, Inc., 518 B.R. 329, 357-59 (Bkrtcy. D.Md.2014) vacated in part 2014 WL 6390312 (Bkrtcy.D.Md. Nov. 14, 2014) (denying motion to dismiss § 502(d) count because Complaint stated a cause of action for avoidance of transfer). In this instance the Complaint alleges that the Defendants have received avoidable transfers and also have filed Proofs of Claim. For efficiency’s sake, it makes sense to leave the disallowance count in, and to consider the § 502(d) claim if there is a ruling in the Trustee’s favor on the avoidance counts. The objection to Count XV is, therefore, denied.
Equitable and Injunctive Relief
Count XIV asks for the freezing of the Defendants’ assets, repatriation of the *101stock shares transferred in 2013, the imposition of a constructive trust, and the deposit of all of the transferred shares with the Court. ¶ 266. The Defendants response is that under the parties’ January 30, 2015 Stipulation, “these shares are currently being held in the United States of America and are under the jurisdiction of the Court.” Frorer Def. Brief, 60. That Stipulation, however does not recite that; it makes no mention of the 2013 transfers but is limited, instead, to the 2014 Transfer which was paid into court and which has since been deposited into an escrow account. See Jan. 30, 2015 Stipulation. For this reason, the Frorer Defendants’ request to dismiss this count will be denied.
Joinder of Necessary Party
The Defendants’ final challenge is not as to what is plead but, rather, who has been left out. They insist that the Debtor’s general partner, Covenant Capital Management, L.P., and that entity’s general partner, Covenant Capital Management, Inc., (the General Party Entities, or GPEs) as well as the principals of the Debtor’s general partner (Messrs. Fretz and Freeman) have an interest in this litigation and so should be made parties. Frorer Br. 61-64
The Trustee’s response makes two points: first, there is nothing to indicate that the General Partner Entities have a stake in the outcome of this litigation; second, and with regard to Messrs. Fretz and Freeman, while the complaint charges them with various misdeeds, they are ascribed the status of joint tortfeasors. That, says the Trustee, is insufficient to make them a necessary party. Tr. Br. Frorer 39-42.
Rule 19 of the Federal Rules of Civil Procedure provides,12 in pertinent part:
(a) Persons Required to Be Joined if Feasible.
(1) Required Party. A person who is subject to service of process and whose joinder will not deprive the court of subject-matter jurisdiction must be joined as a party if:
(A) in that person’s absence, the court cannot accord complete relief among existing parties; or
(B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person’s absence may:
(i) as a practical matter impair or impede the person’s ability to protect the interest; or
(ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.
F.R.C.P.19(a). The party requesting join-der of a necessary party need only establish that one of the grounds under Rule 19 exists. Whyham v. Piper Aircraft Corp., 96 F.R.D. 557, 560 (M.D.Pa.1982); see also Koppers Co. v. Aetna Cas. & Sur. Co., 158 F.3d 170,175 (3d Cir.1998) (“As Rule 19(a) is stated in the disjunctive, if either subsection is satisfied, the absent party is a necessary party that should be joined if possible.”). In the event a plaintiff has not originally joined a necessary party, the proper remedy is to order joinder. F.R.C.P. 19(a)(2).
Complete Relief
Under Rule 19(a)(1)(A), it must be determined “whether complete relief may be accorded to those persons named as parties to the action in the absence of any unjoined parties.... ” Gen. Refractories Co., 500 F.3d 306, 312 (3d Cir.2007) (citing Angst v. Royal Maccabees Life Ins. Co., 77 *102F.3d 701, 705 (3d Cir.1996)). In evaluating this subsection, the focus is solely on the named parties, and any effect a decision may have on absent parties is immaterial. Id.
From its reading of the Complaint, the Court concludes that complete relief can be afforded as between the present parties. The Trustee is suing the Defendants for the Pet360 stock shares or the value of them. The Complaint proceeds on various legal theories to that end. Ultimately, he will prevail and obtain the stock (or its present value) or the Defendants will rightfully retain it. That result may be achieved without the joinder of either the General Party Entities, or Messrs. Fretz and/or Freeman.
Impair or Impede Protection of Interest
Rule 19(a)(1)(B)® directs this Court to consider whether there is an interest of either the GPEs and Messrs. Fretz and Freeman which would be affected by a ruling in this case. This generally requires a showing “that some outcome of the federal case that is reasonably likely can preclude the absent party with respect to an issue material to the absent party’s rights or duties under standard principles governing the effect of prior judgments.” Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 409 (3d Cir.1993). Joinder may also be required absent a preclusive effect where the effect of the court’s decision on the absent party is “direct and immediate.” See Angst, supra 77 F.3d at 705 (implying that the phrase “as a practical matter impair or impede” may have a broader meaning than that given by principles of preclusion).
Here the Court sees no such interest. The stock which the Trustee is trying to recover was originally the Debtor’s property, but has since become the bankruptcy estate’s property. It does not appear from the Complaint that the Debtor’s general partner or its principals ever had an interest in the stock which might be affected by their not being joined as a defendant.
Risk of Multiple Exposure
The lack of any such interest serves to refute the Frorer Defendants’ argument that they legitimately must fear a later lawsuit filed against them regarding the stock transfers. See F.R.C.P. 19(a)(l)(B)(ii) (requiring the court to join non-parties when existing defendants at risk of double, multiple liability or otherwise inconsistent obligations). This rule was intended to protect named parties against inconsistent obligations, not inconsistent adjudications. Holber v. Jacobs, 401 B.R. 161, 175 n. 18 (Bankr.E.D.Pa. 2009) (citing Transdermal Prods., Inc. v. Performance Contract Packaging, Inc., 1996 WL 515497, at *2 (E.D.Pa.1996)). In other words, Rule 19(a)(l)(B)(ii) “protects a party against situations in which two court orders may be entered and compliance with one might breach the other....” Id. (citing Transdermal Prods., Inc., 1996 WL 515497, at *2). By contrast, it does not apply in situations where a defendant may “successfully defend[ ] a claim in one forum, yet lose[ ] on another claim arising from the same incident in another forum.” Id. (citing Delgado v. Plaza Las Americas, Inc., 139 F.3d 1, 3 (1st Cir.1998)) (internal quotation marks omitted). Where two suits arising from the same incident involve different causes of action, defendants are generally “not faced with the potential for double liability because separate suits have different consequences and different measures of damages.” Id. (quoting Delgado, 139 F.3d at 3).
The Frorer Defendants maintain that this is precisely why the GPEs and their principals must be joined. Frorer Def. Br. 63-64. The Court disagrees. To reiterate, the Trustee has sued the Defendants for the stock or the value thereof. The Frorer Defendants cannot reasonably expect to be *103sued for that by the GPE’s or Fretz/Free-man, because they lack standing to do so. Anderson v. Acme Markets, Inc., 287 B.R. 624, 628 (E.D.Pa.2002) (observing that the trustee succeeds to all causes of action held by the debtor at the time the petition is filed). The Court, therefore, finds no reason to compel the joinder of the GPE’s and Messrs. Fretz and Freeman.
Summary
For the foregoing reasons, the Motions of the Defendants to Dismiss the Complaint (with the exception of Count II) will be denied.
An appropriate Order follows.
Order
And, Now, upon consideration of the Defendants’ Motions to Dismiss the Plaintiffs Complaint, the Plaintiffs Response thereto, and after hearings held, it is hereby:
Ordered, that for the reasons contained in the within Opinion, the Motions to Dismiss, (with the exception of Count II, which is dismissed) are denied.
. Because these matters involve a demand for turnover of property, requests for disallowance or subordination of a claim, and the avoidance and recovery of preferential and fraudulent transfers, they are within this Court’s, "core” jurisdiction. See 28 U.S.C. § 157(b)(2)(A), (E), (F), and (H) (including among core proceedings such causes of action)
. See ¶¶ 101, 121 (alleging that the 5 million shares were transferred on two occasions and are together referred to as the 2013 Transfers; and see also ¶ 168 (alleging the transfer of 2.8 million more shares to the Prothonotary referred to as the 2014 Transfer)
.Count III (Turnover by Custodian) is moot because the stock formerly held by the Pro-thonotary is now in an escrow account pending the outcome of this litigation. As to Counts VI (Actual Fraud under state law) and XIII (Violation of the UCC), dismissal is not sought.
. The complaint states that the Prothonotary is named as a defendant in his official capacity only; originally, he was a necessary party because he' had possession of the property (stock shares) which the Trustee seeks to recover. ¶ 12. That has since changed: pursuant to the parties’ stipulation, the stock shares are now in escrow pending the outcome of this litigation.
. The timing of the transfers is not an issue. The Debtor commenced this case in September 2014. The transfers in question were made subsequent to September 2012, but before the bankruptcy was filed. ¶¶ 101, 121, 168. That is within two years prior to bankruptcy as the statute requires.
. As with the actual fraud claim, timing is likewise not an issue as to the constructive claim under either the Bankruptcy Code or the state law fraudulent transfer law. The Code’s provision applies to transfers made within two years prior to bankruptcy and the state law expands that to four years from the date that the transfer was made. See 12 P.S. § 5109(2).
. The transfer of that stock occurred over more than one year beginning in March 2013 and ending in September 2014. In March 2013 the Debtor is alleged to have transferred upward of 3 million shares of stock to Frorer. ¶ 101 In September 2013 another 2 million shares of stock were transferred to the Defendants. ¶ 121 In September 2014, another 2.8 million shares was deposited with the Protho-notary of Montgomery County ¶ 168.
. The Frorer Defendants agree that if Delaware law is controlling as to the elements of this cause of action, they are not meaningfully different from the Pennsylvania elements. Frorer Br. 50 n.10. Delaware law requires the plaintiff to add the allegation of resulting damages. See Bay Center Apartments Owner LLC v. Emery Bay PKI LLC, 2009 WL 1124451, at *10 (Del.Ch. Apr. 20, 2009)
. The Trustee cites another duty, the duty to act in good faith, but that duty is already subsumed in the duty of loyalty. Stone ex. rel. Amsouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del.2006).
. The Pennsylvania Supreme Court has not adopted the gist of the action doctrine, but the Third Circuit Court of Appeals predicted that this doctrine would be adopted based on its *97consistent application in the Pennsylvania Superior Court. Bohler-Uddeholm Am., Inc. v. Ellwood Grp., Inc., 247 F.3d 79, 103 n. 10 (3d Cir.2001) (citations omitted).
. The Bankruptcy Code affords a trustee the power to recover a transfer avoidable under *98applicable non-bankruptcy law. See 11 U.S.C. § 544(b).
. There are exceptions but they are not applicable here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498304/ | ORDER REGARDING CROSS MOTIONS FOR SUMMARY JUDGMENT
Stephani W. Humrickhouse, United States Bankruptcy Judge
This matter came on to be heard upon the cross motions for summary judgment filed by Conan McClain (“McClain”) and William Parker and Diana Lynne Parker (collectively, the “Parkers”). A hearing was held on February 4, 2015 in Raleigh, North Carolina.
BACKGROUND
The Parkers1 own various tracts of real property in North Carolina, and prior to fifing for bankruptcy, had engaged in the business of developing real estate in and around Raleigh. The Parkers operated their business through two companies in which they are the primary shareholders and officers, Gregory & Parker, Inc., and Gregory & Parker-Seaboard, LLC. The Parkers maintain that they relied on the advice of professionals, including, among others, McClain, in conducting their business. In addition to their real property ownership, the Parkers have a large collection of personal property, most notable being numerous historical artifacts recre-ationally collected by Mr. Parker over the past five decades and housed in a museum located at their primary residence. The historical artifacts consist primarily of World War II relics, but the Parkers also own certain Civil War-era items, a collection of vehicles and various other antiques inherited from Mr. Parker’s parents.
The Parkers filed a petition under chapter 11 of the Bankruptcy Code on April 25, 2012. They filed their original Schedule B on May 3, 2012. The original Schedule B omitted certain items, namely, animal wall mounts displayed in the Parkers’ home, three Chevrolet classic vehicles (specifically, two 1955 Chevrolet 4S’s and one 1929 Chevrolet 2S) and a John Deere tractor. On June 22, 2012, the Parkers’ 341 meeting was held. The omitted items were not *106specifically discussed, but McClain posed one question, “[a]nd the automobiles, that’s all the automobiles titled or untitled that you got[?f to which Mr. Parker responded that “[s]ome of them run, some of them don’t.” On July 23, 2012, McClain filed a motion to extend the time to object to the Parkers’ discharge, which was granted by Order dated August 29, 2012. On July 31, 2012, McClain filed a motion for 2004 examination, and therein requested documents and correspondence related to the Chevrolets and the game trophies. Thereafter, on August 23, 2012, the Parkers filed an amendment to Schedule B which listed the omitted items. On September 12, 2012, McClain took the 2004 examination of the Parkers.
On September 17, 2012, McClain initiated this adversary proceeding objecting to the Parkers’ discharge under 11 U.S.C. §§ 727(a)(4)(A) and (a)(2). McClain asserts that the Parkers’ discharge should be denied under § 727(a)(4)(A) because they “knowingly omitted and/or intentionally misrepresented the true nature, extent, and/or value of personal property.” Compl., Doc. No. 1 at 4. McClain contends that the Parkers knowingly and fraudulently made false oaths in their bankruptcy schedules by: failing to itemize their extensive World War II collection and labeling it in a vague and misleading manner; misrepresenting the value of the World War II collection by listing the value as “unknown;” undervaluing certain personal property; and failing to disclose certain property of personal significance in their original bankruptcy schedules. McClain also alleges that the Parkers’ discharge should be denied under § 727(a)(2) because Mr. Parker “knowingly and fraudulently transferred, removed, and concealed personal property, including valuable coins and firearms” from his business office to his personal residence in order to conceal such property from the Bankruptcy Administrator. Compl. at 5.
In their answer, the Parkers assert that they did their best to list all of their assets and assign fair values, and that with respect to the World War II and other collectibles, there was no way to accurately assign a value. Further, the Parkers raise as a defense that McClain and his associates provided substantial assistance to them in preparing their business and personal bankruptcy schedules. The Parkers assert that they provided information to McClain and his associates that included the omitted items, and they were not sure why such information was omitted from the information provided by McClain and his associates to the Parkers’ counsel to be included in their schedules. The Parkers state that they amended their schedules as soon as they realized the omission. On July 8, 2013, the Parkers moved for summary judgment as to all of McClain’s claims against them, and McClain moved for partial summary judgment as to his claim under § 727(a)(4)(A).
DISCUSSION
“[Sjummary judgment is proper ‘if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.’” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)). In making this determination, the court views all facts and inferences to be drawn from the facts in the light most favorable to the nonmov-ing party.. U.S. v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962) (per curiam). Summary judgment is not a “disfavored procedural shortcut,” but an important mechanism for filtering *107out baseless claims and defenses. Celotex, 477 U.S. at 327, 106 S.Ct. at 2555. “[A] complete failure of proof concerning an essential element of the nonmoving party’s case necessarily renders all other facts immaterial.” Celotex, 477 U.S. at 323, 106 S.Ct. at 2552. Although there are credibility determinations inherent in a typical objection to discharge proceeding that often create genuine factual issues, the court notes that the unusual circumstances of this case prevent the court from making a later determination as to credibility. Rather, in light of Mr. Parker’s passing, the record is set, making summary judgment an especially appropriate tool.
Section 727(a) provides that “[t]he 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;
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account.
Discharge provisions are construed liberally in favor of debtors and strictly against the person objecting to discharge. In re Seung Chan Park, 480 B.R. 627, 631-32 (Bankr.D.Md.2012). The discharge statute recognizes dual policies: providing a fresh start to honest debtors while also denying such benefits to “ ‘those who play fast and loose with their assets.’ ” Id. at 632 (quoting Farouki v. Emirates Bank Int’l, Ltd., 14 F.3d 244, 249 (4th Cir.1994)). Under both §§ 727(a)(2) and (a)(4)(A), the court may infer that the debtor acted with the necessary intent from a pattern of concealment and nondisclosure. In re Ingle, 70 B.R. 979, 983 (Bankr.E.D.N.C.1987). Intent exists if the debtor acted with a reckless disregard for the truth. Id.
The court will first address the Parkers’ argument that no genuine issue of material fact exists regarding McClain’s § 727(a)(2) claim. McClain has alleged that, one day prior to the scheduled site visit by the Bankruptcy Administrator in the Parkers’ corporate bankruptcy case, Mr. Parker removed property, consisting of valuable coins and firearms, from the safe at his company’s office and transferred it to his personal residence.2 At the September 12, 2012, 2004 examination of the Parkers, Mr. Parker admitted to moving the personal items to his home because he “didn’t know if it was going to be stolen or not,” and stated that the items moved included “Civil War items, old guns, odds and ends from there, all his hand guns.” Ex. 8 to PI. Mem. in Supp. of Summ. J., Doc. No. 39 at 65-66. McClain asserts that the timing, as well as the fact that the Parkers had experienced break-ins and thefts at their residence, supports his allegation that Mr. Parker actually caused the transfer to conceal the property from the Bankruptcy Administrator. However, Mr. Parker’s affidavit, on file with the court, states that he did not move the property to conceal or hide it, but rather moved it so that it would not be confused with company property.
*108It is an undisputed fact that the property moved from the company safe was personal, rather than company property, and that the site visit was regarding the Par-kers’ corporate bankruptcy case, rather than their personal bankruptcy case. Under these circumstances, it is only logical that Mr. Parker would separate his personal property from the company property prior to the Bankruptcy Administrator’s visit. Indeed, counsel for McClain agreed that separating personal and company property was an equally reasonable explanation for Mr. Parker’s actions at the hearing. Further, the court does not find that Mr. Parker’s prior statement that the transfer was motivated by his fear of theft indicates fraudulent intent, nor does it create a genuine factual issue regarding intent. Either, and indeed, both, of Mr. Parker’s explanations are reasonable in light of the circumstances of this case. Based on the materials before the court, there is simply no evidence that would tend to support McClain’s allegation that Mr. Parker acted with fraudulent intent. The court finds there to be no genuine factual issue as to whether Mr. Parker acted with the requisite culpable intent for purposes of § 727(a)(2), and summary judgment for him is proper as to this Claim.
Next, the court will consider the parties’ cross motions for summary judgment as to McClain’s § 727(a)(4)(A) claim. To constitute a basis to deny discharge under this section, a debtor must have “knowingly and fraudulently” made a “false oath or account.” § 727(a)(4)(A). This requires a debtor to have made a statement under oath which he knew to be false, and to have made the statement willfully, with intent to defraud. In re French, 499 F.3d 345, 352 (4th Cir.2007); Williamson v. Fireman’s Fund Ins. Co., 828 F.2d 249, 251 (4th Cir.1987). Discharge will not be denied when the untruth was the result of mistake or inadvertence. In re Parnes, 200 B.R. 710, 714 (Bankr.N.D.Ga.1996). Furthermore, the false oath must have been related to a material matter. Williamson, 828 F.2d at 251. A matter is material if it “bears a relationship to the bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.” Id. at 252 (quoting In re Chalik, 748 F.2d 616, 618 (11th Cir.1984)). Fraudulent intent may be demonstrated by a' material misstatement with knowledge of falsity, an omission with knowledge that it will create a false impression, or by reckless indifference to the truth. In re Belk, 509 B.R. 513, 520 (Bankr.M.D.N.C.2014); see also In re Ingle, 70 B.R. 979, 983 (Bankr.E.D.N.C.1987) (reckless disregard for the truth is sufficient). While it has been held that a subsequent amendment to schedules does not expunge the initial falsity, see In re Johnson, 82 B.R. 801, 805 (Bankr.E.D.N.C.1988), the fact of prompt correction maybe evidence probative of a lack of fraudulent intent, see In re Beauchamp, 236 B.R. 727 (9th Cir.1999). Ultimately, the determination depends on the facts and circumstances of the case. Williamson, 828 F.2d at 252.
The court will first consider the Parkers’ failure to list the three classic Chevrolet vehicles, John Deere tractor and animal wall mounts from their original Schedule B. It is undisputed that this omission from the Parkers’ schedules equates to a “false oath or account,” but it will only serve as a basis to deny the Parkers’ discharge if it was done “knowingly and fraudulently.” § 727(a)(4)(A). Upon consideration of all the evidence, the court finds there to be no genuine issue of material fact as to whether the Parkers’ omission was knowing and fraudulent, and *109concludes that it was not. The court reaches this conclusion in light of several pertinent considerations.
First, the Parkers have an unusually large collection — and wide range — of personal property, consisting of historical artifacts Mr. Parker collected over five decades without ever making an inventory. The collection includes at least 13 vehicles in addition to the classic cars, a personal shop that houses “worlds of junk ... anything, everything and whatever,” and a museum of World War II relics. Ex. 8 to PI. Mem. in Supp. of Summ. J., Doc. No. 39 at 23-24. In addition to never making an inventory, Mr. Parker stated that he never had any of the items appraised. Id. at 25-26. Among the relics in the museum are: “medals, badges, flags, American, British, German, Italian relics, just too numerous to mention honestly,” as well as uniforms, guns and daggers, although Mr. Parker stated that many of the items had been stolen over the years. Id. Mr. Parker’s collection also includes figurines he inherited from his mother, Indian items he purchased while traveling, and a coin and watch collection he inherited from his father. Much of this property was actually disclosed in the Parkers’ original schedules. The items omitted, in light of the amount of property in existence, is not material. See Matter of Woodlands Inv. Assocs., 95 B.R. 681, 682 (Bankr.W.D.Mo.1988) (circumstances supported no fraudulent intent despite the fact that the schedules omitted a great amount of property where property omitted was of the type that does not easily come to mind when surveying readily disposable property, and where debtor had an unusually wide range of property, much of which was disclosed in schedules).
McClain appears to regard the omission of the classic cars as the most egregious. However, the court deems the omission excusable in light of Mr. Parker’s testimony that the vehicles did not run, and had in fact never been driven by Mr. Parker. Further, the vehicles had been housed outdoors in Wake County3 for years. Doc. No. 39 at 53-54. Mr. Parker also stated that one of the 1955 models “looks like hell,” and that while the interiors of the vehicles had been restored, the exteriors had not. Id. at 53-54. Although Mr. Parker readily admitted to his affinity for classic cars, and especially 1955 Chevro-lets, he stated that he had not been to a car show in “quite a while,” and that he was no longer collecting. Id. at 55.
Second, the Parkers have continuously maintained that they received substantial assistance from McClain and his associates in preparing their bankruptcy schedules, and that prior to filing their petition, they provided information to McClain regarding the particular items omitted. The record is deficient as to a contrary assertion by McClain. If the Parkers’ contention is a fact, it makes it difficult for McClain to maintain his position. The' court cannot fathom why the Parkers would disclose such information to McClain, a creditor, had they truly been trying to defraud their creditors. Assuming the Parkers’ contention is true, McClain was apprised of the nature and a great extent of the Parkers’ property. This is clearly not a case where creditors, and especially McClain, were forced to use their own resources to discover property concealed by unscrupulous debtors. On the contrary, the fact that the Parkers solicited help from McClain in preparing their schedules, in addition to aid of counsel, evidences that they acted carefully and without reckless disregard. See In re Bernard, 99 B.R. 563, 570 (Bankr.S.D.N.Y.1989) (no fraudulent in*110tent; debtor revealed all transactions revealed in creditor’s complaint prior to filing his petition). However, regardless of whether McClain helped the Parkers prepare their bankruptcy schedules, the court reaches the same conclusion as to the Par-kers’ intent.
Third, the Parkers promptly amended their schedules as soon as they realized the omission, and have always been forthcoming in their answers to interrogatories, sworn questioning and depositions. At the Parkers’ 2004 examination, Mr. Parker testified openly and in detail about the John Deere tractor, his collection of vehicles, the animal wall mounts and his World War II collection. Mr. Parker stated that he had killed the animals on the wall mounts while on a hunting trip with his father years ago, and that some of the animals are endangered and illegal to sell. Doc. No. 39 at 60-61. In their interrogatories, the Parkers admitted to omitting certain items in their original schedules. The Parkers stated in their affidavits that the omissions were unintentional, and there is nothing before the court that creates a factual dispute otherwise. See In re Arnold, 369 B.R. 266, 273 (Bankr.W.D.Va.2007) (fact that debtor was forthcoming at 341 meeting supported conclusion that fraudulent intent was lacking); compare with Williamson v. Fireman’s Fund Ins. Co., 828 F.2d 249, 251 (4th Cir.1987) (debt- or made two false oaths in statement of financial affairs and made false oath at 341 meeting, which he later admitted); In re Seung Chan Park, 480 B.R. 627, 638 (Bankr.D.Md.2012) (series of omissions and inaccuracies with no effort to correct or amend schedules); In re Sullivan, 444 B.R. 1, 4 (Bankr.D.Mass.2011) (debtor did not voluntarily reveal he owned a Rolex watch and only showed it to the trustee after the plaintiff advised the trustee that she had given it to debtor; debtor gave misleading answer in interrogatory by stating that he brought the watch to his 341 meeting and showed it to the trustee); In re Cantu, 2009 WL 1374261, at *2 (Bankr.S.D.Tex. May 15, 2009) (debtors were uncooperative with court and trustee; failed to provide material documents to the trustee and violated court orders).
Fourth, the court is influenced by the fact that the Parkers have proposed, and are operating under, a full payout plan. The omission was clearly not an attempt to avoid paying creditors. Fifth, the court notes the lack of involvement or concern by the Bankruptcy Administrator or any other creditor. Surely, if there was genuine concern that the Parkers were engaging in fraudulent conduct that posed a threat to the administration of their bankruptcy estate, other parties would get involved. See In re Segal, 195 B.R. 325, 333-34 (Bankr.E.D.Penn.1996) (“As indicated by the absence of involvement of the Trustee or any other creditor, the Debtor’s misrepresentations have no effect on the administration of the bankruptcy case in and of themselves.”). Noticeably absent from the record, which, as the court already noted is set, are any facts that might indicate fraudulent intent, or even that the debtors acted with reckless disregard in filing their original Schedule B. McClain argues that the collective deficiencies show a reckless disregard, but the court simply cannot agree. The evidence tends to show nothing beyond mere excusable neglect.
The court will next consider whether the Parkers fraudulently concealed the scope and value of their military relic collection in their schedules by labeling it in a vague and misleading manner and by listing the value as “unknown.” The Parkers’ Schedule B lists, under household goods, “Museum: (7) show cases,. (2) tables, (8) chairs, Misc. relics including WWII collectables (American, *111German, British, Italian, Japanese), bulk clothes and hats ...” McClain asserts that the Parkers’ listing of the collection under “household goods and furnishings,” rather than under “antiques or collectibles,” as was done with their coin, watch, doll and figurine collections, was fraudulent for purposes of § 727(a)(4)(A). McClain also contends that the military collection was ambiguously described, and points to the fact that more mundane items were listed in detail. McClain alleges that the short and unremarkable description was done with fraudulent intent, and cites to Mr. Parker’s ability to provide a more detailed description and evaluation of the collection, including some estimates as to value of certain relics, during his 2004 examination. In particular, McClain asserts that the Parkers’ failure to confirm possession of and schedule a particularly valuable dagger, and their failure to produce a valuable gun at the time of McClain’s appraisal, evidences fraudulent intent.4 McClain also cites to personal financial statements from 2008 and 2011, wherein the Parkers valued their antiques and collectibles at $450,000.00, an inventory from Mr. Parker’s father’s estate, which is where Mr. Parker got the values he used in Schedule B for the particular items he inherited, and several police reports listing values, to show that the Parkers’ failure to assign a clear value on their schedules was fraudulent.
Once again, the court finds no evidence to support McClain’s contention that the Parkers acted with the requisite culpable intent. The court relies on the same findings set out above in reaching this conclusion. The court finds it pertinent that Mr. Parker never possessed any inventory of the collection, and further, that he had never had it appraised. Additionally, Mr. Parker stated that he was unsure of the exact extent of his collection due to numerous thefts had occurred over the years,5 and stated that he had "lost interest in the relics.
The court also finds that listing the value as “unknown” was reasonable in light of the extensive nature of the collection, the fact that the artifacts were never appraised, the fact that Mr. Parker acquired the items over several decades, amidst changing prices, and because Mr. Parker was no longer collecting and therefore was without knowledge as to current rates. As Mr.- Parker testified, the value of the artifacts fluctuate not only over time, but also simply due to varying quality and condition. Mr. Parker stated that he bought many of the items decades ago, when they were cheaper. Mr. Parker also stated “I’m starting to lose interest in worrying with it. There’s been so much taken from me. I mean, the heck with it. A lifetime of collecting gone? That’s very discouraging.” Doc. No. 39 at 32.
Mr. Parker largely did not have an opinion of value as to the relics, although he testified generally that some items were valuable,6 and estimated the value of certain other items.7 Mr. Parker was unable *112to state the collective value of his entire collection. In response to a question concerning whether he had thought about the collective value of the antiques and collectibles, Mr. Parker stated, “[n]o, not really. I don’t think about any of it anymore ever since so much if it’s been stolen. I basically just erased it from my mind.” Doc. No. 39 at 84. The court finds that Mr. Parker’s ability to provide a general estimate of the value of certain collector’s items, such as a flag, does not indicate that he knew or concealed the value of his relics, which varied in condition and number. The ability to estimate that a particular item might be worth a certain amount is a far cry from valuing an entire collection, especially one which includes numerous relics with entirely unknown values. The court finds the Parkers’ listing of value as “unknown” to be proper under the circumstances. This conclusion is supported by the fact that McClain objected to the values of antiques that the Parkers did list, and this issue is squarely before the court should the Parkers’ plan fail to pay creditors in full.
The fact that the Parkers assigned a value to the collection in previous personal financial statements and police reports is also unavailing to McClain. See In re Parnes, 200 B.R. 710 (Bankr.N.D.Ga.1996). In In re Parnes, 200 B.R. at 715, the court held that the debtor’s listing of the value of his dental practices as “unknown” in Schedule B did not amount to a false oath. The plaintiffs argued that listing the value as “unknown” was a false oath because the debtor had valued the practices in his divorce proceedings and in financial statements submitted to lenders. Parnes, 200 B.R. at 715. However, the evidence showed that the debtor actually thought he should list a negative value because the practices were laden with debt, but his attorney advised him to list it as “unknown” because he did not know a specific value. Id. at 716-17. The Parnes court distinguished the case from others where it was found to be fraudulent to list values as unknown, citing FDIC v. Ligon (In re Ligon), 55 B.R. 250, 253 (Bankr.M.D.Tenn.1985) and Morton v. Dreyer (In re Dreyer), 127 B.R. 587, 593 (Bankr. N.D.Tex.1991). 200 B.R. at 718.
The Pames court noted that in Ligón, 55 B.R. at 253, the debtor’s listing of stock as having an “unknown” value was fraudulent in light of his savvy in financial affairs and thirty years of experience as a banker, and because of the debtor’s ongoing pattern of fraudulent misrepresentations and omissions. In Morton, 127 B.R. at 593, the debtor’s listing of stock as having an “undetermined” value was fraudulent because the debtor not only knew the corporation had substantial value, but also affirmatively represented to the trustee at the first meeting of creditors that it had no value and deliberately attempted to conceal such value. This court finds, similar to the court in Pames, that the Parkers’ listing of the value of the museum as “unknown” was not fraudulent. Mr. Parker did not try to conceal the value of his collection; he simply had no ability to pinpoint a specific value for it and believed that listing the value as unknown was the most accurate valuation he could provide. See id. at 717.
Next, the court will consider McClain’s contention that the Parkers undervalued certain assets, including the classic Chev-rolets and certain firearms, in a knowing and fraudulent manner. McClain filed his motion for summary judgment and accompanying memorandum on July 8, 2013. In support, McClain offered two appraisals, one of which was submitted along with his *113memorandum on July 8, 2013, and the second of which was filed on July 29, 2013 as a supplement to his motion for summary judgment. The court questions the admissibility of the appraisals, but regardless, finds that they are not probative of fraudulent intent. With or without the appraisal evidence, the same conclusion is apparent: the Parkers did not act with the requisite knowing and fraudulent intent in listing values on their schedules.
The previous discussion regarding the military relics shows that the Parkers assigned values to the best of their ability in a non-fraudulent and non-reckless manner. Additionally, Mr. Parker’s 2004 examination testimony regarding the classic Chev-rolets supports the court’s conclusion in this regard. Mr. Parker stated that the vehicles were acquired roughly a decade ago,8 and that he did not purchase the 1929 Chevrolet 2S, but rather, it was given to his father in exchange for a debt. Ex. 8 to PI. Mem. in Supp. of Summ. J., Doc. No. 39 at 56-57. With regard to the scheduled value of a particular 1955 Chevrolet, Mr. Parker stated that “[i]t would be worth that for sure,” and that “[i]t might be worth a little more maybe.” Id. at 59. Mr. Parker could not remember what he paid for the 1955 Chevrolets, and retained no receipt or bill of sale. Id. at 57. Instead of showing that Mr. Parker knew the values of the Chevrolets and deliberately attempted to conceal such values, the evidence at most appears to show that Mr. Parker did not know specific values. This does not satisfy the scienter requirement of § 727(a)(4). This is especially so in light of the foregoing discussion regarding the military relics. The court finds that there is simply no evidence before it to indicate that the Parkers acted in a knowing and fraudulent manner in scheduling the values of the Chevrolets.
■The court also finds that it was not fraudulent for the Parkers to use the gun values from the 1991 inventory of Mr. Parker’s father’s estate. The Parkers clearly did not know if and to what extent the values had changed,9 and this was the most accurate valuation they had.10 Furthermore, for all of the aforementioned reasons in preceding paragraphs, and especially the discussion regarding the value of the military relics, the court deems this not to have been fraudulent. In light of the foregoing, Parkers’ motion for summary judgment as to McClain’s § 727(a)(4)(A) claim is granted, and McClain’s motion for summary judgment is denied.
CONCLUSION
In conclusion, the court finds there to be no genuine issue of material fact regarding McClain’s claims under either §§ 727(a)(2) or (a)(4). McClain’s motion for summary judgment as to his § 727(a)(2) claim is DENIED, and the Parkers’ motion for *114summary judgment as to McClain’s claims under §§ 727(a)(2) and (a)(4) is GRANTED.
SO ORDERED.
. Unfortunately, sometime after the hearing, the court was informed that Mr. Parker passed away. Pursuant to Bankruptcy Rule 1016, the court deems it to be possible and in the best interest of the parties for Mr. Parker’s case to proceed. Fed. R. Bankr.P. 1016.
. McClain has not alleged that Mrs. Parker was involved in the transfer, and thus it is appropriate to grant summary judgment in her favor as to the § 727(a)(2) count.
. The Parkers are residents of Johnston County-
. These items were not discussed at the hearing.
. In particular, as to guns in his possession, Mr. Parker stated that "I might have a few left here and there. Other than that, the big majority of them have been stolen. I've had so much stuff stolen, I can’t accurately tell you what I’ve had stolen without sitting down and pondering for hours on end. After a lot of it got stolen, I just throwed [sic] my hands up in the air. I don’t worry with it no more. It’s a lifetime gone.” Doc. No. 39 at 47.
. Doc. No. 39 at 27 (medals), 25 (uniforms; "I haven’t bought any uniforms in years. So you’re talking about mega bucks now.”).
. Doc. No. 39 at 29 (uniforms worth $1,200 to $1,500), 31 (flags worth $600 to $700; Adolf Hitler flag worth $1,500), 34 (particular dagger worth $17,000, but not sure if still owned *112it), 35 (daggers worth $600, but those in ragged shape only worth $275 to $300).
. Mr. Parker stated that he acquired the 1929 Chevrolet 2S roughly 12 to 15 years ago, and that he purchased a 1955 Chevrolet 4S roughly a decade ago and another 1955 Chevrolet 4S four years ago. Ex. 8 to PI. Mem. in Supp. of Summ. J., Doc. No. 39 at 56-57.
. Mr. Parker did not zealously collect guns; most of his collection was inherited from his father. He stated that "a big majority” of "what little [he] had” collected was stolen, and that he had not purchased a gun in nine years. See Doc. No. 39 at 44-47.
.Regarding getting an updated appraisal of the guns, Mr. Parker stated "I don’t care what they're worth. They’re personal belongings. I never plan to get rid of them. They're my father's things.” Doc. No. 39 at 47. Mr. Parker also stated that his father's collection consists of Civil War-era pistols, in which he was not interested. Id. "I don't care anything about Civil War relics. So-so. I've never really taken the time to pay any attention to it.” Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498305/ | ORDER
David R. Duncan, Chief U.S. Bankruptcy Judge
This matter is before the Court on the motion of creditor M & T Bank Corporation (“M & T Bank”) to reopen the bankruptcy case pursuant to 11 U.S.C. § 350(b), and the objection of Debtors Jerry and Kathleen Pinks (“Debtors”). The Court held a hearing on the motion on January 7, 2015. For the reasons set forth below, having carefully considered the applicable law, evidence submitted, and arguments of counsel, the Court sustains *116the objection of the Debtors and denies M & T Bank’s motion.
I. Facts and Procedural History
The facts in this case are not in dispute. On January 20, 2012, the Debtors filed for protection under chapter 7 of the Bankruptcy Code. The Debtors scheduled a “Potential UCC Notice Claim Against M & T Bank” with an “unknown” value on their Schedule B.1 At the § 341 meeting of creditors (“§ 341 meeting”), the chapter 7 trustee, Michelle Vieira (“Trustee”), asked the Debtors:
Q. Do you have any lawsuits you could file to collect money from someone else?
A. No.
The Debtors’ attorney, Phillip Fairbanks, then interjected:
Mr. Fairbanks: Excuse me, Trustee, we have listed on the schedule as they have a potential UCC notice claim. We believe that’s worth about under $5,000. There’s a $39,000 deficiency claim against which it would be set off.
Ms. Vieira: And I think you claimed a [$]5,000 exemption in [it] anyway, right?
A. Yes.
Q. Other than that, no other claims?
A. No.
Ms. Vieira: I’m going to declare this a no asset case and abandon the schedule[d] property and that’s all the questions I have. Thank you.
M & T Bank was listed as a creditor and was notified of the bankruptcy filing but was not present at the § 341 meeting and did not otherwise participate in the bankruptcy. The Trustee filed a report of no distribution on March 2, 2012, and abandon the scheduled assets. The Debtors received a discharge on May 1, 2012.
On March 14, 2013, Mr. Pinks filed a complaint against M & T Bank concerning the UCC notification cause of action in the Southern District of New York (the “New York litigation”). The complaint pleaded statutory damages totaling $70,144.20. The parties submitted evidence showing that Mr. Pinks had signed a retainer agreement with attorneys to pursue the cause of action on April 6, 2012, and again on October 5, 2012. Both agreements provide for a 40 percent contingency fee, Mr. Pinks’ promise to serve as the named plaintiff, in any class action, and the possibility that the cause of action may be meritless.
M & T Bank is actively contesting the New York litigation. In its New York filings, M & T Bank has consistently indicated its awareness of the Pinks’ bankruptcy. However, it was not until June 18, 2014, after the New York federal court denied M & T Bank’s motion to dismiss, that M & T Bank asserted its defense that the cause of action was improperly disclosed during the bankruptcy and therefore the bankruptcy case should be reopened so that the Trustee will control the cause of action.
On or about August 4, 2014, M & T Bank reached out to the Trustee and Mr. Pinks to settle the case. This prompted Mr. Fairbanks to write the Trustee on September 3, 2014, explaining his $5,000 estimate at the § 341 meeting. Mr. Fairbanks wrote that he calculated his estimate by subtracting the total deficiency, including estimated interest and attorney fees, along with the Pinks’ estimated attor*117ney fees, from the total amount of the statutory damages. Mr. Fairbanks’ letter indicates that he believed his estimate at the § 341 meeting clearly involved this sort of calculation because “no reasonable attorney” would pursue this type of litigation if the $5,000 estimate was pre- attorney fees, costs, and set-off. Mr. Fairbanks also wrote that he did not believe it was relevant to the bankruptcy to disclose the fact that Mr. Pinks was considering being a named plaintiff in a class action because bankruptcy trustees cannot serve as named plaintiffs in class actions.
On October 31, 2014, M & T Bank filed this motion to reopen and argues that the cause of action should be an asset of the reopened bankruptcy estate because it was not properly disclosed by the Debtors. M & T Bank urged the Court to reopen the case, revoke the abandonment of the asset, and permit the Trustee to further investigate, and presmnably ultimately administer, the cause of action. The Debtors objected to the motion, arguing that the asset was properly disclosed, and that even if disclosure was unintentionally inadequate, M & T Bank’s request to reopen the case should be denied as either waived or untimely in light of M & T Bank’s litigation posture in New York.
The Court held a hearing on the matter, received documentary evidence, and heard the arguments of the parties.2 The Trustee observed the proceedings but did not take a position. She did state, however, that she did not understand Mr. Fairbanks’ estimate at. the § 341 meeting to include the calculations he later detailed in his letter, and that when chapter 7 debtors are involved in class action lawsuits, her office procedure is usually to keep the case open. At the close of the hearing the Court took the matter under advisement.
II. Discussion
Section 350(b) permits the reopening of a bankruptcy case “on motion of the debtor or other party in interest.” Fed. R. Bankr. P. 5010. The Fourth Circuit provides bankruptcy courts with wide discretion to determine when reopening a case is appropriate. Hawkins v. Landmark Finance Company (In re Hawkins), 727 F.2d 324, 326 (4th Cir.1984). The question of whether to reopen “depends upon the circumstances of the individual case.” In re Paul, 194 B.R. 381, 383 (Bankr.D.S.C.1995). The burden of proof is on the moving party. In re Lee, 356 B.R. 177, 180 (Bankr.N.D.W.Va.2006).
When considering whether to reopen a case, courts should first determine whether one of the three grounds articulated in § 350(b) exists. Lee, 356 B.R. at 180. Section 350(b) of the Bankruptcy Code authorizes courts to reopen cases “to administer assets,' to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). Here, M & T Bank asserts that the case should be reopened (1) to administer an asset and (2) for cause.
A. Reopening to administer an asset
Generally, an estate should be reopened to administer assets only if the asset was unknown at the time the case was closed. In re Plusfunds Group, Inc., 492 B.R. 202, 209 (Bankr.S.D.N.Y.2013) (citation omitted) aff'd 505 B.R. 419 *118(S.D.N.Y.2014). If an asset was disclosed, a court may still reopen the case for the purpose of revoking abandonment of the asset3 if disclosure was incomplete or misleading, and administering the asset through the estate would benefit the creditors. E.g., In re Gonzalez, 302 B.R. 687 (Bankr.C.D.Cal.2003). A court should not necessarily infer that disclosure was incomplete or misleading when an asset later appreciates in value or is discovered to be worth more than its scheduled value. Vasquez v. Adair (In re Adair), 253 B.R. 85, 89-91 (9th Cir. BAP 2000). Instead, a court should focus on whether the trustee knew of the asset and had the opportunity to investigate it prior to closing the case. Id.
Thus, for example, in Gonzalez, the court reopened the case and revoked abandonment when the debtor’s disclosed value of her real property only represented her community property interest rather than the actual value of the property. Gonzalez, 302 B.R. at 690. Because there was no question at the time of the filing that both the value on the petition and the debtor’s interest were incorrect, the court found that the asset was improperly disclosed. Id. at 692. This improper disclosure also hindered the trustee’s ability to administer the estate because his decision to abandon the asset was based on incorrect information. Id. The circumstances therefore required reopening the case and revoking the abandonment. Id. at 693.
Conversely, some courts hold that when a debtor discloses a litigation claim, reasonably values it significantly lower than the eventual recovery, and the trustee declines to further investigate the claim beyond the estimated value, a court should not reopen the case and revoke abandonment. Adair, 253 B.R. at 92. In contrast to the debtor’s valuation of her real property — a value which is perhaps more readily ascertainable and verifiable — the debtor's valuation of her litigation claim is necessarily uncertain. Wissman v. Pittsburgh Nat. Bank, 942 F.2d 867, 871 (4th Cir.1991) (holding that valuing litigation as “unknown” is appropriate in the context of placing a value on an exemption). A debt- or’s disclosure of the litigation asset as “speculative” with an unknown, uncertain, or even ultimately incorrect value is therefore consistent with the debtor’s duty to disclose. Adair, 253 B.R. at 89-90 (holding that the debtor’s estimated value of the litigation cause of action at $20,000 was not misleading despite the litigation eventually settling for $430,000 when the cause of action was scheduled, its value disclosed as “speculative,” and" the debtor’s attorney answered all of the trustee’s questions regarding any potential recovery).
Here, the Debtors scheduled the asset as “unknown” and provided the Trustee with an estimate at the § 341 meeting. Mr. Fairbanks’ explanation of his estimate at the § 341 meeting does not lead this Court to conclude that the Trustee’s ability to perform her duties was frustrated. Rather, the Trustee had an opportunity to inquire and investigate further but did not do so. In addition, the fact that Mr. Pinks retained counsel to pursue the litigation during the bankruptcy is not evidence that he intentionally misled the Trustee; nor is the fact that the damages, if any, are statutory. Liability remains uncertain. Debtors’ net recovery *119is subject to expenses and attorney fees. The evidence shows that the Trustee had access to the information she needed to determine whether to administer the cause of action or abandon it. It would be therefore be inappropriate to reopen this case on the grounds that the asset was improperly disclosed.
B. Reopening for cause
Section 350(b) also permits a court to reopen a case “for cause.” The Bankruptcy Code does not define cause, leaving courts to formulate a variety of tests in search of a more precise standard. For example, some courts consider (1) prejudice to the creditor that would be affected by the reopening of the bankruptcy, and (2) whether the debtor intentionally omitted the creditor or the omission was part of a fraudulent scheme. Paul, 194 B.R. at 383. Others use a three-prong test, weighing (1) the benefit to the debtor; (2) the prejudice to the opposing party; and (3) the benefit to the creditors. In re Phelps, 329 B.R. 904, 909 (Bankr.M.D.Ga.2005). Regardless of the formulation of the test, the underlying analysis is an equitable one, and courts should consider whether any of the parties involved in the bankruptcy would suffer a “legal fraud” if the estate is not reopened. Reid v. Richardson, 304 F.2d 351, 355 (4th Cir.1962) (considering under the previous bankruptcy act whether cause existed to reopen a case when spouses filed separate, staggered bankruptcy cases to avoid their joint creditors).
Additionally, courts should consider the amount of time that has elapsed since the closing of the case. As more time elapses between the closing of the estate and the request to reopen, “so must also the cause for re-opening increase in weight.” Reid, 304 F.2d at 355. Although time alone does not constitute prejudice, a “delay may be prejudicial when it is combined with other factors.” Matter of Bianucci, 4 F.3d 526, 528 (7th Cir.1993). When parties incur costs and act in reliance on the closure and finality of the bankruptcy ease, this weighs against reopening a case. Hawkins, 727 F.2d at 327. A court may also decline to reopen a case when the evidence shows a party had “actual knowledge” of the reason to reopen for an “inordinate length of time,” yet waited until litigation commenced before moving to reopen. Bianucci, 4 F.3d at 529 (declining to reopen a case to avoid a lien when the debtor had actual knowledge that the lien was still valid for at least five months after the bankruptcy was closed, yet waited until the creditor attempted to revive the lien to move to reopen). Furthermore, if the timing of the motion indicates it is a “stalling tactic” to delay state-court litigation, a court should not reopen the case. Redmond v. Fifth Third Bank, 624 F.3d 793, 799 (7th Cir.2010) (upholding the bankruptcy court’s denial of a motion to reopen when the motion was filed three weeks before trial in a state court foreclosure proceeding).
The Court finds no cause to reopen this case. Ten months after the close of the bankruptcy, Mr. Pinks filed his complaint in New York. That litigation has now been moving forward for two years. The parties have incurred costs and expenses in moving it forward. The Fourth Circuit has specifically cautioned against reopening cases when parties have incurred litigation costs. Hawkins, 727 F.2d at 327. The Court fails to see why it should ignore that caution here.
The Court is also wary of the timing of M & T Bank’s motion on the heels of the New York court’s denial of its motion to dismiss. Courts generally do not permit debtors who litigate post-bankruptcy issues with full knowledge of the bankruptcy *120relief available to later reopen their cases and seek relief in bankruptcy court. E.g., Bianucci, 4 F.3d at 529. The reason for this is clear: it would be both inequitable and inefficient to reopen cases for the purpose of permitting the party unhappy with the result of pending litigation to utilize the bankruptcy court for its benefit when it previously failed to do so. The Court again sees no reason why it should exercise its discretion to permit M & T Bank to ■ act similarly here.4
Most importantly, however, it is not clear to the Court that reopening the case would be beneficial to creditors. Mr. Pinks has already incurred attorney fees that should perhaps be deducted from recovery. If the Trustee were to take over the lawsuit, she would be unable to serve as the class action plaintiff, thus potentially diminishing the value of the underlying cause of action. She would also presumably need to hire counsel to pursue the litigation, diminishing even further any recovery for the estate. Add to these costs the necessarily speculative nature of litigation and recovery, and the Court is not convinced there would be a benefit to creditors.
The parties have incurred expenses in reliance on the finality of the bankruptcy case. M & T Bank knew of the bankruptcy and its potential effect on the cause of action, yet delayed its request to reopen for nearly two years. The Court sees little potential benefit to the estate if the bankruptcy were reopened to administer the cause of action. Under these circumstances, cause does not exist to reopen.
III. Conclusion
The burden of proof on a motion to reopen is on the moving party. M & T Bank did not provide the Court with proof that the Trustee was either misled or that the asset was so improperly disclosed that her efforts in administering the estate were frustrated. M & T Bank has also not convinced the Court that the case should be reopened for cause. Both M & T Bank and the Pinks have been litigating this cause of action in New York for two years. M & T Bank knew of the bankruptcy yet did not seek relief from the bankruptcy court until after it received an unfavorable ruling from the district court. During the interim time period, M & T Bank, the Pinks, and the New York federal courts have spent time and/or money litigating the dispute. Reopening this bankruptcy case now would prejudice the New York proceedings, prejudice the parties, and accord little if any demonstrated benefit to the Pinks’ creditors.
For the reasons set forth above, the Court sustains the Debtors’ objection to M & T Bank’s motion to reopen. The motion to reopen is denied.
. The cause of action is scheduled as joint, although the financing giving rise to the cause of action was incurred only by Mr. Pinks.
. The original hearing was scheduled for December 8, 2014, in Charleston. The Debtors filed a request to continue the hearing because they had recently retained new counsel and needed additional time to respond to some of the arguments raised by M & T Bank. M & T Bank opposed the continuance. The Court held a hearing on the continuance motion on December 8, 2014, and, with the agreement of the parties, continued the matter to January 7, 2014, in Columbia.
. In their briefing, the parties made much of the distinction between revoking abandonment when abandonment occurs on notice pursuant to 11 U.S.C. § 554(a), versus "technical” abandonment pursuant to 11 U.S.C § 554(c) at the close of the case. The parties agreed at the hearing that the asset was abandon pursuant to 11 U.S.C. § 554(c). The Court therefore declines to opine on whether this distinction exists and, if so, its effect here.
. At the hearing and in its briefing, M & T Bank made much of the fact that because its deficiency claim was discharged in the bankruptcy, equity requires the Court to reopen the case so that the Debtors do not obtain the benefit of the discharge while still pursuing their cause of action. The Court does not consider this “prejudice” relevant here; under Hawkins, “accidental benefits” do not constitute prejudice. Hawkins, 727 F.2d at 327 (holding that the fact that the creditor would lose its lien if relief was granted was not a fact relevant to the prejudice analysis). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498306/ | ORDER DENYING MOTION TO REOPEN
David R. Duncan, Chief U.S. Bankruptcy Judge
THIS MATTER comes before the Court on a motion to reopen a chapter 13 case to *122amend schedules (“Motion”) filed by debtors Mark Edward and Kellie Burch Ingram (“Debtors”). Joy Goodwin, chapter 13 trustee (“Trustee”), filed a response to the Motion and AAA Cooper Transportation (“AAA Cooper”) objected. The Court set the Motion for hearing on April 22, 2015. After considering the evidence submitted, arguments of the parties, and applicable law, the Court denies the Motion.
I. Facts and Procedural History
On January 31, 2008, Debtors filed this chapter 13 case. Their plan was confirmed on June 5, 2008. Prior to confirmation, Debtors amended their schedules twice. Post-confirmation, Debtors amended their schedules again to reflect changes in their income and expenses requiring a modification of the plan. The Court approved an amended plan July 28, 2009. The Trustee filed a notice of completion of plan payments April 5, 2013; the Debtors received a discharge on April 30, 2013; and the case was closed on May 9, 2013. The chapter 13 trustee’s final report states that the case lasted 63 months and the Debtors discharged $55,151.62 in unsecured claims while exempting $59,438.75 in assets and making payments totaling $60,240. The confirmation order in this case provided that “all property described in 11 U.S.C. § 1306(a) shall remain property of the estate until such time as the case is dismissed or a discharge is granted.”
On July 5, 2012, Mrs. Ingram was involved in a vehicle collision. In August, she contacted attorney Stephen P. Bristol to discuss whether she had any causes of action relating to the accident. Bristol testified he sent notice to the insurance companies that month indicating he was investigating her case. After communicating with the insurance companies multiple times, he filed a complaint in state court in Georgia on May 21, 2014, just over a year after the Debtors received their discharge. Bristol did not find out about the bankruptcy until AAA Cooper took the In-grams’ depositions.1 After the depositions, AAA Cooper informed the Debtors it would be filing a motion to dismiss based on judicial estoppel due to the fact that the causes of action were not disclosed in the bankruptcy.2 This prompted the Debtors to file the Motion currently before the Court.3
In their Motion, Debtors ask the Court to reopen the case for the limited purpose of amending their schedules to disclose and exempt the causes of action. They assert that they will likely not need to employ an attorney and will not need the appointment of a trustee because the personal injury case was filed after the close of the bankruptcy case and any proceeds from it will be exempt. The Trustee responded to the Debtors’ Motion and joined in their request to reopen the case for the purpose of determining whether the causes of action are exempt. AAA Cooper objected to the Debtors’ Motion, arguing that reopening is futile because it will not affect the Georgia court’s judicial estoppel analysis, and, regardless, there cannot be any recovery for creditors because providing for such recovery would violate chapter 13’s five-year limitation on plan payments.
*123At the hearing held on the Motion on April 22, 2015, Debtors’ attorney informed the Court that the Debtors’ position had changed. Debtors now believe that not all of the amounts potentially recoverable from the causes of action are exempt. Debtors therefore amended their request to ask that the case be reopened and held open while the Georgia litigation is pursued. Once that litigation is completed, this Court would determine any exemption disputes and whether there are proceeds available for distribution to creditors.4
II. Discussion
Section 350 of the Bankruptcy Code provides for the reopening of a case “to administer assets, to accord relief to the debtor, or for other cause,” 11 U.S.C. § 350(b), upon a “motion of the debtor or other party in interest.” Fed. R. Bankr. P. 5010. The Fourth Circuit provides bankruptcy courts with wide discretion to determine when reopening a case is appropriate. Hawkins v. Landmark Finance Company (In re Hawkins), 727 F.2d 324, 326 (4th Cir.1984). The burden of proof is on the moving party. In re Lee, 356 B.R. 177, 180 (Bankr.N.D.W.Va.2006). If the court cannot accord the moving party the underlying relief requested, then the court should deny reopening the case. In re Danley, 14 B.R. 493, 494 (Bankr.D.N.M.1981).
When considering whether to reopen a closed bankruptcy case to administer a cause of action, a court should consider three interests: (1) the benefit to the debtor; (2) the prejudice or detriment to the party in the pending litigation; and (3) the benefit to the debtor’s creditors. In re Tarrer, 273 B.R. 724, 732 (Bankr.N.D.Ga.2010). The benefit to the Debtors in reopening the case is that they may be able to defeat AAA Cooper’s judicial estoppel defense.5 The detriment to AAA Cooper rests in the same possibility. Because a favorable ruling for either party would necessarily impose on its opponent a corresponding detriment, benefit to the debtor and prejudice to the creditor (or opposing party) are neutral. In re James, 487 B.R. 587, 594 (Bankr.N.D.Ga.2013). The proper inquiry focuses on the effect of reopening the case on the creditors. Id. If the reopening will have no effect on the estate or creditors, and no further administration would be necessary, then the motion to reopen should be denied. Apex Oil Co. v. Sparks (In re Apex Oil Co.), 406 F.3d 538, 543 (8th Cir.2005) (affirming the trial court’s refusal to reopen a chapter 11 bankruptcy case to administer a pre-peti*124tion cause of action when all estate assets had been administered).
Motions to reopen cases to administer causes of action most frequently arise in the context of chapter 7. See e.g., In re McMellon, 448 B.R. 887, 891 (S.D.W.Va.2011). In a chapter 7 case, upon the filing of the petition, all pre-petition property and interests become property of the estate to be administered by the chapter 7 trustee. 11 U.S.C. §§ 541; 704. This property is administered by a chapter 7 trustee, whose primary role is to “collect and reduce to money the property of the estate ... as expeditiously as is compatible with the best interests of parties in interest.” 11 U.S.C. § 704(a)(1). The trustee then distributes the money in accordance with chapter 7’s distribution scheme. 11 U.S.C. § 726. Once the distribution and any other necessary tasks are complete, the case is closed. See 11 U.S.C. § 350. Property that was properly scheduled pursuant to § 521(a)(1) but not administered is abandoned, 11 U.S.C. § 554(c), and the debtor receives a discharge. 11 U.S.C. § 727.
Thus, in a chapter 7 case, when a party files a motion to reopen to amend schedules to include omitted assets, courts generally permit reopening because administering the asset is frequently at least neutral to creditors if not beneficial. 3 Collier on Bankruptcy ¶ 350.03[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (“Collier’s”). When the purpose of the motion to reopen is to pursue a lawsuit, the chapter 7 trustee can elect to pursue the lawsuit if the chapter 7 trustee thinks it will benefit creditors, or abandon the lawsuit if pursuing it would be too costly to the estate. E. g., In re McMellon, 448 B.R. 887, 895 (S.D.W.Va.2011); In re Arana, 456 B.R. 161, 171 (Bankr.E.D.N.Y.2011) (A chapter 7 debt- or’s “failure to schedule a prepetition action may only be a speedbump, not a roadblock, on the road to recovery for the bankruptcy estate.”).
The analysis under chapter 13 is different. Chapter 13 serves a reorganization not liquidation purpose. The filing of the chapter 13 petition creates an estate which includes property of the estate in chapter 7, with the addition of “all property ... that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.” 11 U.S.C. § 1306(a)(1); Carroll v. Logan, 735 F.3d 147, 150 (4th Cir.2013). The right to possess chapter 13 property of the estate is the exclusive right of the chapter 13 debtor unless the plan provides otherwise. 11 U.S.C. § 1306(b). The debtor proposes a plan that may provide for the liquidation of some of the estate, but most importantly provides for the restructuring and payment of debts over the plan period so that the debtor can retain property that would otherwise be liquidated or surrendered. See 11 U.S.C §§ 1322; 1325. Chapter 13 plans must provide for these payments over an “applicable commitment period” of at least three years (36 months) but not longer than five years (60 months). 11 U.S.C. § 1322(d)(1); see Pliler v. Stearns, 747 F.3d 260, 264 (4th Cir.2014) (holding that the “applicable commitment period” for a chapter 13 plan is a mandatory obligation). Even if a debtor later modifies a plan due to changed circumstances, such modification may not be approved by a court if it would extend the plan for longer than five years. 11 U.S.C. § 1329(c). Upon confirmation of the plan, the property of the estate vests in the debtor,6 11 *125U.S.C. § 1327(b), and binds both debtors and creditors to the new debt terms. 11 U.S.C. § 1327(a); United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 275, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (holding that despite the trial court’s legal error in confirming the plan, the creditor was bound by the confirmation order). The chapter 13 trustee’s duties are different from those of a chapter 7 trustee because the former does not generally liquidate the estate. 11 U.S.C. § 1302(b)(1). Instead, the chapter 13 trustee primarily makes disbursements provided for in the plan. 11 U.S.C. § 1302(b)(3).
Because chapter 13 debtors retain property of the estate, reopening the case to include an omitted asset would not necessarily place the asset under the control of the chapter 13 trustee to administer. See Fed. R. Bankr. P. 6009 (“the trustee or debtor in possession may prosecute ... or defendant any pending action ... or commence and prosecute any action or proceeding ... ”) Instead, the chapter 13 debtor may use this property to provide for plan payments. While there is the potential to make lump sum payments or to modify the plan, the plan is subject to the five-year term set by §§ 1322(d) and 1329(c). Congress deliberately included this time limitation because prior to the enactment of the current version of chapter 13,
[ejxtensions on plans, new cases, and newly incurred debts put some debtors under court supervised repayment plans for seven to ten years. This has become the closest thing there is to indentured servitude; it lasts for an indentifiable [sic] period and does not provide the relief and fresh start for the debtor that is the essence of modern bankruptcy law.
8 Collier’s ¶ 1300.02 (citing H.R.Rep. No. 595, 95th Cong. 1st Sess. 117 (1977)).
Distribution of non-disclosed or post-petition acquired assets will therefore be constrained by chapter 13’s time limitation&emdash;a limitation that does not exist in chapter 7. Thus, while closed chapter 7 cases may be freely reopened to include and pursue causes of action, there appears to be only a narrow set of factual circumstances where reopening a chapter 13 case to disclose a post-petition cause of action would serve any purpose. See e.g., In re James, 487 B.R. 587, 594 (Bankr.N.D.Ga.2013) (permitting the chapter 13 debtor to reopen the case to amend schedules because the debtor had previously disclosed the cause of action to the chapter 13 trustee and the completed plan distributed 100% to unsecured creditors).
That scenario is not present here. Debtors wish to reopen their case because they believe there will be recovery significant enough to provide a distribution to their creditors. But the Debtors cannot propose an amended, approvable plan because chapter 13’s 60-month time limitation has long expired. The chapter 13 trustee does not have the authority to liquidate assets. As such, there can be no distribution to creditors.
There is no potential benefit in reopening to creditors. Debtors have provided the Court with no additional evidence in favor of reopening. On the contrary, the evidence before the Court is that the Debtors knew they were in *126bankruptcy, knew (or should have known) they had potential causes of action while in bankruptcy, and did not think to amend their schedules. They demonstrably knew they could amend their schedules during the case, and did so when the circumstances required it, but did not do so to include their causes of action. Chapter 13 debtors have an ongoing duty to disclose post-petition assets, including causes of action. See e.g., Cotita v. Verizon Wireless, 54 F.Supp.3d 714, 719 (W.D.Ky.2014) (rejecting the argument that the chapter 13 debtor’s post-confirmation cause of action’s unknown value and unlikely effect on the plan meant it did not need to be disclosed); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1286 (11th Cir.2002) (“The duty to disclose in a continuing one that does not end once the forms are submitted ... [fjull and honest disclosure in a bankruptcy case is ‘crucial to the effective function of the federal bankruptcy system.’ ”) (citations omitted). Debtors failed to comply with that responsibility. The Motion to Reopen is denied.
AND IT IS SO ORDERED.
. Specifically, Bristol stated that he found out about the bankruptcy during the Ingrams’ depositions taken as part of discovery in the Georgia litigation.
. AAA Cooper filed its motion to dismiss in the Georgia court on March 26, 2015, and the Debtors responded on April 20, 2015.
.Mrs. Ingram died in early 2015. Nevertheless, this Order refers to the movant in the plural.
. At the hearing, the Debtors questioned, but did not argue, AAA Cooper’s standing to object to the motion to reopen because AAA Cooper was not a creditor in the bankruptcy. Courts do not agree on whether state court defendants that are not creditors in the bankruptcy have standing to object to a motion to reopen. Compare In re D'Antignac, C/A No. 05-10620, 2013 WL 1084214, at *3 (Bankr. S.D.Ga.2013) (collecting cases) with In re Tarrer, 273 B.R. 724, 730-31 (Bankr.N.D.Ga. 2001). Without weighing in on this debate, this Court agrees with those courts taking the position that even if a state court defendant lacks standing to object to a motion to reopen, the moving party still bears the burden of proof on the motion. Tarrer, 273 B.R. at 731. Accordingly, the Court considers AAA Cooper’s arguments.
Additionally, although the chapter 13 trustee filed a response to the Motion, at the April 22 hearing the trustee took no position as to whether reopening was futile. Because the Court agrees with AAA Cooper that reopening would serve no purpose, the Court need not consider the trustee's concerns regarding the appropriateness of exempting recovery from the litigation.
. The parties agreed at the hearing that the Georgia court, and not this Court, will decide the judicial estoppel issue.
. Both the plan and confirmation order provide that property of the estate does not vest in the debtor until the closing of the case. The Court therefore need not examine this issue in the context of property vesting in the debtor upon confirmation. See e.g., Matter of *125Heath, 115 F.3d 521, 524 (7th Cir.1997) (considering §§ 1306(a) and 1327(c) to determine • whether the chapter 13 trustee or the debtor had standing to pursue a post-confirmation cause of action); In re Foreman, 378 B.R. 717, 721 (Bankr.S.D.Ga.2007) (holding that because property of the estate vested in the debtor upon confirmation,-the debtor had no duty to disclose the post-confirmation cause of action and the cause of action was not property of the estate). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498308/ | MEMORANDUM OPINION
JEFFREY P. NORMAN, UNITED STATES BANKRUPTCY JUDGE
Before the Court are two competing proposed modified Chapter 12 plans filed pursuant to 11 U.S.C. § 1229. The first modified plan was filed by the debtor, Colby R. Daniels, on April 17, 2015 (Docket No. 198). That plan has drawn an objection from Eugene Hastings, the Chapter 12 Trustee (Docket No. 208), and an objection from Mark W. Hennessy (Docket No. 212). The other proposed modified Chapter 12 plan was filed by creditor Mark W. Hennessy on April 29, 2015 (Docket No. 218). Mr. Hennessy’s plan has drawn objections from the Chapter 12 Trustee (Docket No. 220) and the debtor (Docket No. 229).
The Court has held three hearings on these competing proposed plan modifications. The debtor’s plan was originally confirmed on June 11, 2013. In December of 2014, the debtor defaulted on his plan payments as he failed to pay a total of $149,385.11 to three creditors secured by an interest in farm land. Thereafter, on March 9, 2015, the debtor filed an amended (modified) Chapter 12 plan (Docket No. 167). In summary, this amended Chapter 12 plan proposed that the debtor would sell his farm land for a price equal to the amount of all secured claims against the land ($2,600,000.00 per the fixed value of the farm land in the confirmed Chapter 12 Plan) to pay these secured creditors in full. That plan did not disclose the buyer, and was general as to the terms of the sale. It did propose the debtor would sell the farm and provide the funding within thirty days.
*136On March 24, 2015, creditor Mark W. Hennessy filed a competing motion to modify the Chapter 12 plan. In summary, it also proposed the sale of the debtor’s farm land to pay all of the same secured creditors in full, but at a sales price $100,000.00 higher ($2,700,000.00) than the debtor’s proposed selling price. The competing plans drew various objections.
On April 6, 2014, the Court held the first hearing on the competing plans. It was the opinion of the Chapter 12 Trustee, Eugene Hastings, that the subject farm land should be sold at the highest possible price as to maximize the return to other creditors, including unsecured creditors. The Court agreed and, pursuant to 11 U.S.C. § 1206, authorized an auction to determine the highest possible return to the estate. The Court entered an order authorizing the auction and setting forth auction procedures (Docket No. 193), and a Trustee’s Report on Auction was filed in compliance with the Court’s order (Docket No. 195). The highest bidder was Mr. Hennessy, who bid $2,800,000.00. This amount exceeded both the debtor’s original proposed sales price set forth in his modified Chapter 12 plan, as well as the original sales price Mr. Hennessy had proposed in his competing modified Chapter 12 plan.
Thereafter, on April 17, 2015, both the debtor and Mr. Hennessy amended their competing modified Chapter 12 plans (Docket Nos. 197 and 198). In the debt- or’s new amended plan, he proposed to sell the farm land to WEK Properties, L.L.C. (“WEK”) for $2,800,000.00, which was the highest bid at the court sanctioned auction. WEK was a bidder at said auction, but it was not the high bidder. In summary, Mr. Hennessy amended his plan to mirror the auction terms, which called for the sale of the farm land to Mr. Hennessy for $2,800,000.00 pursuant to his bid. Again, both amended plans drew various objections.
On April 27, 2015, the Court held its second hearing on the competing plans. Further technical plan amendments were required. As a result, Mr. Hennessy amended his modified plan (Docket No. 218). In summary, that amended plan raised the proposed price for the sale of the farm land to Mr. Hennessy to $3,000,000.00. This is a sum that greatly exceeds the original sales price proposed by the debtor in his first attempt to modify his plan. This sum provides an additional $400,000.00 to be distributed to creditors other than those' secured by the farm land.
On May 7, 2015, the Court held its final hearing on the competing plans. The Court heard testimony from the Mr. Hennessy, the debtor, and Robert W. McGe-hee, an agent of WEK.
Mr. Hennessy testified he has known the debtor for about twenty years and has made repeated loans to him. He holds a secured and an unsecured claim against the debtor and has invested one million dollars in a facility within the farm land that is proposed to be sold. Mr. Hennessy owns a five acre parcel of land on which this facility stands. Mr. Hennessy described this land as an “inholding property.” It is this subject property which partially motivates his desire to purchase the entire farm land. The parcel is completely surrounded by the debtor’s farm land. The parcel also includes an easement across the debtor’s farm land for access. The facility on this parcel is used to store and cure sweet potatoes. Mr. Hennessey testified this facility was conceived and constructed as part of his relationship with the debtor, and that for a time the debtor farmed sweet potatoes. Mr. Hennessy believes this parcel’s value would be greatly enhanced if he also owned the property surrounding it. Otherwise, the parcel is *137effectively an island surrounded by farm land owned by the debtor. Accordingly, Mr. Hennessy is willing to pay $3,000,000.00 for the entire farm land. This sum provides a $400,000.00 increase in the dividend to unsecured creditors. The Court finds Mr. Hennessy a credible and competent witness.
The debtor testified that, beginning December 15, 2014, he defaulted on his plan payments to secured creditors. In summary, he defaulted on the following payments due to secured creditors on December 14, 2014: $11,265.41 due to USDA/ FSA, $44,614.11 due to 1st National Bank, and $ 93,505.59 due to Mark W. Hennessy. The total of all defaulted payments was $149,385.11. He testified he planted soybeans in 2014 and his expectations for both crop yield and sales price were not met. This led to the default. While the debtor was a credible witness, the Court has concerns regarding his testimony. He was unable to answer simple questions a farmer should be able to answer. He was unaware of his gross farming revenue and total farming expenses for 2014. His initial estimates of tillable acreage, as well as the acreage he planned to till in 2015, were nonsensical. Only after the Court interjected into questioning did the debtor finally realize his testimony needed to be corrected. Still further the financial information contained in the debtor’s summary of farm operations (Debtor Exhibit 2) is clearly inaccurate. It contains no interest expense for his proposed crop loan, which would be required for him to farm in 2015. Also, based on the lease provided by the debtor (Debtor Exhibit 1) and the debtor’s testimony regarding lease rates of the other parcels he intended to lease and farm, the proposed lease payments are understated. Based on the testimony of the debtor, the minimum lease payments under the “flex” lease would be $83,703.00 (Debtor Exhibit 1), plus $20,000.00 for an additional 160 acre tract, plus $3,000.00 for an additional 25 to 28 acre tract. The minimum lease payments total $106,703.00. The debtor has disclosed lease payments of only $93,375.00 in his summary of farm operations. The Court stresses that the evidence only supports a minimum, and not a maximum or actual, lease payment amount for the debtor’s proposed farming in 2015. The Court does not find the debtor had any intent to deceive. However, he seems generally unaware of basic accounting, and the Court must discount his financial testimony.
The debtor testified that if the farm land were sold to WEK for $2,800,000.00 as he proposed in his modified plan, he could bridge the $200,000.00 difference between Mr. Hennessy’s and WEK’s sales prices by leasing back and farming the sold property under a “flex” lease with WEK. He would devote the farming profit to unsecured creditors in year three of the plan. The debtor introduced a proposed farm lease (Debtor Exhibit 1), the “flex” lease as well as a summary of farm operations (Debtor Exhibit 2). As discussed above, the summary of farm operations contains errors and its evidentiary value is diminished; however, it incorrectly suggests total net income available for unsecured creditors of $196,213.00 for 2015.
The last witness was Robert McGehee, an agent of WEK. He briefly testified he has worked as an agent for WEK for seven years and that WEK has the financial ability to close the sale proposed by the debtor within fourteen days. He also testified that yields for soybeans are determined by many factors. The Court finds Mr. McGehee a competent and credible witness.
In comparing the two competing amended Chapter 12 plans, the Court finds the three year plan proposed by the debtor to *138be financially deficient in comparison to the plan proposed by Mr. Hennessy. Given the evidence, Mr. Hennessy’s plan provides a greater return to unsecured creditors because of the purchase price of the farm land as proposed by Mr. Hennessy, as well as the evidentiary failings of the financials provided by the debtor. In fact, even if the Court were to accept the debt- or’s financials as accurate, the proposed return to unsecured creditors under the debtor’s amended plan ($396,213.00, which is the $2.8 million sales price, minus secured claims of $2.6 million, plus one year of farming operations, and ignoring interest) is still less than the amount offered under Mr. Hennessy’s plan ($400,000.00, which is the $3 million sales price, minus secured claims of $2.6 million, and ignoring interest).
Counsel for the debtor suggested this issue could be resolved by an extension of the debtor’s proposed amended Chapter 12 plan from three to four years. This would increase the distribution to unsecured creditors by adding an additional year of farm profits. In theory, this could propel the debtor’s plan past Mr. Hennessy’s competing plan. However, this hypothetical plan is not before the Court. The Chapter 12 Trustee argued that if the Court were to compare the competing plans before the Court, Mr. Hennessy’s plan should be confirmed based solely on the dividend to unsecured creditors. However, should the Court grant leave for the debtor to amend his modified Chapter 12 plan to a four year term, the dividend to unsecured creditors may be enhanced.
At the conclusion of the presentation of evidence, the Court entered an oral ruling, subject to additional findings. The Court found that while debtor’s counsel has suggested the debtor can further amend the plan to a four year term, this is not presently before the Court. As for the debt- or’s modified plan, the Court finds he has failed to meet his burden under 11 U.S.C. § 1325. Given the errors discussed on the record regarding the summary of farming operations, the debtor has not met his burden with regard to feasibility. He has also not met his burden with regard to liquidation value given the testimony of the parties regarding value of the farm property to be sold.
Still further, the Court orally sustained the objection of the Trustee (Docket No. 208) as to good faith. This is due to the debtor’s apparent attempt to undermine the auction process by proposing a plan after the auction that simply proposes a sales price for the farm that matches Mr. Hennessy’s high bid at the court sanctioned auction. There is the appearance of collusion and unfairness.
Further, the evidence clearly shows Mr. Hennessy’s plan will provide a greater return to unsecured creditors than the debt- or’s plan.
Additionally, the Court orally ruled that if this were not a Chapter 12 case, this Court’s findings would end the debtor’s chance to modify his plan and the Court would approve Mr. Hennessy’s plan. However, this is a Chapter 12 case, and the Court must attempt to adhere to Congressional intent. Chapter 12 is designed to support the family farmer. Additionally, the Court must give great deference to the Chapter 12 Trustee’s recommendation, which is to allow the debtor an attempt to amend his proposed modified Chapter 12 plan. Therefore, the Court granted leave to the debtor to file an amended plan no later than 5:00 p.m. on May 8, 2015. The Court considers such an amendment to be a trial amendment permissible under Federal Rule of Civil Procedure 15(b).
Still further, the Court granted Mr. Hennessy leave to amend his plan to resolve the small technical objections of the *139Chapter 12 Trustee. Such amendment must be filed by 5:00 p.m. on April 8, 2015, pursuant to Federal Rule of Civil Procedure 15(b).
The Court announced it would evaluate any timely filed amended plans and would further rule after reviewing the record and evidence before it. The Court would not hear any other evidence on either competing plan.
Thereafter, the debtor (Docket No. 284) and Mr. Hennessy (Docket No. 287) amended their modified plans within the time allowed by the Court. Both parties filed motions for leave to file objections and responses. As previously suggested by the debtor, his amended plan extended the plan to a term of no less than four years, which is somewhat nebulous because it potentially extends the plan beyond four years, arguably to infinity.
Likewise, Mr. Hennessy also amended his plan. In addition to making technical amendments, he also raised the sales price of the farm land from $3.0 million to $3.2 million.
The Court notes that the process it has undertaken over multiple hearings has had a major impact on the return to unsecured creditors in this case. As originally proposed by the debtor, the sale of the farm land would have provided no benefit to unsecured creditors. Now, there is a competing modified plan that will bring an almost immediate payout of $600,000.00 to unsecured creditors, again ignoring accumulated interest on secured claims.
The debtor has attempted to buttress his position by attaching a new proposed budget to his modified plan (Docket No. 234, Attachment #1). The new budget includes several changes which attempt to correct the errors contained in the original budget. It includes interest for a crop loan, for which there is no evidence as to amount or calculation in the record. It also includes an increase in rent. The rent expense is more accurate than it was in the original budget; however, based on the testimony and other evidence, it is still may not.be an accurate figure as there is no evidence in the record regarding its calculation.
Yet again, this raises a major concern. The debtor has consistently been delayed or delinquent during this modification process. He originally 'proposed a modified plan which proposed the farm land be sold at price equal to the sum of all secured liens against the property. That sales price was almost immediately exceeded by $100,000.00 by Mr. Hennessy. After multiple hearings, the price offered by the debtor for the sale has never exceeded the price offered by Mr. Hennessy. The best proposal the debtor has offered is only to match the auction sales price. Further, the financial information originally submitted by the debtor was inaccurate and needed to be corrected. The debtor has had every opportunity to propose a plan and provide financial information that' would suffice to modify his Chapter 12 plan, but he has repeatedly failed to so. Simply put, the debtor has not been diligent during this process, and has proposed to sell his most valuable asset at a value below what has been offered by Mr. Hennessy on multiple occasions. In addition, the debtor has consistently provided financial information that does not survive an analysis of the evidence. Still further, the Court has concerns the debtor’s attempt to undermine the court sanctioned auction process by proposing a modified plan after the auction that simply matches the auction price after the fact. This potentially subjects this Court to claims of collusion and unfairness.
Based on the initial errors and the debt- or’s testimony, the Court continues to be*140lieve the financial information provided by the debtor is not accurate. The Court has reviewed the monthly operating reports filed by debtor during 2014, which is the year the debtor defaulted on his plan payments. The reports are deficient. Specifically, the Court finds that during 2014, there is not a single operating report that details any crop sales. This is a serious deficiency and further supports the Court’s finding that the debtor’s financial statements and projections are inaccurate. More importantly, even if the debtor’s financial information is accurate, Mr. Hennessy’s most recent plan still provides a greater dividend to unsecured creditors.
Additionally, Mr. Hennessy’s plan has two specific advantages over the modified plan filed by the debtor. First, Mr. Hennessy’s plan lacks the general risk that is attendant with farming. The debtor did not intentionally default on his Chapter 12 plan payments. Instead, he defaulted because his expectations for both soybean crop yield and sales price were not met. The debtor defaulted in his plan payments in the second year of his plan when, unlike the first year, he was required to make both interest and principal payments to secured creditors. There are many factors that lead to crop yield and a crop sales price; therefore, there is a definite risk the debtor will again not meet his projected crop yield and crop sales price. Therefore, there is no guarantee the debtor will meet his financial projections, especially given a historical analysis of the debtor’s operations via his monthly operating reports. Especially over two future years, which is when the debtor proposes to make payments to unsecured creditors from farming operations.
The second advantage of Mr. Hennessy’s plan is that the payment to creditors will be nearly immediate. Under his plan, closing on the sale of the farm land can be completed within weeks, and the distribution to unsecured creditors will be immediate as opposed to the two years proposed by the debtor. While interest rates are currently low, unsecured creditors would likely prefer full payment of their claims now than delayed payments over the next two years.
Lastly, as it relates to the debtor’s modified Chapter 12 plan, Mr. Hennessy has rights in this case. The debtor’s plan prejudices Mr. Hennessy as it forces him to . accept a sale of farm land to an entity he outbid at a court sanctioned auction, and at a sales price lower than he has offered. Under the debtor’s plan, he must then wait for payment on his unsecured claim, which is contingent on whether the debtor’s farming operation is successful, which it has not been in the past. If the debtor fails to meet his financial projections, then Mr. Hennessy will not get paid on his unsecured claim, and he will continue to hold the inholding property surrounded by land owned by an auction bidder that he outbid by $400,000.00. This result is not equitable.
The debtor has the burden of proof when seeking to modify a confirmed Chapter 12 plan. See In re Hart, 90 B.R. 150 (Bankr.E.D.N.C.1988); In re Cooper, 94 B.R. 550 (Bankr.S.D.Ill.1989). The Court holds the debtor has failed to meet his burden under 11 U.S.C. § 1229(b), which incorporates §§ 1222(a), 1222(b), 1223(c) and 1225(a). Specifically, 11 U.S.C. § 1225(a)(3) requires the debtor propose a plan in good faith, which this debtor has not done. Further, pursuant to 11 U.S.C. § 1225(a)(4), the debtor’s plan must meet the liquidation test. The liquidation test requires the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim shall not be less than the amount that would be paid on *141such claim if the estate of the debtor were liquidated under Chapter 7. Given the competing modified plans, and Mr. Hennessy’s proposed sales price of the farm land for $3.2 million, the debtor has failed to meet his burden under § 1225(a)(4). Accepting the debtor’s last proposed financial projection (Docket No. 234, Exhibit A), which the Court still notes is suspect and is not supported by evidence, the Court finds the return to unsecured creditors under the debtor’s proposed modified plan is $526,350.00. This calculation is arrived at from the sale of the farm (sales price of $2.8 million, minus $2.6 million in liens), plus $326,350.00 (which is the debtor’s net projected income of $163,175.00 per year over the next two years). The Court notes that all calculations ignore accrued interest. By comparison, Mr. Hennessy’s proposed modified plan allows for a return to unsecured creditors of $600,000.00, which is calculated by the sales price of $3.2 million minus $2.6 million in liens, and again ignoring accrued interest.
Additionally, pursuant to 11 U.S.C. § 1225(a)(6), the debtor must show he will be able to make all payment under the plan, and that he will be able to comply with the plan. Based on the evidence and the Court’s concerns regarding the debt- or’s financial projections, the Court finds the debtor has failed in this regard.
The Chapter 12 Trustee has recommended confirmation of Mr. Hennessy’s modified Chapter 12 plan (Docket No. 242). Modification of a Chapter 12 plan after confirmation is permissible at any time before plan completion on request of the debtor, the trustee or the holder of an allowed unsecured claim. 11 U.S.C. § 1229(a); see also In re Pearson, 96 B.R. 990 (Bankr.D.S.D.1989). The Court finds that Mr. Hennessy is an unsecured creditor (Claim No. 14); therefore, he can propose a Chapter 12 plan modification.
11 U.S.C. § 1222(b) provides that the plan may provide for the sale of all or any part of the property of the estate. Accordingly, Mr. Hennessy’s modified plan is permissible. Still further, the Court finds the procedures it has set forth comply with 11 U.S.C. § 1206. Therefore, the sale is proper as it pays all secured creditors in full and provides a substantial distribution of $600,000.00 to unsecured creditors, again ignoring accrued interest to secured creditors.
The Court further finds Mr. Hennessy’s modified Chapter 12 plan complies with 11 U.S.C. § 1229(b), which incorporates §§ 1222(a), 1222(b), 1223(c) and 1225(a), and that Mr. Hennessy has met his burden to confirm his modified Chapter 12 plan.
Therefore, the Court grants creditor Mark W. Hennessy’s motion to modify the Chapter 12 plan as recommended by the Chapter 12 Trustee.
The Chapter 12 Trustee, Eugene Hastings, is ORDERED to upload a confirmation order in conformity with this Memorandum Order. All other relief is denied.
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498309/ | MEMORANDUM OPINION AND ORDER: (A) SUSTAINING IN PART AND OVERRULING IN PART TRUSTEE’S OBJECTIONS [DE ##246 & 313]
1
TO DEBTOR’S CLAIM OF RURAL HOMESTEAD EXEMPTION, AS AMENDED; AND (B) SHIFTING CERTAIN ATTORNEY’S FEES TO DEBTOR AND DEBTOR’S COUNSEL, PURSUANT TO SECTION 105(A) OF THE BANKRUPTCY CODE AND THE ORDER TO SHOW CAUSE [DE # 308]
STACEY G. JERNIGAN, United States Bankruptcy Judge
I. INTRODUCTION
This Memorandum Opinion and Order is issued in a contested matter involving a Chapter 7 Debtor with hundreds of acres of real property who — very late in his bankruptcy case — changed his strategy regarding which of his multiple properties he would claim as his exempt, Texas rural homestead. First (for 15 months), the Debtor claimed four, noncontiguous parcels of real property in Navarro County, Texas, as his exempt homestead (the so-called “French Properties” — as later herein described). Then, more than three months after receiving objections to his homestead exemption from the Chapter 7 Trustee and his former spouse (the largest creditor in his bankruptcy case), the Debt- or (mid-way through a hearing on their objections), announced that he would exer-*146rise his right to amend his exemptions,2 and would claim: (a) two different parcels of real property in Freestone County, Texas that he had been both residing on and using for business purposes as his exempt homestead (hereinafter defined as the “Business Properties — 60 Acres”),3 along with (b) one of the four parcels that he had originally claimed as part of his exempt homestead (hereinafter defined as “Parcel 4 of the French Properties”). The most difficult questions presented in this contested matter are: (a) whether the Debt- or’s late-in-the-game amendment of his homestead exemption crossed the line between zealous advocacy into bad faith pettifoggery; and (b) does the Supreme Court’s reasoning in Law v. Siegel4 preclude a bankruptcy court from applying equitable doctrines to disallow a debtor’s otherwise valid exemption claim. The court ultimately rules herein that the objections to the amended homestead exemption are sustained in part and overruled in part. Specifically, the court is allowing on the merits the Debtor’s amended homestead exemption as to the “Business Properties — 60 Acres” but is not allowing on the merits the homestead exemption as to the non-contiguous “Parcel 4 of the French Properties.” However, the court also rules that Law v. Siegel: (a) does, in fact, generally preclude a bankruptcy court from disallowing a debtor’s otherwise valid exemption claim based on bad faith or other equitable considerations; and (b) does not, in fact, denude a bankruptcy court of its essential “authority to respond to debtor misconduct”5 associated with exemptions by imposing meaningful sanctions. Accordingly, pursuant to this court’s inherent power to sanction, under section 105(a) of the Bankruptcy Code (as later explained herein), the court is further ordering that the Debtor and Debtor’s counsel reimburse: (a) the Trustee and his counsel for $25,245 in total fees, and (b) his former wife, Estela, and her counsel for $5,109.50 in total fees — all of which the court determines to have been incurred as a result of the Debtor’s bad faith actions in abruptly amending his homestead exemption only after the Trustee, Estela, and this court had expended significant resources in preparing for a contested hearing that should have never gone forward.6
I. JURISDICTION
Bankruptcy subject matter jurisdiction exists in this contested matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding, pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (O), and, thus, the bankruptcy court has statutory authority to enter a final order.. Moreover, the court has determined that it has Constitutional authority to enter a final order in this matter as well, since it involves a dispute that can only arise in a bankruptcy case.7 Venue is proper before this court, *147pursuant to 28 U.S.C. §§ 1408 and 1409. This Memorandum Opinion constitutes the court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052, as incorporated into contested matters, pursuant to Federal Rule of Bankruptcy Procedure 9014. Where appropriate, a finding of fact should be construed as a conclusion of law and vice versa.
II. FINDINGS OF FACT
1.On September 28, 2013, Gonzalo Sal-dana (the “Debtor” or “Mr. Saldana”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, Case No. 13-34861 (the “Bankruptcy Case”). At the time of the filing, the Debtor owned and operated a large tree-farming business known as Mexia Nursery & Tree Farm, Inc. (“Mexia Nursery”) and also owned a separate business that was no longer operating known as Mexia Tire Company, LLC (“Mexia Tire”). The two business entities each filed voluntary petitions for relief under Chapter 11 at the same time as the Debtor. Initially, all three cases were administratively consolidated. After several months of attempting to reorganize, the Debtor and the businesses are now in Chapter 7 liquidation cases.8 John H. Litzler (the “Trustee”) was appointed as the Chapter 7 Trustee of the Debtor’s Bankruptcy Case and continues to serve in that capacity. The two business entities each have their own, separate Chapter 7 trustees.
2. Although there was uncertainty at the commencement of the three cases regarding the amount of claims that would be asserted against the Debtor, the largest creditor in the Debtor’s case, by far, has turned out to be his former wife of 39 years, Estela B. Saldana (“Estela”), who asserts a claim against him in excess of $2.5 million as a result of a prepetition Divorce Decree entered by the 13th Judicial District Court of Navarro County, Texas, on October 12, 2011 (the “Divorce Decree”).9 There were fifteen proofs of claim filed in the Debtor’s case: (a) ten of which were filed by property taxing authorities; (b) one of which was Estela’s; (c) two filed by financial institutions; (d) one relating to a credit card; and (e) one by a utility. The total dollar amount of the proofs of claim filed was $2,721,831.68, and Estela’s claim was $2,551,568.41 of this amount. Thus, there are $170,263.20 of “other” prepetition creditors in the Debt- or’s case, besides Estela. Restated, Estela asserts 93.74% of the prepetition claims in this case and the other creditors assert 6.26% of the prepetition claims.
3. The Debtor had numerous parcels of real property at the time he filed bankruptcy in several counties, including Navarro, Limestone, Henderson, and Freestone Counties (the “Real Property”). The Divorce Decree stated that Estela was granted an equitable lien in the Real Property as security for the monetary award granted to her in the Divorce Decree.
*1484. On September 25, 2018, the Debtor filed his Original Schedules in the Bankruptcy Case.10 On June 2, 2014, the Debt- or filed his Amended Schedules A, H and E.11 On August 19, 2014, the Debtor filed his Amended Schedules in connection with the conversion of his case, in which the Debtor amended Schedules A and B.12 The Debtor listed the current value of all of his Real Property at $1,255,490 in his Amended Schedules.
5. Despite the various amendments to his Bankruptcy Schedules, the Debtor consistently — for the first 15-plus months of his case — claimed on his Schedule C, as his exempt homestead under Texas law,13 four separate parcels of his Real Property, which he valued at $401,952.72 (the “Homestead Exemption”):
• .50 AC, TRACT 5A, A-10021; D.D. ANDERSON ABST. AKA 14469 STATE HIGHWAY 14, WORTHAM, TEXAS, NAVARRO COUNTY (“Parcel 1 — the Homesite”);
• 22.706 ACRES, TRACT 6, A 10021; D.D. ANDERSON ABST. AKA STATE HIGHWAY 14, WORTHAM, TEXAS, NAVARRO COUNTY (“Parcel 2”);
• 48.30 ACRES MORE OR LESS, TRACT A-10021 D.D.ANDERSON ABSTRACT, NAVARRO COUNTY, TEXAS AKA STATE HWY 14, WORTHAM, TEXAS (“Parcel 3”); and
• 141.24 ACRES, TRACT 2, A-10416; HT & B RR CO.ABST., AKA STATE HWY 14, WORTHAM, TEXAS, NAVARRO COUNTY (“Parcel 4”)
(Parcel 1 — the Homesite, Parcel 2, Parcel 3, and Parcel 4 will collectively be referred to as the “French Properties”).
6.On September 26, 2014, the Trustee filed his Objection to Exemptions, which included an objection to the Debtor asserting a Homestead Exemption in the French Properties (the “Original Objection to Exemptions”).14 In the Original Objection to Exemptions, the Trustee objected to the Debtor’s Homestead Exemption on the following bases: (a) the Debtor did not have a present right to occupy Parcel 1 — the Homesite on the French Properties pursuant to the Divorce Decree (the Debtor had, at best, a future interest in Parcel 1 — the Homesite, which did not entitle him to homestead protection in that property);15 (b> as the Debtor had no present right in Parcel 1 — the Homesite and, in fact, he was not using any of the four parcels of the French Properties as a residence, the Debtor did not have the right to claim any *149of the other French Properties (which were non-eontiguous tracts) as part of a Homestead Exemption (“for non-contiguous tracts to qualify as part of a rural homestead, one of the tracts must be used as a residence and the other tract must be used for the comfort, convenience or support of the family”)16; (c) the Debtor was attempting to exceed the 200 acres permitted by Texas statute for a homestead17 (the four Parcels added up to 212.746 of total acreage) and, therefore, any amount in excess of 200 acres should not be exempt; and (d) Estela held an equitable lien against the French Properties which might further impair the Debtor’s asserted exemptions.18 On October 28, 2014, Estela filed a Joinder in the Trustee’s Original Objection to Exemptions.19
7. On October 27, 2014, the Debtor filed his Response Opposed to the Original Objection to Exemptions, in which the Debtor defended his Homestead Exemption in the French Properties.20
8. Meanwhile, after filing the Original Objection to Exemptions, the Trustee was engaged with various other case administration tasks. As noted earlier, the Debt- or had numerous parcels of Real Property in four different counties. Among this Real Property were two parcels of property that the Debtor owned, but that his business entity known as Mexia Nursery had used as its place of business (hereinaf*150ter, the “Business Properties — 60 Acres”). The Business Properties — 60 acres were more particularly described as follows in the Debtor’s Schedule B and were valued at $273,870:
• 25 ACRES MORE OR LESS OUT OF' THE M. DECANTONA SURVEY, ABSTRACT 7, FREESTONE COUNTY, TEXAS AKA 767 FM 1366 MEXIA, TEXAS (the “25 Acre Tract”); and
• 35 ACRES MORE OR LESS, OUT OF THE M. DECANTONA SURVEY, ABSTRACT 7, FREESTONE COUNTY, TEXAS, AKA 767 FM 1366, MEXIA TEXAS (the “35 Acre Tract”) (collectively, the “Business Properties — 60 Acres”)
On October 10, 2014, the Trustee filed a motion to sell the Business Properties — 60 Acres (which had not been claimed as exempt), free and clear of hens, claims and encumbrances pursuant to 11 U.S.C. § 363(b) and (f) (the “Sale Motion/Business Properties”) and a motion for expedited hearing for same.21 The court granted the motion for an expedited hearing and held such hearing on October 23, 2014.
9. The Trustee, at the hearing regarding the Sale Motion/Business Properties, announced his business judgment that it would be desirable to try to sell such property at an auction, to be conducted concurrently with an auction to sell certain business personal property located thereon (which business personal property was owned by the related debtor, Mexia Nursery — the Debtor’s wholly owned company). The Trustee would work cooperatively with the trustee of the Mexia Nursery case, and both an auctioneer and a real estate broker had been retained. The Trustee proposed a $315,000 reserve price for the Business Properties — 60 Acres. Neither the Debtor, nor any other party in interest, objected to the sale of the Business Properties — 60 Acres, and the Debtor did not appear at the hearing on the Sale Motion/Business Properties. On October 27, 2014, the court entered an Order granting the Sale Motion/Business Properties, and on October 30, 2014, the court entered an Amended Order granting the Sale Motion/Business Properties (hereinafter, the “Sale Order/ Business Properties”).22 In the Sale Order/Business Properties, the court (1) granted the Trustee authority to sell the Business Properties — 60 Acres, specifying that any valid liens would attach to the proceeds of the sale; (2) authorized the Trustee to sell the Business Properties — 60 Acres through the mechanism of an auction to be held by Rosen Systems, Inc., scheduled for October 28, 2014; and (3) permitted the Trustee to immediately disburse $200,000.00 to Estela from any sale proceeds. To be clear, at the time that the Sale Order/Business Properties was entered by the court, the Business Properties — 60 Acres were not claimed by the Debtor as exempt, and the Debtor was asserting his Homestead Exemption in the French Properties.
10. While the Business Properties — 60 Acres were ultimately included in the auction and there was at least one interested bidder for the land, the Trustee did not receive an offer high enough to realize the $315,000 reserve price (which he had thought to be the fair market value of the property), and the property was not sold and remains in the estate. The Debtor was at the auction, his current wife participated in the auction, and the Debtor never raised any complaints about the Trustee’s efforts. In any event, while the business personal property at the site was success*151fully auctioned off for more than a $1 million (realized by the Mexia Nursery bankruptcy trustee), the Trustee still holds the Debtor’s numerous parcels of Real Property (including the Business Properties — 60 Acres and the French Properties).
11. Subsequently, the Trustee refocused his attention on the French Properties and the Homestead Exemption dispute. On January 5, 2015, the court commenced a hearing on the Trustee’s Original Objection to Exemptions and responses thereto (the “Original Exemption Hearing”). At the start of the Original Exemption Hearing, this court — noting that a significant time estimate had been given for the length of the hearing and numerous exhibits had been designated— repeatedly questioned Debtor’s counsel as to what the disputed facts were and why the Debtor anticipated needing significant time to present evidence. From the pleadings, it appeared as though the Debtor’s right to assert the Homestead Exemption in the Frénch Properties boiled down to mostly one legal issue (whether the Debtor had “a present possessory interest” in the French Properties — since he did not live thereon or have the right to present possession pursuant to the Divorce Decree). The court was concerned about expending unnecessary judicial resources on what could be a fairly straightforward hearing. In response, counsel for the Debtor unequivocally asserted that the Debtor had a right to claim the French Properties as his homestead and that counsel for the Debtor needed to present evidence to the court as to why such exemption was valid.23
*15212. So the hearing began. The Debt- or took the witness stand. Documentary exhibits were discussed. The Debtor testified that he thought he had a present right to possession of Parcel 1 — the Homesite of the French Properties, even though he had not paid Estela the full $2.6 million awarded to her in the Divorce Decree, because (he said) Estela was not living there now.24 He thought (albeit mistakenly) that the Divorce Decree permitted him possession whenever Estela moved from Parcel 1 — Homesite of the French Properties, or the latter of June 2011 or after he paid Estela a full $2.6 million.25 The Debtor testified about having lived on the Parcel 1 — the Homesite of the French Properties once before (prior to 2009) and still paying for the mortgage, taxes, and utilities on it. Then, more than an hour into the Original Exemption Hearing, the questioning by Debtor’s Counsel seemed to be pivoting toward asking about the Business Properties — 60 Acres. The Debtor unequivocally testified that he and his current wife had been living at an apartment at the Business Properties — 60 Acres for several years; he testified about its proximity to Parcel 4 of the French Properties; and he testified about what expenses the Debtor was paying for this property and for various other non-French Properties real estate. When pressed to explain the relevance of this testimony (because the testimony was going on at substantial length), for the first time — approximately 1 hour and 6 minutes after the hearing had started — counsel for the Debtor announced that the Debtor would be claiming the Business Properties — 60 Acres as his designated Homestead Exemption. 26 When pressed as to why we were all just learning of this, Debtor’s counsel simply suggested that this is what the facts were showing — that Debtor was living on the 35-acre tract of the Business Properties — 60 Acres.27
13. Thus, after pleadings were filed addressing the legal merits of the Debtor having claimed the French Properties as his homestead, after opening statements were made regarding the French Properties, and after significant questioning occurred regarding what the facts and issues were with regard to the French Properties, it was announced that the Debtor would be changing his exemptions to now assert a homestead interest in: (a) the Business Properties — 60 Acres (or at least 35 acres of it on which he was living); plus (b) Parcel 4 of the French Properties (the 141.24 acre tract, which he had already been claiming as exempt, and was not contiguous to the Business Properties — 60 Acres, just as it was not contiguous to the French Properties). Anecdotally, there was disagreement at the hearing as to whether the Trustee and his professionals *153(or the court, for that matter) had reason to know that the Debtor and his current wife were living at the Business Properties — 60 Acres.28 In any event, the Trustee and Estela vehemently objected to this announced change in strategy — arguing estoppel theories should preclude the abrupt about-face, and bad faith litigation tactics were at play (particularly since the Debtor had claimed the four parcels of French Properties as his Exempt Homestead for 15 months; the Trustee’s and Estela’s objections thereto had been on file for more than three months; the lawyers had prepared for and litigated at a hearing that had already gone on for more than an hour regarding whether the Debtor could validly claim the French Properties as his Homestead Exemption; and the Trustee had — just two-and-a-half months earlier— expended extensive time and effort trying to sell the Business Properties — 60 Acres with no hint from the Debtor or his counsel that they might claim it as exempt). Debtor’s counsel responded by stating that Federal Rule of Bankruptcy Procedure 1009(a) gives a debtor the general right to amend his Schedules, including a Schedule of Exemptions, at any time before his case is closed. It appeared to the court that Debtor’s counsel must have decided that it would be necessary to change strategies halfway through the Original Exemption Hearing — when the Debtor’s testimony was, arguably, not being very helpful to the position that the French Properties could validly be claimed as exempt.
14. In any event, in light of this abrupt announcement, and out of concerns for due process, Rule 1009(a), and other considerations, the court issued an Order Granting in Part Trustee’s Objection to Exemptions, Continuing Hearing in Part on Trustee’s Objection to Exemptions and Order to Show Cause (the “Order to Show Cause”).29 The Order to Show Cause: (1) sustained the Trustee’s Objection to the Debtor’s claim of a homestead exemption in Parcel 1 — the Homesite, Parcel 2, and Parcel 3 of the French Properties (after all, the Debtor’s counsel had just announced that the Debtor was abandoning a claim of exemption on these three parcels);30 (2) continued the hearing on the Trustee’s Objection to the Debtor’s claim of a Homestead Exemption in Parcel 4 of the French Properties (the 141.24-acre, non-contiguous tract); and (3) gave the Debtor a deadline of 11:59 p.m. on January 7, 2015 to file an Amended Schedule C claiming the Business Properties; — 60 Acres (along with the non-contiguous Parcel 4 of the French Properties) as his exempt homestead property. The Order to Show Cause also provided that if the Debtor chose to file an Amended Homestead Exemption, as had been orally announced, he would need to show cause: (1) whether bad faith or estoppel doctrines might bar him from making such a late date amendment of Schedule C, under the facts and circumstances of this Bankruptcy Case; (2) why the Debtor and counsel did not disclose the potential for a Schedule C *154amendment at the beginning of the January 5, 2015 hearing, when pointedly questioned by the court as to what the disputed facts were going to be that day;31 and (3) why the Debtor should not be ordered to pay the fees and expenses of the Trustee, the Trustee’s counsel, and counsel for Estela for their costs and expenses in preparing for a contested hearing on the Debtor’s Homestead Exemption as it currently existed at the start of the Original Exemption Hearing.
15.On January 7, 2015, as anticipated, the Debtor filed his Amended Schedules A, B, and C.32 Debtor’s Amended Schedule C, as expected from the turn of events at the Original Exemption Hearing, reflected that the Debtor was now asserting an exemption in the Business Properties — 60 Acres, as well as Parcel 4 of the French Properties (still), under Tex. Const. Art. 16 §§ 50, 51 and Tex. Prop.Code §§ 41.001 and 41.002, with the value of the exemption listed as $464,040.00 (hereinafter, the “Amended Homestead Exemption”). To be clear, the Amended Homestead Exemption was made more than 15 months after the Debtor filed the Bankruptcy Case; more than three months after the Original Objection to Exemptions was filed; more than two months after the court entered the Sale Order/ Business Properties (that allowed for a sale of a significant portion of the property now included in the Amended Homestead Exemption; as happenstance would have it, the property did not sell); and more than an hour and six minutes after the court began hearing arguments and testimony about the merits of the Debtor’s exemption claim in the French Properties.
16. On February 4, 2015, the Trustee filed his Amended Objection to the Amended Homestead Exemption, to which Estela filed a joinder, on February 9, 2015.33
17. On February 6, 2015, the Trustee filed his Notice of Fees and Expenses Incurred in Relation to Debtor’s Original and Amended Exemption, pursuant to the court’s Order to Show Cause, requesting fees and expenses in the amount of $26,647.24, which represented the amounts expended by Trustee’s counsel, Holder Law, for services rendered to the bank*155ruptcy estate in relation to the Debtor’s original and amended exemptions.34 On February 9, 2015, the Trustee filed a second Notice of Fees and Expenses Incurred in Relation to Debtor’s Original and Amended Exemptions, requesting fees of $25,905.50, which represented the amount expended by the Trustee’s ' accounting firm, Litzler, Segner, Shaw & McKenney, L.L.P. (“LSSM”), for services rendered to the bankruptcy estate in relation to the Debtor’s original and amended exemptions including valuation analysis.35 Pursuant to an Amended Supplement to Notice of Fees and Expenses Incurred in Relation to Debtor’s Original and Amended Exemptions,36 Holder Law requested an additional $1,817.50 in fees and LSSM requested an additional $3,680.50 in fees for responding to the Debtor’s request for production of documents in relation to each parties’ original Notice of Fees and Expenses. The Amended Supplement also requested a $400 decrease in the fees asserted by Holder Law as well as a $2,309 decrease in the fees asserted by LSSM. Accordingly, the total fees and expenses requested by Holder Law was $28,064.74 and the total fees requested by LSSM was $27,277. for a total of $55,341.74 sought by the Trustee.
18.On February 9, 2015, Estela, pursuant to the court’s Order-to Show Cause, also filed her Notice of Fees Incurred in Relation to the Debtor’s Change of Exemptions which requested reimbursement of $5,109.50 of attorney’s fees that were billed to Estela by her law firm, Cavazos, Hendricks, Poirot & Smitham, P.C., in connection with preparations for the .Original Objection Hearing.37
19. On February 19, 2015, the Debtor objected to the Notices of Fees that had been filed by the Trustee (on behalf of Holder Law and LSSM) and Estela.38 The Debtor also filed a Combined Response in Opposition to Trustee’s Objections to Amended Exemptions and Brief in Support Thereof and Response to Motion to Show Cause.39
20. On March 30, 2015, the court held a continued hearing on the Trustee’s Original Objection to Exemptions, a hearing on the Trustee’s Amended Objection to Exemptions, and a hearing on this court’s Order to Show Cause.
III. CONCLUSIONS OF LAW
A. First, Can the Debtor Claim a Valid Homestead Exemption in (collectively) the Business Properties — 60 Acres, plus Parcel 4 of the French Properties, Under Texas Law (Putting Momentarily Aside the Estoppel and Potential Bad Faith Issues)?
Before determining whether the Debtor should be estopped or otherwise barred from amending his Homestead Exemption so belatedly and abruptly (at allegedly great surprise, expense, and inconvenience to the Trustee and Estela), the court must first determine whether the Debtor has a valid legal basis under Texas law to assert a homestead exemption in (collectively): (i) the Business Properties — 60 Acres, plus (ii) the non-contiguous Parcel 4 of the French Properties. The commencement of a bankruptcy estate creates an estate encompassing all legal and equitable, interests in property of the debt- *156or as of the petition date, including any property that might be exempt.40 The Bankruptcy Rules provide that, in any hearing concerning an objection to exemptions, the objecting party has the burden of proving that the exemptions are not properly claimed.41 The facts and law existing as of the date of the petition govern a debtor’s claimed exemptions.42 Moreover, a debtor in Texas is permitted to exempt property from the bankruptcy estate using either the federal exemptions as set forth in section 522(d) of the Bankruptcy Code or under applicable state law.43 Here, because the Debtor elected to exempt his property under Texas law, this court must pivot to Texas law to interpret his exemption rights.44
. The State of Texas (through its Constitution and statutory regime) famously recognizes one of the broadest homestead exemptions in the United States.45 Under Texas law, a homestead claimant has the burden of establishing that his property qualifies as a homestead.46 Among other things, the claimant must have a possessory interest in the homestead he or she is claiming.47 But “[m]ere ownership or possessory interest is not of itself sufficient to establish a homestead.”48 A claimant must show “both (i) overt acts of homestead usage and (ii) the intention on [his] part ... to claim the land as a homestead.”49 Beyond these basic fundamentals, individuals are then entitled to either a rural homestead or an urban homestead. Here, the Debtor is seeking to claim the Business Properties — 60 Acres and Parcel 4 of the French Properties as his rural homestead. No party has objected to the Debtor’s assertion that his claimed homestead is in a rural area, as opposed to an urban area.50
First, turning to the Texas Constitution, Article 16, Section 51 of it states:
The homestead, not in a town or city, shall consist of not more than two hundred acres of land, which may be in one or more parcels, with the improvements thereon; the homestead in a *157city, town or village, shall consist of lot or contiguous lots amounting to not more than 10 acres of land, together with any improvements on the land; provided, that the homestead in a city, town or village shall be used for the purpose of a home, or as both an urban home and a place to exercise a calling or business, of the homestead claimant, whether a single adult person, or the head of a family; provided also, that any temporary renting of the homestead shall not change the character of the same, when no other homestead has been acquired; provided further that a release or refinance of an existing lien against a homestead as to a part of the homestead does not create an additional burden on the part of the homestead property that is unreleased or subject to the refinance, and a new lien is not invalid only for that reason.51
Next, turning to the Texas Property Code, it similarly provides, at Section 41.002, that:
if used for the purposes of a rural home, the homestead shall consist of: (1) for a family, not more than 200 acres, which may be in one or more parcels, with improvements thereon-, or (2) for a single, adult person, not otherwise entitled to a homestead, not more than 100 acres, which may be in one or more parcels, with the improvements thereon.52
Courts have interpreted the Texas Constitution and Property Code to mean that “a rural homestead may include non-contiguous tracts.”53 “However, for non-contiguous tracts to qualify as part of a rural homestead,, one of the tracts must be used as a residence and the other tract must be used for the comfort, convenience or support of the family.”54 Texas courts have recognized that cattle grazing or hunting, when coupled with some additional usage, can demonstrate that the non-contiguous tract qualifies as a rural homestead.55
Here, the Business Properties — 60 Acres are composed of two contiguous tracts (a 35-acre tract and a 25-acre tract), and the Debtor testified that he has resided on the Business Properties — 60 Acres with his current wife for several years now. There was no evidence to the contrary — other than the fact that, for *158whatever reason, he had used the French Properties address in Wortham, Navarro County, Texas as his residential address on his Voluntary Petition and an Amended Voluntary Petition. Thus (estoppel and bad faith issues aside), it appears to this court that the Debtor would be permitted to exempt the Business Properties — 60 Acres as his Texas homestead (ie., a rural homestead — since no one has argued or presented evidence to the contrary). Parcel 4 of the French Properties (the 141.24-acre tract), on the other hand, is nonconti-guous, and is approximately 15 miles from the Business Properties — 60 Acres (in a different county), so the Debtor would need to show that he is using it for the comfort, convenience, or support of his family in order to include it as part of his designated rural homestead exemption under Texas law.56
Here, the Debtor’s only testimony regarding his usage of the 141.24-acre tract was that he used it to “grow some trees” and also had some cows on the property at some point.57 The Debtor also testified that, once it had incorporated, he had allowed the Debtor’s now defunct business, Mexia Nursery,58 to grow some trees on the 141.24-acre tract. However, not only was the Debtor’s testimony very vague as to when, what and where this actually occurred, but the court observes that in the Debtor’s Amended Schedule B (which was filed on January 7, 2015, per this court’s Order to Show Cause), at question 31, which requires the Debtor to list any “Animals” he owns, the Debtor stated that he only owned four horses (no cows), and at question 32, which requires the Debtor to list “Crops-growing or harvested. Give Particulars,” the Debtor listed nothing. In the Schedules originally filed by the Debt- or in this case on September 25, 2013, at question 31, the Debtor stated that he owned “All livestock awarded by the just and right judgment of the 13th District Court, Navarro County, Texas in Case # 10-19768-CV, In re Marriage of Gonzalo and Estela Saldana, filed October 14, 2011. AT TIME OF DECREE; 29 COWS, 2 BULLS, 17 CALVES, 2 HORSES, located at 14469 SH 14, Wortham, Texas 76693 and/or various other real property owned by the Debtor. ALL CATTLE SOLD. DEBTOR NOW OWNS ONLY 4 HORSES.”59 Thus, it appears to the court, in actuality, that the Debtor no longer has any cows on the 141.24-acre tract (to the extent the Debtor’s testimony suggested otherwise, the court did not find his testimony to be credible), and that any trees that he was ever growing there were for a business that is no longer operating. In conclusion, the court finds that the totality of the evidence it has before it, even construing such evidence liberally,60 does not rise to the level of using the 141.24-acre *159tract for the “comfort, convenience, or support of his family.” Even the four horses that the Debtor claims to still own are located, according to the Debtor’s testimony, on the Business Properties — 60 Acres.61 The court heard no-credible evidence to reasonably conclude that the 141.24 acres fits into the category of non-contiguous rural property that is used or necessary for the “comfort, convenience, or support” of the Debtor’s family. The court is sustaining the Trustee’s Original Objection and the Amended Objection as to Parcel 4 of the French Properties (ie., the 141.24-acre tract) and will not permit the Debtor to exempt this property as part of his rural homestead. Accordingly, the Debtor would only be entitled to claim a homestead exemption in the Business Properties — 60 Acres (assuming estoppel and bad faith issues do not otherwise preclude him).
B. Is the Debtor Nonetheless Barred in Asserting the Amended Homestead Exemption Due to Bad Faith/Prejudice to Creditors or Judicial Estoppel?
While the Debtor appears to have met the standard, under state law, to exempt the Business Properties — 60 Acres as his homestead, the court next turns to whether the application of certain equitable theories, including bad faith/prejudice to creditors and judicial estoppel, would nonetheless bar the Debtor from amending his Bankruptcy Schedules, at such a late stage, to change his exemptions — particularly in a situation in which the parties and court had already conducted half of a hearing regarding the Original Exemption Objections.
1. Bad Faith/Prejudice to Creditors
When a debtor files a Chapter 7 bankruptcy petition, all of the debtor’s assets become property of the bankruptcy estate subject to the debtor’s right to reclaim certain property as “exempt.”62 The Bankruptcy Code places a single limitation on the debtor’s ability to exercise this right: That the debtor “file a list of property that the debtor claims as exempt.”63 The Bankruptcy Rules, in turn, specify this procedure, requiring the debtor to “list the property claimed as exempt under § 522 of the Code on the schedule of assets required to be filed by Rule 1007,”64 and to file this schedule “with the petition or within 14 days thereafter.”65 Moreover, significantly, Federal Rule of Bankruptcy Procedure 1009 (“Rule 1009”) provides that a “schedule ... may be amended by the debtor as a matter of course at any time before the case is closed,” and the Fifth Circuit has interpreted Rule 1009 as prohibiting courts *160from denying a debtor’s request to amend its schedules, unless a creditor demonstrates the debtor’s bad faith or that there would be prejudice to creditors in allowing such amendment.66 The Fifth Circuit adopted this approach from the Eleventh Circuit’s ruling in In re Doan, where the Eleventh Circuit held that “a court may deny leave to amend if there is a showing of the debtor’s bad faith or of prejudice to the creditors.”67 However the Eleventh Circuit’s reasoning (and ultimate ruling) in In re Doan (as later adopted by the Fifth Circuit) is now dubious, at best, as a result of the Supreme Court’s recent decision in Law v. Siegel.68
In Law v. Siegel, the Supreme Court addressed the scope and application of section 105(a) of the Bankruptcy Code to remedy an' egregious case of bad faith conduct by a debtor in connection with his exempt homestead. Specifically in Law v. Siegel, the debtor, who filed a Chapter 7 case in the State of California, owned a house that he valued at $863,348, of which he claimed $75,000 as exempt under California law.69 The debtor had also claimed that there were two voluntary liens on the property (one held by Washington Mutual, who was owed $147,156.52, and a second in favor of Lin’s Mortgage & Associates, who was allegedly owed $156,929.04). Since these two liens exceeded the nonexempt value, this left no equity for creditors.70 The Chapter 7 trustee ultimately challenged the lien held by Lin’s Mortgage & Associates, in a subsequent adversary proceeding, where it was ultimately discovered that the Lin lien was a fiction created by the debtor to fraudulently preserve more equity in the home.71 The trustee spent over $500,000 in prosecuting the fraudulent lien and was ultimately successful.72 When the trustee later sold the home, he sought to surcharge the debtor’s $75,000 homestead exemption with the costs that he had expended in avoiding the fraudulent lien.73 The bankruptcy court allowed the surcharge and was affirmed by the bankruptcy appellate panel for the Ninth Circuit, but, the Supreme Court ultimately reversed.
Specifically, the Supreme Court noted that the surcharge conflicted with two subsections of the Bankruptcy Code: section 522(b) of the Bankruptcy Code, which allows a debtor to exempt property in the first place, and section 522(k) of the Bankruptcy Code, which expressly limits the use of exempt property to pay for administrative expenses.74 The Court also noted that section 522 of the Bankruptcy Code, “sets forth a number of carefully calibrated exceptions and limitations,” which relate to the debtor’s misconduct (specifically, sections 522(c), 522(o), and 522(q) of the Bankruptcy Code), and that this was yet a further demonstration that courts were not *161empowered to create additional exceptions.75 The Supreme Court acknowledged that its holding forced trustees to shoulder a heavy financial burden resulting from a debtor’s egregious misconduct, and that it may produce inequitable results for trustees and creditors in other cases, but, in crafting the provisions of section 522 of the Bankruptcy Code, the Supreme Court noted that “Congress balanced the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors and the same can be said of the limits imposed on recovery of administrative expenses by trustees.”76 Thus, the Supreme Court held that it was not the place of courts to alter the balance struck by the statute.77 In summary, the Supreme Court held that the surcharge (ordered by the bankruptcy court under the alleged authority of section 105) exceeded the court’s authority, as it was a circumvention of the other specific provisions of sections 522(b) and (k). The surcharge, while intended to compensate the estate for monetary costs imposed by the debtor’s misconduct, would equate to an outright denial of his homestead exemption. The deadline to object to his homestead exemption expired before the surcharge was imposed. Moreover, there has to be a valid statutory basis to disallow an exemption (in the Code or under State law). “Section 522 does not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate.”78
Although the holding in Law v. Siegel might initially appear to be narrow — applicable only to the notion of attempting to equitably surcharge an exemption — the court believes that the Supreme Court has essentially spoken on the issue of whether a court may disallow a debtor’s claim of exemption based on bad faith or delay or prejudice to creditors. Specifically, the Supreme Court noted that:
a handful of courts have claimed authority to disallow an exemption (or to bar a debtor from amending his schedules to claim an exemption, which is much the same thing) based on the debtor’s fraudulent concealment of the asset alleged to be exempt. See, e.g., In re Yonikus, 996 F.2d 866, 872-873 (C.A.7 1993); In re Doan, 672 F.2d 831, 833 (C.A.11 1982) (per curiam); Stewart v. Ganey, 116 F.2d 1010, 1011 (C.A.5 1940). He [the trustee] suggests that those decisions reflect a general, equitable power in bankruptcy courts to deny exemptions based on a debtor’s bad-faith conduct. For the reasons we have given, the Bankruptcy Code admits no such power.79
Again, while the issue in Law v. Siegel was whether a trustee could surcharge a debt- or’s exempt property based upon a debt- or’s egregious acts during a bankruptcy case, the court concludes that Law v. Seigel, nonetheless, implicitly overruled prior case law (including the Fifth Circuit’s holding in In re Williamson which relied on the Eleventh Circuit’s holding in In re Doan) that enabled a bankruptcy court to deny an amendment to the debtor’s homestead exemption based on bad faith or prejudice to creditors.80
*162Notably, the Supreme Court in Law v. Siegel did appear to leave open the possibility that state law may offer some independent basis to disallow an otherwise appropriate exemption that was created under state law. Specifically, the Supreme Court stated that “[it] is of course true that when a debtor claims a state-created exemption, the exemption’s scope is determined by state law, which may provide that certain types of debtor misconduct warrant denial of the exemption.”81 Here, the Debtor has asserted his homestead exemption utilizing the Texas homestead statutes; thus, if Texas law provides a mechanism for denying the Debtor’s ability to change his homestead exemption freely, the court may be empowered to deny' the Debtor’s right to amend his Bankruptcy Schedules in this case. The Trustee appears to argue that judicial es-toppel could be one of the state law mechanisms alluded to by the Supreme Court in Law v. Siegel.
2. Judicial Estoppel
The doctrine of judicial estoppel prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.82 Here, the Trustee has argued that the Sale Order/Business Properties entered by this court judicially estops the Debtor from amending his homestead exemption since the Sale Order/Business Properties contemplates a sale of such property, free and clear of all liens, claims and encumbrances, pursuant to section 363(f) of the Bankruptcy Code (which would arguably include a homestead exemption claimed by the Debtor) and the Debtor never objected to entry of the Sale Order/Business Properties or argued that he had a homestead interest in the Business Properties — 60 Acres. While it is true that judicial estoppel has been developed through state courts in Texas, the Trustee has cited to no case (and the court was unable to find one) in which a Texas court has applied judicial estoppel to disallow a statutory homestead exemption.83 As a result, the court declines the Trustee’s invitation to create a “judge-made” exception to Texas homestead law (which was admonished by the Supreme Court in Law v. Siegel) and concludes that judicial estoppel cannot be applied to prevent the Debtor from amending his existing exemptions and asserting a homestead *163exemption in the Business Properties — 60 Acres.
In summation, since the holding in Law v. Siegel has taken away a bankruptcy court’s discretion to grant or withhold exemptions based on equitable considerations (i.e., there must be a valid statutory basis to disallow an exemption under the Bankruptcy Code or some basis under State law), and since Texas law provides no independent avenue for doing so, the court concludes that there is no legal basis to preclude the Debtor from amending his Schedules to assert a homestead exemption in the Business Properties — 60 Acres, even at a very late date that was prejudicial to creditors and may have hinted at bad faith. Nevertheless, the Supreme Court in Law v. Siegel did state that ample authority remained to address a debtor’s misconduct in connection with his exemption claims or alleged bad faith litigation conduct associated therewith, including possible sanctions under the Bankruptcy Rules, section 105(a) of the Bankruptcy Code, or a bankruptcy court’s inherent powers. Thereafter, any monetary sanctions may be enforced through the normal procedures for collecting a money judgment. Thus, the court now explores whether there are grounds to impose monetary sanctions (in the form of fee shifting) as requested by the Trustee and Estela.
C. Fee Shifting
To be clear, the Supreme Court in Law v. Siegel stated that:
Our decision today does not denude bankruptcy courts of the essential “authority to respond to debtor misconduct with meaningful sanctions.” Brief for United States as Amicus Curiae 17. There is ample authority to deny the dishonest debtor a discharge. See § 727(a)(2)-(6). (That sanction lacks bite here, since by reason of a postpetition settlement between Siegel and Law’s major creditor, Law has no debts left to discharge; but that will not often be the case.) In addition, Federal Rule of Bankruptcy Procedure 9011— bankruptcy’s analogue to Civil Rule 11 — authorizes the court to impose sanctions for bad-faith litigation conduct, which may include “an order directing payment ... of some or all of the reasonable attorneys’ fees and other expenses incurred as a direct result of the violation.” Fed. Rule Bkrtcy. Proc. 9011(c)(2). The court may also possess further sanctioning authority under either § 105(a) or its inherent powers. Cf. Chambers, 501 U.S. at 45-49, 111 S.Ct. 2123. And because it arises postpetition, a bankruptcy court’s monetary sanction survives the bankruptcy case and is thereafter enforceable through the normal procedures for collecting money judgments. See § 727(b). Fraudulent conduct in a bankruptcy case may also subject a debtor to criminal prosecution under 18 U.S.C. § 152, which carries a maximum penalty of five years’ imprisonment.84
Thus, while the bankruptcy court does not have the authority to deny the Debtor his right to amend his exemptions, a bankruptcy court, more generally, may impose sanctions, including fee shifting, pursuant to Federal Rule of Bankruptcy Procedure 9011 (“Rule 9011”) or section 105(a) of the Bankruptcy Code, to remedy bad faith litigation tactics used by a debtor and/or his counsel. Thus, the court explores below what may be appropriate in this regard.
l'. Federal Rule of Bankruptcy Procedure 9011.
The purpose of Rule 9011 is to deter litigation abuse that is the result of a *164particular pleading, written motion, or other paper and make proceedings more expeditious and less expensive.85 It has been interpreted as imposing on counsel the need to “stop, look, and listen,” before signing and filing documents.86 Rule 9011(b) states as follows:
(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 or to cause unnecessary delay or needless increase in the cost of litigation (2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification or reversal of existing law or the establishment of new law; (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 ... 87
Those who offend Rule 9011(b) may then be sanctioned under Rule 9011(c), which provides that “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 subsection (b) or are responsible for the violation.”88 As stated above, the focus of Rule 9011(b) is a petition, pleading, written motion, or other paper, which here, would be the filing of the Debtor’s Amended Schedule C.89 An attorney signing a document is typically the person against whom a Rule 9011 sanction should be imposed and a represented party should not generally be sanctioned in the absence of circumstances indicating that the client is personally aware of, or responsible for, the proscribed action.90 Because Rule 9011 is substantially identical to Federal Rule of Civil Procedure 11 (“Rule 11”), courts often refer to Rule 11 jurisprudence when considering sanctions under Rule 9011.91
Looking at the various reasons that this court could impose sanctions upon the Debtor and/or his counsel under Rule 9011(b), the only ones that could appear to apply in this case are whether or not the filing of: (a) the Debtor’s Original Schedule C (and the later advocating for it); and/or (b) the Debtor’s Amended Schedule C (and the later advocating for it) was or were made for improper purpose. The focus of a claim for sanctions under the *165“improper purpose” clause is on why the attorney/client filed the legal pleading at issue, and Rule 9011(b)(1) sets forth a nonexclusive list of various improper purposes such as harassment, to cause unnecessary delay, or to needlessly increase the cost of litigation.92 Because direct evidence of motive, intent or purpose is rarely available at hearings, this court must look to objectively ascertainable circumstances that support an inference of improper purpose under Rule 9011(b)(1) and determine whether the signer and advocator of a pleading, motion, or other paper crossed the line between zealous advocacy and plain pettifoggery.93
Here, the court cannot, from the evidence and all the facts and circumstances, infer or conclude that the filing and advocating of the Debtor’s Original Schedule C and then the Debtor’s Amended Schedule C, was done for an “improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.” While the abrupt flip-flop that occurred, one hour and six minutes into a contested hearing, most assuredly caused unnecessary delay and needlessly increased the cost of litigation, the court concludes, taking into account the objectively ascertainable circumstances that existed at the time the schedules were filed, that the Debtor’s Original Schedule C was filed for the purpose of maximizing the Debtor’s exemptions (although it was weakly supported by the facts and law), and the Debtor’s Amended Schedule C was filed for the purposes of salvaging a homestead exemption for the Debtor, when it became suspected that the Debt- or’s position with regard to the more-valuable French Properties was going to be a losing one. In fact, had the Debtor not amended his schedules, the Debtor would likely have lost the right to claim any property as his homestead. While the Debtor’s and his counsel’s actions, in amending his homestead exemption, so late in the game and mid-way through a hearing, certainly seem to warrant some sanctions or fee shifting (particularly when: (a) the court and opposing parties had prepared for a hearing involving the French Properties; and (b) the court pointedly and repeatedly asked at the be*166ginning of the Original Exemptions Hearing what the contested facts or issues would be, and counsel for the Debtor gave no indication that the Debtor might want to amend his' Homestead Exemption midway through the hearing),94 Rule 9011 does not appear to be the means to imposing-such a sanction. However, as stated above, the Supreme Court’s Law v. Siegel ruling did leave the court at least one additional avenue to potentially address the Debtor’s and his counsel’s conduct in this case — specifically, section 105(a) of the Bankruptcy Code.95
2. Section 105(a) of the Bankruptcy Code
When a party’s conduct is not effectively sanctionable pursuant to an existing rule or statute (i.e., Rule 11 or 28 U.S.C. § 1927), it may nevertheless be appropriate for a court to turn to its inherent power to impose sanctions.96 Inherent sanctioning power is “based on the need to control court proceedingfs] and' [the] necessity of protecting the exercise of judicial authority in connection with those proceedings.” 97 A court’s inherent power is not “a broad reservoir of power, ready at the imperial hand, but a limited source; an implied power squeezed from the need to make the court function.”98
As to the court’s ability to use its inherent power to fee shift, the general rule in federal courts is that a prevailing party cannot recover attorney’s fees absent specific statutory authority, a contractual right, or certain special circumstances.99 This rule “is so venerable and ubiquitous in American courts it is known as the ‘American Rule’ ”.100 The American Rule, however, does have several exceptions. Specifically, the Supreme Court has recognized that courts have the inherent power to issue sanctions against litigants for their bad faith conduct and that a court may assess attorney’s fees as a sanction when a party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons.101 The threshold for invocation is high and, if such inherent power is invoked, it must be exercised with restraint and discretion.102 The Fifth Circuit has found that “the ‘bad faith’ actions must occur in the course of litigation” and that the bad-faith exception “does not address conduct underlying the substance of the case; rather, it refers to the conduct of the party and the party’s counsel during the *167litigation of the case.”103 Moreover, the Fifth Circuit has described that the conduct required to invoke the exception to the American Rule must be “callous and recalcitrant, arbitrary, and capricious, or willfull, callous, and persistent.”104
To be clear, a bankruptcy court’s' authority under section 105(a) of the Bankruptcy Code also comports with its inherent power to sanction, and some courts have found that such powers are essentially coterminous.105 Section 105(a) of the Bankruptcy Code states that:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making the determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.106
Several courts have concluded that section 105(a) of the Bankruptcy Code provides a basis for a bankruptcy -court to make an award of attorney’s fees under certain circumstances.107 However, regardless of whether a bankruptcy court chooses to award sanctions under its inherent authority or under section 105(a) of the Bankruptcy Code, it still must make a “specific finding of bad faith.”108
Here, the ultimate question is: was the conduct of the Debtor and/or Debtor’s counsel (in amending the Debt- or’s homestead exemption so very late in this case, and with such surprise, mid-way through a hearing on the validity of the Debtor’s claimed exemptions, after pointed questioning by the court as to what the contested facts would be) “bad faith”? Was it “callous and recalcitrant, arbitrary and capricious, or willful, callous, and persistent”? As mentioned previously, the relevant conduct occurred: (a) more than 15 months after the case was filed; (b) more than three months after two objections to the Debtor’s .original homestead exemption were filed; (c) more than two months after the Trustee moved and obtained an order allowing him to try to sell the amended homestead (ie., the Business Properties — 60 Acres) and had expended time and effort evaluating the value of this property (believing it was going to be nonexempt and liquidated by him), employing an auctioneer and real estate broker and conducting an auction on such property *168(which the Debtor never objected to); and (d) mid-way through a contested hearing for which the parties and court had prepared.
The court concludes yes. There was bad faith. There should be some fee shifting. The actions were sufficiently callous and recalcitrant. The actions were somewhat arbitrary and capricious. The Debt- or’s amendment of his homestead exemption, under the facts and circumstances of this Bankruptcy Case, was so unreasonably late that it ultimately caused counsel for the Trustee and Estela (as well as this court) to needlessly prepare for a hearing that should have never gone forward. While the court understands that positions often change in bankruptcy, the court cannot find that the Debtor and his counsel were acting in good faith in this instance. This is certainly not a situation where a debtor was having to make a quick decision on what property he was claiming as his homestead in a last second filing, but rather, it appears to this court that the Debtor and/or his counsel (with his authority) made a calculated decision to assert that the French Properties were his homestead — so long as they could get away with it unchallenged — and only decided to change strategy in the middle of a hearing once it appeared that the Debtor’s homestead argument was a losing one. It is worth reiterating that this court repeatedly questioned Debtor’s counsel at the beginning of the Original Objection Hearing as to what the disputed fact issues were, since the Debtor’s right to assert a homestead exemption in the French Properties appeared to boil down to a legal issue (whether the Debtor could be deemed to have a present possessory interest in the French Properties) and Debtor’s counsel seemed to evade the court’s questions until finally confirming that the Debtor would testify and argue that he had a present possessory interest in the French Properties. Then, one hour and six minutes into the contested hearing, Debtor’s counsel announced that the Debtor was going to change positions and claim that the Business Properties — 60 Acres was exempt, only after confronted with relevance objections to her questioning of her Debtor-client. A lawyer has a duty of candor to the court. When asked what was going on, Debtor’s attorney asserted attorney-client privilege. Therefore, this court must make inferences, to some extent, regarding who was “calling the shots.” The court concludes it has no choice but to hold both Debtor and counsel jointly and severally accountable, if they both choose not to elaborate on why they did not tell opposing counsel and the court sooner that they might or would be changing strategy. Thus, that is what the court will do. The court next must examine how much fee shifting is appropriate, as a sanction.
3. Amount of Sanction/Fee Shifting Award.
The Trustee and Estela submitted fee statements that the court has reviewed. As noted earlier, on February 6, 2015, the Trustee filed his Notice of Fees and Expenses Incurred in Relation to Debtor’s Original and Amended Exemption, pursuant to the court’s Order to Show Cause, requesting fees and expenses in the amount of $26,647.24, which represented the amounts expended by Trustee’s counsel, Holder Law, for services rendered to the bankruptcy estate in relation to the Debtor’s original and amended exemptions.109 On February 9, 2015, the Trustee filed a second Notice of Fees and Expenses Incurred in Relation to Debtor’s Original and Amended Exemptions, requesting fees of $25,905.50, which repre*169sented the amount expended by the Trustee’s accounting firm, LSSM, for services rendered to the bankruptcy estate in relation to. the Debtor’s original and amended exemptions including valuation analysis.110 Pursuant to an Amended Supplement to Notice of Fees and Expenses Incurred in Relation to Debtor’s Original and Amended Exemptions,111 Holder Law requested an additional $1,817.50 in fees and LSSM requested an additional $3,680.50 in fees for responding to the Debtor’s request for production of documents in relation to each parties original Notice of Fees and Expenses. The Amended Supplement also requested a $400 decrease in the fees asserted by Holder Law as well as a $2,309 decrease in the fees asserted by LSSM. Accordingly, the total fees and expenses requested by Holder Law was $28,064.74 and the total fees requested by LSSM was $27,277. for a total of $55,341.74 sought by the Trustee. As also noted earlier, on February 9, 2015, Estela, pursuant to the court’s Order to Show Cause, also filed a Notice of Fees Incurred in Relation to the Debtor’s Change of Exemptions which requested reimbursement of $5,109.50 of attorney’s fees that were billed to Estela by her law firm, Cavazos, Hendricks, Poirot & Smitham, P.C., in connection with preparations for the Original Objection Hearing.112 Thus, this court must now consider whether it is appropriate to order the Debtor and/or Debtor’s counsel to reimburse approximately $60,000 of fees and expenses incurred by the Trustee and the largest creditor in connection with the bad faith change in strategy.
The court is ordering that the Debtor and his counsel shall be jointly and severally liable to reimburse the full $5,109.50 incurred by Estela’s counsel and $25,245 of the amount incurred by the Trustee’s counsel (Holder Law Firm) but none of the amount incurred by the Trustee’s accountants, LSSM. The court concludes that these amounts represent reasonable and necessary attorney’s fees spent as a result of the Debtor’s and counsel’s arbitrary, capricious, and recalcitrant bad faith behavior concerning the flip-flop on exemptions. Specifically, the fees related to: (a) evaluating and attempting to sell the Business Properties — 60 Acres (while the Debtor and his counsel lay silent about any possibility of later claiming this property as exempt); (b) preparing for a hearing on the homestead exemption on the French Properties that could have been avoided had the Debtor and his counsel amended the Debtor’s homestead exemption in a more timely manner (i e., not in the middle of a contested hearing); and (c) preparing a revised objection to exemption as to the Business Properties — 60 Acres and preparing and submitting fee reimbursement requests for all of this. In assessing these fees, the court has reduced by $2,640 the amount sought by Holder Law (concluding that it would not be appropriate to award fees or expenses relating to engaging in certain settlement negotiations). Additionally, the court does not believe it is reasonable or appropriate to reimburse any time for accountants to the Trustee; the court is not persuaded that genuine accounting services were needed with regard to evaluating the merits or value of the homestead exemptions.
D. Was this all “Much Ado About Nothing”?113
As was noted early on (in footnote 18 herein), the court has worried, while hav*170ing this contested matter under advisement, that this may all turn out to be “much ado about nothing.” As noted, Estela has made the argument that she has an equitable lien in the French Properties, the Business Properties — 60 Acres, and all other Real Property of the Debtor. This equitable lien was granted by the Navarro County Court to secure the Debt- or’s indebtedness to her created in the Divorce Decree, and Estella asserts that it is superior to any homestead rights that the Debtor could assert in the French Properties. This argument was, actually, not very forcefully stressed by the parties (it was given a small amount of attention in the parties’ pleadings and was not orally argued extensively). Presumably, this was due to the fact that the Debtor continues to attack the Divorce Decree through an objection to Estela’s proof of claim, an adversary proceeding, and through a state court proceeding (arguing that.the Divorce Decree amounted to a fraudulent transfer and that there was also fraud in connection with the Divorce Decree) and, thus, the indebtedness owed to Estela and the equitable lien may be subject to reduction or other modification in the domestic court or other courts. However, Estela’s argument that she has a lien superior to any homestead right of the Debtor would likely prevail, if the Divorce Decree ultimately withstands challenge in the state court system. Why? Because a debtor is not able to shield an otherwise exempt homestead from a former spouse who is owed a domestic support obligation (this assumes Estela’s indebtedness would be a domestic support obligation). Additionally, a debtor is not able to stop a forced sale to pay a debt of a kind defined in Tex. CONST, art. XVI, § 50(a)(3) and Tex. PROP.Code § 41.001(4) (ie., a debt of one spouse in favor of the other spouse resulting from a division of a family homestead in a divorce proceeding). Thus, this court cannot help but worry that this contested matter and ruling regarding the validity of the Debtor's homestead exemption is “much ado about nothing.” Stated another way, this contested matter, pertaining to the validity of the Debtor’s homestead exemption, may only be relevant to 6.26% of the Debtor’s prepetition creditors in this bankruptcy case (ie., the non-Estela creditors).114 This is because Estela may not be precluded from collecting against the Debtor’s homestead. And this 6.26% is likely even further diminished when one considers that 10 of the 15 proofs of claim on file in this Bankruptcy Case were filed by real estate taxing authorities that are not only likely significantly over-secured, but also presumably will care mostly about their in rem rights on the property to which their tax claims relate (and likely nothing else). The relevancy is even further diminished when one observes that yet two other of the 15 proofs of claim were filed by secured financial institutions who have non-exempt collateral to look to for payment. Time will tell.
Accordingly, for the reasons set forth above, it is
ORDERED that the Amended Objections to Exemptions are SUSTAINED IN PART AND OVERRULED IN PART *171and the Debtor shall only be permitted to claim a homestead exemption in the Business Properties — 60 Acres, but not Parcel 4 of the French Properties (the 141.24 acre tract); and it is further
ORDERED that, pursuant to section 105 and the court’s inherent sanctioning authority, the Debtor, Gonzalo Saldana, and Debtor’s counsel, Rosa Orenstein, shall reimburse Estela Saldana and her counsel $5,109.50 in reasonable attorney’s fees and the Trustee, John Litzler, and his counsel $25,245 in reasonable attorney’s fees within fifteen (Í5) days of the entry of this Order.115
. Estela Saldana ("Estela”), the largest claimant in the above-referenced bankruptcy case, also filed a Joinder in the Trustee’s Original Objection to Exemptions. See DE # 264 in the Bankruptcy Case. References to "DE #_in the Bankruptcy Case” herein refer to the docket entry number at which a pleading appears in the docket maintained by the Bankruptcy Court Clerk in the Bankruptcy Case.
. See Fed. R. Bankr.Pro. 1009(a) (providing that a debtor has the general right to amend his various bankruptcy schedules, as a matter of course, at any time before a case is closed).
. The court notes that the Trustee had already expended significant efforts during the case trying to sell the Business Properties — 60 Acres (thinking it was non-exempt), hiring a real estate broker and conducting an auction, without objections by the Debtor.
. -U.S.-, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014).
. Id. at 1198.
. The liability for these fees shall be joint and several against the Debtor and his counsel, since the court has been unable to determine which of them is more culpable, due to the assertion of attorney client privilege.
. See Stern v. Marshall, - U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011); Exec. Benefits Ins. Agency v. Arkison, — U.S. —, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014).
. On August 4, 2014, the Debtor filed a voluntary Motion to Convert from Chapter 11 to Chapter 7. On August 5, 2014, the court entered an Order of conversion.
. The Divorce Decree was upheld on appeal in the state courts up through the Texas Supreme Court. However, the Debtor asserts that Estela: (a) received a fraudulent transfer as a result of the Divorce Decree (and the valuations contemplated therein); and (b) committed fraud (by omission of certain information) in connection with the Divorce Decree. The Debtor has objected to Estela’s proof of claim, filed an adversary proceeding against her, and also has initiated a new state court bill of review proceeding to challenge the Divorce Decree. This court stayed the proof of claim litigation and adversary proceeding, pending a resolution of the state court bill of review process.
. See DE # 8 in the Bankruptcy Case.
. See DE ## 158 & 159 in the Bankruptcy Case.
. See DE # 225 in the Bankruptcy Case.
. The Debtor elected to designate these four parcels as exempt homestead property under the state law of his domicile, pursuant to section 522(b)(3)(A) of the Bankruptcy Code, and Tex. Const. Art. 16 §§ 50 & 51 and section 41.002(b) of the Texas Property Code.
. See DE # 246 in the Bankruptcy Case. The Original Objection to Exemptions also contained an objection to the Debtor claiming a certain coin collection as exempt.
.The Divorce Decree specifically provided that Estela would have the “exclusive use and possession of” Parcel 1 — Homesite until her receipt of $2.6 million owed under the Divorce Decree (which receipt of funds has still not occurred, more than three years after the Divorce Decree). See Laster v. First Huntsville Props., 826 S.W.2d 125, 130 (Tex.1991) ("one who holds only a future interest in property with no present right to possession is not entitled to homestead protection in that property); In re Brunson, 498 B.R. 160 (Bankr.W.D.Tex.2013) ("homestead protection ... can arise only in the person or family who has a present possessory interest in the subject property”).
. In re Schott, 449 B.R. 697, 702 (Bankr.W.D.Tex.2011). To be specific, Parcel 4 was not contiguous to the other three Parcels.
. Tex. Prop. Code § 41.002(b)(1). Note that the Debtor has remarried, thus would be entitled to exempt 200 acres for a rural homestead and not the mere 100 acres permitted for single individuals.
. As will be further addressed herein, the argument that Estela has an equitable lien in the French Properties, granted to secure the Debtor's indebtedness to her created in the Divorce Decree, that is superior to any homestead rights that the Debtor could assert in the French Properties, was not very forcefully argued by the parties (it was given a small amount of attention in the parties' pleadings and was not orally argued extensively). Presumably, this may have been due to the fact that the Debtor continues to attack the Divorce Decree through an objection to Estela's proof of claim, an adversary proceeding, and through a state court proceeding (arguing that the Divorce Decree amounted to a fraudulent transfer and that there was also fraud in connection with the Divorce Decree) and, thus, the indebtedness owed to Estela and the equitable lien may be subject to reduction or other modification in the domestic court or other courts. However, as will later be explained, in light of section 522(c) of the Bankruptcy Code (and possibly Tex. Prop.Code § 41.001(4), and Tex. Const, art. XVI, § 50(a)(3)), this court cannot help but worry that this contested matter and ruling regarding the validity of Debtor’s homestead exemption is “much ado about nothing.’’ Why? Because there is, undeniably, plenty of nonexempt real property to pay all creditors in full except for Estela. And, very possibly, at the end of the day, the Debtor will not be able to shield an otherwise exempt homestead from a former spouse who is owed a domestic support obligation, nor stop a forced sale to pay a debt of a kind defined in Tex. Const, art. XVI, § 50(a)(3) and Tex. Prop.Code § 41.001(4). Stated another way, the contested matter now presented, pertaining to the validity of the Debtor’s homestead exemption, may only be relevant to 6.26% of the Debtor's prepetition creditors in this bankruptcy case (i.e., the non-Estela creditors). And this relevancy is even further diminished when one considers that 10 of the 15 proofs of claim on file were filed by real estate taxing authorities that are not only likely significantly over-secured, but also presumably will care mostly about their in rem rights on the property to which their tax claims relate (and likely nothing else). The relevancy is even further diminished when one observes that yet two other of the 15 proofs of claim were filed by secured financial institutions who have nonexempt collateral to look to for payment.
. See DE # 264 in the Bankruptcy Case.
. See DE # 263 in the Bankruptcy Case.
. See DE ## 249 & 250 in the Bankruptcy Case.
. See DE ## 262 & 266 in the Bankruptcy Case.
. See FTR Recording, January 5, 2015, starting at 2:38:20. By way of example:
Judge: All right. Well let me start out by asking do we really have any material disputed facts. I mean I guess we do given the time estimates we got. But it wasn’t real clear to me from the pleadings that we had much in the way of disputed facts.
Judge: All right. [Debtor’s Counsel], what say you?
[Debtor’s Counsel]: Your Honor, my client is entitled to homestead exemptions and personal property exemptions under the Texas Constitution as well as state law and we’re here to prove them up. And I think there are disputed fact issues and that's why we’re here to prove up his homestead exemptions in particular, as well as his personal property exemptions that have been objected to.
Judge: All right. Then just give me a preview of what the disputed facts are.
[Debtor’s Counsel]: Well there's a dispute over his homestead exemption and residence. And there's a dispute over the coin collection and ...
Judge: Okay. Let me back up and again. I hope I’m saving time and not wasting time here. But I mean is there really a dispute over the facts or a dispute over the law because the pleadings say that the former Mrs. Saldana lives at the house that is on the French property ...
[Debtor’s Counsel]: It’s part of the French property, Your Honor. The half acre....
Judge: ... the French Properties and the pleadings indicate that she could live there until her state court judgment amount is paid in full. So an argument has been made that if he doesn’t have a present possessory interest he can't claim it as a homestead. So, first off, is it a legal dispute there or a factual dispute about [whether] she lives there and what the judgment says.
[Debtor’s Counsel]: There's both, Your Honor. There’s a factual dispute and there’s a legal dispute.
Judge: What is the factual dispute? Just preview for me.
[Debtor's Counsel]: Well, we intend to show she actually doesn't live there. Which is one of the...
Judge: Okay. So that's a disputed fact issue. Does she live there. And then there is an allegation that all of these parcels are not contiguous. Is there a fact issue about them being contiguous or not?
[Debtor’s Counsel]: I think that there is a fact issue over the contiguousness of some of the parcels. Yes, Your Honor.
Judge: Okay. But you agree that they are not entirely contiguous.
[Debtor’s Counsel]: Not all of them.
*152Judge: Okay. So therefore my next question is — is there a dispute about whether all of the land is being used for the comfort, convenience and support of his family.
[Debtor's Counsel]: I think that is part of the factual dispute Your Honor.
Judge: Okay. All right. And then' — so how many witnesses are we going to have?
[Debtor's Counsel]: I’m going to have two witnesses, Your Honor.
Judge: Okay. All right. Well I'll entertain very brief opening statements. I don't need more than five minutes.
. It was not clear from the evidence whether it is, in fact, accurate that Estela no longer is living there.
. See FTR Recording, January 5, 2015 at 3:08:17-3:10:07.
. See FTR Recording, January 5, 2015 at 3:44:26.
. At a later hearing, Debtor's counsel stated that she was barred from elaborating on when and why the Debtor decided to change his strategy by attorney-client privilege. See FTR Recording, March 30, 2015 at 4:23:40.
.The Debtor claimed the following address for his residence in his Voluntary Petition [DE #1 in the Bankruptcy Case] and in an Amended Voluntary Petition [DE # 6 in the Bankruptcy Case]: 14469 State Hwy 14, Wortham, TX 76693 and showed his County of Residence as "Navarro.” This is the address for the French Properties. The Business Properties — 60 Acres are located in Me-xia, Texas and in Freestone County.
. See DE # 308 in the Bankruptcy Case. The terms of the Order to Show Cause were stated by the court on the record at the Original Exemption Hearing; however, the actual order was not signed and entered until January 13, 2015.
. The court also sustained an objection to the coin collection that was being claimed as exempt.
.See n.23, supra; see also FTR January 5, 2015 FTR 2:38:20-2:52:05.
Judge: Again, maybe I’m not communicating the best way if there ... do you agree or disagree that this Texas Supreme Court case, Laster v. Huntsville, holds that homestead protection can arise only in the person or family that has a present possessory interest in the exempt property?
[Debtor’s Counsel]: I think that's a correct statement of the law your honor.
Judge: Ok, so what is our disputed fact issue?
[Debtor’s Counsel]: Well, he's got homestead rights that he’s asserting.
Judge: Does he have a present possessory interest in the property?
[Debtor’s Counsel]: He has a present ... he' does your honor.
Judge: Ok ... preview for me what that is.
[Debtor’s Counsel]: Well your honor the only way I can do it is to get him up on the witness stand so we can get our evidence in and then we can argue about what the law says.
Judge: Well I don’t want, with respect, I don’t want to waste hours and hours ... preview for me what the disputed fact issue
* * *
[Debtor’s Counsel]: He’s going to get in here and talk to you about his possessory interest in his real properly.
Judge: Ok so he is going to testify that he, in fact, does have a present possessory interest in this properly.
[Debtor’s Counsel]: Yes.
. See DE # 303 in the Bankruptcy Case.
. See DE ##313 & 326 in the Bankruptcy Case.
. See DE # 319 in the Bankruptcy Case.
. See DE # 325 in the Bankruptcy Case.
. See DE # 325 in the Bankruptcy Case.
. See DE # 327 in the Bankruptcy Case.
. See DE ## 333 & 359 in the Bankruptcy Case.
. See DE # 332 in the Bankruptcy Case.
. See 11 U.S.C. § 541(a).
. See 11 U.S.C. § 541(a).
. See Zibman v. Tow (In re Zibman), 268 F.3d 298, 302 (5th Cir.2001).
. See 11 U.S.C. § 522(b) (2010). To be clear, section 522(b)(2) of the Bankruptcy Code actually contemplates that states can prohibit their citizens from having the option to choose the federal exemptions set forth in section 522(d), so that only state (or other nonbankruptcy law) exemptions will be available to such citizens (so called “opt-out” states). Texas is not an "opt-out” state.
. See Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
. See Denmon v. Atlas Leasing, L.L.C., 285 S.W.3d 591, 595 (Tex. App.-Dallas 2009, no pet.).
. Bradley v. Pac. Sw. Bank, FSB (In re Bradley), 960 F.2d 502, 507 (5th Cir.1992).
. See Laster v. First Huntsville Props., 826 S.W.2d 125, 130 (Tex.1991) ("one who holds only a future interest in property with no present right to possession is not entitled to homestead protection in that property); In re Brunson, 498 B.R. 160 (Bankr.W.D.Tex.2013) ("homestead protection ... can arise only in the person or family who has a present pos-sessory interest in the subject property”).
. In re Mitchell, 132 B.R. 553, 558 (Bankr. W.D.Tex.1991).
. Kennard v. MBank Waco, N.A. (In re Kennard), 970 F.2d 1455, 1458 (5th Cir.1992).
. See Tex. Prop. Code. § 41.002(c) (the court can only assume that Mexia, Texas, where the Business Properties — 60 Acres are located, does not fit the definition contained in this statute, for an "urban” area — although the court is somewhat surprised by this).
. See Tex. Const, art. XVI, § 51 (emphasis added).
. Tex. Prop. Code. Ann. § 41.002(b) (West 2000) (emphasis added).
. See In re Schott, 449 B.R. 697, 702 (Bankr.W.D.Tex.2011); see also Perry v. Dearing (In re Perry), 345 F.3d 303, 318 (5th Cir.2003).
. Schott, 449 B.R. at 702 (citing Perry, 345 F.3d at 318, n. 22 (if part of rural property is noncontiguous to property on which the home is situated, then, to constitute part of the homestead, the separate land must be "used principally for the purposes of a home”)); In re Baker, 307 B.R. 860, 863 (Bankr.N.D.Tex.2003) ("If the party claiming rural homestead protection resides on a separate tract of land, the uninhabited property must be used in connection with the home tract for the comfort, convenience, or support of the family.”)
. PaineWebber, Inc. v. Murray, 260 B.R. 815, 830-32 (E.D.Tex.2001) (holding land as rural homestead where evidence was presented that debtor chopped wood, built a duck blind, irrigated, and farmed or sharecropped the land, and also used land for walking, picnicking, gardening, growing hay, hunting, and cutting wood); Cocke v. Conquest, 120 Tex. 43, 35 S.W.2d 673, 676-78 (1931) (imposing rural homestead protection on a non-contiguous tract because the land was used for graz7 ing cattle and farming); Fajkus v. First Nat'l Bank of Giddings, 735 S.W.2d 882, 884-85 (Tex.App.-Austin, 1987, writ denied) (affirming jury determination of rural homestead protection on a non-contiguous tract because the landowners cleared brush, planted grass, and were grazing cattle on the land).
. The Debtor acknowledged at the hearing on the Amended Objection to Exemptions that he was seeking to exempt more than 200 acres of land (60 acres plus 141.24 acres equals 201.24 acres) and acknowledged that he would only claim a portion of the 141.24-acre tract so that his total homestead exemption did not exceed 200 acres. See FTR Recording, March 30, 2015 at 4:17:30-4:17:57.
. See FTR Recording, January 5, 2015 at 3:21:19-3:23:22.
. As noted earlier, the debtor's business, Me-xia Nursery and Tree Farm, Inc. (Case No. 13-34862), was an operating business when it filed Chapter 11 along with the Debtor on September 23, 2013. However, the business is now no longer operating and the case has been converted to Chapter 7.
. The four horses were claimed as exempt and, while they were shown to have an "unknown” value, the Debtor used a $2,000 value for the amount of his exemption applying to the four horses. See DE # 303 (Amended Schedule C).
. See Perry, 345 F.3d at 316.
.See January 5, 2015 FTR 3:24:40-3:25:20 (questioning of the Debtor):
Q: The 35 Acres where Mexia Nursery was being run?
A: Yes.
Q: Prior to Mexia Nursery coming into existence, what were you doing with that property?
A: Nothing really.
Q: Did you have cows on there?
A: I had some cows and horses on there, yes.
Q: How about the 25 acres, what were you doing with that property prior to allowing Mexia Nursery to operate on it?
A: Same thing, actually I still have 4 horses on there.
Q: You still have 4 horses on there?
A: Yes Ma’am.
. Schwab v. Reilly, 560 U.S. 770, 774, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010) (citations omitted).
. See 11 U.S.C. § 522(1).
. See Fed. R. Bankr.P. 4003(a).
. See Fed. R. Bankr.P. 1007(c).
. See Fed. R. Bankr.P. 1009(a); Lowe v. Sondoval (In re Sandoval), 103 F.3d 20, 22 (5th Cir.1997) (citing Stinson v. Williamson (In re Williamson), 804 F.2d 1355, 1358 (5th Cir.1986)).
. Williamson, 804 F.2d at 1358 (quoting Doan v. Hudgins (In re Doan), 672 F.2d 831, 833 (11th Cir.1982)); see also Hannigan v. White (In re Hannigan), 409 F.3d 480, 482 (1st Cir.2005); In re Yonikus, 996 F.2d 866, 872 (7th Cir.1993); Calder v. Reta Job (In re Calder), 973 F.2d 862, 867 (10th Cir.1992).
. Law v. Siegel, - U.S. -, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014).
. Id. at 1190.
. Id.
. Id.
. Id. at 1193.
. Id.
. Id. at 1195.
. Id. at 1196.
. Id. at 1197-98.
. Id. at 1198.
. Id. at 1196.
. Id. (emphasis added).
.See also Westry v. Lim (In re Westry), 591 Fed.Appx. 429, 432 (6th Cir.2014) (holding that Law v. Siegel strongly suggests that a bankruptcy court exceeds its authority when it disallows an amendment based upon prejudice to creditors, but finding that it need not determine the exact perimeters of the bankruptcy court’s discretion to disallow such *162amendments based on prejudice since there was no adequate showing of prejudice); Gray v. Warfield (In re Gray), 523 B.R. 170, 173-175 (9th Cir. BAP 2014) (Albeit in dicta, the Supreme Court in Law v. Siegel found no equitable power in the bankruptcy court to deny an exemption as a remedy to debtor's bad faith conduct).
. Id. at 1196-97.
. See Pleasant Glade Assembly of God v. Schubert, 264 S.W.3d 1, 6 (Tex.2008) (The doctrine of judicial estoppel precludes a party from adopting a position inconsistent with one successfully maintained in an earlier proceeding.); see also Andrews v. Diamond, Rash, Leslie & Smith, 959 S.W.2d 646, 650 (Tex. App.-El Paso 1997, writ denied).
. There is an established rule of law in Texas that when the physical facts open to observation lead to a conclusion that the property in question is not the homestead of the mortgagor, and its use is not inconsistent with the representations made that the property is disclaimed as a homestead, and these representations were intended to be and were actually relied upon by a lender, then the owner is estopped from asserting a homestead claim in derogation of the mortgage to secure the loan. Shearer v. Allied Live Oak Bank, 758 S.W.2d 940, 945 (Tex.App.-Corpus Christi 1988, writ denied) (citing Prince v. N. State Bank of Amarillo, 484 S.W.2d 405, 411 (Tex.Civ.App.-Amarillo 1972, writ ref'd n.r.e.)). However, the court finds that this rule would not apply to the facts of this case as the court is addressing issues between a debtor and bankruptcy trustee versus a mortgagor and lender.
. Law, 134 S.Ct. at 1198.
. In re Schaefer Salt Recovery, Inc., 542 F.3d 90, 97 (3d Cir.2008); Miller v. Cardinale (In re Deville), 280 B.R. 483, 492 (9th Cir. BAP 2002).
. Household Credit Servs. v. Melton (In re Melton), 217 B.R. 869, 873 (Bankr.D.Colo.1998) (citing Adamson v. Bowen, 855 F.2d 668, 673 (10th Cir.1988)).
. Fed. R. Bankr. P. 9011(b).
.Fed. R. Bankr. P. 9011(c).
. See Thomas v. Capital Sec. Servs., Inc., 836 F.2d 866, 875 (5th Cir.1988) (Rule 11 is restricted to the signing of pleadings, motions, and other papers. Ample protection from the use of abusive tactics in litigation in respects other than the signing of papers is provided for by other rules governing attorney conduct).
. Topalian v. Ehrman, 3 F.3d 931, 935 n. 3 (5th Cir.1993).
. Cadle Co. v. Pratt (In re Pratt), 524 F.3d 580, 586 n. 19 (5th Cir.2008).
. Computer Dynamics, Inc. v. Merrill (In re Computer Dynamics, Inc.), 252 B.R. 50, 57 (Bankr.E.D.Va.1997) ("The enumerated improprieties are examples only of the type of conduct proscribed by the Rule.").
. FDIC v. Maxxam, Inc., 523 F.3d 566, 581 (5th Cir.2008) (affirming the directive that a court should be looking for "objectively ascertainable circumstances that support an inference that a’ filing ... caused unnecessary delay”); see also Long v. Thommessen (In re Tjontveit), 204 Fed.Appx. 439, 441 (5th Cir.2006) (affirming bankruptcy court’s issuance of Rule 9011(b)(1) sanction against party for filing motion for sanctions against bankruptcy trustee, finding that party had engaged in "a pattern of activity,” suing repeatedly and frivolously); In re Enmon, No. 12-10268, 2013 WL 494049, at *5 (Bankr.E.D.Tex. Feb. 7, 2013) (bankruptcy attorney was sanctioned pursuant to Rule 9011(b)(1) for the filing of a Chapter 11 bankruptcy petition and improperly invoking the automatic stay for the sole purpose of achieving a litigation objective rather than in a good faith rehabilitation attempt); In re Stromberg, 487 B.R. 775, 808 (Bankr.S.D.Tex.2013) (debtor’s attorney who electronically filed debtor’s original schedules and original SOFA, representing with a "/s/” that the debtor had signed these documents when, in fact, he had not was a violation of Rule 9011(b)(1)); In re Dental Profile, Inc., 446 B.R. 885, 900 (Bankr.N.D.Ill.2011) (the court must look to "objectively ascertainable circumstances that support an inference” of improper purpose under Rule 9011); United States v. Int’l Bhd. of Teamsters, 948 F.2d 1338, 1344 (2d Cir.1991) (in deciding whether the signer of a pleading, motion, or other paper has crossed the line between zealous advocacy and plain pettifoggery, the court applies an objective standard of reasonableness.)
. See notes 23 & 31, supra.
. Law, 134 S.Ct. at 1198.
. See Chambers v. Nasco, Inc., 501 U.S. 32, 50, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991); see also Carroll v. The Jaques Admiralty Law Firm, P.C., 110 F.3d 290, 292 (5th Cir.1997).
. In re Case, 937 F.2d 1014, 1023 (5th Cir.1991).
. NASCO, Inc. v. Calcasieu Television & Radio, Inc., 894 F.2d 696, 702 (5th Cir.1990), aff'd sub nom. Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991).
. See Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 255-60, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975); see also Galveston County Navigation Dist. No. 1 v. Hopson Towing Co., Inc., 92 F.3d 353, 356 (5th Cir.1996).
. Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 310-11 (Tex.2006); see also Crenshaw v. Gen. Dynamics Corp., 940 F.2d 125, 129 (5th Cir.1991).
. Chambers, 501 U.S. at 43-46, 111 S.Ct. 2123; Alyeska, 421 U.S. at 258-259, 95 S.Ct. 1612. Although Chambers involved a district court, the inherent powers described by the Supreme Court "are equally applicable to the bankruptcy court.” Case, 937 F.2d at 1023.
. Maguire Oil Co. v. City of Houston, 143 F.3d 205, 209 (5th Cir.1998).
. Rogers v. Air Line Pilots Assoc., Int’l, 988 F.2d 607, 615-16 (5th Cir.1993); Flanagan v. Havertys Furniture Cos, Inc., 484 F.Supp.2d 580, 582 (W.D.Tex.2006).
. Galveston County, 92 F.3d.353, 358 (5th Cir.1996).
. Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir.1996) ("By providing that bankruptcy courts could issue orders necessary ‘to prevent an abuse of process,” Congress impliedly recognized that bankruptcy courts have the inherent power to sanction that Chambers recognized within Article III courts.”); Jones v. Bank of Santa Fe (In re Courtesy Inns, Ltd., Inc.), 40 F.3d 1084, 1089 (10th Cir.1994) ("We believe, and hold, that § 105 intended to imbue the bankruptcy courts with the inherent power recognized by the Supreme court in Chambers); but see Ginsberg v. Evergreen Sec. Ltd. (In re Evergreen Sec., Ltd.), 570 F.3d 1257, 1273 (11th Cir.2009); Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1196 (9th Cir.2003); In re Rimsat, Ltd., 212 F.3d 1039, 1049 (7th Cir.2000).
. See 11 U.S.C. § 105(a).
. In re Paige, 365 B.R. 632, 637-40 (Bankr.N.D.Tex.2007); In re Brown, 444 B.R. 691, 695 (Bankr.E.D.Tex.2009); In re Gorshtein, 285 B.R. 118, 124 (Bankr.S.D.N.Y.2002).
. In re Parsley, 384 B.R. 138, 179 (Bankr.S.D.Tex.2008); Gorshtein, 285 B.R. at 124.
. See DE # 319 in the Bankruptcy Case.
. See DE # 325 in the Bankruptcy Case.
. See DE # 351 in the Bankruptcy Case.
. See DE # 327 in the Bankruptcy Case.
. William Shakespeare, Much Ado About Nothing (1599) (often described as a play combining comedy with serious meditations on honor, shame, and court politics).
. As noted early on, there were fifteen proofs of claim filed in the Debtor's case: (a) ten of which were filed by property taxing authorities; (b) one of which was Estela's; (c) two filed by financial institutions; (d) one relating to a credit card; and (e) one by a utility. The total dollar amount of the proofs of claim filed was $2,721,831.68, and Estela's claim was $2,551,568.41 of this amount. Thus, there are $170,263.20 of "other” pre-petition creditors in the Debtor’s case, besides Estela. Restated, Estela asserts 93.74% of the prepetition claims in this case and the other creditors assert 6.26% of the prepetition claims.
. The responsibility of the Debtor and Debtor’s counsel for these amounts is joint and several, and is enforceable through the normal procedures for collecting money judgments. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498311/ | OPINION DENYING MOTION FOR AN ORDER CONFIRMING THAT NO STAY IS IN EFFECT OR IN THE ALTERNATIVE TO PROHIBIT USE OF RENTS AND CASH COLLATERAL
Walter Shapero, United States Bankruptcy Judge
ECP Commercial II LLC (“ECP”) filed this Motion for an Order Confirming that no Stay is in Effect or in the Alternative to Prohibit Use of Rents and Cash Collateral. Debtor filed an objection. The Court conducted a hearing on April 9, 2015, and took *177the matter under advisement. For the reasons set forth below, the motion is denied.
BACKGROUND
Debtor owns a residential townhouse and apartment complex in Shelby Township, MI, known as Town Center Flats. ECP is the holder of a mortgage and assignment of rents executed by Debtor to secure payment of its debt to ECP.1
Debtor defaulted on its payment obligations to ECP on December 31, 2013. On December 22, 2014, ECP attempted to exercise its rights to collect rents directly from the tenants of Town Center Flats. ECP sent a notice of default and payment instructions to - the tenants. The notice was properly filed with the Macomb County Register of Deeds. Debtor failed to remit any rents to ECP.
On January 23, 2015, ECP filed a complaint in Macomb County Circuit Court against Debtor asserting breach of contract, foreclosure on the mortgage and appointment of a receiver. Shortly thereafter, on January 31, 2015, Debtor filed for Chapter 11 relief.
In support of its motion, ECP argues that pursuant to the assignment of rents provision and MCL § 554.231, the rents belong to ECP and are not property of the estate. Therefore, ECP contends, the rents are not subject to the automatic stay. ECP relies on the decision in In re Madison Heights Grp., LLC, 506 B.R. 734 (Bankr.E.D.Mich.2013), recon. denied, 506 B.R. 734 (Bankr.E.D.Mich.2014), in support of its position. Even if the Court finds that the rents could be considered property of the estate, ECP argues that the rents constitute ECP’s cash collateral and therefore must be segregated and accounted for by Debtor.
Debtor relies on this Court’s decision in In re Newberry Square, Inc., 175 B.R. 910 (Bank.E.D.Mich.1994), and asserts that the parties intended the assignment of rents provision to provide additional security to ECP, not to terminate Debtor’s interest in those rents.
DISCUSSION
The determination of whether the rents at issue constitute property of the estate must be decided by reference to applicable state law. Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
Mich. Comp. Laws §§ 554.231 and 554.232 provide:
554.231 Assignment of rents to accrue from leases as additional mortgage security.
Sec. 1. Hereafter, in or in connection with any-mortgage on commercial or industrial property other than an apartment with less than 6 apartments or any family residence to secure notes, bonds or other fixed obligations, it shall be lawful to assign the rents, or any portion thereof, under any oral or written leases upon the mortgaged property to the mortgagee, as security in addition to the property described in such mortgage. Such assignment of rents shall be binding upon such assignor only in the event of default in the terms and conditions of said mortgage, and shall operate against and be binding upon the occupiers of the premises from the date of filing by the mortgagee in the office of the register of deeds for the county in *178which the property is located of a notice of default in the terms and conditions of the mortgage and service of a copy of such notice upon the occupiers of the mortgaged premises.
554.232 Assignment of rents; validity.
Sec. 2. The assignment of rents, when so made, shall be a good and valid assignment of the rents under any lease or leases in existence or coming into existence during the period the mortgage is in effect, against the mortgagor or mortgagors or those claiming under or through them from the date of the recording of such mortgage, and shall be binding on the tenant under the lease or leases upon service of a copy of the instrument under which the assignment is made, together with notice of default as required by section 1.
Mich. Comp. Laws §§ 554.231 and 554.232.
These statutes authorize the assignment of rents, but do not address or define the impact, meaning or effect of an assignment on the mortgagor’s interest in those rents.
In Newberry Square, 175 B.R. 910, this Court essentially held that an assignment of rents gave the creditor a security interest in the rents, not ownership of the rents. Therefore, the debtor’s interest in the rents was not terminated by pre-petition actions effectuating the assignment and was property of the estate. The Court based its conclusion on the following rationale: (1) the language of 11 U.S.C. §§ 363, 541 and 552(b) contemplate rents as property of estate; (2) it was clear from the assignment document itself that it was intended for security; (3) the debtor retained a • substantial interest in the rents because they had to be applied to the costs of maintaining the property, with any surplus applied to the debt; (4) the debtor’s leases were themselves property rights; and (5) assigned rents are akin to accounts receivable, which are property of estate, and there is no logical or conceptual difference between assigned rents and accounts receivable. Id. at 911-12. Finally, the Court found support in U.S. v. Whiting Pools, Inc., 462 U.S. 198,103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), wherein the Supreme Court held that property seized by the IRS pre-petition to satisfy pre-petition liens remains property of the estate.
The Court acknowledged the holding in Otis Elevator Co. v. Mid-America Realty Investors and Newark Fireman’s Ins. Co., 206 Mich.App. 710, 522 N.W.2d 732 (1994), as essentially reflecting state law on the subject. There, Otis Elevator became a judgment creditor of Mid-American Realty and attempted to garnish its rents. However, Fireman’s Insurance Co. held a valid assignment of those rents. The court did say that, “Otis could not garnish Mid-America’s interest in the rents because Mid-America no longer had a valid property interest in the rents subsequent to its default on its mortgage with Fireman’s.” Id. at 734.
In concluding that the holding in Otis Elevator did not require a different result in Newberry, this Court stated in Newberry.
(1) the situation in Otis concerned a determination of the relative priority rights of two creditors of the mortgagee, and did not determine the rights as between the mortgagor and mortgagee; in that context, the Court of Appeals was probably right at least in the result that it reached;
(2) it was unnecessary for the state court to draw any conclusions as to what rights, if any, the mortgagor retained when deciding the priorities as between the two creditors; the determination of the mortgagor’s rights was only necessary for determining that, whatever those rights were, they were both sub*179ject to the assignment of rents and were garnishable — the real and only question being the relative priorities between the rent assignee and the garnisheeing creditor; and
(3) while bankruptcy courts do look to state law when determining what constitutes “property” under § 547, the requirement that bankruptcy courts look to state law when defining “property” is tempered by the presence of controlling federal law; if federal law, such as where the statutory language of the Code, indicates a broader policy or construction than what state law might otherwise indicate, the question of what is “property” of the estate thus ultimately becomes one of federal law. See Barnhill v. Johnson [503 U.S. 393], 112 S.Ct. 1386, [118 L.Ed.2d 39] (1992); Board of Trade of Chicago v. Johnson, 264 U.S. 1, [44 S.Ct. 232, 68 L.Ed. 533] (1924). In this Court’s view the provisions of the Code cited and analyzed by this Court constitute controlling federal law on the subject.
Newberry, 175 B.R. at 914-15.
Although it has been 20 years since the Court decided Newberry, it still believes in its soundness and does not believe there are any subsequent events which might cause it to change its mind.
Furthermore, additional support for the Court’s conclusion can be found in MCL § 554.231. The title of P.A.1953, No. 210, Eff. Oct. 2 itself is “AN ACT to authorize the assignment of rents to accrue from existing leases as additional security to mortgage obligations.” The ensuing prefatory description of the language of § 554.231 is set forth as “Assignment of rents to accrue from leases as additional mortgage security.” The statute permits the assignment to be “in or in connection with any mortgage,” thus, a separate assignment instrument is not required. The statute also states that “Such assignment of rents shall be binding upon such assign- or only in the event of default in the terms and conditions of said mortgage.” All of the foregoing reinforces the concept that an assignment of rents needs to be simply seen, no less and no more, as additional collateral for a secured mortgage debt, and treated herein as property of the bankruptcy estate, like the other collateral and property in which Debtor retains an interest.
Prior to its enactment in 1953, it was said of § 554.231:
Act 62 of the Public Acts of 1843 .... had the effect of preventing the mortgagee from obtaining rents and income from the property occupied by the mortgagor until expiration of the period of redemption. In 1925 the legislature made possible the elimination of the effect of the 1843 statute in the case of property subject to trust mortgage.... The legislature, by Act 210 of the Public Acts of 1953, has now made possible the elimination of the effect of the 1843 statute in the case of mortgages on commercial or industrial property (with some exceptions shown in the statute) so that assignment of rents may be made and a receiver appointed to collect the rents in event of default.
Smith v. Mut. Ben. Life Ins. Co., 362 Mich. 114, 106 N.W.2d 515, 518-19 (1960) (footnotes omitted).
“The language of the 1953 act and the 1925 act are virtually the same. The legislature in 1953 had in mind giving the mortgagees holding mortgages on certain commercial or industrial property the same legal rights as were granted by the 1925 legislature to the holders of trust mortgages.” Id. at 520.
With respect to the 1925 act, the Michigan Supreme Court stated:
*180The act is not perfectly drafted nor entirely complete. It leaves something to be read into it by construction. Thus, it does not state the obviously intended requirement that rents collected by the trustee shall be applied on the mortgage debt. But it is workable and its purpose is unmistakable.
Its outstanding features are:
(1) It was designed for the benefit of holders of obligations under trust mortgages, usually the general public who rely on others for financial guidance, and is to be given effect to that end.
(2) While the right to collect rents is as security, it provides for their “assignment,” not their “mortgage,” as the term is used in connection with other property. No foreclosure and sale are required to exercise the right. The assignment may become effective at once on default and in advance of proceedings for foreclosure.
(3) The rents are not part of the mortgaged premises, nor do they necessarily run with them. The assignment is by way of additional security. It may, but need not, be made in the mortgage. It may be by separate writing at or after the execution of the mortgage.
(4) The act provides a new remedy not before enjoyed. Nusbaum v. Shapero, 249 Mich. 252, 228 N.W. 785. It does not purport to make any change in the general mortgage law by modifying the method, conditions, or effect of foreclosure, sale, redemption, or possession before or after sale. Only such changes in the mortgage relation can be fairly read into the law as are essential to give it the proper effect.
Sec. Trust Co. v. Sloman, 252 Mich. 266, 233 N.W. 216, 219 (1930)
The statute does not state or indicate that an assignment of rents extinguishes all rights of the mortgagor in the assigned rents. What it does is allow for the assignment of rents as additional security.
Further elaborating that point, Black’s Law Dictionary defines the term “security” as “Collateral given or pledged to guarantee the fulfillment of an obligation; esp., the assurance that a creditor will be repaid (usu. with interest) any money or credit extended to a debtor.” Black’s Law Dictionary (10th ed.2014). As noted, the statute providing for assignments of rent references such being for “security.” In the Court’s view that word’s ascribed meaning, as rules of statutory construction teach us, should be considered to have meaning and that meaning is its commonly held definition. In doing so here, that also requires taking note of its reference and analogy to collateral to “guarantee the fulfillment of an obligation.” That suggests both the term’s nature and its limits. In the context of the status of this and any similar Chapter 11 proceeding, the term and considerations of eventual payment of the principal obligation, and when and how the security for its performance will be exercisable remain very much in play, and may very well continue to be so depending on whether a plan can be confirmed and if so what that plan provides for in the event of default.
The Court acknowledges the split in authority and, specifically, Judge Tucker’s recent decision in In re Madison Heights Group, LLC. There, the court relied primarily on In re Woodmere Investors Ltd. P’ship, 178 B.R. 346 (Bankr.S.D.N.Y.1995). Woodmere rejected Newberry and relied on In re Mt. Pleasant Ltd. P’ship, 144 B.R. 727 (Bankr.W.D.Mich.1992), with which, as noted in Newberry, this Court disagrees.
One of the factors this Court considered in Newberry was the intent of the parties as evidenced by the language of the as*181signment. The “Assignment of Leases and Rents” agreement executed by the parties here states that the “Assignor is desirous of further securing to Assignee the performance of the terms, covenants and agreements hereof and of the Note, the Mortgage and the Loan Documents.” See ECP’s Motion, Exh. 6d at 1. The agreement also states that the assignment terminates upon satisfaction of the mortgage. See ECP’s Motion, Exh. 6d at 6, ¶ 15. These facts support a finding that the assignment was intended as additional ' security.
A number of courts have likewise considered the intent of the parties and the language of the relevant documents in finding that an assignment of rents does not effectuate a property transfer. In In re Senior Housing Alternatives, Inc., 444 B.R. 386 (Bankr.E.D.Tenn.2011), the court held that an assignment of rents had the effect of creating a security interest rather than an absolute conveyance of all rights in the rents because it was given to secure payment of the debt and was void upon satisfaction of the debt. Id. at 395-96.
Similarly, in In re Village Green I, GP, 435 B.R. 525, 531 (Bankr.W.D.Tenn.2010), the court found assigned rents to be property of the estate, relying primarily on the language providing for the release of the instrument setting forth the rent assignment upon satisfaction of the debt. See also In re Buttermilk Towne Ctr., LLC, 442 B.R. 558 (6th Cir. BAP 2010) (holding that assignment of rents had effect of granting security interest, based in part on termination of assignment upon satisfaction of debt); In re Amaravathi Ltd. P’ship, 416 B.R. 618, 633-37 (Bankr.S.D.Tex.2009) (if effect of transaction is that borrower retains an interest in rents, then transfer is not truly absolute); In re 5877 Poplar, L.P., 268 B.R. 140, 149 (Bankr.W.D.Tenn.2001) (noting significance of provision requiring release of security instrument upon satisfaction of debt, concluding that “the Debtor did not assign its rights to the rents and revenues ad infinitum and retained some interest in the rents.”); Lyons v. Federal Sav. Bank (In re Lyons), 193 B.R. 637, 648 (Bankr.D.Mass.1996) (“The fact that the assignments are conditioned upon default and will terminate upon satisfaction of the debt indicates that they are merely additional security for the loan, and not an absolute transfer of the Debtors’ interest in the rents to the Bank.”); In re May, 169 B.R. 462, 470-71 (Bankr.S.D.Ga.1994) (“[A]n assignment, which is characterized as ‘absolute’, is not absolute in the sense that it totally divests a grantor of any and all interest in the rents. The grantor retains an equitable interest in the rents, and whether the interest is depicted as a ‘re-versionary interest’, a ‘right of redemption’ or the like, it is an interest which becomes property of the bankruptcy estate.... ”).
In this Court’s view, the purpose, meaning and intent of the applicable statutes were to put rents conceptually and in basically the same security position as the collateral specified in the associated mortgage. That there may be, and of necessity are, differing procedures required to properly and effectively exercise the secured party’s rights under each a rent assignment and a mortgage, (and possibly also a related separate security agreement and financing statement covering certain other assets incident to the financing involved owned by the Mortgagor), does not in this Court’s view alter its basic substantive rationale as expressed in Newberry. As was alluded to in Newberry, the issue arises in the context of a Chapter 11 proceeding which contemplates a reorganization and continuation of the Debtor’s business. It strains reason and practicality in that context, to conclude that an assignment of rents, even one proeedurally effectuated *182pre-petition, completely removes the possibility that those rents can be utilized incident to proposing and effectuating a Chapter 11 plan.
Rents in a Chapter 11 real estate case conceptually are, and for the purpose of a Chapter 11 reorganization ought to be, treated the same as the constantly regenerating receivables in a retail or non-real estate commercial business case. In the latter type of case where you have an all asset mortgage instrument which effectively itself includes receivables as collateral, would pre-petition notification of account receivable obligors preclude those or later receivables payable by those same obligors from being considered as assets of the bankruptcy estate useable in the reorganization? Unlikely.
In a real estate case like this one what, and all, you have is what should be considered as an inseparable combination of the realty and its associated tangible personalty, coupled with the rentals received from tenants or lessees. As the old song says about love and marriage, “you can’t have one without the other.” That, together with the other reasoning advanced in New-berry, militates against ECP’s position.
Accordingly, the Court reaffirms its views in Newberry and concludes that the rents at issue are property of the bankruptcy estate and constitute cash collateral under § 363(a).
Debtor shall present an appropriate order.
. The original loan agreement was between Debtor and KeyBank. KeyBank assigned its rights to ECP on September 30, 2013. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498313/ | ORDER GRANTING IN FULL THE UNITED STATES TRUSTEE’S MOTION AUTHORIZING THE EXAMINATION OF AND REQUIRING THE PRODUCTION OF DOCUMENTS BY OCWEN LOAN SERVICING, LLC, SUBJECT TO THE EXECUTION OF CONFIDENTIALITY AGREEMENTS (DOC. NO. 73)
Judge Caldwell
On May 1, 2015, the Court conducted a hearing on the above-captioned Motion filed by the United States Trustee (“UST”) and an Objection filed by Ocwen Loan Servicing, LLC (“Ocwen”). For reasons expressed below, the Court grants the UST’s Motion in full, subject to the execution of confidentiality agreements. A brief summary follows.
On May 8, 2009, Lawrence W. and Dianna L. Stambaugh (“Debtors”) filed this case under Chapter 13 . of the United States Bankruptcy Code (“Code”). The *192original mortgage holder and servicer, GMAC Mortgage, LLC (“GMAC”), filed a proof of claim on May 26, 2009, for $127,840.61. The Court confirmed the Debtors’ Plan on July 31, 2009, that provided payments to GMAC of $1,174.00 per month, as the amount contractually due under the mortgage, in addition to the cure of a pre-petition arrearage.
Approximately four years later, on March 7, 2013, GMAC assigned its mortgage and servicing rights to Ocwen. Next, on April 2, 2013, Ocwen filed a Notice of Mortgage Payment Change informing Debtors that their mortgage payment would increase to $1,256.52, due to an escrow shortage of $486.85. Three days later on April 5, 2013, Ocwen filed the requisite Notice of Transfer of the claim formerly held by GMAC.
Nearly eighteen months later, on September 19, 2014, the Debtors filed a Motion for Contempt and Damages for Violation of the Automatic Stay. The Debtors alleged that on May 6, June 2, July 29 and August 28, 2014, Ocwen left collection notices at the Debtors’ home. Further, Debtors asserted that the latter collection attempts occurred after their Counsel twice contacted Ocwen. Ocwen never filed a response. Instead, and at its request, the Court granted three answer extensions to allow discussions with Debtors’ Counsel and possible settlement. Indeed, the third extension request filed on November 5, 2014, represented that a resolution had been reached, subject to documentation, that would result in the withdrawal of the Contempt Motion. The Debtors filed their withdrawal on December 11, 2014.
In the interim and on November 25, 2014, the UST filed the present Motion seeking authority to issue a subpoena duces tecum to produce and allow inspection of five categories of documents, and provide a knowledgeable employee of Ocwen to provide related sworn testimony. The scope of the requested discovery includes:
1. The actual, contemporaneously-kept transactional mortgage loan history on the Debtors’ mortgage loan with Ocwen Loan Servicing, LLC.
2. Any and all documentation relating to policy or directives of Ocwen Loan Servicing, LLC, regarding application of Chapter 13 Plan payments to mortgage accounts, including policy or directives directly affecting the Debtors’ account. Include pre- and post-petition payment application policy and directives.
3. Any and all documentation relating to policy or directives regarding collection procedures for mortgage accounts that were involved in a Chapter 13 bankruptcy, including policy or directives directly affecting the Debtors’ account.
4. Any and all documentation relating to policy, directives and/or procedures regarding auditing mortgage accounts boarded from prior servicers for customers who are in an active bankruptcy.
5. A full and complete copy of the mortgage-servicing contract of Ocwen Loan Servicing, LLC, pursuant to the Debtors’ mortgage account.
After receiving three extensions to respond to the UST motion, in hope of reaching a settlement, Ocwen filed its opposition on March 20, 2005. Ocwen counters:
1. It posted the four collection notices on Debtors’ home “inadvertently”; it took “immediate” action to ensure no further postings, and reached an accommodation with the Debtors.
2. Without conceding that cause has been established, it agrees to provide all requested discovery (Items 1-3 and 5 above) with the agreement that discovery is limited to policies in place while it serviced the loan *193and that directly affect the Debtors’ loan.
3. Discovery related to Item 4 above (“Ocwen’s bankruptcy policies for auditing Debtors’ account boarded from the prior servicer”) exceeds the appropriate scope of discovery under Rule 2004 of the Federal Rules of Bankruptcy Procedure.
As explained to the Court by the parties, “boarding” refers to the transfer process of mortgage loans among lenders and/or servicers along with relevant information as to their collection status; i.e., whether the loans are in default or subject to bankruptcy court jurisdiction. The underlying concern is that with the frequency and size of mortgage assignments, and to mitigate harm to customers, procedures are necessary to ensure that accurate collection status information follows the loan to the new owner. This process is subject to federal regulation.
Ocwen argues that because the collection notices were not first posted until approximately a year after transfer of the loan from GMAC, the boarding procedures are not relevant and constitute the “... launch of a wholesale investigation of Ocwen’s private business affairs ... ”.
Bankruptcy Rule 2004(b) allows the court to order the examination of any entity relating to “... the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate ... ”. By definition, Rule 2004 Examinations are broad in scope and are geared to determine whether litigation should be commenced that will then be subject to the more tailored and targeted provisions of the Federal Rules of Civil Procedure. Caution, however, must be exercised to not unleash costly and disruptive procedures that far outweigh the benefit of obtaining the information. In re Fearn, 96 B.R. 135, 137-138 (Bankr.S.D.Ohio 1989).
The Court finds and concludes that the UST’s request is reasonable, and is not burdensome for the reasons that follow. First, how the Debtors received multiple collection notices from Ocwen, after the transfer of the loan, is relevant to the efficacy of the stay provisions of Section 362 of the Code. The Court is not clear how the passage of time between the date of transfer and the collection attempts should diminish this concern. The stay is the reason debtors file bankruptcy. Second, creditors are obligated to structure internal systems and mechanisms to minimize the opportunity for even inadvertent stay violations that may prompt debtors to spend the time and expense to return to bankruptcy court to protect their rights. See In re Roush, 88 B.R. 163, 164-165 (Bankr.S.D.Oh.1988) (discussion of large institutional creditors’ obligation to have systems in place to avoid even inadvertent discharge violations).
Third, without discovery of what collection information accompanied the transfer of the Debtors’ loan, there is no means to determine why the Debtors received four collection notices, two of which Ocwen posted after contact by Debtors’ Counsel. It is reasonable and not burdensome to allow discovery of boarding procedures that were in place at the time of the transfer of the Debtors’ loan. Fourth, stay violations are common and systemic problems that involve many debtors and creditors, and are far beyond the reach of settlements in each case, as the need may arise. The UST is in a unique position and is indeed obligated to act in such instances. 28 U.S.C. § 586(a); 11 U.S.C. § 307.
For these reasons, the Motion Authorizing the Examination of and Requiring the Production of Documents by Ocwen -is *194GRANTED IN FULL, subject to the execution of confidentiality agreements between the parties.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498314/ | MEMORANDUM
Shelley D. Rucker, UNITED STATES BANKRUPTCY JUDGE
The Plaintiff Trustee James Paris (“Plaintiff’ or “Trustee”) has filed this adversary proceeding against the Defendant Cindy Walker (“Defendant”) who is the daughter of the debtors Elbert and Rhonda Walker (“Debtors”) to recover the alleged fraudulent transfer of two pieces of real property or their value from the Defendant pursuant to 11 U.S.C. § 548 and § 550. The Trustee has moved for partial summary judgment1 regarding his fraudulent transfer claim. [Doc. No. 14]. The Defendant opposes the motion on the basis that there are genuine disputes as to material facts with respect to whether the Defendant provided value for the transfers she received and whether Mrs. Walker was insolvent at the time of transfers. [Doc. No. 18]. The Trustee has filed a response to the Defendant’s opposition briefing. [Doc. No. 19]. Both parties have submitted evidence and affidavits in support of their positions. For the reasons stated below, the court will grant the Trustee summary judgment on the fraudulent transfer claim in the amount of $51,000. As to the value of the two pieces of property in excess of $51,000, the Trustee’s motion will be denied.
I. Background
Because the Plaintiff Trustee is the party moving for summary judgment, the court must view the facts in the light most *196favorable to the Defendant. The Debtors filed their Chapter 7 Bankruptcy Petition on June 28, 2013. [Bankr. Case No. 13-13184]. Their Summary of Schedules indicated that they had assets totaling $3,273,620.76 and liabilities of $14,104,843.49. [Bankr. Case No. 13-13184, Doc. No. 22]. In their Statement of Financial Affairs, in response to Question No. 3.e., the Debtors stated that they had provided the Defendant with the amount of $5,000 on May 17, 2013 and had provided the Don Walker Management Account (3rd parties’ funds) with $78,000 on May 17, 2013. [Bankr.Case No. 13-13184, Doc. No. 21].
The Trustee has filed an affidavit outlining the facts associated with the two alleged fraudulent transfers from the Debtors to the Defendant prior to their bankruptcy filing. [Doc. No. 14-1, Affidavit of Chapter 7 Bankruptcy Trustee, James R. Paris (“Paris Aff.”) ]. The Trustee asserts that he has reviewed the bank account records of the Debtors. Paris Aff., ¶ 4. He has analyzed the transfer of two pieces of real estate from the Debtors to the- Defendant on May 17, 2013. He has provided exhibits pertaining to the records of those transfers. See [Doc. No. 14-1, Exhibits A-H]. Based on the schedules filed by the Debtors and the affidavit filed by the Trustee, the record indicates that the Debtor Don Walker managed several real estate properties for a variety of clients, including some family members. Paris Aff., ¶ 5. Mr. Walker maintained a bank account entitled “Don Walker d/b/a Management Account,” Account No. 1961 (“Management Account”), with First Tennessee Bank. Mr. Walker deposited his rental income into this account. Id. Mrs. Walker had signing authority on the account, and the Trustee asserts that “[t]his was not used as a trust account, as the Walkers transferred their own funds into it freely prior to bankruptcy. They used funds in this account as their own.” Id. at ¶ 6.
The Trustee asserts the following facts about two additional bank accounts held by the Debtors:
At all times material in 2013 prior to bankruptcy, Don Walker also maintained a bank account at First Tennessee Bank (Account 1508) known as “Don Walker Construction Account”. This account was primarily used to operate the construction side of Don Walker’s businesses. Rhonda Walker has signature power on this account.
At all times prior to bankruptcy, the Debtors also had a joint personal account 'with First Tennessee Bank (Account 836). The Debtors transferred their own funds from this account in and out of their construction and client management accounts freely prior to bankruptcy.
Paris Aff., ¶¶ 6-7. The court will refer to the Account No. 1508 as the “Construction Account” and the Account No. 836 as the “Personal Account”.
The Defendant does not dispute that she was the recipient of two pieces of real property. She states that on May 17, 2013, Mr. Walker represented her in the acquisition of two pieces of real property, one located at 9004 Fuller Road and one located at 6861 Standifer Gap Road (collectively “Properties”). The Properties are located in Chattanooga, Tennessee. Paris Aff., ¶ 9. Mr. Walker, acting through a power of attorney executed by Defendant, titled the Properties in the name of his daughter, the Defendant Cindy Walker. See Paris Aff., ¶¶ 9-10; [Doc. No. 18-5, Affidavit of Cindy Walker in Response to Plaintiffs Motion for Summary Judgment (“C. Walker Aff’), ¶4]; [Doc. No. 14-1, Exs. A, B]. Exhibits A and B are copies of the Special Warranty Deeds associated *197with the Properties indicating that the Defendant is the new owner. Id.
There is no dispute that the funds for the acquisition came from the checking accounts of the Debtors. The Trustee alleges that on May 17, 2013, the Debtors made a number of financial transfers between their various accounts in order to purchase the Properties for the Defendant. See [Doc. No. 14-1, Exs. C-l through Gl].
In order to purchase the Properties, $134,899.50 was deposited into the Management Account on May 17, 2013. Exhibit C-l is a copy of the May 2013 transaction report for the Management Account, showing $134,899.50 deposited into that account on May 17, 2013. [Doc. No. 14-1, Ex. C-l]. Five separate deposits were made: $87,000; $27,000; $10,000; $8,000; and $2,899.50.
With respect to the sources of the $87,000 deposit, Exhibit C-3 is a copy of the transactions bank statement for the Personal Account dated May 31, 2013. The statements indicate that the Debtors withdrew $78,000 from the Personal Account on May 17, 2013 by check no. 43090. [Doc. No. 14-1, Ex. C-3]. Exhibit D-l is a copy of check number 43090 from the Personal Account in the amount of $78,000. [Doc. No. 14-1, Ex. D-l], Exhibit D-2 is a copy of the deposit slip indicating a currency deposit of $9,000 and a deposit of $78,000 with the notation “43090” beside the amount of $78,000. The deposit slip is dated May 17, 2013 and shows the funds were deposited into the Management Account. These two amounts bring this deposit to $87,000. [Doc. No. 14-1, Ex. D-2]. Exhibit D-2 also shows a notation relating to check number 043090 that states “reimburse 45000 — king phillips note/cindy 33000 repayment.” Id.
With respect to the source of the $27,000 deposit, Exhibit C-2 is a copy of a checking account withdrawal stub indicating a withdrawal of $27,000 from the Construction Account on May 17, 2013. [Doc. No. 14-1, Ex. C-2],
With respect to the source of the $10,000 deposit, Exhibit F-l is a copy of a Deposit Detail sheet relating to the Management Account indicating that the deposit of $10,000 was made on May 17, 2013. The Deposit Detail reflects accounting information, and it contains two lines. The first line has “Property” as “CW TIS,” “Unit” as “6861 SG,” “Account” as “4000 Rental Income,” “Memo” as “5 yr storage bldg use,” and “Amount” as $5,000. The second line references “Property” as “CW TIS,” the “Unit” as “6861 SG,” the “Account” as “3021 CW Reimbursables,” the “Memo” as “loan from Don,” and the “Amount” as $5,000. The two lines total $10,000. The evidence of the “loan” is Exhibit F-3, which is a check from the Personal Account for $5,000 payable to the Management Account. [Doc. No. 14-1, Exs. F-l, F-2],
With respect to the $8,000 deposit, Exhibit E-l is another copy of a Deposit Detail sheet relating to the Management Account indicating a deposit in the amount of $8,000 made on May 17, 2013. Like Exhibit F-l, this Deposit Detail also has accounting information which identifies the “Property” as “CW TIS,” “Unit” as “6861 SG,” “Account” as “1007 Other Receivables,” “Memo” as “Brent” and “Amount” as $8,000. The Defendant, her mother, her brother, and the bookkeeper have stated in their affidavits that there were accounts maintained between family members which reflected transactions and debts between them. Those statements and these entries raise factual issues regarding what was owed to the Defendant. C. Walker Aff., ¶ 5; [Doc. No. 18-2, Affidavit of Rhonda Walker in Response to Plaintiffs Motion for Summary Judgment (“R. Walker Aff’), ¶¶ 4-5]; [Doc. No. 18-3, *198Affidavit of Brent Walker in Response to Plaintiffs Motion for Summary Judgment (“B. Walker Aff’), ¶3]; [Doc. No. 18-4, Affidavit of Janice Long in Response to Plaintiffs Motion for Summary Judgment (“Long Aff’), ¶ 4]. As to the source of the $2,889.50 deposit, there is no additional explanation provided by the Trustee.
There is no dispute that the Properties were purchased with these deposits. Exhibit G1 is a copy of check number 36227 from the Management Account made out to First Tennessee Bank in the amount of $81,722.22. The bottom of the check references “Cindy Walker.” [Doc. No. 14-1, Ex. Gl]. Exhibit HI is a copy of check number 36228 from the Management Account made out to First Tennessee Bank in the amount of $69,242.81 which also references “Cindy Walker” on the left bottom side of the check. [Doc. No. 14-1, Ex. HI], Exhibit H-3 indicates that check numbers 36227 and 36228 were withdrawn from the Management Account on May 17, 2013, and the proceeds were used to purchase the Properties. [Doc. No. 14-1, Ex. H-3].
In addition to the purchase of the Properties for the Defendant, additional sums were spent for her benefit. The Trustee asserts in his affidavit that:
An analysis of the Debtors’ accounts and records also shows that following these purchases and up to June 28, 2013, the Debtors spent an additional $18,056.50 on improvements to these same two properties. An analysis of the Debtors’ records shows that an additional $13,520.41 was spent on improvements to 9004 Fuller Road and $4,536.09 was spent on improvements to 6861 Standi-fer Gap Road. There is no evidence in the Debtors’ books and records that the Defendant gave any consideration in exchange for these expenditures.
At the same time the Fuller Road and Standifer Gap properties were transferred in May 2013, both Debtors were Defendants in a lawsuit in the Chancery Court of Hamilton County Tennessee, Docket # 11-0536. This suit was filed by a creditor, FirstBank, on July 13, 2011. It sought a money judgment in excess of $6,000,000.00 associated with the Debtors’ breach of numerous promissory note obligations and guaranty agreements.
As Chapter 7 Trustee, I am familiar with the value of the Debtors’ assets and the extent of their liabilities in May and June, 2013. Based on a review of their records, the petition and my knowledge of the net values of their properties, the Debtors were balance sheet insolvent by at least $10,000,000.00 on May 17, 2013. This condition did not change materially from then to the petition date.
The unsecured creditors of Don and Rhonda Walker will not receive 100% [of] their claims in the Chapter 7 distribution, based on assets expected to be recovered and claims to be allowed.
Paris Aff., ¶¶ 17-20.
The Defendant opposes the motion for summary judgment and has filed several affidavits, as well as documents in support of her argument that genuine disputes as to material facts exist regarding the Trustee’s fraudulent transfer claim. In her affidavit the Defendant asserts that she lives in Prague in the Czech Republic and that she is the daughter of the Debtors. C. Walker Aff., ¶¶1-2], She further states that she owns 23 properties, and that the last two properties she purchased were the Properties at issue in this adversary proceeding. Id. at ¶ 3. She asserts that she receives the rental income on these properties and that this income is reflected on her income tax returns. Her father d/b/a Don Walker Rentals manages *199her properties for her while she lives abroad, and she has appointed her father as her attorney in fact to help conduct the purchases of the real estate. Id. at ¶ 4-5. She has attached the power of attorney she has given to her father, Don Walker, as Exhibit A to her affidavit. See [Doc. No. 18-6, Ex. A], She states that: “Don Walker Rentals maintained a management account in which receivables were deposited and payables spent out in the maintenance and management of my properties. I was not involved directly in the business of renting these properties or managing receivables and payables and I relied upon Don Walker Rentals for those matters.” Id. at ¶ 5. She has relied on her father to manage her properties and has been willing to borrow money from family members to acquire properties. Id. at ¶ 6. She was planning on using the money earned from her real estate to fund her future retirement.
With respect to the purchase of the Properties, the Defendant stated the following:
In 2013,1 was aware that my father was actively looking for additional properties for me to purchase; While I cannot recall now all of the details surrounding the purchase of the two houses in May of 2013,1 was given specifies at the time. I left the financial arrangements entirely up to my father with the stipulation that any money to be borrowed from family to complete the purchases would have to be repaid solely with the cash from my rental properties. I understood that Don and Rhonda Walker were going to provide a portion of the monies needed to complete the purchases, and I do not deny that they did in fact provide part of the funds to buy these tracts. Most of the money required to make'these purchases, though, came from me.
At the time of the purchases, I had cash available in the management account to pay part of the sales price for the two properties. Meanwhile, my brother and my aunt provided a portion of the funds by way of loans. In fact, the $30,000.00 loan from my aunt is being paid from my rental income at present. Further, a part of the money used to buy the tracts came from the sale of a secured note to Baptist International Missions, Inc. (“BIMI”) for $45,000 in April of 2013. This note was owed to me by King Henry Phillips, who purchased a residence from me in October of 2009.
Id. at ¶¶ 7-8. Exhibit B to her affidavit is a copy of a 2009 warranty deed to Mr. Phillips, a deed of trust, and the assignment of the deed of trust to BIMI. [Doc. No. 18-7]. Exhibit C is a copy of the check from BIMI. The Defendant explains that “the check was inadvertently made payable to my father and was then deposited for the benefit of my brother by mistake. I was made aware of this later, and these funds were transferred by my brother to my ledger and used as a portion of the monies to complete the purchases of the properties.” C. Walker Aff. ¶ 9.
In concluding her affidavit, the Defendant asserts:
At no time have Don and Rhonda Walker ever purchased real estate for themselves which they titled in my name. Rather, I have purchased only what are my properties, often with their assistance, but the real estate in my name is mine and mine alone. We have never titled and retitled property to each other as a means of defrauding anyone.
I do not deny that the purchases of these properties occurred about six weeks before my parents filed a bankruptcy petition; however, neither at the time of the purchases nor at any other point did my parents inform me of any *200need for bankruptcy protection. I was unaware that a filing was being made until they informed me afterward.
Id. at ¶¶ 10-11.
The Defendant has also provided an affidavit from the Debtor Rhonda Walker in support of her opposition to the Trustee’s motion for summary judgment. R. Walker Aff. In her affidavit she asserts that her daughter, the Defendant, was one of several clients for whom Don Walker Rentals managed a number of real properties. R. Walker Aff., ¶¶ 4-5. Mrs. Walker corroborates her daughter’s version of the events:
With regard to the purchases of the two properties in question, Cindy had accumulated funds which were applied to buy the two tracts. Some portion of the purchase funds came from Brent Walker, and Don Walker and I put some of our own funds into the purchase as well. I believe that approximately $51,000.00 of the total needed to buy the two properties (just under $151,000) came from funds Mr. Walker and I provided.
In addition to the purchase of the properties, it was necessary to spend money to improve them. The necessary funds were generated from Cindy and did not come from Mr. Walker and me. My daughter did have to rely on a loan from my sister, Martha Nowlin, in the amount of $80,000.00, but these funds were provided solely by Cindy Walker’s aunt, not from Mr. Walker and me. They were deposited into the management account and applied to cover the purchase and improvement of the two properties.
R. Walker Aff., ¶¶ 6-7.
Mrs. Walker also contends her insolvency remains a question of fact. In her affidavit she contends:
Although I am a Debtor in this matter, there remains a question of whether I am liable on a particular debt allegedly owed to FirstBank of over six million dollars. I have raised a defense and counterclaim to the guaranty I signed at the demand of the bank on the grounds that their actions violated the Equal Credit Opportunity Act, 15 U.S.C. Section 1691 and Regulation B, 12 C.F.R. Section 202.7. The case which was filed in the Hamilton County Chancery Court as case no. 18-0047, FirstBank v. Elbert Donald Walker and Rhonda P. Walker, remains pending. If I am successful, I aver that I am [not] insolvent at all.
R. Walker Aff., ¶ 8.
The Defendant’s brother, Brent Walker, has also submitted an affidavit in support of the Defendant’s opposition to the Plaintiffs motion for summary judgment. B. Walker Aff. In his affidavit he states:
In April and May of 2013 I was aware that Cindy Walker was purchasing two properties through her power of attorney, Don Walker. My sister lives and works out of the country and has long operated her properties through her attorney in fact. I made a loan to her to help come up with the monies needed to complete the two properties. I do not know how much money my father and mother contributed to the purchases but understand they did in fact pay something towards the sales. In addition, my aunt advanced money to my sister to enable her to either complete the purchases or make improvements to the structures.
I also paid the sum of $45,000.00 out of my savings account at First Tennessee Bank which represented funds that were the property of Cindy- Walker to begin with. Through her attorney in fact, she sold a note for $45,000.00 in April of 2013, but the funds were deposited into my account. I simply transferred the funds to the management account and understand they were used to make the purchase of *201the properties that are at issue in this matter.
B. Walker Aff., ¶¶ 4-5. In addition, the former office manager and bookkeeper of the records of Don Walker Rentals, Janice Long, provided the court with an affidavit. Long Aff. Ms. Long asserts that Don Walker Rentals managed properties owned by Cindy Walker and that the company kept a separate ledger for the Defendant’s real estate activities. Long Aff., ¶¶ 4-5.
In response to the Defendant’s opposition to his motion for summary judgment, the Trustee filed a supplemental affidavit in support of his motion. [Doc. No. 21, Supplemental Affidavit of Chapter 7 Bankruptcy Trustee, James R. Paris (“Supp. Paris Aff’)]. This supplemental affidavit states:
I am custodian of the books and bank account records of the Debtors. In the records of the Don Walker Client Management Account (First Tennessee Acct. 1961) are records of a $45,000.00 deposit that was made into the Management Account on May 81, 2013.
The deposit ticket reflects that it is “proceeds of sale from 1416 Bush Road (King Phillips)”. However, the check used to make this deposit was from the Management Account itself, check number 36236 made payable to Cindy Walker in the amount of $45,000.00. This check is dated May 21, 2013.
Attached hereto [as] Exhibit A are copies of the check and the deposit documents in question from May 31, 2013. I had reviewed this transaction previously, but I did not regard it as any consideration for the purchase of the two houses titled in Cindy Walker’s name on or about May 17, 2013.
Attached as Exhibit B are the Bank Statements of the Don Walker Client Management Account for April and May 2013.1 have reviewed all the deposits for both months. There is no record of a $45,000.00 deposit into this account from Brent Walker or BIM in April or May, 2013. I also find no record of a $30,000.00 deposit from Martha Nowlin into this account in April or May of 2013. With regard to improvements made to the two properties after May 17, 2013 and before June 28, 2013, funds were spent out of the Client Management account for that purpose. The sum of $4,536.09 was spent on 6861 Standifer Gap Road. The sum of $13,520.41 was spent on 9004 Fuller Road.
Supp. Paris Aff., ¶¶ 2-7.
II. Jurisdiction
28 U.S.C. §§ 157 and 1334, as well as the general order of reference entered in this district provide this court with jurisdiction to hear and decide this adversary proceeding. The Plaintiffs’ action regarding the avoidance of a fraudulent transfer or a preference is a core proceeding. See 28 U.S.C. § 157(b)(2)(F), (H).
III. Standard of Review
Federal Rule of Bankruptcy Procedure 7056 makes Federal Rule of Civil Procedure 56 applicable to bankruptcy adversary proceedings. See Fed. R. Bank. P. 7056. Summary judgment is appropriate if there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c). The burden is on the moving party to show conclusively that no genuine issue of material fact exists, and the Court must view the facts and all inferences to be drawn therefrom in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Morris v. Crete Carrier Corp., 105 F.3d 279, 280-81 *202(6th Cir.1997); 60 Ivy Street Corp. v. Alexander, 822 F.2d 1432, 1435 (6th Cir.1987); Kava v. Peters, No. 09-2327, 2011 WL 6091350, at *3 (6th Cir. Dec. 7, 2011).
Once the moving party presents evidence sufficient to support a motion under Fed. R. Civ. P. 56, the nonmoving party is not entitled to a trial merely on the basis of allegations. The nonmoving party is required to come forward with some significant probative evidence which makes it necessary to resolve the factual dispute at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); 60 Ivy Street, 822 F.2d at 1435. The moving party is entitled to summary judgment if the nonmoving party fails to make a sufficient showing on an essential element of the nonmoving, party’s case with respect to which the nonmoving party has the burden of proof. Celotex, 477 U.S. at 323, 106 S.Ct. 2548; Collyer v. Darling, 98 F.3d 211, 220 (6th Cir.1996).
Rule 56 outlines the requirements for defeating a motion for summary judgment. Rule 56(c) and (e) provide guidance to the non-moving party:
(c) Procedures
(1)Supporting Factual Positions.
A party asserting that a fact cannot be or is genuinely disputed must support the assertion by:
(A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or
(B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact....
(e) Failing to Properly Support or Address a Fact. If a party fails to properly support an assertion of fact or fails to properly address another party’s assertion of fact as required by Rule 56(c), the court may:
(1) give an opportunity to properly support or address the fact;
(2) consider the fact undisputed for purposes of the motion;
(3) grant summary judgment if the motion and supporting materials— including the facts considered undisputed — show that the movant is entitled to it; or
(4) issue any other appropriate order.
Fed.R.Civ.P. 56(c), (e).
For an affidavit to create a genuine dispute as to any material fact, it must do more than “reiterate [the] allegations in vague and conclusory terms.” Emmons v. McLaughlin, 874 F.2d 351, 355 (6th Cir.1989). A non-moving party cannot withstand a motion for summary judgment by providing a “bare legal conclusion” or without providing “specific information that might conceivably create a genuine issue.” Id. In addition,
... applying Rule 56(e), the non-movant may not simply attack the credibility of the movant’s affiants without a supporting factual showing.... It is not sufficient that the affidavit merely recite facts to which a competent witness will testify at trial. Nor can the affidavit consist only of conjective, conclusory allegations as to ultimate facts, or conclusions of law.
Treinish v. Glazer (In re Glazer), 239 B.R. 352, 356 (Bankr.N.D.Ohio 1999).
IV. Analysis
11 U.S.C. § 548 allows a trustee to:
*203avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that ' such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
11 U.S.C. § 548(a)(1)(B). The statute defines “value” as “property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor ...” 11 U.S.C. § 548(d)(2)(A). As it does with § 547 claims, 11 U.S.C. § 550 allows a trustee to recover property for the benefit of the estate where a court has avoided transfer of the property pursuant to 11 U.S.C. § 548. 11 U.S.C. § 550. A transfer includes: “each mode direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with — (i) property; or (ii) an interest in property.” 11 U.S.C. § 101(54).
As one bankruptcy court has explained:
The primary purpose of fraudulent transfer law is to avoid transactions that “unfairly or improperly deplete a debt- or’s assets or that unfairly or improperly dilute the claims against those assets.” Transfers that are deemed fraudulent and capable of being avoided fall into two distinct categories of transactions— those made by means of actual fraud, and those deemed constructively fraudulent. Under either theory, the burden of proof falls to the party claiming that fraud has occurred, and this burden must be met by a preponderance of the evidence.
In re Eubanks, 444 B.R. 415, 422 (Bankr.E.D.Ark.2010) (quoting In re S.W. Bach & Co., 435 B.R. 866, 875 (Bankr.S.D.N.Y.2010)). In the constructive fraud context of Section 548(a)(1)(B) “no finding with regard to the state of mind of the transferor is necessary.” In re Eubanks, 444 B.R. at 425. The constructive fraud section:
carries no element of intent; instead, the sole issues are whether the Plaintiff received less than reasonably equivalent value — determined by comparing the value of the property transferred with the value of what the debtor received— in exchange for the transfers in question and whether the Plaintiff was insolvent at the time of or rendered insolvent by the transfers or whether the Defendant intended or believed that the Plaintiff would incur debts that would be beyond its ability to pay as such debts matured.
Lingham Rawlings, LLC v. Gaudiano (In re Lingham Rawlings), LLC, No. 10-3125, 2013 WL 1352320, at *26 (Bankr.E.D.Tenn. Apr. 3, 3013).
*2041. Dispute Regarding Whether a Transfer Occurred
The Trustee argues that the Defendant received title to the Properties without providing any consideration to the Debtors in exchange. There appears to be no dispute that the funds to purchase the Properties came from the Debtors’ Management Account on May 17, 2013. There is no dispute that the Properties worth approximately $150,000 were given to. the Defendant prepetition and removed $150,000 in cash from the Debtors’ estate. There is no genuine dispute regarding whether a transfer of the Debtors’ property was made by the Debtors.
2. Dispute Regarding Whether the Transfer Was a Transfer of Property of the Estate for Less than Reasonably Equivalent Value
The question remains whether the Debtors received reasonably equivalent value for the transfer of the value of the Properties. Section 548 also requires that the debtor receive less than reasonably equivalent value for the transfer. 11 U.S.C. § 548(a)(1)(B). The Sixth Circuit has addressed the meaning of “reasonably equivalent,” which is undefined in the Bankruptcy Code. See In re Congrove, No. 04-8049, 2005 WL 2089856, 330 B.R. 880, at *3 (6th Cir. BAP 2005) aff'd, 222 Fed.Appx. 450 (6th Cir.2007). There, the 6th Circuit Bankruptcy Appellate Panel noted that:
In determining whether value is reasonably equivalent, focus should be placed upon the consideration received by the debtor rather than the value given by the transferee:
[T]he proper focus is on the net effect of the transfers on the debtor’s estate, the funds available to unsecured creditors. As long as the unsecured creditors are no worse off because the debtor, and consequently the estate, has received an amount reasonably equivalent to what it paid, no fraudulent transfer has occurred.
“[I]t is clear that the debtor need not collect a dollar-for-dollar equivalent to receive reasonably equivalent value.”
Id. (quoting Harman v. First Am. Bank (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d 479, 484 (4th Cir.1992) and Butler Aviation Int’l, Inc. v. Whyte (In re Fairchild Aircraft Corp.), 6 F.3d 1119, 1125-26 (5th Cir.1993), abrogated on other grounds by Texas Truck Ins. Agency, Inc. v. Cure (In re Dunham), 110 F.3d 286, 289 (5th Cir.1997)).
In general, where the central issue in dispute is whether a debtor received reasonably equivalent value in exchange for a transfer, the question is one of fact. See Lisle v. John Wiley & Sons, Inc. (In re Wilkinson), 2006 WL 2380887, 196 Fed.Appx. 337, 341 (6th Cir. Aug. 17, 2006) (citing In re Humble, 19 Fed.Appx. 198, 200 (6th Cir.2001)); Webb Mtn, LLC v. Executive Realty Partnership, L.P. (In re Webb Mtn, LLC), 420 B.R. 418, 432-33 (Bankr.E.D.Tenn.2009). In In re Wilkinson the Sixth Circuit further instructed that “[a] court considering this question should first determine whether the debtor received any value in the exchange. If so, the court should determine if the value received was reasonably equivalent.” 196 Fed-Appx. at 341 (citing Pension Transfer Corp. v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Corp. Retirement Plan No. 003 (In re Freuhauf Trailer Corp.), 444 F.3d 203, 212 (3d Cir.2006)). Further, “ ‘[i]n assessing whether a challenged transfer is supported by reasonably equivalent value, courts generally compare the value of the property transferred with the value of that received in exchange for the transfer.’ ” In re Webb Mtn, LLC, 420 B.R. at 433 (quoting Corzin *205v. Fordu (In re Fordu), 201 F.3d 693, 707 (6th Cir.1999)). Courts may consider fair market value or the elimination of an antecedent debt as factors in this assessment. See In re Webb Mtn, LLC, 420 B.R. at 433.
The Defendant admits that some of the funds used to purchase the Properties came from her parents, the Debtors. Her mother, Rhonda Walker, states that “approximately $51,000.00 of the total needed to buy the two properties (just under $151,000) came from funds Mr. Walker and I provided.” R. Walker Aff., ¶ 6. Thus, it appears to be undisputed that $51,000 was property of the Debtors that was used to fund the purchase of the Properties for the Defendant. The affidavit does not offer any evidence that this sum was provided on account of the accumulation of rentals or as a loan with repayment terms. There appears to be no dispute as to the transfer of that amount for no consideration.
As to the remaining balance of the value of the Properties, the Defendant has offered other evidence in the form of several affidavits to rebut the Trustee’s argument that she provided no consideration for the Properties. She asserts under oath that she owns 23 rental properties that her father manages for her and that the income received from the'rentals is recognized on her tax returns each year. C. Walker Aff., ¶¶ 3, 5. She states that “most of the money required” to buy the two Properties came from her. Id. at ¶ 7. She contends that “[a]t the time of the purchases, I had cash available in the management account to pay part of the sales price for the two properties. Meanwhile, my brother and my aunt provided a portion of the funds by way of loans.” Id. at ¶ 8. She also asserts that “a part of the money used to buy the tracts came from the sale of a secured note” to BIMI for $45,000 in April of 2013. Id. Mrs. Walker also contends under oath that the Defendant “had accumulated funds which were applied to buy the two tracts.” R. Walker Aff., ¶ 6. In addition, the Defendant’s brother has declared under oath that he “made a loan to [the Defendant] to help come up with the monies needed to” purchase the two Properties. B. Walker Aff., ¶ 4.
The Defendant did not provide the court with any specifics about the exact amount that she was owed on May 17, 2013 as a result of the collection of her rentals by her father, but the three affidavits create a factual issue as to the consideration and whether there was any antecedent debt satisfied by purchase of the Properties in her name.
The Trustee’s response to the Defendant’s response contends that the Defendant’s evidence in opposition to his motion for summary judgment is too vague and speculative to survive summary judgment. [Doc. No. 19]. His response to the Defendant’s statement of additional undisputed facts states that the Defendant “has never furnished an accounting to this court of what funds of hers ... might be in the management account. Further, the evidence shows substantial new inflows into the account from the Debtors on May 17, 2013 to fund the purchase of the two houses.” [Doc. No. 20, Trustee’s Response to Defendant’s Additional Undisputed Material Facts, ¶ 15]. However, the court notes that the exhibits provided by the Trustee in support of the source of the “new inflows” has accounting designations that create a question about whether there was a satisfaction of antecedent debt owed to Ms. Walker. [Doc. No. 14-1, Ex. E-l, F-1],
The Trustee disputes that the Defendant “held funds in the Don Walker Rentals management account ... and had cash available to apply to the purchases of the properties.” [Doc. No. 20], The Defendant has offered evidence that there were *206such funds. The court will have to make the factual determination at trial as to whether the amounts owed by Walker Rentals to the Defendant exceeded the value of the Properties she received. The court will not grant summary judgment for an amount in excess of $51,000 because a genuine dispute remains.
3. Issues of Fact Regarding the Insolvency of Rhonda Walker
The Trustee relies on Section 548(a)(l)(B)(ii)(I) for the second prong of his Section 548 claim. The Defendant contends that there is a factual dispute with respect to this element of the claim. This prong requires that the Debtor be “insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation ...” 11 U.S.C. § 548(a)(l)(B)(ii)(I). The Bankruptcy Code defines “insolvent” as
With reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of—
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and (n) property that may be exempted from property of the estate under section 522 of this title; ...
11 U.S.C. § 101(32)(A). As the bankruptcy court in In re Eubanks explained, “[t]he basic requirement of this form of insolvency is that a debtor’s assets exceeded her liabilities on the date that the transfer in question took place.” 444 B.R. at 426.
When a defendant fails to file affidavits or excerpts from the record, courts have been willing to grant a trustee summary judgment on a Section 548 avoidance claim, including a finding of insolvency based on the assets and liabilities listed in the debtor’s schedules. For example, in In re Goldstein the court concluded that the insolvency question was undisputed “[biased upon the Debtor’s schedules and his testimony that his financial situation as reflected in the schedules was substantially comparable to his financial situation at the time of the Transfers, it is not disputed that Mr. Goldstein was insolvent on the date of the Transfers.” Hagan v. Goldstein (In re Goldstein), 428 B.R. 733, 736 (Bankr.W.D.Mich.2010). The court further noted that the ' “schedules reflect debts in an amount exceeding $8.1 million and property valued at less than $2.5 million.” Id.
In this proceeding the Trustee has filed an affidavit under oath indicating the review of the Debtors’ financial affairs which he has undertaken. In his affidavit he testifies that:
At the same time the Fuller Road and Standifer Gap properties were transferred in May 2013, both Debtors were Defendants in a lawsuit in the Chancery Court of Hamilton County Tennessee, Docket # 11-0536. This suit was filed by a creditor, FirstBank, on July 13, 2011. It sought a money judgment in excess of $6,000,000.00 associated with the Debtors’ breach of numerous promissory note obligations and guaranty agreements.
As Chapter 7 Trustee, I am familiar with the value of the Debtors’ assets and the extent of their liabilities in May and June, 2013. Based on a review of their records, the petition and my knowledge of the net values of their properties, the Debtors were balance sheet insolvent by at least $10,000,000.00 on May 17, 2013. This condition did not change materially from then to the petition date.
*207Paris Aff., ¶¶ 19-20. The Debtors’ Amended Summary of Schedules filed shortly after the filing of the bankruptcy petition indicates that the Debtors had assets of $3,328,620.76 and liabilities of $14,104,843.49. [Bankr. Case No. 13-13184, Doc. No. 37].
The Debtor Rhonda Walker has submitted an affidavit challenging the conclusion that can be drawn from the schedules. R. Walker Aff. Her affidavit states:
Although I am a Debtor in this matter, there remains a question of whether I am liable on a particular debt allegedly owed to FirstBank of over six million dollars. I have raised a defense and counterclaim to the guaranty I signed at the demand of the bank on the grounds that their actions violated the Equal Credit Opportunity Act.... The case was filed in the Hamilton County Chancery Court as case no. 13-0947, First-Bank v. Elbert Donald Walker and Rhonda P. Walker, remains pending. If I am successful, I aver that I am [not] insolvent at all.
R. Walker Aff., ¶ 8.
This statement by Mrs. Walker does not raise a genuine issue of fact. Taking the statement in the light most favorable to Mrs. Walker, the court will remove from the total liabilities attributable to First-Bank scheduled by the Debtors. Based on the amounts listed in the most recent version of Schedule F, the amount listed for FirstBank is $6,708,935.07. [Bankr.Case No. 13-13184, Doc. No. 29, pp. 2-3], The total of unsecured debts was $11,188,218.54. Id. at p. 6. Without the FirstBank debt, there remains $4,479,283.47 of unsecured debt. Schedule D reflects additional secured debt of $2,619,557, for total liabilities, without FirstBank, of $7,098,840.47.
On the asset side, in October of 2013, the Debtors amended their schedules to reflect real property values of $2,458,630. [Bankr.Case No. 13-13184, Doc. No. 194]. The list also included- fifteen properties whose value was listed as “unknown,” and their value was not included in the totals, but a collective value of $1,505,500 was given in the description for fourteen of the properties based on their tax appraisal. The fifteenth property was 515 Airport Road which was “appraised in 2013” but no value was given. [Bankr.Case No. 13-13184, Amended-Schedule A, Doc. No. 194, p. 1], In-2014, 513 and 515 Airport Road were sold for $475,000. [Bankr.Case No. 13-13184, Doc. Nos. 437, 440]. For purposes of this motion, the court will attribute the entire sales price to 515 Airport Road. The sum of the stated values on Schedule A, plus values derived from the tax appraisal plus the sales proceeds brings the total asset value for real property to $4,439,130.
The value listed for personal property on Schedule B was $1,134,120.76. Adding that to the real property value brings total asset value to $5,573,250.76. When the asset value is compared to liabilities without FirstBank of $7,098,840.47, Mrs. Walker’s joint and individual liabilities are approximately $1,500,000 more than the assets.
After viewing the facts in the light most favorable to the Defendant, the court does not find that there is any genuine dispute of material fact regarding Mrs. Rhonda Walker’s insolvency.
IV. Conclusion
As to $51,000, the court finds that there is no genuine dispute as to any fact material to the court finding a fraudulent transfer occurred. The court will grant in part the Trustee’s motion for summary judgment and grant the Trustee a judgment for $51,000 which represents the funds giv*208en by the Debtors while they were insolvent for less than reasonably equivalent value to the Defendant and which were used to purchase the Properties. As to the transfer of the remaining amount used to purchase or the amount used to repair the Properties, the Trustee’s motion will be denied.
The Trustee’s motion for partial summary judgment regarding his Section 548 fraudulent transfer claim will be denied in part and granted in part. The motion for partial summary judgment will be GRANTED for $51,000. As to the amounts claimed in excess of $51,000, the Trustee’s motion is denied.
A separate order will enter.
. The Trustee’s request for summary judgment is partial because he has two theories of recovery — -fraudulent transfer and preference. The Trustee has not moved for summary judgment on his claims that the transfers were preferences pursuant to 11 U.S.C. § 547. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498315/ | MEMORANDUM DECISION
Hon. Catherine J. Furay, U.S. Bankruptcy Judge
I. Statement of Procedural History
The Debtor, Sheila Marie Spencer (“Spencer”), filed this Chapter 13 bankruptcy case on April 3, 2015. PNC Bank, N.A. (“PNC”) filed a Motion for Relief from Stay with In Rem Relief for Real Property Located at 1222 W. Jefferson Street, Marshfield, Wisconsin 54449, on April 16, along with a memorandum in support of the motion. PNC requested relief pursuant to section 105(a) and sections 362(d)(1), (2), and (4) of the Bankruptcy Code.
Spencer filed a Chapter 13 Plan and an offer of adequate protection on April 17, 2015. The adequate protection offer proposes to make monthly payments of $1,270.88 to “the Federal Home Loan Mortgage Corporation (Freddie Mac), in its own identity and capacity or as Trustee of an Unidentified Securitization Trust, or its successors or assigns (possibly the United States Treasury) to her attorney’s trust account, pending sale of her homestead. ...” Offer of Adequate Protection, Docket #24. Spencer’s Amended Chapter 13 Plan states a sale of her homestead will be to her son, “contingent upon Buyer obtaining financing at an interest rate not to exceed 5% per annum.” Offer to Purchase, Docket # 29, Exhibit A.
The Court conducted an evidentiary hearing on May 11, 2015, and the parties submitted written argument.
II. Background
The relevant facts have been recited numerous times by this Court and other courts1 and will not be recited in detail here. A summary of the facts is sufficient to address the issues presented by the motion for relief from stay and the proffered adequate protection.
*211Spencer borrowed $209,160 to purchase a home in 2005. She signed a Note for, that amount. The Note was secured by a mortgage on the home. No payments have been received and applied to the Note since late 2008. While the parties dispute the facts surrounding the failure of payments in 2008, Spencer concedes she has not tendered or made any payment in years. A foreclosure was commenced in April 2009 by FNMC, a division of National City Bank of Indiana n/k/a National City Bank. An amended foreclosure complaint was filed naming PNC as the plaintiff. It is undisputed that Federal Home Loan Mortgage Corporation (“Freddie Mac”) owns a beneficial interest in the Note and Mortgage and PNC is the servicer.
In 2010, Spencer filed a Chapter 7 bankruptcy case. PNC moved for and was granted relief from stay. Spencer received a discharge of her personal liability on the Note. The foreclosure action continued. PNC was formally substituted as the plaintiff. PNC filed a motion for summary judgment.
Spencer then began advancing the argument that is the theme of various theories in subsequent proceedings: PNC is not the real party in interest, Freddie Mac is the “true owner” of her Note, and PNC has no standing to enforce the Mortgage. She filed a motion for contempt in the bankruptcy court in 2012, claiming PNC and others continued in personam collection actions in the foreclosure proceeding in violation of the discharge order. That motion was denied. She then filed a motion to reopen the Chapter 7 ease. The bankruptcy court denied the motion and two motions for reconsideration. Spencer appealed, and the District Court affirmed.
Having no success in the bankruptcy court, Spencer removed her foreclosure case to the District Court, which remanded and then denied two motions for reconsideration. Spencer appealed the District Court’s order to the Seventh Circuit Court of Appeals. The Court of Appeals affirmed and ordered Spencer’s attorney to show cause as to why she should not be sanctioned for pursuing a frivolous appeal.
Spencer then filed her first Chapter 13 bankruptcy case. PNC filed a motion for relief from stay and a motion to dismiss. An evidentiary hearing was held in February of 2014. The original Note was produced at the hearing. The Court found PNC had standing, that it was not adequately protected, and granted PNC relief from stay. Spencer admitted the sole reason for the filing was to prevent the foreclosure from proceeding. The Court also dismissed the bankruptcy case for lack of good faith in filing the petition. Spencer appealed both orders.
Back in state court, the foreclosure proceedings continued. Spencer engaged in various procedural feints in those proceedings. The state court entered a judgment of foreclosure on August 20, 2014. Spencer appealed. No stay pending appeal was granted.
The property was sold at sheriff sale on April 1, 2015. The next day, April 2, the District Court affirmed the bankruptcy court’s order granting relief from stay and dismissing Spencer’s first Chapter 13 case. *212The day after, April 3, the Wisconsin Court of Appeals ordered Spencer’s foreclosure appeal dismissed unless her now delinquent brief was filed within five days.
Spencer then filed this Chapter 13 case. She later filed an adversary proceeding. The adversary requests, yet again — and despite the existence of the foreclosure judgment — that this Court determine the identity of the entity entitled to payment of her Note and Mortgage, declare the Mortgage is null and void, and enjoin the state court from proceeding with the foreclosure or any eviction.
Spencer stipulated at the hearing that there is no equity in the property. She argues that this Court should determine and order adequate protection to be an amount equal to the original scheduled monthly mortgage payments. Finally, based on the fact she has been in the house since 2005 and it is the only home her minor son has known, she argues that the Court should determine the property is necessary for an effective reorganization.
III. Jurisdiction
The Court has jurisdiction over this motion for relief from stay under 28 U.S.C. § 1334 by way of the reference from the District Court. 28 U.S.C. §§ 157(a) and (b)(1). Because it involves core proceedings under 28 U.S.C. §§ 157(b)(2)(A) and (G), the Court may enter final judgment. 28 U.S.C. § 157(b)(1).
IV. Analysis
The filing of a bankruptcy petition automatically stays a number of actions, including actions taken by the debtor’s secured creditors to repossess or foreclose on their collateral. 11 U.S.C. § 362(a).
Parties in interest may request relief from the stay. Section 362(d)(1) provides the court shall grant relief from stay “for cause, including the lack of adequate protection of an interest in property of such party in interest.” Section 362(d)(2) provides the court shall grant relief from stay as to property if (A) “the debtor does not have an equity in such property” and (B) “such property is not necessary to an effective reorganization.”
The party requesting relief from stay has the burden of proof on the issue of the debtor’s equity in property. 11 U.S.C. § 362(g)(1). The party opposing the relief — Spencer—has the burden of proof on all other issues. 11 U.S.C. § 362(g)(2). Courts have interpreted section 362(g)(2) to mean the movant must first establish a prima facie case, which then must be rebutted by the debtor if relief from stay is to be avoided. In re Rexene Products Co., 141 B.R. 574, 577 (Bankr.D.Del.1992).
A. Standing to Seek Relief from Stay
Hearings on motions for relief from stay are summary proceedings at which the court decides limited issues. Rinaldi v. HSBC Bank USA, N.A. (In re Rinaldi), 487 B.R. 516, 530 (Bankr.E.D.Wis.2013). A decision to modify the stay is “only a determination that the creditor’s claim is sufficiently plausible to allow its prosecution elsewhere.” Id. Thus, a creditor need merely demonstrate a “color-able claim” to property of the estate. In re Vitreous Steel Prods. Co., 911 F.2d 1223, 1234 (7th Cir.1990); see also In re Rinaldi, 487 B.R. at 530.
Here, PNC has demonstrated a col-orable claim to property of the estate. PNC obtained a judgment of foreclosure on August 20, 2014. The Wood County Circuit Court found PNC is entitled to enforce a mortgage securing Spencer’s performance of the terms of the Note executed by Spencer. Judgment of Foreclosure, Docket #36, Movant’s Exhibit 8 *213(finding “[t]hat the plaintiff is the holder of a Note dated July 29, 2005 and executed by defendant, (“the Note”) and is entitled to enforce a Mortgage dated July 29, 2005 and executed by defendant on the Premises (“the Mortgage”) which secured defendant’s performance of the terms of the Note.”)2 PNC’s witness, an Assistant Vice President and Manager of PNC’s Default Litigation Department, testified there has been no assignment since the judgment of foreclosure was entered. This determination is sufficient to establish PNC’s standing to seek relief from stay.
Spencer’s initial argument is that PNC cannot rely on the foreclosure judgment to demonstrate its standing because an appeal of the judgment is pending. She argues this means it is not a final judgment for the purpose of relief from stay. She is in error. The appeal is irrelevant to the motion. The issue is not whether any form of res judicata, or collateral estoppel precludes Spencer from litigating who is entitled to payments or proceeds from a sale of the house. This Court need only determine whether PNC has demonstrated a colorable claim to property of the estate so that it can prosecute the claim elsewhere. Granting relief from stay does not preclude Spencer from proceeding in her state court appeal.
Spencer also asserts PNC is not the real party in interest to seek relief from stay because “it is the admitted servicing agent for Freddie Mac and does not have the authority of its principal to bring prosecute this Motion.” Again, the Wood County Circuit Court has already determined PNC is entitled to enforce the Note and Mortgage. PNC is the holder of the original Note and the Mortgage. That there may be a beneficial interest holder does not obviate the findings of the state court. Further, as previously found by this Court, PNC is the holder of the original Note. It produced the original at the hearing in February of 2014 and> it was admitted into evidence. This Court concluded, as did the state court, that PNC was the holder of the Note and entitled to enforce it under Section 403.301, Wis. Stats. The Court need not determine whether a beneficial owner exists and, if so, who it is. Moreover, other courts have found that loan servicers are parties in interest under Rule 17 of the Federal Rules of Civil Procedure. See, e.g., In re Woodberry, 383 B.R. 373, 379 (Bankr.D.S.C.2008) (collecting cases). Such a finding would be especially appropriate in this case, where PNC proceeded in the foreclosure action, obtained a foreclosure judgment, and also previously produced the original Note in this Court. PNC has demonstrated that it holds a colorable claim to the property and that is sufficient to confer standing.
B. Relief from Stay
1. “Cause, ” Including Lack of Adequate Protection
“Cause” as used in section 362(d) “has no clear definition and is determined on a case-by-case basis.” In re Fernstrom Storage & Van Co., 938 F.2d 731, 735 (7th Cir.1991), quoting In re Tucson Estates, Inc., 912 F.2d 1162, 1166 (9th Cir.1990). However, it specifically includes “lack of adequate protection.” Section 361 describes ways in which a party’s interests may be adequately protected, including periodic cash payments. Secured creditors cannot repossess or foreclose on their collateral while the automatic stay is in effect. *214Thus, the purpose of adequate protection is to compensate secured creditors for the decrease in value of their interest in collateral during the period of a bankruptcy case before a plan providing for payment is confirmed. One bankruptcy court observes,
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 be-tweén the parties and whether the creditor’s property interest is being unduly jeopardized.
In re Rogers, 239 B.R. 883, 887 (Bankr.E.D.Tex.1999) (citation omitted).
PNC has made a prima facie case that it is not adequately protected. Spencer stipulated there is no equity in the property, so an equity cushion cannot adequately protect PNC’s interest. She has made no payments on the Mortgage since October 2008. PNC’s witness testified it has been required to pay for insurance and real estate taxes in order to protect its collateral and lien position. According to the foreclosure judgment, PNC’s unpaid escrow advances for real estate taxes and hazard insurance totaled $33,654.64 as of September 13, 2013. It has not been reimbursed and has subsequently advanced further amounts. PNC has also expended funds in litigating Spencer’s removal of the foreclosure proceeding to District Court and the resulting appeal. It continues to expend funds in this litigation.
Spencer devotes a portion of her argument to an assertion that PNC’s witness did not have authority to refuse her offer of adequate protection. PNC’s refusal of the offer is irrelevant to the matter before the Court. A relief from stay movant is free to accept or reject an offer to settle its motion, and the Court’s role is not to second-guess why or how it made a decision not to accept an offer. If the offer is refused, the issue before this Court is simply whether PNC is adequately protected according to the terms of sections 361 and 362(d)(1).
Spencer has the burden of proving PNC is adequately protected. See 11 U.S.C. § 362(g)(2). She proposes to make monthly adequate protection payments of $1,270.88 to “the Federal Home Loan Mortgage Corporation (Freddie Mac), in its own identity and capacity or as Trustee of an Unidentified Securitization Trust, or its successors or assigns (posáibly the United States Treasury) to her attorney’s trust account, pending sale of her homestead .... ” Offer of Adequate Protection, Docket #24. This is the amount of the principal and interest payment on the original mortgage amount. At the same time, she states she will seek to sell the property to her son and has commenced an adversary proceeding “to seek the Court’s determination of the identity of the entity with the right to receive her payments .... ” Id. Spencer introduced a declarations page showing an insurance policy in effect since August 9, 2014. The declarations page listed “Freddie Mac” as the mortgagee. Her brief indicates she has budgeted for real estate taxes, and the budget on her Schedule J does contain that as a line item. However, no evidence was presented by Spencer that she has paid real estate taxes. Neither has she taken action to add PNC as a mortgagee *215or additional named insured on the insurance policy.
Spencer’s “offer” cannot seriously be viewed as something that meets her burden to show the interests of PNC are adequately protected against a decrease in value resulting from a continuation of the automatic stay. Rather, Spencer’s offer continues to jeopardize the property interest. She proposes to make payments in the amount according to the original terms of the Note. Although she argues the property is not depreciating at a rate greater than her proposed payments, she presented no evidence to support this contention. The judgment of foreclosure is in an amount significantly higher than the original face amount of the Note. The proposed payment does not account for any increase in the debt. It does not address the real estate taxes that continue to accrue or the fact that PNC was required to pay them to protect its lien position. Spencer merely asserts she has “budgeted” for them.
As for the issue of insurance on the property, PNC’s witness testified that the insurance payee should be PNC. To his knowledge, PNC had not been provided with anything indicating insurance coverage on the property that names PNC as an additional insured for a policy that has been paid for by Spencer. Spencer offered no evidence or argument as to whether or how a policy listing Freddie Mac as a secondary insured would protect PNC.
It is also elementary that to adequately protect an entity through periodic cash payments, one must direct the payment appropriately. The terms of the offer do not contemplate payments to PNC. The written offer is a proposal to pay the Federal Home Loan Mortgage Corporation, or pay funds into Spencer’s attorney’s trust fund while litigation continues. Even if the Court took oblique comments made at the evidentiary hearing to constitute a proposal to pay PNC directly if the Court so ordered, Spencer has still not demonstrated the amount adequately protects PNC.
The final component of the adequate protection offer is the abbreviated offer to purchase from Spencer’s son. While the amount is slightly greater than the amount bid at the sheriff sale, it is a contingent offer. It is subject to financing at a rate of less than 5% amortized over an unspecified term. There is no closing date. No evidence regarding whether Spencer’s son is an able buyer or that he has even applied for a loan was presented.
Spencer has failed to meet her burden of proving that PNC is adequately protected. Accordingly, PNC Bank is entitled to relief from stay for cause under' section 362(d)(1).
2. Lack of Equity in Property Not Necessary to an Effective Reorganization
Parties in interest are also entitled to relief from stay as to property if “the debtor does not have an equity in such property” and “such property is not necessary to an effective reorganization.” 11 U.S.C. §§ 362(d)(2)(A) and (B). The moving creditor has the burden of proof on the issue of the debtor’s equity in the property. 11 U.S.C. § 362(g)(1). Spencer has stipulated there is no equity in the property.
Thus, the burden shifts to Spencer to prove the property is necessary to an effective reorganization. To do so, Spencer must show not just that “if there is cqnceivably 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.” United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, Ltd. (In *216re Timbers), 484 U.S. 365, 376, 108 S.Ct. 626, 633, 98 L.Ed.2d 740 (1988). She must show that there is “a reasonable possibility of a successful reorganization within a reasonable time,” to which the property is necessary. Id.
Many debtors file Chapter 13 cases for the main purpose of curing delinquent mortgage or car payments so that they may retain a home or vehicle. Because this can be a legitimate use of Chapter 13, courts often conclude that a home or vehicle is typically necessary for a debtor’s effective rehabilitation without significant analysis. See, e.g., In re Stratton, 248 B.R. 177, 182 (Bankr.D.Mont.2000). However, this is not the typical case. Both Spencer’s initial Chapter 13 Plan and amended Chapter 13 Plan turn on a proposal to sell the property to her son.
If Spencer does not intend to retain the property, it is difficult to see how it is necessary to her effective reorganization as a Chapter 13 debtor. There is no financial benefit to Spencer or the estate in selling the property herself rather than having it sold through the sheriff sale. Spencer does not have any equity in the property, so the sale will not generate exempt equity for her to use to purchase another home. There will not be any proceeds from a sale available to any creditor other than PNC. The proposed sale simply delays the ability of PNC to realize on the value of the collateral. Spencer’s personal liability has been discharged, so there will be no deficiency judgment following the sheriff sale.
The prospect of a successful sale to Spencer’s son actually closing is speculative at best. The “offer” from Spencer’s son is contingent on his obtaining financing. There is no evidence as to the son’s ability to obtain financing. There is no period specified for finalizing the offer or filing a motion requesting the Court approve the sale. There is no closing date. Thus, although the plan contemplates a sale of the property, the plan as proposed does not appear to offer a reasonable possibility of success.
The proposed sale is an attempt to keep the house in Spencer’s family. This is presumably so Spencer may also continue to live there. There was no testimony that the property was in any way uniquely suited to her needs or those of her family. Admittedly, the property may be the place she would prefer to live. It is certainly the location suggested as her residence in her proposed plan. It is not, however, the only possible residence for Spencer and her child. There was no testimony that no other housing options existed. In fact, Spencer testified that she looked at another property she might rent on the same street as the house at issue. She has not pursued that option or any other housing option because she simply refuses to move from this property.
Spencer testified about her emotional attachment to the house. An emotional attachment, however, does not make the house reasonably necessary to an effective reorganization. The Spencer family had the chance to keep the house by bidding at the sheriff sale. They did not do so. If there were defects in the sale process, Spencer is entitled to raise those at any hearing on confirmation of the sale. Like the offer of adequate protection, the plan as currently proposed and the corresponding offer to purchase appear to be no more than an effort at additional delay in an attempt to repeat the arguments that PNC is not entitled to enforce the Mortgage and, consequently, to continue to avoid making payments. PNC is also entitled to relief from stay under section 362(d)(2). Spencer has stipulated she does not have equity in the property, and she *217has not shown it is necessary to an effective reorganization.
3. Applicability of Section 362(d)(8)
PNC did not request relief from stay under section 362(d)(3). However, Spencer addresses this section, seemingly arguing it affords her a right to retain the property in exchange for payments. Although Spencer observes section 326(d)(3) applies only to a creditor whose claim is secured by single asset real estate, and observes there is no evidence PNC is secured by single asset real estate, she devotes part of her argument to attempting to show the offer of adequate protection more than meets its requirements. As noted, relief under the section has not been requested and this section does not apply here.3 For those reasons, the Court will not address the requirements of that section.
C. “In Rem” Relief from Stay
PNC Bank has further requested the Court grant “in rem ” relief from stay under section 362(d)(4). This infrequently-used provision of the Bankruptcy Code permits bankruptcy courts to enter an order excepting real property from the automatic stay that would come into effect in a subsequent bankruptcy case filed within two years. See 11 U.S.C. § 362(b)(20).
Section 362(d)(4) provides the court shall grant this relief if:
with respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved either&emdash;
(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.
The section requires the establishment of three elements: (1) a scheme; (2) to delay, hinder, or defraud creditors; and (3) involving either the transfer of property without the creditor’s consent or court approval or multiple filings affecting real property. The second requirement is now disjunctive and requires a finding that the scheme be to delay, or to hinder, or to defraud. In re First Yorkshire Holdings, Inc., 470 B.R. 864, 870 n. 5 (9th Cir. BAP 2012) (noting the Bankruptcy Technical Corrections Act of 2010 eliminated the conjunctive “and” and replaced it with the disjunctive “or”).
“Scheme” is defined as “an intentional artful plot or plan.... ” In re Wilke, 429 B.R. 916, 922 (Bankr.N.D.Ill.2010). Spencer’s litigation history, coupled with the fact that she has not made payments since 2008, demonstrate a scheme to delay PNC. Other courts have held that a “Debtor’s continued efforts to use the bankruptcy filings to collaterally attack [a] Foreclosure Judgment, notwith*218standing repeated rulings that such a collateral attack is precluded by res judicata and Rooker-Feldman ” serve as some evidence of a scheme to delay, hinder, or defraud creditors. In re Richmond, 516 B.R. 229, 235 (Bankr.E.D.N.Y.2014).
In opposing PNC’s motion for relief from stay and motion to dismiss her prior Chapter 13 bankruptcy case, Spencer rehashed arguments challenging PNC’s right to enforce the mortgage on her house. This Court had already rejected similar arguments when it refused to reopen Spencer’s 2010 Chapter 7 case, by the District Court when it affirmed the refusal to reopen, by the District Court when it remanded the foreclosure proceeding, and by the Seventh Circuit Court of Appeals when it affirmed the remand order. All the while, she has been living in the home without making payments on the Mortgage, real estate taxes, or providing proof of insurance.
Having filed the petition in the present case two days after the property was sold at sheriff sale, Spencer is now back in bankruptcy court asking this Court to answer the same question of what entity has a right to enforce the Mortgage and/or asserting the Mortgage is void. Her proposal as to how she will proceed in the present case is a proposal to delay further: pursue an adversary proceeding based on the argument that PNC is not entitled to enforce the Mortgage, and not make any payments to PNC while the adversary proceeding is pending.
This scheme involved multiple bankruptcy filings. Spencer has filed three bankruptcy petitions since foreclosure proceedings were initiated. All three bankruptcy cases stayed the foreclosure action as to the real property. Admittedly, Spencer’s intent when she filed the first of the three may have simply been to receive a Chapter 7 discharge, although the motion for contempt and sanctions filed after the discharge appeared targeted at delaying the state court foreclosure proceeding. Even without counting that case, Spencer has filed two Chapter 13 cases to delay PNC. She filed the first Chapter 13 case the day before the summary judgment hearing was to take place in the foreclosure proceeding. The Court found that she lacked good faith in filing that case and dismissed it for that reason. Spencer waited to file the present case until her brief was due in the foreclosure appeal, which was also the day after the District Court affirmed dismissal of the prior case, and two days after the property was sold at sheriff sale. If Spencer was genuinely interested in pursuing an answer, she could have prosecuted that appeal. Instead, she sought to delay by filing this bankruptcy.
Spencer has engaged in a scheme to delay creditors involving multiple bankruptcy filings affecting real property. Thus, PNC is entitled to in rem relief from stay as to the real property located at 1222 W. Jefferson Street, Marshfield, Wisconsin 54449. If recorded in compliance with applicable state laws governing notices of interests or liens in real property as provided in section 362(d)(4), the order granting relief from stay shall be binding in any other case under this title purporting to affect such real property filed not later than two years after the date of the entry of such order by the Court.
V. Conclusion
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. PNC is entitled to relief from stay in rem.
A separate order consistent with this decision will be entered.
. See In re Spencer, Ch. 7 Case No. 10-15242 (Bankr.W.D.Wis. Feb. 12, 2013), aff'd sub nom. Spencer v. PNC Bank, N.A., Case No. 13-cv-369-bbc, 2013 WL 5563999 (W.D.Wis. Oct. 8, 2013) (denying motion to reopen Chapter 7 case); PNC Bank, N.A. v. Spencer, Case No. 13-cv-21-bbc (W.D.Wis. Mar. 25, 2013), aff'd, 763 F.3d 650 (7th Cir.2014) (re*211manding foreclosure proceeding); In re Spencer, Ch. 13 Case No. 13-15076 (Bankr.W.D.Wis. Feb. 25, 2014), aff'd sub nom. Spencer v. PNC Bank, N.A., Case No. 14-cv-422-wmc, 2015 WL 1520912 (W.D.Wis. April 2, 2015) (granting relief from stay and dismissing prior Chapter 13 case); see also FNMC v. Spencer, Wood County Circuit Court Case No. 2009CV000283 (filed Apr. 7, 2009), appeal filed sub nom. PNC Bank, NA, v. Spencer, Court of Appeals District 4 Case No. 2014AP002353 (notice of appeal filed Oct. 6, 2014) (foreclosure proceeding).
. The judgment states PNC will not have a deficiency claim, and this is something PNC acknowledges as well. Brief in Support of Motion for Relief from Stay, Docket #11, p. 12 (“in light of her Chapter 7 discharge, the Debtor faces no deficiency judgment as a result of the sale”).
. Section 362(d)(3) provides that a creditor whose claim is secured by an interest in "single asset real estate” is entitled to relief from stay of acts against single asset real estate unless certain criteria are met. "Single asset real estate” is a term defined in section 101(51B) of the Bankruptcy Code and 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.
The only real property scheduled in the case is Spencer’s homestead, so this is unequivocally not a single asset real estate case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498316/ | MEMORANDUM OPINION
HONORABLE RICHARD D. TAYLOR, UNITED STATES BANKRUPTCY JUDGE
The debtors filed their voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court, Eastern District of Arkansas, on June 3, 2009. On motion and with the debtors’ consent, the court converted their case to a Chapter 7 proceeding on January 28, 2014, and appointed M. Randy Rice (“Trustee”) as trustee of the debtors’ estate. The Trustee and a creditor, Arvest Bank (“Arvest”), filed symbiotic objections to the debtors’ exemption of an individual retirement account (“IRA”) owned by and in the name of the joint debtor, Barry Kellerman. The objections came for hearing on April 29, 2015. At the conclusion of the evidence, the court took the matter under advisement. For the reasons stated below, the objections to the claimed exemption are sustained.
I. Jurisdiction
This court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (B). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052 made applicable to this proceeding under Federal Rule of Bankruptcy Procedure 9014.
II. Findings of Fact
Prior to his bankruptcy case, Barry Kel-lerman created the IRA, which as of October 27, 2008, had a reported value of $252,112.67. (Arvest Ex. 4, at 1.) The named administrator of the IRA is Entrust Mid South, LLC (“Entrust”). The IRA is self-directed by Barry Kellerman who made all of the decisions pertinent to the issues raised in the objections. At the commencement of their case, the debtors valued the IRA at $180,000.00 and claimed the entire fund as exempt pursuant to 11 U.S.C. § 522(d)(12). (Arvest Ex. 1, at 8.)
Arvest and the Trustee object to the debtors’ claimed exemption in the IRA on the basis that it was no longer exempt from taxation under the Internal Revenue Code as of the commencement of the case and, accordingly, is not eligible for exemption under 11 U.S.C. § 522(d)(12). They allege that the IRA lost its exempt status in 2007 because Barry Kellerman directed the IRA to engage in prohibited transactions involving disqualified persons as defined by the Internal Revenue Code. At trial, the parties conceded, or tacitly recognized, that the transactions involved disqualified persons; the debtors did not argue or suggest that any of the parties involved were not disqualified persons. Thus, the remaining issue principally concerns whether the transactions were prohibited transactions as defined in 26 U.S.C. § 4975(c).
The alleged prohibited transactions involve the 2007 acquisition of approximately four acres of real property located near *221Maumelle, Arkansas. Panther Mountain Land Development, LLC (“Panther Mountain”) played a precipitating and integral role in the purchase. Barry Kellerman and his wife each own a 50 percent interest in Panther Mountain. (Arvest Ex. 5, at 28.) The address for Panther Mountain is the same as Barry Kellerman Construction, Inc. and is the debtors’ home address. (Arvest Ex. 1, at 32.) Barry Kellerman is also a co-debtor on a number of debts with Panther Mountain. (Arvest Ex. 1, at 23.)
To effect the acquisition and development of the four-acre property, the IRA and Panther Mountain formed a partnership by executing a Partnership Agreement dated August 8, 2007. (Debtors’ Ex. 2.) Barry Kellerman, executed the Partnership Agreement on behalf of Panther Mountain. (Debtors’ Ex. 2, at 3.) Jerry O. Pearson, Jr. executed the Partnership Agreement on behalf of the IRA. (Debtors’ Ex. 2, at 3.) Barry Kellerman is the only person specifically designated to sign partnership checks. (Debtors’ Ex. 2, at 2.) The Partnership Agreement does not disclose Panther Mountain’s ownership. The partnership operated under the name Entrust Mid South LLC FBO Barry Keller-man IRA # 0605002-01 and Panther Mountain Land Development, LLC (“Entrust Partnership”). (Debtors’ Ex. 2, at 1.)
Although the IRA and Panther Mountain each possessed a 50 percent interest, the Partnership Agreement called for the IRA to deliver the real property as a “Noncash Contribution[ ]” valued at $122,830.56. (Debtors’ Ex. 2.) The IRA was also called upon to make a “Cash Contribution[ ]” of $40,523.93 by November 30, 2007. (Debtors’ Ex. 2.) Panther Mountain’s sole obligation was a cash contribution of $163,354.49 — an amount equal to the IRA’s cash and non-cash contribution values — at an unspecified “construction completion” date. (Debtors’ Ex. 2.) Neither party introduced testimony or evidence that Panther Mountain ever partially or fully made its cash contribution. (Ar-vest Ex. 5, at 17.)
Exactly one day after the formation of the Entrust Partnership, Barry Kellerman directed the IRA to liquidate assets in the amount of $123,000. (Arvest Ex. 6.) His August 9, 2007 Sell Direction Letter (“Sell Letter”) illuminates the relationship between Barry Kellerman, the beneficiary of the IRA, and Entrust, the plan administrator, and contradicts the debtor’s assertion that the administrator sanctioned or approved of the transaction as consistent with the IRA’s tax exempt status. Specifically, the Sell Letter makes Entrust’s role clear, stating:
I understand that my account is self-directed and that Entrust ... will not review the merits, legitimacy, appropriateness and/or suitability of any investment in general, including, but not limited to, any investigation and/or due diligence prior to selling any investment, or in connection with my account in particular.... I understand that neither the Administrator nor the Custodian determine whether this investment is acceptable under the Employment Retirement Income Securities Act (ERISA), the Internal Revenue Code (IRC), or any applicable federal, state, or local laws, including securities laws. I understand that it is my responsibility to review any investments to ensure compliance with these requirements.
(Arvest Ex. 6, at I.) Further,
I am directing you to complete this transaction as specified above. I confirm that the decision to sell this asset is in accordance with the rules of my account, and I agree to hold harmless and without liability the Administrator and/or Custodian of my account under the foregoing hold harmless provision.
*222(Arvest Ex. 6, at 2.) By a separate Buy Direction Letter dated August 8, 2007, Barry Kellerman directed Entrust to buy the four-acre tract through Standard Abstract & Title Co. for a purchase price of $122,830.56. (Arvest Ex. 6, at 3.) Terms contained in the Buy Direction Letter mirror the exculpatory and disclaimer language found in the Sell Letter.
The purchase of the four-acre tract also took place on August 8, 2007. Barry Kel-lerman made the decision to purchase the four acres. The purchase took place principally to complement and assist in the development of two nearby tracts of approximately 80 and 120 acres owned by Panther Mountain. While the four-acre tract could be independently developed, controlling it substantially assisted in the development of -the other Panther Mountain properties. The IRA funded the entire purchase price. (Arvest Ex. 3.) The Warranty Deed from Maumelle Development, LLC, dated August 8, 2007, did not convey the property to the Entrust Partnership; rather, the seller conveyed the tract to the IRA and Panther Mountain with each owning an undivided one-half interest. (Arvest Ex. 2.) This undivided one-half interest is the sole remaining asset in the IRA. Confusingly, the IRA’s October 27, 2008 Account Statement reflects the full value of the real estate as an asset of the IRA without reference to its divided interest. (Arvest Ex. 4, at 1.)
The IRA’s contributions did not end with the property purchase. On December 5, 2007, the IRA, as a “Business Expense,” paid $40,523.93 to develop the property; Barry Kellerman characterized this amount as design and engineering expenses. (Arvest Ex. 4, at 4.) The IRA paid an additional “Business Expense” of $411.82 on October 15, 2008. (Arvest Ex. 4, at 4.) On his individual bankruptcy schedules, Barry Kellerman shows distributions from the IRA of $12,349.99 in 2009, $124,100.74 in 2008, but none in 2007. (Arvest Ex. 1, at 28.)
Panther Mountain filed its own Chapter 11 bankruptcy on September 20, 2009, shortly after the Kellermans commenced their bankruptcy proceeding on June 3, 2009. (Arvest Ex. 5.) On its schedules, Panther Mountain lists both the Keller-mans and the IRA as unsecured creditors. (Arvest Ex. 5, at 17-18.) Specifically, two debts are reflected as owed to the IRA: (1) $163,000.00 with the claim described as “50% Interest in new entity,” and (2) $7,891.96 with the claim described as “Loans from B Kellerman IRA to PMLD, LLC.” (Arvest Ex. 5, at 4, 11, 17-18.) Barry Kellerman’s testimony regarding the $7,891.96 debt was unclear. He alternatively characterized it as money that he and his wife paid personally for Panther Mountain or money that did, in fact, come from the IRA. As stated, it is scheduled as a debt to the IRA and not -as a debt to the Kellermans.
III. Discussion
The Trustee and Arvest object to the debtors’ use of 11 U.S.C. § 522(d)(12) to exempt the IRA. Subsection 522(d)(12) provides that “[t]he following property may be exempted under subsection (b)(2) of this section .... (12)[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” 11 U.S.C. § 522(d)(12) (2014).
A. Burden of Proof
“When a debtor files a bankruptcy petition, ‘all legal or equitable interest of the debtor in property’ becomes property of the bankruptcy estate subject to claims by creditors.” Res-Ga Gold, LLC v. Cherwenka (In re Cherwenka), 508 B.R. 228, 234 (Bankr.N.D.Ga.2014) (citing 11 U.S.C. § 541(a)). However, “the Bankruptcy *223Code allows certain interests in property to be exempted] from the bankruptcy estate” pursuant to 11 U.S.C. § 522. Id.
A debtor’s claim of exemption is “presumptively valid.” Danduran v. Kaler (In re Danduran), 657 F.3d 749, 754 (8th Cir.2011) (citing Stephens v. Hedback (In re Stephens), 425 B.R. 529, 533 (B.A.P. 8th Cir.2010)). Thus, pursuant to Federal Rule of Bankruptcy Procedure 4003, an “objecting party has the burden of proving that the [debtors’] exemptions are not properly claimed.” FED. R. BANKR. P. 4003(C) (2014). “If the [objecting party] meets this burden to produce evidence in support of the objection, the burden of production shifts to the debtor[s] to show that the claimed exemption is proper.” Danduran, 657 F.3d at 754 (citing Walters v. Bank of the West (In re Walters), 450 B.R. 109, 113 (B.A.P. 8th Cir.2011)). Consequently, the burden of persuasion remains with the objecting party who must prove his case by a “preponderance of the evidence.” In re Williams, No. 09-43872-A-7, 2011 WL 10653865, at *2 (Bankr.E.D. Cal. June 3, 2011) (citing Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)).
B. Section 408
Section 408 of 26 U.S.C. frames the analysis of whether the IRA remains exempt from taxation and whether the debtors’ claimed exemption is proper. Section 408 defines an individual retirement account as a “trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries[.]” 26 U.S.C. § 408(a) (2014). Subsection (e) addresses the tax implications and specifically states:
(1) Exemption from tax — Any individual retirement account is exempt from taxation under this subtitle unless such account has ceased to be an individual retirement account by reason of paragraph (2) or (3)....
(2) Loss of exemption of account where employee engages in prohibited transaction.
(A) In general — If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year. For purposes of this paragraph—
(i) the individual for whose benefit any account was established is treated as the creator of such account, and
(ii) the separate account for any individual within an individual retirement account maintained by an employer or association of employees is treated as a separate individual retirement account.
(B) Account treated as distributing all its assets — In any case in which any account ceases to be an individual retirement account by reason of subpar-agraph (A) as of the first day of any taxable year, paragraph (1) of subsection (d) applies as if there were a distribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day).
26 U.S.C. § 408(e) (2014). Thus, an individual retirement account remains exempt from taxation pursuant to subsection (e) as long as the owner or beneficiary does not engage in a prohibited transaction. If an owner or beneficiary does engage in a prohibited transaction, the individual retirement account “ceases to be an individual retirement account ... as of the first *224day of any taxable year” and is taxable as a distribution. 26 U.S.C. § 408(e)(2)(A), (B).
C. Disqualified Persons Under Subsection 4975(e)
As discussed below, a prohibited transaction by necessity involves a “disqualified person.” Pursuant to subsection 4975(e)(2), a “disqualified person” includes the following individuals and entities:
(A) a fiduciary;
(B) a person providing services to the plan;
(C) an employer any of whose employees are covered by the plan;
(D) an employee organization any of whose members are covered by the plan;
(E) an owner, direct or indirect, of 50 percent or more of—
(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of . stock of a corporation,
(ii) the capital interest or the profits interest of a partnership, or
(iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D);
(F) a member of the family (as defined in paragraph (6)) of any individual described in subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of—
(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation,
(ii) the capital interest or profits interest of such partnership, or
(iii)the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E);
(H)an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in sub-paragraph (C), (D), (E), or (G); or (I) a 10 percent or more (in capital or profits) partner or joint venturer of a person described in subparagraph (C), (D), (E), or (G).
The Secretary, after consultation and coordination with the Secretary of Labor or his delegate, may by regulation prescribe a percentage lower than 50 percent for subparagraphs (E) and (G) and lower than 10 percent for subparagraphs (H) and (I).
26 U.S.C. § 4975(e)(2) (2014). A fiduciary, as referenced in subsection 4975(e)(2)(A), includes “any person who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,” or “any person who has any discretionary authority or discretionary responsibility in the administration of such plan.” 26 U.S.C. § 4975(e)(3)(A), (C) (2014).
In the present case, the debtors conceded that they are “disqualified persons” pursuant to subsection 4975(e)(2). Specifically, Barry Kellerman is the beneficiary of the IRA and a fiduciary under subsection 4975(e)(2)(A) because he exercises “discretionary authority” and “discretionary control” over the IRA as the owner. Dana Kellerman qualifies as a “member of the family” pursuant to subsection *2254975(e)(2)(F) as the wife of Barry Keller-man. Panther Mountain constitutes a “disqualified person” under subsection 4975(e)(2)(G) because Barry Kellerman asserts a 50 percent membership interest. Likewise, the Entrust Partnership is a disqualified person pursuant to subsection 4975(e)(2)(G). Based on. the debtors’ concessions and the court’s findings on disqualified persons, all that remains is a determination of whether a prohibited transaction occurred that terminated the tax exempt status of the IRA.
D. Prohibited Transactions Pursuant to Subsection 4975(c)
Subsection 4975(c)(1) defines six instances in which a.prohibited transaction may occur.
(1) General rule — For purposes of this section, the term “prohibited transaction” means any direct or indirect—
(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
26 U.S.C. § 4975(c)(1) (2014). “These enumerated prohibited transactions are not mutually exclusive; one transaction may fall within the parameters of more than one of the identified transactions under section 4975.” Ellis v. Comm’r, 106 T.C.M. (CCH) 468, 2013 WL 5807593, at *5 (U.S. Tax Ct. Oct. 29, 2013) (citing Janpol v. Comm’r, 101 T.C. 518, 525 (1993)). In adopting the list of prohibited transactions, Congress intended “to prevent taxpayers involved in a qualified retirement plan from using the plan to engage in transactions for their own account that could place plan assets and income at risk of loss before retirement.” Id. (citations omitted). Thus, “[t]he fact that a transaction would qualify as a prudent investment when judged under the highest fiduciary standards is of no consequence.” Id. (citation omitted).
In Cherwenka, the court considered whether a debtor could exempt a self-directed IRA utilized “to invest in distressed real properties and have the IRA realize profit from the later sale of these properties.” 508 B.R. at 232. There, the debtor located potential real estate investments, a representative of the IRA executed the purchase documents, and the debtor reviewed the closing statements. Id. After flipping and selling a property, the IRA realized all the profits from the sale. Id. In contrast to the case before this court, the debtor in Cherwenka asserted that he “never jointly owned a property with [the IRA].” Id. Although the debtor was a disqualified person based on his ownership of the IRA, the court found that the debtor’s involvement in selecting property and participating in other actions taken by the IRA did not constitute a prohibited transaction because the evidence failed to demonstrate that the “IRA-owned properties resulted in any benefit to [the] [d]ebtor outside of the plan.” Id. at 237.
*226Similar to the benefit analysis set forth in Cherwenka, a United States Department of Labor opinion is equally instructive; wherein, it considered “whether allowing the owner of an IRA to direct the IRA to invest in a limited partnership, in which relatives and the IRA owner in his individual capacity are partners, [] violate[d] section 4975 of the [Internal Revenue] Code.” Office of Pension and Welfare Benefit Programs, Opinion No. 2000-10A (E.R.I.S.A.), 2000 WL 1094031, at *1 (Dept. of Labor July 27, 2000). Analyzing the facts, the Department of Labor noted that the owner of the IRA was a fiduciary and a disqualified person based on his “investment discretion over the assets of his IRA.” Id. at *2. Further, the owner of the. IRA was a disqualified person based on “his capacity as the general partner of the [partnership to the extent he exerciser] discretionary authority over the administration or management of the IRA assets invested in the [partnership” as were his children, who were members of the partnership. Id. However, the opinion states that the partnership was “not a disqualified person under section 4975(e)(2)(G) of the [Internal Revenue] Code” because the owner of the IRA only owned 6.5 percent of the partnership. Id. Thus, the Department of Labor found that the “IRA’s purchase of an interest in the [partnership would not constitute a transaction described in section 4975(c)(1)(A) of the [Internal Revenue] Code” because the owner of the IRA would receive no “compensation by virtue of the IRA’s investment in the [partnership.” Id. at 3.1 The Department of Labor additionally stated:
that if an IRA fiduciary causes the-IRA to enter into a transaction where, by the terms or nature of that transaction, a conflict of interest between the IRA and the fiduciary (or persons in which the fiduciary has an interest) exists or will arise in the future, that transaction would violate either 4975(c)(1)(D) or (E) of the [Internal Revenue] Code. Moreover, the fiduciary must not rely upon and cannot be otherwise dependent upon the participation of the IRA in order for the fiduciary (or persons in which the fiduciary has an interest) to undertake or to continue his or her share of the investment.
Id. Thus, the Department of Labor held that “an IRA may invest in a partnership,” and a “violation of [subjection 4975(c)(1)(D) or (E) w[ould] not occur merely because the fiduciary derives some incidental benefit from the transaction involving IRA assets.” Cherwenka, 508 B.R. at 239.
In Rollins, the United States Tax Court also looked to the benefit derived in holding that a plan owner was a disqualified person who engaged in prohibited transactions pursuant to subsection 4975(c)(1)(D) by directing his plan to make loans to various entities in which he held a membership interest. Rollins v. Comm’r, T.C.M 2004-260, 2004 WL 2580602, at *9 (U.S. Tax Ct. Nov. 15, 2004). The court noted that “[t]he transactions were uses by petitioner or for petitioner’s benefit[] of assets of the [p]lan.” Id. Thus, the “petitioner derived a benefit (as significant part owner of each the [borrowers) from the [borrowers’ securing financing without having to deal with independent lenders” and engaged in a prohibited transaction each time a loan was made. Id. at *10.
As discussed above, the debtors conceded and this court finds that the debtors, Panther Mountain, and the Entrust Partnership are disqualified persons pursuant to 26 U.S.C. § 4975(e)(2). In *2272007, Barry Kellerman engaged the IRA in transactions including: (1) the purchase of th'e real property with IRA funds and subsequent conveyance of the real proper- • ty to the IRA and Panther Mountain (the “non-cash contribution” under the Partnership Agreement), and (2) the cash contribution of $40,523.93 made by the IRA to the Entrust Partnership (the “cash contribution” under the Partnership Agreement). Collectively, individually, and with some redundancy, both the non-cash contribution and the cash contribution constitute “prohibited transactions” with disqualified persons pursuant to subsections 4975(c)(1)(B), (D), and (E), which renders the IRA non-exempt.2
Specifically, subsection 4975(c)(1)(B) proscribes the “lending of money or other extension of credit between a plan and a disqualified person[.]” At trial, the debtors argued that this was not a loan transaction but rather an investment in real estate through the Entrust Partnership. Despite a lack of traditional loan documentation, the facts suggest otherwise. Panther Mountain, jointly owned by the debtors, filed its own Chapter 11 bankruptcy on September 20, 2009. (Arvest Ex. 5.) On its schedules, Panther Mountain listed the IRA, not the Entrust Partnership, as an unsecured creditor for $163,000.00; the claim is described as “50% Interest in new entity.” (Arvest Ex. 5, at 4, 11, 17-18.) This figure approximates Panther Mountain’s $163,354.49 cash contribution to the Entrust Partnership that was ambiguously due “[a]t construction completion” and equals the IRA’s immediate obligation to make a non-cash contribution of $122,830.56, representing the purchase price of the property, and a cash contribution of $40,523.93 to develop the property. (Debtor Ex. 2 at 1.) The aggregate of the non-cash and cash contributions is $163,354.49. This treatment, as listed on the Panther Mountain schedules, is more consistent with Panther Mountain using the IRA as a lending source for the purchase price and development of the four-acre tract without any real commensurate obligation by Panther Mountain to do anything other than perhaps. contribute an equal amount at an unspecified and ambiguous date.
Further, and cumulatively, Barry Kel-lerman transferred or used “the income or assets of [the IRA]” for the benefit of each of the aforementioned disqualified persons and as a fiduciary dealt with “the income or assets of [the IRA] in his own interest or for his own account.” 26 U.S.C. § 4975(c)(1)(D),(E). Barry Kellerman, as the owner and fiduciary of the IRA, (1) orchestrated the IRA’s membership in the Entrust Partnership with Panther Mountain, (2) signed the Buy Direction Letter and the Sale Letter that facilitated the purchase of the four acres solely by the IRA but held with Panther Mountain as tenants in common, and (3) directed the payment of “Business Expense[s]” by the IRA to develop the four-acre tract. The real purpose for these transactions was to directly benefit Panther Mountain and the Kellermans in developing both the four acres and the contiguous properties owned by Panther Mountain. The Kellermans each own a 50 percent interest in Panther Mountain and stood to benefit substantially if the four-acre tract and the adjoining land were’developed into a residential subdivision. Similar to the petitioner in Rollins, the Kellermans utilized the IRA to indirectly “secur[e] [additional] financing” for their existing Panther Mountain development “without having to deal with independent lenders.” Rollins, 2004 WL *2282580602, at *10. Thus, the Kellermans utilized the income and assets of the IRA for their benefit, as disqualified persons, in violation of subsection 4975(c)(1)(D). Alternatively, Barry Kellerman dealt with the income or assets of the IRA as a fiduciary for his own interest in violation of subsection 4975(c)(1)(E). The first transaction — the non-cash contribution — occurred on or about August 8, 2007, and the second transaction — -the cash contribution — occurred on or about December 5, 2007. Therefore, based on the prohibited transactions engaged in by disqualified persons, the IRA ceased being tax exempt as of January 1, 2007, pursuant to 26 U.S.C. § 408(e). Thus, the debtors may not claim any interest in the IRA as exempt under 11 U.S.C. § 522(d)(12) of the United States Bankruptcy Code.
IV. Conclusion
For the aforementioned reasons, the objections filed by the Trustee and Arvest are sustained.
IT IS SO ORDERED.
. The Department of Labor declined to decide whether the IRA's investment in the partnership would violate subsections 4975(c)(1)(D) and (E).
. The de minimis $411.82 "Business Expense” on October 15, 2008, could also qualify as a prohibited transaction. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498317/ | MEMORANDUM OPINION
DENNIS R. DOW, UNITED STATES BANKRUPTCY JUDGE
Phillips 66 Company (the “Plaintiff’) filed a complaint seeking a determination *230that the debt owed to the Plaintiff by-Steven Andrew Miltenberger and Sondra K. Miltenberger (collectively, the “Debtors”) is not dischargeable pursuant to 11 U.S.C. § 528(a)(2).1 This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1384(b), 157(a) and 157(b)(1). The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure. For the reasons that follow, the Court finds that the debt owed by the Debtors to the Plaintiff is not excepted from' discharge.
I. FACTUAL BACKGROUND
The following facts have been stipulated by the parties. Steven Miltenberger (the “Defendant”) was the President and Secretary of Jump Oil Co., Inc. (“Jump Oil”), a marketer of gasoline and petroleum-based distillate products, from its inception in 2003 through December 31, 2013. In 2004, ConocoPhillips Company (“Conoco”) and Miltenberger Oil Co., Inc. executed a Branded Marketer Agreement (the “2004 BMA”) that was later assigned to Jump Oil. The Defendant signed the 2004 BMA on behalf of Miltenberger Oil as its President. He also signed updated BMAs in that capacity in 2007 and 2010.
The owners of Jump Oil in 2004 were the Debtors, Jason Miltenberger (the Defendant’s brother) and his wife, Melissa, and David Miltenberger (another brother). These owners each executed guaranty agreements that guaranteed Jump Oh’s then existing and future indebtedness to Conoco. The guarantee agreement signed by Jason Miltenberger, and purportedly Melissa Miltenberger (the “Guaranty”), was notarized by Becky Bledsoe (“Bled-soe”), the Defendant’s secretary.2
Jump Oh executed a Brand Incentive Program Agreement (the “BIP”) with Co-noco in 2009. While the BIP was executed in connection with the 2007 BMA, the BIP continued to be effective after the execution of the 2010 BMA. Under the BIP, among other things, Conoco provided monetary incentive payments to Jump Oil. Jump Oil agreed to remain current on Conoco’s brand and image standards and to purchase a minimum volume of gasoline and distillates from Conoco. The BIP provided that in the event the 2010 BMA was terminated, Jump Oil would be responsible for repaying a certain percentage of the incentive payments based on the number of years Jump Oil had been enrolled in the program. The same would hold true if Jump Oil failed to purchase the required minimum amount of gasoline and distillates.
Jump Oil failed to pay all amounts due under the 2010 BMA and the BIP, thus breaching those agreements. On or about December 15, 2011, Conoco sent written demands to both Jump Oil and the Defendant which demanded that they pay all amounts due under the 2010 BMA and BIP, which at the time totaled $5,887,130.99, exclusive of any applicable interest and attorneys’ fees (the “Debt”). To date, neither the Defendant nor any of the guarantors has paid any amounts Jump Oil owed under the guaranty agreements.
On April 30, 2012, Conoco filed suit in the United States District Court for the Northern District of Oklahoma to enforce *231the 2010 BMA, BIP and guaranty agreements. Phillips 66 Company later substituted as plaintiff in the case after Conoco assigned its rights in the agreements to the company in May of 2012. The case was subsequently transferred to the Western District of Missouri. In response to the filing of the lawsuit, Melissa Miltenber-ger filed a motion to dismiss based on her allegation that she did not sign any agreement guaranteeing Jump Oil’s debt. In support of that motion, she swore “the signature on the Guaranty is not [her] signature but is a forgery.” The forensic document examiner expert hired by Phillips 66 concluded that Melissa Miltenber-ger did not sign the Guaranty bearing her name. The expert hired by Melissa concluded that it was highly probable that Melissa did not sign the Guaranty.
On June 26, 2014, the Debtors filed their Chapter 7 bankruptcy petition. This adversary proceeding objecting to the dis-chargeability of the Debt followed. The Plaintiff alleges that the Defendant fraudulently induced Conoco to extend credit by forging Melissa Miltenberger’s signature on the Guaranty, and such a representation constitutes false pretenses, false misrepresentations, and/or actual fraud within the meaning of 11 U.S.C. § 523(a)(2). The Defendant asserts that there exists no evi-dentiary support for Plaintiffs allegations.
II. DISCUSSION
A. Elements of the Plaintiff’s claim
Section 523(a)(2)(A) provides:
A discharge under 727 ... of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition....
To obtain a determination that a debt is non-dischargeable under § 523(a)(2)(A), a creditor must prove five discrete elements: 1) that the debtor made a representation; 2) that the debtor knew the representation was false at the time it was made; 3) that the debtor made the representation deliberately and with the intention and purpose of deceiving the creditor; 4) that the creditor relied on the representation; and 5) that the creditor sustained the alleged loss as the proximate result of the representation having been made. In re Guske, 243 B.R. 359, 362 (8th Cir. BAP 2000). The standard of proof for each element is the preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Any evidence presented must be viewed consistent with the congressional intent that exceptions to discharge be narrowly construed against the creditor and in favor of the debtor in order to provide the debt- or with comprehensive relief from the burden of his indebtedness. In re Cross, 666 F.2d 873, 879-80 (5th Cir.1982).
In this case, there is no dispute as to the last two elements: that the creditor relied on the representation and was damaged as a result. Therefore, this Court will focus on the remaining elements that must be proven by the Plaintiff.
B. Did the Defendant make a representation?
The Plaintiff asserts that the first element is satisfied (i.e., that the Debtor made a representation) because the Defendant “orchestrated the forging of Melissa [sic] signature, or at the very least directed his secretary, Becky Bledsoe, to notarize the forged signature.... In any event, Steven knowingly provided Conoco-*232Phillips a guaranty agreement containing false statements and/or a forged signature.” Here there was no written or oral representation, so it must be implied from the circumstances. There was no evidence in the record that the Defendant actually presented the Guaranty to the Plaintiff. As discussed below, the Defendant’s secretary was primarily responsible for handling the paperwork that crossed his desk and he had no recollection of handling the execution of the Guaranty or its delivery to the Plaintiff. Although the Court is not entirely convinced that the Plaintiff has established the first element, it will resolve its doubt in favor of the Plaintiff.
C. Did the Defendant have knowledge of falsity of the representation?
With respect to the second element, knowledge that the representation was false when made, the Plaintiff frames the question this way: Did the Defendant' have a reckless disregard for the validity of Melissa Miltenberger’s Guaranty? The Plaintiff answers this affirmatively, contending that Steven Miltenberger directed his secretary to notarize the Guaranty even though Melissa was not present, and then presented it to the Plaintiff as if genuine. The evidence on which the Plaintiff principally relies is 1) Melissa’s declaration that “she was not consulted by any party during the negotiation of the Guaranty” and did not know it existed until Conoco filed suit against the guarantors, and 2) Bledsoe’s deposition testimony that reads as follows:
Q: Was it your practice to require people whose signatures you were notarizing to be present at the time that you notarized it?
A: If they were an employee, yes. The family, not necessarily.
Q: Okay. Why — why not regarding the family?
A: Well, because Steven was my boss, I trusted his — to tell me, you know, what to do. And if he told me to notarize a document, I notarized the document.
Q: Even if the person whose signature you were notarizing was not present?
A: I could have.
Q: Okay. Do you recall any occasions where Steven A. Miltenberger came to you, handed you a document with signatures on it and said, “Notarize this,” and it wasn’t necessarily his signature, it was somebody else’s?
A: I — I don’t know the answer.
Q: Yeah, let me ... rephrase the question. Was there ever an occasion where Steven A. Miltenberger, the son, came to you, brought you a document with a signature on it that purported to be somebody else other than him? In other words, did he ever come to you and bring you a document that his wife had signed and said, “Hey, sign this,” and she was not present?
A: I don’t recall a situation, but it could be, yes.
This evidence can hardly be characterized as compelling; Bledsoe’s testimony is noncommittal at best. It cannot be considered evidence that the Defendant knew that Melissa’s signature was a forgery. Likewise, the fact that Melissa was unaware of the Guaranty until the lawsuit does not establish the Defendant’s knowledge of the forgery either. In fact, there is not a shred of evidence of that in the record before this Court. If anything, the evidence presented by the Plaintiff comments on the Defendant’s rather lax business practices or suggests that Melissa’s signature was not secured in Bledsoe’s presence, but even that is merely a suggestion.
*233What is compelling is the Defendant’s testimony in which he denies that he knew about the forged signature or that he played any role in getting it notarized:
Q: And you understand that the signature that purports to be Melissa Milten-berger’s signature is a forgery?
A: I understand it’s an alleged forgery. I don’t know that for sure.
Q: During the 2003-2004 time period, do you remember Becky Bledsoe ever asking you whether or not she should notarize a document?
A: No, I don’t remember that at all.
Q: Do you remember her ever asking you in person, bringing a document in and asking you should I notarize this? A: No.
... Q: Based on that memory, do you believe that there was ever .any discussion by Becky Bledsoe with you in 2004 about whether she should notarize a document?
A: No. No there was not_ I would remember that.3
Further, the Plaintiffs attempt to elicit an admission from the Defendant was not successful:
Q: And so you expressly authorized your assistant Becky Bledsoe to notarize that forged guarantee, didn’t you?
A: I did not.4
Additionally, the Plaintiff cites to this Court’s opinion in In re Reuter, 427 B.R. 727, 744 (Bankr.W.D.Mo.2010), as setting the standard for knowledge of falsity, namely that where the maker should have known that the statement was false, the statement was made with reckless disregard for the truth. The Reuter case, however, is distinguishable. As the Debtors noted, numerous red flags existed in that case to alert the debtor that his business partner was different than what he held himself out to be. Those circumstances do not exist here. Nothing in the record suggests that Steven Miltenberger should have known that Melissa would not sign the Guaranty and therefore, her signature would have to be a forgery. (If, for example, Melissa had been in an unhappy marriage at the time and Steven knew about it, that could be construed as a red flag. The record reflects that Melissa’s marriage was good at the time the Guaranty was signed.)
The Plaintiff also cites the Restatement (Second) of Torts to support its claim of recklessness. Section 526 of the Restatement states that “[a] misrepresentation is fraudulent if the maker (a) knows or believes that the matter is not as he represents it to be, (b) does not have the confidence in the accuracy of his representation that he states or implies, or (c) knows that *234he does not have the basis for his representation that he states or implies.” The Comment on Clause (c) elaborates:
In order that a misrepresentation may be fraudulent it is not necessary that the maker know that matter is not as represented. Indeed, it is not necessary that he should even believe this to be so. It is enough that being conscious that he has neither knowledge nor belief in the.existence of the matter he chooses to assert it as a fact. Indeed, since knowledge implies a firm conviction, a misrepresentation of a fact so made as to assert that the maker knows it, is fraudulent if he is conscious that he has merely a belief in its existence and recognizes that there is a chance, more or less great, that the fact may not be as it is represented. This is often expressed by saying that fraud is proved if it is shown that a false representation has been made without belief in its truth or recklessly, careless of whether it is true or false. (Emphasis added.)
In In re Woolley, 145 B.R. 830, 834 (Bankr.E.D.Va.1991), the court explained:
Reckless conduct refers to unreasonable conduct in disregard of a known or obvious risk from which it is highly probably that harm would follow. It is usually accompanied by a conscious indifference to the consequences.... [T]he conduct must exceed negligence and rise to the level of reckless disregard for truth.
Courts construing this Restatement section in a bankruptcy context reach varying conclusions when it comes to determining whether the scienter element is established. This is because the analysis is driven by the facts of each particular case. However, one principle is consistently applied: the debtor must be “consciously aware.” See, e.g., Gebhart v. S.E.C., 595 F.3d 1034, 1041, 1042, 1044 (9th Cir.2010); In re Johnson, 477 B.R. 156, 170 (10th Cir. BAP 2012)(a breach of duty of care resulting in the dissemination of misinformation does not necessarily implicate knowledge of the falsity of the representation, and does not satisfy the scienter element). That is, a misrepresentation is fraudulent only if the maker “knows or believes the matter is not what he represents it to be.” In re Cribbs, 327 B.R. 668, 673 (10th Cir. BAP 2005).
In this case, there is no evidence demonstrating that the Defendant was conscious of how the guaranty agreements were signed or notarized. His explanation of his modus operandi in running the business supports the argument that he was not aware of any falsity in terms of the Guaranty. He testified that the company’s main office, where Bledsoe was located, was two hours away from his home, so he was only in that office one or two days a week. He described his routine as follows. Bledsoe would go through all mail and handle whatever matters she could. On the days when the Defendant came into the office, she would hand him a pile of documents to review or sign, and after-wards, he would return them to Bledsoe so she could do what needed to be done. The Defendant also testified that he had no recollection of receiving unsigned personal guarantees from the Plaintiff, but if had, he would have given them to Bledsoe because “she was responsible for getting the documents out and back in.”
The Court acknowledges that the Defendant may have been negligent in his business practices, and perhaps should have been more conscientious in facilitating the execution and notarization of the guaranty agreements. However, even if the Court were to infer that the Defendant knew that Melissa’s signature was not made in Bled-soe’s presence, the Plaintiff has still not satisfied the element that he knew the signature was a forgery. He denied know*235ing that Melissa’s signature was false. He also denied knowing that the Guaranty was not signed in the presence of a notary. The Court finds this evidence credible. Accordingly, the Court concludes that the Defendant’s actions do not rise to the level of reckless disregard of the truth.
D. Did the Defendant have the intent to deceive?
Even if the Plaintiff had proven that the Defendant made a false or misleading statement, it failed to establish the element of “intent to deceive.” This requires the debtor to “have acted with the subjective intent to deceive the creditor.” In re Johnson, 477 B.R. at 169(emphasis in original). Subjective intent is often based on circumstantial evidence because a debt- or rarely admits to fraudulent intent. See, e.g., In re Treadwell, 637 F.3d 855, 863 (8th Cir.2011)(imputed fraud determination turned on “disputed facts, credibility determinations, and the inferences a fact finder may choose to draw therefrom.”). To find fraudulent intent based on circumstantial evidence, the court considers whether “the totality of the circumstances ‘presents a picture of deceptive conduct by the debtor which indicates intent to deceive the creditor.’ ” In re Davis, 246 B.R. 646, 652 (10th Cir. BAP 2000), aff'd in part, vacated in part on other grounds (citations omitted).
The Plaintiff is essentially asking the Court to draw the inference that because the Guaranty was forged, the Defendant necessarily “tricked” the Plaintiff into entering into the transaction. The Court is unable to do so. In the first place, the Plaintiff produced no evidence of a motive. To the contrary, the Defendant produced evidence of his lack of a motive to engage in fraud. The Defendant testified that the Debtors’ relationship with the Plaintiff was “great,” “long-term,” and “a good fit.” In other words, he wished to preserve that relationship, not do something which would poison it. In addition, “there wasn’t any pressure” to get the deal done with the Plaintiff because the Debtors “were shopping other brands with other suppliers.” The transaction was not time sensitive and the company was not desperate to close the deal as it had other options. Further, if Melissa had not signed the Guaranty, Steven Miltenberger “would have called ... our account rep, who was working on that deal and let him know that she’s not signing it. And then, he would have had to go back to his people and see what that meant, if anything.” Whether this is the case or not is not the point; the point is that the Defendant believed Melissa’s failure to sign would not necessarily have been fatal to the transaction and thus had no motive to falsify her signature. The bottom line is that the Defendant established that the Debtors “definitely had options” such that there was no need for them to resort to fraud. There is conflicting evidence as to whether the Defendant directed Bledsoe to notarize the Guaranty without the guarantor present. There is no evidence that the Defendant engaged in a pattern of fraud. In short, the Plaintiff offered insufficient circumstantial evidence from which the Court can infer that the false representation was made with the intent to deceive.
III. CONCLUSION
It is well-established that a finding of reckless disregard for the truth in relation to dischargeability should be very narrowly interpreted, and such a finding must be based on evidence of the debtor’s knowledge or belief that a matter is not what he represents it to be. Implied fraud is not sufficient. The record does not support a finding that the Debt should be excepted from discharge under § 523(a)(2). The *236Plaintiff has failed to meet its burden of proving each element, and thus, the Debt is dischargeable.
. On February 17, 2015, the parties entered into a Stipulation of Dismissal of Sondra K. Miltenberger whereby the Plaintiff dismissed its claims in this action against her without prejudice.
. Bledsoe previously worked as the secretary of the Defendant’s father until he retired. .
. The Defendant described an incident that occurred some time after Bledsoe ceased to be his secretary, when there was a document that his wife needed to sign. His new assistant, a notary, told the Defendant that she could only notarize the document with his wife's signature if his wife was present. The Defendant testified that this was the first time he became aware of the requirement that the signatory must be present for the signature to be notarized.
. At trial, the Plaintiff attempted to discredit Steven Miltenberger by mischaracterizing his interrogatory answer as a ratification of Bled-soe's deposition testimony. Specifically, in response to Interrogatory No. 17, "Please state in detail your knowledge about the circumstances under which Becky Bledsoe notarized the signatures on Jason and Melissa Miltenberger’s guarantee agreement,” Milten-berger responded, "Defendant has no such knowledge and refers the plaintiff to the deposition testimony of Becky Bledsoe.” As the Court stated then and reiterates now, it does not view that sworn response as either an endorsement of Bledsoe’s testimony or as an inconsistent statement. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498318/ | MEMORANDUM OPINION DENYING THE DISCHARGE OF DAVID EARL BROWN
Cynthia A. Norton, UNITED STATES BANKRUPTCY JUDGE
The Court held a trial on April 27, 2015, on the complaint of Bruce E. Strauss, Chapter 7 Trustee, to deny the discharge of Debtor/Defendant, David Earl Brown, pursuant to 11 U.S.C. §§ 727(a)(2)(A), (a)(2)(B), (a)(3), (a)(4)(A); (a)(4)(D), (a)(5) and (a)(7). After the conclusion of the evidence, the Court took the matter under advisement, primarily to have sufficient time to review Exhibits 33 and 34 (both deposition transcripts) that were admitted by agreement but not in sufficient time for the Court to review them before the conclusion of the evidence. Having heard the testimony, reviewed the exhibits, listened to the opening statements and closing arguments of counsel, the Court is prepared to rule. For the reasons set forth below, the Court finds that the Trustee has met his burden of proof with respect to several of the counts, and that the discharge of David Earl Brown should be denied.
Jurisdiction
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(a), and there is no dispute that this is a core matter under 28 U.S.C. § 157(b)(2)(J). Venue is proper, and although this is a St. Joseph Division case, the parties agreed to try the matter in Kansas City.
Findings of Fact
History of the Browns’ Chapter 13 Filing — Schedules, Statements & Plan
Mr. Brown is a so-called “dirt man,” who operated an excavation business in Chilli-cothe, Missouri. Before being involved in excavation, Mr. Brown owned a transmission repair or service shop for many years. He and his wife filed a Chapter 13 petition in the Western District of Missouri, Case No. 12-50094, on February 10, 2012. The bankruptcy was apparently filed to stop collection activities of the Chillicothe State Bank (the “Bank”), after Mr. Brown suffered a slow-down in his construction-related business due to the economy.
Mr. and Mrs. Brown’s Schedule A of real property listed two pieces of real estate, a marital home in Chillicothe, valued at $85,000, and a shop building valued at $40,000. The Schedule D disclosed that the home was encumbered by a first deed of trust in favor of Midland Mortgage in the amount of $29,245, and a second deed *241of trust in favor of Mr. Brown’s sister, Alice Elliott, in the amount of $25,000. After the Browns deducted their $15,000 Missouri homestead exemption, the home appeared to still have nonexempt equity of almost $16,000.1 The shop building was encumbered by a deed of trust in favor of the Bank of approximately $39,000, such that there was effectively no equity in that building.
In addition to personal property of minimal value (bank accounts, jewelry, guns, clothing), the Browns’ Schedule B itemized exempt household goods and furnishings valued in aggregate at $2,250; six vehicles, including two dump trucks used in Mr. Brown’s construction business; a boat val- ■ ued at $250; and “business machinery and equipment” valued at $149,500. The Schedule B stated that a list of business machinery and equipment was attached, but no such list was attached to the schedules.2 The Schedule D disclosed that the two dump trucks, another truck, as well as the $149,500 of business machinery and equipment all secured a second loan to the Bank of $207,000.
The Schedule I of income stated that Mr. Brown had $8,166 in business income; in addition to his wife’s wage and other income, the Browns’ combined average monthly income was $10,142.38. After deducting living expenses of $10,079.41, including $8,200 of “business expenses,” the Schedule J revealed monthly net income of a mere $62.97. The Schedules were verified (signed under penalty of perjury) by both Mr. and Mrs. Brown.
The Browns’ Chapter 13 plan proposed paying $100 per month, out of which the Bank was to receive an equal monthly amount (“EMA”) of $40.00 on account of the loan secured by the business equipment and trucks. . With respect to the shop building, the plan proposed paying the Bank the monthly payment of $316.00 through the plan3; the monthly mortgage payments to Midland Mortgage of $583.94 and to Alice Elliott of $350.00 on the marital home, on the other hand, were proposed to be paid directly.
Chapter 13 Procedural History
A review of the docket sheet reveals that the Chapter 13 case was as troubled as it was short-lived. The Browns did not appear at the first § 341 meeting date set for March 6, 2012, compelling the Chapter 13 Trustee, Richard Fink, to continue the hearing until April 3, 2012, and to request the Court issue an order to show cause for the Browns’ failure to appear.4 The failure of the Browns’ plan to propose a payment sufficient to pay the Bank’s secured claim prompted the Bank to file an objection to confirmation, as well as a motion for relief from stay and request for Rule 2004 examination. The Chapter 13 Trustee in turn filed a motion to deny confirmation, noting among other issues, that the schedules were incomplete. Specifically, the Chapter 13 Trustee noted that there were multiple items of collateral listed on the Bank’s filed proofs of claim, many of which were not listed in the schedules. The Chapter 13 Trustee filed a response to the Bank’s stay relief motion, noting that *242he had no funds on hand, and also filed a motion to dismiss for failure to commence plan payments under 11 U.S.C. § 1326(a)(1) (although the motion was later withdrawn).
Testimony at the Chapter 13 § 341 Meeting
The Browns did appear at the continued § 341 hearing on April 3, 2012, and a transcript5 from that hearing was admitted into evidence. At that hearing, the Chapter 13 Trustee, Richard Fink, asked the Browns if they had reviewed the petition, plans, schedules, and statements of financial affairs before they had signed them, and both Mr. and Mrs. Brown answered “yes.” Mr. Fink then asked Mr. Brown: “Were they accurate to the best of your knowledge and belief?” and Mr. Brovm responded: “The best I can tell.” Mr. Fink followed by asking Mr. Brown if he was aware of any errors in the bankruptcy papers, and Mr. Brown answered: “Nothing that I can think of.”
Later in the hearing, however, Mr. Fink asked Mr. Brown if anyone owed him any money; Mr. Brown answered that the federal government indeed owed him about $13,000. Mr. Fink then advised Mr. Brown: “So, then you will need to amend the Schedule B” and asked: “What is the likelihood that you will be able to collect?” Mr. Brown replied that “[w]e’ve been fighting for a year and a half. I would say it’s probably not very good that we will get the full $13,000.” Mr. Fink then reiterated: “You all need to get the information to your attorney so that your schedules can be amended and you keep her [the attorney, Christine Stallings] into the loop ...”
Mr. Fink then gave Robert Cowherd, the attorney for the Bank, the opportunity to examine the Browns. Mr. Cowherd specifically questioned Mr. Brown about the loan from his sister, Alice Elliott. Mr. Brown testified that he had actually borrowed $25,000 from his sister, and that the terms of the loan were to be a “monthly payback.” Mr. Cowherd then asked: “And did you make payments to her?” Mr. Brown responded: ‘Tes. How much I honestly don’t know. We would have to go back and dig up the ancient records to find out.” In response to Mr. Cowherd’s question about whether Mr. Brown had made any payments to his sister in the last year, Mr. Brown said “No.”6 Mr. Cowherd also questioned the balance of the loan as shown on the Schedule D, inquiring: “What is the balance that you show in your schedules? Is that the current balance including interest?” Mr. Brown replied: “Actually it would be more interest on top of that ...”
Mr. Cowherd then turned to questions about a half-interest in a farm valued at $124,000 that Mr. Brown had disclosed he owned in a financial statement given to the Bank in 2008.7 Mr. Cowherd asked Mr. Brown directly if he owned any farm real estate, and Mr. Brown answered that he did not. Mr. Cowherd then asked if Mr. Brown had owned farm real estate in 2009. Mr. Brown responded: “At one time my sister and I had an agreement to own *243some land and it has since fell through because we never got the plan [sic] transferred to me partially because we were not able to pay her on that note.” Mr. Cowherd pressed: “In 2009, you listed a half-interest in a real estate farm on the financial statement you provided to the [Bank] ... ”. Mr. Brown responded: “It was my understanding at that time that relations between myself and her were good enough but basically was a matter to doing the paperwork to get it transferred to me.”
At that point, Mr. Fink intervened, wanting to know if Alice Elliott had inherited the farmland at issue. Mr. Brown replied that, “No, she bought it.” Mr. Fink also pressed: “So she bought it and you were supposed to get half of it?” to which Mr. Brown responded, “Yes.” Mr. Fink then asked if Mr. Brown had paid his sister for his half. Mr. Brown replied: “I threw some of the money that she loaned me to pay part of the down payment on it. But you might say gave her back some of the money. No much, I would have to go dig it up.” Mr. Cowherd then re-intervened: “So you paid her something?” to which Mr. Brown replied, “Something?” Mr. Cowherd asked: “What is something?” Mr. Brown responded: “Well, I paid her back and she put it down on the farm with the understanding that the farm would be half mine.” Both Mr. Fink and Mr! Cowherd then asked in essence about whether Alice had refused to convey the property to him, and Mr. Brown replied: “Yep.”
The questioning then turned to how much money Mr. Brown had paid his sister. Mr. Brown testified in response to this question by Mr. Fink: “I would have to dig the paperwork up. I honestly don’t know right now. That is way back many years ago.” But Mr. Cowherd pressed: ‘Well, that was in 2009 that you listed a half-interest. That was only two years ago ... Mr. Brown answered, The payment to her was not in 2009. It was several years before that.” This line of questioning continued:
Q [by Mr. Cowherd]: I understand that, but you listed that you owned a half-interest in it [the farm].
A [by Mr. Brown]: It was my understanding at that time that I did. We just hadn’t got the paperwork done yet.
Q: So what happened between 2009 and 2012?
A: To be honest, the [Chillicothe] State Bank pressured me for money and I called her and asked her if she could help me for the money.' Since then I have not spoken with her.
Q: But did she give you any money?
A: No.
So you thought you owned it in 2009 O’
A: And since we have not been able to communicate with her ...
Q: But nothing has happened so you potentially have some claim against that property?
A: I don’t see how.
Q: But you paid her for the property, didn’t you?
A: Well back by month. What she did with the money I cannot say. She may have paid part of the down on the farm or she may not have.
Q: Well, what I don’t understand is why you would list it on the financial statement as a joint half in 2009. Nothing has happened, you said from 2009 to now. But now you say you don’t have the half. Why did you own the half in 2009?
A: It was a misunderstanding.
Q: It is on your financial statement.
*244A: It was my understanding I have since gave your client corrected financial statements since then that the property is not on it. Gary Constant [the bank officer] was made aware of that.
Q: I understand that.
A: You are asking me questions that I have already answered to your client.
Q: I am asking again and keep asking until I get an answer them fully.
A: You can ask me all you want my answer is not going to change.
After some further questioning about where the farm was located, Mr. Cowherd asked Mr. Brown if he had ever received any income from the farm. Mr. Brown replied: “No. None.” Then, turning back to Mr. Brown’s payments to his sister, Mr. Cowherd asked Mr. Brown: “And when do you think you paid her some money?” Mr. Brown responded: “It would have been back earlier in 2000s. I would have to get the paperwork out to see.” The following colloquy then occurred:
Q: But you would have paperwork on it?
A: I would have a cancelled check. Not where I paid on the property but what I paid to her.
Q: On the loan?
A: From the money on the loan.
Q [By Mr. Fink]: If I understand, just so I understand, sorry to interrupt. In your mind at the time you told Mr. Cowherd’s client that you had an ownership interest in this farm, the money that you considered to get a down payment wasn’t a down payment on that farm but was actually just a repayment on this loan that she reported that she lent you $25,000, August of 2001? Is that right?
A: Would you rephrase that? Cuz I didn’t understand it.
Q [By Mr. Fink]: Well, if I understood you correctly, the money that you thought you had used as a down payment on the farm was really not a payment on the farm but was — you were just making monthly payments to her on the note that you had executed with her in August of 2001?
A: We had paid her back on the note with the understanding that someday when that note was paid off, we might have part of that farm. Or have control of that farm.
Q [by Mr. Cowherd]: Is that in writing?
A: No.'
Q [By Mr. Fink]: And, if I understand you correctly, your [Chapter 13] plan suggested that your payment to her is current but it sounds like you haven’t made a payment to her in years. Is that correct?
A: It’s been quite some time since we have. I need to talk to her but so far ...
Q [By Mr. Fink]: As far as your bankruptcy where your plan is concerned, it’s erroneous when it says your payments on the note to your sister on the supplement [sic] of the loan is current at the time you filed this case, correct? You haven’t paid monthly payments, correct?
A: Yes.
Q: So for that statement to have been true ... that would have meant that all the payments that you should have made between 2001 and whatever month you filed this case have been paid and that’s not correct?
A: How long ... how many, I don’t know.
Q: When is the last time you made a payment?
A: It’s been quite a while.
A [By Mrs. Brown]: I have no idea.
Q: Just an educated guess.
*245A: Well, part of that money that we paid her back was payment.
Q: Okay, well you need to get that fixed so that it’s accurate.
Shortly thereafter, Mr. Fink concluded the § 841 meeting.
Proceedings on the Bank’s Motion to Lift Stay
Three days after the § 341 meeting concluded, or on April 12, 2012, the Bankruptcy Judge8 held a hearing on the Bank’s stay relief motion. The Court granted the Bank partial relief on the equipment and machinery, but stayed its order for 60 days to allow Mr. Brown to sell the collateral and turnover the proceeds to the Bank. The Court set another date for a hearing to lift the stay as against the shop building. The Court also sustained the Trustee’s motion to deny confirmation, and ordered the Browns to file another plan by June 15, 2012.
Five weeks after the Court lifted the stay, on May 18, 2012, the Bank filed a motion to prohibit use of cash collateral or lift the remaining stay immediately, and a motion to convert the case to a Chapter 7. The Bank recited that, although the Court had stayed the effective date of the stay relief order to allow Mr. Brown to sell the collateral, Mr. Brown in the meantime had not filed a motion to sell or made any other efforts to sell the collateral, and was using the collateral without paying adequate protection. The Bank subsequently amended the motion to convert to request, in the alternative, that the case be dismissed with prejudice.
The Court entered an order on May 24, 2012, granting the Bank’s motion to prohibit use of cash collateral and enjoining Mr. Brown’s use of the collateral pending sale, and lifted the stay as to all the collateral, including the shop building. The Court set a hearing on the Bank’s motion to convert or dismiss for May 29, 2012. The Court sua sponte continued that hearing, however, after Mr. Brown contacted the clerk by phone, stating he would be in surgery on May 29 and that he was seeking new counsel. The hearing was thus reset for June 19, 2012.
Proceedings to Vacate the Stay Relief Order
In the meantime, new counsel, Joel Pe-lofsky, entered an appearance for the Browns. Mr. Pelofsky immediately filed a motion to vacate the stay relief order, alleging that the Browns were arranging for a sale as to some equipment but had not completed the arrangements as of May 22, and “were not aware of these deadlines for performance of the orders resulting from the May 22, 2012 hearing.” The motion also recited that the Browns’ inability to propose a confirmable plan was due in part to communication difficulties with prior counsel. Mr. Brown’s notarized signature on the motion acknowledged that the statements in the motion were true. The Court denied the motion to vacate, and set an evidentiary hearing on the Bank’s motion to convert or dismiss.
A transcript9 of the Court’s ruling at the evidentiary hearing on June 25, 2012, indicated that the Court considered it a “close call” as to whether to dismiss or convert the Browns’ case. Addressing Mr. Brown directly, the Court stated: “It’s not an easy decision for me, Mr. Brown ... and I know it’s not one that will make you happy at all ... But I think given the circumstances, maybe a dismissal is best *246and that’ll give you a chance to hang on to your house and see if you can work something' out with other folks ... I think if I convert the case to a Chapter 7 there’s a chance you lose your house.... ”
More importantly, the Court referenced testimony (not submitted to this Court) about unscheduled assets as well as a “disappearing farm interest” in addressing Mr. Brown directly:-
And, you know, I think I am extending you maybe more consideration than is appropriate when I hear testimony that several tens of thousands of dollars of tools that are not listed on bankruptcy schedules ... We have the farm property ... that is not explained ... The farm interest ... disappeared from the financial statement in February of 2011 which brings it within the statute on fraudulent conveyances in Missouri so there might be some explaining to do.... I know Mr. Brown won’t agree or understand perhaps that I might be cutting him a break at this point in dismissing the case and not converting it and letting Mr. Strauss [the Chapter 7 Trustee]10 start digging around in all of this background. I will condition the dismissal, Mr. Cowherd, with prejudice for a period of 90 days — that will allow the bank ample time to complete the liquidation of its collateral_ Mr. Brown, ... when I • was a lawyer in practice I represented a lot of debtors ... and I represented a number of banks ... I came to find out — there comes a time in a banker’s life when they just don’t want to do business with somebody. And, it may be because that somebody is difficult or has concealed property or any number of things ... [a]nd I think you’re at that point with Chillicothe [State] Bank ... The case will be dismissed with prejudice to any refiling in any bankruptcy court anywhere for a period of 90 days from this date.
The Court then entered the order denying the Bank’s motion to convert and dismissing the case with prejudice to refiling for 90 days on June 25, 2014. The Chapter 13 Trustee’s Final Report showed the Browns had paid in a total of $400 during the six months their bankruptcy was pending.
Events During the Period Before Refiling
The Bank scheduled an auction sale of Mr.'Brown’s personal property and equipment for September 16, 2012. The day before the sale, the bank officer, Gary Constant, allowed Mr. Brown to remove personal property items from the shop building, included a motorcycle, three wheelers and a large amount of other items. The value of those items is in dispute, and will be discussed below. In any event, it is undisputed that Mr. Brown asked four or five friends to brings trucks and trailers, and they loaded multiple items of personal property and moved them to a friend’s storage facility. The auctioneer testified that the auction was well-attended, and that the remaining items sold for around $184,000 to $185,000. Chapter 7 Filing — Schedules, and Statements
Mr. and Mrs. Brown filed Chapter 7 on November 26, 2012, some five months after their Chapter 13 had been dismissed. Bruce E. Strauss was duly appointed as Chapter 7 Trustee. The Schedule A of real estate listed the marital home as still worth $85,000, with a first deed of trust in *247the same amount ($29,245) to Midland Mortgage, but a second to Alice Elliott of $48,000, leaving no nonexempt equity after deduction of the homestead exemption.
The Schedule B reflected the absence of the dump trucks, machinery and equipment that the Bank had repossessed, and included the motorcycle and three-wheeler Mr. Brown retrieved before the auction, both valued at $100 each, but was otherwise essentially the same as the Schedule B in the Chapter 13 (with some minor, irrelevant details). The itemization and valuation of the exempt household goods in the Chapter 7 Schedule B was identical to the list in the Chapter 13; however, the Chapter 7 Schedule B included a contingent, unliquidated claim against the Bank for allegedly selling exempt property and personal records at the auction, valued at $6,000. The statement of financial affairs reflected the foreclosure of the shop building and other collateral, but otherwise disclosed no transfers of any other property. The schedules and statements were verified by Mr. and Mrs. Brown.
Chapter 7 Procedural History
Like the Browns’ Chapter 13 case, the Chapter 7 case has been similarly troubled. Two Orders to Show Cause were issued for failures to file the creditor mailing matrix and schedules.11 The Browns did attend the first § 341 meeting set (more about that later), but the Trustee filed three motions to extend the deadline for objecting to discharge, reciting the need to conduct further investigation, including the need to review documentation Mr. Brown had not yet provided and to complete a Rule 2004 examination. Before the expiration of the third extension, the Trustee timely filed the adversary complaint at issue in this case. In the meantime, however, the Trustee filed a motion to compel turnover of 2012 tax returns, a motion to compel Mr. Brown to answer certain questions to which Mr. Brown had invoked his 5th Amendment privilege, and a motion to compel disclosure of unidentified assets and to amend schedules.!- The Trustee later withdrew the motion to compel turnover of the tax returns, but the Court entered orders on the other two motions.
- First, the Court’s January 10, 2014 Order on the motion to compel unidentified assets recited that. Mr. Brown with the assistance of friends had taken possession of a significant amount of personal property before the auction sale, and that neither the specific property nor the names and addresses of the friends who had helped moved the property had been provided to the Trustee. In response, the Browns did file an Amended Schedule B on January 16, 2014, adding “Misc. Automotive Books, Signs, Shop Manuals, Typewriter,” valued at $50; “Sacks of used clothing” with no value; “Various Shelves & Cabinets, Tables, Chairs,” valued at $25; and “Boxes of Used Automotive Parts, See Attached Lists,” valued at “more than $50.” An eleven-page, handwritten list of miscellaneous items, such as squares, “T and framing,” shop rags, blankets, wooden mallets, scanner, utility knife, etc., was attached. An amended Schedule G, filed of even date, added an executory contract with an attorney representing Mr. Brown on a previously unscheduled workers’ compensation claim.12
*248The Court in the meantime also entered an Order on the Trustee’s Motion to Compel answers; the Court held that Mr. Brown had properly invoked his 5th Amendment privilege in response to questions about the 2009 financial statement and the half-interest in the farm listed in that financial statement, but noted that Mr. Brown could suffer negative ■ consequences from any refusal to explain loss of assets or to cooperate with the Trustee.
Chapter 7 § 341 Meeting
Mr. Strauss in his capacity as Chapter 7 Trustee conducted the examination of the Browns under § 341 on January 4, 2013. A transcript13 of the hearing was admitted into evidence. After Mr. and Mrs. Brown were sworn in, Mr. Strauss asked if there were any changes or modifications that needed to be made to the schedules; the Browns’ counsel interjected that he would be amending to add a workers’ compensation claim, a claim against the Bank, as well as to add two small creditors. In response to what the claim against the Bank involved, Mr. Brown testified that it involved numerous items that were in the building when the Bank foreclosed that were never returned. Mr. Strauss asked Mr. Brown to provide, in addition to the amended Schedule B, a narrative report of the details and requested that be done within 15 days. Mr. Brown responded: “I have been compiling it so I got numerous notes, just a few days to compile it.”
Mr. Strauss then returned to the litany of standard questions being asked of Mrs. Brown and asked if “other than that, do you believe that your schedules are true and correct?” Mrs. Brown replied “Yes.” Mr. Strauss then asked Mr. Brown: “If I asked you the same questions I asked your wife, would your answers be the same ... ”? Mr. Brown responded: ‘Tes.” After discussing some particulars about the vehicles and the business, Mr. Strauss inquired: “Where in your schedules are, like, the tools and so forth?” Mr. Brown responded: “Well, the bank took them.” Mr. Strauss pressed: “So you don’t have any tools anymore?” To which Mr. Brown replied: “I can’t even change oil in my own pickup.”
Mr. Strauss also inquired about the balance of the deed of trust owed to Alice Elliott, asking: “How come her claim is $48,000?” Mr. Brown replied: “Well, as of May, we have not made payments to her for quite some time and the interest has accrued on it.” Mr. Strauss again pressed: ‘Tou have not made a payment to her since the year 2000?” Mr. Brown said, “No. Since about 2001 or 2 — somewhere in there.” In response to Mr. Strauss’ question about whether Mr. Brown had maintained a record of how much he had paid his sister, Mr. Brown replied: “At one time we did. We have looked and looked. She has come up with some figures of her own. That was so long ago that I am kind of relying on her now.” After that, Mr. Strauss concluded the examination.
Rule 2004 Examination of Mr. Brown
A transcript14 of the Rule 2004 examination was admitted into evidence. At the Rule 2004 examination, Mr. Strauss asked Mr. Brown about the $25,000 loan from Alice Elliott and specifically asked what *249Mr. Brown used the loan proceeds for. In response to the question, “What did you do with that money?” Mr. Brown testified: “I did not know at the time that my wife had some pretty severe credit card debt. And when I discovered it things had already gotten pretty well out of hand to the point where I discussed it with Alice and asked if she would loan me the money to get that problem rectified once and for all, and that’s what that loan was for.” Mr. Strauss followed up: “So you took the $25,000 and paid it on your wife’s credit card debt?” Mr. Brown replied: “That was part of her debt, yes.” The colloquy continued:
Q [by Mr. Strauss]: What was the other part?
A: [by Mr. Brown]: I think her debt totaled around $32,000, somewhere in that range.
Q: I’m asking you right now just what you did with the $25,000?
A: Paid it to the credit card companies.
Q: And that was the only thing you did with it?
A: Yes.
Mr. Strauss then asked if Mr. Brown had records that would reflect the deposit of the $25,000. Mr. Brown responded: “I’m sure I could find some. That was before electronic, so it’s going to be hard copy.” Mr. Strauss indicated that hard copy would be fine, and said, “I’d ask that you do see if you can find the deposits for .that money.”
With respect to payments to Alice Elliott, Mr. Strauss asked Mr. Brown to verify a document marked for the examination as Exhibit 2, purporting to be a loan repayment history. Exhibit 2 is not attached to the Rule 2004 examination transcript, although there is a loan repayment history marked as Defendant’s Exhibit C that was admitted by agreement. The Court assumes that Exhibit C is the same as the Exhibit 2. In any event, Mr. Brown testified and Exhibit C reflects that the Browns made only minimal payments to Alice Elliott: $250 in October 2003; $200 in October 2004; $200 in October 2006; $250 in October 2008; $375 in April 2010; and $500 in October 2011. Mr. Brown did not confirm, however, that all of these were cash payments or that Exhibit 2 reflected all the payments he made; he stated he would have to review his records and that some of the “payments” may have been credits for work he did on the farm property. Mr. Strauss concluded his examination upon this particular topic by stating: ‘Well, I do want your records that you have gathered for that purpose for which you can’t remember what they say today and I’d like you to provide those documents as well.” Mr. Brown responded: “Okay.”
Mr. Strauss then turned to the house and Alice Elliott’s note and deed of trust. After noting that Mr. Brown had still not provided him the note, he asked Mr. Brown about the $48,000 balance owed to Alice as reflected on the Schedule D. Mr. Brown answered that he had made a “ball park guess” since he had asked Alice for the actual balance “and it was slow in coming to me.” Mr. Brown admitted that the actual balance as reflected on Exhibit 2 was, at $58,984.03, “apparently a little more” than the $48,000 as reflected on the Schedule D. Mr. Brown contended, however, that he had told his sister that he didn’t think her schedule of payments was correct, prompting Mr. Strauss to ask: “Do you have any documents to contest what your sister has said?” Mr. Brown responded: “In doing a like-kind exchange some of the work I did up there for her, no. Some checks I’m sure I could find.” Mr. Strauss questioned: “Haven’t you already found those checks with regard to *250when you did your search?” To which Mr. Brown answered: “I found a ledger that I was keeping that I would note in whenever I would make a payment to her.” Mr. Strauss then asked: “So you will be able to get that ledger to me?” Mr. Brown replied. “Yes.”
With respect to the farm, Mr. Brown denied he had had an agreement with his sister to own a half-interest in the farm at the inception of its purchase. Rather, he testified that Alice’s husband had been interested in acquiring land for hunting in Missouri, and that he, Mr. Brown, had located some real estate, negotiated the purchase price, and arranged through his bank for Alice and her husband to finance the purchase price, a process he described as similar to “brokering.” He testified that “I had borrowed a little more money from Alice to help pay off Darla’s credit card bills, so Alice was counting on that to be used ... for her to either pay down on the farm or to make improvements on the farm, so I paid her a little bit of money that I had [and][s]he bought the farm.”
It was not until several years later, around 2005, Mr. Brown testified, that the topic of loss of his hunting grounds had come up with Alice, and “she had told me then that as far as she was concerned, since I had lost all my other places to hunt she was going to give me one half of that farm ... for me to always have a place to hunt, and it really never got done because Alice lives in Mississippi and doesn’t come back here very often.” Mr. Brown also testified that after he investigated with the U.S.D.A. about enlarging a pond on the property, he and Alice had a falling out, over the fact that enlarging the pond would reduce the CRP income from the property. This trouble with Alice, causing her to not want to convey him an interest in the farm, Mr. Brown testified, had occurred sometime in 2008 (after he had provided the January 1, 2008 financial statement to the Bank).
The examination then turned to the discrepancies in value between items on the January 1, 2008 financial statement and the Chapter 7 Schedule B. The financial statement listed personal property valued at $129,200; Mr. Brown testified that that amount would have been made up of (1) the boat (valued at $1,500 in 2008 vs. $250 in both the Chapter 13 and 7 Schedules in 2012); (2) the motorcycle (valued at between $1,000 and $1,500 in 2008 and not scheduled in the Chapter 13 Schedules but valued at $100 in the Chapter 7 Schedule B filed in December 2012); and (3) “everything inside the house as far as furniture, odds and ends, some collections of antiques that I had which was in the shop building.” Mr. Brown also denied that any of that $129,200 included business equipment, but testified that it included $70,000 to $80,000 in personally-owned antiques that he had collected since he was a teen. Mr. Brown denied having created an inventory or that the items were insured. Mr. Strauss responded: “So, if I do my math that would come out to somewhere between $46,000 worth of remaining down to $36,000 of remaining items. What happened to those?” Mr. Brown responded: “Well, some went to nieces and nephews, but it was odds and ends and small stuff.”
Then followed a particularly frustrating exchange spurred by Mr. Strauss’ attempts to determine how Mr. Brown had valued the personal property and what property had been included:
Q [by Mr. Strauss]: So, between this statement [January 1, 2008] and when you filed your original bankruptcy with Ms. Stallings, some was given to nephews and nieces, but small stuff. What else?
A [by Mr. Brown]: I don’t really recall other than I was always instructed when you make a financial your personal what*251ever you paid for your chair, desk was always reflected on the financial.
Q: Okay. So how did you do that calculation?
A: Pretty much keeping track of items that we owned in the house.
Q: But you had no inventory list, so how would you be able to put that together on your financial statement?
A: Well, it was pretty easy to walk through the house and remember what we paid for stuff.
Q: So that’s what you suspect you did before you filled out the financial statement?
A: Yes.
Q: Can you walk through the house and determine what’s not there anymore?
A: Over the years, probably not. There has been too many — too many days gone by.
Q: As you sit here what you’re telling me is you can’t explain what happened to — forget the antiques for a moment, but to the $36 — to $46,000 worth of items which you have no list for, what happened to them between the day you filed this (indicating) [January 1, 2008 financial statement] and the day you filed your original bankruptcy?
A: If you are asking for specifically what was in the house that we valued, I don’t have an inventory of it.
Q: You haven’t told me anything specific or not. You’re asking me just to believe that somewhere they went but you don’t know where.
A: Ask the bank because not just the antiques were in that shop building, a lot of personal private stuff.
Q: Sir, I’m going back to the property that you said was in your house, you walked through your house and that’s how
you did it. So what happened to those items between the time you did this financial statement and you filed bankruptcy?
A: What you did not ask and you assumed was that the personal things I was talking about that was in the house was actually in the house.
Q: But you told me — stop for a minute. ...- You just told me a minute ago that the way you figured out the value is that you went through the house and looked at them and realized what you paid for them, so you told me they were in the house. So now go back and tell me what happened to the items that were in the house that based on the math that you gave me — I’m accepting your numbers— that weren’t there when you filed your Chapter 13 bankruptcy with Ms. Stallings, aside from some small things given to nieces and nephews.
A: I would have to add that some of the personal items were stored in the shop building.
Q: Forget those and just go to what was in the house.
A: You’re asking me for a number that I can’t give you because without going back through it I can’t make that statement. I can’t give you a definite answer.
Q: You are not giving me any answer, sir. You’re not telling me whether you had garage sales, whether you sold it on eBay. I’m looking for assets that you under oath stated existed, now those assets aren’t there and I’m giving you this opportunity to explain it, other than telling me the [Bank] took assets.
A: Anything of major value is still in my house.
After a break with his counsel, Mr. Brown resumed his testimony about the value of his personal property. When shown the Schedule B from the Chapter *25213, -Mr. Brown testified that his attorney-had determined the value of the household goods, and that although he had questioned her about it, he “was told repeatedly that she wanted to get this filed, that she could always go back and amend the filing.” In response, Mr. Strauss queried: “So are you saying that’s not the proper value? Mr. Brown: “I didn’t think so at the time. What is the proper value I would have to again go back and look at.” When asked why he had testified under oath to Mr. Fink at the Chapter 13 § 341 meeting that the schedules were true and correct without saying anything about the apparent incorrect value, Mr. Brown said: “With the understanding that they would be modified.”
Another frustrating exchange occurred:
Q [by Mr. Strauss]: Did you raise your hand and say, Mr. Fink, I understand I can modify these and I’ll correct them?
A: I really think at one point, yes.
Q: Okay, I have the transcript. I’ve listened to it. That’s your testimony that’s what you said to Mr. Fink?
A: There was mention in there of making a modification to it.
Q: To the plan, sir. Tothe^plan.
A: What is the difference? I don’t know.
Q: So what’s wrong with that number then? You think it’s too low?
A: That particular number I can’t say yes or no right now.
Q: But you just told me that you said it was wrong.
A: It looks low to me.
Q: So you’re not satisfied with Ms. Stallings, she put the number down out of the sky. Well, let me ask you about Exhibit 8 [the Schedule B from the Chapter 7].
A: Again, what is this?
Q: Why don’t you read it, look at it, and then ask.
A [to his attorney]: What am I looking at?
Q: Mr. Brown, those are a portion of the bankruptcy schedules that you filed in the case in which I am the trustee on November 26, 2012. Once again, you signed them under penalty of perjury. Let’s go to Schedule B. Go down to household goods and furnishings. What did you list the value of the property at, Mr. Brown?
A: I believe that was taken off of Christine Stallings’ numbers.
Q: ... I’m asking you what is the amount placed on that?
A: $2,250.
Q: How much did Ms. Stallings put on in her petition?
A: I do not know.
Q: Well, pick it up and look at it. You just looked at it a minute ago and said it was incorrect.
A: Let’s look at the dates. This was. 2/27 of ’12 and this is 12 of ’12. This is low.
Q: What number is that?
A: $2,250.
Q: And what’s the one in the newest schedules?
A: $2,250.
Q: Okay.
A: This one is low; this one is not.
Q: Why would that be, Mr. Brown?
A: Didn’t have any job. I had to sell some things off to be able to eat.
Q: So between the filing on 2/27/12 and the filing on 11/2/12 you sold property?
*253A: Some odds and ends, yes.
Q: What did you sell?
A: I sold a lawn mower, sold a chain saw, a couple chain saws.
Q: What else?
A: I’d have to ask the wife ’cause there was odds and ends stuff that we sold off.
Q: How much did they total in value?
A: I don’t know.
Q: How can you know that the numbers are different or wrong? How do you know the number is wrong when you don’t even know what was sold or what was obtained?
A: You know, I simply don’t know.
Mr. Strauss then directed Mr. Brown to look at his- answer to the Statement of Financial Affairs showing that in answer to the question of whether he had transferred any property in the last two years, he had answered “none.” Mr. Brown’s explanation for answering that he had no transfers was that “[m]y definition of property is real estate.”
The Adversary Proceeding
The extended deadline for the Trustee to file objections to discharge under § 727 expired on September 13, 2013; the Trustee timely filed his complaint against Mr. Brown on September 11, 2013. The Trustee’s Adversary Complaint as amended seeks to deny the discharge of Mr. Brown based on seven separate grounds. With respect to § 727(a)(2)(A), the Trustee alleged that Mr. Brown had transferred and concealed assets within the year before the filing, by selling and gifting the property that he had testified about in his Rule 2004 examination, and by concealing the personal property removed from the shop building before the sale. With respect to § 727(a)(2)(B), the Trustee alleged that Mr. Brown had transferred and concealed assets after the bankruptcy filing. With respect to § 727(a)(3), the Trustee alleged that Mr. Brown had failed to keep or preserve documents regarding his financial condition, specifically the records of payments to Alice Elliott and the records of what happened to the personal property that was sold.
With respect to § 727(a)(4)(A), the Trustee alleged that Mr. Brown had made a false oath or account, by testifying falsely at both 341 meetings that his schedules and statements were correct; by failing to schedule a workers’ compensation claim; by knowingly undervaluing his household goods and furnishings in the Chapter 13; by failing to schedule the personal property assets he removed from the shop building in the Chapter 7, and by failing to disclose the sale of household goods between the dismissal of the Chapter 13 and the filing of the Chapter 7. With respect to § 727(a)(4)(D), the Trustee alleged that Mr. Brown had withheld books and records from him as an officer of the estate, in particular the record of his deposits of the $25,000 loan proceeds from Alice Elliott, the ledger of his payments to Alice and documents regarding credits for work he had done, and the accounting of the property Mr. Brown had taken from the shop building.
Finally, under § 727(a)(5), the Trustee alleged that Mr. Brown had failed to satisfactorily explain the loss of assets that had been shown on his January 1, 2008 financial statement, namely his interest in the farm and the loss of thousands of dollars of personal property. And, with respect to § 727(a)(7), the Trustee contended that Mr. Brown committed the same acts in his Chapter 13 and in connection with an insider, by stating in his plan that payments to his sister on the second deed of trust were current, and by understating the amount he owed her.
*254Mr. Brown’s answer generally denies the allegations.
Motions To Continue the Trial Setting
The trial date was set with the issuance of the summons for December 5, 2013. At a pretrial held on November 12, 2013, the parties represented that discovery was ongoing but had been made difficult on account of Mr. Brown’s taking of the 5th Amendment, so the Court cancelled the trial setting and set another status conference for January 7, 2014. That conference was continued to coincide with a hearing in the main case on the Trustee’s motion to compel to compel Mr. Brown to answer questions (for a determination that Mr. Brown had improperly invoked the 5th Amendment).
On January 21, 2014, the Court held a status hearing and a hearing on the motion to compel. The Court denied the motion to compel15 and set another status conference for April 22, 2014, based on the Trustee’s indication that he might need to amend to add some additional counts regarding missing assets.
On April 3, 2014, Mr. Brown’s current counsel filed a motion to withdraw. In the motion, he recited that Mr. Brown had failed to provide him with documentation about the personal property listed in the financial statement or to assist counsel in the collection of documents and had failed to generally cooperate. Mr. Brown was served with the motion but did not object. Mr. Brown’s counsel at the next status conference asked the Court, however, to hold the motion to withdraw in abeyance16; he reported that Mr. Brown had received a favorable settlement offer on his workers’ compensation claim which he hoped could be used to settle with the Trustee, but that Mr. Brown was refusing to execute the settlement agreement. The Court set the matter for trial for July 22, 2014, with a pretrial conference on June 10, 2014.
On June 10, 2014, the parties reported to the Court that the matter was ready for trial. By agreement, the Trustee filed a second amended complaint to add some additional factual allegations that had already been the topic of discovery and which would not delay the trial. The Court granted the Trustee leave to amend, and Mr. Brown timely answered the Trustee’s second amended complaint.
On July 16, 2014, Mr. Brown filed a motion to continue the trial. He alleged that he had suffered another work-related back injury in April 2014 and that the psychological distress made him unable to concentrate or prepare for legal matters. The motion was supported by a statement from his physician dated the day before. The Court granted the motion, and set a status hearing for July 29, 2014 to discuss rescheduling the trial.
On July 29, 2014, the Court held a status conference and reopened discovery for the limited purpose of allowing the Trustee to serve requests for admissions based on Mr. Brown’s refusal to allow his counsel to stipulate to documents. The Court ordered that discovery be cutoff by September 30, 2014, and set a status conference for October 7, 2014, at which time the Court said it would set a trial date.
On October 7, 2014, the Court held another pretrial conference. Mr. Pelofsky reported that his client was not in good medical condition but did not have specific *255information. The Court set a trial for December 15, 2014 and ordered witness and exhibit lists to be filed by December 8, 2014.
On December 8, 2014, the Trustee filed his witness and exhibit lists; Mr. Brown did not. Rather, on December 9, 2014, Mr. Brown filed a second motion to continue the trial. The motion was supported by another statement from Mr. Brown’s physician, again indicating that Mr. Brown had suffered an acute back injury and was in severe psychological distress, making him unable to fully concentrate on tasks and unable to adequately prepare for his upcoming legal matters. The Court granted the motion to continue, and continued the trial to a date to be determined. Noting that the letters from the physician did not say what Mr. Brown’s prognosis was or when he might be able to prepare, the Court directed Mr. Brown and his counsel to consult with the physician and to report back to the Court, after which the trial would be set and there would be no more continuances.
Mr. Brown filed a “Notice of Compliance” on December 16, 2014 and a medical report under seal. The Court held another status conference on January 27, 2015. The Court stated that it did not agree that Mr. Brown had complied with the Court’s Order; the medical report was not erne-rent, but was dated June 2014, and the way the doctor had written the report strongly suggested to the Court that Mr. Brown was not injured as seriously as he was proclaiming to be. Since Mr. Brown’s next doctor’s appointment was purportedly scheduled for February 6, 2015, after which Mr. Brown was to know his course of treatment, the Court scheduled another status conference for February 10, 2015, indicating that the trial date would be set then. The Court further expressly directed Mr. Brown to discuss with his physician when he would be available for trial, what his limitations would be, and to give the doctor authority to speak to Mr. Brown’s counsel.
On February 10, 2015, it again appeared to the Court that Mr. Brown was deliberately dragging his feet so as to avoid having a trial set since Mr. Brown had not provided the information requested by the Court; the Court thus set a trial date for April 27, 2015, and a deadline for filing any pretrial motions, including any motions to continue, for March 16, 2015. Mr. Brown did not file any motions by March 16, 2015, but did file his witness and exhibit lists as directed by the Court.
On April 21, 2015, the Court received word that Mr. Brown, acting without benefit of counsel, was attempting to fax-file a motion to continue the hearing. The Court obtained a copy of the purported motion from counsel, and held an emergency hearing. The Court put the motion under seal since it contained information about Mr. Brown’s medical condition. What the motion did not contain, however, was an answer to the Court’s earlier questions about Mr. Brown’s prognosis; 'it stated that Mr. Brown had been in the hospital earlier in the month, but had asked the doctor to go home, and that Mr. Brown would not ask his current physician to explain his medical condition for fear of alienating him. The motion reflected a clear ability to concentrate and intelligently articulate his position, contrary to Mr. Brown’s allegations about the effect his condition was having on his mental faculties. Under the circumstances, the Court denied the motion, saying that if Mr. Brown needed accommodations, such as access to his breathing machine or frequent breaks, the Court would be more than happy to provide such accommodations.
*256Finally, in the middle of the trial, Mr. Brown made an oral motion to continue the trial, stating that he was in pain, and that, due to his walking so much, his pain medication had worn off. Although not reminding Mr. Brown that in his letter motion filed under seal he had stated he was not taking any pain medication because it interfered with his other medications, the Court denied the motion. The Court had the opportunity to observe Mr. Brown closely, both sitting and occasionally standing at counsel table and on the stand. Mr. Brown had no trouble answering questions both on direct and cross examination intelligently and articulately; although in some pain, he did not appear confused or unable to answer questions. He followed the testimony of the other witnesses closely and regularly took notes and consulted with his counsel.
The Court incorporates its rulings at all the previous status hearings outlined above as well as the hearing on April 22, 2015, and reiterates and restates its findings that Mr. Brown did not comply with the Court’s Orders to provide evidence of his medical condition; appeared to be dragging his feet to avoid a trial setting; was not prejudiced in having his continuance motions denied, since he was able to fully participate in the presentation of his evidence; and that, conversely, the Trustee had subpoenaed witnesses and prepared for trial, and would have been prejudiced had the Court granted the continuance. See In re Hopper, 228 B.R. 216, 217 (8th Cir. BAP 1999).
Additional findings of fact will be made in connection with the discussion of each § 727 count.
■Discussion
Section 727 governs discharges in bankruptcy. A discharge under 11 U.S.C. § 727 reheves a debtor of personal liability on pre-petition discharged debt and effectuates the debtor’s fresh start. One of the primary goals in an individual Chapter 7 is to discharge the debt of the honest but unfortunate debtor. This provision provides a procedure by which “certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.’ ” Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). A discharge in bankruptcy is, however, a privilege, not a right. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Matter of Juzwiak, 89 F.3d 424, 427 (7th Cir.1996).
Upon the expiration of the time to object, a bankruptcy court must grant a discharge to a Chapter 7 debtor unless grounds to deny discharge exist. 6 Collier on Bankruptcy ¶ 727.01[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.); See 11 U.S.C. § 727(a); Fed. R. Bankr.P. 4004(c)(1). Denying a discharge is a “harsh and drastic penalty” as it defeats the debtor’s purpose in seeking bankruptcy relief. In re Korte, 262 B.R. 464, 471 (8th Cir. BAP 2001). The provisions under § 727 are construed liberally in favor of the debtor and strictly against creditors, but also protect system from abuse by debtors. See In re Chalasani, 92 F.3d 1300 (2d Cir.1996). Generally, a discharge is unavailable to debtors who engage in unscrupulous conduct. Bernau v. Olbur (In re Olbur), 314 B.R. 732, 740 (Bankr.N.D.Ill.2004). As one court stated, “complete disclosure is the touchstone in a bankruptcy case.” In re Bernard, 99 B.R. 563 (Bankr.S.D.N.Y.1989).
Discharge objections must be brought by adversary proceeding within the time specified in Rule 4004(a). See *257Fed. R. Bankr.P. 7001 & 4004. The party objecting to discharge must prove each element by a preponderance of the evidence. 6 Collier on Bankruptcy ¶ 727.01[2] (16th ed.2012). The trustee has standing to object to the debtor’s discharge under 11 U.S.C. § 727(c)(1), which states: “[t]he trustee, a creditor, or the United States trustee may object to the granting of a discharge under subsection (a) of this section.”
Taking each count in turn:
11 U.S.C. § 727(a)(2)(A)
11 U.S.C § 727(a)(2)(A) provides that the court shall grant the debtor a discharge, unless “[t]he debtor, with intent to hinder, delay or defraud a creditor or an officer of the state 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 — property of the debtor, within one year before the date of the filing of the petition.” To prevail on a § 727(a)(2)(A) complaint, the Trustee must prove each of four elements by a preponderance of the evidence:
(1) The wrongful action occurred within 1 year before the petition filing;
(2) The act was committed by the debt- or;
(8) The debtor had actual intent to hinder, delay, or defraud a creditor or officer of the estate; and
(4) The debtor’s action consisted of transferring, removing, destroying, or concealing the debtor’s property.
In re Korte, 262 B.R. 464 (8th Cir. BAP 2001).
Actual intent can be inferred from circumstantial evidence, such as the facts and circumstances of the debtor’s conduct. McCormick v. Security State Bank, 822 F.2d 806, 808 (8th Cir.1987). Factors considered when determining whether the debtor acted with actual intent include: lack or inadequacy of consideration; family, friendship, or other close relationship between transferor and transferee; retention of possession, benefit or use of property in question; financial condition of the transferor prior to and after the transaction; conveyance of all of debt- or’s property; secrecy 'of conveyance; existence of trust or trust relationship; existence or cumulative effect of pattern or series of transactions or course of conduct after pendency or threat of suit; instrument affecting the transfer suspiciously states it is bona fide; debtor makes voluntary gift to family member; and general chronology of events and transactions under inquiry. Riley v. Riley (In re Riley), 305 B.R. 873, 878-79 (Bankr.W.D.Mo.2004) (Dow, J.).
The Trustee in this case alleged generally that Mr. Brown had transferred property of the estate within the year before filing. At trial, the Trustee argued that the concealment of Mr. Brown’s interest in the farm as well as the sale of the “odd and ends” of personal property constituted a violation of this subsection. The Court disagrees.
First, with respect to the farm, the undisputed evidence is that Mr. Brown listed an ownership interest in the farm on a January 1, 2008 financial statement, but removed it from later financial statements dated March 2, 2010, and February 1, 2011. The Chapter 7 was filed on November 26, 2012; Mr. Brown testified about why he removed the farm interest from his later financial statements at the § 341 meeting on April 13, 2012. Although the Court does not believe Mr. Brown’s various stories about why he no longer has an interest in the farm (which will be discussed in more detail below), any “concealment” occurred outside the one year-peri*258od before the filing of the Chapter 7. See, e.g., In re Gordon, 526 B.R. 376 (10th Cir. BAP 2015) (discussion of meaning of concealment). With respect to the personal property sold after the Chapter 13 was dismissed (lawn mower, chainsaws, odds and ends), the Court again does not believe Mr. Brown’s story (more about that later, too), but believes the evidence falls short of showing that these purported sales were made with the requisite actual intent to'hinder, delay, or defraud.
Judgment on this count is entered in favor of Defendant David Earl Brown.
11 U.S.C. § 727(a)(2)(B)
11 U.S.C. § 727(a)(2)(B) provides that the court shall grant the debtor a discharge unless 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 — property of the estate, after the date of the filing of the petition.” The elements of § 727(a)(2)(B) are the same as those under § 727(a)(2)(A), except that the wrongful action must occur post-petition. See In re Darr, 472 B.R. 888, 894 (Bankr.E.D.Mo.2012).
The Court understands that, as of the date the § 727 was set to expire, the Trustee was still unable to fully investigate the loss of estate assets, due to Mr. Brown’s evasiveness in answering questions, his failure to produce documents, his invocation of his 5th Amendment privilege, and his general failure to cooperate. Under those circumstances, it was reasonable for the Trustee to include a § 727(a)(2)(B) count in his complaint. The Trustee candidly admitted at trial that he did not present evidence that Mr. Brown transferred any property of the estate postpetition, and the Court finds none.
Judgment on this count is entered in favor of Defendant David Earl Brown.
11 UJ3.C.S 727(a)(3)
11 U.S.C. § 727(a)(3) provides that the court shall grant the debtor a discharge, unless “the debtor has concealed, destroyed, mutilated, falsified,, or failed to keep or preserve any recorded information, including books, documents, records and paper, 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.”
Under § 727(a)(3), the objecting party carries the initial burden of making a prima facie showing that the records are inadequate, and then the burden shifts to the debtor to show the failure was justified. In re Gregg, 510 B.R. 614, 627 (Bankr.W.D.Mo.2014) (Federman, C.J.); In re Wolfe, 232 B.R. 741, 745 (8th Cir. BAP 1999). There is no intent element involved in evaluating the applicability of this provision, rather, a standard of reasonableness applies. In re Wolfe, 232 B.R. at 745.
The debtor must “take such steps as ordinary fair dealing and common caution dictate to enable the creditors to learn what he did with his estate.” In re Wolfe, 232 B.R. at 745. The court should not deny discharge if “the debtor’s records, though poorly organized, are reasonably sufficient to ascertain the debtor’s financial condition.” Riley, 305 B.R. at 883. A “justified” failure to keep records is determined by considering “what records someone in like circumstances to the debtor would keep.” Riley, 305 B.R. at 883.
The Court considers several factors when considering an alleged § 727(a)(3) violation:
*2591. The complexity of the debtor’s business;
2. The customary business practices in the particular industry;
3. The degree of accuracy of existing records; and
4. The debtor’s courtroom demeanor.
In re Gregg, 510 B.R. 614, 626-27 (Bankr.W.D.Mo.2014) (Federman, C.J.).
The Trustee in this case pled § 727(a)(3) in the alternative with § 727(a)(5) (failure to explain loss of assets). At trial, he argued that Mr. Brown’s failure to provide documents that he had requested, either during the § 341-meeting, the Rule 2004 examination, in letters admitted into evidence, or in the motions to compel, constituted a violation of the § 727(a)(3). Those documents included (1) records of the deposit of the $25,000 loan proceeds from Alice Elliott; (2) the ledger of payments to Alice Elliott; (3) documentation regarding credits against the Alice Elliott loan for work performed; (4) a list of the property that the Bank had allegedly inappropriately sold at auction, including a narrative of what happened; and (5) documentation about the $129,200 of assets shown on his financial statements. Mr. Brown, for his part, blamed his failure to provide this information to the Trustee on communication problems with his lawyer, or that it had “slipped his mind,” or that the Bank had taken all his records.
Again, the Court does not believe Mr. Brown’s excuses for his failure to cooperate and provide requested documentation to the Trustee. Subsection 727(a)(3), however, punishes a failure to “keep or preserve recorded information.” The only “recorded information” among the list of requested documents is the deposit records and the ledger Mr. Brown testified he created. The remaining requests involve information to be created. The Trustee cites no legal authority for the proposition that failure to create a narrative, for example, upon the Trustee’s admittedly reasonable request for one, triggers a § 727(a)(3) violation. The Trustee does argue that the Court should apply a “totality of circumstances” type test to its § 727 analysis in general, but the Trustee’s legal authorities involve revocation of discharge for fraud under § 727(d). See, e.g., In re Osborne, 476 B.R. 284 (Bankr.D.Kan.2012). The Court finds no legal justification to stretch § 727(a)(3) into a general failure to cooperate or to respond to, in essence, discovery requests.
It is undisputed that the Alice Elliott loan occurred in September 2001, more than ten years before either the Chapter 13 or Chapter 7 bankruptcy was filed. And, the ledger of payments was ultimately provided by Alice Elliott to the Trustee and shows only six payments in almost twelve years. Although not condoning Mr. Brown’s utter failure to assist the Trustee in his duty to investigate the Debtor’s assets and financial affairs, under the circumstances, the Court finds that the Trustee has not met his burden of showing that Mr. Brown’s records were inadequate within the meaning of. 11 U.S.C. § 727(a)(3).
Judgment on this count is entered in favor of Defendant David Earl Brown.
11 U.S.C. § 727(a)(4)(A)
11 U.S.C. § 727(a)(4)(A) provides that the court shall grant the debtor a discharge, unless “the debtor knowingly and fraudulently, in or in connection with the case&emdash;made a false oath or account.”
A “harsh penalty” awaits a debtor who “deliberately secretes information from the court, the trustee, and other parties of interest in his case.” Cepelak v. Sears (In re Sears), 246 B.R. 341, 347 (8th Cir. BAP 2000)). A debtor’s “knowledge” *260and “intent” are questions of fact. A false oath bars discharge when it is both material and made with intent. Korte, 262 B.R. at 474. “Materiality” carries a low threshold. Id. A false oath is “material” when it relates to the debtor’s “business transactions or estate, or concerns the discovery of assets, business dealings, or the existence or disposition of his property.” Id. “Intent” can be established with circumstantial evidence and “statements made with reckless indifference to the truth are regarded as intentionally false.” Id. The Code requires the debtor’s full and complete disclosure of any interests of any kind and the location of all assets. Id.
To prove a violation of § 727(a)(4)(A), the Trustee must prove four elements:
(1) the debtor knowingly and fraudulently;
(2) in or in connection with a case;
(3) made a false oath or account;
(4) regarding a material matter.
In re Gregg, 510 B.R. 614, 621 (Bankr.W.D.Mo.2014).
In this case, the Trustee alleges that Mr. Brown knowingly and fraudulently (1) failed to schedule assets, including his interest in the farm, his pending workers’ compensation claim, the personal property from the shop building; (2) failed to schedule the correct value of his household goods; (3) failed to disclose in his statement of financial affairs sales and transfers of property; and (4) testified falsely about these things at his § 341 meeting and his Rule 2004 examination. The Court agrees.
The Interest In the Farm
The undisputed evidence showed that David Brown “brokered” a purchase of the farm on behalf of his sister and her husband in 2001 and wrote a $2,500 check to the realtor from his joint personal account. In 2005, Mr. Brown signed a Cash Rent Statement for the benefit of the Grundy County Farm Service Agency as “owner” indicating that he had rented “my/our farm” and that the tenant would receive the program payments for the 2005 year. Mr. Brown claimed a half interest in the farm valued at $124,000 on his 2008 financial statement. Although Mr. Brown invoked the 5th Amendment when asked whether he had signed the financial statement, the Court heard the credible testimony of the Bank officer that the financial statement was Mr. Brown’s statement and that the officer recognized Mr. Brown’s signature, from which the Court can find as a fact finder that Mr. Brown did indeed sign the January 1, 2008 statement. Further evidence that Mr. Brown signed it comes from his testimony that he later “corrected” the financial statement by removing his interest in the farm.
Mr. Brown testified at trial that although he brokered the loan, the land was not put in his name because his sister did not trust Mr. Brown’s wife and did not want his and his wife’s name on the deed. He testified that his way of making payments for the land would be to build ponds on the land, but that Alice did not like the idea because it would take some of the land out of the CRP program, and that he had had a falling out with his sister because of it, sometime in the Fall or Winter of 2008 (after he had provided his financial statement to the Bank).
The Court does not believe Mr. Brown’s story told at trial. Mr. Brown told a different story to the Chapter 13 Trustee and Mr. Cowherd, saying, “We had paid her back on the note with the understanding that someday when that note was paid off, we might have part of that farm. Or have control of that farm.” Other testimony from the meeting states that the money *261Mr. Brown paid his sister was actually from the $25,000 loan proceeds. Yet Mr. Brown testified at trial that all the $25,000 of the loan proceeds went to pay off his wife’s credit card debts. The Court also finds it convenient that when asked by Mr. Cowherd about a 2009 financial statement, a date that was obviously an error, Mr. Brown said nothing about the land being acquired for hunting, or paying Alice back through building ponds, and that he could not remember when the falling out had occurred. Once Mr. Brown realized that the financial statement was dated January 1, 2008, not 2009, however, then suddenly the falling out occurred after he presented his financial statement.
The Court is not sure what the true story is about the farm, but is convinced that Mr. Brown had and has a 50% equitable ownership in it, regardless of whether or not the farm was titled in his name. The Court further finds credible the testimony of Gary Constant, the Bank officer, that the Bank discussed taking an interest in the farm as additional collateral to assist Mr. Brown in restructuring his loans, but that Mr. Brown said he could not grant the Bank a deed of trust because the farm wasn’t in his name “yet.” The Court also believes Mr. Constant’s testimony that he had to leave the farm off the next financial statement because he was having difficulties with his wife and did not want her to know about the farm in case of a divorce.
In sum, overwhelming evidence is that Mr. Brown had an interest in the farm; that he knew he had an interest in the farm; that his interest was material and valuable — valuable enough to include on a financial statement — and that he knowingly and fraudulently failed to schedule his interest in the farm in either of his bankruptcy filings. The Court’s finding .that Mr. Brown’s omission was knowing and fraudulent is buttressed by the fact that he attended Judge Venter’s hearing when the Judge questioned his omission of the farm interest, and yet still filed another bankruptcy without scheduling it.
Pending Workers Compensation Claim
The evidence is undisputed that Mr. Brown was injured in November 2011 and had a workers’ compensation claim pending at the time he filed his Chapter 7 bankruptcy that Mr. Brown did not schedule in his bankruptcy schedules. Although it is true that Mr. Brown’s counsel wisely disclosed it to the Trustee at the § 341 meeting; later amended the Schedules B and G to reflect a contract with the workers’ compensation attorney; and that an unliquidated workers compensation claim would be exempt if scheduled, the Court nonetheless believes that Mr. Brown’s omission of the workers’ compensation claim was knowing and fraudulent and material, for several reasons.
First, Mr. Brown knew from his participation at the § 341 meeting with Mr. Fink in his first bankruptcy case that a debtor is required to list “all assets”; Mr. Fink even directed Mr. Brown to get with his attorney to amend to include an asset that had been omitted, the $13,000 account receivable. And, Mr. Brown has made much of this injury and his inability to be treated for it, as well as his subsequent devastating injury in April 2014 at every turn during this proceeding, referring to it and the pain each time he sought a continuance. It is inconceivable to the Court that someone in as much pain as Mr. Brown claims to be could fail to tell his lawyer about this claim. The only conclusion the Court can draw is that the omission was knowing and fraudulent.
More importantly, the omission is material. Even though an unliquidated workers’ compensation claim is exempt under *262Missouri law,17 the Trustee had a right to investigate to determine whether Mr. Brown might- have a nonexempt cause of action for product liability or other tort arising out of the injury.
Finally, Mr. Brown is an intelligent man, whom the Court was able, as noted above, to observe closely during the trial. The Court does not believe Mr. Brown when he testified at trial that he did not know the workers’ compensation claim was “relevant,” particularly since Mr. Brown was intelligent enough to retain a lawyer for the claim, and to turn down a $37,000 settlement offer made sometime in the first half of 2012 — obviously during the Chapter 18 and before the Chapter 7 was filed — on the grounds it was not enough to provide appropriate medical treatment for his injuries.
Other Omissions
Mr. Brown has made numerous other false oaths during the course of both his bankruptcies. Although treating the debt to his sister under the plan as being current, he testified initially at the Chapter 18 § 341 meeting that he had not paid his sister back in the year before filing the Chapter 13, and included no payments to insiders in answer to Question 3(b) on his statement of financial affairs. Yet the undisputed evidence is that he paid his sister $500 within the year before Chapter 13 filing, rendering both his testimony and the statement of financial affairs false. Mr. Brown also scheduled the debt to his sister as being $25,000, leading Judge Ven-ters to believe that the Browns had equity the house such that the Browns were spared an immediate conversion to Chapter 7. The failure to ascertain the correct balance was reckless, if not fraudulent.
In addition to omitting the farm interest and workers’ compensation claim, Mr. Brown also omitted from his Chapter 13 Schedules the personal property allegedly located in his shop building, including what he testified were some $70,000 to $80,000 of antique tools, a motorcycle and a three-wheeler. The level of detail describing the other vehicles that were scheduled in the Chapter 13 Schedule B makes it inconceivable that Mr. Brown could “forget” to list these titled vehicles. He did not disclose these other assets even though the Chapter 13 Trustee asked him if he had disclosed all assets, and advised him when the Trustee found out about the omitted $13,000 account receivable that he needed to get with his attorney to correct that omission.
Then, after having been advised by the Chapter 13 Trustee and hearing Judge Venter’s remarks about disappearing and omitted assets, Mr. Brown filed a Chapter 7, and still made no effort to verify the correct balance of the loan to Alice Elliott; did not disclose the property taken from the shop building; did not disclose any sales of household goods or other property until asked at the Rule 2004 examination to explain what happened to his $129,200 of personal property; did not disclose gifts to nieces and nephews; did not disclose his collection of the $13,000 accounts receivable; in addition to not disclosing the farm interest or workers’ compensation claim. And, his testimony at the Chapter 7 § 341 and the Rule 2004 examination — in marked contrast to his testimony at trial — is evasive, obfuscating, and simply unbelievable (such as when Mr. Brown testified during the Rule 2004 examination that he understood transfers of property to only mean real estate).
Nor does the Court believe Mr. Brown’s explanations — that in the Chapter 13, he merely relied on advice of counsel or that *263the failures were the result of communication difficulties, or his medical difficulties, and that in the Chapter 7, it was a simple “misunderstanding” on his part; that he did not pay enough attention to the schedules but now he understands he has to comply and is willing to amend to now fully disclose, if only the Court will give him that opportunity, since he now realizes he will never work again and needs his discharge. These protestations and proclamations ring hollow, after months and months of the Trustee attempting to pry information out of Mr. Brown.
Nonetheless, the Court believes it cannot deny a discharge to Mr. Brown for his false oaths during the Chapter 13, except within the confines of § 727(a)(7), which only applies to bad acts concerning insiders “in connection with another case”— that section will be discussed below. Rather, § 727(a)(4)(A) applies to false oaths “in or in connection with this case”— meaning the Chapter 7. More importantly, the Chapter 13 § 341 transcript does not contain any recitation that Mr. Brown was sworn in before he testified, and the Court is unwilling to merely assume Mr. Brown was sworn when the transcript does not contain it and there has been no other evidence that Mr. Brown was sworn before testifying.
As for the other omissions and testimony during the Chapter 7, however, the Court does conclude the Trustee has met his burden. “A debtor acts knowingly if he or she acts deliberately and consciously.” In re Osborne, 476 B.R. 284, 294 (Bankr.D.Kan.2012). Mr. Brown admitted that he signed the schedules and statements, and admitted he merely glanced at them. “Such reckless indifference to the truth has consistently been treated as the functional equivalent of fraud for purposes of § 727(a)(4)(A).” Id. At a minimum, Mr. Brown acted with reckless indifference, if not fraudulently, in omitting assets and transfers from his Chapter 7 schedules and statements.
Finally, with respect to materiality, the Court agrees with Mr. Strauss that an accumulation of small omissions of assets of small values can be material under § 727(a)(4)(A). The Court has already concluded that omission of the farm interest and workers’ compensation claim were material. However, omission of the other property was material, too. The Court does not believe Mr. Brown when he says that the personal property he retrieved from the shop building was merely junk; it is not believable that Mr. Brown would call on four or five friends with trucks and trailers and expend the time and effort he did to move the property if he thought it were junk. His explanation that he took it anyway because he knew the Bank would later say they returned valuable assets to him is simply nonsensical. Mr. Brown’s trial testimony that he did not understand that the Trustee wanted information about it and that he simply misunderstood because he thought it was junk is belied by the fact that Mr. Brown later amended his schedules and did include values on some of the property.
With respect to the household goods and tools, the Court does not believe that Mr. Brown ever had $129,200 in household goods including $70,000 to $80,000 in antique tools. The Court believes the credible testimony of the very experienced and knowledgeable auctioneer who inspected the items in the building and conducted the sale that there were no antique tools. The Court believes the auctioneer when he testified he had no incentive not to advertise antique tools had indeed there been some, since it would only have attracted more buyers and induced more sales and increased his sales commission. The Court likewise believes the credible testi*264mony of the Bank officer that there were no antique tools. Mr. Brown scheduled the Bank as a creditor with a deficiency balance on its loans of $68,000; the Bank, facing such an uncollectible deficiency, had no incentive to depress the value of items to be sold at auction or otherwise ignore valuable antique tools if they had existed, since the Bank had a blanket lien in all the personal property, including any tools.
If Mr. Brown had truly had a collection of antique tools worth that much money and of great sentimental value, he would have protested the absence of the tools to the auctioneer or the Bank officer18 (or his lawyer); he would have had pictures of the tools or have had them insured; or would have disclosed the loss of the tools in answer to the question of the statement of financial affairs about losses within the year before filing.
Rather, the Court believes Mr. Brown concocted the story about the tools as a defensive measure to avoid the Bank’s potential nondischargeability claim for Mr. Brown’s submission of a false financial statement. A fair reading of the Rule 2004 examination indicates that when faced with the question of how the household goods could go from a value of $129,200 to $2,250, Mr. Brown could not explain it — that the household goods were never worth $129,200 — and thus he came up with the story of antique tools, items given to nieces and nephews, and so on. The Court thus does not believe that there are $36,000 of household .assets missing, but, rather, that they never existed. Nonetheless, testifying — falsely—that such assets exists so as to send the Trustee off on a wild goose chase to find assets and tools that never existed is itself a “false account” within the meaning of 11 U.S.C. § 727(a)(4)(A).
In the words of the Osborne case, “the Court’s examination of the admitted exhibits in this case, review of the dockets in the main case and the adversary case, and familiarity with these proceedings convinces the Court that if [Mr. Brown’s] filings had been complete and accurate, or even if [Mr. Brown] had cooperated once the deficiencies were identified, the course of these proceedings would have been smoother and the work of the Trustee significantly reduced. When coupled with [Mr. Brown’s] cavalier indifference and his on-going pattern of disdain for full disclosure, the deficiencies in [his] filings required the Trustee to ‘engage in a laborious tug-of-war to drag the simple truth into the glare of daylight.’ ” In re Osborne, 476 B.R. at 296. Mr. Brown’s sudden willingness to apologize, cooperate and amend is simply too late. See In re Rao, 526 B.R. 623 (Bankr.E.D.La.2015).
In sum, the Court concludes that Mr. Brown’s failure to schedule his interest in the farm, his workers’ compensation claim, and the other personal property; his failure to disclose transfers of property, along with his false testimony in connection therewith, constitutes a violation of §'727(a)(4)(A); that the Trustee has met his burden of proof and that judgment should be entered in favor of the Trustee and against David Earl Brown.
11 U.S.C. § 727(a)(4)(D)
11 U.S.C. § 727(a)(4)(D) provides that the court shall grant the debtor a discharge unless “the debtor knowingly and fraudulently, in or in connection with the case — withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial *265affairs.” A debtor “knowingly and fraudulently withholds records when the failure to produce requested records is an attempt to hide assets or impede the trustee.” In re Mullin, 455 B.R. 256, 261 (Bankr.M.D.Fla.2011).
The Trustee argues that Mr. Brown’s failure to turnover the documents discussed in connection with § 727(a)(3) along with a failure to turnover guns and other nonexempt property constitutes a violation of this subsection. The Court reiterates its conclusions with respect to. § 727(a)(3); § 727(a)(4)(D) cannot be stretched into a general failure to turnover or cooperate but rather applies to the withholding of “recorded information.” The Trustee has not met his burden of proof with respect to this count.
Judgment on this count is entered in favor of Defendant David Earl Brown.
11 U.S.C. § 727(a)(5)
11 U.S.C. § 727(a)(5) provides that the court shall grant the debtor a discharge, unless “the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities.”
The party objecting to discharge must first offer some evidence of the disappearance of assets or unusual transactions, then the debtor must “explain satisfactorily” what happened to the assets. Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 619-20 (11th Cir.1984). A finding of “intent” is not required. Nof v. Gannon (In re Gannon), 173 B.R. 313 (Bankr.S.D.N.Y.1997). “Lack of wisdom in the debtor’s expenditures, by itself, is not grounds for denial of a discharge.” Great American Ins. Co. v. Nye (In re Nye), 64 B.R. 759 (Bankr.E.D.N.C.1986) (explanation need not be meritorious to be satisfactory). The debtor’s explanation “must amount to more than a ‘vague, indefinite, and uncorroborated hodgepodge of financial transactions ... and must be definite enough to convince the trial judge that assets are not missing.” In re Darr, 472 B.R. 888, 900 (Bankr.E.D.Mo.2012) (cites omitted).
In this case, the Trustee argues that based on Mr. Brown’s signed personal financial statement and sworn testimony, thousands of dollars of assets are missing. As noted above, the Court does not believe that $129,200 of assets existed; however, when faced with the evidence that he had signed a financial statement in as recently as February 2011 listing $129,200 in personal property assets, as compared to only $2,250 listed in the Schedule B, the burden shifted to Mr. Brown to “explain satisfactorily” what happened. Mr. Brown failed to do so. At trial, the Trustee asked Mr. Brown about the $126,000 (the $129,200 minus about $3,000 disclosed); Mr. Brown testified that he did not know he had to disclose or account for those assets, and that he had relied entirely on legal advice, and that it was a “communication problem,” 19 even though he now knows he has to comply.
The Court believes this testimony is disingenuous at best. Mr. Brown could not have failed to understand, when asked at the Rule 2004 examination in addition to motions to compel and letters from the Trustee. ’ His answer at trial&emdash;that he did not know&emdash;was in stark contrast to his evasive answers at the examination. Mr. Brown has still not satisfactorily explained what happened to the $129,200 of assets that he had in his mind when he prepared the financial statement to when he filed the bankruptcy case.
*266Judgment on this count is entered against in favor of the Trustee and against Defendant David Earl Brown denying his discharge under 11 U.S.C. § 727(a)(5).
11 U.S.C. § 727(a)(7)
11 U.S.C. § 727(a)(7) provides that the court shall grant the debtor a discharge unless “the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider.”
The Court has already outlined the elements- of acts under § 727(a)(2), (a)(3), (a)(4) and (a)(5), and need not repeat them here. In addition to the elements required under those specified paragraphs, the Court must find: (1) an insider relationship exists; and (2) the misconduct must have occurred within 1 year of the filing of the debtor’s petition. In re Kane, 755 F.3d 1285 (11th Cir.2014).
In this case, the Trustee contends that Mr. Brown’s plan treatment of Alice Elliott’s loan as being current; that Mr. Brown’s scheduling of only a $25,000 balance to Alice Elliott; that his failure to schedule the farm interest co-owned with Alice Elliott; and his testimony at the Chapter 13 § 341 meeting regarding these matters constituted violations of § 727(a)(4)(A) (false oath) in connection with an insider, his sister, in the previous Chapter 13 case. The Court agrees in part.
It is undisputed that Alice Elliott is Mr. Brown’s sister, and therefore is an “insider” within the meaning of § 727(a)(7) and 11 U.S.C. § 101(31)(A)(i). Moreover, Chapter 13 Schedules and Statements containing the false oaths were filed on December 11, 2012, and the § 341 meeting occurred on April 13, 2012, both within the year before Mr. Brown filed this Chapter 7 bankruptcy, on November 26, 2012. However, as noted above, the Court will not consider the testimony at the Chapter 13 § 341 meeting as consisting of a false oath, since there is no evidence before the Court that Mr. Brown was sworn before he testified. Moreover, the Chapter 13 plan dated February 27, 2012, is neither signed nor sworn by Mr. Brown.
On the other hand, the Court has determined that the failure to schedule the interest in the farm; the failure to. schedule the accurate loan balance owed to Alice Elliott; and the failure to disclose the loan repayment made to Alice Elliott within the year before the filing all constitute knowing and fraudulent false oaths regarding material matters within the meaning of § 727(a)(4))A). Other falsehoods include the fact that Mr. Brown testified inconsistently each time he testified on how and why the farm was acquired; whether and how he obtained an interest in the farm; what he did with the $25,000 loan proceeds; whether any of the loan proceeds were used to acquire his interest; whether and when he had paid his sister; when and what was the source of his falling out with Alice Elliott; and even how many loans he had with Alice Elliott.
At trial, for the first time, Mr. Brown testified that there had actually been two loans from Alice Elliott. It is shocking to the Court that, over the course of three withering examinations on this subject by three different lawyers, Mr. Brown would have failed to remember that he borrowed money a second time from his sister. Sadly, it is another indication of Mr. Brown’s apparent willingness to testify to what seems expedient to him at the time, rather than to the truth. The Court therefore concludes that the Trustee has met his burden of proving a violation of ' § 727(a)(7).
Judgment on this count is entered in favor of the Trustee and against Defendant David Earl Brown.
*267Conclusion
The Court does not lightly deny a debt- or a discharge, particularly one who clearly faces some medical problems and may or may not be able to regain the ability to earn a meaningful livelihood. Nonetheless, Mr. Brown’s cavalier disregard for the truth — continued up until the very time he took the stand — when he suddenly professed a new-found regard for the truth— rings hollow with this Court. Mr. Brown failed to take responsibility for his own actions — blaming his attorneys, the Bank, and everyone but himself. The system does not work unless debtors fully and accurately disclose their assets. Mr. Brown failed to do so, and now, unfortunately, must suffer the “harsh penalty” of denial of his discharge.
A separate Judgment denying the discharge of David Earl Brown under 11 U.S.C. §§ 727(a)(4)(A), (a)(5) and (a)(7), will issue.
. The true amount of the balance owed to Alice Elliott, and the resulting lack of equity, will be discussed below.
. Any failure to attach the list has not been made a part of the Trustee’s allegations.
. No evidence was presented concerning the fact that the $100.00 monthly plan payment was obviously insufficient if it -was intended that the Bank be paid its $316.00 deed of trust payment out of the plan payment.
.No evidence was presented as to why the Browns failed to appear and the failure to appear is not part of the allegations in the complaint.
.The transcript was not transcribed or certified by an officer, and nowhere on the transcript is it reflected that the Browns were sworn in by the Trustee; the Court assumes that someone typed a record of what he or she heard on the tape of the 341 meeting. No party objected to the admission of the transcript, however. The Court also notes that the Trustee has no funds in the estate.
. Exhibit C established that Mr. Brown had actually paid his sister $500 within the year before filing, on Oct. 1, 2011.
. The financial statement at issue, Plaintiff's Exhibit 43, is actually dated January 1, 2008. The Court believes the reference to a 2009 financial statement is a misstatement.
. The Honorable Jerry W. Venters, now retired.
. Again, the “transcript" is not transcribed or certified by an officer, but was admitted into . evidence without objection.
. Mr. Strauss is the panel Trustee assigned to all Chapter 7 cases filed in the St. Joseph Division.
. The Orders to Show Cause were admitted into evidence. However, debtors not infrequently file bankruptcy without all required schedules, statements or other documents; § 521 and applicable rules do not require all documents be submitted with the petition. And, the Court received no evidence that the issuance of the show cause orders in this case is somehow evidence of bad faith or other malevolent intent.
. The workers’ compensation claim, listing dates of injury on April 6, 2012 and Novem*248ber 31, 2011, was scheduled on an amended Schedule B, and claimed exempt on the Amended Schedule C, filed along with the Amended Schedule G; the value per the Schedule C is $125,000, with the notation that "offer of $125,000 for 12/13 not accepted.”
. The transcript is not transcribed or certified by an official, but was admitted into evidence without objection.
. The transcript is officially transcribed and certified.
. The Court's Order is incorporated herein by reference.
. The motion to withdraw is still pending pursuant to counsel's request. The Court would note, however, the counsel for Mr. Brown has done an exemplary job of representing and defending his client under difficult circumstances.
. Missouri Rev. Stat. § 287.260.
. The Court believes the credible testimony of the auctioneer and Gary Constant that Mr. Brown never told them he had any antique tools.
. The Court knows both attorneys who represented Mr. Brown, and does not believe that either attorney would fail to communicate adequately with Mr. Brown, and that any communication problems with his attorneys should rest solely at the feet of Mr. Brown. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498319/ | MEMORANDUM OPINION
DENNIS R. DOW, UNITED STATES BANKRUPTCY JUDGE
Before this Court is the Motion for Summary Judgment (the “Motion”) filed by LVNV Funding, LLC (“LVNV”) and Resurgent Capital Services, L.P. (the “Defendants”) against William Steven Dunaway and Cynthia Ann Dunaway (the “Debtors”). Also before the Court is Debtors’ Motion for Summary Judgment. Both parties filed Suggestions in Support of their motions and Suggestions in Opposition to the opposing parties’ motions. The Plaintiff initiated the adversary proceeding seeking a right to recover actual and statutory damages, costs and attorney’s fees from Defendants for violation of the Fair Debt Collections Practices Act, 15 U.S.C. § 1692 et seq. (the “FDCPA”). In accordance with Rule 7056 of the Federal Rules of Bankruptcy Procedure and for the reasons set forth below, the Court grants the Defendants’ Motion and denies Debtors’ Motion.
I. FACTUAL BACKGROUND
The following facts are undisputed. Debtors filed for Chapter 13 bankruptcy on March 31, 2014. LVNV was listed on Debtors’ Schedule F and creditor matrix. On July 25, 2014, Defendants filed a proof of claim on behalf of LVNV. The Claim lists an unsecured amount of $6,206.92. The attachment to the Claim lists First USA Bank, N.A. as the creditor from whom LVNV purchased the account. The attachment also states that the account was charged off by the original creditor on 05/05/2000, the last payment date was 8/19/1999, and the last transaction date was 8/19/1999. On October 14, 2014, Debtors filed an objection to the Claim. On October 16, Debtors amended the objection and filed an adversary proceeding against Defendants. On November 19, 2014, the Court granted the amended objection to the Claim.
II. LEGAL ANALYSIS
A. Standard for Summary Judgment
Bankruptcy Rule 7056, applying Federal Rule of Civil Procedure 56(c), provides that summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.” See Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met this burden, the non-moving party must set forth specific facts sufficient to raise a genuine issue for trial, and may not rest on its pleadings or mere assertions of disputed facts to defeat the motion. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). When reviewing the record for summary judgment, the court is required to draw all reasonable inferences in favor of the non-movant. Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir.1991).
B. Allegation of Violation of the Fair Debt Collection Act
Debtors allege in their adversary complaint that filing a proof of claim on a time-barred debt is a violation of the FDCPA. Debtors urge the Court to adopt and apply the 11th Circuit’s holding in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir.2014). In that case, the debtor filed for bankruptcy in 2008 and proposed to *269repay creditors over a five year period. LVNV filed a proof of claim in the bankruptcy case on a debt outside the statute of limitations. Neither the debtor nor the trustee objected to the claim and the debt- or continued to pay on all debts including the LVNV claim. After four years, the debtor realized the LVNV claim was based on a stale debt and filed an objection to the claim and an adversary proceeding against LVNV for violation of the FDCPA. The Crawford court found that LVNV did violate the FDCPA by filing a time-barred proof of claim because absent an objection, the claim is automatically allowed against a debtor and was therefore “unfair, unconscionable, deceptive and misleading” within the broad scope of § 1692e and § 1692f.
Debtors argue that filing a time-barred proof of claim violates the FDCPA. First, Debtors assert that filing a proof of claim is akin to collecting a debt and analogous to the filing of a complaint in a civil action. Citing In re Brimmage, 523 B.R. 134 (Bankr.N.D.Ill.2015) and Smith v. Dowden, 47 F.3d 940 (8th Cir.1995). The FDCPA prohibits debt collectors from taking any action that cannot legally be taken in connection with the collection of a debt. See 15 U.S.C. § 1692e(5). Numerous district and circuit courts have held that the FDCPA prohibits a defendant from filing a lawsuit to collect a time-barred debt, see, e.g., Freyermuth v. Credit Bureau Services, 248 F.3d 767, 771 (8th Cir.2001). Debtors argue that action taken in bankruptcy courts should not be exempt from this prohibition because if they are then debt collectors will have a blanket immunity to pursue claims in bankruptcy court that they could not pursue in a non-bankruptcy court context. Debtors argue that not only will this practice harm debtors but that it will also harm legitimate creditors because they will receive a lesser amount paid on their timely claims. Debtors also assert that the Bankruptcy Code and the FDCPA are not incompatible and thus can co-exist and courts can enforce both.
Defendants of course disagree. They contend that the FDCPA protections are inapplicable in the bankruptcy context because the Code has its own set of procedures and protections. Defendants assert that the FDCPA is not implicated by filing a proof of claim, even if invalid, because the Code gives an interested party the right to object to an invalid claim, which includes a claim that is barred by the statute of limitations. In fact, Debtors have in fact done just that in this case and objected to the claim filed by Defendants and the objection was granted and the claim disallowed.
Defendants further argue that filing a proof of claim does not constitute an attempt to collect a debt from a consumer as required by the FDCPA. Rather, they argue, a debtor’s bankruptcy estate is not a consumer. Defendants contend that filing a proof of claim is not a collection activity but rather an attempt to be involved in the distribution of estate proceeds. They further assert that if filing a proof of claim was an attempt to collect a debt that it would be a violation of the automatic stay. Finally, Defendants contend that even if filing a proof of claim is a debt collection activity, it is not an abusive or deceptive practice as required by the FDCPA.
C. Analysis
1. Whether the Bankruptcy Code precludes FDCPA actions.
When two federal statutes have inconsistent provisions, a court may find that one of the statutes precludes application of the other. See, e.g., Simon v. FIA Card Ser., N.A., 732 F.3d 259, 280 (3rd Cir.2013). Several decisions have held that the Bankruptcy Code precludes actions un*270der the FDCPA based on collection activity within a bankruptcy case. The leading decision is B-Real, LLC v. Chaussee (In re Chaussee), 399 B.R. 225, 237 (9th Cir. BAP 2008) (“[T]he debt validation provisions required by FDCPA clearly conflict with the claims processing procedures contemplated by the [Bankruptcy] Code and Rules”). Similarly, the FDCPA has been held not to apply to a bankruptcy proof of claim allegedly filed in an excessive amount, because “[t]here is no need to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by bankruptcy itself.” Simmons v. Roundup Funding, LLC, 622 F.3d 93, 96 (2nd Cir.2010).
Determining whether the provisions of the Bankruptcy Code regarding the filing and allowance of claims preclude the application of the FDCPA requires consideration of both the appropriate standard for judging preclusion generally and the specific context in which the question is being asked. In Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir.2004), the Seventh Circuit adopts a standard requiring either an irreconcilable conflict or a clearly expressed legislative intention that one statute replace the other. The Eighth Circuit has employed a similar, but not identical standard, stating that if the statutes are capable of coexistence, it is the duty of the court to regard each as effective absent a clearly expressed legislative intention to the contrary. See Wood v. Fiedler, 548 F.2d 216 (8th Cir.1977). Context is also important. Some of the cases finding no conflict and thus no preclusion are based upon actions alleged to have been in violation of the discharge injunction. See, e.g., Randolph, 368 F.3d 726; Simon, 732 F.3d 259. These actions were taken after the bankruptcy case was concluded. In other instances, the question has arisen in the context of acts alleged to have been a violation of the automatic stay, acts which were taken by the creditor outside the context of the bankruptcy case. Maloy v. Phillips, 197 B.R. 721, 723 (M.D.Ga.1996); Divane v. A & C Elec. Co., Inc., 193 B.R. 856, 859 (N.D.Ill.1996); Hubbard v. Nat'l Bond & Collection Assoc., Inc., 126 B.R. 422, 428-29 (D.Del.1991). The alleged violation in this case arises from the filing of a proof of claim in the bankruptcy court. As to this process, governed by the Bankruptcy Code and Rules and managed by the bankruptcy court within the context of a pending case, the possibility for inconsistency is heightened.
If the standard is one of irreconcilable conflict, the Court might find it difficult to determine that the application of the FDCPA is precluded even in this context. If there is any lower threshold, the Court would likely conclude the Bankruptcy Code precludes application of the FDCPA in the specific context of the filing and allowance of proofs of claim. The Court finds persuasive the extensive analysis by the court in Chaussee regarding the inconsistencies between the process of filing claims and adjudicating objections and the principles of the FDCPA, specifically debt validation requirements. Chaussee, 399 B.R. at 237. Because the Court has determined that the filing of a claim barred by the statute of limitations does not violate the FDCPA, it need not determine the preclusion question now and leaves it to another day if it arises again in another context.
2. Filing a proof of claim is an action to collect a debt.
The liability under the FDCPA asserted in Debtors’ complaint can only arise from actions taken “in connection with the collection of any debt.” 15 U.S.C. § 1692e. The Defendants’ second point in their motion is that the action of filing a proof of *271claim was not taken in connection with debt collection. The Court disagrees.
A proof of claim, of course, is intended to result in some recovery for the creditor on the debt set out in the proof of claim, and so filing a proof of claim would be within the ordinary meaning of “debt collection.” See In re LaGrone, 525 B.R. 419 (Bankr.N.D.Ill.2015); Crawford, 758 F.3d at 1262 (“Filing a proof of claim is the first step in collecting a debt in bankruptcy and is, at the very least, an ‘indirect’ means of collecting a debt.”). A number of decisions, however, hold that that filing of a proof of claim is not a debt collection activity. These decisions are collected in Humes v. LVNV Funding, LLC (In re Humes), 496 B.R. 557, 581 (Bankr.E.D.Ark.2013), and rationalize that the filing of a proof of claim is a request to participate in the distribution of the bankruptcy estate under court control and is not an effort to collect a debt from the debtor, who enjoys the protections of the automatic stay. See e.g., Jenkins v. Genesis Fin. Solutions (In re Jenkins), 456 B.R. 236, 240 (Bankr.E.D.N.C.2011) (emphasis in original); see also McMillen v. Syndicated Office Sys., Inc. (In re McMillen), 440 B.R. 907, 912 (Bankr.N.D.Ga. 2010); Simmons, 622 F.3d at 95.
This analysis is not persuasive. There is no contradiction between a proof of claim being an action to collect a debt and the automatic stay. The automatic stay does indeed prohibit debt collection activity, and filing a proof of claim is an action to collect a debt, but it is well established that the automatic stay does not prohibit actions taken in the bankruptcy case itself. See Eger v. Eger (In re Eger), 507 B.R. 1, 1 (Bankr.N.D.Ga.2014) (collecting authorities). The argument is particularly unpersuasive in the Chapter 13 context where the payment of unsecured claims is made primarily or exclusively from the debtor’s wages. Further, in some, and perhaps many of these cases, the amount the debt- or must commit to the payment of claims will depend upon the filed and allowed amount of such claims.
3. Filing a proof of claim subject to a limitations defense does not violate the FDCPA.
The first section of the FDCPA sets out a finding that “abusive, deceptive, and unfair debt collection practices” are employed by debt collectors against consumers, 15 U.S.C. § 1692, and the Act goes on to prohibit a number of specific practices. Section 1262k provides for an award of damages against any debt collector who fails to comply with the Act’s provisions.
Debtors assert generally in their Complaint that the acts of Defendants in attempting to collect a time-barred debt are in ■ violation of the FDCPA, 15 U.S.C. § 1692, and that the filing of a proof of claim to collect a stale debt violates sections 1692d, 1692e and 1692f. Specifically, Debtors allege that the acts and omissions by Defendants constitute violations of the FDCPA, including, but not limited to, collecting or attempting to collect amounts not permitted by law and by otherwise using unfair and deceptive methods in direct violation of 1692f(l). Defendants’ argue that filing a proof of claim on a debt subject to a limitation defense does not violate any of these provisions.
Section 1692d states: “A debt collector may not engage in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt.” The section goes on to provide specific conduct that is a violation that includes the use or threat of use of violence or other criminal means to harm the physical person, reputation, or property of any person; the use of obscene *272or profane language or language the natural consequence of which is to abuse the hearer or reader; among others that Debtors do not allege. Here, there is no “threat” in a proof of claim that accurately reflects information about an unsecured debt the debtor has listed on his own schedules. “It is neither a lawsuit nor a threat of a lawsuit; it’s a statement that a debt exists ... and there is no prohibition in the Bankruptcy Code against filing a proof of claim on an unsecured, stale debt.” See, e.g., Donaldson v. LVNV Funding, LLC, Case No. l:14-ev-01979, - F.Supp.3d -, 2015 WL 1539607 (S.D.Ind.2015).
Section 1692e provides that “a debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” That section also provides specific examples of such conduct As discussed above, the Court agrees that filing a proof of claim is an act to collect a debt. However, the Court does not agree that a proof of claim that accurately reflects information on the debt, including the date of last payment, date the account was charged off by the original creditor and the last transaction date is false, deceptive or misleading on its face. Further, Debtors listed the debt on their schedules as unsecured indicating an intent to include it in any discharge that resulted from the bankruptcy. The argument that filing a proof of claim on a time-barred debt mischaracter-izes the legal status of the debt also fails because a debt that is legally unenforceable or uncollectible is not extinguished; the money is still owed and only the creditor’s remedies are regulated. See Donaldson, Case No. l:14-cv-01979, — F.Supp.3d —, 2015 WL 1539607 (S.D.Ind.2015). Similarly, “a factual, true statement about the existence of a debt and the amount, which is recognized in the debtor’s own bankruptcy schedules, is neither false nor deceptive.” Id.; see also, In re McMillen, 440 B.R. 907, 913 (Bankr.N.D.Ga.2010).
Section 1692f of the FDCPA, which generally prohibits “unfair or unconscionable” debt collection activities, is an additional ground for relief asserted by Debtors. However, as with the other sections, there is nothing unconscionable or unfair about filing a proof of claim that contains truthful and accurate information on a debt that is known to debtors and their attorney. See, e.g., In re Claudio, 463 B.R. 190, 193-94 (Bankr.D.Mass.2012). There can be no violation to these sections if the claimant complies with all of the rules for filing a proof of claim, including the requirement to supply various attachments with certain specific information, and unless any of that information is false, the filing can hardly be deceptive.
Numerous courts have held that an FDCPA claim “cannot be based on the filing of a proof of claim, regardless of the ultimate validity of the underlying claim.” In re Simpson, 2008 WL 4216317 at *3 (Bankr.N.D.Ala.2008); see, e.g., In re Pariseau, 395 B.R. 492, 493-94 (Bankr. M.D.Fla.2008); In re Varona, 388 B.R. 705, 717-21 (Bankr.E.D.Va.2008); see also Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 510-11 (9th Cir.2002) (debtor’s claim under FDCPA for an alleged violation of the bankruptcy discharge must be dismissed); Jones v. Wolpoff & Abramson, L.L.P., 2006 WL 266102 at *3 (E.D.Pa.2006) (same). Although there are conflicting decisions on this issue, the Court finds that Defendants’ position is the better one. Courts have interpreted these FDCPA provisions as prohibiting a debt collector from filing untimely lawsuits against consumer debtors, but these interpretations are grounded in the situation of the defendants facing such lawsuits. See Phillips v. Asset Acceptance, LLC, 736 F.3d 1076, *2731079 (7th Cir.2013). The question raised by Defendants’ motion is whether this analysis applies to debt collectors filing bankruptcy proofs of claims. The Eleventh Circuit has held that it does apply in Crawford, 758 F.3d at 1261 and Debtors urge this Court to follow the Crawford reasoning.
In the Eighth Circuit case Freyermuth, a debtor alleged that a collection agency engaged in abusive practices in violation of the FDCPA by attempting to collect on a debt that was potentially time-barred. The court found that a creditor may attempt to collect on a claim barred by the statute of limitations and does not violate the FDCPA unless the creditor either threatens to or actually files a lawsuit on such a claim. See 248 F.3d at 771. The filing of a proof of claim does not constitute a threat of litigation. For the reasons discussed below, this Court does not believe that a debtor in bankruptcy is in the position of a consumer facing a collection lawsuit and would not extend Freyer-muth to bankruptcy claims. Debtors also urge the Court to use the “least sophisticated consumer” standard for determining the existence of an FDCPA violation.. However, the Freyermuth court found that standard to be appropriate only if the representation is made directly to the debtor. Here, the representation is made to the Court, not directly to the Debtors. That fact and the fact that Debtors are represented by counsel make the application of the standard urged by Debtors inappropriate. This case is thus distinct from Crawford in which the 11th Circuit employed this stricter standard. Id.; see also, Donaldson, Case No. l:14-cv-01979, — F.Supp.3d —, 2015 WL 1539607 (S.D.Ind.2015). While the FDCPA’s purpose is to protect unsophisticated consumers from unscrupulous debt collectors, that purpose is not implicated when a debtor is instead protected by the court system and its officers. See Simmons, 622 F.3d at 96. The Court agrees that there are differences between lawsuits filed against individuals and proofs of claim filed in bankruptcy cases, all indicating that the deception and unfairness of untimely lawsuits is not present in the bankruptcy claims process. See LaGrone, 525 B.R. at 426.
First, Debtors in bankruptcy cases have the benefit of a trustee with a fiduciary duty to all parties to “examine proofs of claims and object to the allowance of any claim that is improper.” In re Andreas, 373 B.R. 864, 876 (Bankr.N.D.Ill.2007) (“[T]he Trustee' is a fiduciary owing duties to all parties in interest in a Chapter 13 case.”); In re Mid-States Express, Inc., 433 B.R. 688, 697 (Bankr.N.D.Ill.2010) (“The trustee has a duty to object to improper claims.”). Also, debtors in bankruptcy are likely to be represented by an attorney who can both advise them about the existence of a statute of limitations defense and file an objection if the trustee does not. The process of filing an objection to a proof of claim is much simpler and more streamlined than defending a civil lawsuit. All a debtor need do is file a simple objection, usually one page long, setting forth the factual or legal basis for the dispute. Then, after the filing of a response within a limited period of time, the matter is set for hearing before the bankruptcy court and promptly resolved. The Debtors here have been represented by counsel throughout the case. Further, in the bankruptcy context, a debtor has the benefit of the U.S. Trustee acting as watchdog and the U.S. Trustee has indeed been active in this area recently.
Second, a debtor in bankruptcy often has much less at stake in the allowance of a proof of claim than a defendant facing the prospect of an adverse judgment in a collection lawsuit. A proof of claim does *274not always result in collection from the debtor personally but seeks only a share in the total payments available to all of the debtor’s creditors. This is most obvious in a Chapter 7 case, where the debtor’s nonexempt assets are the sole source of payments to creditors and where it is rare for the value of these assets to exceed the amount of the debt. Accordingly, in most Chapter 7 cases, the debtor has no standing to object to claims. LaGrone, 525 B.R. at 426-27; see In re Curry, 409 B.R. 831, 838 (Bankr.N.D.Tex.2009) (noting that Chapter 7 debtors lack standing to file claim objections because they “have no pecuniary interest in doing so”). In Chapter 13, creditors are paid through a plan the debtor proposes, but in a case like the present one, where the debtor is proposing to pay the creditors less than the full amount of their claims, the effect is similar to Chapter 7 in that the debtor will pay the same total amount to creditors, regardless of whether particular proofs of claim are disallowed. In many instances in Chapter 13 cases, the amount to be paid to unsecured creditors is not determined by the amount of the debt, but rather either by the debtor’s projected disposable income or the hypothetical distribution to creditors in.a Chapter 7 case. In either case, the amount is a lump sum which would be distributed to the unsecured creditors pro rata. The allowance of additional claims would not affect the total amount that the debtor would have to pay in order to confirm and consummate the Chapter 13 plan. While it is true that in cases dismissed before discharge the debtors would still owe whatever portion of their debts was not paid through their plans, and if payments made on a time-barred claim had been made to other creditors, the amounts remaining to be paid on the other claims would.be lower, this contingency still presents a much smaller effect on a debtor than would a civil judgment.
The Court recognizes that debtors, their counsel, bankruptcy trustees and the U.S. Trustee must be vigilant in reviewing proofs of claim, so that a distribution is not provided to those holding claims barred by the statute of limitations. Nonetheless, as other courts have observed, the present statute and. procedural rules do not preclude such filings by creditors. Until the Bankruptcy Code is amended (for example, by adding a provision in § 501 requiring creditors to have a good faith belief in the allowability of their claims), or the procedural rules modified to render such claims invalid, see Chaussee, 399 B.R. at 240 n. 16; In re Andrews, 394 B.R. 384, 388 (Bankr.E.D.N.C.2008), creditors such as these defendants are entitled to file proofs of claim even for stale debts.
III. CONCLUSION
After reviewing the entire record, the Court finds that the Defendants have met their burden of proving that there is no genuine issue of fact and that they are entitled to judgment as a matter of law. Accordingly, the Defendants’ Motion for Summary Judgment is granted and Debtors’ Motion for Summary Judgment is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498321/ | *311
DECISION AND ORDER TO DIRECT THE UNITED STATES MARSHALS TO TAKE RICHARD BIVO-NA INTO CUSTODY AND HOLD HIM IN THEIR CUSTODY UNTIL SUCH TIME AS HE PURGES HIS CIVIL CONTEMPT
Alan S. Trust, United States Bankruptcy Judge
For the reasons set out herein, this Court has determined that an Order should be entered directing the United States Marshals Service to take Mr. Richard Bivona into their custody, as a coercive civil contempt sanction.
Jurisdiction
This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (B), (E) and (0), and 1334(b), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011. The following constitutes the Court’s findings of fact and conclusions of law to the extent Rule 7052 of the Federal Rules of Bankruptcy Procedure (the' “Bankruptcy Rules”) so requires.1 See Fed. R. Bankr. P. 7052
Background and Procedural History
This case, which started as a questionable involuntary chapter 7 filing, is one in a series of bankruptcy filings which have' been tainted with improprieties, and have been intermingled with multiple litigations involving this debtor, 1990’s Caterers Ltd aka Vina de Villa Caterers (“Debtor”), its affiliates (collectively the “Debtor Entities”), and an entity known as MHRP Realty, LLC (“MHRP”). MHRP was the owner of and the landlord for the property located at 2005 Route 112, Medford, New York 11763 (the “Property”), at which the Debtor Entities operated a catering venue under a lease with MHRP (the “Lease”). Some of the litigious history involving the Debtor Entities with MHRP is set forth in this Court’s Order concerning MHRP’s request for sanctions (the “Sanctions Order”) [dkt item 56]; this history includes an eviction proceeding commenced by MHRP and two voluntary chapter 11 bankruptcy filings by Debtor2, the second of which was prejudicially dismissed by this Court. The focus of this Order is Mr. Richard Bivona and his on-going, flagrant and open defiance of this Court’s Orders in this bankruptcy case.
Proceedings leading up to this bankruptcy case and the entrg of an order for relief
By way of brief background, on June 28, 2013, Debtor and MHRP entered into a stipulation for dismissal of the second 1990’s chapter 11 bankruptcy case, which this Court so ordered, and provided that “[t]he dismissal of this case is with prejudice against the filing of a subsequent petition under Title 11 of the United States Code by this Debtor for a period of two (2) years from the date of this Order” (the “Prejudicial Dismissal Order”), [dkt item 26, Case No. 13-72354-ast]
After several litigation tactics failed, with eviction yet again looming after a failed attempt by Debtor to remove an eviction action to federal court,3 and with Debtor still unable to voluntarily file for *312bankruptcy relief, on September 24, 2013, Mr. Bivona, Mr. John DeJohn and Ms. Jacqualene Dyber4 joined together as petitioning creditors to commence this involuntary chapter 7 bankruptcy case against Debtor (collectively, the “Petitioning Creditors”). As stated in the Sanctions Order, this involuntary case appeared to have been filed to circumvent the Prejudicial Dismissal Order.5
On October 9, 2013, this Court entered an Order granting MHRP stay relief to proceed with the eviction and pursue its state law remedies against Debtor, [dkt item 15]
On November 5, 2013, MHRP filed an emergency motion seeking, inter alia, entry of an order for relief and the immediate appointment of an interim chapter 7 trustee pursuant to § 303(g) (the “Emergency Motion”), based on its discovery that Debtor had conducted an auction sale of its assets at the Property on October 30, 2013. [dkt item 21] In order to avoid immediate and irreparable harm to the estate, that same day the Court entered an order (1) directing Debtor to show cause on November 19, 2013, as to why an interim chapter 7 trustee should not be appointed and (2) imposing a temporary restraining order pending the November 19 hearing, prohibiting Debtor and the auctioneer who conducted the sale, Michael Amodeo & Co., Inc., (the “Auctioneer”) from distributing any auction sale proceeds.
On November 19, 2013, the Court held a hearing on, inter alia, the Emergency Motion. At the November 19 hearing, the Petitioning Creditors, through Mr. Pop-kin,6 made an oral application to withdraw the involuntary petition and dismiss this case, again raising the specter of impropriety. The Court denied that request on the record. MHRP then offered into evidence the Auctioneer’s receipt from the sale showing that the auction sale had yielded net proceeds in the amount of $30,613.00 and that Mr. Bivona was in possession of these sale proceeds (the “Sales Proceeds”). Mr. Bivona then testified to the following: (1) an auction sale had occurred at the Property; (2) he had signed the auction receipt on Debtor’s behalf, but that he was not Debtor’s owner as reflected on the receipt; and (3) he had received approximately $29,500 in sale proceeds and still had them in his possession. Mr. Bivona also testified that he and his uncle Mr. DeJohn were creditors of Debt- or and that the Sale Proceeds were generated from the sale of equipment owned by Manor East of Massapequa, LLC, a company he testified he and his uncle owned (and a prior chapter 11 debtor before this Court [case no. 12-71127-ast]).
At the conclusion of the hearing, the Court determined that regardless of the questionable route by which this case came before it, Debtor should be administered under chapter 7 by an independent trustee. The Court further determined that the Sales Proceeds should be safeguarded until this Court could determine to whom the funds legally belonged, as the bank*313ruptcy estate appeared to have prima fa-cie title to them as property of the bankruptcy estate under § 541 of title 11 of the United States Code (the “Bankruptcy Code”). The Court clearly and unambiguously directed Mr. Bivona from the bench to turn the Sales Proceeds over to the chapter 7 trustee, with ownership to be determined at a later date. Immediately following the hearing, the Court entered an Order restraining any disposition of the Sales Proceeds, and directing Mr. Bivona or any other party in possession of the auction proceeds to turn those funds over to the trustee (the “November 19, 2013 Order”), [dkt item 28] The Petitioning Creditors were served with the November 19 Order, [dkt item 29] No appeal was taken from the November 19, 2013 Order.
On November 22, 2013, the Court entered an order for relief under chapter 7. [dkt item 30]
On December 18, 2013, Kenneth P. Sil-verman was appointed as the chapter 7 trustee (the “Trustee”).
Mr. Bivona’s repeated failures to comply with this Court’s directives
On January 29, 2014, the Trustee filed and served a declaration stating that Mr. Bivona had not complied with the November 19, 2013 Order to turn over the Sale Proceeds despite the Trustee’s written demand that he do so (the “Motion”), [dkt item 35] The Trustee further sought entry of an order holding Mr. Bivona in civil contempt, but did not notice the Motion for hearing.
The Court initially scheduled a hearing on the Trustee’s Motion for April 22, 2014. Mr. Bivona requested an adjournment to retain counsel, which the Court granted. He retained, Genevieve Lane LoPresti (“Ms.LoPresti”), who had previously represented Debtor in one of its prior chapter 11 cases and in other non-bankruptcy proceedings. Ms. Lopresti asked to adjourn the hearing due to various scheduling conflicts and personal matters, several of which the Court granted.
On June 3, 2014, over four months after the Motion had been filed and served, the Court held a hearing on the Motion. The Trustee appeared through his counsel. Ms. LoPresti appeared as Mr. Bivona’s counsel, and Mr. Bivona appeared. At the conclusion of the hearing, the Court determined that it would conduct an evidentiary hearing on whether to hold Mr. Bivona in contempt.
On June 10, 2014, the Court issued an order scheduling an evidentiary hearing for August 4 and establishing certain pre-hearing requirements (the “Scheduling Order”). [dkt item 41] The Scheduling Order provided that a response to the Motion would be due by no later than July 1, 2014 — no response had been filed in the over four months that the Motion had been pending — and that no pleadings filed after that deadline would be considered. The Scheduling Order further directed that, inter alia, the parties must exchange exhibits and file affidavits of direct testimony by no later than July 21, 2014.
The Scheduling Order was served on Mr. Bivona and Ms. LoPresti. [dkt item 42]
Mr. Bivona did not file a response to the Motion by the deadline.
On July 18 and July 23, 2014, Mr. Bivo-na, through Ms. LoPresti, filed affidavits of direct testimony of Messrs. DeJohn, Salvatore Cataldo, and Richard Ammons (the “Affidavits”), [dkt items 43, 44, 45, 45] None of the Affidavits address Mr. Bivo-na’s failure to turn the Sale Proceeds over to the Trustee.
On July 24, 2014, the Trustee filed a supplemental declaration requesting, inter alia, the imposition of sanctions in the form of attorney’s fees and the entry of an order for civil contempt without the need to conduct an evidentiary hearing based on *314Mr. Bivona’s failure to respond to the Motion or provide any evidence in defense of his failure to turn over the Sale Proceeds, [dkt item 47]
On August 1, 2014, the Court notified the parties that the August 4 evidentiary hearing would proceed as a telephonic status conference.7
On August 4, 2014, the Court held a telephonic status conference on the Motion for which the Trustee and Ms. LoPresti appeared. Mr. Bivona had still not filed any response to the Motion. The Court admitted Mr. Bivona’s Affidavits into evidence, which did not address Mr. Bivona’s failure to turn over the Sale Proceeds since November 2013. As a result, the Court issued an Order which, among other things, clearly and unambiguously directed Mr. Bivona to deliver the $30,613.00 of Sale Proceeds to the Trustee for safeguarding by no later than August 11, 2014. The order further: (1) provided that in the event Mr. Bivona failed to deliver Sale Proceeds to the Trustee by August 11, 2014, beginning August 12, 2014, a sanction of $200.00 per day would be assessed against Mr. Bivona until the $30,613.00 was delivered to the Trustee; and (2) set an adjourned hearing on the Motion, including the Trustee’s request for an award of attorney’s fees, for October 7, 2014 (the “August 4, 2014 Order”), [dkt item 50] On August 6, 2014, the Trustee served a copy of the August 4 Order on Ms. Lo-Presti as directed, [dkt item 51]
No appeal was taken from the August 4, 2014 Order.
On October 7, 2014, the Court held the adjourned hearing on the Motion. Only the Trustee appeared for the hearing. The Trustee reported that Mr. Bivona had again failed to comply with the Court’s prior orders to turn over the Sale Proceeds to him. Based on the record before it, including Mr. Bivona’s continued noncompliance and his failure to explain that noncompliance, the Court stated that it would hold Mr. Bivona in contempt. The Court then directed the Trustee to file an affidavit memorializing his report to the Court and authorized him to file a statement of fees incurred in attempting to collect the Sale Proceeds. The Court further authorized Mr. Bivona to file opposition to the Trustee’s statement within fourteen (14) days of its filing, after which this Court would determine the reasonableness of the fees sought.
On October 21, 2014, the Trustee filed a fee statement and a declaration concerning Mr. Bivona’s continued non-compliance, [dkt item 52] The Trasteé stated that he had incurred $10,703.40 in attorney’s fees and expenses as a direct result of Mr. Bivona’s failure to turn over the Sales Proceeds and his intentional efforts to frustrate the administration of the Debt- or’s estate. The Trustee served the declaration on Ms. LoPresti that same day.8 [dkt item 53]
*315
The Court’s Orders to show cause and related hearings
On November 14, 2014, the Court entered an Order that, inter alia, held Mr. Bivona in civil contempt and directed him to appear and show cause on December 16, 2014, at 11:00 a.m.: as to (1) why the Court should not issue a warrant for his arrest directing the United States Marshals to take him into their custody and hold him in their custody until such time as he purges his civil contempt by turning the Sales Proceeds over to the Trustee, as a further coercive civil contempt sanction; and (2) why the Court should not request that the District Court for Eastern District of New York withdraw the reference under 28 U.S.C. § 157(d) for the limited purpose of consideration of issuing criminal contempt sanctions against him and/or for further civil contempt proceedings (the “November 14 Order to Show Cause”), [dkt item 65] The November 14 Order to Show Cause authorized Mr. Bivona to file a response by no later than December 9, 2014.
On November 17, 2014, the Trustee served a copy of the November 14 Order to Show Cause on Mr. Bivona and Ms. LoPresti by regular and certified mail, [dkt item 67]
On November 18, 2014, this Court entered a Judgment against Mr. Bivona in favor of this estate in the amount of Twenty Six Thousand Seven Hundred Three Dollars and Forty Cents ($26,703.40), representing $10,703.40 for the Trustee’s reasonable attorney’s fees incurred in attempting to collect the Sale Proceeds, plus $16,000 representing the $200 per day sanction which accrued against Richard Bivona between August 12, 2014 and October 31, 2014 for failing to turn over the Sale Proceeds by August 11, 2014; the Trustee was also awarded post judgment interest at the federal rate pursuant to 28 U.S.C. § 1961 (the “Judgment”), [dkt item 68]
No appeal was taken from the Judgment.9
Mr. Bivona did not file a response to the November 14 Order to Show Cause.
On December 10, 2014, Ms. LoPresti sought to withdraw as Mr. Bivona’s counsel of record; she filed a declaration requesting an emergency hearing and seeking to adjourn his deadline for him to file a response to the November 14 Order to Show Cause, and to stay of all matters in the case pending his retention of new counsel (the “Emergency Withdrawal Motion”). [dkt item 75]
On December 12, 2014, the Court entered an order scheduling a hearing on the Emergency Withdrawal Motion for December 16, 2014 at 11:00 a.m. (the “Emergency Order”), which directed Ms. Lo-Presti to serve a copy of the Emergency Withdrawal Motion and Emergency Order on Mr. Bivona by expedited means by December 12, 2014 at 5:00 p.m. and to file a certificate of service by December 15, 2014 at 12:00 p.m. [dkt item 76]
Ms. LoPresti failed to comply with the Emergency Order. On December 16, 2014, the Court held hearings on the November 14 Order to Show Cause and the Emergency Withdrawal Motion. The Trustee by his counsel, Mr. Bivona, Ms. LoPresti, Mr. Popkin, and the Office of the United States Trustee through its counsel appeared. Ms. LoPresti informed the Court that she did not serve the Emergency Withdrawal Motion on Mr. Bivona, and that she had not directly expressed to him her desire to withdraw as his attorney. *316Mr. Bivona requested additional time to respond to the November 14 Order to Show Cause. and to retain new counsel. Because of the seriousness of the issues, the Court granted Mr. Bivona’s request.
To memorialize this adjournment, on December 19, 2014, the Court entered a Supplemental Order reiterating the directives of the November 14 Order to Show Cause, and scheduled a hearing thereon for January 13, 2015 at 2:00 p.m. (the “January 13 Hearing”) (the “Supplemental OSC”). [dkt item 77]
On January 6, 2015, Ms. LoPresti filed a letter withdrawing her Emergency Withdrawal Motion [dkt item 80], as well as an unsigned Affidavit purporting to be from Mr. Bivona (the “Bivona Affidavit”), [dkt item 83]
On January 13, 2015 the Court conducted the adjourned order to show cause hearing. Richard Bivona and Ms. LoPres-ti appeared, as did counsel for the Trustee. First, the Court inquired of Ms. LoPresti as to the withdrawal of her Emergency Withdrawal Motion.10
Second, the Court addressed the merits of the contempt proceeding. Mr. Bivona was sworn in and testified that he had signed the original version of the Bivona Affidavit and affirmed all of its contents. Tr. at 11. The Affidavit was admitted as Exhibit 1. Tr. at 12. The Bivona Affidavit does not state that Mr. Bivona was unable to comply with the November 19, 2013 Order when it was entered.11
The Trustee was then permitted to cross examine Mr. Bivona. When asking Mr. Bivona if he was aware in November 2013 to turn over the auction Sales Proceeds, he testified as follows:
Q. ... Were you aware that Judge Trust had ordered you to turn over the proceeds from the sale that you conducted in 2013?
A. Yes, I was aware of the order that was cut from what I was told on November 19th and the sale was October 30th.
Q. So you were aware that you were under an obligation to turn over those funds to the trustee.
A. Yes I was. Yes, in front of Judge Trust, yes, at that time, yes.
Tr. at 21:23-22:11. Mr. Bivona then admitted he has not turned over the Sales *317Proceeds or any money to the Trustee. Tr. at 22:7-8.
The Court then inquired as to why Mr. Bivona had not turned over the Sales Proceeds:
THE COURT: All right. Mr. Bivona, I ordered you on November 19th of 2013 to turn over $31,613 to the trustee. Why didn’t you do that back in November of 2013?
THE WITNESS: Your Honor, if I had the money I would have done it immediately. I did not have the money, the money was long gone. The sale was the 30th and there were debts that were incurred while the catering hall was under “contractual obligations.”
We put all types of money into the building under the guise of a lease that was, that we were going to sign, i.e., fire marshal, concrete work, things that needed to be done pursuant to town orders.
THE COURT: So is your testimony today that you did not have the $30,613 from the auction sale on or about November 19th of 2013?
THE WITNESS: Your Honor, if I had that money, I would have brought it her personally. I’ve never missed a Court date, I have no disrespect for this Court whatsoever.
THE COURT: And you weren’t holding approximately $29,500 of the auction sale proceeds on the date of the November 19th, 2013 hearing—
THE WITNESS: Absolutely not.
Tr. at 23:4-24.
Upon redirect examination by Ms. Lo-Presti, Mr. Bivona reiterated that he did not have possession of the Sales Proceeds when he was ordered to turn them over by this Court:
When Judge Trust ordered approximately three weeks after, the easiest thing for me in the world to do at that point would have been to turn the money over. It would be my greatest joy to turn the money over just so I wouldn’t be sitting here right now. There’s nothing better I would rather do if I had it. That money was dispersed. It was dispersed.
Tr. at 29:16-22.
Thus, in spite of numerous proceedings having been held before this Court specifically related to the Sales Proceeds, Mr. Bivona, for the very first time in fourteen (14) months, testified on January 13, 2015, that he neither had the Sales Proceeds in his possession nor had them under his control on November 19, 2013. This testimony is simply incredible. First, it is unfathomable that Mr. Bivona would sit idly by for fourteen (14) months while he is being held in contempt, sanctioned at a daily rate of $200, and has a monetary Judgment entered against him, all based on an Order to turn over the Sales Proceeds that he now says he did not have at the time of the November 19, 2013 hearing. Second, his January 13, 2015 testimony directly controverts his own sworn testimony given on November 19, 2013, at a time when the events were fresh, and when Mr. Bivona had been unequivocal that he still had possession of the Sale Proceeds:
COURT REPORTER: Can you please state your name, and spell if for the record.
MR. BIVONA: Richard Bivona, B-i-v-on-a.
MR. BLANSKY: Okay. Your Honor, can I mark as an exhibit the 16(sic) auctioneer’s receipt? I think it’s relevant to narrow [the] issue we’re talking about.
THE COURT: Yes. Do you have copies available?
MR. BLANSKY: Yes, I have copies to hand to the Court, and give a copy to Mr. Popkin.
*318THE COURT: All right. Fair enough.
Q. Okay. I’m showing you a facsimile comprised of five pages. If you can turn your attention to the third page of that facsimile. Do you recognize the signature on that page? It is a receipt from the Michael Amodeo & Company, Inc., Auctioneers.
A. Yes.
Q. Whose signature is that?
A. It’s mine.
Q. Okay. And did you.have an oppor- ■ tunity to read this document before you signed it?
A. I didn’t read — this wasn’t there. The only think (sic) I signed was a sheet of inventory. .
Q. Well, did you receive money from— A. Absolutely.
Q. —Mr. Amodeo on November 4?
A. Not himself. Someone else.
Q. Okay, and how much in total did you receive from him that day?
A. It was in increments. And I believe it was before November 4.
Q. And how much in total did you receive from him?
A. I think 29 and change.
Q. Okay.
A. In totality.
Q. And were these funds—
BY THE COURT:
Q. Hang on a second. Twenty-nine and change? Can you all be more specific about that?
A. I want to say twenty-nine, five, Your Honor?
Q. Hundreds? Thousands?
A. Twenty-nine thousand five hundred. I apologize.
Q. All right, thank you.
BY MR. BLANSKY:
Q. And was it your understanding that there were proceeds of an auction sale at 1990’s premises?
A. Absolutely.
Q. Okay. And what happened to the approximately $29,500 of proceeds that you received from a Mr. Amadeo?
A. I have it.
See Transcript from November 19, 2013 hearing, at 9:5-14:7. [dkt item 64]
Having observed Mr. Bivona testify at both hearings,12 this Court rejects his Jan*319uary 13, 2015 revisionist testimony as false.
To date, Mr. Bivona has still not turned over the Sale Proceeds.
Discussion
It is well settled that bankruptcy courts are vested with the inherent authority to enforce compliance with their orders through the issuance of civil contempt orders. See 11 U.S.C. § 105(a); Fed. R. Bankr. P. 9020; Rosen v. Breitner & Hoffman, P.C., (In re Flushing Hosp. & Med. Ctr.), 395 B.R. 229, 241 (Bankr.E.D.N.Y. 2008); In re Chief Exec. Officers Clubs, Inc., 359 B.R. 527, 534 (Bankr.S.D.N.Y.2007); see also Solow v. Kalikow (In re Kalikow), 602 F.3d 82, 96-97 (2d Cir.2010); MA Salazar, Inc. v. Inc. Vill. of Atl. Beach, 499 B.R. 268, 274-275 (E.D.N.Y.2013). A court may only exercise this discretionary authority when (1) the alleged contemnor knowingly violated a court order- that is clear and unambiguous,13 (2) the proof of non-compliance is “clear and convincing,” and (3) the alleged contemnor has not diligently attempted in a reasonable manner to comply with the order. See United States v. Local 1804-1, Int’l Longshoremen’s Ass’n, AFL-CIO, 44 F.3d 1091, 1096 (2d Cir.1995) (citing New York State Nat’l Org. for Women v. Terry, 886 F.2d 1339, 1351 (2d Cir.1989), cert. denied, 495 U.S. 947, 110 S.Ct. 2206, 109 L.Ed.2d 532 (1990)).
Sanctions for civil contempt may be imposed both to coerce future compliance with a court order issued for another party’s benefit and to “compensate for any harm that previously resulted” from the noncompliance. Chief. Exec. Officers Clubs, 359 B.R. at 534 (citing Nat’l Org. for Women v. Terry, 159 F.3d 86, 93 (2d Cir.1998)). In fashioning an appropriate remedy, courts must consider “the nature of the harm and the probable effect of alternative sanctions”. Id. at 536 (citing EEOC v. Local 28, Sheet Metal Workers, 247 F.3d 333, 336 (2d Cir.2001)).
Courts may utilize incarceration as a coercive sanction for civil contempt, so long as “the contemnor is able to purge the contempt and obtain his release by committing an affirmative act”. See Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 828-29, 114 S.Ct. 2552, 129 L.Ed.2d 642 (1994) (internal citations and quotation marks omitted); Hicks ex rel. Feiock v. Feiock, 485 U.S. 624, 635 n. 7, 108 S.Ct. 1423, 99 L.Ed.2d 721 (1988); Lawrence v. Goldberg (In re Lawrence), 279 F.3d 1294, 1297 (11th Cir.2002) (affirming bankruptcy court’s imprisonment of a debtor for civil contempt for failing to comply with a turnover order); In re CTLI, LLC, 528 B.R. 359, 379 (Bankr.S.D.Tex.2015) (directing the former majority owner of the debtor to relinquish control of its social media accounts, the failure of which would result in the issuance of a warrant for his arrest and his incarceration until he turned those accounts over as a civil contempt sanction); In re Count Liberty, LLC, 370 B.R. 259, 274 (Bankr.C.D.Cal.2007) (stating that incarceration is an appropriate coercive sanction so long as “the contemnor can avoid the sentence imposed on him, or purge himself of it, by complying with the terms of the original order.”); Chief Exec. Officers Clubs, Inc., 359 B.R. at 536-537, 542-43 (the bankruptcy court determined that it had the authority, as a coercive civil contempt sanction, to *320imprison an officer of the debtor until he returned funds improperly transferred from the debtor’s bank accounts in violation of a court order).
The coercive sanction of incarceration is especially appropriate where (i) it is unlikely that increased monetary sanctions would improve the likelihood of compliance and (ii) there has been a pattern of noncompliance. See In re Vaso Active Pharms., Inc., 514 B.R. 416, 426 (Bankr.D.Del.2014) (collecting cases); see also Souther v. Tate (In re Tate), 521 B.R. 427, 439-44 (S.D.Ga.2014) (discussing the bankruptcy court’s authority to impose and the propriety of imposing incarceration as a coercive sanction for civil contempt).
Mr. Bivona has knowingly violated this Court’s final and non-appealable Orders that clearly and unambiguously directed him to turn the Sale Proceeds over to the Trustee. He continues to act in open defiance of and flagrant disregard for this Court’s November 19, 2013 Order and August 4, 2014 Order, and the proof of his non-compliance is not only clear and convincing, it is overwhelming and blatant. Further, not only has Mr. Bivona not diligently attempted in any reasonable manner to comply with either the November 19, 2013 Order or the August 4, 2014 Order, he has continuously and willfully ignored those Orders. That Mr. Bivona would now have the audacity to falsely testify about not possessing the Sales Proceeds on November 19, 2013, is shocking and demonstrates that he simply has no respect for this Court and its procedures.
Finally, while not plead as a defense, this Court has considered whether Mr. Bivona has proven a defense of impossibility of complying with the November 19, 2013 Order when it was entered. The burden is on a contemnor to demonstrate “categorically and in detail” why they were unable to comply with an order of the court. Oliner v. Kontrdbecki (In re Cent. European Dec. Co.), 305 B.R. 510, 520 (N.D.Cal.2004) (internal quotation marks and citations omitted); see United States v. Rylander, 460 U.S. 752, 757, 103 S.Ct. 1548, 75 L.Ed.2d 521 (1983) (“Where compliance is impossible, neither the moving party nor the court has any reason to proceed with the civil contempt action. It is settled, however, that in raising this defense, the defendant has a burden of production.”); see also Trading Comm’n v. Wellington Precious Metals, Inc., 950 F.2d 1525, 1529 (11th Cir.1992) (noting that a contemnor must do more than merely assert an inability to comply but instead must establish that “he has made in good faith all reasonable efforts to meet the terms of the court order he is seeking to avoid.”) (internal quotation marks omitted).
Mr. Bivona cannot avail himself of the impossibility defense, because “[t]he defense is not available, ... ‘when the person charged is responsible for the inability to comply.’” Count Liberty, LLC, 370 B.R. at 275 (quoting United States v. Asay, 614 F.2d 655, 660 (9th Cir.1980)). Whatever disposition Mr. Bivona may have made of the Sales Proceeds after being ordered to turn them over is not a defense for his violation of this Court’s Orders. He fully had the ability to turn the Sales Proceeds over on November 19, 2013, and he simply chose not to do so.
Having considered this serious matter in great detail, this Court concludes that there is no available lesser sanction than the coercive sanction of incarceration; given Mr. Bivona’s conduct and his ignorance of prior monetary sanctions, it is extremely unlikely that any increased monetary sanctions would improve the likelihood of his compliance. He has exhibited a clear pattern of noncompliance and utter disregard for this Court’s Or*321ders, and the dignity of the judicial process.
As such, if Mr. Bivona does not purge his contempt and turn the Sales Proceeds in the amount of Thirty Thousand Six Hundred and Thirteen Dollars ($30,-613.00) over to the Trustee in good and valid funds by June 22, 2015, this Court will issue a warrant for his arrest directing the United States Marshals to take him -into their custody and hold him in their custody until such time as he purges his civil contempt by turning the Sales Proceeds over to the Trustee.
Thus, based on the foregoing, it is hereby
ORDERED, that if Mr. Bivona does not purge his contempt and turn the Sales Proceeds in the amount of Thirty Thousand Six Hundred and Thirteen Dollars ($30,613.00) over to the Trustee in good and valid funds by June 22, 2015, this Court will issue a warrant for his arrest directing the United States Marshals to take him into their custody and hold him in their custody until such time as he purges his civil contempt by turning the Sales Proceeds over to the Trustee; if Mr. Bivo-na is arrested, once he files a letter with this Court clearly and unambiguously stating that he is ready, willing and able to immediately comply and to turn the Sales Proceeds over the Trustee, along with evidence of the source of the funds required to comply, the Court will schedule a further hearing to determine whether Mr. Bivona should be released from the United States Marshals’ custody; and it is further
ORDERED, that on or before June 25, 2015, the Trustee shall file and serve an affidavit or affirmation as to whether Mr. Bivona purged his contempt and turned over the Sales Proceeds as required by this Order; and it is further
ORDERED, that the Trustee shall serve a copy of this Order on Mr. Bivona and Ms. LoPresti by regular and certified mail on or before June 8, 2015, and shall file an affidavit or affirmation of service on or before June 11, 2015.
. Case Nos. 13-71842-ast; 13-72354-ast.
.On August 15, 2013, to stave off another effort by MHRP to consummate an eviction, Debtor removed a landlord tenant action between MHRP and Debtor from the District Court of Suffolk County to the U.S. District Court for the Eastern District of New York, [dkt item 9-2] On August 26, 2013, the District Court sua sponte remanded the action *312back to the Suffolk County Court for lack of subject matter jurisdiction, [dkt item 9-3]
. See the Sanctions Order for a more complete history of the numerous prior bankruptcy filing by affiliates of the Debtor, and the prejudicial dismissal of those cases.
. See the Sanctions Order for a more complete discussion of the tactics employed in this case to avoid eviction by MHRP.
.The Court notes that in filed pleadings and throughout hearings in this case, Mr. Popkin provided conflicting statements on who he represents. When questioned by the Court at the November 19 hearing about the scope of his representation, Mr. Popkin unequivocally stated that he represents all of the petitioning creditors.
. Late on August 1, 2014, the Friday before the August 4 Monday hearing, Ms. LoPresti filed a letter seeking an adjournment of the August 4 evidentiary hearing for thirty days due to a medical emergency that allegedly occurred on July 25, 2014. [dkt item 49] The Trustee opposed any further adjournment. On August 1, 2014, the Court notified the parties that the August 4 evidentiary hearing would proceed as a telephonic status conference.
. To further demonstrate Mr. Bivona's litigiousness, on October 24, 2014, Ms. LoPresti filed a letter indicating her belief that "on August, 2014, this mátter was removed to the Federal District Court.” [dkt item 57] On October 31, 2014, the Trustee filed a letter stating that this bankruptcy case has not been removed to the District Court and that Mr. Bivona has not filed a motion to withdraw the reference pursuant to 28 U.S.C. § 157(d). [dkt item 63] No order withdrawing the reference of this bankruptcy case was ever entered *315by the District Court for the Eastern District of New York.
. On November 26, 2014, the Trustee filed an Abstract of the Judgment and on December 10, 2014 filed an Amended Abstract of the Judgment, [dkt items 70 & 73]
. THE COURT: In your motion to withdraw, you had indicated a concern of threats to your physical well being from Mr. Bivo-na—
MS. LOPRESTI: Yes, Your Honor.
THE COURT:, —although you advised the Court at the December 16 hearing that no such threats had actually been made directly to you.
Ms. LoPresti then stated:
MS. LOPRESTI: I spoke to, I spoke to an agent of the FBI and I spoke also to, (sic) that we've been in touch with, and I also spoke to a private investigator. We actually all met and spoke about what had transpired. And I am satisfied that it's been resolved....
See Transcript of the January 13 Hearing at 6:13-25 (the “Tr.”) [dkt item 97]
. The Bivona Affidavit includes the following statements:
12. I am a creditor, not the debtor in possession, with neither the means nor the assets to pay the fines. The monies were used to pay Vina DeVilla debts, including the new fence that was installed, etc....
13. In the instant matter, I have not violated any court orders. (Nov. 19, 2013, and August 4, 2014). The sale was conducted on or about October 31, 2013 (prior to the sale), from goods that I taken and removed from the Manor East. These were stored in a warehouse and were maintained for a time certain. These included tables, chairs, dishes, utensils, etc.
14. I was not aware of any court orders prior to or during the sale. I should not be held in either civil or criminal contempt. The court had not issued an order to prevent the sale in the first place and second, the products that were sold were not within the ownership of the debtor.
[dkt item 83]
. The Trustee inquired of Mr. Bivona at the January 13 Hearing about his conflicting November 19, 2013 testimony:
Q. You testified a little while ago that by the time the November 19th hearing occurred, you had already distributed all the money that you received. Right?
A. Yes sir.
* *
Q. Okay. And I believe you also testified that if you had had the money on November 19th, you would have turned it over to the trustee.
A. There is absolutely no doubt whatsoever. [indiscernible] you’ve been very kind as to speak to me on numerous occasions.
Q. Do you recall testifying at the November 19th hearing that you on that date were in possession of $29,500 in proceeds that you had received from Mr. Armadeo (phonetic)?
A. Where you do see that, sir?
Q. I’m just asking if you recall testifying that you were in possession of the sale proceeds.
A. I recall — no, what I recall is I was asked if I received the proceeds, and my answer was yes. Whether or not I had them that day, I don't recall, like in other words, that specific day at that time.
Q. You understood that you were under oath on November 19th. Correct?
A. Yes I do.
Q. And you responded to Mr. Pilansky’s (sic) question of what happened to the proceeds by saying, I have it. Is that correct?
*319A. It says it, so you're correct.
Q. Thank you.
Tr. at 34:1-22, 35:23-6-37:8.
. For an order to be clear and unambiguous, it must be reasonably clear “from the four corners of the order precisely what acts are forbidden” or required and must leave "no uncertainty in the minds of those to whom it is addressed”. In re Metz, 231 B.R. 474, 480 (E.D.N.Y. 1999) (quoting King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir.1995)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498323/ | MEMORANDUM OPINION AND ORDER
JOHN G. KOELTL, District Judge.
The appellant, Conway Hospital, Inc. (“Conway”), appeals from an order of the United States Bankruptcy Court for the Southern District of New York disallowing its proof of claim. In 2012, Conway filed a proof of claim that arose from a 1998 debt service reserve fund agreement (the “1998 Agreement”) between Conway and Lehman Brothers Special Financing Inc. (“LBSF”). The bankruptcy court held that the appellant’s claim against Lehman Brothers Holdings Inc. (“LBHI”) was time-barred.
The bankruptcy court’s Bar Date Order provided that “any holder of a claim against the Debtors who is required, but fails to file a proof of such claim in accordance with the Bar Date Order on or before the Bar Date [September 22, 2009] ... shall be forever barred, estopped and enjoined from asserting such claim against the Debtors.” (App. at 44-45.) The corresponding Bar Date Notice contains similar language. (App. at 58.) Conway filed its proof of claim in 2012. (App. at 69.)
*341Conway argues that its claim is not time-barred because it arose after LBHI petitioned for bankruptcy and that the Bar Date Notice was constitutionally insufficient. The bankruptcy court rejected both arguments and disallowed the claim. This Court agrees with the bankruptcy court, and therefore the disallowance order is affirmed.
I.
The following facts are undisputed unless otherwise noted.
A.
Under the terms of the 1998 Agreement between Conway and LBSF, a designated trustee agreed to purchase a series of securities at Conway’s direction from Lehman Brothers Inc. or other qualified dealers. (App. at 78-79.) Beginning on September 15, 2008, twenty-three of LBSF’s affiliates, including LBHI, (collectively, “Lehman”) filed for voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. (App. at 130.) On October 3, 2008, LBSF filed its Chapter 11 petition (the “LBSF Commencement Date”). (App. at 130.)
LBSF’s bankruptcy qualified as an “Event of Default” pursuant to Section 6.1(e) of the 1998 Agreement. (App. at 83.) As a result, Conway could terminate the contract and recover damages from LBSF. (App. at 130-31.) On November 18, 2008, Conway sent a notice to LBSF that terminated the contract and calculated the amount due under the 1998 Agreement. (App. at 102-03.) LBSF logged the notice upon receipt. (App. at 153-54.)
On July 2, 2009, the bankruptcy court entered a Bar Date Order setting September 22, 2009 as the date by which prepetition claims against LBHI and its affiliates (the “Debtors”) were required to be filed with the bankruptcy court. (App. at 37.) The Debtors provided actual notice of the deadline to Conway on July 8, 2009. (App. at 154.) The Bar Date Notice provided that “September 22, 2009 ... [was] the last date ... for each person or entity ... to file a proof of claim ... based on pre-petition claims against the Debtors.” It provided that “the word ‘claim’ means ... a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, [or] contingent....” (App. at 53.) It also stated that “[a]ny person or entity that holds a claim arising from the rejection of an executory contract or unexpired lease must file a Proof of Claim based on such rejection by the later of (i) the Bar Date, and (ii) the date which is forty-five (45) days following the effective date of such rejection or be forever barred from doing so.” (App. at 55.)
On December 6, 2011, the bankruptcy court approved and confirmed the Modified Third Amended Joint Chapter 11 Plan (“Plan”) of the Debtors. (App. at 31-34.) The Plan became effective on March 6, 2012. (App. at 131.)
B.
On April 18, 2012, Conway filed its proof of claim, which requests $1,290,795.04 in damages from LBSF. (App. at 69.)
As Plan Administrator, LBHI objected and requested that the bankruptcy court expunge Conway’s 2012 claim because it was filed after the Bar Date. (See App. at 116.) Conway argued that the Bar Date did not apply to its claim because the claim arose after the LBSF Commencement Date and that disallowing its 2012 claim would violate the Due Process Clause of the Constitution. (See App. at 133-39.)
On July 16, 2014, the bankruptcy court held a hearing and orally sustained the objection with respect to Conway’s claim. (App. at 26.) The bankruptcy court formally entered the disallowance order on July 21,2014. (App. at 166.)
*342II.
This Court has appellate jurisdiction under 28 U.S.C. § 158(a). The Court reviews the bankruptcy court’s factual findings for clear error and its legal conclusions de novo. See Cellmark Paper, Inc. v. Ames Merch. Corp. (In re Ames Dep’t Stores, Inc.), 470 B.R. 280, 283 (S.D.N.Y.), aff'd, 506 Fed.Appx. 70 (2d Cir.2012). The Court can affirm on any ground supported by the record. See Miller v. Sapir (In re Miller), No. 08cv4305, 2009 WL 174902, at *1 (S.D.N.Y. Jan. 26, 2009).
III.
Bar dates serve an integral role in bankruptcy law because “[t]hey are not designed merely as a ‘procedural gauntlet’ but rather serve ‘as an integral part of the reorganization process’ and the efficient administration of bankruptcy cases.” In re Lehman Bros. Holdings Inc., 433 B.R. 113, 119 (Bankr.S.D.N.Y.2010) (quoting First Fid. Bank, N.A. v. Hooker Invs., Inc. (In re Hooker Invs., Inc.), 937 F.2d 833, 840 (2d Cir.1991)). The bankruptcy court correctly held that Conway’s claim arose before the LBSF Commencement Date and was consequently time-barred because it was filed after the Bar Date.
A.
The Bankruptcy Code determines when Conway’s claim arose. See, e.g., Pearl-Phil GMT (Far East) Ltd. v. Caldor Corp., 266 B.R. 575, 581 (S.D.N.Y.2001) (“[I]t is well-settled that the Bankruptcy Code governs when a claim arises.”). Section 101(5) of title 11 of the United States Code defines a “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.” In interpreting this provision, the Second Circuit Court of Appeals has held that “the term ‘claim’ is sufficiently broad to encompass any possible right to payment.” Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 302 (2d Cir.1997).
Conway’s 2012 claim is a “contingent” claim. Contingent claims are “obligations that will become due upon the happening of a future event that was within the actual or presumed contemplation of the parties at the time the original relationship between the parties was created.” Ogle v. Fid. & Deposit Co. of Md., 586 F.3d 143, 146 (2d Cir.2009) (internal quotation marks omitted) (quoting Olin Corp. v. Riverwood Int’l Corp. (In re Manville Forest Prods. Corp.), 209 F.3d 125, 128-29 (2d Cir.2000)); see also Kling Realty Co. v. Texaco, Inc. (In re Texaco Inc.), No. 10cv8151, 2011 WL 4526538, at *4 (S.D.N.Y. Sept. 28, 2011). The “Event of Default” provision in the 1998 Agreement allowed Conway to terminate the Agreement and receive damages based on its termination. (App. at 83.) Conway’s claim therefore was contingent at the time the Lehman bankruptcy proceedings commenced, and it became liquidated when Conway terminated the contract and sought damages from LBSF.
Having concluded Conway held a contingent claim against LBSF when LBSF filed for bankruptcy, the next issue is when this claim arose. A prepetition claim requires that “the claimant ... possess a right to payment” and “that right must have arisen prior to the filing of the bankruptcy petition.” In re Manville, 209 F.3d at 128; see also LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478, 497 (2d Cir.1995). A claim is “deemed to have arisen pre-petition if the relationship between the debtor and the creditor contained all of the elements necessary to give rise to a legal obligation&emdash;a right to payment&emdash;under the relevant non-bank*343ruptcy law.” Ogle, 586 F.3d at 146 (internal quotation marks omitted).
“Contract claims” such as Conway’s “arise upon execution of an agreement.” In re Texaco, 2011 WL 4526538, at *4; see also Pearl-Phil GMT, 266 B.R. at 582 (“[T]he clear weight of case law in this Circuit ... recognizes that contract-based bankruptcy claims arise at the time the contract is executed.”). The relationship between Conway and LBSF therefore “was created upon the signing of the” 1998 Agreement. In re Manville, 209 F.3d at 129. The fact that the Lehman bankruptcy&emdash;the relevant contingency&emdash;“material-ized post-petition does not transmogrify the claim into a post-petition claim, but merely means that the contingent claim moved closer to becoming liquidated upon the happening of the contingency.” Id.; see also Pearl-Phil GMT, 266 B.R. at 581 (“[U]nder the Code, a right to payment need not be currently enforceable in order to constitute a claim.”).
Conway relies on NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984), and Century Indemnity Co. v. National Gypsum Co. Settlement Trust (In re National Gypsum Co.), 208 F.3d 498 (5th Cir.2000), but neither case supports its contention that its claim was a postpetition claim. Bildisco concerned the postpetition rejection of an executory collective bargaining agreement, and no party argues that the 1998 Agreement was rejected. And Century Indemnity dealt was an assumed contract, and no party argues that the 1998 Agreement was assumed. See 208 F.3d at 506-07, 509.
Conway argues that treating all contract claims as prepetition claims would render the “rejected executory contract” provision of the Bar Date Notice superfluous. This argument is without merit. The Bar Date Notice creates a separate deadline for rejected executory contracts because without it, claimants whose executory contracts were rejected just prior to the Bar Date would have little to no time to file a proof of claim.
Because the 1998 Agreement was executed prior to the LBSF Commencement Date, Conway’s claim likewise arose prior to the LBSF Commencement Date. Accordingly, the Bar Date governs Conway’s prepetition claim and precludes Conway’s untimely proof of claim.
B.
Section 502(g)(2) of the Bankruptcy Code provides a separate basis for affir-mance. Section 502(g)(2) provides that “[a] claim for damages calculated in accordance with section 562 shall be allowed ... or disallowed ... as if such claim had arisen before the date of the filing of the petition.” Section 562(a) of the Bankruptcy Code in turn provides that damages from the rejection or termination of a “swap agreement, securities contract (as defined in section 741), forward contract, commodity contract (as defined in section 761), repurchase agreement, or master netting agreement ... shall be measured from the earlier of (1) the date of such rejection; or (2) the date or dates of such liquidation, termination, or acceleration.” 11 U.S.C. § 562(a); see also Taunton Mun. Lighting Plant v. Enron Corp. (In re Enron Corp.), 354 B.R. 652, 657 (S.D.N.Y.2006).
Conway does not dispute that the termination of the 1998 Agreement&emdash;whether classified as a swap agreement, securities contract, or forward contract&emdash;is measured according to § 562(a). (See Appellant’s Br. at 6.) Therefore, Conway’s claim must be treated as if it “had arisen before the date of the filing of the petition” because it is a “claim for damages calculated in accordance with section 562.” § 502(g)(2).
Undeterred, Conway insists that 502(g)(2) claims are different from other *344prepetition claims, because § 502(g)(2) provides that such claims merely are treated “as if’ they arose prepetition. This argument also lacks merit.
Treating § 502(g)(2) claims as prepetition claims comports with the recognition that “contract-based bankruptcy claims ... arise at the time the contract is executed,” and thus, “a post-petition breach of a pre-petition contract gives rise solely to a pre-petition claim.” In re Bradlees Stores, Inc., No. 02cv0896, 2003 WL 76990, at *3 (S.D.N.Y. Jan. 9, 2003). “The fact that [a claim] remain[s] contingent until the occurrence of a triggering or disqualifying event ... is not controlling. Once the contingency occurs, even if it occurs post-petition, the contingent claim simply becomes a liquidated one; it, however, is not thereby elevated to the status of a post-petition claim.” In re Chateaugay Corp., 102 B.R. 335, 352 (Bankr.S.D.N.Y. 1989) (internal quotation marks omitted).
Finally, Conway insists that 11 U.S.C. § 101(10) differentiates between prepetition claims and § 502(g)(2) claims. This argument is unpersuasive. Subsection 101(10) provides that “[t]he term ‘creditor’ means (A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor; (B) entity that has a claim against the estate of a kind specified in section ... 502(g).... ” As explained above, § 502(g)(2) claims are allowed “as if such claim had arisen before the date of the filing of the petition.” Therefore, those claims are treated as prepetition claims. The fact that § 502(g)(2) claims are included as “creditor” claims does not suggest that they are postpetition claims.
Under § 502(g)(2), Conway’s claim arose prepetition. The Bar Date and Bar Date Notice required Conway to file a prepetition claim by September 22, 2009. Conway failed to so do, and its claim is therefore time-barred.
C.
Conway finally argues that the Bar Date Notice provided insufficient notice of the need to file a prepetition claim by the Bar Date.
Creditors are entitled to receive adequate notice of bar dates. ReGen Capital I, Inc. v. Habperin (In re Wireless Data, Inc.), 547 F.3d 484, 492 (2d Cir.2008). A bar date “should be prominently announced and accompanied by an explanation of its significance.” Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 398, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). The Lehman Bar Date Notice meets these requirements.
The bankruptcy court correctly addressed Conway’s due process allegations, concluding that there was “no doubt that the bar date order entered in this case obligated anyone who had a prepetition claim to file a claim.” (App. at 22.) The Notice unequivocally provided that September 22, 2009 was the last date for any party to “file a proof of claim ... based on prepetition claims against the Debtors.” (App. at 53.) It was not LBSF’s responsibility to advise Conway on the nature of Conway’s claims; ‘ rather, it was up to Conway, “having been notified of the Bar Date, to determine if it had any claims against the Debtors.” In re Delphi Corp., No. 05br44481, 2009 Bankr.LEXIS 571, at *6-7 (Bankr.S.D.N.Y. Jan. 20, 2009).1
*345There also was no ambiguity that all prepetition claims, defined very broadly, would be barred if not raised by the Bar Date. See In re Wireless Data, 547 F.3d at 493. The Bar Date Notice afforded Conway ample notice that it was required to file its claim by the Bar Date or be prohibited from doing so. The failure to file a timely claim was solely Conway’s responsibility and was not caused by any lack of adequate notice. Thus, Conway’s due process rights were not violated.
Conclusion
The Court has considered all of the remaining arguments of the parties. To the extent not specifically addressed above, they are either moot or without merit. For the foregoing reasons, the order disallowing Conway’s claim is affirmed. The Clerk is directed to close all pending motions.
SO ORDERED.
. The Notice encouraged parties with potential claims to consult the claims' administrator or to consult with their attorneys if they had any questions with respect to the Notice. (See App. at 53.) There are no allegations that Conway was confused by the contents of the Notice or that Conway did not receive the Notice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498324/ | OPINION AND ORDER
JOHN G. KOELTL, District Judge:
This bankruptcy appeal arises out of Bernard L. Madoff s Ponzi scheme and the subsequent bankruptcy of Bernard L. Ma-doff Investment Securities LLC (“BLMIS”) in the wake of the public revelation of that scheme. In early 2010, the appellants, Adele Fox and Susanne Stone Marshall, who each had invested money in BLMIS, sought to -file separate class action lawsuits in the United States District Court for the Southern District of Florida (the “Florida Actions”) asserting state law claims against Jeffrey Picower, an alleged Madoff co-conspirator, and other related defendants (collectively, the “Picower defendants”). The appellee, Irving H. Picard (“Picard” or the “Trustee”), is the trustee for the BLMIS estate pursuant to the Securities Investor Protection Act of 1970 (“SIPA”), 15 U.S.C. § 78aaa et seq. After Picard reached a $7.2 billion settlement agreement with the Picower defendants, *347the United States Bankruptcy Court for the Southern District of New York granted Picard’s motion to enjoin the appellants’ Florida lawsuits because they were commenced in violation of the Automatic Stay Order in the BLMIS liquidation proceeding, and approved the settlement and a permanent injunction precluding the assertion of claims that were duplicative or derivative of claims brought by the Trustee, or that could have been brought by the Trustee, against the Picower defendants. On March 26, 2012, this Court affirmed the bankruptcy court’s Automatic Stay Order and its approval of the settlement and injunction.
The Court of Appeals for the Second Circuit affirmed that judgment. Marshall v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 740 F.3d 81, 96 (2d Cir.2014). In the present appeal, the appellants challenge the decision of the bankruptcy court (Bernstein, B.J.), preventing the appellants from filing a Second Amended Complaint in the Florida district court alleging new claims against the Picower defendants. The bankruptcy court held that the appellants’ new claims, including a claim under Section 20(a) of the Securities Exchange Act of 1934 (“the Exchange Act”), 15 U.S.C. § 78t(a) (the “Section 20(a) Claim”), and a claim under the Federal Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1961 et seq. (the “Federal RICO Claim”), were derivative of the Trustee’s claims against the Picower defendants and therefore were precluded by the permanent injunction.
For the reasons that follow, the bankruptcy court was correct in finding that the appellants’ proposed complaint was derivative of the Trustee’s claims on behalf of all the creditors of BLMIS and was barred by the permanent injunction.
I.
The factual background of this case was set out at length in this Court’s prior decision. See Fox v. Picard (In re Madoff), 848 F.Supp.2d 469, 473-76 (S.D.N.Y.2012). The Court assumes familiarity with that decision. The following factual and procedural background is presented for its relevance to this appeal.
In May 2009, the Trustee first filed an adversary proceeding against the Picower defendants (the “New York Action”), bringing claims under federal and New York state law for, among other things, fraudulent transfers and conveyances made by the Picower defendants as part of their conspiracy with Madoff. The Trustee’s complaint alleged that the Picower defendants, knowing that BLMIS was an elaborate hoax, withdrew billions of dollars from their BLMIS accounts, money that belonged to defrauded BLMIS customers.
In February 2010, appellants Fox and Marshall filed separate class action lawsuits in the United States District Court for the Southern District of Florida, alleging Florida state law claims against the Picower defendants based on the same factual allegations as the Trustee’s complaint (the “Florida Actions”). Indeed, much of the appellants’ initial complaints were cut-and-paste repetitions of the Trustee’s complaint. The Trustee filed a motion in the bankruptcy court to enjoin those lawsuits, and on May 3, 2010, the bankruptcy court granted the Trustee’s motion. The bankruptcy court held that the appellants’ claims were covered- by the automatic stay provisions of 11 U.S.C. § 362(a) and therefore belonged “exclusively to the Trustee.” Secs. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC (“Automatic Stay Decision”), 429 B.R. 423, 432 (Bankr.S.D.N.Y.2010). The court also found that the Florida Actions violated part of a protective order *348issued by the District Court for the Southern District of New York on December 15, 2008, which had placed BLMIS customers under the protection of the SIPA. Id. at 433. Finally, the bankruptcy court issued a preliminary injunction pursuant to 11 U.S.C. § 105(a) finding that the Florida Actions threatened the BLMIS estate. Id. at 434.
Thereafter, the Trustee reached a settlement with the Picower defendants pursuant to which the Picower defendants agreed to return $5 billion to the BLMIS estate and forfeit $2.2 billion to the Government. The $7.2 billion represented the entire amount of money withdrawn by the Picower defendants from their BLMIS accounts. On January 13, 2011, the bankruptcy court approved the settlement and issued the following permanent injunction pursuant to the settlement agreement:
[A]ny BLMIS customer or creditor of the BLMIS estate who filed or could have filed a claim in the liquidation, anyone acting on their behalf or in concert or participation with them, or anyone whose claim in any way arises from or is related to BLMIS or the Madoff Ponzi scheme, is hereby permanently enjoined from asserting any new claim against the Picower BLMIS Accounts or the Picower Releasees that is duplicative or derivative of the claims brought by the Trustee, or which could have been brought by the Trustee against the Pi-cower BLMIS Accounts or the Picower Releasees....
Murphy Decl. filed Mar. 11, 2014, Ex. A (Permanent Injunction Order and Exhibit, Picard v. Picower, Case No. 09-1197, 2011 WL 10549389 (Bankr.S.D.N.Y. Jan. 13, 2011), ECF No. 43 (“Settlement Order”), at 7).
On March 26, 2012, this Court affirmed the January 13 Order, holding that the settlement was fair and reasonable, and that the issuance of the permanent injunction was a proper exercise of the bankruptcy court’s power under § 105(a) to protect the BLMIS estate and the bankruptcy court’s jurisdiction over the massive SIPA liquidation. See Fox, 848 F.Supp.2d at 473. This Court held that the claims asserted in the Florida Actions were “general claims common to all BLMIS investors” that were “substantively duplicative of the Trustee’s fraudulent transfer action.” Id. at 481. In particular, this Court noted that both complaints in the Florida Actions explicitly relied on the Trustee’s complaint in the New York action and cited to the Trustee’s complaint throughout. Id. at 479. Accordingly, the Court affirmed the bankruptcy court’s grant of the Trustee’s motion to enjoin the Florida Actions, and its issuance of a preliminary injunction. This Court also affirmed the bankruptcy court’s approval of the Settlement Agreement, holding that the “substantial sum” of $7.2 billion was “recovered for the estate after arm’s length bargaining, and the injunction of derivative claims like the Florida Actions was part of that bargain.” Id. at 490.
On January 13, 2014, the Court of Appeals for the Second Circuit affirmed this Court’s judgment. See Marshall, 740 F.3d at 96. The Court held that the appellants had merely put new legal labels on the same claims brought by the Trustee against the Picower defendants for fraudulent transfers and withdrawals. Id. at 92. Citing with approval an opinion in a related case by Judge Sullivan of this Court, the Court of Appeals stated that the “[cjomplaints plead nothing more than that the Picower Defendants traded on their own BLMIS accounts, knowing that such ‘trades’ were fraudulent, and then withdrew the ‘proceeds’ of such falsified transactions from BLMIS.” Id. (emphasis in original) (quoting A & G Goldman P’ship v. Picard (In re Bernard L. Madoff Inv. *349Secs., LLC), No. 12cv6109, 2013 WL 5511027, at *7 (S.D.N.Y. Sept. 30, 2013)).
Ultimately, the Court of Appeals held that the Florida Actions were derivative of the Trustee’s claims against the Picower defendants, because although they alleged different legal claims and sought different types of damages, the Fox and Marshall complaints alleged “nothing more than steps necessary to effect the Picower defendants’ fraudulent withdrawals of money from BLMIS, instead of ‘particularized’ conduct directed at BLMIS customers.” Id. at 84. As an example of “particularized” actions that were lacking, the Court noted that the appellants did not allege that “the Picower defendants made any misrepresentations to appellants.” Id. at 93. Finally, the Court of Appeals noted that it was affirming “without prejudice to appellants seeking leave to amend their complaints,” and stated:
There is conceivably some particularized conspiracy claim appellants could assert that would not be derivative of those asserted by the Trustee. That question, however, is not properly before us, and is a question in the first instance for the United States District Court for the Southern District of Florida.
Id. at 94.
Less than a month after the Court of Appeals’ decision, on February 5, 2014, appellants Fox and Marshall, together with appellants Marsha Peshkin and Russell Oasis, moved in the Florida District Court to re-open the Fox action, and for leave to file a Second Amended Complaint (the “New Fox Complaint”). See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC (“Injunction Decision”), 511 B.R. 375, 383 (Bankr.S.D.N.Y.2014). The New Fox Complaint asserts a Section 20(a) claim, a Federal RICO claim, a claim under the Florida Civil Remedies for Criminal Practices Act, Chapter 772 of the Florida Statutes (the “Florida RICO Claim”), and claims under Florida common law. See Murphy Decl. Ex. B (New Fox Complaint). Plaintiffs Fox and Oasis make their claims on behalf of “net winners” — BLMIS customers who "withdrew more money than they deposited with BLMIS over the span of their participation in the BLMIS Discretionary Trading Program — and plaintiffs Marshall and Peshi-kin seek to represent “net losers”— BLMIS customers who withdrew less money than they deposited with BLMIS.1 New Fox Compl. ¶¶ 8-11. The New Fox Complaint removes all citations to the Trustee’s complaint in the New York Action, and adds allegations that the Picower defendants controlled the BLMIS investment scheme, and that Picower caused BLMIS to make misrepresentations to customers in order to induce them into investing with BLMIS, so that Picower could make more fraudulent gains from the BLMIS scheme. New Fox Compl. ¶¶ 46-56.
On February 18, 2014, the Picower defendants sought an immediate stay of the action before the Florida district court. Injunction Decision, 511 B.R. at 383. In their motion, they included a letter from the Trustee stating his intention to file an injunction motion in the bankruptcy court. Id. The Florida district court ultimately stayed the proceedings in that court, and denied the plaintiffs’ request for an emergency hearing on their cross-motion to allow them to proceed in the Florida district *350court, after the Trustee had filed an injunction motion in the bankruptcy court. Id. The Florida district court stated:
The Court declines to conduct an emergency hearing on the question of whether to enjoin the New York action. Rather, this Court defers to the Bankruptcy Court for the Southern District of New York for a ruling on Picard’s motion to enjoin the instant action.
Id. (citing the Florida district court’s Order dated March 14, 2014). The plaintiffs filed a notice of appeal, and moved before the Court of Appeals for the Eleventh Circuit to expedite the appeal and for an injunction pending appeal. Id. On May 7, 2014, the Eleventh Circuit Court of Appeals denied both motions. Id. at 383-84.2
On June 23, 2014, the bankruptcy court granted the Trustee’s motion to enjoin the Fox Plaintiffs from prosecuting the New Fox Complaint in the Florida Actions. Id. at 394-95.3 The court held that the New Fox Complaint did not contain “any particularized allegation that the Picower Defendants participated in the preparation of any financial information sent to the proposed class members or directed BLMIS to send false information to the customers.” Id. at 394. The court found the new allegations as to the Picower defendants’ misrepresentations to BLMIS customers to be “wholly conclusory,” and concluded that the appellants were attempting to “plead around” the permanent injunction by attaching new legal claims to allegations that were derivative of the Trustee’s action. Id. at 394-95.4
On appeal, the appellants principally argue that (1) by acting on the Trustee’s injunction motion, the bankruptcy court violated the directions of the Court of Appeals in Marshall which stated that whether there is “some particularized conspiracy claim” that the appellants could bring against the Picower defendants “is a question in the first instance for the United States District Court for the Southern District of Florida,” 740 F.3d at 94; and (2) the claims in the New Fox Complaint allege particularized injuries traceable to the Picower defendants and thus are independent claims that they may permissibly bring against the Picower defendants.
A district court reviews a bankruptcy court’s findings of fact for clear error and its legal conclusions de novo. See In re Bell, 225 F.3d 203, 209 (2d Cir.2000); In re Metaldyne Corp., 421 B.R. 620, 624 (S.D.N.Y.2009).
II. i
As an initial matter, the appellants argue that the bankruptcy court violated the mandate from the Second Circuit Court of Appeals by exercising jurisdiction over the Trustee’s motion and enjoining the New Fox Complaint. They contend that when the Court of Appeals stated in Marshall that whether the appellants could assert claims that were not deriva*351tive of the Trustee’s claims was a “question in the first instance” for the Florida District Court, 740 F.3d at 94, the Court reserved that question for the Florida district court alone.
This argument is without merit. In making the statement on which the appellants rely, the Court of Appeals noted that' a sufficiently particularized non-derivative claim was not “properly before” it. Id. Any discussion by the Court of what such a claim could “conceivably” look like would ‘ have been strictly hypothetical. Id. Therefore, the Court made clear that the appellants should seek to file any amended complaint in the court where its claims were pending, the United States District Court for the Southern District of Florida. The Court of Appeals did not state, in its January 13 Opinion or the Mandate issued on February 5, that only the Florida district court could consider whether the appellants had stated non-derivative claims. As the bankruptcy court properly found, the Court of Appeals did nothing to disturb the bankruptcy court’s jurisdiction to interpret its own orders, including the permanent injunction issued as part of the Trustee’s settlement with the Picower defendants. See Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009) (stating that “the Bankruptcy Court plainly had jurisdiction to interpret and enforce its own prior orders,” including an injunction it had issued).
In any event, the parties’ actions in this case were consistent with the language that the appellants quote from the Court of Appeals’ decision in Marshall. The appellants sought to file the New Fox Complaint in the Florida district court in the first instance, and that court decided to stay the action so that the bankruptcy court could determine whether the Complaint violated its own prior injunction. See Injunction Decision, 511 B.R. at 383. The appellaiits thus availed themselves of both the Florida district court and the Eleventh Circuit Court of Appeals before the bankruptcy court issued its decision.
Accordingly, the bankruptcy court appropriately considered the merits of the Trustee’s motion to enjoin the appellants’ claims as derivative of the Trustee’s claims in violation of the permanent injunction.
III.
The Court of Appeals has defined “derivative claims” in the context of a bankruptcy as “ones that ‘arise from harm done to the estate’ and that ‘seek relief against third parties that pushed the debt- or into bankruptcy.’ ” Marshall, 740 F.3d at 89 (quoting Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Secs. LLC), 721 F.3d 54, 70 (2d Cir.2013) (brackets omitted)). “While a derivative injury is based upon ‘a secondary effect from harm done to the debtor,’ an injury is said to be ‘particularized’ when it can be ‘directly traced to the third party’s conduct.”’ Id. (quoting St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 704 (2d Cir.1989) (brackets omitted)). Although the same factual allegations may give rise to both derivative and independent claims, appellants may not state independent claims merely by asserting new legal claims or seeking different forms of relief than the Trustee. Id. at 91-93. Rather, courts should “inquire into the factual origins of the injury” and the- “nature of the legal claims asserted.” Id. at 89 (citing Johns-Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns-Manville Corp.) (“Manville III”), 517 F.3d 52, 67 (2d Cir.2008)).
The appellants argue that the claims they have added in the New Fox Complaint, principally the Section 20(a) claim, allege particularized injuries to themselves and others similarly situated *352and thus are independent from the Trustee’s claims against the Picower defendants. The Section 20(a) claim alleges that BLMIS committed a primary violation of § 10(b) of the Exchange Act, and that the Picower defendants controlled BLMIS and participated in convincing additional customers to invest in BLMIS by inducing BLMIS’s misleading statements to customers. See New Fox Compl. ¶¶ 109-20.
The Goldman plaintiffs, who are also parties that sought to file class actions against the Picowers, had brought a similar Section 20(a) claim that an earlier bankruptcy court decision found derivative of the Trustee’s claims. In an Opinion dated September 30, 2013, the district court affirmed the bankruptcy court’s order. See Goldman, 2013 WL 5511027, at *1. Judge Sullivan acknowledged that a creditor’s claim may be non-derivative if “some direct legal obligation flowed from the defendants to the creditor,” and that a Section 20(a) claim provides that direct legal obligation. Id. at *5-6. However, Judge Sullivan noted that the court must analyze the factual allegations to ensure that the claim is a “bona fide” Section 20(a) claim, or else parties could “easily plead around the protections of the Bankruptcy Code by deceptively labeling their claims.” Id. at *6. The court held that the appellants had not alleged bona fide Section 20(a) claims because the only substantive factual allegations against the Picower defendants pertained to their fraudulent withdrawals from their BLMIS accounts, the same subject matter as the Trustee’s claims. Id. at *6-9. The only allegations pertaining to elements of “control person” liability were conclusory or involved BLMIS and not the Picower defendants. Id.
The appellants in this case argue that unlike the appellants in Goldman, they have alleged a “bona fide” Section 20(a) claim against the Picower defendants. The appellants argue that their Section 20(a) claims “involve direct injuries ... based [on] their own reliance on fraudulent statements and misrepresentations made to them.” Medkser v. Feingold, 307 Fed.Appx. 262, 265 (11th Cir.2008) (holding that Section 20(a) claims were non-derivative of bankruptcy trustee’s claims). However, like the plaintiffs in Goldman and unlike the plaintiffs in Medkser, the appellants have not made particularized allegations about any misrepresentations made by the Picower parties or direct involvement of the Picower parties in misrepresentations by Madoff. In fact, the New Fox Complaint does not provide any specific misrepresentations, and with respect to the only misrepresentations it generally discusses — the “inflated account values” sent by BLMIS — the allegations regarding Picower’s involvement are entirely conclu-sory. New Fox Compl. ¶¶ 51-55. Therefore, the bankruptcy court properly found that the allegations supporting the Section 20(a) claim were conclusory and simply “based on the secondary effects of the fraudulent transfers to the Picower Defendants,” and thus “inseparable from the Trustee’s claim.” Injunction Decision, 511 B.R. at 394.5
The appellants point to a handful of paragraphs of the New Fox Complaint to argue that there are sufficient, particularized allegations of Picower’s direct involvement in misrepresentations made by *353BLMIS. However, the paragraphs contain allegations similar to the control person allegations that Judge Sullivan rejected in Goldman in the opinion cited with approval by the Court of Appeals. The portions of the New Fox Complaint identified by the appellants, along with the rest of the Complaint, are replete with the type of derivative allegations that Judge Sullivan identified: (1) They allege actions taken by the Picower defendants regarding “their own BLMIS accounts,” and are thus duplicative of the Trustee’s fraudulent transfer claims, 2013 WL 5511027, at *7 (emphasis in original); see New Fox Compl. ¶ 44 (“[Picower] directed Madoff ... to document fictitious gains in the accounts of the Picower Parties • .... ”); id. ¶ 47 (“[The Picower Parties] demanded that BLMIS manufacture fictitious losses for the Picower Parties.”); (2) They make particularized factual allegations regarding the BLMIS fraud, but the Picower defendants are nowhere to be found, see id. ¶¶ 34-40; or (3) They make eonclusory allegations of control person liability with no particularized factual support, see id. ¶ 46 (“Picower fully and knowingly participated in the fraud that BLMIS perpetrated on customers ... and actively encouraged people to enter into investment advisory agreements with BLMIS.”); id. ¶ 119 (“Picower directly or indirectly induced the material misrepresentations and omissions giving rise to the securities violations alleged herein.”). As the bankruptcy court correctly concluded: “The New Fox Complaint does not include any particularized allegations that Picower solicited any investor or induced Madoff to do so. Indeed, the Fox Plaintiffs do not even allege that they were solicited directly or indirectly by Picower to invest in BLMIS. Thus the allegations in the New Fox Complaint are wholly eonclusory.” Injunction Decision, 511 B.R. at 394.
The appellants cite cases with examples of meritorious Section 20(a) claims, but the descriptions of the facts alleged in those cases present a telling contrast with the paucity of specifics in the New Fox Complaint. For example, the appellants cite In re Global Crossing, Ltd., 322 F.Supp.2d 319 (S.D.N.Y.2004), but the court in that case made clear that the factual allegations supporting the Section 20(a) claims were “fully developed” and “considerably more specific” than other claims that the court had dismissed. Id. at 351 (holding that the plaintiffs stated Section 20(a) claim against the defendant because they alleged specific scenarios showing “actual control and culpable participation” by the defendant). In another case relied upon by the appellants, the court lists several paragraphs of specific facts showing that the defendant acted with “severe recklessness.” See In re Sunbeam Secs. Litig., 89 F.Supp.2d 1326, 1344-45 (S.D.Fla.1999). In this case, the appellants have alleged no particularized actions on the part of the Picower defendants. The purpose of this comparison is not to opine on whether appellants’ Section 20(a) claim would survive a motion to dismiss, but rather to make clear that any allegations purporting to show an injury directly traceable to the Picower defendants’ conduct are too con-clusory to present a “bona fide” claim independent from the Trustee’s action. See Goldman, 2013 WL 5511027, at *9.
The appellants have offered little explanation for how the rest of the claims in the New Fox Complaint are independent from the Trustee’s claims, and indeed, the bankruptcy court was plainly correct in finding those claims to be derivative. See Injunction Decision, 511 B.R. at 394-95. None •of the Federal RICO claims and claims under Florida state law in the New Fox Complaint allege particularized injuries directly traceable to the Picowers’ conduct. See New Fox Compl. ¶¶ 123-93. Accord*354ingly, Counts Two through Six of the New Fox Complaint are also derivative of the Trustee’s claims against the Picower defendants.
In sum, the appellants seek to bring claims based on legal theories that Judge Sullivan in Goldman and the Second Circuit Court of Appeals in Marshall explained could qualify theoretically as independent claims. However, the appellants have merely repackaged the same facts underlying the Trustee’s claims without any new particularized injuries of the appellants that are directly traceable to the Picower defendants. Thus, all of the claims in the New Fox Complaint “imper-missibly attempt to ‘plead around’ the bankruptcy court’s injunction barring all ‘derivative claims,’ ” Marshall, 740 F.3d at 96, and the bankruptcy court properly granted the Trustee’s motion to enjoin the filing of the New Fox Complaint in the Florida district court.6
Accordingly, the bankruptcy court’s June 23 Order is affirmed.
CONCLUSION
The Court has considered all of the arguments raised by the parties. To the extent not specifically addressed, the arguments are either moot or without merit.
The bankruptcy court’s Order enjoining the appellants from filing the New Fox .Complaint in the United States District Court for the Southern District of Florida is AFFIRMED.
This Opinion and Order finally disposes of the above captioned appeal.
The Clerk is directed to close this case and to close any open motions.
SO ORDERED.
. As explained in this Court’s previous decision, the Trustee’s method of calculating each customer’s pro rata share of the BLMIS property, or their net equity, entitles "net losers" to receive all of their principal investments before "net winners” receive any compensation for the fictitious profits they believed they had made. The Court of Appeals has affirmed this method of reimbursement. See In re Bernard L. Madoff Inv. Secs. LLC, 654 F.3d 229, 235 (2d Cir.2011).
. After the bankruptcy court granted the Trustee’s motion to enjoin the filing of the New Fox Complaint, the Eleventh Circuit Court of Appeals dismissed the appeal as moot.
. The Court also granted the Trustee's motion to enjoin the proposed amended class action complaint which plaintiffs Pamela Goldman and A & G Goldman Partnership (collectively, the “Goldman Plaintiffs’’) sought to file in the Florida district court. Id. at 393. The Goldman Plaintiffs initially appealed from that decision, but subsequently withdrew their appeal and filed another amended complaint in the Florida district court. The Trustee moved to enjoin that complaint as well, and the Trustee's motion is currently pending before the bankruptcy court. See Picard v. Goldman' (In re Bernard L. Madoff), Adv. Pro. No. 1402407 (Bankr.S.D.N.Y.2014).
.Because the bankruptcy court found that the New Fox Complaint violated the permanent injunction, it declined to reach the question of whether the New Fox Complaint violated the automatic stay. Id. at 395.
. The appellants argue at length that the bankruptcy court improperly treated the Trustee's motion as a motion to dismiss and found that the appellants Section 20(a) claim does not state a claim upon which relief can be grounded. The bankruptcy court did no such thing. The court’s discussion of the merits of any of the appellants’ claims only related to whether they were derivative of the Trustee's claims and could properly be enjoined.
. The Trustee argues that the claims in the New Fox Complaint violate the automatic stay provisions of 11 U.S.C. § 362(a)(3). The bankruptcy court found it unnecessary to reach this question in light of its holding that the New Fox Complaint violates the permanent injunction, and this Court agrees. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498325/ | DECISION RE FORM OF JUDGMENT
ROBERT E. GERBER, UNITED STATES BANKRUPTCY JUDGE:
The parties’ inability to agree on a form of judgment to implement the Court’s Decision on Motion to Enforce Sale Order1 requires this Court to decide the disputed matters. The Court will be entering a judgment, consistent with its rulings on the disputed matters, within a few days.2 The Court’s reasoning on the disputed matters follow.
I. Request for Delay in Entry of Judg- ' ment
Gary Peller, Esq., counsel for the Elliott and Sesay Plaintiffs (and an additional plaintiff, Sharon Bledsoe, a pre-petition accident victim) (collectively, the “Pel-ler Plaintiffs”) — whose insistence on prosecuting their complaints ahead of all of the other plaintiffs similarly situated *357(and that this Court lacks the jurisdiction to enforce its own orders) necessitated two written opinions by this Court3' — -now argues that entry of judgment is premature. He argues, effectively, that the entry of a judgment as desired by all of the other parties in this case (and the prompt appellate review that all of the other parties also desire) should await the consideration of additional arguments he wishes to present.
He further argues, on behalf of the Pel-ler Plaintiffs, that the Court’s rulings in the Decision are not binding on them. The Court disagrees. The Peller Plaintiffs had more than ample opportunity to raise contentions Designated Counsel did not raise. And though Mr. Peller’s filings were so numerous and frivolous that the Court warned him of the entry of a Martin-Trigona order,4 he still had the right, under the Court’s orders establishing the mechanisms for determination of the Motion to Enforce, to make any points others had not.
Under these circumstances, there is no good reason for delaying the entry of a judgment that all of the other parties in this case need. Judgment will be entered now. The only fairly debatable issue is exactly how it will be framed.
2. Dismissal With Prejudice v. Stay of Cases
In its proposed form of judgment, New GM provides for the outright dismissal, with prejudice, of the complaints embodying claims that continue to be barred by the Sale Order. In their proposed form of judgment, Designated Counsel argue that such complaints should merely be stayed. Though the matter is close — as neither side would be materially prejudiced by the other’s approach — the Court believes it should provide, for the time being, for no more than a stay.
Of course it is true, as New GM has argued, that many plaintiffs’ counsel filed plenary action complaints, in both state and federal courts, in knowing disregard of the prohibitions of the Sale Order. And whether those counsel did so out of arrogance; ignorance; their own perceptions of when orders should be complied with; or an apparent notion that orders of a United States Bankruptcy Court are unworthy of respect, is of no moment. Compliance with the Court’s Sale Order was required, unless and until the Sale Order was vacated or modified by this or a higher court.5 With this Court having declined to vacate or modify the Sale Order with respect to successor liability claims, New GM is right in its contention that the normal remedy for the filing of a complaint in violation of a court order — now determined, in respects relevant here, to be fully valid — would be an order mandating that complaint’s dismissal.
The real issue, however, is when — and whether merely staying the actions pending the completion of appellate proceedings would suffice. Designated Counsel argue that full dismissal “would provide an inefficient labyrinth of cumbersome procedures impacting a wide array of actions pending against New GM in various juris*358dictions.” That is true, but it is largely a problem of Ignition Switch Plaintiffs’ making — resulting from their filing of many actions that they knew or should have known were barred by the Sale Order, and apparently intentional efforts to intermingle permitted and impermissible claims in common complaints.
Nevertheless, though many of New GM’s proposed procedures would have to remain in any event (to provide mechanisms for relief from the stays, and for determining whether curative measures were sufficient), New GM’s dismissal procedures would be cumbersome, and could result in additional expense in refiling fees if any complaints now to be dismissed later turn out, after, appeal, to assert claims that could properly be presented. And while New GM offers mechanisms (such as a tolling of the statute of limitations and restoration of the status quo ante) to protect Ignition Switch Plaintiffs in the event of a reversal or modification of the Decision, there is no need for quite so many measures so complex, nor for the additional burdens on the Court that would result from New' GM’s approach. New GM would not be prejudiced, much less materially so, if complaints embodying claims proscribed by the Sale Order are simply stayed for the time being.
The Court gave substantial thought to the issues addressed in the Decision and believes, not surprisingly, that it got them right. But as the Court noted when it certified the Decision for direct appeal to the Circuit, available authorities, while helpful to a point, came nowhere close to addressing a factual situation of this nature. Staying the actions embodying barred claims more than satisfactorily protects New GM’s legitimate needs and concerns for now. If, as the Court believes, its conclusions on the issues to be appealed were right, New GM can then come back to the Court for full dismissals after the appellate process has taken its course.
3. State Court Attorney General Actions
After the filing of the Motion to Enforce, actions in California and Arizona state court (the “State Actions”) were filed on behalf of the Attorneys General of California and Arizona (the “State Plaintiffs”) seeking injunctive relief, civil penalties and “other available relief.” New GM’s form of judgment provides for those actions to be stayed. Designated Counsel object to that, contending that the two State Actions assert claims based only on New GM conduct — which, if true, would be permissible under the Decision.
But the Court does not believe that to be true. On their face, the State Plaintiffs, like many Ignition Switch Plaintiffs, intermix claims involving pre- and post-sale conduct. The California complaint includes at least 18. paragraphs alleging events that took place prior to the 368 Sale,6 and the Arizona complaint includes at least 60 paragraphs alleging pre-363 Sale conduct.7 Reliance on allegations of that character was expressly prohibited under the Court’s decision. And the State Actions’ prayers for monetary relief (as contrasted to injunctive relief, which is forward looking, and much less prone to rest on Old GM conduct), in reliance on pre-sale allegations aggravate the problem.
The Court has included within the Judgment, however, provisions allowing the State Plaintiffs to choose between maintaining the complaints in their State Actions as they originally drafted them, pending any appeal they might bring, or pruning their complaints of allegations relating conduct to Old GM conduct. If either elects the latter, and New GM does *359not agree that claims and allegations only of a permissible nature remain, the State Plaintiffs may seek a ruling from this Court. But in the meantime, the prosecution of the state lawsuits will remain stayed.8
k- Language Re Barred Claims
In its form of judgment, New GM proposes to continue the injunction against claims against New GM “concerning an Old GM vehicle or part seeking to impose liability or damages based on Old GM conduct, or a successor liability theory of recovery.” Designated Counsel’s form of judgment limits the barred claims to those “based on successor liability.” But the latter’s formulation is unduly narrow, distorting the Court’s intent. The Court cannot accept Designated Counsel’s language.
Successor liability theories are the paradigmatic example of claims that must be barred under a Free and Clear Order, but they are not the only ones. The Sale Order was intended to bar claims of any type that might be asserted against the asset buyer New GM that would be based on the asset seller Old GM’s wrongful conduct — including, but not limited to, successor liability claims.9 Acquirers of assets cannot be placed at risk of liability for claims based on seller conduct premised on the notion that the claims are not exactly for “successor liability.” Any sale order that did not protect purchasers of assets from the sellers’ wrongful acts would not do its job. And when the Court issued the Decision (having rejected the Ignition Switch Plaintiffs’ contentions, except insofar as they involved alleged wrongful conduct by New GM alone), its intent was to leave all of the protective provisions intact.10
*360The Court’s judgment will stay true to the original Sale Order and the language in the Decision.
5. Language Re Norir-Ignition Switch Plaintiffs
As both sides recognize, after New GM filed the Motion to Enforce, still another category of Plaintiffs came into the picture — the “Non-Ignition Switch Plaintiffs.” Though New GM brought still another motion — a third one — to enforce the Sale Order with respect to Non-Ignition Switch Plaintiffs, this third motion could not easily be melded into the earlier stipulation and briefing schedule. Thus it was deferred pending the determination of the issues addressed in the Decision.
The Non-Ignition Switch Plaintiffs’ claims remain stayed, and properly so; those Plaintiffs have not shown yet, if they ever will, that they were known claimants at the time of the 363 Sale, and that there was any kind of a due process violation with respect to them. And unless and until they do so, the provisions of the Sale Order, including its injunctive provisions, remain in effect. Similar considerations (and also mootness points) may apply with respect to the allowance of late Non-Ignition Switch Plaintiffs’ claims.
Yet as Designated Counsel properly observe, the Non-Ignition Switch Plaintiffs are still entitled to a fair opportunity to be heard in this Court as to whether there are any reasons to excuse them from the Sale Order, or the Court’s mootness conclusions with respect to tapping GUC Trust assets. The Decision will be stare decisis for the Non-Ignition Switch Plaintiffs (subject to the usual right of any litigant to show that a judicial opinion is distinguishable), but it will not be res judi-cata. The Court agrees with New GM, the GUC Trust and the Unitholders that it is 'time to come to closure on whether there is any basis to excuse the Non-Ignition Switch Plaintiffs from the provisions of the Sale Order and the Court’s mootness conclusions. And fairness to the MDL Court requires that this Court timely provide the MDL Court with any rulings that the MDL Court may require. The Court’s Judgment balances the Non-Ignition Switch Plaintiffs’ need for opportunity now to be heard with others’ needs for expeditious closure on these additional claims.
6. Language Re GUC Trust Assets
New GM and, particularly, the GUC Trust and the Unitholders, on the one hand, and Designated Counsel, on the other, disagree on the language in the judgment appropriate to implement the Court’s mootness conclusions. The Court generally agrees with the GUC Trust, Unitholders and New GM. But it believes, consistent with the rationale of the Decision, that the guiding standard should the reasonable expectations of GUC Trust and acquirors of GUC Trust Units under the Plan — a matter not fully addressed by either side.
It is necessary, in the Court’s view, to include different provisions in the Judgment with respect to new claims and reconsideration of old ones. When Old GM creditors received distributions under the Plan, and when Unitholders — even if as aftermarket acquirors of GUC Trust Units — acquired their units, they had a reasonable expectation that the total universe of claims filed against Old GM would not increase. And while they knew that there was an accordion feature, they also knew that claims exposure would result, with exceptions exceedingly difficult to show, only from previously filed claims. The Decision respected those concerns. The Court’s Judgment will stay true to the principles articulated in the Decision, and will not allow GUC Trust assets to be tapped for claims not previously filed.
*361But as noted, the situation is different with respect to claims that were already filed, and previously allowed or disallowed. Bankruptcy Code section 502© provides, in relevant part:
A claim that has been allowed or disallowed may be reconsidered for cause. A reconsidered claim may be allowed or disallowed according to the equities of the case.11
Creditors receiving distributions under the Plan, and owners of GUC Trust units acquiring such units after confirmation of the Plan, were on notice that the Bankruptcy Code includes a section 502©. Just as they had the justifiable expectation that the Court would apply provisions of the Bankruptcy Code or caselaw that would bolster their rights, they had (or should have had) the same expectation that the Court might apply provisions of the Bankruptcy Code or caselaw that could dilute their recoveries. Each assumed the risk that the Court might apply section 502© with respect to any claims that previously had been allowed or disallowed.
The Court expresses no view now as to whether or how it would apply section 502© to the claim of any plaintiff who previously filed a claim that was allowed or disallowed, but has added a proviso to its Judgment to provide that nothing in the judgment impairs any rights under section 502a).
7. Language Re Disputed Facts
Designated Counsel and New GM also joust over the extent to which the Court should address, in the judgment, disputed facts that did not affect the Court’s Decision. Designated Counsel ask the Court to provide that disputed facts did not raise any “genuine issue of material fact as to any of the Four Threshold Issues, and that treating any of the disputed facts as part of the undisputed stipulated record would not have affected the Decision.” New GM opposes such a provision, stating that this “is found nowhere in the Decision and, in fact, is inconsistent with the Decision.”
New GM is right that the language Designated Counsel want to add is found nowhere in the Decision. But New GM is mistaken when it says that the language “is inconsistent with the Decision.” Such language — or at least language to the same general effect — is implicit. The Court expressly stated that “[b]y analogy to motions for summary judgment, the Court has relied only on undisputed facts.”12 Both sides agree, or should, that the Plaintiffs did indeed put forward additional facts which New GM disputed, but which the Court found unnecessary to decide to reach the conclusions, it did. If the Court considered any disputed fact to have *362the potential to change the outcome (or even its analysis on the way to the outcome), the Court would have said so — -just as it would, if necessary, on a motion for summary judgment.
8. Enforcement Authority
New GM’s proposed form of judgment provides, in Paragraph 15:
Notwithstanding the foregoing, in all events, however, the Decision and Judgment shall apply with respect to (a) the Court’s interpretation of the enforceability of the Sale Order, and (b) the actions of the affected parties that are authorized and proscribed by the Decision and Judgment.
The Plaintiffs want this language taken out. The Court declines to do so.
New GM has expressed an understandable concern that plaintiffs in actions whose prosecution is barred by the Sale Order cases will seek to have this Court’s Sale Order or Judgment vacated or modified by courts in which plaintiffs’ underlying actions are docketed. This Court cannot not tolerate efforts of that character. Wholly apart from the additional expertise that Bankruptcy Courts have with respect to the orders they enter and the bankruptcy matters they decide, the interpretation of this Court’s Sale Order is a matter for this Court. Subject to the power, of course, of federal courts exercising appellate jurisdiction over this Court, so is the interpretation of the Decision and the Judgment. This Court’s determinations with respect to each of those matters are reviewable by the federal appellate courts alone; they cannot be subject to collateral attack. And this last point is so important that the Court is adding even more language to the Judgment to make that clear.
8. Other Matters
In several places, New GM has proposed that the judgment state that notice of the 363 sale came from Old GM, fearing that omitting reference to Old GM would imply that someone else was responsible for the 363 sale notice, “which clearly is not true.” Of course the notice came from Old GM. But leaving it out does not result in the implication New GM fears. Consistent with the Court’s practice here to minimize unnecessary matter, and to point readers to the Decision to understand its rationale, the Court leaves that and other nonessential matter out.
Certification to the Second Circuit Court of Appeals is more appropriately handled by a separate order.13 The parties’ stipulation with respect to voluntary supplemental statements will be included in that separate order as well.
In many places, the Court has pruned language from the proposed forms of judgment to reduce verbosity. Where changes were meant to be substantive, they have been explained in the discussion above.
. See In re Motors Liquidation Co., 529 B.R. 510 (Bankr.S.D.N.Y.2015) (Bankr.S.D.N.Y. Apr. 15, 2015) (the "Decision”), familiarity with which is assumed. Defined terms (such as the Court's reference to "Designated Counsel,” the bankruptcy counsel for many of the Ignition Switch Plaintiffs) are as set forth the Decision and in the proposed forms of judgment.
. By separate order, entered today, the Court is inviting comments on technical matters relating to the form of judgment. The entry of the judgment will await the submission of any such technical comments, but nothing else.
. See In re Motors Liquidation Co., 514 B.R. 377 (Bankr.S.D.N.Y.2014) (Elliott Plaintiffs); In re Motors Liquidation Co., 522 B.R. 13 (Bankr.S.D.N.Y.2014) (“Sesay ”) (Sesay Plaintiffs), leave to appeal denied, No. 15-CV-772 and 15-CV-776 (S.D.N.Y. May 18, 2015) (Furman, J.).
. See Sesay, 522 B.R. at 20 n. 13.
.See, e.g., Celotex Corp. v. Edwards, 514 U.S. 300, 306, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) ("Persons subject to an injunctive order issued by a court with jurisdiction are expected to obey that decree until it is modified or reversed, even if they have proper grounds to object to the order.”)(internal citations omitted).
. See ECF No. 1313 7, Exhibit E.
. See id. Exhibit D.
. According to New GM, the State Plaintiffs have indicated that they will not amend their complaints to eliminate reliance on Old GM conduct. The Court does not know that to be true. But assuming that it is, a decision of that character comes with a price — and that price is a stay of the State Action for as long as appropriate as the federal appellate process takes its course. Compliance with the Sale Order, or with the Decision and Judgment, is not a matter for the State Plaintiffs, or the state courts, to decide. The issues addressed in the Decision were issues properly before the federal courts, and this Court in particular. On matters properly within its purview, the Court cannot permit a disregard of its orders and judgments, or end-runs on its jurisdiction.
. See Sale Opinion, In re General Motors Corp., 407 B.R. 463, 500 n. 92 (Bankr.S.D.N.Y.2009) (Sale Order would provide that except for Assumed Liabilities, assets would be transferred "free and clear of all liens, claims, encumbrances, and other interests of any kind or nature whatsoever ... including rights or claims based on any successor or transferee liability ....” (quoting Proposed Sale Order at ¶ 7) (emphasis added)). See also id. (noting that injunction would bar persons and entities holding claims "of any kind or nature whatsoever, including rights or claims based on any successor or transferee liability, against or in a Seller or the Purchased Assets ... arising under or out of, -in connection with, or in any way relating to, the Sellers, the Purchased Assets, the operation of the Purchased Assets prior to the Closing, or the 363 Transaction ....’’ (quoting Proposed Sale Order art 8) (emphasis added)).
.See Decision, 529 B.R. at 528, 2015 WL 1727285 at *8 ("[I]t is plain that to the extent the Plaintiffs seek to impose successor liability, or to rely, in suits against New GM, on any wrongful conduct by Old GM, these are actually claims against Old GM, and not New GM”); id. at 528, 2015 WL 1727285 at *8 ("Claims premised in any way on Old GM conduct are properly proscribed under the Sale Agreement and the Sale Order, and by reason of the Court's other rulings, the prohibitions against the assertion of such claims stand.”); id. at 598, 2015 WL 1727285 at *68 (Economic Loss Plaintiffs could assert otherwise viable claims against New GM arising "solely out of New GM's own, independent, post-Closing acts,” so long as those Plaintiffs’ claims do not in any way rely on any acts or conduct by Old GM ”) (emphasis added in each case).
. It goes on to say that:
Reconsideration of a claim under this subsection does not affect the validity of any payment or transfer from the estate made to a holder of an allowed claim on account of such, allowed claim that is not reconsidered, but if a reconsidered claim is allowed and is of the same class as such holder's claim, such holder may not receive any additional payment or transfer from the estate on account of such holder’s allowed claim until the holder of such reconsidered and allowed claim receives payment on account of such claim proportionate in value to that already received by such other holder.
This provides other creditors with a considerable measure of protection, but does not go to all of the concerns the GUC Trust and Unitholders voiced that were thereafter addressed in the Decision. Importantly, section 502(j) applies, by its terms, only to claims that were previously allowed or disallowed.
. Decision, 529 B.R. at 529-30, 2015 WL 1727285 at *9 n. 17.
. See Fed. R. Bankr. P. 8006(e)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498327/ | MEMORANDUM OPINION AND ORDER SUSTAINING THE TRUSTEE’S OBJECTION TO GENERAL CREDITOR CLAIM NUMBER 50200 FILED BY CHARLES SON-SON
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE:
James W. Giddens (the “Trustee”), as Trustee for the liquidation of MF Global Inc. (“MFGI”)1 under the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”) filed an objection (the “Objection,” ECF Doc. #8107) to general creditor claim number 50200 (the “Claim,” ECF Doc. # 8108, Ex. 1) filed by Charles Sonson (“Sonson”).2 The Claim is based on causes of action that Sonson has previously asserted against MFGI in an action filed in Illinois in 2010. Specifically, the Claim asserts causes of action for breach of contract, breach of the fiduciary duty of care, and misrepresentations in violation of the Commodities Exchange Act (the “CEA”) based on MFGI’s allegedly improper liquidation of Sonson’s customer account with MFGI. The Trustee’s Objection seeks to disallow Sonson’s Claim under section 502(d) of the Bankruptcy Code on the basis that Sonson’s account has a negative balance that is subject to turnover, and until Sonson pays MFGI the amount of his account deficit, his Claim must be disallowed. Sonson filed a response in opposition to the Objection (the “Opposition,” ECF Doc. # 8157),3 and the *426Trustee filed a reply (the “Reply,” ECF Doc. # 8730).4 The Court held a hearing on the Objection on April 7, 2015 and took the matter under submission. This Opinion sustains the Objection to Sonson’s Claim.
I. BACKGROUND
On October 31, 2011 (the “Filing Date”), the Honorable Paul A. Engelmayer, United States District Court Judge for the Southern District of New York, entered an order commencing the liquidation of MFGI pursuant to the provisions of SIPA (the “MFGI Liquidation Order”). (Obj.1l 4.) On November 23, 2011, the Court entered the Order Granting Trustee’s Expedited Application Establishing Parallel Customer Claims Processes and Related Relief (the “Claims Process Order,” ECF Doc. # 423), which, among other things, (1) approved the procedures for filing, determining, and adjudicating claims, and (2) established January 31, 2012 as the bar date for filing securities and commodity futures customer claims in the SIPA Proceeding and June 2, 2012 as the date by which all claims must be received by the Trustee. {See id. ¶¶ 6-7.)
A. Sonson’s Account with MFGI
Sonson opened an investment trading account with MFGI through Lind-Wal-dock. (Obj.H 8.) On August 20, 2009, Son-son executed a customer agreement with MFGI (the “Customer Agreement,” Moris-seau Decl. Ex. 2). (Obj.H 8.) The Customer Agreement governed the relationship between the ■ parties and granted MFGI various rights, including, without limitation, the right to declare Sonson in default without declaring a margin call and the right to liquidate his account without affording him prior notice. (Id. (citing Mor-isseau Decl. Ex. 2 ¶ 5).)
According to the Trustee, there was a severe market disruption on May 6, 2010; a rapid decline in prices for many major exchange-listed stocks caused Sonson’s account to become undermargined and exposed MFGI to risk. (Id. ¶ 9.) Although not contractually obligated to do so, MFGI attempted to notify Sonson three times on May 6 to inform him that his account was below margin and that he needed to deposit $154,000 into his account to maintain his minimum margin balance. (Id.) MFGI was unable to speak with Sonson on each attempt to contact him. (See id.)
MFGI’s attempts to contact Sonson on May 6, 2010 are summarized as follows. First, Tracy Schafroth, an MFGI-regis-tered representative, telephoned Sonson’s home number and left a voice message informing him about the margin demand. (Id. (citing Morisseau Decl. Ex. 3 at 14).) Second, Schafroth subsequently called Sonson’s cell phone at approximately 1:25 p.m. (prevailing Central time) and left another voice message indicating that the margin call had been issued. (See id. (citing Morisseau Decl. Ex. 3 at 14); see Sonson Decl. ¶ 12.) Third, Schafroth sent Sonson an email stating the following: ‘Your account ... is on margin call for $154,000. Failure to meet this margin call may result in Lind-Waldock liquidating all or part of the positions in your account. You must notify the order desk in the event that you áre going to meet this call.” (Id. (citing Morisseau Decl. Ex. 4).) After boarding a flight from Boston to Charlotte scheduled to depart at 1:45 p.m. (prevailing Central time), Sonson listened to the cell phone voice message left by Schafroth a few minutes after it was made. (See Sonson Decl. ¶¶ 11, 15.) Despite landing in Charlotte before the close of market on May 6, 2010, Sonson waited until after the *427market closed to contact MFGI. (See id. ¶ 20.)
The Trustee asserts that Sonson’s account was overdrawn within BO minutes from the time Schafroth left Sonson the initial voice message. (Obj-¶ 10.) Sonson failed to contact MFGI, and MFGI was forced to cover Sonson’s debit to protect itself. (Id.) Accordingly, MFGI began liquidating Sonson’s account. (Id.) By the following day, Sonson’s customer account was fully liquidated and had a debit balance in the amount of $51,093.46. (Id.) According to the Trustee, the Customer Agreement provided that Sonson was “unconditionally obligated” to pay MFGI the amount of any debit balance in his account regardless of how it was incurred. (Id. (citing Morisseau Deck Ex. 2 ¶ 5).)
MFGI demanded that Sonson pay the debit balance, but Sonson refused to pay. (Id. ¶ 11.) Sonson contends that MFGI improperly liquidated his account. (Id.) Rather than pay MFGI the debit balance, on June 22, 2010, Sonson commenced a lawsuit (the “Prepetition Litigation”) against MFGI in the United States District Court for the Northern District of Illinois (the “District Court”) seeking $284,543 in damages and asserting causes of action for breach of contract, breach of the fiduciary duty of care, and misrepresentations in violation of the CEA. (Id.) MFGI counterclaimed for breach of contract alleging that Sonson failed to pay MFGI the debit balance as well as fees and costs pursuant to the terms of the Customer Agreement. (Id.) The Prepetition Litigation was stayed by entry of the MFGI Liquidation Order.5 (Id.) Sonson has not sought relief from the automatic stay. (Id.)
B. The Claim
On March 30, 2012, Sonson submitted his Claim seeking approximately $545,000. (Id. ¶ 12.) Sonson asserts that the damage award of $284,543 that he sought in the Prepetition Litigation was a minimum amount, and the amount he seeks in his Claim is based on a hypothetical valuation of his MFGI account based on similar positions he held at Tradestation Securities (“Tradestation”). (Id. (citing Morisseau Decl. Ex. 8).)
C. The Objection
The Trustee argues that section 502(d) of the Bankruptcy Code requires the disal-lowance of any claim from a claimant from which property is recoverable unless the claimant pays the amount for which it is liable. (Id. ¶ 14 (citing 11 U.S.C. § 502(d)).) According to the Trustee, the debit balance of Sonson’s account, which has a fair and reasonable value of approximately $51,093.46, constitutes estate property subject to turnover pursuant to SIPA section 78fff(b) and section 542 of the Bankruptcy Code. (Id.) The Trustee asserts that Sonson has refused to turn over any portion of this property to MFGI or otherwise agree to a consensual resolution of the debit balance. (Id. ¶ 15.) Accordingly, the Trustee argues that Sonson’s Claim should be disallowed unless and until he has paid or turned over this property to the Trustee. (Id.)
D. The Opposition
Sonson asserts four arguments in his Opposition. First, Sonson argues that the Customer Agreement incorporates federal law, regulations, and market practices, and MFGI’s conduct did not meet what was required under federal law and market *428custom. (See Opp. at 2-3.) Second, Sonson argues that he was entitled to address the margin call by the close of trading on May 6, 2010, as was understood by Sonson and Schafroth. (See id. at 7-8.) Sonson also asserts that the Customer Agreement incorporates a reasonable notice requirement, and MFGI did not provide Sonson with reasonable notice before liquidating the positions in his account. (See id. at 8.) Third, Sonson disputes that his account was in debit when liquidated by MFGI, arguing that “no reliable intraday valuation of an account holding such positions could be made, and certainly not on the day in question.” (Id. at 9.) Sonson claims he held positions similar to those in his MFGI account in two other accounts with Tradestation, actual margin calls were not received from Tradestation until the morning of May 7, 2010, and those margin calls were quickly met. (Id.) Sonson contends that the indiscriminate manner in which MFGI liquidated his account led to the disputed deficit, rather than his actions or inactions. (See id. at 10.) Finally, Sonson argues that he is not obligated to pay the disputed deficit as a condition to maintaining his Claim. (Id.) According to Sonson, the Trustee must first obtain a determination that Sonson owes money to the estate before the Claim may be disallowed under Bankruptcy Code section 502(d). (See id. at 10-18.)
E. The Reply
According to the Trustee, the material facts regarding Sonson’s Claim are not in dispute. (Reply ¶2.) On May 6, 2010, many financial markets experienced an extremely rapid decline later referred to as the “flash crash.” (Id.) As a result of the rapid decline in the value of Sonson’s positions, MFGI determined that Sonson’s account had become undermargined, resulting in Schafroth (1) leaving a voice message on Sonson’s home phone; (2) leaving a voice message on Sonson’s cell phone, indicating that Sonson’s account was on margin call and that he had until the end of the day to meet that margin call; and (3) sending Sonson an email regarding the margin call. (See id.) According to the Trustee, Sonson admits that he received the voice message left on his cell phone before the close of market on May 6, 2010. (Id.) Despite knowing that his account was on margin call, Son-son did not respond to MFGI’s attempts to contact him or otherwise indicate that he would meet the margin call. (Id.) Rather, Sonson boarded an airplane, leaving MFGI unable to reach him. (Id.) As the markets continued to decline on May 6, 2010, MFGI determined that Sonson’s account was in deficit and exercised its contractual right to limit potential losses. (Id.)
First, the Trustee argues that MFGI had the right to liquidate Sonson’s account without notice for being undermargined. (Id. ¶ 4.) The Trustee argues that neither Illinois nor federal law impose reasonable notice requirements on FCMs, and the Chicago Board of Trade (“CBOT”) and Chicago Mercantile Exchange (“CME”) “rules cited by ... Sonson exist to protect the broker from claims that it should have liquidated an account sooner, not to void an FCM’s contractual right to liquidate undermargined accounts without notice.” (Id. (citations omitted).) On the other hand, Sonson did have a requirement not only to meet the margin call, but also to notify MFGI that he would meet the margin call. (Id. ¶ 6.) Despite his awareness of highly irregular market behavior on May 6, 2010, Sonson did not promptly inform MFGI of his intention to meet the margin call. (See id.)
Second, the Trustee contends that Son-son’s argument that his account was not in debit when it was liquidated fails “because MFGI had an absolute right to liquidate [ ] *429Sonson’s account when it determines, in its sole discretion, that [] Sonson’s account was undermargined or in debit.” (Id. ¶ 7 (citing Morisseau Decl. Ex. 2 ¶ 5).) The Trustee argues that Sonson offers no legal argument to support his contention that the account must be in deficit as opposed to at risk of a deficit. (Id.) Additionally, Sonson cannot deny that his account was actually in deficit because it “was actually liquidated and resulted in a $50,000 debit, and that liquidation provided, by definition, the actual price the market was willing to pay for those options at the time of liquidation.” (Id. ¶ 8.) Furthermore, under the Customer Agreement, MFGI had the sole discretion to determine the manner of liquidation, and liquidating Sonson’s positions at the going market price was commercially reasonable. (Id.)
Third, the Trustee argues that Sonson’s liability for the deficit is unconditional and must be paid to MFGI to maintain his Claim. (See id. ¶ 9.) According to the Trustee, “[d]espite Sonson’s contentions to the contrary, this Court can make a determination of Sonson’s debt to the MFGI estate in the context of this claim objection, without the need for a separate proceeding to determine Sonson’s liability.” (Id. (citations omitted).) Finally, the Trustee contends that the automatic stay should not be lifted if the Court were to overrule the Objection because Sonson has not met his burden to show cause why the automatic stay should be lifted. (Id. ¶ 10.)
II. DISCUSSION
A. Section 502(d) of the Bankruptcy Code
Section 502(d) of the Bankruptcy Code provides in relevant part:
[T]he court shall disallow any claim of any entity from which property is recoverable under section 542 ... of this title, unless such entity ... has ... turned over any such property, for which such entity ... is liable....
11 U.S.C. § 502(d).6 Under section 502(d), a bankruptcy court is required “to disallow the claim of any claimant who is withholding property of the estate which may be recovered under § 542(b) of the Code.” Seta Corp. of Boca, Inc. v. Atl. Computer Sys. (In re Atl. Computer Sys.), 173 B.R. 858, 861 (S.D.N.Y.1994). The purpose of section 502(d) is to prevent entities that hold property subject to turnover or avoidance from receiving a distribution of estate assets until such property is first returned to the estate. See In re Mid Atl. Fund, Inc., 60 B.R. 604, 609 (Bankr.S.D.N.Y.1986).
A claim should not be disallowed pursuant to section 502(d) without the court initially determining whether the claimant is required to turn over property of the estate. See Atl. Computer Sys., 173 B.R. at 862 (finding that section 502(d) requires “some sort of determination of the claimant’s liability before its claims are disallowed, and in the event of an adverse determination, the provision of some opportunity to turn over the property”); In re S. Air Transp., Inc., 294 B.R. 293, 297 (Bankr.S.D.Ohio 2003) (“When raising an objection to a claim based upon the ground that claimant has failed to surrender the alleged voidable transfer, the claim can neither be allowed nor disallowed until the preference matter is adjudicated.” (citations and internal quotation marks omitted)); 4 CollieR on Bankruptcy ¶ 502.05[2][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014) (“[A] claim may be disallowed at least temporarily and for certain purposes, subject to reconsideration, simply upon the allegation of an avoidable transfer.”). According to Son-son, his Claim cannot be disallowed under *430section 502(d) until MFGI first obtains a judicial determination that he indeed is required to turn over estate property. (See Opp. at 11.) Sonson essentially argues disallowance of his Claim is premature because MFGI has not yet obtained such a determination. (See id. at 11-12.) The Trustee agrees that the Court must determine Sonson’s liability to MFGI in resolving the Objection to his Claim, but argues “the Trustee does not need to obtain a separate determination of [] Son-son’s liability ... prior to objecting to his [Cjlaim pursuant to section 502(d).” (Reply ¶ 9.) The Trustee cites to In re Metiom, Inc., 301 B.R. 634 (Bankr.S.D.N.Y.2003) for the proposition that a court may determine a claimant’s liability to the estate on the merits in connection with a claim objection made pursuant to section 502(d). (Id. (citing Metiom, 301 B.R. at 641).)
In Metiom, the trustee filed an objection to a claim, asserting among other things that the holder of such claim received an avoidable preference under section 547 of the Bankruptcy Code, and therefore, the claim must be' disallowed pursuant to Bankruptcy Code section 502(d) until the claimant returned the amount of the preference payment to the estate. See Metiom, 301 B.R. at 636-37. The claimant opposed the claim objection on several grounds, including that the claim objection invoked rights involving sections of the Bankruptcy Code that must be resolved through an adversary proceeding, but the trustee did not file an adversary proceeding. See id. at 639. The court held that the trustee’s failure to commence an adversary proceeding was not fatal, observing that Rule 3007 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) provides that “[i]f an objection to a claim is joined with a demand for relief of the kind specified in [Bankruptcy] Rule 7001, it becomes an adversary proceeding.” Id. (quoting Fed. R. BankR. P. 3007).
However, Bankruptcy Rule 3007, which governs claims objections, was amended after the Metiom decision was issued. See In re Donson, 434 B.R. 471, 474 (Bankr.S.D.Tex.2010) (“In 2007, [Bankruptcy Rule] 3007 was substantially amended.”). Bankruptcy Rule 3007 formerly provided that a claim objection may be joined with an adversary proceeding. See Metiom, 301 B.R. at 639 (citing Fed. R. Bankr. P. 3007). However, Bankruptcy Rule 3007(b) now provides that “a party in interest shall not include a demand for relief of a kind specified in [Bankruptcy] Rule 7001 in an objection to the allowance of a claim, but may include the objection in an adversary proceeding.” Fed. R. Bankr. P. 3007(b) (emphasis added). The advisory committee notes to the 2007 amendments to Bankruptcy Rule 3007 explain “the amendment prohibits a party in interest from including in a claim objection a request for relief that requires an adversary proceeding.” Id. advisory committee note. Accordingly, Bankruptcy Rule 3007 no longer permits a claim objection to automatically convert to an adversary proceeding when the claim objection is joined with a demand for relief that must be brought by adversary proceeding, as the Metiom court recognized under Bankruptcy Rule 3007 before the 2007’ amendments went into effect. See Pu v. Grubin (In re Food Mgmt. Grp., LLC), 484 B.R. 574, 583 (S.D.N.Y.2012) (observing that “[subsequent amendments to [Bankruptcy Rule 3007] appear to disallow this kind of automatic conversion” (citing Fed. R. Bankr. P. 3007(b); id. advisory committee note)).
Therefore, if the Trustee’s Objection seeks relief of the type that must be sought in an adversary proceeding, such relief cannot be sought in a claim objection and must instead be pursued in an adversary proceeding. See Donson, 434 B.R. at 474-75 (overruling claim objection on the ground that the objection violated Bank*431ruptcy Rule 3007(b) by seeking relief that must be pursued in an adversary proceeding).
B. The Objection Does Not Seek Affirmative Relief that Must Be Pursued in an Adversary Proceeding
The Trustee’s Objection to Sonson’s Claim is based on the Trustee’s allegation that Sonson’s account deficit constitutes estate property subject to turnover under section 542(a) of the Bankruptcy Code. (See Obj. ¶ 14.) Section 542(a) provides in relevant part:
[A]n entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
11 U.S.C. § 542(a).
Bankruptcy Rule 7001 identifies matters that constitute adversary proceedings governed by the rules of Part VII of the Bankruptcy Rules. See Fed. R. Banks. P. 7001. Bankruptcy Rule 7001(1) specifically provides that an adversary proceeding includes “a proceeding to recover money or property, other than a proceeding to compel the debtor to deliver property to the trustee, or a proceeding under § 554(b) or § 725 of the Code, Rule 2017, or Rule 6002.” Id. 7001(1) (emphasis added). Accordingly, an action to compel turnover of estate property pursuant to section 542(a) constitutes an adversary proceeding under Bankruptcy Rule 7001(1). In re Perkins, 902 F.2d 1254, 1258 (7th Cir.1990) (“A turnover action is an adversary proceeding which must be commenced by a properly filed and served complaint.” (citations omitted)); see also Camall Co. v. Steadfast Ins. Co. (In re Camall Co.), 16 Fed.Appx. 403, 407-08 (6th Cir.2001) (unpublished decision) (affirming bankruptcy court’s decision to deny trustee’s request for turnover where it was made by motion rather than adversary proceeding).
However, the Trustee is not seeking affirmative relief under section 542(a) of the Bankruptcy Code. (Hr’g Tr. 15:10-14, 21-25.) Rather, the Trustee is solely seeking a determination that Sonson’s account with MFGI is in deficit for purposes of temporarily disallowing his claim under section 502(d). (See id.) Sonson agrees that a determination that his account was in deficit “would constitute required judicial determination” for such purpose. (See id. 18:8 (“I agree that the existence of a deficiency can be determined in a claim objection.”).) Therefore, the Court concludes that the Objection need not be overruled on the basis that it improperly seeks relief that must be pursued in an adversary proceeding.
C. The Trustee Has Made a Prima Facie Showing that Sonson’s Debit Account Balance Is Subject to Turnover
According to the Trustee, Sonson’s account has a debit balance in the approximate amount of $51,093.46, which constitutes estate property.7 (See Obj. ¶¶ 14-15.) This debit balance “is in the possession and under the control of [] Sonson and is of more than inconsequential value to the MFGI estate.” (Id. ¶ 15.) According to the Trustee, while the exact amount *432of Sonson’s debit balance is in dispute, the Court can determine as a matter of law that Sonson’s account has a debit balance that is owed to the MFGI estate. (See Hr’g Tr. 10:19-22.)
Sonson agrees that there are no disputed issues of fact that need to be resolved by the Court in order to determine whether his account has a debit balance. (See id. 24:20-25:14.) However, Sonson argues that MFGI had no right to liquidate his account before the market closed on May 6, 2010 because he was not provided sufficient time to meet MFGI’s margin call. {See id. 20:18-21:17.) Sonson asserts that he was told that he had until the close of market to meet MFGI’s margin call, but MFGI had effectively liquidated his entire account approximately 30 minutes later, with the exception of one position that was liquidated the next day. (See id. 21:17-24:19.) Additionally, Sonson contends that “the inconsistent and haphazard way in which [MFGI] liquidated the positions in his account, after barring him from trading in it, created the very deficit about which it now complains.” (Opp. at 10.)
Whether the Trustee has made a prima facie showing that the debit balance of Sonson’s account is subject to turnover for purposes of ruling on the Objection requires the Court to resolve whether this debit balance constitutes estate property, an issue with binary outcomes. Either (1) Sonson is liable to MFGI for breach of the Customer Agreement by failing to pay the debit balance of his account, or (2) MFGI is liable to Sonson for breach of the Customer Agreement by improperly liquidating the positions in his account. As discussed below, the Court concludes that Sonson is liable to MFGI in the amount of the debit balance of his account. Additionally, the Court holds that the Trustee has met his burden of making a prima facie showing that this debit balance is subject to turnover pursuant to section 542 of the Bankruptcy Code.
1. MFGI Did Not Breach the Customer Agreement by Liquidating Sonson’s Account Without Notice
Paragraph 3 of the Customer Agreement imposed on Sonson the obligation to maintain a certain amount of margin on deposit (the “Margin Provision”). {See Morisseau Decl. Ex. 2 ¶ 3.) The Margin Provision provided in relevant part:
You agree to maintain, without demand from us, such margin, cash or other acceptable collateral as we in our discretion require from time to time and you agree to pay on demand any debit balances in your account. You will make deposits of such margin or collateral immediately upon our request.
{Id.) Paragraph 5 of the Customer Agreement sets forth MFGI’s ability to declare a default and the remedies available upon an event of default. {See id. ¶ 5.) Specifically, paragraph 5 of the Customer Agreement provided the following with respect to MFGI declaring a default (the “Default Provision”):
Should we deem it desirable for our protection, or should we feel insecure, or should you be in breach of or violate any of the terms of this Agreement, we are authorized to declare {and without the necessity of a call for additional capital) you in default under this and any other agreement you may then have with us or our affiliates, whether heretofore or hereafter entered into.
(Id. (emphasis added).) Paragraph 5 further afforded MFGI the following remedies upon default (the “Remedy Provision”):
In the event of default, each of us and our affiliates reserves the right to sell, without prior notice to you, any and all property in which you have an interest *433held by or through us or our affiliates ... after which you shall be liable to us, for any remaining deficiencies, losses, costs or expenses sustained by us in connection therewith. Such ... sales may be effected publicly or privately without notice or advertisement in such manner as we may in our sole discretion determine.
(Id. (emphasis added).)
While the Default Provision broadly authorized MFGI to declare Sonson in default (see id.), the Customer Agreement did not indicate whether MFGI was required to notify Sonson that he was in default before exercising its remedies upon default. The plain language of the Default Provision provided that MFGI was authorized to declare Sonson in default “[s]hould [MFGI] deem it desirable for [its] protection, ... should [MFGI] feel insecure, or should [Sonson] be in breach of or violate any of the terms of th[e] [Customer] Agreement....” (Id.) Additionally, the Default Provision made clear that MFGI may declare Sonson in default without first making a margin call. (See id. (setting forth that default may be declared “without the necessity of a call for additional capital”).) The Customer Agreement required nothing further for MFGI to declare Sonson in default.
It is undisputed that MFGI attempted to contact Sonson three times on May 6, 2010 to advise him that his account was below margin, including by Schafroth sending Sonson an email indicating:
Your account [redacted] is on margin call for $154,000. Failure to meet this margin call may result in Lind-Waldock liquidating all or part of the positions in your account. You must notify the order desk in the event that you are going to meet this call.
(Morisseau Decl. Ex. 4.) Sonson also admits that he learned of the margin call by listening to a voice message left by MFGI before his account was liquidated. (See Opp. Decl. ¶¶ 13-15, 19.) To the extent that the Customer Agreement required MFGI to communicate to Sonson that he was in default on May 6, 2010, the Court concludes that MFGI satisfied this requirement. By notifying Sonson of the margin call, MFGI communicated that his account was undermargined and in violation of the Margin Provision. (See id. Ex. 2 ¶ 3.) Additionally, MFGI notified Sonson that his failure to meet this margin call may result in the liquidation of the positions in his account. (See id. Ex. 4.)
The Remedy Provision also clearly provided that, upon default, MFGI may liquidate Sonson’s account positions without notice. (See id. Ex. 2 ¶ 5.) Once MFGI declared Sonson in default, it was authorized to liquidate positions in Sonson’s account “without prior notice” and in the manner that MFGI determined in its “sole discretion.” (Id.) Under the plain language of the Remedy Provision, MFGI was not required to provide Sonson with notice before liquidating the positions in his account.
Additionally, neither Illinois nor federal law requires an FCM to provide a customer prior demand or notice before liquidating an undermargined account.8 See ADM Investor Servs., Inc. v. Ramsay, 558 F.Supp.2d 855, 861 (N.D.Ill.2008) (applying Illinois law and holding that FCM was authorized to liquidate undermargined account without notice as a matter of law); First Am. Disc. Corp. v. Jacobs, 324 Ill. *434App.3d 997, 258 Ill.Dec. 291, 756 N.E.2d 273, 284 (2001) (holding that liquidation provision in FCM customer agreement “is enforceable, in that no demand or notice is required on the part of a brokerage house prior to liquidating an under-margined account”); see also Mohammed, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,229 (Jan. 27, 1992) (“Nothing in the [CEA] or regulations requires a futures commission merchant to obtain the consent of a customer to liquidate positions on an undermargined account.”); but see Nanlawala v. Jack Carl Assocs., Inc., 669 F.Supp. 204, 210 (N.D.Ill.1987) (finding that exchange rules governing FCM customer agreement require customer be afforded reasonable time to comply with margin call before FCM may liquidate account).
Sonson argues that the Customer Agreement incorporates a requirement that he be afforded reasonable time to comply with a margin call and reasonable notice of liquidation, relying on Nanlawala v. Jack Carl Associates, Inc., 669 F.Supp. 204 (N.D.Ill.1987). (See Opp. at 6.) In Nanlawala, the plaintiffs asserted a breach of contract claim against an FCM and two of its employees, arguing that the defendants breached the applicable eus-tomer agreement by failing to afford the plaintiffs reasonable time to meet a margin call before liquidating their undermargined account. 669 F.Supp. at 209. The court denied the parties’ cross-motions for summary judgment, holding that whether the defendants provided the plaintiffs a reasonable amount of time to comply with the margin call was a genuine issue of material fact. See id. at 210. In reaching its holding, the court found that the applicable customer agreement incorporated CBOT Rule 430.00 and CME Rule 827(D), both of which “establish a reasonableness standard for the time accorded a customer to comply with a margin call....”9 Id. Specifically, the court held that both CBOT Rule 430.00 and CME Rule 827(D) require an FCM to provide a customer a reasonable amount of time to meet a margin call before liquidating the customer’s account. See'id.
In Jacobs, however, the Appellate Court of Illinois reversed the trial court’s finding that the plaintiffs liquidation of the defendants’ account constituted unauthorized trading and a breach of fiduciary duty, holding that the customer agreement’s provision authorizing liquidation without notice was enforceable. 258 Ill.Dec. 291, 756 N.E.2d at 284. In reaching this hold-*435mg, the court relied on Moss v. J.C. Bradford & Co., 337 N.C. 315, 446 S.E.2d 799 (1994), a decision of the Supreme Court of North Carolina, and Mohammed, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,229 (1992), an administrative law decision of the Commodity Futures Trading Commission, observing that “both Moss and Mohammed enunciate the principle that under the federal regulatory scheme, a broker is permitted to liquidate an under-margined account without prior notice.” See Jacobs, 258 Ill.Dec. 291,756 N.E.2d at 281. The court rejected the defendants’ argument that CME Rule 827 requires a broker to issue a margin call before liquidating a customer’s account,10 noting that such argument “was explicitly rejected by the court in Moss, which emphasized that ‘[r]ules of this sort governing margin calls and account liquidation are for the protection of the merchant and, ultimately, for the protection of the commodities exchange itself.’” Id. (quoting Moss, 446 S.E.2d at 806). “[A]s articulated in Moss, the broker may issue a margin call, but Rule 827 does not prohibit him from going a step further and liquidating the customer’s under-margined account without notice.” Id., 258 Ill.Dec. 291, 756 N.E.2d at 282.
While Illinois courts appear divided on whether FCM customer agreements import a “reasonable notice” requirement, the Court finds the reasoning of Jacobs persuasive. “As a good business practice, a futures commission merchant should make a diligent effort to notify a customer that additional margin money must be deposited to avoid liquidation.” Mohammed, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,229, at ¶ 25,229. However, “[n]othing in the [CEA] or regúla-tions requires a futures commission merchant to obtain the consent of a customer to liquidate positions on an undermargined account.” Id. The regulations applicable to margin are designed to protect FCMs, not customers. See Capital Options Invs., Inc. v. Goldberg Bros. Commodities, Inc., 958 F.2d 186, 190 (7th Cir.1992) (“Margins are accorded a special status in the regulatory scheme of the [CEA] so that futures commission agents are able to assure their own financial integrity, which, in turn, contributes to the financial integrity of the entire marketplace.” (citing Baker, [1980— 1982 Transfer Binder], Comm. Fut. L. Rep. (CCH) ¶ 21,167, at ¶ 24,772 (Jan. 27, 1981))); ; see also ADM Investor Servs., Inc. v. Collins, 515 F.3d 753, 756 (7th Cir.2008) (“[M]argin requirements in futures markets are not designed to protect investors ... from adverse price movements. Margin protects counterparties from investors who may be unwilling or unable to keep their promises.”); Friedman, [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,307, 1981 CFTC LEXIS 83, at *4-5 (Nov. 13, 1981) (“Margin is a security deposit to insure that futures commission merchants have adequate customer funds to settle open positions and is required by brokerage houses and exchanges to assure their own financial integrity and the financial integrity of the entire market place.” (citations omitted)). Because the regulatory scheme governing margin calls and liquidation of customer accounts is designed to protect FCMs from losses resulting from under-margined accounts, the Court concludes that this regulatory scheme does not require an FCM to provide reasonable notice, or any notice, to a customer before *436liquidating an undermargined account. See Moss, 446 S.E.2d at 807.
Additionally, MFGI did not waive its right to liquidate Sonson’s account without notice once Sonson was in default, notwithstanding that Schafroth communicated to Sonson that his account was on margin call with the understanding that Sonson could meet the call by the market close on May 6, 2010. (See Opp. at 7-8.) Paragraph 10 of the Customer Agreement provides:
Neither our failure to insist at any time upon strict compliance with this Agreement or with any of the terms hereof nor any continued course of such conduct on our part shall constitute or be considered a waiver by us of any of our rights or privileges hereunder.
(Morisseau Decl. Ex. 2 ¶ 10.) Assuming arguendo that MFGI did communicate to Sonson that he had until the close of market to meet the margin call, the Customer Agreement explicitly provided that this statement did not waive or limit MFGI’s right to ultimately liquidate Sonson’s account without notice after failing to receive assurance that Sonson would be able to meet such demand. Cf. Prudential-Bache Sec., Inc. v. Stricklin, 890 F.2d 704, 707 (4th Cir.1989) (holding that customer agreement allowing liquidation without notice authorized broker to liquidate account approximately one hour after issuing margin call, notwithstanding that broker ordinarily provided customers 24 hours to meet margin calls, where customer agreement stated that no “prior course of conduct or dealings” would invalidate customer’s “waiver of his right to demand any notice of liquidation”). Accordingly, the Court concludes MFGI had the right to liquidate Sonson’s undermargined account without notice, and -such right was not waived or limited by MFGI’s margin call.
2. MFGI Did Not Breach the Customer Agreement by Liquidating Sonson’s Account in the Manner Performed
Sonson argues that the debit balance in his account resulted from “the inconsistent and haphazard way” that MFGI liquidated the positions in his account. (Opp. at 10.) According to Sonson, MFGI could not make a reliable valuation of his account on May 6, 2010 because substantially all of the positions in his account were relatively illiquid. (See id.) Because no reliable in-traday valuation of his account could be made on the day in question, he disputes that his account went “into debit.” (Id. at 9-10.) The Trustee asserts that Sonson’s positions were actually liquidated at the price the market was willing to pay for such positions at the time, resulting in a debit balance of approximately $50,000. (Reply ¶ 8.) While the value of Sonson’s positions may have been theoretical before liquidation, the market price for the positions at the time of liquidation provided the actual value for such positions. (Id.) According to the Trustee, the Customer Agreement authorized MFGI to determine the manner of liquidation “in its sole discretion.” (Id. ¶ 8 n.9 (citing Morisseau Decl. Ex. 2 ¶ 5).) Moreover, it is commercially reasonable to liquidate an account’s positions at the market price. (Id.)
The plain language of the Customer Agreement imposed no limitations on the manner in which MFGI liquidated the positions in Sonson’s account. The Remedy Provision of the Customer Agreement authorized MFGI to liquidate Sonson’s account positions “publicly or privately without notice or advertisement in such manner as we may in our sole discretion determine.” (Morisseau Decl. Ex. 2 ¶ 5.) Additionally, neither Illinois nor federal law requires an FCM to liquidate a customer’s account in any particular manner. Indeed courts do not require FCMs to *437adopt “less drastic alternatives” than liquidation. See Capital Options Invs., Inc. v. Goldberg Bros. Commodities, Inc., No. 88 C 2073(JFG), 1990 WL 180583, at *6 (N.D.Ill. Nov. 5, 1990) (“We are not equipped to second-guess, especially with the benefit of hindsight, the business judgments of professional traders and brokers regarding the risks associated with any given position or the volatility and direction of any future market movements.”). Nor do courts require FCMs to liquidate a customer’s account in the manner most beneficial to the customer. See Morgan Stanley & Co. v. Peak Ridge Master SPC Ltd., 930 F.Supp.2d 532, 541 (S.D.N.Y.2013) (“Morgan Stanley is not required ... to choose the most beneficial trading strategy for Peak Ridge, as the right to liquidate is for the benefit of Morgan Stanley in protecting itself against high-risk positions.” (citations omitted)). Additionally, CME Rule 930.K, which governs the liquidation of accounts, provides:
If at any time there is a liquidating deficit in an account in which security futures are held, the clearing member shall take steps to liquidate positions in the account promptly and in an orderly manner.
CME Rule 930.K.2, available at http:// www.emegroup.com/rulebook/CME/I/9/9. pdf.
Based on MFGI’s broad authority under the Customer Agreement to liquidate Son-son’s account in the manner of its choosing, and the absence of any limitation on such authority under case law and the applicable exchange rules, the Court concludes that MFGI’s liquidation of Sonson’s account did not breach the Customer Agreement. MFGI promptly liquidated substantially all of Sonson’s account positions before the May 6, 2010 close of market. (See Morisseau Decl. Ex. 6 at 19-20.) A single remaining position was liquidated the next day because there was no bid offer for such position in the only available market open on May 6, 2010. (See id. at 20-21.)
3. The Trustee Has Adequately Alleged that Sonson’s Debit Account Balance Is Subject to Turnover
The Customer Account provides:
You are unconditionally obligated to pay to us the amount of any debit balance in your account, however incurred, at the lesser of the highest rate permitted by applicable law or two percent above the current prime rate as announced from time to time by the banking institutions with which we normally do' business.
(Morisseau Decl. Ex. 2 ¶ 5.) After Sonson’s account was liquidated, his account had a debit balance of $51,093.46. (See Moris-seau Decl. Ex. 9 ¶ 7.) While Sonson argues that the debit balance is the result of MFGI’s allegedly improper manner of liquidating his positions (see Opp. at 10), he does not dispute that the account currently has a debit balance (see Hr’g Tr. 24:25-25:1 (“I don’t believe there are any disputed issues of fact....”)). As set forth above, MFGI’s liquidation of Sonson’s account did not constitute a breach of the Customer Agreement. Accordingly, the Court concludes that Sonson is liable to MFGI for the debit balance.
Additionally, the Court finds that the Trustee has adequately alleged that the debit balance of Sonson’s account is subject to turnover under section 542 of the Bankruptcy Code. Section 542(b) provides:
Except as provided in subsection (c) or (d) of this section, an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to .the extent that such debt may be offset under section 553 of this title against a claim against the debtor.
11 U.S.C. § 542(b). Because the Trustee has established that Sonson is uncondition*438ally liable to MFGI for the debit balance of his account, this debt constitutes estate property under section 541(a) of the Bankruptcy Code. See 11 U.S.C. § 541(a). Section 541(a) of the Bankruptcy Code provides in relevant part:
The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
Id. § 541(a)(1). “This definition of property has been given ‘the broadest possible interpretation’.... ” In re Nemko, Inc., 143 B.R. 980, 985 (Bankr.E.D.N.Y.1992) (quoting Brown v. Dellinger (In re Brown), 734 F.2d 119, 123 (2d Cir.1984)). “Such property includes ‘tangible and intangible property’ as well as ‘causes of action.’ ” Notz v. Tate (In re Chi. Disc. Commodity Brokers, Inc.), 58 B.R. 619, 623 (Bankr.N.D.Ill.1985) (citation omitted), affd in part, rev’d in part on other grounds, No. 86 C 4036(WTH), 1987 WL 5256 (N.D.Ill. Jan. 5, 1987). The debit balance of Sonson’s customer account with MFGI constitutes a debt owed to MFGI pursuant to a prepetition contract.
Additionally, because the Trustee has established that Sonson is unconditionally obligated to pay MFGI the amount of this debit balance under the Customer Agreement, the debt is “matured” within the meaning of section 542(b) of the Bankruptcy Code. See Sec. Investor Prot. Corp. v. Rossi (In re Cambridge Capital, LLC), 331 B.R. 47, 57 (Bankr.E.D.N.Y.2005) (“Matured [debt] refers to debts that are presently payable, as opposed to those that are contingent and become payable only upon the occurrence of a certain act or event.” (alterations in original) (citation and internal quotation marks omitted)); see also Tese-Milner v. TPAC, LLC (In re Ticket-planet.com), 313 B.R. 46, 67 (Bankr.S.D.N.Y.2004) (“In order for a claim to be considered a matured debt, it must be specific in its terms as to amount due and date payable.” (citing Shea & Gould v. Red Apple Cos. (In re Shea & Gould), 198 B.R. 861, 867 (Bankr.S.D.N.Y.1996)); Kenston Mgmt. Co. v. Lisa Realty Co. (In re Kenston Mgmt. Co.), 137 B.R. 100, 108 (Bankr.E.D.N.Y.1992) (“[F]or an action to be a turnover proceeding, it is not relevant that [all] the defendants] dispute the existence of the debt by, perhaps, denying the complaint’s allegations, as long as these allegations state the existence of a mature debt.” (alterations in original) (citation and internal quotation marks omitted)).
Based on the foregoing, the Court concludes that the Trustee has made a prima facie. showing that the debit balance of Sonson’s account is subject to turnover pursuant to section 542 of the Bankruptcy Code.11 Accordingly, the Court SUSTAINS the Objection to Sonson’s Claim under section 502(d) of the Bankruptcy Code.
III. CONCLUSION
For all of the foregoing reasons, the Objection is SUSTAINED and the Sonson Claim is hereby DISALLOWED pursuant to section 502(d) of the Bankruptcy Code.
IT IS SO ORDERED.
.MFGI is a dually registered futures commission merchant ("FCM”) and broker-dealer. See SIPA Liquidation of MF Global, Inc., U.S. Sec. & Exch Comm’n, http://www.sec.gov/news/ press/2011/secinfo-mfglobal.htm (last modified Nov. 1, 2011).
. The Objection is supported by the declaration of Nancy Morisseau (the "Morisseau Declaration,” ECF Doc. # 8108).
. The Opposition is supported by the Declaration of Charles V. Sonson (the "Sonson Declaration,” ECF Doc. # 8156).
. The Trustee filed an appendix to the Reply (the "Reply Appendix,” ECF Doc. #8731).
. At the time the Prepetition Litigation was stayed, the parties had litigated the action for approximately 15 months and had briefed cross motions for summary judgment. (See Hr’g Tr. 19:14-20, Apr. 7, 2015, ECF Doc. # 8752.)
. Section 502(d) also applies to claims held by transferees of avoidable transfers. See id.
. The Trustee also asserts that Sonson owes MFGI accrued interest in the amount of $3,442.42 and $24,064.06 in fees and costs incurred by MFGI. (Id. ¶ 14 n.4 (citing Moris-seau Decl. Ex. 9).)
. The Customer Agreement's governing law provision provides that the Customer Agreement "shall be governed by, and the rights and liabilities of the parties shall be determined in accordance with, the laws of the State of Illinois, without regard to any of its conflicts of laws, principles or rules, and by the laws of the United States.” (Id. ¶ 29.A.)
. Chicago Board of Trade Rule 430.00 provides:
Deposits by customers — A member acting as commission merchant for a customer (member or nonmember) may require from such customer a deposit, as indemnity against liability, and subsequent deposits to the extent of any adverse fluctuations in the market price. Such deposits must be made with the commission merchant within a reasonable time after demand, and in the absence of unusual circumstances, one hour shall be deemed a reasonable time. The failure of the customer to make such deposit within such time, shall entitle, but shall not- obligate, the commission merchant to close out the trades of the defaulting customer. ...
Chicago Mercantile Exchange Rule 827(D) provides:
The clearing member may call for additional margins at his discretion, but whenever a customer's margins are depleted below the minimum amount required, the clearing member must call for such additional margins as will bring the account up to initial margin requirements, and if within a reasonable time the customer fails to comply with such demand (the clearing member may deem one hour to be a reasonable time), the clearing member may close out the customer’s trades or sufficient contracts thereof to restore the customer’s account to required margin status.
Id. (emphasis added).
. The Jacobs court observed that "CME Rule 827 was replaced by portions of Rule 930 (particularly Rule 930.E and 930.K).... ” Id., 258 Ill.Dec. 291, 756 N.E.2d at 282 n. 2 (noting that the parties did not dispute that there is any “significant difference between Rule 827 and the relevant portions of Rule 930”).
. Although the Trustee also alleges facts supporting a turnover action under section 542(a) of the Bankruptcy .Code (see Obj. ¶¶ 14-15), the Trustee generally alleges that Sonson’s negative account balance is subject to turnover under section 542 and has adequately alleged facts supporting a turnover action under section 542(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498328/ | SIPA LIQUIDATION
(Substantively Consolidated)
MEMORANDUM DECISION REGARDING OMNIBUS MOTIONS TO DISMISS
STUART M. BERNSTEIN, United States Bankruptcy Judge:
-- Defendants in 233 adversary proceedings identified in an appendix to this opinion have moved pursuant to Rules 12(b)(1), (2) and (6) of the Federal Rules of Civil Procedure to dismiss complaints filed by Irving H. Picard (“Trustee”), as trustee for the substantively consolidated liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”) and the estate of Bernard L. Madoff.1 The complaints seek to recover fictitious profits allegedly withdrawn by the defendants from their BLMIS accounts. In addition, many non-moving defendants have stipulated with the Trustee to be bound by this decision.
The defendants in 128 adversary proceedings represented by the law firm Becker & Poliakoff LLP2 filed motions to dismiss (the “B & P Motions ”) supported by Defendants’ Omnibus Memorandum of Law in Support of Motions to Dismiss, dated Nov. 1, 2013 (“B & P Memo ”) (ECF Adv. P. No. 10-04292 Doc. # 36),3 and the Trustee and the Securities Investor Protection Corporation (“SIPC”) filed opposition.4 Prior to the return date of the B & P Motions, defense counsel representing former BLMIS customers in another 105 adversary proceedings involving common legal issues requested consolidation of the *447B & P Motions with their own pending motions to dismiss (“Non-B & P Motions,” and together with the B & P Motions, the “Motions ”).5 (See Letter, dated Feb. 6, 2014 (ECF Doc. ,# 5641).) The Court held a status conference on February 14, 2014 in response to the letter request and outlined a process whereby the Trustee and SIPC would respond to the Non-B & P Motions on an omnibus basis. The Trustee and SIPC filed their opposition,6 and following the completion of briefing, the Court heard argument on September 17, 2014.
The Motions raise many of the same issues, and those issues are dealt with on an omnibus basis. Issues specific to a particular defendant, such as insufficient service of process, lack of personal jurisdiction or defenses under state-specific non-claim statutes are not addressed in this decision, and will be heard separately upon a scheduling request by the parties. (See Order Scheduling Hearing on Becker & Poliakoff LLP Motions to Dismiss and Motions to Dismiss Listed on Appendix A to the Trustee’s February 20 Letter to the Court, as Amended, dated July 24, 2014 (ECF Doc. # 7513).) For the reasons that follow, the Motions are granted in part and denied in part, and the parties are directed to settle orders or submit consent orders in each adversary proceeding in accordance with this opinion.
BACKGROUND
The facts underlying the Ponzi scheme perpetrated by Bernard Madoff have been recounted in multiple reported opinions. See, e.g., SIPC v. Ida Fishman Revocable Trust (In re BLMIS), 773 F.3d 411, 415 (2d Cir.2014) (“Ida Fishman”), pet. for cert. pending, 83 U.S.L.W. 3746 (U.S. Mar. 17, 2015) (Nos.14-1128, 1129); Picard v. JPMorgan Chase & Co. (In re BLMIS), 721 F.3d 54, 58-59 (2d Cir.2013), cert. denied, — U.S. —, 134 S.Ct. 2895, 189 L.Ed.2d 832 (2014); SIPC v. BLMIS (In re BLMIS), 424 B.R. 122, 125-32 (Bankr.S.D.N.Y.2010), aff'd, 654 F.3d 229 (2d Cir. 2011), cert. denied, — U.S. —, 133 S.Ct. 24, 183 L.Ed.2d 675 (2012). The complaints allege the background in substantially the same language, and these facts will not be repeated except to the extent necessary in the body of this opinion. For present purposes, it is enough to say that the complaints allege that the defendants who received initial transfers from BLMIS withdrew more than they deposited, and are net winners. In the main, the Trustee seeks to avoid and recover these net winnings, or fictitious profits, from the initial transferees and the defendant subsequent transferees. In many cases, the Trustee also seeks to avoid obligations owed by BLMIS to the defendants.
The Trustee concedes that the defendants lacked knowledge of Madoff s Ponzi scheme. Accordingly, his claims to avoid transfers are limited to intentional fraudulent transfers made within two years of December 11, 2008 (the Filing Date) under 11 U.S.C. §§ 546(e) and 548(a)(1)(A). See Ida Fishman, 773 F.3d at 423. Subject to the grant of the Trustee’s petition for a writ of certiorari and reversal of the judg*448ment in Ida Fishman by the Supreme Court, all other claims to avoid transfers asserted by the Trustee are dismissed. The balance of the Discussion deals solely with intentional fraudulent transfers made within two years of the Filing Date (the “Two-Year Period”) and the subsequent transfers of those initial transfers. One portion also addresses the Trustee’s claims to avoid fraudulent obligations.
The Discussion is organized in a manner that corresponds to the various arguments raised by many or all of the defendants. The headings are intended to assist in the organization of the opinion and are descriptive of the particular argument.
DISCUSSION
A. Standing, Jurisdiction, Authority and Related Issues
1. The Trustee lacks Article III standing.
The Trustee is seeking to recover property that belonged to BLMIS customers, not BLMIS, at the time of each transfer. Many defendants contend that the Trustee has failed to demonstrate Article III standing because the BLMIS estate never had an interest in the customer property that Madoff transferred, and because in pari delicto bars his claims. The Court disagrees.
A SIPA trustee administers two distinct estates, a general estate consisting of the property of the estate of BLMIS as defined in 11 U.S.C. § 541(a) and an estate consisting of customer property. SIPC v. BLMIS, 499 B.R. 416, 420 (S.D.N.Y.2013) (“Antecedent Debt Decision ”) (“SIPA superimposes on the Bankruptcy Code a separate customer property estate that takes priority over the debtor’s general estate.”). “Customer property” includes “cash and securities (except customer name securities delivered to the customer) at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor, including property unlawfully converted, SIPA § 78111(4), and property recovered by the Trustee pursuant to SIPA § 78fff-2(c)(3), quoted below. If the customer property exceeds the customer property claims, the excess becomes part of the general estate. SIPA § 78fff-2(c)(l) (Any customer property remaining after allocation in accordance with this paragraph shall become part of the general estate of the debtor.). Conversely, if the customer property is insufficient to fully satisfy the customers’ net equity claims, such customers shall be entitled, to the extent only of their respective unsatisfied net equities, to participate in the general estate as unsecured creditors.” Id.
To the extent consistent with SIPA, the liquidation is conducted in accordance with chapters 1, 3 and 5 and subchapters I and II of chapter 7 of the Bankruptcy Code, SIPA § 78fff(b), and the trustee is vested with the same powers and title with respect to the property of the debtor, including the right to avoid preferences, as any ordinary bankruptcy trustee. SIPA § 78fff-l(b). These powers are sufficient to avoid and recover transfers of the debtor’s property, but not customer property. Money held by the broker on behalf of its customers is not property of the broker under state law, and in an ordinary bankruptcy, a trustee cannot avoid and recover a transfer of non-debtor property. Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 213 (2d Cir.2014).
“SIPA circumvents this problem through a statutorily created legal fiction that confers standing on a SIPA trustee by treating customer property as though it were ‘property of the debtor’ in an ordinary liquidation.” Id.; accord Picard v. Chais (In re BLMIS), 445 B.R. 206, 238 *449(Bankr.S.D.N.Y.2011). SIPA § 78fff-2(c)(3) provides:
Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of paragraph (1), the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of Title 11. Such recovered property shall be treated as customer property. For purposes of such recovery, the property so transferred shall be deemed to have been the property of the debtor and, if such transfer was made to a customer or for his benefit, such customer shall be deemed to have been a creditor, the laws of any State to the contrary notwithstanding.
With this fiction, the Trustee may exercise an ordinary trustee’s powers under the Bankruptcy Code to avoid and recover preferential and fraudulent transfers of customer property for the benefit of the customer property estate. Hence, the trustee comes within the statute’s “zone of interests” because SIPA authorizes him to recover fraudulent transfers of customer property, a status courts have referred to as prudential standing. See Lexmark Int’l, Inc. v. Static Control Components, Inc. - U.S. -, 134 S.Ct. 1377, 1387, 188 L.Ed.2d 392 (2014).
The defendants contend that even if the Trustee has statutory or prudential standing, he lacks Article III standing. Constitutional, or Article III standing, imports justiciability: whether the plaintiff has made out a case or controversy between himself and the defendant within the meaning of Art. III. Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). To establish Article III standing, a party must show (1) an injury in fact that is actual or imminent rather than conjectural or hypothetical, (2) the injury is fairly traceable to the conduct complained of, and (3) it is likely, as opposed to speculative, that the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992).
A fiduciary that sues as a representative of an insolvent estate to avoid and recover transfers for the benefit of that estate satisfies the requirement for Article III standing. See Official Comm. of Asbestos Claimants of G-l Holding, Inc. v. Heyman, 277 B.R. 20, 33 (S.D.N.Y.2002). Here, the estate of customer property suffered the injury in fact by virtue of BLMIS fraudulent transfers of that property, the Trustee’s lawsuits will redress that injury, and as discussed in the next section, the estate is insolvent. Any recovery from the defendants will be deemed customer property and replenish the funds available to satisfy the customers’ net equity claims. Accordingly, the Trustee has established Article III standing.
Lastly, neither the doctrine of in pari delicto nor the rule of Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir.1991) bars the Trustees claims. The doctrines are related, and subject to certain exceptions, prevent a debtor from suing third parties who conspired with the debtors management to defraud the debt- or. See Picard v. JPMorgan Chase, 721 F.3d at 63. Because the trustee stands in the shoes of the debtor, he cannot assert claims that the debtor could not assert under non-bankruptcy law. Id.
The Trustee’s claims to avoid and recover customer property never belonged to the debtor under state law. Instead, they were created by Congress and conferred on the Trustee pursuant to SIPA § 78fff-2(c)(3) and the pertinent provisions of the Bankruptcy Code. Consequently, the aforementioned doctrines do not deprive the Trustee of standing or otherwise *450prevent him from asserting the avoidance claims against the defendants. Fox v. Picard (In re BLMIS), 848 F.Supp.2d 469, 483 (S.D.N.Y.2012), aff'd, 740 F.3d 81 (2d Cir.2014); Nisselson v. Empyrean Inv. Fund, L.P. (In re Marketxt Holdings Corp.), 376 B.R. 390, 423 (Bankr.S.D.N.Y. 2007); Picard v. Taylor, 326 B.R. 505, 513 (Bankr.S.D.N.Y.2005). Picard v. JPMorgan Chase, 721 F.3d 54, cited by the defendants, is inapposite because it addressed the Trustee’s lack of standing to assert the creditors’ own common law claims against third parties who allegedly conspired with Madoff and BLMIS to defraud BLMIS, and ultimately, the customers of BLMIS. Id. at 67 (citing Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972)). The Trustee is not asserting any common law claims that belonged to the creditors under non-bankruptcy law.
2. The Trustee has no authority under SIPA § 78fff~2(c)(3) to pursue these avoidance actions.
SIPA § 78fff-2(c)(3), quoted above, authorizes the Trustee to recover transferred customer property “Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of paragraph (1).” Several movants represented by three firms Becker & Poliakoff, Bernfeld Dematteo & Bernfeld and Wachtel Missry LLP make some variation of the argument that there is enough customer property to satisfy all customer claims in full, and the Trustee therefore lacks authority or standing under SIPA § 78fff-2(c)(3) to continue his avoidance actions.7 Defendants in several other adversary proceedings seek to intervene pursuant to Fed.R.CivP. 7004(b)(1) in two pending motions to dismiss, (Memorandum of Law in Support of Motion to Intervene and Be Heard on the Issue of the Trustee’s Standing to Recover Customer Property, dated Mar. 17, 2014 (ECF Doc. #5886)), and make a similar argument. (Intervenors’ Memorandum on the Limits of Trustee Standing to Recover Customer Property, dated Mar. 17, 2014 (“Intervenors’ Memo ”) (ECF Doc. # 5886-1).)8
The arguments are based on two premises: (1) the sufficiency of the customer property estate must be determined now or at some future date rather than when the SIPA proceeding or the underlying adversary proceeding was commenced; and (2) there is now (or there will be) enough aggregate property collected by the Trustee and the Madoff Victim Fund established by the United’States Department of Justice to satisfy allowed customer claims in the case.
*451The legal argument centers on the construction of the introductory clause to SIPA § 78fff-2(c)(3) (“[w]henever customer property is not sufficient to pay ... the trustee may recover”). These defendants contend that “whenever” means “at any time,” and the use of the present tense (“is insufficient”) necessarily focuses on the time of recovery. (Intervenors’ Memo at 3-6.) In addition, SIPA includes several provisions that expressly refer to the filing date. See SIPA § 78III (11) (defining net equity with reference to the amount that would have been owed to a customer had the debtor liquidated on the filing date); id. § 78fff-2(b) (“For purposes of distributing securities to customers, all securities shall be valued as of the close of business on the filing date.”); id. § 8(c)(1)(D) (“For purposes of allocating customer property under this paragraph, securities to be delivered in payment of net equity claims for securities ... shall be valued as of the close of business on the filing date.”). The defendants maintain that the specification of the filing date in certain parts of SIPA indicates that Congress did not intend the use of the filing date as the measure in SIPA § 78fff-2(c)(3). (Intervenors’ Memo at 6-7.) Moreover, SIPA § 78fff-2(c)(3) borrows the Bankruptcy Code avoidance powers which distinguish between the remedies of avoidance, e.g., 11 U.S.C. § 548, and recovery. See 11 U.S.C. § 550. Its use of the word “recover” suggests that Congress intended to use the later date of recovery as the time to test the sufficiency of the customer property fund. (Id. at 8.) Finally, the defendants argue that the leading contrary authority, Hill v. Spencer Sav. & Loan Ass’n (In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880 (D.N.J.1988), is neither controlling nor persuasive. (Intervenors’ Memo at 8-12.) The Intervenors conclude, however, that it is unnecessary to decide the proper interpretation of SIPA § 78fff-2(c)(3) now; the decision should be made after the Trustee has avoided the transfer and before the entry of a money judgment. (Id. at 12.)
The Trustee’s opposition relies primarily on Bevill, Bresler. (Trustee’s Limited Opposition to Motion to Intervene on the Issue of the Trustee’s Standing to Recover Customer Property, dated Mar. 28, 2014, at 1-7 (ECF Doc. #6069).) There, the SIPA trustee brought actions to avoid and recover transfers. One of the disputed issues concerned the date on which to value the customer property for purposes of SIPA § 78fff-2(c)(3). The defendants moved for summary judgment arguing that the trustee was required to show an insufficiency at the time he filed each avoidance complaint or when the judgment was entered in each case, id. at 892, and contended that the trustee was then holding enough money to satisfy all of the customer claims in full. See id. at 883.
The District Court disagreed ruling that “the date to be used for the valuation of the fund of customer property is the SIPA filing date.” Id. at 893. It observed that SIPA and the legislative history were silent regarding the date on which to make the sufficiency valuation. Id. at 892. In other situations, SIPA expressly required the use of the filing date to value certain debts and liabilities. The filing date was used to insulate the calculation from market fluctuations. Id. The District Court concluded that it would appear sensible to value the customer fund as of the same time as the various other calculations that take place on the filing date. Id.
The District Court also expressed the concern that a floating valuation date would create an enormous administrative burden on the trustee. Requiring him to value the. customer fund each time the trustee filed a complaint or obtained a judgment would pose a logistical nightmare and could delay or defeat valid claims because a customer property fund *452could fluctuate in value, and once sufficient become insufficient.9 Id. at 893. The District Court refused to impose this burden on the trustee on the “speculative possibility” that an “unexpected sufficiency” would allow the trustee to satisfy the customer claims in full. Id.
The defendants’ argument was also considered and rejected by the District Court in the BLMIS case. In Picard v. Flinn Invs., LLC, 463 B.R. 280 (S.D.N.Y.2011), numerous defendants moved to withdraw the reference to this Court on a variety of SIPA and other issues. One of the issues concerned the date for determining the insufficiency under SIPA § 78fff-2(c)(3).
Judge Rakoff denied the motion to withdraw the reference on that issue. Citing to and quoting from the decision in Bevill, Bresler, he ruled
[I]t has long been held that “the fund of customer property shall be valued for the purposes of 15 U.S.C. § 78fff-2 (c)(3) as of [the filing date],” In re Bevill, Bresler & Schulman, Inc., 83 B.R. 880, 898 (Bankr.D.N.J.1988), and no “substantial and material consideration of non-Bankruptcy Code federal statutes” is required to see why this is so: any different interpretation of § 78fff-2(c)(3) would cause the Trustee’s powers to fluctuate, leading to a ‘logistical nightmare.’ ” Id. at 893.
Flinn, 463 B.R. at 284. Judge Rakoff noted that the Trustee might file a meritorious claim but find out later that he could not pursue it for reasons having nothing to do with the claim itself. Id. In addition, the defendant who repaid the avoided transfer would be deemed to have a claim allowing the creditor to recover at least some of what the trustee avoided. Id. The District Court concluded that “only simple application of SIPA is required to resolve the issue Greiff presents, and thus that the issue does not warrant withdrawal.” Id.
The defendants argue that the discussion in Bevill, Bresler regarding the time to determine the insufficiency was dictum, (Intervenors’ Memo at 8), and Flinn did not decide the issue on the merits. (Id. at 11 n. 5.) I disagree. The Bevill, Bresler court acknowledged that it was “theoretically possible” that the customer fund was insufficient on the SIPA filing date, but the resolution of the issue was not likely to have a great impact on the case, in part, because the trustee had presented evidence that the customer property would be insufficient regardless of the date selected for valuation. Bevill, Bresler, 83 B.R. at 891. The District Court nevertheless proceeded to decide the issue, id. at 892 (“Thus, as with determination of the ‘filing date,’ I must choose the proper date with reference to the overall purposes of SIPA.”), and held that the filing date was the appropriate date to determine the insufficiency. Id. at 893 (“Thus, I find that the date to be used for valuation of the fund of customer property is the SIPA filing date, April 8, 1985, and I will grant the trustee’s motion for partial summary judgment on this issue.”). Its ruling was not dictum.
Furthermore, the Flinn Court decided not to withdraw the reference on the issue only because the answer was obvious in light the reasons given in Bevill, Bresler. Its decision reflected its conclusion that it was not required to engage in significant interpretation of SIPA § 78fff-2 (c)(3), and instead, called for the simple application of settled law. Flinn, 463 B.R. at 284 (“Accordingly, the Court concludes that, even assuming arguendo that this issue implicates non-bankruptcy aspects of SIPA, *453only simple application of SIPA is required to resolve the issue Greiff presents, and thus that the issue does not warrant withdrawal.”) (citing City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir.1991) (mandatory withdrawal required only where “a bankruptcy court judge [is required] to engage in significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes”)). Thus, the Flinn Court actually considered the valuation date issue, and decided not to withdraw the reference based on its conclusion that the issue was correctly decided in Bevill, Bresler.
The courts’ reasoning in Bevill, Bresler and Flinn are more persuasive than the defendants’ arguments, but I nevertheless agree with the Intervenors that I need not reach the issue now and may never have to decide it. At the outset, the defendants have not challenged the legal sufficiency of the Trustee’s allegations regarding the insufficiency of the customer property fund, and the Trustee has adequately pleaded the insufficiency. The allegations in Picard v. Schiff Family Holdings Nevada Ltd. P’ship, Adv. P. No. 10-04363(SMB) and Picard v. Jordan H. Hart Revocable Trust, Adv. P. No. 10-04718(SMB), the two proceedings in which the Intervenors have intervened, are typical. The complaint in Schiff Family Holdings (¶ 16) and the second amended complaint in Jordan H. Hart (¶ 18) allege that the “assets will not be sufficient to reimburse the customers of BLMIS for the billions of dollars that they invested with BLMIS over the years.... Absent this or other recovery actions, the Trustee will be unable to satisfy the claims described in subparagraphs (A) through (D) of SIPA section 78fff-2(c)(1).” Thus, the complaints plead that the customer property fund was insufficient at the time the pleading was filed, and it is undisputed that it was Insufficient before then. Furthermore, the Trustee has not yet avoided any transfers. Hence, he is not in a position to recover money and it is unnecessary to determine if the customer property fund is insufficient, a determination that raises a factual issue.
Although the latter conclusion should end the inquiry for the present, the factual premise of the defendants’ argument — that the customer fund is presently sufficient or is likely to become sufficient— is patently wrong and is based on an incorrect assumption relating to the Madoff Victim Fund (“MVF’) maintained by the Department of Justice. According to the Trustee’s Thirteenth Interim Report for the Period October 1, 2011 through March 31, 2005, dated Apr. 29, 2015 (“Thirteenth Interim Report ”) (ECF Doc. # 9895), almost $20 billion of principal was lost in Madoff s Ponzi scheme and of the $20 billion, approximately $17.5 billion of principal was lost by those who filed claims. (Id. at ¶ 1 n. 3.) As of March 31, 2015, allowed claims totaled $13,568,096,668.92, (id. at ¶ 14), but the Trustee has recovered or has agreements to recover approximately $10.6 billion. (Id. at ¶ 12.) There is currently a shortfall of $3 billion in the customer property estate, and in denying SIPA claimants the right to an inflation or interest adjustment on their claims, the Second Circuit described the prospect of full recovery as “doubtful.” SIPC v. 2427 Parent Corp. (In re BLMIS), 779 F.3d 74, 81 (2d Cir.2015). The notion that the customer property fund will ever be sufficient to pay 100% of the net equity claims is speculative, and the undisputed facts show that at present it is insufficient.10
*454The movants contend, however, that the Court must add in the money in the MVF overseen by the Department of Justice. According to the web site maintained by Richard C. Breeden, the Special Master, the Fund currently has approximately $4 billion. (See www.madoffvictimfund.com (Home Page, n. 3) (last visited May 26, 2015).) The addition of the $ 4 billion, they argue, would render the customer estate solvent.
This argument lacks merit for two reasons. First, the MVF does not meet SIPA’s definition of “customer property” as used in SIPA § 78fff — 2(c)(3). Money recovered by the Department of Justice from third parties in settlement of their criminal or civil liability does not appear to satisfy the definition of “cash ... at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor, including property unlawfully converted,”11 SIPA § 78III (4), and is certainly not money or property recovered by the Trustee pursuant to SIPA § 78fff-2(c).
Second, the beneficiaries of the MVF are not limited to SIPA customers and cover a much wider array of victims. The Special Master reports on the web site that the MVF protects anyone who lost his or her own money as a direct result of investments rendered worthless by Ma-doff s fraud. It includes, for example, indirect investors who invested directly with .BLMIS feeder funds. Hundreds of millions of dollars were lost by indirect investors who do not qualify as SIPA customers. See Kruse v. SIPC (In re BLIMS), 708 F.3d 422, 426-27 (2d Cir.2013).
Consequently, the universe of claims against MVF dwarfs the amount of SIPA customer claims. The Special Master reports in the web site that he has received 63,553 claims covering losses of $76.654 billion, and if all of the claims were allowed, the victims would receive a 5% distribution. Although he has concluded that approximately 20% of the dollar value of the claimed losses reviewed thus far appears to be ineligible, the Special Master estimates that “for every one of the 2,500 claimants who have recovered payments through the bankruptcy, there were at least another 20 victims whose money was also stolen.” Given the number and amount of claims against the MVF asserted by non-SIPA customers, the $4 billion will not come close to covering the shortfall in the SIPA customer property fund.
Accordingly, the motions to dismiss based on the Trustee’s lack of authority under SIPA § 78fff — 2(c) to avoid and/or recover fraudulently transferred customer property are denied.
3. The Court lacks the authority to enter final judgments under Stern v. Marshall.
Many defendants contend that the Court lacks the authority to enter a final judgment in some or all of these adversary proceedings under the authority of Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Initially, the Supreme Court has held that bankruptcy judges have authority to render proposed findings of fact and conclusions of law where they otherwise have subject matter jurisdiction but lack the Constitutional authority to enter a final judgment in a statutory core matter. See Exec. Benefits Ins. Agency v. Arkison, — U.S. —, 134 S.Ct. 2165, 2174, 189 L.Ed.2d 83 (2014). The jurisdiction to hear the Trustee’s avoidance claims is conferred by 28 U.S.C. *455§§ 1334(b) and 157(a) and (b) and Order No. M 10-450 (S.D.N.Y. July 10, 1984), as amended by Amended Standing Order of Reference, No. M 104168, 12 Misc. 00032 (S.D.N.Y. Jan. 31, 2012). Jurisdiction is also conferred by the provisions of SIPA discussed below.
Judge Rakoff decided the precise issue raised by the defendants after many of the motions to dismiss had been filed. SIPC v. BLMIS, 490 B.R. 46 (2013). He concluded that Stem prevented the Court from entering final judgments unless the avoidance claim provided a basis to disallow the customer’s net equity claim .under 11 U.S.C. § 502(d),12 and subsequently concluded that § 502(d) applies to SIPA claims. SIPC v. BLMIS, 513 B.R. 437, 443 (S.D.N.Y.2014).
The Court’s authority to enter a final judgment depends, therefore, on whether a particular defendant filed a claim that is still subject to allowance or disallowance through the claims allowance process. If the defendant has filed a claim and the Trustee is seeking to disallow the claim under § 502(d) based on the defendant’s receipt of a fraudulent transfer, this Court can enter a final judgment on the fraudulent transfer claim. On the other hand, and subject to the possibility of consent discussed in the next paragraph, the Court cannot enter a final judgment against a defendant that never filed a claim because the lawsuit cannot implicate the claims allowance process through § 502(d). Similarly, no § 502(d) disallowance claim would lie against a defendant who filed a claim that has been finally disallowed. Cf Picard v. Estate of Igoin (In re BLMIS), 525 B.R. 871, 887-88 (Bankr.S.D.N.Y.2015) (Trustee could not base personal jurisdiction on the filing of a SIPA claim that had been finally disallowed because the adversary proceeding did not implicate the claims allowance process).
In Wellness Int’l Network, Ltd. v. Sharif, — U.S. —, 135 S.Ct. 1932, 1937-39, 191 L.Ed.2d 911, No. 13-935, 2015 WL 2456619, at *3 (May 26, 2015) the Supreme Court ruled that parties may consent to the final adjudication of a so called Stem claim13 by a Bankruptcy Court. Consent can be express or implied but must be knowing and voluntary. Id. at 451, 2015 WL 2456619 at *12. Quoting its prior precedent in Roell v. Withrow, 538 U.S. 580, 590, 123 S.Ct. 1696, 155 L.Ed.2d 775 (2003), the Supreme Court explained that the “key inquiry is whether ‘the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case’ before the non-Article III adjudicator.” Wellness, 135 S.Ct. at 1948, 2015 WL 2456619, at *12. Accordingly, consent provides another basis to permit the entry of a final judgment by this Court, and dismissal of the Trustee’s claims for lack of jurisdiction is premature absent examination of the whether or not consent was given.
*4564. The proceedings must be dismissed because they have been commenced in the wrong court and defendants have been served with defective process.
The defendants represented by Bernfeld, Dematteo & Bernfeld, LLP (Adv. P. Nos. 10-04349; 10-04394; 10-04396; 10-04408; 10-04468; 10-04560; 10-04561; 10-04717; 10-05094; 10-05231; 10-04361) argue that the adversary proceedings were commenced in the wrong court, and they were served with defective process. As a result, there is no jurisdiction — either subject matter or in personam. They contend that the District Court is vested with original jurisdiction over cases and proceedings, 28 U.S.C. § 1334(a), the bankruptcy petition must be filed and the case must be commenced in the District Court, and only then can the District Court refer the case (or proceeding) to the bankruptcy court. (E.g. Defendants’ Memorandum of Law in Support of Motions to Dismiss, dated Feb. 18, 2014, at 6 (ECF Adv. Pro. No. 10-04349 Doc. #24) (“[Tjhe District Court obviously cannot refer a proceeding that has not been commenced or filed in that court. Thus, the commencing of an adversary proceeding, such as the one at issue here, in the Bankruptcy Court rather than the District Court is improper and any act of this Court with respect to the same — such as the issuing of a summons— is a nullity.”) (footnote omitted).
At the outset, the defendants overlook the fact that the SIPA proceeding was commenced in the District Court on December 11, 2008, and expressly removed by the District Court to this Court pursuant to SIPA § 78eee(b)(4), (Order, Civ. 08-01789 (S.D.N.Y. Dec. 15, 2008), at tlX (ECF Doc. # 1)), which provides:
Upon the issuance of a protective decree and appointment of a trustee, or a trustee and counsel, under this section, the court shall forthwith order the removal of the entire liquidation proceeding to the court of the United States in the same judicial district having jurisdiction over cases under Title 11. The latter court shall thereupon have all of the jurisdiction, powers, and duties conferred by this chapter upon the court to which application for the issuance of the protective decree was made.14
Thus, once the SIPA proceeding was removed to this Court, this Court was authorized to exercise all of the powers of the District Court subject to the Constitutional limitations placed on Article I courts.
More generally, the District Court has referred its bankruptcy jurisdiction to this Court. While 28 U.S.C. § 1334 grants the district court jurisdiction over bankruptcy cases and proceedings in the first instance, 28 U.S.C. § 157(a) authorizes the district court to refer its bankruptcy jurisdiction to the bankruptcy judges in the district. The United States District Court for the Southern District of New York has referred its bankruptcy jurisdiction to the judges of this Court through Order No. M 10-450 (S.D.N.Y. July 10, 1984), as amended by Amended Standing Order of Reference No. M 10-468, 12 Misc. 00032 *457(S.D.N.Y. Jan. 31, 2012). The defendants assume but cite no authority to support their central argument that the District Court cannot refer its bankruptcy jurisdiction prospectively. In fact, courts in this district have uniformly recognized that the District Court’s standing orders of reference confer bankruptcy court jurisdiction in cases and proceedings commenced after the date of the standing order of reference.15 E.g., ResCap Liquidating Trust v. Primary Capital Advisors, LLC (In re Residential Capital, LLC), 527 B.R. 865, 869-70 (S.D.N.Y.2014); Penson Fin. Servs., Inc. v. O’Connell (In re Arbco Capital Mgmt., LLP), 479 B.R. 254, 258 (S.D.N.Y.2012).
If the bankruptcy case has been referred, all complaints and “and other papers required to be filed by these rules, except as provided in 28 U.S.C. 1409, shall be filed with the clerk in the district where the case under the Code is pending.” Fed. R. Bankr.P. 5005(a)(1). The “clerk” means the clerk of the bankruptcy court if one has been appointed. Fed. R. BanerP. 9001(3). Vito Genna has been appointed the clerk of this Court, (see Order M-367, dated Jan. 26, 2009), and in accordance with Rule 5005(a), all papers, including complaints in adversary proceedings must be filed with his office. In addition, the clerk of the court in which the complaint is filed is the clerk that issues the summons. See Fed.R.Civ.P. 4(b), made applicable to adversary proceedings by Fed. R. Bankr.P. 7004(a)(1).16 Consequently, the complaints were properly filed with and the summonses were properly issued by the clerk of this Court.
Finally, the defendants argue that the summonses are incorrect, “prejudicial” and defective because they contained misstatements. Federal Civil Rule 4(a)(1), made applicable by Federal Bankruptcy Rule 7004(a)(1), requires a summons to include the name of the court and the parties, be directed to the defendant, state the name and address of the plaintiffs attorney, state when the defendant must appear and defend and “notify the defendant that a failure to appear and defend will result in a default judgment against the defendant for the relief demanded in the complaint.” In addition, the summons must be signed by the clerk and bear the court’s seal.
The defendants have not argued that the summonses fail to comply with Rule 4(a)(1). Instead, they contend that the summonses are defective because the following warning appears at the end of each summons:
IF YOU FAIL TO RESPOND TO THIS SUMMONS, YOUR FAILURE WILL BE DEEMED TO BE YOUR CONSENT TO ENTRY OF A JUDGMENT BY THE BANKRUPTCY COURT AND JUDGMENT BY DE-’ FAULT MAY BE TAKEN AGAINST YOU FOR THE RELIEF DEMANDED IN THE COMPLAINT
According to the defendants, the statement that their default would constitute implied consent to the entry of a default judgment by the bankruptcy court misstates the law and constitutes a jurisdictional defect.
I disagree. First, the proper service of a summons containing the quoted warning17 followed by the defendant’s *458default in pleading constitutes the defendant’s implied consent to the entry of a default judgment by the bankruptcy court, Exec. Sounding Board Assocs. Inc. v. Advanced Mach. & Eng’g Co. (In re Oldco M Corp), 484 B.R. 598, 614 (Bankr.S.D.N.Y.2012), unless the defendant appears and raises the issue. Ariston Props., LLC v. Messer (In re FKF 3, LLC), 501 B.R. 491, 498-99 (S.D.N.Y.2013). Second, the defendants offer no authority to support their contention that the issuance and service of the summons that complies with Federal Civil Rule 4(a)(1) is ineffective because it contains a misstatement that does not prejudice the defendant. These defendants did not default in pleading because they filed timely motions to dismiss, and raised the issue of the Courts authority to enter a final judgment in their motions. Hence, they did not impliedly consent to the entry of a final judgment, much less a default judgment, against them by this Court.
B. Due Process
1. The Trustee’s financial stake in his quasi-Governmental decisions violates defendants’ due process rights.
The defendants represented by Becker & Poliakoff argue that the Trustee decides on behalf of SIPC, a governmental agency, which avoidance actions to bring, retains a financial stake in his litigations because he allegedly receives a 15% share of the fees paid to his law firm, and his financial interest in these litigations violates the defendants’ due process rights. (B & P Memo at 5-7.)
SIPC was created by act of Congress in 1970 as a non-profit corporation, SIPA § 78ccc(a)(l), in response to customer losses resulting from stockbroker failures. SIPC v. Barbour, 421 U.S. 412, 413, 95 S.Ct. 1733, 44 L.Ed.2d 263 (1975); Bevill, Bresler, 83 B.R. at 886. With certain exceptions, its members include all persons registered as brokers or dealers under 15 U.S.C. § 78o(b). SIPA § 78ccc(a)(2)(A). It is not “an agency or establishment of the United States Government.” SIPA §■ 78ccc(a)(l)(A). Among its powers, SIPC may file an application for a protective decree in federal district court if it determines that a member of SIPC has failed or is in danger of failing to satisfy its obligations to its customers, and meets one of the conditions set forth in SIPA § 78eee(b)(l). See SIPA § 78eee(a)(3)(A). If the district court issues a protective decree, the “court shall forthwith appoint, as trustee for the liquidation of the business of the debtor and as attorney for the trustee, such persons as SIPC, in its sole discretion, specifies.” SIPA § 78eee(b)(3). The SIPA proceeding is then referred to the bankruptcy court, SIPA § 78eee(b)(4), and the trustee is vested with the powers of a bankruptcy trustee, SIPA § 78fff-l(a), in addition to the powers granted under SIPA § 78fff — 2(c)(3).
Finally, upon appropriate application, the bankruptcy court shall grant reasonable compensation for services rendered and reimbursement of proper costs and expenses by the trustee and his attorneys. SIPA § 78eee(b)(5)(A). SIPC must file its recommendations concerning the application. SIPA § 78eee(b)(5)(C). SIPC will advance the funds to pay the allowed fees and expenses if the general’ estate is insufficient to pay them. SIPA § 78eee(b)(5)(E). Where there is no reasonable expectation that SIPC will recoup the advances with SIPA and the application and the recommendation agree, “the court shall award the amounts recommended by SIPC.” SIPA § 78eee(b)(5)(C).
As noted, SIPC is not a government agency; it is a not-for-profit corporation whose members include brokers and *459dealers. Furthermore, although SIPC selects the Trustee, the district court must approve the selection and find that the trustee is disinterested. SIPA § 78eee(b)(6). The Trustee represents the estate, not SIPC, and like any other bankruptcy trustee, decides which avoidance and recovery actions to bring and whether to settle. The Trustee is not the decision maker for SIPC, and SIPC and the Trustee can and sometimes do disagree on the actions the Trustee takes in the case. See, e.g., SIPC v. Morgan, Kennedy & Co., Inc., 538 F.2d 1314 (2d Cir.) (sustaining SIPC’s objection to the trustee’s proposed treatment of each beneficiary of a trust as a SIPC customer), cert. denied, 426 U.S. 936, 96 S.Ct. 2650, 49 L.Ed.2d 387 (1976); In re Bell & Beckwith, 93 B.R. 569, 575-80 (Bankr.N.D.Ohio 1988) (overruling SIPC objections to trustee’s proposed settlement).
Finally, the trustee has no financial stake in the outcome of any litigation he pursues. He and his firm are entitled to reasonable compensation like any other trustee and his counsel. Compare SIPA § 78eee(b)(5)(A) (“The court shall grant reasonable compensation for services rendered and reimbursement for proper costs and expenses incurred ... by a trustee, and by the attorney for such a trustee, in connection with a liquidation proceeding.”) with 11 U.S.C. § 330(a)(1) (authorizing bankruptcy court to award “reasonable compensation for actual, necessary services” and “reimbursement for actual, necessary expenses,” inter alia, to the trustee and his professionals). Defendants’ argument regarding the Trustee’s share of the fees received by his law firm goes well beyond the four corners of the complaints they seek to dismiss, but in any event, does not give him a financial interest in the litigation he pursues or deprive the defendants of due process.18
Finally, the cases cited by defendants are distinguishable because they involve bias by the adjudicator. Two of the four concerned extreme cases of possible bias when the judge or adjudicator presiding over a matter had a direct financial or personal interest in the outcome or received a significant benefit from a litigant. See Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813, 822-24, 106 S.Ct. 1580, 89 L.Ed.2d 823 (1986) (due process was violated when appellate judge who authored a precedential decision on an unsettled question of insurance law adverse to an insurer based on its failure to pay a claim had filed his own class action against an insurance company that raised the same issue); Tumey v. Ohio, 273 U.S. 510, 531-33,47 S.Ct. 437, 71 L.Ed. 749 (1927) (statute that permitted town mayor to adjudicate prohibition violations and impose fines and tax costs against the accused upon conviction violated due process because the fees and costs funded town expenses in' which the mayor lived and a portion was paid to the mayor). A third case concluded that due process *460was violated where an appellate judge significant campaign contributions from a litigant while the litigant’s case was proceeding toward appellate review in the judge’s court. See Caperton v. A.T. Massey Coal Co., 556 U.S. 868, 885-87, 129 S.Ct. 2252, 173 L.Ed.2d 1208 (2009).
The fourth case, Withrow v. Larkin, 421 U.S. 35, 95 S.Ct. 1456, 43 L.Ed.2d 712 (1975), addressed whether the combination of investigative and adjudicative functions in the same state agency violated due process. There, a state medipal board was authorized to investigate whether a physician had engaged in certain proscribed acts, and could refer the matter to the district attorney if it concluded that criminal charges were warranted. The same board could also suspend the physician’s medical license. A physician charged with performing proscribed acts challenged the combined investigative and adjudicative roles arguing that it denied, him the right to a hearing before a fair tribunal. The Court observed that the combination of the investigative and adjudicative functions may raise due process concerns, but the party challenging the combination has a difficult burden of overcoming the presumption of the integrity of the adjudicator. Id. at 47, 95 S.Ct. 1456. The Court rejected the physician’s due process argument because there was no evidence that the board had prejudged the merits of the matter it had investigated and counsel for the physician was present throughout and knew the facts presented to the board. Id. at 54-55, 95 S.Ct. 1456.
Here, the Trustee is not the adjudicator of the claims he brings. He investigates the claims and brings litigation, but a judge decides the outcome. Furthermore, although the Trustee has an interest in the fees awarded to his firm and paid by SIPC, neither he nor his firm have an interest in the outcome of any litigation he brings.
2. The Trustee’s calculation of the clawback exposure violates due process.
In Picard v. Greiff, (In re BLMIS), 476 B.R. 715 (S.D.N.Y.2012) (“Greiff”), aff'd on other grounds, 773 F.3d 411 (2d Cir.2014), Judge Rakoff explained how to calculate fraudulent transfer exposure in a clawback action:
As for the calculation of how much the Trustee may recover under these claims, the Court adopts the two-step approach set forth in Donell v. Kowell, 533 F.3d 762, 771-72 (9th Cir.2008). First, amounts transferred by Madoff Securities to a given defendant at any time are netted against the amounts invested by that defendant in Madoff Securities at any time. Second, if the amount transferred to the defendant exceeds that amount invested, the Trustee may recover these net profits from that defendant to the extent that such monies were transferred to that defendant in the two years prior to Madoff Securities’ filing for bankruptcy.
Greiff, 476 B.R. at 729 (emphasis added).
The Trustee’s calculation of clawback relies on the Net Investment Method to compute a customer’s net equity. He offsets all deposits and withdrawals during the life of the account, but he cannot recover more than the amount transferred during the two years preceding the filing date. The defendants represented by Becker & Po-liakoff contend that the Trustee should be limited to a claim for withdrawals taken during the Two-Year Period reduced by the deposits made by the defendants during the Two-Year Period, ie., the Replenishment Credit method, (B & P Memo at 22-25), but Judge Rakoff expressly rejected that approach in the Antecedent Debt Decision, 499 B.R. at 427-28, and the Court will not revisit his conclusion.
*461In addition, these defendants contend that the Trustee’s method of calculating their clawback exposure violates due process because it allows him to avoid transfers indirectly that occurred beyond the two-year period of limitations. Counsel for these defendants, Becker & Poliakoff, signed the brief that pressed the same argument before Judge Rakoff. (Consolidated Memorandum of Law in Support of Motion to Dismiss Regarding Antecedent Debt Issues on Behalf of Withdrawal Defendants, as Ordered by the Court on May 12, 2012, filed June 25, 2012, at 36-37 (“The Trustee’s approach is clearly at odds with this Court’s prior rulings that the Trustee may not avoid transfers that occurred more than two years before the commencement of these cases and it violates the due process rights of Defendants.”) (footnotes omitted) (ECF Case no. 12 MC-00115 Doc. # 199).) Judge Rakoff did not discuss the due process challenge but he could not have reached his conclusion in the Antecedent Debt Decision without implicitly rejecting it. See Camps Newfound/Owatonna, Inc. v. Town of Harrison, Maine, 520 U.S. 564, 606, 117 S.Ct. 1590, 137 L.Ed.2d 852 (1997) (Scalia J., dissenting) (observing that counsel in an earlier case had unquestionably raised an argument in its briefs and during oral argument, “and the Court could not have reached the disposition it did without rejecting it.”) Furthermore, this Court previously rejected a similar due process challenge. SIPC v. BLMIS, 522 B.R. 41, 53 n. 8 (Bankr.S.D.N.Y.2014).
To the extent the issue has not already been decided, the Court concludes that the defendants’ due process challenge lacks merit. As stated in the previous section, the Trustee is not a governmental actor, but even if he was, his computation of the defendants’ clawback exposure is neither “arbitrary” nor “outrageous,” and does not give rise to a claim for violation of due process. Cnty. of Sacramento v. Lewis, 523 U.S. 833, 845, 118 S.Ct. 1708, 140 L.Ed.2d 1043 (1998) (“the touchstone of due process is protection of the individual against arbitrary action of government”); Rochin v. California, 342 U.S. 165, 172, 72 S.Ct. 205, 96 L.Ed. 183 (1952) (conduct that “shocks the conscience” violates due process); Notale v. Town of Ridgefield, 170 F.3d 258, 259 (2d Cir.1999) (only a gross abuse of governmental authority can violate the substantive standards of the due process clause). In fact, Judge Rakoff concluded that calculating the clawback exposure under the Net Investment Method rather than the Replenishment Credit Method is more equitable. Antecedent Debt Decision, 499 B.R. at 427-28. Accordingly, the Court rejects the defendants’ challenge to the Trustee’s method of computing their clawback exposure.
C. The BLMIS transfers of fictitious profits satisfied antecedent debts.
Bankruptcy Code § 548(c) provides a defense in a fraudulent transfer action to the extent a transferee takes “for value and in good faith,” 11 U.S.C. § 548(c)(emphasis added). The Trustee does not challenge the good faith of the defendants who made the Motions, and they can assert a defense under Bankruptcy Code § 548(c) to the extent they gave value to BLMIS. “Value” includes the “satisfaction or securing of a present or antecedent debt of the debtor....” 11 U.S.C. § 548(d)(2)(A) (emphasis added). Many of the defendants argue that the fictitious profits they received from BLMIS satisfied their claims against BLMIS including those arising from violations of federal securities law and state law (e.g. fraud, breach of contract, breach of fiduciary duty, rescission). Consequently, they provided “value” to BLMIS in exchange for the fictitious profits.
*462The District Court has already rejected this argument twice. In Greiff, several defendants moved to dismiss the complaints alleging, among other things, that they had state law claims entitling them to the securities listed on their customer statements even though BLMIS failed to purchase those securities. 476 B.R. at 724. According to these defendants, BLMIS’ “transfers discharged its liability on [their] claims,” and consequently, they “took ‘for value’ under § 548(d)(2)(A).” Id. at 725.
The District Court disagreed. It concluded that transfers from BLMIS that “exceeded the return of defendants’ principal, i.e., that constituted profits, were not ‘for value.’” Id. Instead, the “transfers must be assessed on the basis of what they really were; and they really were artificial transfers designed to further the fraud, rather than any true return on investments.” Id. It found it unsurprising that “every circuit court to address this issue has concluded that an investor’s profits from a Ponzi scheme are not ‘for value.’ ” Id. (citing Donell v. Kowell, 533 F.3d 762, 771-72 (9th Cir.), cert. denied, 555 U.S. 1047, 129 S.Ct. 640, 172 L.Ed.2d 612 (2008); Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir.) (Posner, J.), cert. denied, 516 U.S. 1028, 116 S.Ct. 673, 133 L.Ed.2d 522 (1995) and Sender v. Buchanan (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1286, 1290 (10th Cir.1996)).
Judge Rakoff addressed the same issue a second time in Antecedent Debt Decision. Citing Greiff, he rejected the defendants’ arguments that they had valid state law claims based on their account statements reiterating that the fictitious account statements were invalid and unenforceable. Antecedent Debt Decision, 499 B.R. at 421 n. 4. In addition, assuming the BLMIS investors held claims for rescission to recover their principal investments, they had recovered their principal investments prior to the bankruptcy and had no state law claim for interest. Id. at 422. Finally, even if the defendants held valid claims under the federal securities laws or state law, the claims did not provide value as against the BLMIS customer property estate under SIPA. Id. at 422 n. 6.
Judge Rakoffs conclusions are consistent with the well-settled rule in Ponzi scheme cases that net winners must disgorge their winnings. “[Ijnvestors may retain distributions from an entity engaged in a Ponzi scheme to the extent of their investments, while distributions exceeding their investments constitute fraudulent conveyances which may be recovered by the Trustee.” Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortg. Inv. Corp.), 256 B.R. 664, 682 (Bankr.S.D.N.Y.2000), aff'd, 264 B.R. 303 (S.D.N.Y.2001); accord Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Group, LLC), 439 B.R. 284, 337 (S.D.N.Y.2010) (“[Vjirtually every court to address the question has held unflinchingly that to the extent that investors have received payments in excess of the amounts they have invested, those payments are voidable as fraudulent transfers.”) (internal quotation marks and citations omitted); Picard v. Cohmad Sec. Corp. (In re BLMIS), 454 B.R. 317, 333 (Bankr.S.D.N.Y.2011) (“[W]hen investors invest in a Ponzi scheme, any payments that they receive in excess of their principal investments can be avoided by the Trustee as fraudulent transfers.”); Gowan v. The Patriot Grp., LLC (In re Dreier LLP), 452 B.R. 391, 440 n.44 (Bankr.S.D.N.Y.2011) (“The Court’s conclusion that the Defendants did not provide ‘reasonably equivalent value’ for the payments in excess of principal is consistent with those courts that have held that investors in a Ponzi scheme are not entitled to retain the fictitious profits they received.”). The *463rationale for the rule is that the Ponzi scheme participant does not provide any value to the debtor in exchange for the fictitious profits it receives. Scholes, 56 F.3d at 757 (“The paying out of profits to [the Ponzi scheme investor] not offset by further investments by him conferred no benefit on the [entities involved in the Ponzi scheme] but merely depleted their resources faster.”); Armstrong v. Collins, No. 01 Civ. 2437 (PAC), 2010 WL 1141158, at *22 (S.D.N.Y. Mar. 24, 2010) (“By ‘investing’ in a Ponzi scheme run by the debtor, even unwittingly, a person does not — strictly speaking — provide ‘value.’ This is because the money invested simply perpetuates the debtor’s fraudulent scheme: ‘the longer a Ponzi scheme is kept going the greater the losses to the investors.’ ”) (quoting Scholes, 56 F.3d at 757)).
After Greiff and the Antecedent Debt Decision were decided, the Fifth Circuit Court of Appeals reached the same conclusion in a case involving the R. Allen Stanford’s Ponzi scheme. Janvey v. Brown, 767 F.3d 430 (5th Cir.2014). There, the defendants purchased certificates of deposit from Stanford International Bank that promised high rates of return, and received back their principal investments as well as guaranteed interest. The receiver appointed at the request of the SEC sued the net winners under the Texas Uniform Fraudulent Transfer Act (“TUFTA”) to recover their net winnings (i.e., the interest payments). The defendants argued that they were contractually entitled to the interest they received, and consequently, gave value because the interest payments discharged an antecedent debt. Id. at 433-34, 440.
Applying TUFTA, which defines “value” in the same way as Bankruptcy Code § 548(d)(2)(A), ,the Fifth Circuit held that the defendant had failed to give reasonably equivalent value for the interest payments because the certificates of deposit were void and unenforceable. Allowing the defendants to enforce their claims for contractual interest in excess of their deposits would further the fraudulent scheme at the expense of innocent investors. Since they had no claim for interest, the payment of interest could not satisfy an antecedent debt. Id. at 441-42. The Court recognized that the conclusion was an exception to general principles of contract law but the result was nevertheless commanded by the unique feature of Ponzi schemes:
To be sure, courts often permit innocent plaintiffs to enforce contracts that are against public policy, but here, such “enforcement would further none of the poll icies generally favoring enforcement by an innocent party to an illegal bargain .... [A]ny award of damages would have to be paid out of money rightfully belonging to other victims of the Ponzi scheme.”
Id. at 442 (quoting Merrill v. Abbott (In re Indep. Clearing House Co.), 77 B.R. 843, 858 (D.Utah 1987).)19
Certain defendants attempt to distinguish Janvey on the basis that the Court was interpreting “value” under the TUF-TA rather than the Bankruptcy Code and applying Texas contract law. (See Letter from Richard Levy, Esq. and Carole Ne-*464ville, Esq. to the Court, dated Sept. 16, 2014, at 1 (ECF Doc. # 7962)) (“The Jan-vey decision is not persuasive because it was decided as a matter of the Texas state avoidance statute and Texas contract law.”) As to the first point, the Janvey Court relied on Sender v. Buchanan (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1286 (10th Cir.1996) in reaching its conclusion that the creditors did not provide value for the interest payments. Janvey, 767 F.3d at 441-42 & nn. 65, 66. The Janvey Court observed that although Hedged-Investments was addressing the Bankruptcy Code, the provision of the Uniform Fraudulent Transfer Act at issue “is ‘virtually identical’ to the corresponding provision of the Bankruptcy Code[.]” Idl (quoting Warfield v. Byron, 436 F.3d 551, 558 (5th Cir.2006)). The Janvey Court is, therefore, persuasive authority in interpreting value under the Bankruptcy Code.
As to the second point, the defendants argue that New York law would enforce a contract in favor of an innocent party. (See Letter from Richard Levy, Esq. and Carole Neville, Esq. to the Court, dated Sept. 16, 2014, at 2-3.) Initially, the Fifth Circuit noted the same policy but concluded that Ponzi scheme payments were an exception because any award of damages would be paid from the money rightfully belonging to other victims. The defendants have failed to explain why the same reasoning would not apply under New York law.
Furthermore, the New York courts have rejected claims for “lost” fictitious profits in other contexts because a claimant cannot lose something that never existed. For example, in Hecht v. Andover Assocs. Mgmt. Corp., 114 A.D.3d 638, 979 N.Y.S.2d 650 (N.Y.App.Div.2014)(“Andouer II ”), the plaintiff brought a derivative action on behalf of Andover Associates (the “Fund”), which had invested in BLMIS, to recover damages, inter alia, from the Fund’s accountants based on professional negligence. The final BLMIS statement reported that the Fund had a balance of $14 million but the amount of its un-recouped investment was only $3,288 million. Hecht v. Andover Assocs. Mgmt. Corp, No. 006100/09, 27 Misc.3d 1202(A), —, 910 N.Y.S.2d 405, 2010 WL 1254546 at *6 (N.Y.Sup.Ct. Mar. 12, 2010)(“Andover I ”). On appeal, the Appellate Division stated that the plaintiff could not recover the Fund’s “lost profits,” limiting its recovery to its un-recouped investment:
It is undisputed that the profits reported by Madoff were completely imaginary. The fictitious profits never existed and, thus, Andover did not suffer any loss with respect to the fictitious sum.
Andover II, 979 N.Y.S.2d at 653.20
The Hecht Court relied on Jacobson Family Invs., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 102 A.D.3d 223, 955 N.Y.S.2d 338 (N.Y.App.Div.2012). There, the plaintiffs had also invested in BLMIS. Their last account statements showed an aggregate value of over $105 million but their aggregate net winnings were only slightly more than $3 million. They filed a claim under a fidelity bond for the “loss” of the value reflected in their last account statements, and the insurer rejected the claim asserting that the plaintiffs did not suffer losses on account of the non-existent profits that Madoff fraudulently attributed to them. Id. at 341-42.
Although the case involved the construction of an insurance policy, the Court’s view of fictitious profits bears on the defendants’ argument that New York law would permit an innocent investor to recover and retain fictitious profits generat*465ed through Madoffs Ponzi scheme. The plaintiffs argued, as the defendants do in these cases, that they had a UCC “security entitlement” to the phantom gains in their accounts.21 The Appellate Division rejected the contention stating that “any pro-tectable UCC ‘interest’ based on the fictitious value of securities only existed for as long as the Madoff scheme remained hidden.” Id. at 345. As to the notion that the inability to recover fictitious profits constituted a “loss,” the Court stated:
JFI criticizes the Horowitz court’s reliance on In re Bernard L. Madoff Inv. See., arguing that the Bankruptcy Court was concerned with the application of SIPA, not state insurance law. However, the distinction is meaningless. Under either scenario, it is not reasonable to claim that the revelation that an asset, once thought to exist, did not exist, constitutes a “loss,” whether for the purpose of a claim under SIPA or under a fidelity bond.
Id. at 346.
The case to which the Appellate Division referred, Horowitz v. Am. Int’l Group, Inc., No. 09 Civ. 7312 (PAC), 2010 WL 3825737 (S.D.N.Y. Sept. 30, 2010), aff'd, 498 Fed.Appx. 51 (2d Cir.2012), also involved an insurance claim arising out of the BLMIS Ponzi scheme. The plaintiffs’ last BLMIS account statement indicated that their investment had a value of over $8.5 million, but the plaintiffs were actually net winners to the tune of $225,000. They nevertheless asserted a claim for the full limit under their fraud policy ($30,000) contending that they had a reasonable expectation that their investments would yield earnings. The defendant rejected the claim because the plaintiffs had actually withdrawn more than they had invested. Id. at *1.
In granting the motion to dismiss, the District Court concluded that the fictitious profits were not lost through fraud; the plaintiffs “did not lose this money; they lost the mistaken belief that they owned this money.” Id. at *7. The Court then turned to the argument, sometimes made in this case, that the plaintiffs suffered a loss because they could have withdrawn all of their fictitious profits prior to the collapse of the Ponzi scheme. Citing an unreported decision by Judge Lifland in the BLMIS case, the District Court rejected the plaintiffs’ contention:
More importantly, assuming that this were possible, any withdrawals in excess of their deposits would have been made with other customers’ initial investments, and would now be subject to claw back under the Bankruptcy proceedings. See id. at 23-24. Accordingly, Plaintiffs would not have been legally entitled to this money.
Id. (citation omitted).
In short, the few decisions that have considered fictitious profits arising out of investments in BLMIS under New York law have concluded that they were not “lost” to the extent they were not paid, and are not recoverable as an element of damages under the UCC or in any other context in which the proposition was advanced. Thus, there is no support for the defendants’ argument that they could recover fictitious profits as a matter of New York contract law or their related argument that the payment of fictitious profits satisfied an antecedent debt.
Judge Rakoff also found a second reason to reject the defendants’ “value” defense *466based on a conflict with SIPA. SIPA differentiates between the assets of the customer property estate and the assets of the general estate. Customers have priority in the customer property, and the Trustee may invoke the Bankruptcy Code’s avoidance provisions when the customer property estate is insufficient to satisfy the customers’ net equity claims. Greiff, 476 B.R. at 727. Allowing net winners to retain fictitious profits in satisfaction of state law claims would conflict with SIPA’s priority system and frustrate the Trustee’s efforts to satisfy priority claims;
[T]he Court finds that, when determining whether a transferee provides value, SIPA requires consideration not only of whether the transfer diminishes the resources available for creditors generally, but also whether it depletes the resources available for the satisfaction of customers’ net equity claims and other priority claims. As described above, a different approach would ignore both SIPA’s distinctions between -creditors and its specific concern for the depletion of the fund of ‘customer property’ available for distribution according to customers’ “net equities.”
Id. at 728 (footnote omitted).
The District Court reiterated and amplified its reasoning regarding the separate customer property and general estates in the Antecedent Debt Decision, 499 B.R. at 424-26. It also rejected the defendants’ argument that because the SIPA trustee has the same powers as an ordinary bankruptcy trustee, he is subject to the same “value” defense under Bankruptcy Code § 548(c). Judge Rakoff noted that the Bankruptcy Code applied “[t]o the extent consistent with the provisions of this chapter,” 15 U.S.C. § 78fff(b), and the SIPA trustee’s powers “must be interpreted through the lens of SIPA’s statutory scheme.” Antecedent Debt Decision, 499 B.R. at 423. SIPA grants the trustee the same avoidance powers as a bankruptcy trustee, and hence, the power to rely on Bankruptcy Code § 548(a)(1)(A). Section 548(c) is a defense to avoidance, and the Bankruptcy Code affirmative defenses may apply differently, in a SIPA case. Id. at 424.
Judge Rakoffs extensive consideration of the antecedent debt/value issue would normally foreclose further argument in this Court. Those moving defendants that participated in the withdrawal of the reference of the antecedent debt/value issue have had their day in court and Judge Rakoffs decisions are law of the case. Furthermore, Judge Rakoff returned the proceedings to this Court “for further proceedings consistent with this Opinion and Order.” Id. at 430. This sounds like a mandate. Those moving defendants who did not move to withdraw the reference on the antecedent debl/value issue are not similarly bound, but the persuasive force of Judge Rakoffs decisions lead me to the same conclusions.
Notwithstanding the District Court’s rulings, many defendants continue to argue that the payment of fictitious profits satisfied an antecedent debt, and point to certain case law that post-dated the briefing before the District Court on the antecedent debt/value issue or the decisions themselves which, the defendants contend, require a different conclusion. Some cite Official Comm. of Unsecured Creditors v. Hancock Park Capital II, L.P. (In re Fitness Holdings Int’l, Inc.), 714 F.3d 1141 (9th Cir.2013). There, the debtor’s shareholder, Hancock, made a series of subordinated loans in the approximate aggregate sum of $24 million to the debtor. The debtor had also borrowed approximately $9 million from Pacific Western Bank secured by all of its assets. The debtor subsequently refinanced these debts by borrowing $25 million from Pacific Western, secured by a lien on all of its assets, and used the proceeds to pay Hancock *467roughly $12 million in satisfaction of its unsecured promissory notes and Pacific Western’s secured loan. Id. at 1142-43.22
After bankruptcy ensued, the unsecured creditors committee sued Hancock alleging, inter alia, that the Hancock debt should be recharacterized as equity and the payment on account of its equity interest should be avoided as a constructive fraudulent transfer. Id. at 1144. Following conversion to chapter 7, the trustee continued the action. The bankruptcy court dismissed all of the trustee’s claims, and the district court affirmed, holding that the recharacterization claim was barred as a matter of law. ' Id.
The principal issue on appeal to the Ninth Circuit was whether the bankruptcy court had the power to recharacterize the Hancock claim. If recharacterized as an equity investment, the $12 million transfer to Hancock would represent a return of capital rather than the satisfaction of a debt, and preclude Hancock from asserting that it provided “reasonably equivalent value” in exchange for the transfer. Id. at 1145-46. Before reaching the issue, the Court recounted the general law that a “claim” is a right to payment, and “unless Congress has spoken, the nature and scope of a right to payment is determined by state law.” Id. at 1146. “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.” Id. (quoting Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)) (emphasis added). Citing Fitness Holdings, the defendants in this proceeding argue that “value” under Bankruptcy Code § 548 must be determined by reference to non-bankruptcy law, and since they have claims under non-bankruptcy law, the satisfaction of those antecedent debts constitutes value.
Fitness Holdings was not a Ponzi scheme or SIPA case. While its statement of the law is correct, it does not address the particular rule in Ponzi scheme cases, applied by every Bankruptcy and District Court Judge in this district and every Circuit Court that has considered the issue that Ponzi scheme investors do not give value within the meaning of the fraudulent transfer laws for the fictitious profits they receive. Furthermore, Fitness Holdings, quoting Butner, recognized that while claims and debts are usually based on state law rights, a federal interest may require a different result. The principal purposes of SIPA are to protect investors against financial losses arising from their broker’s insolvency and protect the securities markets as a whole. In re BLMIS, 654 F.3d at 235, 239, accord Stafford v. Giddens (In re New Times Sec. Servs., Inc.), 463 F.3d 125, 127 (2d Cir.2006); see SIPC v. Barbour, 421 U.S. at 415, 95 S.Ct. 1733. As Judge Rakoff explained, interpreting value to include the satisfaction of claims against the general estate would deplete the resources available to satisfy the customers’ net equity claims and other priority claims, and thereby undercut one of SIPA’s principal goals.
During oral argument, defense counsel also argued that the debt at issue in Fitness Holdings was contractually subordinated, and the decision meant that the satisfaction of a subordinated debt instrument constituted value. (See Transcript of Sept. 17, 2014 Hearing, at 51:20-52:20 (ECF Doc. # 8636).) By analogy, even if the damage claims comprising the BLMIS debts are “subordinated” to net equity *468claims, the satisfaction of the damage claims should still provide value for purposes of section 548(c).
Fitness Holdings did not distinguish between subordinated and senior debt, and cannot be read to support the argument that it doesn’t make a difference for purposes of computing “value.” The nature of the subordination was not discussed by the Court of Appeals with good reason. An examination of the bankruptcy court record reveals that the series of notes delivered by the debtor to Hancock were identical except for the date and amount. According to paragraphs 3(a) and 3(b) of each note, they were subordinated only to the senior debt of U.S Bank owing under a revolving credit agreement. (See Declaration of Karen Brown in Support of Motion to Dismiss Complaint, dated July 30, 2009, Ex. 1; 2, 4, 6-10 (ECF Case 2:09-ap 01610 Doc. # 17 & 17-1 (Bankr.C.D.Cal.)). The Ninth Circuit’s decision did not mention the U.S. Bank debt, or even whether it had been satisfied or refinanced. In short, although the debtor’s promissory notes were “subordinated,” they were only subordinated to U.S. Bank, and nothing indicated that the U.S. Bank debt remained outstanding.
The defendants also cite the recent Supreme Court case Law v. Siegel, — U.S. —, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) for the proposition that courts cannot override the express language of the Bankruptcy Code § 548(c) based on notions of equity. (See Omnibus Reply Memorandum of the Pryor Cashman Movants in Further Support of Their Motions to Dismiss the Amended Complaints, dated Mar 17, 2014, at 17 (ECF Doc. # 5875); Reply Memorandum of Law in Support of Defendants’ Motion to Dismiss, dated Mar. 17, 2014, at 18 (ECF Doc. # 5867)). Here, the Trustee is not relying on Bankruptcy Code § 105(a) to argue that the satisfaction of general claims does not provide value for the transfer of fictitious profits. He is relying on SIPA as well as the case law that has interpreted the meaning of “value” under the Bankruptcy Code and similar avoidance statutes and concluded that a Ponzi scheme investor does not provide value beyond his principal investment.
After Judge Rakoff decided the antecedent debt issue, the Second Circuit rendered three decisions in the Madoff case, Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir.2014), Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.), 768 F.3d 239 (2d Cir.2014) and Picard v. Ida Fishman Revocable Trust (In re BLMIS), 773 F.3d 411 (2d Cir.2014). After each decision, which they viewed as intervening authority, certain defendants wrote letters to the Court arguing that the particular decision undercut Judge Ra-koff s analysis of value in a SIPA case. In Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir.2014), the Trustee sought, inter alia, to enjoin settlements between BLMIS feeder funds and their customers under Bankruptcy Code § 105(a), contending that the settlements impeded the Trustee’s ability to recover fraudulent transfers from the settling feeder fund defendants. Id. at 204, 205, 212. The Second Circuit affirmed the District Court’s refusals to enjoin the settlements. It concluded that the Trustee had no greater legal interest in an unadjudicated fraudulent transfer than an ordinary trustee. Id. at 212-13. Furthermore, the limited purpose of SIPA § 78fff~2(c)(3) was to allow a SIPA trustee to avoid and recover the transfer of customer funds — non-debtor property — to the same extent that a bankruptcy trustee could avoid and recover the transfer of debtor property. Id. at 213. The defendants argue that this statement reinforces their contention, rejected in the Antecedent Debt Decision, that the SIPA trustee •is subject to the same “value” defense as the ordinary bankruptcy trustee. (Letter *469from Richard Levy, Jr., Esq. and Carole Neville, Esq. to the Court, dated Sept. 4, 2014) (ECF Doc. # 7862).)
The defendants next point to Krys v. Farnum Place, LLC, 768 F.3d 239 (2d Cir.2014). In Krys, the British Virgin Islands (“BVI”) liquidator of a BLMIS feeder fund (Sentry) sold Sentry’s customer claim in the BLMIS case to Farnum Place, LLC (“Farnum”). Three days after the parties signed a trade confirmation, the Trustee announced the settlement of a significant avoidance claim and Sentry’s customer claim rose substantially in value. As a result, the Trustee decided not to seek approval of the transaction. Farnum petitioned the BVI court, which approved the sale of the claim over the liquidator’s opposition. The parties then returned to this Court, and the liquidator sought an order disapproving the sale. Id. at 242-34.
The principal issue was whether Bankruptcy Code § 1520(a)(2), which makes Bankruptcy Code § 363 applicable to a foreign main proceeding, required this Court to approve (or disapprove) the sale of the Sentry claim. Reversing the Bankruptcy and District Courts, the Second Circuit concluded that the Sentry claim was property within the territorial jurisdiction of the United States, § 1520(a)(2) stated that § 363 applied to the transfer “to the same extent that [§ 363] would apply to property of the estate,” and the Court was not required to defer to the BVI court under principles of comity. Id. at 244-46. Seizing on the Court’s “to the same extent” language, the defendants argue that SIPA § 78fff — 2 (c)(3) uses similar language (permitting the SIPA trustee to recover transfers of customer property “to the extent that such transfer is voidable or void under the provisions of Title 11”), and reason that there is no basis to limit the value defense based on non-statutory notions of priority and subordination. (See Letter from Richard Levy, Jr., Esq., and Carole Neville, Esq., to the Court, dated Sept. 30, 2014) (ECF Doc. # 8051).)
Finally, defendants rely on Ida Fish-man. There, the Court of Appeals affirmed the District Court’s ruling that payments to customers were, inter alia, settlement payments and subject to the safe harbor of Bankruptcy Code § 546(e) which limited the Trustee to recovering intentional fraudulent transfers under 11 U.S.C. § 548(a)(1)(A) made within two years of the petition or filing date. Ida Fishman, 773 F.3d at 417-23. The Court also rejected the Trustee’s argument that affirmance would be inconsistent with the Court’s Net Equity Decision, In re BLMIS, 654 F.3d 229 (2d Cir.2011), cert. denied, — U.S. —, 133 S.Ct. 24, 183 L.Ed.2d 675 (2012), noting a distinction between the SIPA and the Bankruptcy Code, and emphasizing that in enacting § 546(e), Congress struck a balance and determined that the need for finality was paramount even in light of countervailing equitable considerations. Ida Fishman, 773 F.3d at 423. The defendants argue that the Court’s holding confirms that the transfer of fictitious profits that satisfied state law obligations constituted “value,” and SIPA priorities cannot impair an otherwise valid defense under Bankruptcy Code § 548(c). (See Letter from Richard Levy, Jr., Esq., Carole Neville, Esq. and Matthew A. Kupillas, Esq. to the Court, dated Dec. 10, 2014 (ECF Doc. #8703).)
The three decisions support the general proposition that SIPA § 78fff-2(c)(3) is limited to granting a SIPA trustee the additional power to recover the transfers of customer property, but otherwise, the Trustee’s fraudulent transfer claims proceed as they would in an ordinary bankruptcy. It does not follow, however, that the defendants paid value in exchange for the fictitious profits they received. First, the decisions did not address the question of value, and a non-SIPA bankruptcy trus*470tee can recover fictitious profits because transferees in a Ponzi scheme do not give “value” within the meaning of the Bankruptcy Code beyond what they pay into the scheme. Fictitious profits are not profits at all but distributions of other people’s money based on an arbitrary allocation of fraudulent bookkeeping entries. The three Second Circuit decisions did not address this rule and it remains the majority view.
Second, although the Ida Fishman court emphasized the distinction between the goals of SIPA and the Bankruptcy Code when discussing the statute of limitations incorporated into Bankruptcy Code § 546(e), the two statutory regimes are not so easily separated with respect to other aspects of fraudulent transfer litigation. Unlike § 546(e), there is no clear statutory direction that the satisfaction of claims against the general estate provides value for the fraudulent transfer of fictitious profits from the deposits made by other customers. The “same extent” language is tempered by the “to the extent consistent” with SIPA proviso. The District Court ruled that the antecedent debt defense urged by the defendants 'would minimize the customer property fund and distributions to customers in contravention of one of the principle purposes of SIPA.
Accordingly, the Court concludes that the payment of fictitious profits did not satisfy an antecedent debt or provide value within the meaning of Bankruptcy Code § 548(c) and (d)(2)(A).
D. Pleading Deficiencies
1. The Trustee has not established that the transfers were made with the intent to defraud creditors; the Ponzi scheme presumption does not apply because BLMIS was not a Ponzi scheme.
In order to plead a legally sufficient fraudulent transfer claim under 11 U.S.C. § 548(a)(1)(A), the Trustee must plead that BLMIS made the subject transfer with the actual intent to defraud. The Trustee has relied upon the Ponzi scheme presumption, discussed below, to satisfy this requirement. Many defendants argue that the Ponzi scheme presumption does not apply because Madoff did not perpetuate a Ponzi scheme. First, BLMIS employed 200 people, 94% of whom conducted legitimate trades equal to 10% of the daily volume on the New York Stock Exchange. Only twelve BLMIS employees were involved in a dishonest investment advisory business. Second, the Ponzi scheme presumption should apply only to transfers to equity investors and the Defendants were not equity investors in BLMIS. The defendants did not “invest” in BLMIS. Third, a trade confirmation ticket produced by the Trustee confirms that BLMIS conducted actual trades. (B & P Memo at 25-28.)
“A ‘Ponzi scheme’ typically describes a pyramid scheme where earlier investors are paid from the investments of more recent investors, rather thandrom any underlying business concern, until the scheme ceases to attract new investors and the pyramid collapses.” Eberhard v. Marcu, 530 F.3d 122, 132 n. 7 (2d Cir.2008); accord In re BLMIS, 654 F.3d 229, 232 (2d Cir.2011) (“Net Equity Decision”), cert. denied, — U.S. —, 133 S.Ct. 25, 183 L.Ed.2d 675 (2012); see United States v. Moloney, 287 F.3d 236, 242 (2d Cir.) (“A Ponzi scheme by definition uses the purportedly legitimate but actually fraudulently obtained money to perpetuate the scheme, thus attracting both further investments and, in many cases, new investors to defraud.”), cert. denied, 537 U.S. 951, 123 S.Ct. 416, 154 L.Ed.2d 297 (2002). Some courts have applied a four factor test to determine if a Ponzi scheme existed: *471“1) deposits were made by investors; 2) the Debtor conducted little or no legitimate business operations as represented to investors; 3) the purported business operation of the Debtor produced little or no profits or earnings; and 4) the source of payments to investors was from cash infused by new investors.” Gowan v. Amaranth Advisors L.L.C. (In re Dreier LLP), Adv. P. No. 10-03493, 2014 WL 47774, at *9 (Bankr.S.D.N.Y. Jan. 3, 2014) (citation omitted).
Once it is determined that a Ponzi scheme exists, all transfers made in furtherance of that Ponzi scheme are presumed to have been made with fraudulent intent. Picard v. Merkin (In re BLMIS), No. 11 MC 0012(KMW), 2011 WL 3897970, at *4 (S.D.N.Y. Aug. 31, 2011); Christian Bros., 439 B.R. at 306 n. 19; Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 8 (S.D.N.Y.2007). As one court explained:
The logic for applying a presumption of actual intent to defraud in the Ponzi scheme scenario is tied to the fact that a Ponzi scheme “cannot work forever.” When the pool of investors runs dry — as it will — the operator knows that the scheme will collapse and that those still invested in the enterprise will lose their money. “Knowledge to a substantial certainty constitutes intent in the eyes of the law,” and awareness that some investors will not be paid is sufficient to establish actual intent to defraud.
Christian Bros., 439 B.R. at 306 n. 19 (quoting Martino v. Edison Worldwide Capital (In re Randy), 189 B.R. 425, 438 (Bankr.N.D.Ill.1995)).
A transferor’s admissions made during a guilty plea or allocution are admissible to prove that the transferor engaged in a Ponzi scheme. See Dreier, 2014 WL 47774, at *11. In pleading that Madoff perpetrated a Ponzi scheme through BLMIS, the Trustee relied on Madoffs allocution.23 Madoff admitted during his allocution that “for many years up until my arrest on December 11, 2008,1 operated a Ponzi scheme through the investment advisory side of my business, Bernard L. Madoff Securities LLC.” (Madoff Allocution, at 23:14-17, (United States v. Madoff, No. 09 Cr. 00213 (S.D.N.Y. Mar. 12, 2009) (DC) (ECF Doc. #50).) He admitted that he falsely represented to investors that he would invest their money in the securities of large, well-known corporations, but never invested the in the securities as promised. (Id. at 24:9-17.) Instead, he deposited the investors’ funds in a Chase bank account and “when clients wished to receive the profits they believed they had earned with me or to redeem their principal, I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds.” (Id. at 24:18-22.) Ma-doff allocuted to all of the elements of a Ponzi scheme, and accordingly, the Trustee has sufficiently pleaded that BLMIS made the transfers he seeks to avoid and recover with actual fraudulent intent for purposes of 11 U.S.C. 548(a)(1)(A).
The defendants’ contrary arguments lack merit. Their first and third points which refer to the number of BLMIS employees that worked for the investment advisory business and the existence of an actual trade confirmation rely on facts outside of the Trustee’s pleadings, and cannot be considered on a motion to dismiss.24 As to the second point, the defendants do not *472cite authority for the distinction they draw between fraudulent schemes involving investments in equity and those involving investments in debt, and the District Court has already rejected this contention as a “distinction without a difference” because the BLMIS investors faced the same risks as equity investors. Greiff, 476 B.R. at 726.
The Court agrees that there is no distinction. The hallmark of all Ponzi schemes is the use of “the investments of new and existing customers to fund withdrawals of principal and supposed profit made by other customers,” and Madoffs activities fit the definition. Net Equity Decision, 654 F.3d at 232. It does not matter whether the fraudster stole money by inducing his victims to invest in debt or equity. Charles Ponzi orchestrated his eponymous scheme borrowing money on his own promissory notes, see Cunningham v. Brown, 265 U.S. 1, 7-8, 44 S.Ct. 424, 68 L.Ed. 873 (1924), and those who issue their own fraudulent debt are treated as Ponzi schemers. See, e.g., Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837, 838 (2d Cir.1998) (“This class action suit arises from a massive Ponzi scheme perpetrated by Towers Financial Corporation (Towers) whereby Towers raised approximately $245 million through fraudulent offering memoranda and kept its failing enterprise afloat by using the principal payments of investors to make interest payments to other investors.”). Furthermore, the term Ponzi scheme has been used in appropriate circumstances to describe activities by a broker dealer and investment advisor that induced clients to entrust their funds for the purpose of investing in ostensibly legitimate securities. See, e.g., New Times Secs. Servs., 463 F.3d at 126 (“Goren conducted a Ponzi scheme using the two brokerage houses (the Debtor). He solicited investments in fictional money market funds; he pretended to invest in genuine money market funds; and he issued fraudulent promissory notes.”). In fact, the Second Circuit Ponzi scheme case that the defendants cited, Eberhard v. Marcu, 530 F.3d 122 (2d Cir.2008), involved a broker and investment advisor whose fraudulent activities mirrored many of Madoffs. See Eberhard v. United States, No. 09 Civ. 110, 2010 WL 1789889, at *3-4 (S.D.N.Y. May 4, 2010) (describing Eberhard’s fraudulent activities as a broker-dealer and investment advisor who churned client accounts and misappropriated millions of dollars through unauthorized withdrawals).
Accordingly, the portion of the Motions seeking to dismiss the complaints based on the failure to plead that the transfers were made with the actual intent to defraud are denied.
2. The Trustee has failed to adequately plead subsequent transfer liability with respect to certain of the complaints.
Section 550(a)(2) of the Bankruptcy Code allows a trustee to recover an avoided transfer from “any immediate or mediate transferee of’ the initial transferee. 11 U.S.C. § 550(a)(2). In many of his avoidance actions, the Trustee has sought to recover the initial transfers from subsequent transferees. Numerous subsequent transferee defendants argue that the' Trustee has failed to adequately plead the subsequent transfer claims.
To plead a subsequent transfer claim, the trustee must plead that the initial transfer is avoidable, and that the defendant is a subsequent transferee of that initial transfer. Rule 9(b) of the Federal Rules of Civil Procedure governs the portion of a claim to avoid an initial intentional fraudulent transfer, Sharp Int’l Corp. v. State Street Bank & Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 56 (2d Cir.2005); Atlanta Shipping Corp., Inc. v. *473Chem. Bank, 818 F.2d 240, 251 (2d Cir.1987); Nisselson v. Drew Indus., Inc. (In re White Metal Rolling & Stamping Corp. ), 222 B.R. 417, 428 (Bankr.S.D.N.Y.1998), and Rule 8(a) governs the portion of a claim to recover the subsequent transfer. Picard v. Madoff(In re BLMIS), 458 B.R. 87, 119 (Bankr.S.D.N.Y.2011); Picard v. Merkin (In re BLMIS), 440 B.R. 243, 269 (Bankr.S.D.NY.2010); SIPC v. Stratton Oakmont, Inc., 234 B.R. 293, 317-18 (Bankr.S.D.N.Y.1999). For the reasons stated, the Trustee has adequately pleaded that the initial transfers were made with fraudulent intent.
To plead the subsequent transfer prong, the complaint must allege facts that support the inference “that the funds at issue originated with the debtor,” Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.), 379 B.R. 5, 30 (Bankr.E.D.NY.2007); accord Picard v. Estate of Chais, 445 B.R. at 235, and contain the “necessary vital statistics — the who, when, and how much” of the purported transfers to establish an entity as a subsequent transferee of the funds. Allou Distribs., 379 B.R. at 32; accord Gowan v. Amaranth LLC (In re Dreier LLP), 452 B.R. 451, 464 (Bankr.S.D.N.Y.2011). The plaintiffs burden at the pleading stage “ ‘is not so onerous as to require “dollar-for-dollar accounting” of “the exact funds” at issue.’ ” Picard v. Charles Ellerin Revocable Trust (In re BLMIS), Adv. Pro. No. 10-04398, 2012 WL 892514, at *3 (Bankr.S.D.N.Y. Mar. 14, 2012) (quoting Allou Distribs., 379 B.R. at 30 (citing IBT Int'l, Inc. v. Northern (In re Int’l Admin. Servs., Inc.), 408 F.3d 689, 708 (11th Cir.2005))).
Becker & Poliakoffs omnibus memorandum of law mentioned only one subsequent transfer claim filed in one complaint: the December 14, 2011 amended complaint in Picard v. RAR Entrepreneurial Fund, Ltd., Adv. P. No. 10-04352(SMB) (“RAR Am. Complaint”) (ECF Adv. P. No. 10-04352 Doc. # 26). There, the Trustee sought to avoid and recover over $17 million in initial transfers made to defendants RAR Entrepreneurial Fund, Ltd. and Tamiami Tower Corp. as fraudulent transfers and preferences under provisions of the Bankruptcy Code and New York law. {RAR Am. Complaint at ¶¶ 2-3.) The suit also sought to recover from Russell Oasis, Alan Potamkin, and Robert Potamkin as subsequent transferees. (Id. at ¶¶ 101-106.) The Trustee alleged that these three individual defendants are co-owners of Tamiami and limited partners of RAR. {Id. at ¶¶ 10-12.) He further alleged “[o]n information and belief, some or all of the Transfers were subsequently transferred by [Tamiami and RAR] to [the three individual defendants].” (Id. at ¶ 47; see also id. at ¶ 103.)
The barebones allegations of subsequent transfer are insufficient. They lack the “vital statistics,” and the fact that the subsequent transferee defendants have ownership interests in the initial transferees is insufficient to plead a subsequent transfer claim. Dreier, 452 B.R. at 480 (subsequent transferee claims based on such transferees’ positions in the corporate structure insufficient to meet pleading standard). Other firms also argue for dismissal of the subsequent transfer claims in cases involving their clients. The Court has conducted a random review of the approximate 230 pleadings, and its review indicates that the subsequent transfer allegations, where made, suffer from the same deficiencies as the RAR Am. Complaint and must meet the same fate. My review also indicates that some counsel filed the same brief in every adversary proceeding, and argued for the dismissal of a subsequent transfer claim where the Trustee sued only one defendant and did not assert a subsequent transfer claim. See Picard v. Feldman, Adv. Pro. No. 10-*47404349(SMB); Picard v. Schur, Adv. Pro. No. 10-04396(SMB); Picard v. R. Feldman, Adv. Pro. No. 10-04560(SMB); Picard v. Diamond, Adv. Pro. No. 10-04717(SMB). Obviously, those motions are denied.
Accordingly, the subsequent transfer count in the RAR Am. Complaint and similarly pleaded claims in the other complaints will be dismissed. The Court leaves it to the parties in the first instance to determine whether this ruling requires the dismissal of the subsequent transfer claim in the specific case. If they agree, the disposition should be incorporated into a dismissal order. If they cannot agree, they should arrange a conference with the Court to discuss a procedure by which the Court can expeditiously consider the individual pleadings or an agreed upon sample and determine whether the subsequent transfer claims warrant dismissal in accordance with this opinion.
The Trustee’s opposition merits one further comment. Although not presented in a formal count, the Trustee’s complaints often include generic language alleging that to the extent the funds transferred from BLMIS were for the benefit of the subsequent transferee defendant, the latter is an initial transferee of the transfer. Section 550(a)(1) of the Bankruptcy Code allows the Trustee to recover an avoided transfer from “the initial transferee of such transfer or the entity for whose benefit such transfer was made,” 11 U.S.C. § 550(a)(1), and § 550(a)(2) permits the Trustee to recover the avoided transfer from the “immediate or mediate transferee of such initial transferee.” “The structure of the statute separates initial transferees and beneficiaries, on the one hand, from ‘immediate or mediate transferee^]’, on the other. The implication is that the ‘entity for whose benefit’ is different from a transferee, ‘immediate’ or otherwise.” Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 895 (7th Cir.1988); accord Christy v. Alexander & Alexander of New York, Inc. (In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey), 130 F.3d 52, 57 (2d Cir.1997)(“beeause ‘immediate and mediate’ transferees are the subject of the following subsection (§ 550(a)(2)), we know that the ‘entity for whose benefit’ phrase does not simply reference the next pair of hands; it references entities that benefit as guarantors of the debtor, or otherwise, without ever holding the funds.”). “The paradigm ‘entity for whose benefit such transfer was made’ is a guarantor or debt- or-someone who receives the benefit but not the money.” Bonded Fin. Servs., 838 F.2d at 895.
The Trustee’s allegations ignore these distinctions. The defendants are either transferees or persons for whose benefit the transfers were made; they can’t be both. Furthermore, they are either subsequent transferees or initial transferees. The complaints do not allege facts showing that the transfers were made for the benefit of any defendant; instead, they allege the initial transfers and assert, in concluso-ry fashion, that the subsequent transferee defendants received subsequent transfers.
As a result of the foregoing, the Trustee’s subsequent transfer claims are dismissed to the extent set forth above.
3. The Trustee has failed to adequately plead a claim to avoid obligations.
Bankruptcy Code § 548 and corresponding state law allow a bankruptcy trustee to avoid intentionally and constructively fraudulent obligations as well as transfers, and many of the complaints seek both forms of relief. “Transfers” and “obligations” represent distinct concepts, and certain provisions of the Bankruptcy Code apply to fraudulent transfers but not to *475fraudulent obligations. See, e.g., In re Asia Global Crossing, Ltd., 333 B.R. 199, 202 (Bankr.S.D.N.Y.2005) (“[Bankruptcy Code] § 502(d) applies to avoidable transfers but does not apply to avoidable obligations.”). Although not raised by the parties, the Bankruptcy Code § 546(e) safe harbor provision is such a provision. By its terms, it limits a trustee’s right to avoid a “transfer” but not his power to avoid fraudulent obligations. Lehman Bros. Holdings Inc. v. JPMorgan Chase Bank, N.A. (In re Lehman Bros. Holdings Inc.), 469 B.R. 415, 444-45 (Bankr.S.D.N.Y.2012); Geltzer v. Mooney (MacMenamin’s Grill Ltd.), 450 B.R. 414, 429-30 (Bankr.S.D.N.Y.2011). Thus, the Trustee may seek to avoid actual and constructive fraudulent obligations under Bankruptcy Code § 548 and applicable state law to the extent permitted by 11 U.S.C. § 544(b)(1).
Many defendants have moved to dismiss the claims to avoid fraudulent obligations on two grounds: (1) SIPA does not allow the Trustee to avoid fraudulent obligations and (2) the Trustee failed to plead legally sufficient avoidance claims. The former argument is based on the text of SIPA § Y8f£f — 2(c)(3). As discussed, this provision allows the Trustee to avoid transfers of customer property by creating a fiction that treats transferred customer property as property of the debtor. The defendants argue that SIPA § 78fff — 2(c)(3) does not grant the Trustee the power to avoid obligations, and conclude that the SIPA trustee cannot do so.
The defendants read SIPA § 78fff-2(c)(3) in isolation and ignore its purpose and the remainder of SIPA. The SIPA trustee is “vested with the same powers and title with respect to the debtor and the property of the debtor ... as a trustee in a case under title 11,” SIPA § 78fff-l(a), and these powers include the ability to avoid fraudulent transfers and obligations pursuant to Bankruptcy Code § 548 and applicable state fraudulent transfer law through the authority granted under Bankruptcy Code § 544(b)(1). See Marshall v. Picard (In re BLMIS), 740 F.3d 81, 88 n. 8 (2d Cir.2014) (“Although a SIPA liquidation is not a traditional bankruptcy, a SIPA trustee’s authority to bring claims in administering a SIPA liquidation is coextensive with the powers of a Title 11 bankruptcy trustee.”). As discussed earlier, the ordinary powers conferred on a bankruptcy trustee would not allow a SIPA trustee to avoid the pre-filing fraudulent (or preferential) transfer of customer property because customer property belonged to the customer and not the debtor.
SIPA § 78fff — 2(c)(3) grants the SIPA trustee the additional power to avoid the transfer of customer property. It adds to the avoiding powers that the SIPA trustee obtains through the Bankruptcy Code; SIPA does not limit those powers. See S.Rep. No. 95-763 at 13 (1978) (SIPA § 78fff-2(c)(3) “preserve^] the substance of SIPA subsection 6(c)(2)(d) which describes transactions deemed to be voidable under SIPA. Such transactions include those void or voidable under the bankruptcy act and those which have the effect of granting preferential treatment to individual customers.”); Antecedent Debt Decision, 499 B.R. at 420 (“Thus, in addition to the ordinary recovery of the debtor’s assets for distribution to creditors of the general estate, the Trustee in this SIPA proceeding must both recover customer property — which, for our purposes, has primarily been transferred to other customers in the form of fictitious ‘profits’ as part of Madoff Securities’ efforts to perpetrate its fraud — and then distributed to customer who have ‘net equity’ claims.”).
The SIPA trustee does not need additional authority or Congressionally-created fictions to avoid a fraudulent obligation incurred by the debtor. The provisions of *476the Bankruptcy Code are sufficient for that purpose, and unlike the power to avoid transfers of customer property, do not require supplementation. Accordingly, the Trustee has the authority through his Bankruptcy Code powers to avoid fraudulent obligations under Bankruptcy Code §§ 544(b)(1) and 548.
Although the Trustee has the power, the claims to avoid fraudulent obligations are inadequately pleaded. The allegations in RAR Am. Complaint, the only pleading referred to by Becker & Poliakoff,25 are also typical of the claims asserted against the defendants represented by other firms identified below:
41. To the extent BLMIS or Madoff incurred obligations to the Defendants in connection with the Account Documents, or any statement or representations made by BLMIS or Madoff, such obligations (collectively the “Obligations”) are avoidable under sections 105(a), 544(b) and 548(a) of the Bankruptcy Code, applicable provisions of [New York law], and applicable provisions of SIPA, including sections 78fff(b) and 78fff-l(b). BLMIS or Madoff incurred the Obligations as an integral part of and in furtherance of BLMIS’s Ponzi scheme.
42. To the extent BLMIS or Madoff incurred the Obligations, such Obligations were incurred with actual intent to hinder, delay, or defraud existing and/or future creditors.
43. To the extent BLMIS or Madoff incurred the Obligations, such Obligations were incurred when BLMIS was insolvent, had unreasonably small capital, and/or was unable to pay its debts as they matured. BLMIS was a massive Ponzi scheme, which as a matter of law was insolvent from its inception and, therefore, never capable of fulfilling its obligations to its creditors.
RAR Am. Complaint at ¶¶ 41-43.
These allegations fail to identify any specific obligation to be avoided beyond a reference to those incurred “in connection with” the Account Documents or statements or misrepresentations made by BLMIS or Madoff.26 The RAR Am. Complaint, at paragraph 39, defines the Account Documents to include the “Customer Agreement,” the “Option Agreement” and/or “Trading Authorization Limited to Purchases and Sales of Securities and Options” in addition to the “periodic customer statements, confirmations and other communications made by BLMIS or Madoff and sent to the Defendants.” Obligations arising “in connection with” the Account Documents or statements by BLMIS or Madoff encompass every debt that BLMIS might owe; but for the Account Documents, the defendants would not have invested with BLMIS. Moreover, victims of BLMIS’ fraud and parties to the contracts that BLMIS breached may have claims against BLMIS even if those claims only lie against the general estate. Finally, the Trustee’s apparent premise, that the victims of a Ponzi scheme hold avoidable obligations because the obligations were incurred in the course of a Ponzi scheme, makes no sense.
*477As a consequence, the intentional fraudulent obligation claims do not satisfy Fed. R. Civ. P. 9(b), cf Buchwald Capital Advisors LLC v. JP Morgan Chase Bank, N.A., (In re M. Fabrikant & Sons, Inc.), 541 Fed.Appx. 55, 57-58 (2d Cir.2013) (affirming dismissal of actual fraudulent transfer claims under Rule 9(b) based upon the plaintiffs failure to identify the “dates, amounts, and other relevant circumstances of the particular transfers”), and the constructive fraudulent obligation claims do not meet the requirements of Rule 8(a) because they fail to “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)); accord Erickson v. Pardus, 551 U.S. 89, 93, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007). The Motions to dismiss the claims seeking to avoid fraudulent obligations are granted with respect to the five adversary proceedings listed in an earlier footnote in which Becker & Poliakoff represents the moving defendants.
Other counsel made the same motion on behalf of their clients in the following adversary proceedings:
*478[[Image here]]
The obligation avoidance claims asserted in these adversary proceedings are also dismissed for the same reasons, but this ruling applies only to the defendants represented by the corresponding defense *479counsel and not to any other defendant in the adversary proceeding.
4. The Complaint fails to allege sufficient facts regarding inter-account transfers.
In SIPC v. BLMIS, 522 B.R. 41 (Bankr.S.D.N.Y.2014) (“Inter-Account Transfer Decision ”), the Court determined the correct method for calculating the net equity where a customer account had received a transfer from another BLMIS account. First, the Trustee must compute the amount of net equity in the transferor account on the date of the transfer under the Net Investment Method approved by the Second Circuit in the Net Equity Decision. Second, the Trustee must credit the transferee with the amount of the transfer up to the amount of net equity in the transferor account. See Inter-Account Transfer Decision, 522 B.R. at 62. The Court overruled numerous objections including that the Inter-Account Method violated the two year statute of limitations for fraudulent transfers, id. at 53-54, the transferees of the inter-account transfers were actually subsequent transferees, id. at 55-56, and the Inter-Account Method improperly combined accounts and violated the federal securities laws, id. at 56, and ERISA. Id. at 58-59.
Many of the defendants raise the same arguments in their motions to dismiss. Although the Inter-Account Transfer Decision dealt with the computation of net equity under SIPA and the Trustee is seeking in these adversary proceedings to recover fictitious profits, I reject these arguments for the same reasons. As discussed previously, the computation of fictitious profits that a defendant received through an inter-accotmt transfer is the same for purposes of calculating the customer’s net equity claim or his clawback exposure. If the transferor had negative net equity (or less positive equity than the amount of the transfer), the transferee did not receive credit to the extent of the negative net equity.
The one issue raised by the defendants that was not previously addressed concerns whether the Trustee has sufficiently pleaded the inter-account transfer. In particular, the exhibits attached to the complaints state the amount of the inter-account transfer (often negative) on the date of each transfer without alleging how the Trustee computed the amount. The complaints also do not allege who owned the transferor account or the relationship between the transferor and the transferee. (See, e.g., Memorandum of Law in Support of Defendants’ Motion to Dismiss the Trustee’s Complaint, dated Jan. 17, 2014, at 20 (ECF Adv. P. No. 10-04655 Doc. # 32).)
The defendants’ arguments lack merit. The complaints give the defendants fair notice of their alleged clawback exposure and the specific transfers that the Trustee is challenging during the Two-Year Period. Although the complaints do not allege how the Trustee computed the amount of the inter-account transfer, the exhibits state what the Trustee contends that amount was, and hence, provide adequate notice of the Trustee’s claims to the defendants. The defendants can test those calculations through discovery. The relevance of the identity of the transferor and its relationship to the transferee-customer is not apparent, but the defendants can certainly -learn this information through pre-trial discovery.
E. Other Arguments
1. The Trustee improperly combines accounts.
SIPA provides advances up to $500,000 per customer to promptly satisfy, in whole or part, the customer’s net equity claim. SIPA § 78fff-3(a) (“In order to provide for prompt payment and satisfac*480tion of net equity claims of customers of the debtor, SIPC shall advance to the trustee such moneys, not to exceed $500,000 for each customer, as may be required to pay or otherwise satisfy claims for the amount by which the net equity of each customer exceeds his ratable share of customer property....”). “[A] customer who holds accounts with the debtor in separate capacities shall be deemed to be a different customer in each capacity.” SIPA § 78fff-3(a)(2). The SIPC Rules implementing SIPA state that “[a]ccounts held by a customer in different capacities, as specified by these rules, shall be deemed to be accounts of ‘separate’ customers.” 17 C.F.R. § 300.100(b). Accounts held by corporations, partnerships or unincorporated associations are treated as separate from the partners or owners of the entity, id. § 300.103, and trust accounts are separate customers distinct from the trustee, settlor or beneficiary of the trust. Id. § 300.104.27
Many defendants contend that the complaints improperly combine accounts in violation of SIPA § 78fff-3(a)(2), the SIPC Rules and/or applicable pleading rules. (E.g., B & P Memo at 35-36 (citing the complaint in Picard v. Gertrude Alpern Revocable Trust (the “Alpern Complaint ”) (ECF Adv. P. No. 10-04327, Doc. # 1); Memorandum of Law in Support of Defendants’ Motion to Dismiss the Amended Complaint, dated Mar. 22, 2013, at 21-23 (ECF Adv. P. No. 10-04401 Doc. #24).) The Alpem Complaint referred to by Becker & Poliakoff is typical of other mul-ti-defendant complaints. Although it does aggregate the transfers received by the several defendants in some allegations, (e.g., Alpem Complaint at ¶¶2, 46), it annexes Exhibits B-l and B-2 which separately identify every transfer to each of the initial transferees, Gertrude E. Alpern, as Trustee, the Paul Alpern Residuary Trust and the Roberta Schwartz Trust, by date and amount. In addition, the exhibits also show that Gertrude E. Alpern, as Trustee, withdrew a total of $170,232 in net profits during the Two-Year Period on the dates indicated. (Alpern Complaint, Ex. B-l.) During the same period, the Paul Alpern Residuary Trust withdrew $13,266, (id., Ex. B-l), and the Roberta Schwartz Trust withdrew $409,702, (id., Ex. B-2), all net profits, on the dates indicated.
Each complaint attaches comparable exhibits that identify the initial transfers at issue as to each account and the withdrawals during the Two-Year Period. The complaints treat the accounts separately and provide adequate notice of the dates and amounts of the initial transfers that form the subject of the litigation. Finally, because the Trustee does not combine accounts, the defendants’ argument that the Trustee violated SIPA § 78fff-3 or 17 C.F.R. §§ 300.100(b), 300.104(b), (see B & P Memo, at 35-36), lacks merit.
The initial transferee in Picard v. Marden, Adv. P. No. 10-04348 makes a variation of this argument based on facts unique to that proceeding. According to the Complaint, dated Nov. 12, 2010 (ECF Adv. P. No. 10-04348 Doc. # 1), the dispute involves a single account, BLMIS Account No. 1M0086 (the “Account”). From April 23, 1996 when the Account was opened until around July 2004, the Account was held in the name of “Bernard A. Marden Revocable Trust.” (Complaint ¶ 11(a).) The Account was thereafter held in the name of “Marden Family LP.” (Id. ¶ 11(b).) Exhibit B attached to the complaint shows that as of July 2, 2004, the *481balance in the Account computed under the Net Investment Method was negative $36,158,815. (Id., Ex. B, at 6 of 10.) Following the last withdrawal on December 5, 2008, the negative balance increased to $68,677,612. (Id., Ex. B, at 10 of 10.) Finally, during the Two-Year Period, $40,481,500 in fictitious profits were withdrawn. (Id., Ex. B, at 8-10'of 10.)
When an account holder “transferred” fictitious profits, the transferee account received zero credit but the “transfer” did not reduce the balance in the transferee account. See Inter-Account Transfer Decision, 522 B.R. at 48. Thus, if the transferee account had a $100,000 balance and received a “transfer” consisting entirely of fictitious profits, the balance after the “transfer” remained at $100,000. When the Account changed names, however, the renamed Account retained the approximate $36 million of negative equity, a number that nearly doubled by the time the Ponzi scheme collapsed.
The Marden defendants argued that there were really two accounts, and contend that SIPA required the Trustee to treat each account separately because they were held in different capacities. In addition, the Trustee should have treated the name change as an inter-account transfer of the fictitious profits from the Bernard A. Marden Revocable Trust account, and “zeroed out” the negative starting balance in the Marden Family LP account. Had he done so, the $36,158,315 in beginning negative net equity would have disappeared, and the Marden defendants’ claw-back exposure would have been reduced from $40,481,500 during the Two-Year Period to slightly more than $32 million. (See Memorandum of Law in Support of Defendants’ Motion to Dismiss the Amended Complaint, dated Mar. 22, 2013 (“Marden Memo ”), at 29-32 (ECF Adv. P. No. 10-04348 Doc. # 25-1).)28
Unlike the typical inter-account transfer scenario, the dispute with the Marden defendants involves only one account, and there was never a transfer of profits, fictitious or otherwise, between two different accounts held by two different entities. Furthermore, the Trustee’s treatment of the Account as a single account for purposes of computing the Marden Family LP’s clawback exposure does not implicate SIPAs “separate capacities” rules. The rules were designed to expand the availability of SIPC insurance to satisfy shortfalls in the recovery of net equity. The Bernard A. Marden Revocable Trust and Marden Family LP “accounts” had negative net equity and were ineligible for SIPC insurance.
2. The Trustee’s disallowance of unidentified related claims is inconsistent with SIPA.
Section 502(d) of the Bankruptcy Code states that “the court shall disallow any claim of any 'entity from which property is recoverable under” the avoidance provisions of the Bankruptcy Code (emphasis added). In SIPC v. BLMIS, 513 B.R. 437 (S.D.N.Y.2014), the District Court withdrew the reference and denied motions to dismiss, ruling that § 502(d) applied in SIPA proceedings and authorized the disallowance of a customer claim asserted by a transferee who received a voidable transfer and failed to return it. Id. at *482445-46. The complaint that Judge Rakoff discussed for illustrative purposes, Picard v. Cardinal Mgmt., Inc., alleged that the defendant, a net loser, had failed to act in good faith and sought to avoid and recover all transfers received from BLMIS. It also included a count seeking to disallow the defendant’s customer claims under 11 U.S.C. § 502(d). Id. at 440.
The moving defendants are good faith transferees from whom the Trustee is seeking to recover only fictitious profits. According to some moving defendants, they held multiple accounts; one account may have received fictitious profits and is liable as fraudulent transferee but another account suffered a loss and is entitled to assert a customer claim. They argue that the Trustee is attempting to combine the net winner and net loser accounts and use § 502(d) tp avoid making a distribution on the latter account because of the fraudulent transfers received by the former account. They also contend that the District Court did not address this situation, and moreover, disallowing a valid customer claim because another account received fictitious profits violates the “separate capacities,” SIPA § 78fff-3(a)(2), and the accompanying rules discussed in the previous section.
Bankruptcy Code § 502(d) and SIPA § 78fff-3(a)(2) are facially consistent. Section 502(d) requires the Court to disallow the claims of an entity if the same entity received an avoidable transfer unless the entity repays the transfer. If the creditor that filed the claim is a different “entity” than the creditor that received the voidable transfer, § 502(d) does not apply. See, e.g., In re Saint Catherine Hosp. of Pennsylvania, LLC, 507 B.R. 814 (Bankr.M.D.Pa.2014) (creditor who acquired claim against the debtor after the creditor’s own bankruptcy was not the same entity for purposes of § 502(d) as the creditor’s bankruptcy estate). Similarly, if the customer owns an account in his individual name and another account as a trustee, the customers are different entities that own the accounts in separate capacities for purposes of SIPA § 78fff-3(a)(2). Conversely, if a customer holds two or more accounts in the same capacity, the customer does not hold the accounts in separate capacities under SIPA and the two accounts are held by the same entity for purposes of 11 U.S.C. § 502(d).
Accordingly, the motions to dismiss the § 502(d) claims on the ground that Bankruptcy Code § 502(d) is inconsistent with SIPA § 78fff-3(a)(2) as a matter of law are denied.
3. Applicable non-bankruptcy law protects transfers and distributions from defendants’ accounts that are held in the name of an irrevocable trust.
New York Civil Practice Law & Rules (“CPLR”) § 5205 exempts certain trust property and income from judgment execution. With some exceptions, CPLR § 5205(c)(1) provides . that “all property while held in trust for a judgment debtor, where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor, is exempt from application to the satisfaction of a money judgment,” and 5205(c)(2) states that certain trusts and plans that qualify under the Internal Revenue Code, including IRAs, shall be considered a trust created by someone other than the . judgment debtor. CPLR 5205(c)(5) provides a limited exception:
Additions to an asset described in paragraph two of this subdivision shall not be exempt from application to the satisfaction of a money judgment if (i) made after the date that is ninety days before the interposition of the claim on which such judgment was entered, or (ii) *483deemed to be fraudulent conveyances under article ten of the debtor and creditor law.
The Trustee seeks to avoid and recover fraudulent transfers made to several irrevocable trusts, e.g., Picard v. Trust For the Benefit of Ryan Tavlin, No. 10-05282(SMB) (Bankr.S.D.N.Y. Dec. 6, 2010) (ECF Adv. P. No. 10-05282 Doc. # 1)), and certain of those defendants have moved to dismiss. They argue that the challenged transfers to and distributions from the trust accounts are protected under CPLR § 5205(c). The District Court has already ruled that CPLR § 5205(c) exemption from satisfaction of a judgment does not apply because fraudulently transferred property is not exempt under CPLR § 5205(c)(5)(ii). Greiff, 476 B.R. at 729 n. 13. The moving defendants respond that the exception only applies to fraudulent transfers under New York state law, and the Trustee is limited to seeking avoidance under Bankruptcy Code § 548(a)(1)(A). .
The motion to dismiss on this ground is denied. First, CPLR § 5205 exempts certain trust property from judgment execution, but the defendants have not cited any authority in support of their argument that it invalidates the plaintiffs cause of action. Second, the exemption does not apply to all trusts. Third, CPLR § 5205 addresses the situation where the judgment debtor and the trust are different entities, and the plaintiff seeks to satisfy its judgment against the judgment debtor from the trust property or income. Here, the trust or retirement account received the fraudulent transfer. Fourth, even if the principal is exempt, the income earned by the trust may not be fully exempt from execution by a judgment creditor. See CPLR 5205(d)(1).
4. The Trustee’s actions against charitable trusts violate Free Exercise of religion.
Several defendants are charitable and/or religious organizations, and argue that the Trustee’s clawback actions violate the Religious Freedom Restoration Act of 1993 (“RFRA”), 42 U.S.C. §§ 2000bb, et seq., and the Religious Liberty and Charitable Donation Protection Act of 1998 (“RLCDPA”), P.L. 105-183. (B & P Memo at 44-45; Memorandum of Law in Support of Defendants’ Motion to Dismiss the Amended Complaint, dated Mar. 22, 2013, at 30-32 (ECF Adv. P. No. 10-05224, Doc. # 20).)
RFRA provides that the “Government shall not substantially burden a persons exercise of religion even if the burden results from a rule of general applicability,” unless it can show that burden on a person is in furtherance of a compelling governmental interest and the government has used the least restrictive means of furthering that compelling interest. Id. at 2000bb-l. RFRA imposes a burden shifting test that requires the plaintiff to show a substantial burden on the exercise of religion, and if the burden is met, requires the government to show that the burden is justified by a compelling governmental interest. Listecki v. Official Comm. of Unsecured Creditors, 780 F.3d 731, 736 (7th Cir.2015). Because the RFRA imposes the burden on the government, there is substantial doubt that it applies in litigation between private parties. Rweyemamu v. Cote, 520 F.3d 198, 203 n. 2 (2d Cir.2008) (“[W]e do not understand how [RFRA] can apply to a suit between private parties, regardless of whether the government is capable of enforcing the statute at issue.”); Hankins v. Lyght, 441 F.3d 96, 114-15 (2d Cir.2006) (“Where, as here, the government is not a party, it cannot go[] forward with any *484evidence. In my view, this provision strongly suggests that Congress did not intend RFRA to apply in suits between private parties.”) (footnote omitted) (Soto-mayor, J., dissenting).29
The defendants have failed to demonstrate a violation of the RFRA. First, these adversary proceedings are between private parties. The Trustee brought these proceedings pursuant to SIPA § 78fff-2(c)(3) and only a SIPA trustee has the authority to do so. For the reasons discussed, the Trustee is not a governmental or quasi-governmental actor, and hence, the RFRA does not appear to apply-
Second, the defendants have failed to show that the Trustees clawback actions impose a substantial burden on the exercise of religion. The defendants invested with BLMIS, and received fictitious profits in the form of money invested by other customers. The defendants transactions with BLMIS had nothing to do with the exercise of religion. Furthermore, while a money judgment may pose a monetary burden on them, it does not impose a burden much less a substantial burden on their ability to exercise their religious rights. Indeed, their argument would require exoneration from all forms of liability resulting from breaches of tort and contract law.
The defendants argument that the Trustees clawback actions violate RLCDPA is also meritless. Codified in Bankruptcy Code § 548, RLCDPA provides that subject to certain limitations:
A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B)....
11 U.S.C. § 548(a)(2). The amendment prevents a trustee from challenging good faith charitable gifts as constructive fraudulent transfers. 5 AlaN N. ResNicK HenRY J. SommeR, Collier on Baneruptoy 548.09[6], at 548-101 (16th ed.2014). The defense is available only to a qualified religious organization that receives a charitable contribution from an individual debt- or. 11 U.S.C. §§ 548(d)(3), (4).
Bankruptcy Code § 548(a)(2) is inapplicable on its face. First, it does not apply to intentional fraudulent transfer claims, and these are the only avoidance claims that the Trustee can pursue against these defendants in light of the Second Circuit’s decision in Ida Fishman. Second, the Trustee is not seeking to recover charitable contributions. Third, the exemption only applies to charitable contributions made by a natural person, and BLMIS was not a natural person.
The defendants also argue that the Trustee recognized that his complaints against charitable organizations violated the RFRA and the principles underlying the RLCDPA when he entered into a “sweetheart settlement” with the heirs of Norman Levy pursuant to which he did not seek to recover amounts transferred to the family’s charitable foundation. (B & P Memo at 45; Memorandum of Law in *485Support of Defendants’ Motion to Dismiss the Amended Complaint, dated Mar. 22, 2013, at 32 (ECF Adv. P. No. 10-05224, ' Doc. #20).) The contention grossly distorts the record and amounts to irresponsible advocacy. The Trustees Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and Among the Trustee and Jeanne Levy-Church and Francis N. Levy, dated Jan. 27, 2010 (ECF Doc. # 1833), which the moving defendants cite, stated that he was not pursuing a judgment against the Levys’ charitable Foundation because the Foundation had no remaining assets and was judgment proof. In a footnote, the Trustee indicated that he reserved the right “to engage in discussions with the charities that received money from the Foundation about returning to the Trustee the amounts they received that constitute customer property.” Id. at ¶ 12 n. 5. The Trustee did not recognize that his complaint against the Levys violated the RFRA or the RLCDPA.
Accordingly, the motions to dismiss based on the RFRA and RLCDPA are denied.
5. The complaint improperly relies on (a) transactions between the defendants and third party brokers other than BLMIS; and (b) withdrawal payments made to a ■ customer by non-BLMIS brokers and paid from a non-BLMIS account.
The defendants represented by Bernfeld, Dematteo & Bernfeld, LLP in eleven adversary proceedings (see 10-04349; 10-04394; 10-04396; 10-04408; 10-04468; 10-04560; 10-04561; 10-04717; 10-05094; 10-05231; 10-04361) moved to dismiss contending that although BLMIS was not formed until December 2001, the Trustee has included the deposits to and withdrawals from the pre-BLMIS entity in computing the amount of fictitious profits that each defendant received. This argument requires consideration of facts outside of the four corners of the complaints, and is improperly interposed on a motion to dismiss pursuant to Rule 12(b)(6).
In addition, this Court rejected the argument as a factual matter in the Inter-Account Transfer Decision, 522 B.R. at 60. Prior to January 2001, Madoff operated BLMIS as a sole proprietorship, and in January 2001, BLMIS changed to a limited liability company. The forms Madoff submitted to SIPC at the time stated that BLMIS was a successor to all of the assets and liabilities of the predecessor business and the transfer would not result in any change in ownership or control. Thus, nothing changed. Furthermore, the fictitious profits that comprised their accounts when Madoff operated as a sole proprietorship were still fictitious profits in their accounts when Madoff operated as BLMIS LLC. Accordingly, the motions to dismiss on this ground are denied.
6. The Trustee’s complaints violate New York public policy.
The defendants represented by Becker & Poliakoff argue that the Trustee’s actions violate the New York public policy regarding commercial certainty and finality, primarily relying on Banque Worms v. BankAmerica Int'l, 77 N.Y.2d 362, 568 N.Y.S.2d 541, 570 N.E.2d 189 (1991) and Commodity Futures Trading Comm’n v. Walsh, 17 N.Y.3d 162, 927 N.Y.S.2d 821, 951 N.E.2d 369 (2011) and suggesting that any other rule would lead to chaos. (B & P Memo at 28-30.) The Court rejected a similar argument in the Inter-Account Transfer Decision, 522 B.R. at 56-58, and does again for the same reasons.
In addition, federal and state laws include fraudulent transfer provisions. In *486particular, the Bankruptcy Code and SIPA provide for the recovery of fraudulent transfers, and expectations of certainty and finality are tempered by the knowledge that transactions may be avoided and the transfers recovered. The public policies of the State of New York and the United States condemn fraudulent transfers, and do not give commercial transactions a free pass.
The defendants also quote from Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 336 (2d Cir.2011) that “ ‘certainty and predictability are at a premium’ in the area of law governing securities transactions.” (B & P Memo at 30.) Enron concerned the interpretation of 11 U.S.C. § 546(e). Construing the same provision in Ida Fishman, the Court of Appeals stated that in enacting the Bankruptcy Code, “Congress struck careful balances between the need for an equitable result for the debtor and its creditors, and the need for finality,” and the need for finality was reflected in the two year reach back period granted the Trustee to avoid and recover intentional, fraudulent securities-related transfers through 11 U.S.C. §§ 546(e) and 548(a)(1)(A). Ida Fishman, 773 F.3d at 423. Here, the Trustee seeks to recover intentional fraudulent transfers made during the Two-Year Period consistent with that policy.
CONCLUSION
The Motions are granted in part and denied in part. The Court has considered the defendants’ remaining arguments and concludes that they lack merit. The parties are directed to settle appropriate orders or submit consensual orders consistent with this decision in the adversary proceedings that it covers.
Appendix
Case Name Adv. Pro. No. Defense Counsel
1 Picard v. R. Roman 10-04292 Becker & Poliakoff, LLP30
2 Picard v. J. Roman 10-04302 Becker & Poliakoff, LLP
3 Picard v. David Shapiro Nominee 4, et al. 10-04305 Becker & Poliakoff, LLP
4 Picard v. Tiletnick 10-04306 Becker & Poliakoff, LLP
5 Picard v. David Shapiro Nominee 3. et al 10-04314 Becker & Poliakoff, LLP
6 Picard v. Barbanel, et al. 10-04321 Becker & Poliakoff LLP
7 Picard v. Roth, et al. 10-04324 Becker & Poliakoff LLP
8 Picard v. David Shapiro Nominee 2, et al. 10-04325 Becker & Poliakoff LLP
9 Picard v. Gertrude E. Alpern Revocable Trust, et al. 10-04327 Becker & Poliakoff LLP31
10 Picard v. David Shapiro Nominee, et al. 10-04328 Becker & Poliakoff LLP
11 Picard v. Sirotkin 10-04344 Becker & Poliakoff LLP
12 Picard v. Sage Assocs., et al. 10-04362 Becker & Poliakoff. LLP’32
13 Picard v. Heller 10-04367 Becker & Poliakoff LLP
14 Picard v. Yaffe 10-04380 Becker & Poliakoff LLP
15 Picard v. Abel 10-04381 Becker & Poliakoff LLP
16 Picard v. Fern C. Palmer Revocable Trust DTD 12/31/91, as amended, et al. 10-04397 Becker & Poliakoff, LLP
17 Picard v. Sage Realty, et al. 10-04400 Becker & Poliakoff LLP33
*488Case Name Adv. Pro. No. Defense Counsel
18 Picardy. Triangle Props, 39, el al. 10-04406 Becker & Poliakoff, LLP
19 Picard v. Rechler 10-04412 Becker & Poliakoff, LLP
20 Picard r. Jaffe 10-04425 Becker & Poliakoff, LLP
21 Picard v. Kamestein. et al. 10-04469 Becker & Poliakoff, LLP
22 Picard v. Roger Rechler Revocable Trust, et al. 10-04474 Becker & Poliakoff, LLP
23 Picard v. Robbins 10-04503 Becker & Poliakoff, LLP
24 Picard v. Ferber 10-04562 Becker & Poliakoff, LLP
25 Picard v. The Whitman P'ship, et al. 10-04610 Becker & Poliakoff, LLP
26 Picard v. Benjamin 10-04621 Becker & Poliakoff, LLP
27 Picard v. Dusek 10-04644 Becker & Poliakoff, LLP
28 Picard v. Gross, et al. 10-04667 Becker & Poliakoff, LLP
29 Picard v. Timothy Shawn Teufel and Valerie Ann Teufel Family Trust U/T/D/ 5/24/95, et al. 10-04668 Becker & Poliakoff, LLP
30 Picard v. Chalek Assocs. LLC 10-04680 Becker & Poliakoff, LLP
31 Picard v. Joseph S. Popkin Revocable Trust Dated February 9, 2006, a Florida Trust, et cd. 10-04712 Becker & Poliakoff, LLP34
32 Picard v. Hirsch, et al. 10-04740 Becker & Poliakoff, L.I.P
33 Picard v. Samdia Family L.P.. a Delaware P 'ship, el al. 10-04750 Becker & Poliakoff, LLP
34 Picard v. Kuntzman Family LLC, et at. 10-04752 Becker & Poliakoff LLP
35 Picard v. Ginsburg 10-04753 Becker & Poliakoff, LLP
36 Picard v. Estate of Irene Schwartz, et al. 10-04781 Becker & Poliakoff, LLP
37 Picard v. Michalove 10-04786 Becker & Poliakoff, LLP
38 Picard v. The. Estelle Harwood Family Ltd. P ’ship, et al. 10-04803 Becker & Poliakoff, LLP
39 Picard v. Kohl, et al. 10-04806 Becker & Poliakoff, LLP
40 Picard v. Gordon 10-04809 Becker & Poliakoff, LLP
41 Picard v. Harwood 10-04818 Becker & Poliakoff, LLP
42 Picard v. DiFazio, et al. 10-04823 Becker & Poliakoff, LLP
43 Picard v. Estate of Boyer Palmer, et al. 10-04826 Becker & Poliakoff, LLP
*489Case Name Adv. Pro. No. Defense Counsel
44 Picard v. Ehrlich, et al. 10-04837 Becker & Poliakoff, LLP
45 Picard v. Estate of Steven I. Harnick 10-04867 Becker & Poliakoff, LLP
46 Picard v. Andelman, et al. 10-04884 Becker & Poliakoff, LLP
47 Picard v. Gordon 10-04914 Becker & Poliakoff, LLP
48 Picard v. Castelli 10-04956 Becker & Poliakoff LLP
49 Picard v. Sylvan Assocs. LLC, et al. 10-0496) Becker & Poliakoff LLP
50 Picard v. Melvin H. and Leona Gale Joint Revocable Living Trust u/a/d 1/4/94, et al. 10-04993 Becker & Poliakoff LLP
51 Picard v. Trust u/art Fourth o/w/o Israel Wilentz, et al. 10-04995 Becker & Poliakoff LLP
52 Picard v. Waller Freshman Trust A, a Florida trust, et al. 10-05026 Becker & Poliakoff LLP
53 Picard v. Benjamin, et al. 10-05102 Becker & Poliakoff LLP
54 Picard v. Robert C. Luker Family P’ship, et al. 10-05105 Becker & Poliakoff LLP
55 Picard v. The Lawrence J. Ryan and Theresa R. Ryan Revocable Living Trust, et al. 10-05124 Becker & Poliakoff, LLP
56 Picard v. Estate of Boyer Palmer, et al. 10-05133 Becker & Poliakoff LLP
57 Picard v. Bert Brodsky Assocs., Inc. Pension Plan, at al. 10-05148 Becker & Poliakoff, LLP
58 Picard v. Palmer Family Trust, et al. 10-05151 Becker & Poliakoff LLP
59 Picard v. Blue Bell Lumber and Moulding Co., Inc. Profit Sharing Plan, et al. 10-05154 Becker & Poliakoff LLP
60 Picard v. The Harnick Bros. P ’ship, et al. 10-05157 Becker & Poliakoff LLP
61 Picard v. Laura Ann Smith Revocable Living Trust, et al. 10-05184 Becker & Poliakoff LLP
62 Picard v. The Lazarus-Schy Family P 'ship, a Florida gen. P ’ship, et al 10-05190 Becker & Poliakoff, LLP
63 Picard v. Trust for the Benefit of Ryan Tavlin, et al. 10-05232 Becker & Poliakoff LLP35
64 Picard v. Doron Tavlin Trust U/A 2/4/91. el al. 10-05312 Becker & Poliakoff, LLP36
*490Case Name Acfv. Pro. No. Defense Counsel
65 Picard v. Eaton 10-05377 Becker & Poliakoff, LLP
66 Picard v. Unflat, el al. 10-05420 Becker & Poliakoff LLP
67 Picard v. Schaffer, et al. 10-05435 Becker & Poliakoff. LLP
68 Picard v. Realty Negotiators Defined Pension Plan, et al. 10-05438 Becker & Poliakoff, LLP
69 Picard v. Wechsler 10-05443 Becker & Poliakoff, LLP
70 Picard v. Cutroneo, et al. 10-04303 Becker & Poliakoff, LLP37
71 Picard v. RAR Entrepreneurial Fund, LTD., et al. 10-04352 Becker & Poliakoff, LLP38
72 Picard v. Yesod Fund, a trust 10-04391 Becker & Poliakoff, LLP
73 Picard v. Meisels 10-04428 Becker & Poliakoff, LLP
74 Picard v. Trust U/W/O Morris Weintraub FBO Audrey Weintraub, et al. 10-04434 Becker & Poliakoff, LLP
75 Picard v. Estate of Seymour Epstein, et al. 10-04438 Becker & Poliakoff LLP
76 Picard v. Trust Under Agreement Dated 12/6/99 for the benefit of Walter and Eugenie Kissinger, et al. 10-04446 Becker & Poliakoff LLP
77 Picard v. Roger Rechler Revocable Trust 10-04474 Becker* Poliakoff LLP
78 Picard v. Estate of Audrey Weintraub, et al. 10-04487 Becker & Poliakoff, LLP
79 Picard v. Krauss 10-04489 Becker & Poliakoff LLP
80 Picard v. Elaine Dine Living Trust dated 5/12/06, et al. 10-04491 Becker & Poliakoff, LLP
81 Picard v. The Gerald and Barbara Keller Family Trust, et al. 10-04539 Becker* Poliakoff LLP
82 Picard a. Perlman, et al. 10-04541 Becker & Poliakoff LLP39
83 Picard v. Goodman, et al. 10-04545 Becker & Poliakoff, LLP
84 Picard v. Jacob M. Dick Rev Living Trust DTD 4/6/01, et al. 10-04570 Becker & Poliakoff, LLP40
*491Case- Name Adv. Pro. No. Defense Cotinsel
85 Picard v. A. Shulman 10-04599 Becker & Poliakoff, LLP
86 Picard v. Estate of Florence W. Shulman, et al. 10-04606 Becker & Poliakoff. LLP
87 Picard v. Whitman 10-04614 Becker & Poliakoff, LLP
88 Picard v. Estate of Richard S. Poland, et al. 10-04633 Becker & Poliakoff. LLP
89 Picard v. P. Kamenstein 10-04648 Becker & Poliakoff LLP
90 Picard r P.B. Robco Inc. 10-04660 Becker & Poliakoff, LLP
91 Picard v. Garten 10-04682 Becker & Poliakoff, LLP
92 Picard v. Clothmasters, Inc. 10-04694 Becker & Poliakoff, LLP
93 Picard v. Goodman 10-04709 Becker & Poliakoff. LLP
94 Picard v. The Jordan H. Kart Revocable Trust, et al. 10-04718 Becker & Poliakoff, LLP
95 Picard v. Diginlian 10-04728 Becker & Poliakoff. LLP
96 Picard v. J.Z. Personal Trust, et al. 10-04733 Becker & Poliakoff, LLP
97 Picard v. Horowitz, et al. 10-04748 Becker & Poliakoff, LLP
98 Picard v. Palmedo 10-04749 Becker & Poliakoff, LLP
99 Picard v. Estate of James M. Goodman, et al. 10-04762 Becker & Poliakoff. LLP
100 Picard v. Placon2, et al. 10-04768 Becker & Poliakoff, LLP
101 Picard v. Alvin E. Shulman Pourover Trust, et al. 10-04852 Becker & Poliakoff. LLP
102 Picard v. Bert Margolies Trust, et al. 10-04859 Becker & Poliakoff, LLP
103 Picard v. Rautenberg 10-04876 Becker & Poliakoff. LLP
104 Picard v. R. Savin 10-04889 Becker & Poliakoff, LLP
105 Picard v. Train Klan, a P’ship, et al. 10-04905 Becker & Poliakoff, LLP
106 Picard v. Harry Smith Revocable Living Trust, el al. 106 10-04912 Becker & Poliakoff. LLP
107 Picard v. Andelman 10-04916 Becker & Poliakoff, LLP
108 Picard v. Glenhaven Ltd., et al. 10-04920 Becker & Poliakoff. LLP
109 Picard v. James M. New Trust did 3/19/01, et al. 10-04979 Becker & Poliakoff, LLP
110 Picard v. Gviducci Family Ltd. P 'ship, et al. 10-04991 Becker & Poliakoff. LLP
111 Picard v. Ehrmann, et al. 10-05032 Becker & Poliakoff, LLP
*492Case Name Adv. Pr<J. No; Defense Counsel
112 Picard v. B. Savin 10-05037 Becker & Poliakoff, LLP
113 Picard v. Marilyn Turk Revocable Trust, et al. 10-05041 Becker & Poliakoff, LLP
114 Picard v. Bevro Realty Corp. Defined Benefit Pension Plan, et al. 10-05051 Becker & Poliakoff, LLP
115 Picard v. The Celeste & Adam Bartos Charitable Trust, et al. 10-05064 Becker & Poliakoff, LLP
116 Picard v. Estate of James M. Goodman 0-05079 Becker & Poliakoff LLP
117 Picard v. C. Benjamin, et al. 10-05102 Becker & Poliakoff, LLP
118 Picard v. The Gloria Albert Sandler and Maurice Sandler Revocable Living Trust, et al. 10-05104 Becker & Poliakoff, LLP
119 Picard v. Stony Broof Found., Inc. 10-05106 Becker & Poliakoff, LLP
120 Picard v. Leonard J. Oguss Trust, et al. 10-05116 Becker & Poliakoff, LLP
121 Picard v. Atwood Mgmt. Profit Sharing Plan & Trust, et al. 10-05127 Becker & Poliakoff, LLP
122 Picard v. JABA Assocs. LP, et al. 10-05128 Becker & Poliakoff, LLP
123 Picard v. Reckson Generation, et al. 10-05135 Becker & Poliakoff, LLP
124 Picard v. Plafsky Family LLC Retirement Plan, et al. 10-05150 Becker & Poliakoff, LLP
125 Picard v. Blue Bell Lumber and Moulding Company, Inc. Profit Sharing Plan, et al. 10-05154 Becker & Poliakoff, LLP
126 Picard v. Irene Whitman 1990 Trust U/A DTD 4/13/90, et al. 10-05196 Becker & Poliakoff, LLP
127 Picard v. William Pressman, Inc., et al. 10-05309 Becker & Poliakoff, LLP41
128 Picard v. The Estate of Nathan Schupak, et al. 12-01706 Becker & Poliakoff, LLP
129 Picard v. Estate of Eleanor Myers, et al. 10-05401 Milberg LLP42
*493Case Name Adv, Pro. No. Defense Counsel
130 Picard v. E. Gorek, et al. 10-04797 Day Pilney LLP43
131 Picard v. E. Gorek 10-04623 Day Pitney LLP
132 Picard v. P. Feldman 10-04349 Bernfeld, Bernfeld, DeMatteo & LLP44
133 Picard k Konigsberg, et al. 10-04394 Bernfeld, Bernfeld, DeMatteo & LLP45
134 Picard v. Schur 10-04396 Bernfeld, Bernfeld, DeMatteo & LLP
135 Picard r. Yankowifz, et al. 10-04408 Bernfeld, Bernfeld, DeMatteo & LLP
136 Picard v. Ken-Wen Family Ltd. P 'ship, et al. 10-04468 Bernfeld, Bernfeld, DeMatteo & LLP46
137 Picard v. R. Feldman 10-04560 Bernfeld, Bernfeld, DeMatteo & LLP
138 Picard v. Jeffrey R. Werner 11:1:98 Trust, et al. 10-04561 Bernfeld, Bernfeld, DeMatteo & LLP
139 Picard v. William Diamond 10-04717 Bernfeld, Bernfeld, DeMatteo & LLP
140 Picard v. The Estate of Carolyn Miller, et al. 10-05094 Bernfeld, Bernfeld, DeMatteo & LLP
141 Picard v. Trust under Deed of Suzanne R. May dated November 23, 1994, et al. 10-05231 Bernfeld, Bernfeld, DeMatteo & LLP
142 Picard v, Harvey L. Werner Revocable 10-04361 Bernfeld, DeMatteo &
*494Case Name Adv. Pro. No. Defense Counsel
Trust IJ/A-'D H/31'82. as amended, eta/. Bevnfelcl, Ll.P
143 Picard v. Schmall 10-04772 Herbet Beigel & Associates47
144 Picard v. Jaffe Family Iriv. P ’ship, et al. 10-04655 Lax & Neville LLP48
145 Picard v. Kaye, et al. 10-04756 Lax & Neville LLP
146 Picard v. Kansler 10-04900 Lax & Neville LLP
147 Picard v. Livingston 10-04881 Lax & Neville LLP
148 Picard v. Wallenstein 10-04467 Lax & Neville LLP
149 Picard v. H. Solomon 10-04307 Lax & Neville LLP
150 Picard v. Wallenstein/NY P 'ship, et al. 10-04988 Lax& Neville LLP
151 Picard v. The Estate of Madeline Gins Arakawa, et al. 10-04827 Lax & Neville LLP49
152 Picard v. Fujiwara, et al. 10-04289 Lax & Neville LLP
153 Picard v. Bloom 10-04301 Lax & Neville LLP
154 Picard v. E. Solomon 10-04304 Lax & Neville LLP
155 Picard v. Abbit Family Trust 9:7:90, et al. 10-04647 Lax & Neville LLP
156 Picard v. Fairfield Papua Associates, T.P, a New York Ltd. P 'ship, et al. 10-05169 .1 ,ax & Neville LLP
157 Picard v. The Frances J. Le Vine Revocable Trust, et al. 10-05246 Lax & Neville LLP
158 Picard v. Kahn 10-04954 Lax & Neville LLP
159 Picard v. Felcher 10-05036 Lax & Neville LLP
160 Picard v. Yan, et al. 10-05048 Lax & Neville LLP50
*495Case Name Adv. Pro. No. Defense Counsel
161 Picard v. The Lamry Rose Revocable Trust, a Florida trust, et al 10-05160 Lax & Neville LLP
162 Picard v. Bruce Leventhal 2001 Irrevocable Trust, etal. 10-04573 Lax & Neville LLP
163 Picard v. Onesco Int’l, Ltd., et al. 10-04966 Lax & Neville LLP51 Milberg LLP52
164 Picard v. Goldberg, et al. 10-05400 Waehtel Missry LLP53
165 Picard v. Chemla, et al. 10-04726 Waehtel Missry LLP
166 Picard v. Shetland Fund Ltd. P ’ship, et al. 10-04579 Waehtel Missry LLP
167 Picard v. Feffer 10-04896 Waehtel Missry LLP
168 Picard v. O.D.D. Inv., L.P., et al. 10-05372 Waclitel Missry LLP
169 Picard v. Schiff 10-04502 Waehtel Missry LLP
170 Picard v. Schiff Family Holdings Nevada Ltd. P 'ship, et al. 10-04363 Waehtel Missry LLP
171 Picard v. Sands 10-04447 Waehtel Missry LLP
172Picard v. Silna, et al. 10-04472 Waehtel Missry LLP
173 Picard v. The Silna Family Inter Vivos Trust, etal. 10-04470 Waehtel Missry LLP
174 Picard v. Greiff 10-04357 Dentons US LLP54
175 Picard v. Kaye 10-04796 McLaughlin & Stern LLP55
*496Case Name Adv, Pro. No. Defense Counsel
176 Picard v. Lindenbautn 10-04481 Lax & Neville LLP
177 Picard v. Pergament Equities, LI.C, et ai 10-04944 Prvor Cashman LLP56
178 Picard v. Pergament, et al. 10-05194 Pryor Cashman Ll.P
179 Picard v. Steven V Marcus Separate Prop, of the Marcus Family Trust, et al. 10-04906 Milberg LLP
180 Picard v. Hein 10-04861 Dentons US LLP
181 Picard v. Miller 10-04921 Dentons US LLP
182 Picard v. Cole 10-04672 Dentons US LLP
183 Picard v. Berdon 10-04415 Dentons US LLP
184 Picard v. Lapin Children LLC 10-05209 Dentons US LLP
185 Picard v. Weisfeld 10-04332 Demons US LLP
186 Picard v. Rose Gindel Trust, et al. 10-04401 Dentons US LLP
187 Picard v. Eugene J. Ribakoff2006 Trust, et al. 10-05085 Dentons US LLP
188 Picard v. The Frederica Ripley French Revocable Trust, et ai. 10-05424 Demons US LLP
189 Picard v. Markin, et al. 10-05224 Dentons US LLP
190 Picard v. Alvin Gindei Revocable Trust, a Florida trust, et al. 10-04925 Demons US LLP
191 Picard v. Neil Reger Profit Sharing Keogh, et al. 10-05384 Dentons US LLP
192 Picard v. Am. Israel Cultural Found., Inc. 10-05058 Demons US LLP
193 Picard v. Thau 10-04951 Milberg LLP
194 Picard v. Goldenberg 10-04946 Milberg LLP
195 Picard v. John Denver (Concerts, Inc. Pension Plan Trust, et al. 10-05089 Milberg LLP
196 Picard v. Aspen Fine Arts Co., et al. 10-04335 Milberg LLP
197 Picard v. Estate of Ira S. Rosenberg, et al. 10-04978 Milberg LLP
*497Case Name Adv. Pro. No. Defense Counsel
198 Picard v. Goldstein 10-04725 Milberg LLP
199 Picard v. Potamkin Family Found. Inc. 10-05069 Milberg LLP
200 Picard v. Eisenberg 10-04576 Milberg LLP
201 Picard v. William M. Woessner Family Trust et al 10-04741 Milberg LLP57
202 Picard v. Gabriele 10-04724 Milberg LLP
203 Picard v. Blumenthal 10-04582 Milberg LLP
204 Picard v. Roth 10-05136 Milberg LLP
205 Picard v. Sobin 10-04540 Seeger Weiss LLP58
206 Picard v. J. Marden. et al. 10-04341 Pryor Cashman LLP
207 Picard v. Marden Family Ltd. P ’ship, a Delaware Ltd. P’ship, et al. 10-04348 Pryor Cashman LLP
208 Picard v. Fried, et al. 10-05239 Pryor Cashman LLP
209 Picard v. Goldberg, et al. 10-0543.9 Pryor Cashman LLP
210 Picard v. C. Marden, et al 10-05118 Pryor Cashman LLP
211 Picard v. Boslow Family Ltd. P ’ship, et al. 10-04575 Pryor Cashman LLP
211 Picard v. Bernard A. & Chris Marden Foundation Inc., et al. 10-05397 Piyor Cashman LLP
213 Picard v. The Murray & Irene Pergament Found., Inc., et al. 10-04565 Pryor Cashman LLP
214 Picard v. Estate of Mermen Greenberg, et al. 10-04998 Arent Fox LLP59
215 Picard v. 1776 K St. Assocs. Ltd. P 'ship, a Virginia Ltd. P’ship, et al. 10-05027 Arent Fox LLP
*498Case Name Adv. Pro. No. Defense Counsel
216 Picard v. Eleven Eighteen Ltd. P 'ship, a District of Columbia L.td. P’ship, etal. 10-04976 ArentFoxLLP
217 Picard v. Kaplan, et al. 10-04865 Arcnt Fox LLP
218 Picard v. Olshan 10-04799 Olshan Promo Wolosky LLP60
219 Picard v. Wilson 10-04774 Simon & Partners LLP61
220 Picard v. Johnson 10-04551 Herrick, FeinsteinLLP62
221 Picard v. Sidney Marks Trust 2002, et al. 10-04370 Wihner Cal lor Pickering Hale and Dorr LLP63
222 Picard v. Nancy J. Marks Trust 2002, et al. 10-04698 Wilmer Cutler Pickering Hale and Dorr LLP
223 Picard v. Weithorn Casper Assocs. for Selected Holdings, LLC, et al. 10-04511 Becker, Glynn, Muffly, Chassin & Hosinski LLP64
Case Name Adv. Pro. No. Defense Counsel
224 Picard v. Katz Grp. Ltd. P 'ship, a Wyoming I.td. P 'ship, et al. 10-04419 Becker Meisel LLC65
225 Picard v. Glick 10-04495 Becker, Glynn, Muffly, Chassin & Hosinski LLP
226 Picard v. Prospect Capital Partners, et al. 10-04435 Becker, Glynn, Muffly, Chassin & Hosinski LLP
227 Picard v. Washburn 10-04294 Becker, Glynn, Muffly, Chassin & Hosinski LLP
228 Picard v. Weiner Family Limited Partnership, et al. 10-04323 Fox Rothschild LLP66
229 Picard v. Weiner 10-04293 Fox Rothschild LLP
230 Picard v. L.II. Rich Cos., et al. 10-05371 Garvey Schubert Barer, Esq.67
231 Picard v. Irving J. Pinto 1996 Grantor Retained Annuity Trust, etal. 10-04744 Bruce S. Shaeffer, Esq.68
*499Casé Name Adv. Pro. Mo. Defense Counsel
232 Picard v. James B. Pinto Revocable Trust DA dtd 12:1:03, et al. 10-04538 Bruce S. Shaeffer, Esq.69
233 Picard v. Amy Pinto Lome Revocable Trust U.A.D 5-22-03 10-04588 Bruce S. Shaeffer, Esq.70
. The number of motions was actually greater, but several of the adversary proceedings were subsequently dismissed or the motions were withdrawn.
. The defendants represented by Becker & Poliakoff and the corresponding adversary proceedings are listed in Exhibits A and B to a Notice of Motions to Dismiss filed in each affected adversary proceeding. See, e.g., Notice of Motions to Dismiss, dated Oct. 31, 2013 (ECF Adv. Pro. No. 10-04292 Doc. # 35). “ECF” refers to the docket in SIPC v. BLMIS, Adv. Pro. No. 08-01789. "ECF” followed by an adversary proceeding number refers to the docket in that adversary proceeding.
. The B & P Memo was filed in each adversary proceeding.
.See (i) Trustee’s Memorandum of Law in Opposition to Defendants’ Motions to Dismiss, dated Jan. 17, 2014 ("Trustee Memo 1 ") (ECF Adv. Pro. No. 10-04292 Doc. # 40), (ii) Declaration of Nicholas J. Cremona, Pursuant to 28 U.S.C. § 1746, in Support of Trustee’s Memorandum of Law in Opposition to Defendants’ Motions to Dismiss, dated Jan. 17, 2014 (ECF Adv. Pro. No. 10-04292 Doc. # 41), and (iii) Memorandum of Law of the Securities Investor Protection Corporation in Opposition to Defendants' Motions to Dismiss, dated Jan. 17, 2014 (“SIPC Memo I”). (ECF Adv. Pro. No. 10-04292 Doc. # 39.) Like the B & P Memo, these documents were also filed in each adversary proceeding.
. A list of the adversary proceedings included in the Non-B & P Motions is attached as Appendix. A to the Trustee Memo II (defined infra note 6).
. See (i) Memorandum of Law in Opposition to Defendants’ Motions to Dismiss, dated Mar. 10, 2014 ("Trustee Memo II”) (ECF Doc. # 5803), (ii) Declaration of Nicholas J. Cremona, Pursuant to 28 U.S.C. § 1746, in Support of Trustee’s Memorandum of Law in Opposition to Defendants’ Motions to Dismiss, dated Mar. 10, 2014 (ECF Doc. # 5804), and (iii) Memorandum of Law of the Securities Investor Protection Corporation in Opposition to Defendants’ Motions to Dismiss, dated Mar. 10, 2014 ("SIPC Memo II"). (ECF Doc. # 5802.)
. The Wachtel Missry defendants also seek a stay of their adversary proceedings until the estate's solvency can be determined.
. The proposed intervenors moved, in the alternative, to submit their brief as amicus curiae. The Trustee opposed both prongs of the motion, arguing that two of the signatory law firms had filed an aggregate of nearly thirty motions to dismiss without raising the "customer property fund issue,” and had unduly delayed in seeking to raise the issue then. In addition, they had failed to show that their interests were not adequately represented by the other movants who raised the issue. (Trustee's Limited Opposition to Motion to Intervene on the Issue of the Trustee’s Standing to Recover Customer Property, dated Mar. 28, 2014 (ECF Doc. #6069).)
The motion to intervene is granted. The "customer property fund issue” affects all of the defendants, and the intervenors have raised statutory interpretation arguments in much greater depth than the treatment accorded the issue by the other movants. Finally, intervention will not unduly delay the proceedings or prejudice the Trustee. Other defendants raised the same issue, the Trustee responded to their arguments and also responded to the intervenors’ argument.
. For example, the customer property could include securities whose value goes up and down. In addition, the amount of the allowed customer claims can increase, as has occurred in this case.
. In addition, the Trustee does not have any funds to make distributions to general creditors. (Thirteenth Interim Report at ¶ 16.)
. It is possible that customers could trace their unlawfully converted property into the MVF. However, none have attempted to do so.
. Section 502(d) states:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.
. “A ‘Stern claim' is a claim that is ‘core’ under the statute but yet prohibited from proceeding in that way as a constitutional matter.” Wellness, 135 S.Ct. at 1949 n. 1, 2015 WL 2456619, at *13 n. 1 (Alito, J. concurring in part and concurring in the judgment) (citation and internal quotation marks omitted).
. The reference to the "court of the United States in the same judicial district having jurisdiction over cases under Title 11” in SIPA § 78eee(b)(4) means the bankruptcy court. Otherwise, the statute would lead to the absurd result of commanding the district court to refer the SIPA case to itself. Turner v. Davis, Gillenwater & Lynch (In re Inv. Bankers, Inc.), 4 F.3d 1556, 1564 (10th Cir.1993), cert. denied, 510 U.S. 1114, 114 S.Ct. 1061, 127 L.Ed.2d 381 (1994); Barton v. SIPC, 185 B.R. 701, 703 (D.N.J.1994). Furthermore, this interpretation is consistent with Congress’ intent that SIPA proceedings should be conducted like ordinary bankruptcy cases in the bankruptcy court. Turner, 4 F.3d at 1564-65; Barton, 185 B.R. at 703.
.According to the statistics recently published by the Administrative Office of United States Courts, 936,795 bankruptcy cases were filed in 2014, and 36,488 adversary proceedings were filed for the 12-monlh period ending September 30, 2014. Under the defendants’ theory, the district courts would have been required to execute nearly one million orders of reference just in 2014.
. Fed. R. Bankr.P. 7004(a)(2) authorizes the clerk to use an electronic signature ("s/”) on the summons. The defendants do not challenge the use of an electronic signature.
. The form of summons used in these cases is based on Director's Procedural Form 250B.
. Under defendants’ theory, any ordinary bankruptcy trustee would similarly violate a defendant’s due process rights. In every chapter 7 case, an interim chapter 7 trustee is selected by the United States Trustee, an agency within the Department of Justice. The election of a chapter 7 trustee by creditors is extremely rare, and the interim trustee becomes the permanent trustee if no one is elected to replace him. See 11 U.S.C. § 702(d). The chapter 7 trustee decides whether to prosecute or settle avoidance actions. His compensation is based on a formula dependent on the amount of money he distributes, see 11 U.S.C. § 326(a), and the amount he distributes depends on the amount he recovers. Furthermore, the chapter 7 trustee is usually a lawyer who typically retains his own firm as his attorney. See 11 U.S.C. § 327(a). The firm receives compensation for its actual, necessary services, see 11 U.S.C. §§ 330, 331, and the trustee may be entitled to share in the firm’s compensation.
. On a related point, the Second Circuit has recently held that SIPA does not allow an inflation or interest adjustment to a customer's net equity claim. SIPC v. 2427 Parent Corp., 779 F.3d at 76. The Court observed that "[a]n inflation adjustment to net equity claims could allow some customers to obtain, in effect, a protection from inflation for which they never bargained, in contravention of the text and purpose of SIPA, and at the expense of customers who have not yet recovered the property they placed in Madoffs hands.” Id. at 81 (footnote omitted)(emphasis added).
. The Appellate Division also concluded that the complaint stated a claim to recover fees paid to the accountant. Andover II, 979 N.Y.S.2d at 653.
. Letter from Richard Levy, Jr., Esq., Carole Neville, Esq. and Matthew A. Kupillas, Esq., to the Court, dated Dec. 10, 2014 (ECF Doc. # 8703)("The [Second Circuit's] citation to Article 8 of the New York Uniform Commercial Code demonstrates its recognition that the securities entitlements rising in favor of a broker’s customer are valid under New York law.”).
. The decision does not explain why the outstanding balance on the Hancock loan was so much less (approximately 50%) of the aggregate amount of promissory notes issued by the debtor to Hancock.
. The Trustee also relied to the same effect on the allocution of former BLMIS employee Frank DiPascali. See United States v. DiPascali, No. 09 Cr. 764(RJS) (S.D.N.Y. Aug. 11, 2009) (ECF Doc. #11).)
. This is not meant to suggest that the arguments otherwise have merit.
. According to the Trustee, only five complaints asserted against Becker & Poliakoff clients seek to avoid obligations: Picard v. The Harnick Brothers P'ship, Adv. Pro. No. 10-05157, Picard v. Irene Whitman 1990 Trust U/A/ DTD 4/13/90, Adv. Pro. No. 10-05196, Picard v. Estate of Nathan Schupak, Adv. Pro. No. 12-01706, Picard v. RAR Entrepreneurial Fund, Ltd, Adv. Pro. No. 10-04352 and Picard v. Joseph S. Popkin Rev. Trust Dated February 9, 2006, Adv. Pro. No. 10-04712. (Trustee Memo I at 30 n. 35.)
. Judge Rakoff has concluded that the account statements were invalid and entirely unenforceable, and did not give rise to binding obligations under state law. Antecedent Debt Decision, 499 B.R. at 421 n. 4.
. The SIPC rules regarding the separateness of accounts do not apply if the entity "existed for a purpose other than primarily to obtain or increase protection under [SIPA].” Id. §§ 300.103-.104(a).
. According to the Marden defendants, the clawback exposure during the Two-Year Period would drop to $17.95 million. (Marden Memo at 30-31.) The reason for the discrepancy is unclear. The increase in negative balance between the Bernard A. Marden Revocable Trust account on July 2, 2004 and the final balance in the Marden Family LP account reflects all additions to the account during the period that it was held in the name of Marden Family LP. For present purposes, the discrepancy is immaterial because the methodology that the Marden defendants challenge is the same.
. In Hankins, the Court of Appeals held, over then-Circuit Judge Sotomayor’s dissent, that the RFRA applied to an age discrimination lawsuit between private parties because the government, in the guise of the EEOC, could have brought the same lawsuit, "and the substance of the ADEA’s prohibitions cannot change depending on whether it is enforced by the EEOC or an aggrieved private party.” Id. at 103. In Rweyemamu, the Second Circuit questioned Hankins majority's conclusion, Rweyemamu, 520 F.3d at 203 (expressing doubts about Hankins's determination that RFRA applies to actions between private parties when the offending federal statute is enforceable by a government agency ....), but found it unnecessary to "wrestle with the RFRA’s applicability” because the defendants had waived the RFRA defense. Id. at 204.
. Becker & Poliakoff, LLP, 45 Broadway, New York, NY 10006, Helen Davis Chaitman, Esq., Peter W. Smith, Esq., Julie Gorchkova, Esq. Of Counsel
. In this adversary proceeding, Becker & Poliakoff, LLP represents defendants Roberta Schwartz Trust; Jonathan Schwartz, as beneficiary of the Gertrude E. Alpern Revocable Trust; and Roberta Schwartz, as beneficiary of the Gertrude E. Alpern Revocable Trust, as settlor and beneficiary of the Roberta Schwartz Trust, and in her capacity as trustee of the Roberta Schwartz Trust.
. It is unclear whether Becker & Poliakoff, LLP represents all defendants in this adversary proceeding as they allege in the exhibit attached to the B & P Motions. The' firm replaced a prior firm as defense counsel, but did not include defendant Lillian M. Sage in the stipulation substituting attorney. (See Substitution of Attorney, dated Mar. 14, 2013 (ECF Adv. Pro. No. 10-04362 Doc. #22).)
.It is unclear whether Becker & Poliakoff, LLP represents all defendants in this adversary proceeding as they allege in the exhibit attached to the B & P Motions. The firm replaced a prior firm as defense counsel, but did not include defendant Lillian M. Sage in the stipulation substituting attorney. (See Substitution of Attorney, dated Mar. 14, 2013 (ECF Adv. Pro. No. 10-04400 Doc. #22).)
. In this adversary proceeding, Becker & Poliakoff, LLP represents defendant Dara N. Simons.
. In connection with the B & P Motions, Becker & Poliakoff, LLP represents defendants Trust for the Benefit of Ryan Tavlin; Doron Tavlin, in his capacity as Trustee for the Trust for the Benefit of Ryan Tavlin; Omega Asset Management, LLC; and Ryan Tavlin, individually as beneficiary of the Trust for the Benefit of Ryan Tavlin. (See Stipulation, dated April 16, 2014 (ECF Adv. Pro. No. 10-5232 Doc. # 40).)
. In this adversary proceeding, Becker & Poliakoff, LLP represents defendants Doron Tavlin Trust U/A 2/4/91; Doron A. Tavlin, as Trustee and Beneficiary of the Doron Tavlin Trust U/A 2/4/91; and Omega Asset Management, LLC.
. In this adversary proceeding, Becker & Poliakoff, LLP represents defendant Garynn Rodner Cutroneo.
. In this adversary proceeding, Becker & Poliakoff, LLP represents defendants RAR Entrepreneurial Fund, Ltd. and Russell Oasis.
. In this adversary proceeding, Becker & Poliakoff, LLP represents defendants Felice J, Perlman and Sanford S. Perlman.
. In this adversary proceeding, Becker & Poliakoff, LLP represents defendants Jacob M. Dick Rev Living Trust DTD 4/6/01, individually apd as tenant in common; Estate of Jacob M. Dick, as grantor of the Jacob M. Dick Rev Living Trust DTD 4/6/01; Andrea J. Marks, trustee and beneficiary of Jacob M. Dick Rev Living Trust DTD 4/6/01, executor and beneficiary of Estate of Jacob M. Dick, and trustee of Article 8.1 Trust created under Jacob M. Dick Rev Living Trust DTD 4/6/01; R.D.A., a minor, as beneficiary of the Article 8.1 Trust created under the Jacob M. Dick Rev Living Trust DTD 4/6/01; Rio Jocelyn Breen, as beneficiary of the Article 8.1 Trust created under the Jacob M. Dick Rev Living Trust DTD 4/6/01; Article 8.1 Trust; and Suzanne Breen, as beneficiary of the Estate of Jacob M. Dick and the Jacob M. Dick Rev Living Trust DTD 4/6/01.
. In this adversary proceeding, Becker & Poliakoff, LLP represents defendants Irene May; Shirley Blank; and Allan Wilson.
. Milberg LLP
One Pennsylvania Avenue New York, N.Y. 10119
Matthew Gluck, Esq.
Matthew A. Kupillas, Esq.
Jennifer L. Young, Esq.
Joshua E. Keller, Esq.
Of Counsel
In this adversary proceeding, Milberg LLP represents defendant Trust U/W/O Harriet Myers.
. Day Pitney LLP
7 Times Square New York, N.Y. 10036 Thomas D. Goldberg, Esq. Margarita Y. Ginzburg, Esq. Of Counsel
. Bernfeld, DeMatteo & Bernfeld, LLP
600 Third Avenue, 15th Floor New York, N.Y. 10016
David R. Bernfeld, Esq.
Jeffrey L. Bernfeld, Esq.
Joseph R. DeMatteo, Esq.
Of Counsel
. In this adversary proceeding, Bernfeld, DeMatteo & Bernfeld, LLP represents defendants Frederic Z. Konigsberg; Susan M. Ko-nigsberg; Lee Rautenberg; and Bradermark, Ltd.
. In this adversary proceeding, Bernfeld, DeMatteo & Bernfeld, LLP represents defendants Ken-Wen Family Ltd. P’ship; Kenneth W. Brown; and Wendy Brown.
. Herbet Beigel & Associates
38327 S. Arroyo Way Tucson, AZ 85739
Herbert Beigel, Esq. Of Counsel
. Lax & Neville LLP
1450 Broadway, 35th Floor New York, N.Y. 10018 Barry R. Lax, Esq.
Brian J. Neville, Esq.
Gabrielle Pretto, Esq.
Of Counsel
. Lax & Neville LLP represented the defendants in this adversary proceeding in connection with their motion to dismiss, but was subsequently replaced by Carter Ledyard & Milburn LLP. (See Order Authorizing Substitution of Counsel, dated May 6, 2014 (ECF Adv. Pro. No. 10-04827 Doc. # 44).)
. In this adversary proceeding, Lax & Ne-ville LLP represents defendant Peng Yan.
. In this adversary proceeding, Lax & Ne-ville LLP represents defendant Robin G. Swaffield.
. In this adversary proceeding, Milberg LLP represents defendant Gary Albert.
.Waehtel Missry LLP
885 Second Avenue New York, N.Y. 10017
Howard Kleinhendler, Esq. Sara Spiegelman, Esq. Of Counsel
. Dentons U.S. LLP
1221 Avenue of the Americas New York, N.Y. 10020
Carole Neville, Esq. Of Counsel
. McLaughlin & Stern LLP
260 Madison Avenue New York, N.Y. 10016
Lee S. Shalov, Esq. Marc Rosenberg, Esq. Of Counsel
. Pryor Cashman LLP
7 Time Square New York, N.Y. 10036
Richard Levy, Jr., Esq. David C. Rose, Esq.
Of Counsel
In this adversary proceeding, Pryor Cash-man LLP represents defendants Robert Pergament; and Lois Pergament.
. In this adversary proceeding, Milberg LLP represents defendants William M. Woessner Family Trust; Sheila A. Woessner Family Trust; William M. Woessner; and Sheila A. Woessner.
. Seeger Weiss LLP
77 Water Street, 26th Floor New York, N.Y. 10005
Stephen A. Weiss, Esq.
Parvin K. Aminolroaya, Esq. Of Counsel
. Arent Fox LLP
1050 Connecticut Avenue NW Washington, DC 20036
James H. Hulme, Esq. Joshua A. Fowkes, Esq. Heike M. Vogel, Esq. Of Counsel
. 65 East 55th Street New York, N.Y. 10022
Thomas J. Fleming, Esq. Joshua S. Androphy, Esq. Of Counsel
. Simon & Partners LLP 551 Fifth Avenue New York, N.Y. 10176
Bradley D. Simon, Esq. Kenneth C. Murphy, Esq. Jonathan Stern, Esq. Of Counsel
. Herrick, Feinstein LLP 2 Park Avenue New York, N.Y. 10016
Howard R. Elisofon, Esq.
Hanh V. Huynh, Esq. Of Counsel
. Hale and Dorr LLP
399 Park Avenue New York, N.Y. 10022
Charles C. Platt, Esq. Of Counsel
. Becker, Glynn, Muffly, Chassin & Hosinski LLP
299 Park Avenue, 16th Floor New York, N.Y. 10171
Chester B. Salomon, Esq. Alec P. Ostrow, Esq. Of Counsel
. Becker Meisel LLC
590 Madison Avenue, 21st Floor New York, N.Y. 10022
Stacey L. Meisel, Esq. Of Counsel
. Fox Rothschild LLP
100 Park Avenue, 15th Floor New York, N.Y. 10017
Ernest E. Badway, Esq. Lauren J. Talan, Esq. Of Counsel
. Garvey Schubert Barer, Esq.
100 Wall Street, 20th Floor New York, N.Y. 10005
Andrew J. Goodman, Esq. Of Counsel
. Bruce S. Shaeffer, Esq.
404 Park Avenue South New York, N.Y. 10016
Bruce S. Schaeffer, Esq. Of Counsel
Defendents’ dismissal motion was filed by Bruce S. Shaeffer but the defendants are now represented by Marvin C. Ingber and McClay Alton, P.L.L.P.
. Defendents' dismissal motion was filed by Bruce S. Shaeffer but the defendants are now represented by Marvin C. Ingber and McClay Alton, P.L.L.P.
. Defendents’ dismissal motion was filed by Bruce S. Shaeffer but the defendants are now represented by Marvin C. Ingber and McClay Alton, P.L.L.P. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498329/ | OPINION1
Sontchi, J.
INTRODUCTION2
Before the Court is the defendant’s3 motion to dismiss (“Motion to Dismiss”) the Complaint for lack of subject matter jurisdiction alleging that the plaintiffs-EFIH Debtors have presented no case or controversy in the Complaint, and thus, the issues are not ripe for adjudication. The EFIH Debtors’ complaint (the “Complaint”) seeks declaratory judgment related to prepayment penalties and post-petition interest in connection with the repayment of the PIK Notes. The Trustee seeks dismissal of the Complaint because the EFIH Debtors have not paid the PIK Notes and the circumstances of such payment, if any, cannot be known at this time; thus, the Trustee asserts that the Complaint is not ripe.
The Court, herein, grants the Motion to Dismiss as there are too many unknown factors relating to the repayment of the PIK Notes to determine whether prepayment penalties and post-petition interest would be due under the terms of the PIK Note Indenture. However, nothing herein prevents the EFIH Debtors from objecting to the proof of claim filed by the Trustee on behalf of the PIK Notes, which asserts claims for prepayment penalties and post-petition interest.
FACTS
A. Current Status of Debtors’ Chapter 11 Cases 4
i. General Background
On April 29, 2014, Energy Future Holdings Corp. (“EFH”) and its affiliates (collectively, the “Debtors”), including Energy *502Future Intermediate Holding Company LLC and EFIH Finance Inc. (together, the “EFIH Debtors”), filed voluntary petitions with the United States Bankruptcy Court for the District of Delaware under chapter 11 of title 11 of the United States Code.
On May 13, 2014, the Office of the Unites States Trustee established an official committee of unsecured creditors to represent the interests of the unsecured creditors of Texas Competitive Holdings Company EEC (“TCEH”) and certain affiliates (the “T-side Committee”).5 Thereafter, on October 27, 2014, the- United States Trustee formed a statutory committee of unsecured creditors for Energy Future Holdings Corp. and various affiliates (the “E-side Committee”).6
ii. Oncor Sale
Thereafter, the Debtors sought bidding procedures to sell the Debtors’ economic interest in Oncor Electric Delivery Company LLC (“Oncor”). After revision, the Court approved the bidding procedures.7 Based on the schedule contained in the Oncor bidding procedures, the value of the winning bid for Oncor (if approved) will not be resolved until, at the earliest, late June 2015. As the Oncor sale process has not been completed, the sale structure and value obtained at the same is unknown to the Debtors.
iii. Plan Process
Prior to the petition date, the Debtors negotiated a Restructuring Support Agreement (“RSA”) with several parties that laid out an exit strategy and plan structure for the Debtors’ cases. The RSA provided that the PIK Notes would be paid in full, subject to various limitations. However, the Debtors ultimately withdrew from the RSA.
Thereafter, the Court extended the exclusive period for the Debtors to file a plan through and including October 29, 2015, and the exclusive period to solicit until December 29, 2015.8 On February 11, 2015, the Debtors distributed a Draft Global Term Sheet (“Draft Term Sheet”) to their creditors which embodied the proposed terms of a plan of reorganization involving all of the Debtors. On April 14, 2015, the Debtors filed a proposed plan and disclosure statement.9 The Draft Term Sheet, as well as the proposed plan, propose to pay general unsecured claims against the EFIH Debtors (including the PIK Notes) an amount equal to at least principal and accrued but unpaid prepetition interest. The Debtors assert that the PIK Notes will be paid; however, the only *503factual questions are the amount of the PIK Notes claim and the form of such repayment. The PIK Notes disagree with the Debtors regarding the open factual issues regarding payment of the PIK Notes and believe the following facts are yet unknown: (i) the resolution of any intercompany claims between the T-side and E-side;10 (ii) the terms required by the first lien creditors of TCEH to consent to and participate in a transaction premised upon the Debtors’ optimal tax-free spin structure; and (iii) the length of time that the- EFIH Debtors remain in bankruptcy.
iv. EFIH First and Second Fien Adversary Complaints
The Debtors are presently engaged in adversary proceedings with the trustees for the EFIH Debtors’ first hen11 and second lien12 notes over, among other things, the respective trustee’s entitlement to payment of prepayment premiums in connection with the repayment — or potential repayment — of their debt.
a. First Lien Adversary Action
The EFIH Debtors have redeemed all of the EFIH first hen debt (“First Lien Notes” held by the “First Lien Notehold-ers” and governed by the “First Lien Indenture”). Thus, the Court heard arguments from the First Lien Notes and the EFIH Debtors regarding prepayment premiums (also referred to herein as “make-whole payments”), among other things, and issued an opinion related thereto.13 The Court held that when the EFIH Debtors filed for bankruptcy, the First Lien Notes automatically accelerated and became due and payable immediately.14 However, the acceleration of the First Lien Notes was not voluntary, as a result, any payment of the First Lien Notes was not a voluntary prepayment under the optional redemption provision of the First Lien Indenture and did not trigger payment of any make-whole payment.15 Thus, the Trustee under the First Lien Indenture was not entitled to a make-whole payment. However, the Court then held that the First Lien Noteholders had an absolute right to rescind the automatic acceleration of the First Lien Notes;16 however, the rescission was barred by the automatic stay.17 The Court subsequently held a trial on the Trustee for the First Lien Notes’ motion for relief from the automatic stay on April 20-22, 2015. At the conclu*504sion of the stay relief trial, the Court requested additional briefing by the parties and took the matter under advisement.
b. Second Lien Adversary Action
The Trustee for the second lien notes (the “Second Lien Notes” held by the “Second Lien Noteholders” and governed by the “Second Lien Indenture”) filed an adversary action seeking damages for a make-whole premium due in connection with the partial paydown of the Second Lien Notes, as well as a declaration that other amounts are due in connection with the Second Lien Notes and any future make-whole that may become due in connection with any subsequent redemption of the Second Lien Notes. A partial pay-down of a portion of the Second Lien Notes occurred on March 11, 2015, which makes it distinguishable from the PIK Notes (which have not been paid-down or redeemed).
Thus, the EFIH Debtors are currently litigating pre-payment penalties and post-petition interest regarding the First Lien Indenture and the Second Lien Indenture, and the EFIH Debtors are seeking to litigate similar relief with regard to the PIK Notes through this Declaratory Judgment Action (as defined below), which is the subject of this Opinion.
B. PIK Notes Adversary Action
i. The PIK Notes
The EFIH Debtors issued the PIK Notes in the aggregate principal amount of $1,566,234,000 pursuant to the Indenture. The Indenture provides for certain contingent payments to holders of the PIK Notes upon redemption of the PIK Notes.
Section 3.07(a) if the Indenture provides for payment of an “Applicable Premium” if EFIH redeemed the PIK Notes prior to December 1, 2014:
Notes Make Whole Redemption. At any time prior to December 1, 2014, the Issuer may redeem, in whole or in part, the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest (including Additional Interest, if any) to, the date of redemption (the “Redemption Date”), subject to the right of Holders of Notes of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date.18
The Indenture continues:
Noted Optional Redemption. From and after December 1, 2014 the Issuer may redeem Notes, in whole or in part at the redemption prices (expressed as percentages of principal amount of the Notes to be redeemed) set forth below, plus accrued and unpaid interest (including Additional interest, if any, [sic]) to the Redemption Date ... if redeemed during the twelve-month period beginning on December 1 of each of the years indicated below:
Year Percentage
2014. . 105.6250%
2015. . 105.6250%
2016 and thereafter ... . 102.812%19
The Indenture also provides for Post-Petition Interest:
*505The Issuer shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (including Additional Interest, if any) (without regard to any applicable grace period) at the same rate to the extent lawful.20
ii.Trustee’s Proof of Claim
In October 2014, the Trustee, on behalf of itself and the PIK Noteholders, filed a proof of claim (as identified by the Debtors, Claim No. 6347) (the “PIK Claim”). The PIK Claim asserted a claim for a minimum of approximately $1,647 billion “plus interest, fees and other amounts arising in connection with the Indenture (see addendum).”21 The PIK Claim states:
4. This Master Proof of Claim makes claim to all amount — whether liquidated or unliquidated — due under or relating to the EFIH Senior Toggle Notes or arising under the Indenture on behalf of the Claimant and the Noteholders, including, but not limited to, principal, premiums, the Applicable Premium, prepayment penalties, make-whole premiums, call premiums, interest, fees, costs, and expenses outstanding as of, and arising from and after, April 29, 2014.22
The PIK Claim contains a reservation of rights to amend or supplement the PIK Claim, including “setting forth or changing the basis or amount of the claim .... ”23
iii. The PIK Notes Declaratory Judgment Action
In December 2014, the EFIH Debtors commenced this declaratory judgment action against the Trustee by filing the Complaint (the “Declaratory Judgment Action”).24 Specifically, the EFIH Debtors are seeking declaratory judgment that: (i) the PIK Noteholders are not entitled to payment of an Applicable Premium; (ii) the PIK Noteholders are not entitled to an Optional Redemption Price; (iii) the Debtors are not liable for breach of a “no call” provision; (iv) the Debtors did not default in order to prevent the PIK Noteholders from recovering the Applicable Premium, Optional Redemption Price, or any other fee; (v) any claim for the Applicable Premium, Option Redemption Price, No Call Damages, or damages related to an alleged intentional default is disallowed as unma-tured interest; and (vi) the PIK Notehold-ers are not entitled to receive post-petition interest at the rate specified in the Indenture.
iv. PIK Notes Motion to Dismiss
The Trustee has moved to dismiss the Complaint for lack of subject matter jurisdiction alleging that the EFIH Debtors have presented no case or controversy in the Complaint, and thus, the issues are not ripe for adjudication. The Trustee asserts that both the prepayment fee counts and post-petition interest count are premised on contingencies (for example, the filing of a plan and the repayment of the PIK *506Notes pursuant to such plan) and hypothetical regarding the solvency of the EFIH Debtors in connection with such potential plan. The Trustee asserts that the Court cannot rely on factual circumstances that are not yet fixed (i.e. the EFIH Debtors paying the PIK Notes through a plan and/ or assuming that the PIK Notes will take certain positions regarding prepayment fee counts and post-petition interest count).
The PIK Notes highlight the following provisions of the Complaint:
“The Trustee is expected to seek payment of a premium when the Debtors repay the PIK Notes.”25 “Such a claim [for prepayment fee based on intentional default] would also be unusual here because the majority of PIK Noteholders voted in favor of a restructuring support agreement....”26 The EFIH Debtors expect that the Trustee will claim that the PIK Note-holders are entitled to receive interest on the PIK Notes’ outstanding principal ... at the rate specified in the Indenture.” 27
The EFIH Debtors responded that the issues are ripe because they are seeking to resolve the PIK Claim, the value of which could have significant effects on recoveries to the Debtors’ other stakeholders. In that regard, in addition to the language noted by the Trustee, the Complaint also provides that efficient resolution of the adversary proceeding “is important to move the Debtors’ reorganization forward and will provide all parties with clarity beneficial to ongoing plan negotiations.”28 The Complaint also notes that “[t]o advance this [plan] process, the Debtors seek to resolve a number of discrete legal disputes that determine the value of claims.”29
The Motion to Dismiss has been fully briefed and the Court heard oral argument on the Motion to Dismiss on May 4, 2015.30 At the conclusion of the oral argument, the Court took the matter under advisement. This is the Court’s Opinion thereon.
ANALYSIS
In the Motion to Dismiss, the Trustee argues that this Court lacks subject matter jurisdiction to hear this matter because the Declaratory Judgment Action is based on contingencies and the discrete issues may or may not ripen into controversies at some point in the future, and thus, deciding these issues is premature, as any decision would be advisory. The Debtors disagree.
A. Burden of Proof
Rule 12(b)(1) of the Federal Rule of Federal Procedure, made applicable to these procedures by Rule 7012(b) of the Federal Rule of Bankruptcy Procedures, allows a party to bring a motion to dismiss for lack of subject matter jurisdiction. “As a rule, the party invoking the federal court’s jurisdiction bears the burden of establishing that the Court has the requisite jurisdiction.”31 Thus, the EFIH *507Debtors bear the burden of establishing that the Court has requisite jurisdiction to hear the declaratory judgment action.
B. Subject Matter Jurisdiction
Article III of the Constitution prohibits federal courts from deciding issues where there is no case or controversy.32 Pursuant to 28 U.S.C. § 2201, “[i]n a case of actual controversy within its jurisdiction ... any court of the United States ... may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.”33 “Determining whether declaratory judgment jurisdiction exists in a particular case requires consideration of the facts alleged, under all the circumstances, in order to evaluate whether they show that there is a substantial controversy between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”34 The Supreme Court has instructed that “[t]he disagreement must not be nebulous or contingent but must have taken a fixed and final shape so that a court can see what legal issues it is deciding, what effect its decision will have on its adversaries, and some useful purpose to be achieved in deciding them.”35
Federal jurisdiction is also limited by the doctrine of “ripeness.” “Ripeness” “determines when a proper party may bring an action. The function of the ripeness doctrine is to prevent federal courts through avoidance of premature adjudication, from entangling themselves in abstract disagreements.”36 “Ripeness” is a “prudential limitation on federal jurisdiction, ... [that] is at least partially grounded in the case or controversy requirement.”37 “Central to the ripeness requirement is that courts should not endeavor to resolve contingencies that may or may not occur as expected or may not happen at all.”38
The Third Circuit Court of Appeals has focused on three factors to aid in determining whether a declaratory judgment action is ripe: (i) adversity of the interest of the parties, (ii) the conclusiveness of the judicial judgment, and (iii) the practical help, or utility, of that judgment.39 Each of these foregoing factors will be discussed in turn below. However, these factors are “not exhaustive of the principles courts have considered in evaluating ripeness challenges.”40
*508i. Adversity of Interest of the Parties a. Parties’ Arguments
In the case sub judice, the Trustee argues that the EFIH Debtors’ Declaratory-Judgment Action is based on numerous contingencies such as (i) who will propose a plan, (ii) the treatment of the PIK Notes pursuant to a plan, (iii) whether the proposed EFIH Debtors’ plan under which the PIK Notes are paid proceeds to confirmation, and (iv) whether or not the Trustee and the PIK Noteholders will object to their treatment in such plan. The Trustee lists numerous scenarios that would alter these contingencies, such as termination of exclusivity, solvency, and terms of a plan, among others. The Trustee argues that each of the uncertainties could have a material effect on the nature of the controversy; thus, the Trustee contends that the parties’ interests are not adverse.
The EFIH Debtors’ contend that this action is largely an action to liquidate or at least cap the PIK Claim and that such action can be done well in advance of a plan. The EFIH Debtors also argue that in all iterations of proposed restructuring plans — the PIK Notes will be repaid; thus it is consistent with the EFIH Debtors’ assertion in the Complaint that that it will make distributions on the PIK Notes. The EFIH Debtors also claim that solvency has no relevance to this dispute — just as it had no relevance in Phase I of the First Lien Adversary Action. The Debtors continue that this dispute centers on how much money one party owes another under the terms of their contract (i.e. how much will it cost to settle the PIK Claim). The EFIH Debtors claim that future events will not determine the fundamental disagreement over how much money is owed under the terms of the PIK Notes Indenture.
The Trustee replies that no dispute has arisen regarding whether and at what rate to pay post-petition interest to unsecured creditors. The Trustee asserts that post-petition interest is a pure solvency issue and thus should be decided in connection with plan confirmation. As to pre-payment fees, the Trustee asserts that term sheets and plan proposals are not conclusive that the PIK Notes will be repaid; thus the issue of whether the PIK Notes are even eligible to receive pre-payment fees is not ripe for adjudication. The Trustee asserts that conflicting financial interests alone are not sufficient to create adversity of the parties,
b. There is not an actual controversy between the EFIH Debtors and the PIK Noteholders in the Declaratory Judgment Action.
“ ‘For there to be an actual controversy the defendant must be so situated that the parties have adverse legal interests’ ”41 The Third Circuit has held:
Though a plaintiff need not suffer a completed harm to establish adversity of interest between the parties, to protect against a feared future event, the plaintiff must demonstrate that the probability of that future event occurring is real and substantial, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. We have held that a potential harm that is “contingent” on a future event occurring will likely not satisfy this prong of the ripeness test.42
However, a plaintiff does not need to establish with “mathematical certainty” that injury will occur nor does the plaintiff need to await actual injury before filing suit.43
*509In Adelphia, holders of subordinated debt sought declaratory relief seeking a ruling that the indenture did not require that holders of senior debt be paid in full before any distributions to the holders of junior debt when the currency by which plan distributions were made was stock, rather than cash or securities.44 Between the filing of the adversary proceeding and hearing on the motion to dismiss for lack of subject matter jurisdiction, among other motions, the debtors filed a proposed plan; however, that proposed plan had not been confirmed.45 The Adelphia court held that the controversy between the junior and senior lenders was too contingent and speculative to meet Article III requirements.46 The bankruptcy court continued that the debtors’ plan was a “proposal to its stakeholders, which they may or may not find to their liking.” 47 The bankruptcy court continued that there were too many moving parts (exclusivity, amendments to plan, timing of confirmation hearing, objections, whether or not the court confirmed the plan, among others), and the junior debt holders’ concerns could be addressed in the context of the facts as they exist at that time.48 The Adelphia court held:
The Court understands, and is sympathetic to, the points made by the [junior debt] ... holders that an early ruling might facilitate their negotiations; that they would know better what litigation positions they might wish to take if they knew what the outcome would be in this controversy; and that efforts on the part of the Debtors to confirm what would turn out to be an unconfirmable plan would be time consuming and costly. But these points do not confer subject matter jurisdiction where it is lacking, and in any event prove too much. Because as the Creditors’ Committee fairly argues, “[w]ere such an argument to carry the day, bankruptcy- courts would be beset with requests for numerous advisory opinions, many of which ultimately would have no practical application.” 49
Although Adelphia at first blush seems on all squares with the case sub-judice, here the Debtors are seeking to resolve the proper amount (or more accurately, the proper components) of any amounts to be paid to the PIK Noteholders,50 not necessarily determining how the PIK Claim will be treated under any proposed plan. The case sub judice is distinguishable from Adelphia where the issue was whether one creditor class may recover before another class under the terms of their agreement. Here, the EFIH Debtors are not seeking to determine how much or the currency of any payment to the PIK Noteholders, but they are seeking to establish the outside boundaries of payments to the PIK Note-holders.
The Trustee also refers to Matter of Trans World Airlines, Inc.51 wherein the debtor sought approval of a settlement where the debtors would solicit the con*510sent of holders of its new notes to grant a subordinated lien in certain of the assets that comprised their collateral package. The settlement contained a provision that in the event of a default on the new notes a marshalling of assets would be required wherein the senior holders would be required to satisfy those notes out of certain collateral, leaving other collateral for the subordinated lien holders pursuant to a settlement.52 Although the court allowed solicitation and the subordinated interest in certain of the collateral, the court did not approve the marshalling order. The court held that the rights and obligations of the parties to be determined with respect to a potential event of default on the notes, the specific facts concerning the potential default and the proposed marshall-ing order’s effect upon the holders of the notes must be known.53 Thus, as to the marshalling order, the issue was not ripe for adjudication. Trans World Airlines is similar to the case sub judice because the Debtors have not paid the PIK Notes; thus, the Court does not know the specific circumstances of the any repayment.54
The EFIH Debtors assert that they are seeking declaratory judgment on conflicting financing interests and a resolution would have significant effect of the settlement posture of the underlying litigation. The EFIH Debtors cite Home Ins. Co. v. Powell55 wherein an insurance company sought a declaration that it had no duties to pay defense costs or indemnify its insured for liability arising from a separate pending legal malpractice action. The Powell court held that the insurer’s duty to indemnify did not turn on the results of the underlying litigation but on whether alleged failures to act underlying the malpractice litigation should have been included in a prior acts endorsement in the insurance policy. The Powell court held that the parties were “sufficiently adverse so as to create an actual controversy for ripeness purposes: they have staked out opposing positions in the instant litigation, they have conflicting financial interests with regard to the issues before this Court, and a declaratory judgment here will likely have a significant effect on the settlement posture of the underlying litigation.” 56 Powell is distinguishable because here the PIK Notes have not been repaid nor have the PIK Notes objected to their treatment under any proposed plan, it is unknown at this time whether the parties will have conflicting financial interests.
The Trustee argues that the EFIH Debtors are attempting to have this Court preemptively determine that they can cram down the PIK Notes under section 1129 of the Bankruptcy Code by paying post-petition interest at the federal judgment rate. Herein, the Court cannot determine when or the percentage of recoveries, if at all, the PIK Notes would receive under any plan.
c. Conclusion
As there are multiple contingencies that must be resolved prior to the determination of prepayment penalties and post-petition interest, looking at the Complaint alone, the Court finds that the parties do not have, as of yet, adversity of interests. At this time, the Debtors have only filed a *511plan, but this plan is just a proposal to the parties, the Court has not confirmed the plan nor does the Court know whether the parties will vote in favor of the plan. The proposals made by the EFIH Debtors are not enough, at this time, to create adversity of interests.
ii. Conclusiveness of the Judicial Judgment
a. Parties’ Arguments
The Trustee argues that the Complaint is based on a hypothetical scenario — repayment of the PIK Notes through a debt- or-sponsored plan that results in the Trustee asserting specific arguments and claims. The Trustee urges that any opinion on these matters could be rendered idle or incorrect because later factual developments changed or eliminate the issues to be decided. Thus, the Trustee asserts that the EFIH Debtors are unable to satisfy the conclusiveness of judgment prong.
The EFIH Debtors respond arguing that a judgment that declares the parties’ rights under the Indenture (i.e. whether a make-whole payment is owing) does not have to immediately affix the amount of the damages owed. The EFIH Debtors continue that all of the parties in interest in these cases will rely upon the resolutions of currently pending proofs of claim, including the PIK Claim.
The Trustee replies that the Complaint is not a claim objection and that the Trustee has not yet asserted an entitlement to prepayment penalties or post-petition interest because events that would give rise to such claims have not yet occurred and may never occur. The Trustee asserts that they only reserved their rights to amend the PIK Claim to file prepayment penalties and post-petition interest — and that a debtor cannot object to a reservation of rights in a claim. The Trustee asserts that the EFIH Debtors must wait until the Trustee amends its claim to add prepayment penalties and post-petition interest to object to the then amended PIK Claim. The Trustee continues that post-petition interest is not properly asserted in a proof of claim, rather it is a byproduct of whether a solvent debtor’s plan satisfied the confirmation requirements of Bankruptcy Code section 1129.
b. Judgment could not be conclusive at this time.
In the second Step-Saver factor, the Court must
determine whether judicial action at the present time would amount to more than an advisory opinion based upon a hypothetical set of facts. Predominantly legal questions are generally amenable to a conclusive determination in a preen-forcement context, so long as Article III standing exists.57
“Absent a set of concrete facts, a declaratory judgment itself would be a contingency, and application of the judgment to actual controversies that arise later would be an ‘exercise in futility.’ ”58
Herein, the EFIH Debtors are seeking to determine certain legal questions relating to the PIK Notes Indenture. The Trustee relies on Grace Holdings wherein the plaintiff sought a declaration in 1995 that the defendant must redeem preferred stock and pay all of the then accrued and unpaid dividends on or before July 31, 2000. The Grace Holdings court held that it lacked “the prescience to discern ... whether in fact there will be any accrued *512but unpaid dividends on that date; no one knows if this circumstance is certain to occur. Additionally, over the next five years, any number of other events could transpire that would nullify any prospective court order.”59
Although, in fact, the Court could determine that pursuant to the terms of the PIK Notes Indenture, that no prepayment penalties are due as in the litigation with the First Lien Trustee; here the Debtors have not repaid the PIK Notes, and at this time it is unknown when and if the EFIH Debtors intend to repay the PIK Notes. Although in every iteration of the Debtors’ proposed resolutions of these cases the PIK Notes are repaid, these proposals are not sufficiently complete for the Court to be able to provide conclusive judgment,
c. Conclusion
Without more information concerning the repayment of the PIK Notes, the EFIH Debtors are unable to satisfy the conclusiveness of judgment prong.
iii. Practical Help, or Utility, of that Judgment
a. Parties’ Arguments
The Trustee argues that any ruling on the issues in the Complaint will not cause the Debtors to behave differently (i.e. the EFIH Debtors will not repay or refuse to pay the PIK Notes based on the Court’s ruling). Furthermore, as a practical matter, the Trustee asserts that litigating all the potential claims and arguments that could arise upon repayment through a chapter 11 plan would be inefficient use of the parties’ and the Court’s resources. The Trustee asserts that the only benefit the EFIH Debtors have identified is giving the parties clarity beneficial to ongoing plan negotiations. The Trustee believes that this will lead to piecemeal litigation to adjudicate confirmation issues preemptively could delay these cases.
The EFIH Debtors respond that any judgment would be conclusive because the Complaint is designed to clarify the legal relationship between EFIH and the Trustee. The EFIH Debtors continue that a declaration of the parties’ rights under a contract does not have to immediately affix the amount of the damages owed. The EFIH Debtors assert that they are asking the Court to determine certain legal questions relating to the Indenture governing the PIK Notes.
The Trustee replies that the PIK Notes have not been repaid and may never be repaid, as such, there would be no utility in litigation any pre-payment penalties when there is not guarantee that the PIK Notes will be repaid. The Trustee replies that the EFIH Debtors have failed to identify any decisions they face that will hinge on resolving the post-petition interest counts.60 The Trustee replies that the *513only precursor to post-petition interest is solvency, so the parties do not know whether any interest savings will actually be available for distributions to interest holders. The Trustee continues that other events will have an even great impact on post-petition interest, such as the.results of the Oncor sale, if any.
b. There is no practical help or utility in deciding the declaratory judgment counts at this time.
In the third Step-Saver factor, the Court evaluated whether the plaintiffs are trying to “preserve the status quo before irreparable damage was done, and a case should not be considered justiciable unless the court is convinced that by its action a useful purpose will be served.”61
As Congressman Gilbert remarked in debate, “[ujnder the present [pre-De-elaratory Judgment Act] law, you take a step in the dark and then turn on the light to see if you stepped into a hole. Under the declaratory judgment law you turn on the light and then take the step.”62
In Travelers Ins. Co. v. Obusek,63 the Third Circuit held that there was utility in determining whether insurance covered attendant medical care services and expenses under a state no-fault motor vehicle insurance act. The Third Circuit held that the insured “should not have to blindly take the step of incurring an expense that Travelers [the insurance company] may be legally obligated to assume before being told if she has stepped in a hole.”64
Utility was also found in Zinn v. Seruga,65 wherein the parties were in dispute over the right to use a trademark. The court held that declaration that the trademark was invalid would clarify the parties’ rights as to the use of the trademark, could lead to a compromise by the parties over their respective use of the trademark, as well as potentially aiding the pending litigation.66
Herein, the EFIH Debtors assert that a declaration regarding prepayment penalties and post-petition interest will resolve uncertainty surrounding all of the EFIH Debtors’ debt tranches and clarify the availability of funds for all of EFIH’s stakeholders. However, such amounts for post-petition interest cannot be known until EFIH’s solvency is resolved, nor do the parties know whether the PIK Notes will be prepaid triggering the potential prepayment penalty. The EFIH Debtors’ desire to further plan negotiations cannot confer subject matter jurisdiction when there are still too many unknown contingencies. Much like the bankruptcy court stated in Adelphia:
The Court understands, and is sympathetic to, the points made by the Sub Debt holders that an early ruling might facilitate their negotiations; that they *514would know better what litigation positions they might wish to take if they knew what the outcome would be in this controversy; and that efforts on the part of the Debtors to confirm what would turn out to be an unconfirmable plan would be time consuming and costly. But these points do not confer subject matter jurisdiction where it is lacking, and in any event prove too much.67
As the parties and the Court do not know the structure of any confirmed plan, whether and how much the PIK Notes will be paid, or whether the Trustee for the PIK Notes will object to any proposed treatment of the PIK Notes in a plan; it is difficult to see the utility of any declaratory ruling regarding pre-payment penalties and post-petition interest.
c. Conclusion
As such, in the posture of a Declaratory Judgment Action (and except as set forth below), the Court finds that there is no practical help or utility in determining whether the PIK Notes are entitled to post-petition interest or prepayment penalties when there are various contingencies that could ultimately make this Court’s ruling advisory.
iv. Conclusion
As the Court has not found that any of the Step-Saver factors have been satisfied in the Declaratory Judgment Action, the Court will dismiss the Complaint as the prepayment penalties and the post-petition interest claims are not ripe for adjudication.
C. Declaratory Judgment Action versus Claims Objection
i. PIK Claim and Objecting Thereto
The Declaratory Judgment action does not specifically address the PIK Claim; although the Debtors are essentially seeking declaratory judgment on elements asserted in the PIK Claim. The Trustee makes much ado that the Debtors are attempting to “rebrand” the Complaint as a routine claims objection. The Trustee argues that the PIK Claim only includes a reservation of rights for post-petition interest and prepayment penalties. As such, the Trustee asserts that the Debtors should not be able to object to the PIK Claim until the Trustee amends the claim to asserts dollar amounts for interest and penalties.
The Court disagrees with the Trastee. Neither the face of the claim nor the addendum to the claim states that the Trustee is only “reserving their rights to later assert” such claims. The PIK Claim states:
4. This Master Proof of Claim makes claim to all amounts — whether liquidated or unliquidated — due under or relating to the EFIH Senior Toggle Notes or arising under the Indenture on behalf of the Claimant and the Noteholders, including, but not limited to, principal, premiums, the Applicable Premium, prepayment penalties, make-whole premiums, call premiums, interest, fees, costs, and expenses outstanding as of, and arising from and after, April 29, 2014.68
The PIK Claim continues that the Trustee reserves the right to “amend or supple*515ment this Master Proof of Claim at anytime and in any respect, including, without limitation, for the purpose of (i) setting forth or changing the basis or amount of the claim described herein in paragraph 4 hereof....”69 Thus, although, the PIK Claim contains a reservation of rights, the Court does not perceive the language in paragraph 4 to be such a reservation. The above quoted language is a claim to those components of the Indenture, some of which have not been liquidated as of the filing of the PIK Claim. Thus, the PIK claim is partially liquidated, partially unliq-uidated,70 and possibly contingent.71 However, the Complaint does not mention the PIK Claim nor does it object to the PIK Claim as a portion of the relief requested.
As to the Trustee’s assertion that the Debtors must wait until the PIK Claim is amended in order to object, the EFIH Debtors do not need to wait until the claim is amended or confirmation of any plan to object to claim or to liquidate claims. Bankruptcy Rule 3007 governs objection to claims and “provides no time limits for filing objections to claims. An objection against a claim in bankruptcy may be lodged at any time during the pendency of the case.”72 Furthermore, Courts have heard similar claims objections relating to prepayment fees and interest.73 Thus, nothing in this Opinion limits the EFIH Debtors’ ability to object to the PIK Claim or to seek to liquidate such claim.
CONCLUSION
As set forth above, the Court dismisses the Complaint for lack of subject matter jurisdiction because the issues set forth in the Complaint are not ripe for adjudication. However, nothing herein limits the *516EFIH Debtors from objecting to the PIK Claim.
As order will be issued.
. "The court is not required to state findings or conclusions when ruling on a motion under Rule 12_" Fed. R. Bankr.P. 7052(a)(3). Accordingly, the Court herein makes no findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
. Capitalized terms not defined herein shall have the meaning ascribed to them infra.
. The defendant herein is UMB Bank, N.A., as Indenture Trustee (the "Trustee") for the unsecured 11.25% / 12.25% Senior Toggle Notes Due 2018 (the “PIK Notes”) pursuant to the terms of an Indenture dated December 5, 2012 (as amended and supplemented, the "Indenture”).
. The parties agree to the factual history relevant to the matter before the Court, except where noted.
. D.I. 420. The T-side Committee is composed of creditors of Energy Future Competitive Holdings Company LLC ("EFCH”), • EFCH’s direct subsidiary, TCEH, TCEH’s direct and indirect subsidiaries, and EFH Corporate Services Company. This committee represents the interests of the unsecured creditors of the aforementioned debtors and no others.
. D.I. 2570. The E-side Committee is composed of creditors of Energy Future Holdings Corp.; Energy Future Intermediate Holding Company, LLC; EFIH Finance, Inc.; and EECI. This committee represents the interests of the unsecured creditors of the aforementioned debtors and no others.
. D.I. 3295.
. D.1.4634.
. D.I. 4142 and 4243. See also solicitation procedures motion and supporting documents at D.I. 4144, 4145, 4146, 4147. On May 18, 2015, the Court entered an Order approving a scheduling motion related to the Debtors’ disclosure statement, as well as, appointment of a mediator. See Order (A) Scheduling Certain Hearing Dates and Deadlines, (B) Establishing Certain Protocols in Connection with the Approval of Debtors’ Disclosure Statement, and (C) Establishing the Terms Governing Mediation, D.I. 4497 (May 18, 2015).
. Currently, the T-side committee, the Ad Hoc Group of TCEH Unsecured Noteholders, and the E-side Committee have each filed motions seeking derivative standing to bring various causes of action. See D.I. 3593, 3596, and 3605. These standing motions are currently scheduled to be heard on June 25, 2015.
. Adv. Pro. No. 14-50363.
. Adv. Pro. No. 14-50405.
. Delaware Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 527 B.R. 178 (Bankr.D.Del. 2015).
. Id. at 193-94.
. Id. at 195.
. Id. at 196. The Court has entered an order regarding its Opinion on a majority of the issues in Phase I of the First Lien Adversary Action (Adv.Pro.15-50363, D.I.246); the Trustee for the First Lien Notes has filed a motion pursuant to Bankruptcy Rule 59 ("Rule 59 Motion”) to alter or amend the Court’s order to clarify that the order was not a "final judgment.” Adv. Pro. 15-50363, D.I. 254. The Rule 59 Motion has not been submitted to the Court for decision. See Adv. Pro. 15-50363. Furthermore, the Court has not yet issued an opinion or order on the remaining piece of the Phase I First Lien adversary dispute regarding relief from the automatic stay related to the First Lien Trustee’s rescission of the First Lien Note acceleration.
. Id. at 197.
. Indenture § 3.07(a).
. Indenture § 4.01.
. PIK Claim (Form BIO) and Addendum to PIK Claim ¶ 4. See Declaration of Jason M. Madron, Esq. in Support of EFIH Debtors’ Opposition to UMB Bank N.A.’s Motion to Dismiss, Exh. A (“Madron Declaration”). Adv. D.I.14.
. Addendum to PIK Claim ¶ 4 (emphasis added). See Madron Declaration, Exh. A.
. Id. at ¶ 12.
. Adv. Pro. No. 14-51002, D.I. 1.
. Complaint at ¶ 2 (emphasis added).
. Complaint at ¶ 40 (emphasis added).
. Complaint at ¶ 44 (emphasis added).
. Complaint at ¶ 1.
. Id. (emphasis added).
. During the oral argument, the T-side Committee joined the EFIH Debtors in opposing the Motion to Dismiss. Transcript of Oral Argument at 154:1-23 (Del.Bankr.May 4, 2015) (Case No. 14-10979, D.I. 4477).
.Sportsman’s Warehouse, Inc v. McGillis/Eckman Investments-Billings, LLC (In re Sportsman's Warehouse, Inc.), 457 B.R. 372, 383-84 (Bankr.D.Del.2011) (footnote omitted).
. U.S. Const., art. Ill, § 2,
. 28 U.S.C.A. § 2201(a) (West).
. PHL Variable Ins. Co. v. ESP QIF Trust by & through Deutsche Bank Trust Co., No. CV 12-319-LPS, 2013 WL 6869803, at *3 (D.Del. Dec. 30, 2013) (internal quotation marks and citations omitted).
. Pub. Serv. Comm’n of Utah v. Wycoff Co., 344 U.S. 237, 244, 73 S.Ct. 236, 97 L.Ed. 291 (1952). See also Bank of New York v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.), 307 B.R. 432, 437 (Bankr.S.D.N.Y.2004) (hereinafter, "Adelphia”).
. Travelers Ins. Co. v. Obusek, 72 F.3d 1148, 1154 (3d Cir.1995) (citations and internal quotation marks omitted).
. Obusek, 72 F.3d at 1154 (citations and internal quotation marks omitted).
. Adelphia, 307 B.R. at 438 (citations, internal quotation marks and alteration omitted).
. Step-Saver Data Sys., Inc. v. Wyse Tech., 912 F.2d 643, 647 (3d Cir.1990) (hereinafter "Step-Saver”).
. Armstrong World Indus., Inc. by Wolfson v. Adams, 961 F.2d 405, 412 (3d Cir.1992) (citing Step-Saver, at 647). But see Obusek, 72 F.3d at 1154 (“If we are satisfied that all three [Step-Saver\ elements are present, the declaratory judgment action is ripe.”).
.Step-Saver, 912 F.2d at 648 (quoting 10A C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 2757, at 582-83 (2d ed.1983)).
.Pittsburgh Mack Sales & Serv., Inc. v. Int'l Union of Operating Engineers, Local Union No. 66, 580 F.3d 185, 190 (3d Cir.2009) (citations and internal quotation marks omitted).
.Obuselc, 72 F.3d at 1154.
. Adelphia, 307 B.R. at 433-34.
. Id. at 436.
. Id. at 438.
. Id. at 438.
. Id. at 439.
. Id. at 440-41 (citations and footnotes omitted).
. Ultimately, the Debtors are seeking to set the ''components” of the PIK Claim; i.e., is the PIK Claim comprised of principal, pre-petition interest, prepayment penalties, and post-petition interest or is the PIK Claim comprised of a subsection of these components.
. 169 B.R. 91, 94 (Bankr.D.Del.1994).
. Id. at 93.
. Id. at 94.
. See also Armstrong World Indus., 961 F.2d at 415 (wherein the court held that there was not adversity of interests wherein plaintiffs sought declaratory judgment regarding whether an antitakeover statute’s contral-share acquisitions and disgorgement provisions were applicable if there was a takeover attempt offer).
. Home Ins. Co. v. Powell, No. CIV. A. 95-6305, 1996 WL 269496 (E.D. Pa. May 20, 1996) aff'd, 156 F.3d 1224 (3d Cir.1998).
. Id. at *7.
. Pittsburgh Mack Sales & Serv., 580 F.3d at 190-91 (citations, internal quotation marks and alteration omitted). See also Grace Holdings, L.P. v. Sunshine Min. & Ref. Co., 901 F.Supp. 853, 862 (D.Del.1995) (emphasis added; citations omitted).
. Grace Holdings, 901 F.Supp. at 862 (citations omitted).
. Id. (citations omitted).
. The Trustee cites to In re Nortel Networks, Inc. wherein Judge Gross, along with the Canadian court hearing the cross-border cases, was scheduled to hear a pre-confirmation objection to decide whether and at what rate to award post-petition interest under an indenture. Prior to the scheduled hearing, Judge Gross adjourned the objection determining that it was not ripe prior to a determination of solvency. In re Nortel Networks, Inc., Case No. 09-10128(KG) (Bankr.D.Del. Nov. 15, 2013) (D.I.12399). Although Judge Gross declined to hear the post-petition interest issues, the Canadian court went forward with the hearing and issued an order regarding the objection. However, thereafter, Judge Gross agreed to hear the post-petition interest dispute despite his prior ruling. In re Nortel Networks, Inc., 522 B.R. 491, 507 (Bankr.D.Del.2014). Judge Gross, along with the Canadian Court, entered a scheduling order related to whether the bondholders could receive any amount under the indentures in excess of the outstanding principal debt and prepetition interest. Case No. 09-10138, D.I. 13910. The parties eventually settled their post-petition interest dispute and Judge Gross *513issued an opinion approving that settlement. In re Nortel Networks, Inc., 522 B.R. 491. The Trustee urges this Court that Judge Gross' order adjourning the objection on ripeness grounds is akin to the ripeness issues being raised in the case sub judice. This Court has a very small snap-shot of the complicated, cross-border Nortel Networks cases and the post-petition interest dispute therein and is disinclined to rely on a one-page order adjourning an objection as heavily as the Trustee suggests without additional information and context which is unnecessary given this Court’s ruling on the Motion to Dismiss.
. Step-Saver, 912 F.2d at 649 (citations, internal quotation marks and alterations omitted).
. Id. at 649-50 (quoting 69 Cong.Rec. 2108 (1928)).
. 72 F.3d 1148 (3d. Cir.1995).
. Id. at 1155-56.
. No. 05-CV-3572 (WGB), 2006 WL 2135811 (D.N.J. July 28, 2006).
. Id. at *6.
. Adelphia, 307 B.R. at 440 (footnotes excluded). See also In re Antonelli, No. 91-4-0254-PM, 1992 WL 435879, at *3 (Bankr.D.Md. Nov. 6, 1992) ("While this court understands and appreciates the desire of the Plaintiffs to determine certain tax liabilities prior to confirmation, the issue presented at this point in time is not ripe for adjudication. The court is also mindful that this ruling may delay confirmation efforts and complicate the negotiation process.”).
. PIK Claim Addendum ¶ 4 (emphasis added).
. PIK Claim AddendunW 12.
. In re RNI Wind Down Corp., 369 B.R. 174, 183 (Bankr.D.Del.2007) (citations and internal quotation marks omitted) ("An unliquidat-ed claim is a claim in which the amount owed has not been determined.”).
. Id. at 182 (citations and internal, quotation marks omitted) ("A claim is contingent where it 'has not yet accrued and ... is dependent upon some future event that may never happen.”). Section 502(e) of the Bankruptcy Code provides, in relevant part, that:
(1) Notwithstanding subsections (a), (b), and (c) of this section and paragraph (2) of this subsection, the court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim of a creditor, to the extent that—
(B) such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or contribution.
11 U.S.C. § 502(e).
. In re Presque Isle Apartments, L.P., 118 B.R. 331, 332 (Bankr.W.D.Pa.1990). Furthermore, Section 502(b) provides in pertinent part:
if [an] objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim ... and shall allow such claim....
(c) There .shall be estimated for purpose off allowance under this section—
(1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case.....
11 U.S.C. § 502(b).
. In re S. Side House, LLC, 451 B.R. 248, 254 (Bankr.E.D.N.Y.2011) aff'd sub nom. U.S. Bank Nat. Ass’n v. S. Side House, LLC, No. 1 l-CV-4135 ARR, 2012 WL 273119 (E.D.N.Y. Jan. 30, 2012) (granting a claims objection, in part, holding that pursuant to the terms of the loan documents, the claimant was not.entitled to prepayment consideration, among, other things); In re LaGuardia Associates, L.P., No. BR 11-19334 SR, 2012 WL 6043284, at *1 (Bankr.E.D.Pa. Dec. 5, 2012) (granting a claims objection and holding that pursuant to the terms of the promissory note and mortgage, the prepayment fee component of the claimant's claim must be disallowed). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498330/ | Kathryn C. Ferguson, Chief U.S.B.J.
Procedural History
Elaine Maitland filed a Chapter 7 petition on January 2, 2013. In her schedules, she listed debts owed to the IRS and the State of New Jersey Division of Taxation (“Division of Tax”) for unpaid income taxes for the 2008 tax year. The court issued a notice of discharge on April 13, 2013, and closed the case. Ms. Maitland filed a motion to reopen her bankruptcy case for the purpose of filing this adversary proceeding.
Ms. Maitland filed a one-count complaint seeking a declaration that her income tax liability to the State of New Jersey for the 2008 tax year has been discharged, and that any effort by the Division of Tax to collect that debt would constitute a violation of the discharge injunction of 11 U.S.C. § 524(a). Ms. Maitland filed a motion for summary judgment, and the Division of Tax filed a cross-motion for summary judgment. The parties submitted a Joint Stipulation of Material Facts, and agree that there are no disputed material facts that would require a trial.
The court took oral argument on the summary judgment motions on January *51713, 2015, and requested additional briefing from the parties. Ms. Maitland filed a supplemental brief on January 28, and the Division of Tax filed its brief on February 3, 2015. The parties waived oral argument and on the return date of the motions the court denied Ms. Maitland’s motion, and ruled in favor of the Division of Tax on its cross-motion for summary judgment. During its oral opinion, the court noted, incorrectly as it turns out, that Ms. Mait-land had failed to file a supplemental brief. After the hearing, Ms. Maitland’s counsel listened to a recording of the ruling, and brought the error to the court’s attention. Because the time for filing a motion for reconsideration had passed, the court informed the parties that it would reconsider its ruling under Federal Rule of Civil Procedure 60(a), made applicable in bankruptcy by Federal Rule of Bankruptcy Procedure 9024. Rule 60(a) provides that the court may correct “a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice.”1
Facts
The facts are not in dispute. Ms. Mait-land filed her federal and New Jersey personal Gross Income Tax return for the 2008 tax year on September 16, 2010. Under federal and New Jersey law,2 the returns were due on April 15, 2009. On January 31, 2012, she filed an amended federal and an amended New Jersey personal Gross Income Tax Return for the 2008 tax year. Ms. Maitland’s amended New Jersey return reduced her state tax liability from $23,860 to $11,641.
The IRS notified Ms. Maitland that it acknowledged that the tax liability on her amended return was discharged in her bankruptcy, and issued a Certificate of Release of Federal Lien. The Division of Tax, however, takes the position that the tax debt reflected on the 2008 returns was not discharged. Ms. Maitland filed this adversary proceeding to resolve that issue.
Discussion
A. Summary judgment standard
Federal Rule of Civil Procedure 56 was substantially revised in December 2010. The comments to Rule 56 provide that the changes were intended “to improve the procedures for presenting and deciding summary-judgment motions.... ” Among other changes, the familiar formulation of “genuine issue of material fact” that was previously set forth in 56(c) was moved to 56(a) and modified to read “genuine dispute as to any material fact.” Rule 56(a) now provides that the “court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The court should state on the record the reasons for granting or denying the motion.”3 The comment to Rule 56 indicates that the 2010 “amendments will not affect continuing developments of the decisional law construing and applying these phrases.”4
Accordingly, it remains a correct statement of the law to say that when faced with a summary judgment motion, the court must view the facts “in the light most favorable to the nonmoving party.”5 After the movant shows that there is no genuine factual dispute for trial, the non-*518moving party then bears the burden of identifying evidence that creates a genuine dispute regarding a material fact.6 To be material, a fact must have the potential to alter the outcome of the case.7 Disputes over non-essential facts will not preclude a grant of summary judgment.8
This matter is ripe for summary judgment because the parties have stipulated that there are no genuine disputes as to any material fact.
B. Definition of “return” under BAPC-PA
Before addressing the issues presented by the parties, the court must start at square one with the definition of a “return.” The Bankruptcy Code requires that a debtor file a tax return in order for the tax debt to be dischargeable.9 The parties fail to address whether either the original or amended tax return Ms. Mait-land filed even qualifies as a “return” after the passage of BAPCPA.10 This is an unsettled issue. Certain courts have interpreted the new definition of “return” to mean that there is a per se ban on discharging taxes if the return is filed after the due date.11 Other courts have found that the mere fact that a debtors’ tax return was filed late does not disqualify it as a “return.”12
Prior to 2005, the term “return” as used in § 523(a)(1) was not defined in the Bankruptcy Code. The definition of “return” that developed in the case law involved a four-part test “under which the document must: (1) purport to be a return; (2) be executed by the debtor under penalty of perjury; (3) contain sufficient data to allow calculation of the tax; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax law.”13 As part of BAPCPA, a “hanging paragraph” was inserted after § 523(a)(19) that defines a “return”:
For purposes of this subsection, the’ term “return” means a return that satisfies the requirements of applicable non-bankruptcy law (including applicable filing requirements). Süch 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.
*519Most courts have adopted an asterisk to indicate the “hanging paragraph.”14 The Third Circuit Court of Appeals has not had occasion to rule on the definition of a “return” post-BAPCPA, but the First, Fifth, and Tenth Circuits have.15 Those courts have all concluded that a late return does not satisfy § 523(a)(*)’s definition of a “return.” .
The Fifth Circuit in McCoy was the first Circuit Court of Appeals to address whether a late-filed return qualifies as a “return” under the BAPCPA definition and Mississippi law.16 The Fifth Circuit noted that the first sentence of § 523(a)’s hanging paragraph provides “a clear definition of ‘return’ for both state and federal taxes.17 The court concluded that the definition’s requirement that a return must comply with “applicable nonbankruptcy law (including applicable filing requirements)” necessarily encompasses any timeliness requirement contained in non-bankruptcy law.18 Accordingly, the McCoy court found that late-filed returns cannot be considered “returns” for bankruptcy discharge purposes under what it called the plain language of the statute.
Notably, even the IRS has expressed concern over the Fifth Circuit’s interpretation of the hanging paragraph, which' would render a one-day-late return not a “return” at all for purposes of § 523. The IRS advocated against the McCoy result in a brief filed in a bankruptcy case in California, stating “The United States does not adopt this position, which creates a harsh result that appears inconsistent with the statute’s intent.”19 Despite the IRS’s position, other Circuit courts have adopted McCoy’s draconian interpretation.
The Tenth Circuit in Mallo,20 reached the same conclusion as the Fifth Circuit, but in the context of a late-filed federal tax return. The Mallo court found that the Internal Revenue Code’s use of the phrase “shall be filed on or before” April 15 to be a classic example of an “applicable filing requirement” because it was something that must be done with respect to filing a tax return. Accordingly, the Mallo court found that a return that did not satisfy the timeliness filing requirement can never be discharged.
The First Circuit in Fahey,21 which involved four consolidated bankruptcy appeals, undertook a thorough analysis of the issue and concluded that timely filing a tax return is a “filing requirement” under Massachusetts law. Curiously, despite what appear to be facial inconsistencies in the text of the statute, the Fahey court concluded that there was “little need — or justification — for turning to secondary principles of statutory construction.”22 Fahey was not a unanimous decision, and Judge Thompson presented a robust dissent. He criticized the majority for being “unfairly dismissive of the debtors’ logical interpretation of the statutory provisions at issue.”23 This court agrees that the *520majority’s result in Fahey “defies common sense.”24
The Seventh and Eighth Circuits have also considered this issue, but did not have to decide it because the cases before those courts were filed prior to the effective date of BAPCPA. The Seventh Circuit decided Payne25 based on pre-BAPCPA law, but it nonetheless informs this court's decision. Judge Easterbrook wrote a cogent and nuanced dissent in that case. Judge Easterbrook pointed out that before a taxpayer can propose a compromise of his tax liabilities he must file a tax return, even if the IRS has already assessed the tax on its own. Judge Easterbrook therefore concluded that the Treasury Department does not consider a late filed (even post-assessment) tax return to be useless.26 This is a compelling point because one of the rationales employed by those courts excluding a late filed return from the definition of a “return” is that a late return does not assist the IRS. Judge Easterbrook noted that “timely filing and satisfaction of one’s financial obligations are requirements distinct from the definition of a ‘return’ ” and he argued that the relevant legal provisions were the ones that require that taxpayers yield all financial information necessary for calculation of their tax liabilities.27 Judge Easter-brook believed that the majority improperly conflated the objectives of obtaining accurate financial data and maximizing tax revenues, and insinuated a motive requirement into the definition of “return” that the cases used to formulate that definition do not support. “Motive may affect the consequences of a return,” Judge Easter-brook opined, “but not the definition.”28 A year later, the Eighth Circuit noted in Colsen29 that if that court were deciding the issue under the BAPCPA definition of a “return”, it would adopt Judge Easter-brook’s rationale in Payne.
This court respectfully disagrees with the conclusion reached by the Courts of Appeal that have ruled on this issue post-BAPCPA. This court, consistent with the dicta in Colsen and the dissents in Payne and Fahey, finds that a late-filed tax return can meet the definition of a return under § 523(a)(*). The reasons are fivefold.
First, those courts’ reading of the definition of the term “return” would render other parts of 523 superfluous, a result the Supreme Court has advocated that lower courts avoid.30 In Fahey, the First Circuit opined that its ruling would not render § 523(a)(l)(B)(ii) superfluous because in a minute number of cases the IRS will allow a taxpayer to submit a return using the provisions of section 6020(a) of the Internal Revenue Code.31 The Fahey court acknowledged that such returns are rare, but pointed out that there had been one bankruptcy case in which the IRS had prepared a return on behalf of the taxpayer with information supplied by the taxpayer under section 6020(a). That debtor was able to take advantage of § 523(a)(l)(B)(ii).32 *521This court finds that one example of an instance where § 523(a)(l)(B)(ii) was not superfluous — in the decade since the enactment of BAPCPA — is hardly compelling support. Also, the Fahey court’s interpretation means that a statutory provision is not superfluous so long as it is not utterly impossible for it to be used. That reading is far too contrived. The Supreme Court teaches that a statute should not be construed in a way that allows a “clause, sentence, or word” to be “superfluous, void, or insignificant.”33 If § 523(a)(1)(B)(ii) is read so that it applies only to those few souls that the IRS deems worthy of helping to file their tax returns, then the provision has undeniably been rendered insignificant.
Another provision of § 523 that would be undermined under the McCoy line of cases is § 523(b), which provides that “a debt that was excepted from discharge under subsection (a)(1) ... in a prior case concerning the debtor ... is dischargeable in a case under this title.” If a late-filed return is not a “return” then there is little need34 for that provision, because in a new bankruptcy case the prior taxes, if based on an untimely return, would remain non-dischargeable.
Second, this court finds that a plain language approach (which admittedly the McCoy line of cases claimed to have engaged in as well) does not fully support those courts’ reading of the term. In crafting a definition of “return”, Congress could have easily excluded a late return, but it did not do so. In fact, there is no temporal element in the definition. Additionally, the definition itself makes an exception for “a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law.” Although that statutory provision does not specify when such a return would be filed, logic dictates that a 6020(a) return will invariably be filed after April 15th. Given that the definition itself includes a late-filed return as a “return”, this court concludes that the definition was focused on what was filed, ie., the information necessary for a taxing authority to collect the debt, rather than when it was filed. The inclusion of 26 U.S.C. § 6020(a) versus § 6020(b) hinges on the cooperation of the taxpayer, not on any time requiremént. Therefore, it seems inconsistent to conclude that the satisfaction of filing requirements allows only timely filed returns.
Third, the draconian result occasioned by excluding a late-filed return from discharge is inconsistent with the oft-stated policy of the Bankruptcy Code that its principal purpose is to grant a fresh start to the “honest but unfortunate debtor.”35 The Fahey court asserts that “there is hardly anything ‘unfathomable,’ ‘draconian,’ or ‘absurd’ ” in its holding. The First Circuit may have underappreciated the number of bankruptcy cases in which clearing up old tax debt is the primary purpose of the filing. Those debtors would certainly find the conclusion that if their tax return was so much as one day late — no matter how justified the reason— that they are saddled with that debt in perpetuity to be an unfathomable, draconian and absurd result. This court believes that following the McCoy line of cases “will produce a result demonstrably at odds with the intention of [the Bankruptcy Code’s] drafters.” Moreover, this court *522finds it implausible that Congress would enact such a dramatic change from prior law without a meaningful discussion of it in the legislative history.
Fourth, when one considers § 523(a)(1) as part of the broader statutory scheme of § 523(a), the McCoy line of cases is anomalous. Other subsections of § 523 primarily address debts arising out of culpable conduct by the debtor: fraud (§ 523(a)(2)); defalcation, embezzlement or larceny (§ 523(a)(4)); death or personal injury caused by driving while intoxicated (§ 523(a)(9)); or violation of Federal securities laws (§ 523(a)(19)). The McCoy reading of the definition of “return” would impose the same penalty for blameless failure to file a timely return, such as a debtor who was prevented from mailing his return on April 15th because of illness, as would be imposed on a debtor who committed an intentional tort. This court is reticent to adopt such a reading without stronger textual support in the statute.
Finally, the Circuit courts in the McCoy camp failed to address the detrimental impact their rulings would have on unsecured creditors who now must share the limited assets of the debtor with tax claims that may be decades old. Many of these unsecured creditors extended credit to the debtor based on its then current financial condition, unaware of old tax claims. Other aspects of the Bankruptcy Code demonstrate a careful balancing of the rights of various constituencies, so it is difficult to believe that Congress chose to favor taxing authorities to the complete detriment of other unsecured creditors and the debtor’s fresh start.
For all of these reasons, the court finds that a late-filed tax return can meet the definition of a “return” under § 523(a)(*).
C. Dischargeability of Ms. Maitland’s 2008 tax debt under § 523(a)(l)(B)(ii)
Ms. Maitland posits that the time period for determining whether her tax debt is dischargeable under § 523(a)(l)(B)(ii) should be measured from the filing of her original return, not from the filing of her amended return. Ms. Maitland cites two bankruptcy court opinions that support her position.
The first is Greenstein,36 which although decided against the debtor, discussed the policy behind the two year period in § 523(a)(l)(B)(ii). The Greenstein court reasoned:
Chapter 7 discharge depends on the taxpayer/debtor’s compliance with applicable law governing the filing of the appropriate tax return. The effect of the two year limitation period is to allow the taxing authorities a reasonable time to collect the tax or create a lien on assets of the debtor. That period should begin with the filing of the return that reports or should report the debts the taxing authority seeks to collect. Until that return is filed, the taxing authority cannot be expected to take action to assess or collect the tax.37
The Greenstein court logically concluded that if the rationale behind the two year period in § 523(a)(l)(B)(ii) is to allow the taxing authority time to collect from or create a lien on assets of the debtor, then the clock should start running from the first time the debtor reports its tax liability.
The second case Ms. Maitland relies on is Lambom;38 which adopted, in part, the *523reasoning in Greenstein. The Lamborn court undertook a thorough analysis of all cases, dating back into the 1920’s, that addressed whether a limitations period should be measured from an original or an amended tax return. Ultimately, the court concluded that the question is best answered on a case-by-case basis that balances fairness to the taxpayer against fairness to the taxing authority.39 The Lam-bom court reasoned that, absent special circumstances, the limitations period in cases involving taxpayer misreporting should be calculated as follows:
the limitations period for an original tax return should commence on the filing of the original return; an amended return should not toll the period as to the same taxes admitted to be owed in the original return; but an amended return should toll the period as to additional tax liability admitted for the first time in the amended return.40
If this court were to adopt the Lambom approach it would be dispositive, because Ms. Maitland over-reported her 2008 tax liability; thus, there was no “additional tax liability admitted for the first time in the amended return.”41
The Division of Tax attempts to distinguish Lambom based on the fact that the language of § 523(a)(l)(B)(ii) does not differentiate between an original and an amended return. That argument is a nonstarter. It is precisely because § 523(a)(l)(B)(ii) does not use the term “original” or “amended” that the Lamborn court had to undertake an exhaustive review of the relevant caselaw.
The Division of Tax also suggests that this court should disregard Lambom because it is a non-binding decision from a bankruptcy court outside this jurisdiction. While that is true, the parties have not cited the court to any binding authority on. this issue, and the court’s own research has not disclosed any. It is worth noting that the cases the Division of Tax relies on are also outside this jurisdiction and are both more than twenty-five years old.42
The Division of Tax relies on Wood43 for the proposition that “11 U.S.C. § 523(a)(l)(B)(ii) is the product of Congress’ balancing of competing interests between a fresh start for debtors and the importance of paying taxes to State and Federal government.”44 That statement is not wholly accurate. The court in Wood noted that the tax dischargeability provisions in the Bankruptcy Code represented a balance between the interests of the debtor, unsecured creditors, “and the interests of the United States in collecting income taxes due.” That is a subtle but important distinction; public policy aimed at encouraging taxpayers to pay taxes is different than public policy aimed at providing a taxing authority a fair opportunity to collect taxes. It appears to this court that § 523(a)(l)(B)(ii) is aimed at the opportunity to collect.
That conclusion is supported by the legislative history to the Bankruptcy Reform Act of 1978. The House Committee on the Judiciary, explaining why certain taxes should not be dischargeable in bankruptcy, stated that “[a]n open-ended dischargeabil*524ity policy would provide an opportunity for tax evasion through bankruptcy, by permitting discharge of tax debts before a taxing authority has an opportunity to collect any taxes due,”45 The Committee also noted that the fixing of time periods in § 523(a)(1)(A) and (a)(l)(B)(ii) is intended to provide taxing authorities with a reasonable time in which “to pursue delinquent debtors and obtain secured status.”46
The recent case of Putnam v. IRS47 further supports the court’s conclusion that § 523(a)(l)(B)(ii) is aimed at giving a taxing authority a fair opportunity to collect taxes. Putnam involved the collateral issue of whether the two-year period in § 523(a)(l)(B)(ii) is tolled by a debtor’s intervening bankruptcy cases. The IRS argued that the period should be tolled because the automatic stay in the debtor’s subsequent bankruptcy filings deprived the IRS of a full two year period in which to collect the tax debt. The Putnam court reasoned:
The two-year lookback period [in § 523(a)(l)(B)(ii) ] provides the IRS with a specified time period within which it must pursue its claim and preserve its rights. Because liability for untimely tax returns will be discharged if the return was filed more than two years before the bankruptcy petition, it encourages the IRS to collect on the debt or perfect its lien before the two-year period expires. If the IRS neglects its claim, the tax debt becomes dischargea-ble. The noted policies of repose, elimination of stale claims and certainty are all present.48
The Putnam court’s observation that the two-year period commences when an untimely tax return is filed because that is “when the IRS is put on notice that it has a complete and present cause of action”49 is highly relevant to this court’s analysis. Here, the Division of Tax was first put on notice that there was an unpaid tax liability when Ms. Maitland filed the original return, the filing of the amended return merely provided supplemental notice.
Finally, this court’s interpretation is consistent with the Supreme Court’s decision in Young50 That case addressed whether the three-year period in § 507(a)(8)(a)(I) is tolled during the pen-dency of a bankruptcy case. The Supreme Court noted-that the lookback “period thus encourages the IRS to protect its rights— by, say, collecting the debt ... or perfecting a tax lien ... before three years have elapsed. If the IRS sleeps on its rights, its claim loses priority and the debt becomes dischargeable.”51 That logic is equally applicable to § 523(a)(l)(B)(ii).
Finally, the Division of Tax claims that it is irrelevant whether an amended tax return increases or decreases the tax liability. That statement is at odds with New Jersey tax law, which clearly recognizes that there is a difference. The New Jersey Gross Income Tax Act provides that a tax “shall be deemed to be assessed on the date of filing of the return (including any amended return showing an increase of tax).”52 That statutory provision *525makes clear that under New Jersey law whether an amended return increases or decreases tax liability matters. It would be surprising that an increase or decrease is relevant under state law but not under bankruptcy law.
This court finds that the filing of an amended tax return that does not increase the tax liability should not give the taxing authority a second chance to collect unpaid taxes. In the case before the court, the Division of Tax was given a fair opportunity to collect the 2008 taxes as reflected on the original tax return. It did not to do so. The filing of an amended return that reduces the tax liability should not reward the Division for sleeping on its rights to the detriment of a debtor’s fresh start.53 As noted in Wood, “the Bankruptcy Code prefers the interests of the United States as a tax creditor only if the United States acts diligently....”54 The court concludes that the 2008 tax debt is discharge-able under § 523(a)(l)(B)(ii) because the Division of Tax had more than the required two years from the filing of the original return [September 16, 2010] until the filing of the bankruptcy petition [January 3, 2013] to take action to assess or collect the tax.”55 Such a ruling furthers the principles enunciated by Congress when it adopted the original Bankruptcy Code and when it adopted BAPCPA.56
D. Dischargeability of Ms. Maitland’s 2008 tax debt under § 523(a)(1)(A)
The Division of Tax alternatively argues that the 2008 tax debt is nondischargeable under § 523(a)(1)(A). That section provides that a discharge does not apply to a tax “of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title.... ” The Division of Tax asserts that Ms. Maitland’s 2008 taxes are not dischargeable under § 507(a)(8)(A)(iii) because it encompasses taxes “not assessed before but assessable, under applicable law or by agreement, after the commencement of the case.”57 The “applicable law” relied on by the Division of Tax is N.J.S.A 54:49-6(b), which provides that personal Gross Income Taxes may be assessed at any time within four years of the filing of a return. Ms. Maitland filed her original 2008 return on September 16, 2010, so under that statute the Division of Tax could assess additional taxes for the 2008 tax year at any time until September 15, 2014. In other words, additional assessments could be made on Ms. Maitland’s original and amended 2008 returns after the commencement of her case.
That argument has a certain initial appeal, but it fails to take into account the introductory language of § 507(a)(8)(A)(iii), which makes it applicable to taxes “other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title.... ” 58 This court has already found that Ms. Maitland’s 2008 tax debt is a “tax of a kind specified in section 523(a)(1)(B)”; therefore, § 507(a)(8)(A)(iii) is, by its own terms, inapplicable. Accordingly, the court rejects § 523(a)(1)(A) as an alterna*526tive basis for finding the 2008 tax debt nondischargeable.
Conclusion
The court hereby vacates its orders of February 17, 2015. The court grants summary judgment in favor of Ms. Maitland, and finds that her 2008 tax debt was discharged as part of her bankruptcy case. The court denies the cross-motion for summary judgment by the Division of Tax. Ms. Maitland’s counsel should submit a proposed order in accordance with this opinion.
. Fed. R. Civ. P. 60(a)
. N.J.S.A. 54A:8-l(a)
. Fed. R. Civ. P. 56(a)
. See also, Various Plaintiffs v. Various Defendants, 856 F.Supp.2d 703 (E.D.Pa.2012)
. Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007)
. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)
. Kaucher v. County of Bucks, 455 F.3d 418 (3d Cir.2006)
. NAACP v. North Hudson Regional Fire & Rescue, 665 F.3d 464 (3d Cir.2011)
. 11 U.S.C. § 523(a)(l)(B)(i) (“[a] discharge under section 727 ... does not discharge an individual debtor from any debt — (1) for a tax ... with respect to which a return ... was not filed or given....”)
. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”)
. See, e.g., Perkins v. Mass. Dep't of Revenue, 507 B.R. 45 (D.Mass.2014); In re Wendt, 512 B.R. 716 (Bankr.S.D.Fla.2013); Cannon v. United States (In re Cannon), 451 B.R. 204 (Bankr.N.D.Ga.2011); Creekmore v. Internal Revenue Serv. (In re Creekmore), 401 B.R. 748 (Bankr.N.D.Miss.2008)
. See, e.g., Biggers v. Internal Revenue Service (In re Biggers), 528 B.R. 870 (Bankr.M.D.Tenn.2015); Briggs v. United States (In re Briggs), 511 B.R. 707 (Bankr.N.D.Ga.2014); In re Martin, 508 B.R. 717 (Bankr.E.D.Cal.2014)
. Hamer v. United States (In re Hamer), 328 B.R. 825, 831 & n. 9 (Bankr.N.D.Ala.2005). This four-part test, commonly referred to as the Beard test, is derived from Beard v. Commissioner, 82 T.C. 766 (1984), aff'd, 793 F.2d 139 (6th Cir.1986).
. 11 U.S.C. § 523(a)(*)
. This issue is currently on appeal to the Ninth Circuit Court of Appeals. See, IRS v. Smith (In re Smith), 527 B.R. 14 (N.D.Cal.2014) (holding that BAPCPA’s definition of a return did not displace the Beard test)
. In re McCoy, 666 F.3d 924 (5th Cir.2012)
. 666 F.3d at 930
. Id. at 929
. Martin v. Internal Revenue Service (In re Martin), 508 B.R. 717, 727 n. 14 (Bankr.E.D.Cal.2014)
. Mallo v. Internal Revenue Service (In re Mallo), 774 F.3d 1313 (10th Cir.2014)
. Fahey v. Massachusetts Department of Revenue (In re Fahey), 779 F.3d 1 (2015)
. Fahey, at 9
. Fahey, at 11 (Judge Thompson, dissenting)
. Id.
. In re Payne, 431 F.3d 1055 (7th Cir.2005)
. Id. at 1060 (Easterbrook, J., dissenting)
. Id. at 1060-61 (Easterbrook, J., dissenting)
. Id. at 1061-62 (Easterbrook, J., dissenting)
. In re Colsen, 446 F.3d 836 (8th Cir.2006). The Colsen court did not apply the current definition of return because the case was filed was prior to the effective date of BAPCA; therefore, its statement agreeing with Judge Easterbrook’s rationale in Payne is dicta.
. See, Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (“[W]e are hesitant to adopt an interpretation of a congressional enactment which renders superfluous another portion of that same law.”)
. Fahey, 779 F.3d at 6-7
. In re Kemendo, 516 B.R. 434 (Bankr.S.D.Tex.2014)
. TRW Inc. v. Andrews, 534 U.S. 19, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001)
. The court is aware that occasionally a debtor will file a new bankruptcy case because the 240 day period in § 507(a)(8) had not passed as of the date of the filing of the previous case; however, in this court’s experience even in those instances most of those tax returns were not timely filed.
. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 373, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007)
.Greenstein v. Illinois Dep’t of Revenue (In re Greenstein), 95 B.R. 583 (Bankr.N.D.Ill.1989)
. Id. at 585
. Lamborn v. IRS (In re Lamborn), 204 B.R. 999 (Bankr.N.D.Okla.1997)
. Id. at 1005
. Id. (emphasis in original)
. Id.
. One of the cases the Division of Tax relies on is In re Edwards, 74 B.R. 661 (Bankr.N.D. Ohio 1987). That case was decided under § 523(a)(1)(A) and both its facts and reasoning have no bearing on this issue.
. Wood v. IRS (In re Wood), 78 B.R. 316 (Bankr.M.D.Fla.1987)
. Brief in Support of Cross-Motion for Summary Judgment in Favor of the State of New Jersey at 4
. H. Rep. No. 95-595, 95th Cong., 2d Sess. 1, 190, reprinted in 1978 U.S.Code Cong. & Admin. News 5963, 6150 (emphasis added)
. House Report at 190, reprinted in 1978 U.S.Code Cong. & Admin. News at 6150
. Putnam v. IRS (In re Putnam), 503 B.R. 656 (Bankr.E.D.N.C.2014)
.' Id. at 664
. Id.
. Young v. United States, 535 U.S. 43, 122 S.Ct. 1036, 152 L.Ed.2d 79 (2002)
. Id. at 47, 122 S.Ct. 1036
. N.J.S.A. § 54a:9-3
. Putnam, 503 B.R. at 665 (the two-year rule ... provide[s] the IRS with a window within which it can reasonably expect to collect on the debt or perfect a lien, yet [it] also pre-servéis] a debtor’s right to a "fresh start” when those same tax claims go unpur-sued....”)
. 78 B.R. at 322
. Greenstein, 95 B.R. at 585
. BAPCPA added new provisions to § 507(a)(8) that were intended to toll the relevant time periods whenever the taxing authority is prevented from collecting, such as when an offer in compromise is pending. See, 11 U.S.C. § 507(a)(8)((A)(ii)(I)
. 11 U.S.C. § 507(a)(8)(A)(iii)
. 11 U.S.C. § 507(a)(8)(A)(iii) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498332/ | OPINION
THE HONORABLE NOVALYN L. WINFIELD, BANKRUPTCY JUDGE
Before the Court is a Motion to Dismiss Debtor’s Bankruptcy Case Pursuant to 11 U.S.C. § 105(a) and 11 U.S.C. § 1112(b) (“Motion to Dismiss”) filed by Susan E. Champion, Esq. (“Movant” or “Champion”), a judgment creditor of the Blanche Zwerdling Revocable Living Trust (“Debt- or” or “Trust”). Joining in the Motion to Dismiss are three other judgment creditors: Linda Couso Puccio, Esq.; Tania M. Nemeth, Esq.; and Joseph A. Mecca, Esq. The Movant seeks dismissal on two grounds: (1) the Debtor is ineligible to be a debtor under 11 U.S.C. § 109(a) as the Debtor is not a business trust; and (2) the Debtor filed the petition in bad faith. Todd Trombetta, Blanche Zwerdling’s grandson and the current Trustee of the *539Trust (“Todd”), opposed the Motion to Dismiss on behalf of the Debtor.
I. JURISDICTION
Jurisdiction over this contested matter arises pursuant to 28 U.S.C. §§ 1334(b) 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. The Court has jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(A) and (0). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. FACTUAL BACKGROUND
On February 20, 2015, the Debtor, by and through Todd as the current Trustee, filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (“Bankruptcy Code”). The Debtor in this case is a trust, created on January 28, 1998 by the late Blanche Zwerdling (“Zwerdling”), as a self-settled revocable living trust. (See Verified Application of Susan E. Champion (“Champion’s Verified App.”) at ¶4, and Exhibit A attached thereto).
The Trust was funded with certain of Zwerdling’s personal assets, including various bank accounts and three (3) parcels of real property that Zwerdling owned in her own name. (Id.). The real property was comprised of: (1) an 18-unit mixed residential and commercial property located at 255 Union Avenue, Paterson, New Jersey (“Union Avenue Property”); (2) a condominium in Delray Beach, Florida (“Florida Property”), sold in 2002; and (3) a townhouse located at 109-4 Crosby Avenue, Paterson, New Jersey (“Crosby Avenue Property”). (Champion’s Verified App., Exhibit A, “Real Estate Properties Transferred into the Trust”).
Upon creating the Trust, Zwerdling was both the Trustor and sole Trustee. (Champion’s Verified App., at ¶ 5, and Exhibit A at Section 1.03). The beneficiary of the Trust is Zwerdling’s granddaughter, Cheryl Trombetta (“Cheryl”). (Champion’s Verified App. at ¶ 5, and Exhibit A at Section 3.03).
The stated purpose of the Trust is in Section 1.01: “[t]his Revocable Trust is formed to hold title to real and personal property for the benefit of the Trustor of this Trust and to provide for the orderly use and transfer of these assets upon the death of the Trustor....” (Champion’s Verified App., Exhibit A at Section 1.01). The Trust provides that:
During the life of the Trustor, should Trustor become incapacitated ... the Trastee may, in the Trustee’s absolute discretion, pay income and principal for the benefit of the incapacitated Trustor, and may pay to or apply for the benefit of that Trustor such sums from the net income and from the principal of the Estate as the Trustee, in the Trustee’s absolute discretion, believes is necessary or advisable for the medical care, comfortable maintenance, and welfare of the Trustor.
(Champion’s Verified App., Exhibit A at Section 2.02). The Trust did make distributions for Zwerdling’s and Cheryl’s personal spending, including expenses for hair salons, restaurants, medical professionals, cable television, etc. (Champion’s Verified App. at ¶ 31, and Exhibit E).
The Trust gave the Trustee specific powers, including:
a) Trust Estate — The Trustee may ' leave invested, any property coming into the hands hereunder in any form of investment, even though the investment may not be of the character of investments permitted by law to trustees, without liability for loss or depreciation in value. The Trustee may sell, exchange or otherwise dispose of and reinvest proper*540ty which may at any time be part of the Trust Estate upon such terms and conditions as the Trustee deems advisable. The Trustee may invest and reinvest the Trust Assets from time to time in any property, real, personal, or mixed, including without limitation securities of domestic and foreign corporations and investment trusts or companies, bonds, debentures, preferred stocks, common stocks, mortgages, mortgage participations, and interests in common trust funds, all with complete discretion to convert realty into personalty or personalty into realty or otherwise change the character of the Trust Estate, even though such investment (by reason of its character, amount, proportion to the total Trust estate, or otherwise) would not be considered appropriate for a fiduciary apart from this provision, and even though such investment caused part or all of the total Trust Estate to be invested in investments of one type or of one business or company.
o) Continuation of Business — The Trustee may continue any business or businesses in which I have an interest at the time of my death for so long as the Trustee may, in his or her sole discretion, consider necessary or desirable, whether or not the business is conducted by me at the time of my death individually, as a partnership or as a corporation wholly owned or controlled by me, with full authority to sell, settle and discontinue any of them when and upon such terms and conditions as the Trustee may, in his or her sole discretion, consider necessary or desirable.
p) Retain Property for Personal Use— The Trustee may retain a residence or other property for the personal use of a beneficiary and to allow a beneficiary to use or occupy the retained property free of rent and maintenance expenses.
(Champion’s Verified App., Exhibit A at Section 4.03).
The record evidences that the res of the Trust stayed virtually the same since its creation, and the only “business” ever engaged in by the Trust was occasionally leasing the Crosby Avenue Property and the Florida Property and consistently leasing the commercial and residential units on the Union Avenue Property. (Champion’s Verified App. at ¶¶ 36, 39, 40, 41 and 44; and Verified Application of Todd E. Trom-betta (“Todd’s Verified App.”) at ¶¶ 6, 12, 13). While the Trustor was alive and competent, managing and leasing the Union Avenue Property was a task performed by Zwerdling herself. It further appears that Zwerdling claimed all profits and losses on her personal tax returns. (Champion’s Verified App. at ¶ 50).
The Trust also provides for its termination:
On the death of the Trustor, the Trustee shall distribute the principal of the Trust and any such accrued or undistributed income from the principal of the Trust in such a manner and to such persons, including the Estate or its Creditors, as directed in this Trust Agreement.
(Champion’s Verified App., Exhibit A at Section 3.01). This termination provision is tempered only by Exhibit A to the Trust, titled “Additional Special Directives of Blanche Zwerdling Trustee and Trustor of the Blanche Zwerdling Revocable Living Trust” that states the following handwritten directive:
I direct that my granddaughter Cheryle Trombetta receive the proceeds from my Prudential Life Insurance Policy # [xx-*541xxx]-596 in one lump sum, also my bank balances.
I direct that my granddaughter Cheryle Trombetta receive the balance of my estate on a monthly basis to cover only her day to day living expenses and not to have control of the estate.
(Champion’s Verified App., Exhibit A). Todd, through counsel, makes much of the directive to pay the balance of Zwerdling’s estate to Cheryl on a month-to-month basis as evidence that the Trust was to continue after Zwerdling’s death.
There are also various references in the Trust to probate and estate planning matters. (Champion’s Verified App., Exhibit A at Section 5.01(a), entitled, “Coordination with Trustor’s Probate Estate”; Section 8.03, entitled, “Personal Property Distribution”; and Section 9.01, entitled “Perpetu-ities Savings Clause”).
Zwerdling maintained her role as sole trustee from the Trust’s creation in 1998 until eventually removed by court order in 2009. In or about May 2009, Todd filed a probate action in the Superior Court of New Jersey, Chancery Division, Probate Part, Passaic County (“Probate Court”), Docket No. P-197937, to declare Zwer-dling incapacitated and to have himself appointed as Zwerdling’s guardian. (Champion’s Verified App. at ¶ 18). The Probate Court instead appointed Champion, an attorney with no relation to the family, as Zwerdling’s Temporary Guardian. (Id. at ¶ 22).
On November 5, 2009, the Probate Court entered an Order adjudicating Zwerdling as a partially incapacitated person in need of a limited guardian of her person and property. (Id. at ¶22, and Exhibit B). The Order appointed Champion and Sandra Scala, Zwerdling’s niece, as Co-Guardians of Zwerdling and Co-Trustees of the Trust. (Id.).
After several years, Champion ultimately resigned as Co-Guardian and Co-Trustee and the Office of the Public Guardian for the Elderly (“OPG”) was appointed as Co-Guardian and Co-Trustee in her place. (Id. at ¶¶ 28 and 29). The OPG served as Co-Guardian of Zwerdling until she passed away on March 21, 2014. (Id. at ¶ 29).
On September 29, 2014, the Probate Court entered an Order relieving both the OPG and Scala as Co-Trustees of the Trust and appointed Todd as the Substitute Trustee of the Trust. (Id. at ¶ 30.
Following Todd’s appointment, the Trust employed an on-site supervisor for the Union Avenue Property, as well as a property management company. (Todd’s Verified App. at ¶ 6).
Throughout the guardianship proceeding, the Probate Court judge entered orders awarding fees to court-appointed counsel and other attorneys involved in the case, including: Champion; Puccio (Court-appointed attorney for Zwerdling); Nem-eth (Court-appointed Guardian ad litem for Zwerdling); and Mecca (former attorney for Todd). (Champion’s Verified App. at ¶¶ 24, 25, and 26). The Orders regarding fee awards stated that to the extent Zwer-dling’s personal assets were insufficient to satisfy the attorney’s fee awards, the assets of the Trust could be used to pay same. (Id. at ¶ 25, and Exhibit C). The fees are alleged to exceed $337,000.00 and are still outstanding. (Champion’s Verified App. at ¶ 27, and Exhibit D). The fee awards have been docketed as judgments against Zwerdling and the Trust. (Champion’s Verified App. at ¶ 32). There is an ongoing dispute in the Probate Court about satisfying the judgments. (Id. at ¶¶ 32 - 35). The last order entered by the Probate Court is a February 20, 2015 Order Directing Listing of Property, compelling the marketing and sale of the Union Avenue Property. (Id. at ¶ 34, and Exhibit G).
*542On the same date as entry of the Order Directing Listing of Property, February 20, 2015, Todd filed the instant bankruptcy case for the Trust.
On March 23, 2015, Champion filed the Motion to Dismiss requesting dismissal of the bankruptcy case on the basis that the Debtor was ineligible for relief. Subsequently, Puccio, Nemeth and Mecca filed letters in support of the Motion to Dismiss.
On April 3, 2015, Todd, acting on behalf of the Debtor, filed a Verified Application in Opposition to the Motion to Dismiss (“Opposition”). In the Opposition, Todd argues that the Trust was formed primarily for a business purpose and is a business trust eligible for bankruptcy relief. In support, he cites to certain provisions of the Trust and to Zwerdling’s actions, ie., keeping her original personal residence out of the Trust and “operating” the Union Avenue Property since its purchase. However, during oral argument counsel for the Debtor recognized that the original purpose of the Trust was “geared to some degree to assist Blanche Zwerdling ... and personal expenses were taken out”, but there was a “change in purpose” and the Court must now focus on current purpose of the Trust. Counsel argues that upon the death of Zwerdling the Trust changed in character and.changed in purpose to be run as a business for profit. The change, counsel submits, is two-fold: (1) while revocable during Zwerdling’s lifetime, the Trust is now irrevocable; and (2) the more efficient and profitable manage-, ment of the Union Avenue Property by Todd. Accordingly, Todd, on behalf of the Debtor, asks this Court to make a distinction between the Trust as it existed prior to Zwerdling’s death and the Trust as it existed after her death, when Todd' became the successor trustee. Counsel appears to argue the “change in character” is sufficient to take this from an ineligible personal trust to an eligible business trust.
III. ANALYSIS
Section 109(d) of the Bankruptcy Code provides that “[o]nly a ... person that may be a debtor under chapter 7 of this title ... may be a debtor under chapter 11....” 11 U.S.C. § 109(d). The Bankruptcy Code defines “person” to include individuals, partnerships and corporations. 11 U.S.C. § 101(41). The definition of “corporation” is limited to certain business entities, including a “business trust.” 11 U.S.C. § 101(9)(A)(v). Accordingly, whether a trust is eligible for relief under the Bankruptcy Code depends on whether the trust is a “business trust.”
The Third Circuit has not addressed the applicable criteria for what constitutes a “business trust” under Section 101(9)(A)(v). Both the Second Circuit and Sixth Circuit addressed the issue; both Circuit courts agreeing that there is no uniform standard. Secured Equip. Trust of E. Airlines, Inc. v. First Fidelity Bank (In re Secured Equip. Trust), 38 F.3d 86, 89 (2d Cir.l994)(“a uniform body of law has not resulted and the decisions are, in fact, hopelessly divided.”); Kenneth Allen Knight Trust v. Schilling (In re Kenneth Allen Knight Trust), 303 F.3d 671, 680 (6th Cir.2002)(“there are a number of court-made definitions, and indeed perhaps the only thing that all the cases have in common is the recognition that they all differ.”). The Sixth Circuit also stated that “the definition of ‘business trust’ properly belongs to federal, rather than state, law.” In re Kenneth Allen Knight Trust, 303 F.3d at 679.
While there is no uniform standard from these cases, the Second Circuit identified several factors for determining whether a trust is a business trust. In re Secured Equip.Trust, 38 F.3d at 89. First, “whether the trust at issue has the attributes of a corporation.” Id. Second, whether the trust was “created for the *543purpose of carrying on some kind of business” or created “to protect and preserve the res.” Id. Third, whether the trust engages in “business-like activities.” Id. Fourth, whether, the trust “transacts] business for the benefit of investors.” Id. at 90. And, fifth, whether there is “the presence or absence of a profit motive.” Id. “Ultimately, each decision is based on a very fact-specific analysis of the trust at issue.” Id. at 89. Importantly, “the inquiry must focus on the trust documents and the totality of the circumstances, not solely on whether the trust engages in a business.” Id. at 90-91.
In Secured Equipment Trust, the Second Circuit upheld the bankruptcy court’s decision that the trust was not a business trust. The bankruptcy court found that the trust was simply created as a vehicle to facilitate secured financing — its purpose was to preserve the interest guaranteed to the certificateholders, not to generate a profit. Id. at 90. Any business activity engaged in by the trust was incidental to protecting the certificateholders’ security interests. Id.
Eight years after the Second Circuit’s decision, the Sixth Circuit articulated a “primary purpose” test consisting of two propositions. In re Kenneth Allen Knight Trust, 303 F.3d at 680. First, “trusts created with the primary purpose of transacting business or carrying on commercial activity for the benefit of investors qualify as business trusts, while trusts designed merely to preserve the trust res for beneficiaries generally are not business trusts.” Id. Second, “the determination is fact-specific, and it is imperative that bankruptcy courts make thorough and specific findings of fact to support their conclusions ... regarding what was the intention of the parties, and how was it operated.” Id.
In Kenneth Allen Knight Trust, the Sixth Circuit upheld the bankruptcy court’s finding that the trust was a business trust. Id. The bankruptcy court concluded that the grantor of the trust treated the trust the same as his other business entities, the trust served as a “holding company” for his various business enterprises, and the “sole purpose” of the trust, “since its inception”, was to transact business for the grantor and not just to preserve the res for the beneficiaries. Id. at 676. The Sixth Circuit rejected any notion that a business trust requires the existence of a transferable certificate of ownership. Id. at 679.
In support of his position, Todd relies on Greate Bay Hotel & Casino, Inc. v. City of Atlantic City, 264 N.J.Super. 213, 624 A.2d 102 (Ch.Div.1993) and In re Parade Realty, Inc., 134 B.R. 7 (Bankr.D.Haw.1991). This reliance is misplaced. Greate Bay Hotel & Casino provides no guidance as it largely addressed whether a business trust had the same legal status as an unincorporated organization and the impact such a designation would have on a law firm’s ability to represent the co-trustees of various trusts pursuant to the applicable Rules of Professional Conduct. 264 N.J.Super. at 216-17, 624 A.2d 102. Greate Bay Hotel & Casino is also inapposite to the case here as what constitutes a business trust for bankruptcy purposes is a matter of federal law: “[wjhether an entity is eligible for relief under title 11 of the United States Code is purely a matter of federal law. To hold otherwise would result in different results in different states and an entity would be eligible for relief in one state but not in another.” Kenneth Allen Knight Trust, 303 F.3d at 678-79, quoting In re Arehart, 52 B-R-308, 310-11 (Bankr.M.D.Fla.1985).
The other case relied on by Todd, Parade Realty, adopted the following test for determining whether a trust is a business trust: “1) the trust must be actively engaged in and doing business, 2) the trust *544must have some of the significant attributes of a corporation, primarily the transferability of interests in the trust, and 3) the trust must have been formed primarily for a business purpose.” 134 B.R. at 11. In relying on this case, Todd and his counsel gloss over one of the most salient points in the case — that to qualify as a business trust the trust must allow for the transfer of beneficial interests. Id. (The Court uses the descriptors “primarily” and “especially” with regard to the attribute “transferability of interests”). Todd does not argue, nor is there any indication, that Cheryl’s beneficial interest in the Trust is transferrable. Todd also ignores the third prong of the case — that to qualify as a business trust, the “trust must have been formed primarily for a business purpose.” Id. (emphasis added). Accordingly, the third prong of the test in Parade Realty actually cuts against the argument that the Court should consider the “change in character” of the trust following the Trustor’s death.
In addition to the Circuit Court opinions cited above, this Court also finds instructive In re Jin Suk Kim Trust, 464 B.R. 697 (Bankr.D.Md.2011) and In re Rubin Family Irrevocable Stock Trust (Rubin Family Trust), 2013 WL 6155606 (Bankr.E.D.N.Y. Nov. 21, 2013).
In In re Jin Suk Kim Trust, the court determined that a generation skipping trust established by the mother of the income beneficiary to provide for the income beneficiary during her life and allow her to pass trust corpus to heirs designated in her will was a business trust. The court found the following facts supported a determination that the trust was a business trust:
[FJrom the moment of its inception, Kim managed the Debtor to maximize its profits and the value of its assets in order' to enhance the overall wealth of her family. She managed it, and the real estate assets it acquired, the same way she ran her other businesses, without regard to trust principals, including the traditional trust principals of prudent, diversified investment and protection of the trust res. She did not pay to the income beneficiary (i.e., herself) any income from the Debtor, instead reinvesting it to maximize the Debtor’s value.... Kim used the Debtor’s initial real estate investment ... in order to maximize the Debtor’s value. While the Court would not conclude Kim’s actions were reckless, they were not consistent with a fiduciary’s obligation to prudently protect and preserve the res of a trust.
[T]he purpose of the Debtor was to transfer the economic interest of ninety percent of the Mattapony Center to Kim from her mother, in a manner that resulted in tax benefits, but which was intended to allow Kim to continue to manage the Mattapony Center and any other assets the Debtor acquired the same as she operated her other real estate ventures. It also allowed Kim to realize the value from the transfer if she chose while continuing to expand her real estate business as she saw fit.
In re Jin Suk Kim Trust, 464 B.R. at 704-6. In short, the Court found that the profit-making attributes and management of the trust far outweighed the estate planning benefit.
Finally, the Court in Rubin Family Trust found that the trust, despite being an estate planning vehicle, was in fact a business trust as its primary purpose was to do business. 2013 WL 6155606, at *9. The Court found:
Here, there is no question that one of the purposes of the Trust is to create an estate-planning vehicle to preserve Robert’s assets for the benefit of his family ... Nevertheless, this does not necessarily mean that the Trust Debtors are *545not “business trusts,” so long as their primary purpose is to do business.
The Trust Debtors borrowed and lent funds, invested, made, and lost millions of dollars in their various dealings ... Surely, no one would consider such activity to be anything other than “business activity” with a “profit motive” in the common, ordinary sense of these terms.
Moreover, the manner in which the Trust Debtors conducted business is clearly inconsistent with the notion that their primary purpose was to “protect and preserve” the res, because they continually put hundreds of thousands (at times millions) of dollars’ worth of the res at great risk in the course of chasing profits.
Id.
It is evident from the case law that whether a trust is a business trust is a fact-sensitive determination that goes beyond just the trust documents. The focus is on both the purpose of the trust and the actual operations of the trust. A trust that contains provisions regarding the distribution of the trust corpus upon the death of a trustor, does not preclude a finding that the trust is a “business trust” so long as its primary purpose is to do business. On the other hand, just because a trust engages in business like activities, without more, it does not necessarily follow that the trust is a business trust.
The facts present in Kenneth Allen Knight Trust, Jin Suk Kim Trust, and Rubin Family Trust, simply do not exist here.
As the facts here reflect, the only stated purpose of the Trust in the trust documents was to hold title to real and personal property for the benefit of the Trustor and for the orderly transfer of the assets upon the death of the Trustor. And, in fact, this appears to be what happened up until the time of the Trustor’s death. Upon its inception in 1998, the Trust res consisted of certain of Zwer-dling’s personal assets and bank accounts and, most notably, three (3) parcels of real property: the Union Avenue Property, the Florida Property and the Crosby Avenue Property. The Trust res did not change in any meaningful way until the sale of the Florida Property in 2002. At one time, the Crosby Avenue Property was used as the Trustor’s primary residence, along with her granddaughter, the beneficiary.
And the Union Avenue Property, the 18 unit mixed use commercial and residential building, continued to lease and maintain the units. Other than the business activity ancillary to preserving the Union Avenue Property, there is nothing in the Trust documents, or the activity of the Trust, that speaks of ongoing business operations. In fact, the Trust documents do not even mention the fact that the Union Avenue Property consisted of multiple units and was meant to be rented — it was simply an asset of the Trust, identified only by its address. Moreover, as counsel for Champion noted during oral argument, the “continuing business provisions” in the Trust (Section 4.03(o)) are typical in estate planning and such provisions are set forth in the New Jersey Probate Code. N.J.S.A. 3B:14-23v. In any event, by the time this matter reached oral argument, counsel for the Debtor did not dispute that the primary purpose of the trust at the time of its creation was “geared to some degree to assist Blanche Zwerdling.”
Rather, counsel argued that after Todd’s appointment as Trustee, there was essentially a “change in character” of the Trust, such that the primary purpose became transacting business with a profit motive. I am not convinced. First, there is nothing to indicate that the Trust was treated differently in any meaningful way since its creation to the present. Factually, the *546Trust maintained the same exact res, save for the sale of one parcel of real property in 2002. And the Trust res, in particular the Union Avenue Property that is the main focus in this proceeding, has always been a mixed used commercial and residential property that was managed and rented. The only difference Todd can point to now is the fact that a management company was put in place to handle the leasing and maintenance, a function previously performed by Zwerdling herself. Second, even if there was a meaningful “change of character,” Todd offered no case law to support the contention that a trust, that functioned as a personal, testamentary trust from its creation in January 1998 until the Trustor’s death in March 2014, a span of sixteen (16) years, can be transformed into a business trust as a result of management by a successor trustee for only five (5) months until he caused the filing of this bankruptcy on February 20, 2015. Even the case law relied on by Todd explicitly states that “the trust must have been formed primarily for a business purpose.” In re Parade Realty, 134 B.R. at 11. Refocusing a trust after the death of a trustor does not create a new trust. Arguably, it only moves the functioning of a trust away from its original purpose.
Also pertinent to the Court’s decision that the Trust is not a business trust eligible for bankruptcy relief is the fact that the Trust was managed under the supervision of the Probate Court from approximately May 2009 until February 20, 2015, when the Debtor filed this case. Equally important is the fact that the probate action was commenced by Todd, who filed the Chapter 11 petition on behalf of the Trust.
The real issues here appear to stem from the probate of Zwerdling’s estate, including the Trust. The current status of the probate matter appears to be either a dispute over fees owed to the Court-appointed professionals, as well as former counsel for Todd, or, how to satisfy those fees. Before the Debtor filed for bankruptcy, there was a directive by the Probate Court to sell the Union Avenue Property in order to pay professional fees. Todd, as Trustee, failed to do so, instead filing a Chapter 11 bankruptcy petition for the Trust on the same day that the Probate Court entered the Order. Debtor’s counsel admitted to this delay tactic during oral argument, explaining Todd was “buying time to sell the Crosby Avenue Property to pay off creditors” and avoid selling the Union Avenue Property as ordered by the Probate Court. This is a fight for the Probate Court; it does not belong in the Bankruptcy Court.
Because I find the Trust is not a business trust, and therefore ineligible for bankruptcy, I do not need to address the allegation that the petition was filed in bad faith.
IV. CONCLUSION
For the foregoing reasons, the Motion to Dismiss is granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498333/ | MEMORANDUM OPINION
RUFE, District Judge.
Plaintiff Christine C. Shubert, trustee of the bankruptcy estate of Joseph Grasso, filed this ease as an adversary proceeding in the United States Bankruptcy Court for the Eastern District of Pennsylvania (the “Bankruptcy Court”). Defendants Paul J. Winterhalter and his law offices (the “Firm”), proceeding pro se, have moved to withdraw the reference from the Bankruptcy Court and transfer the case to this Court.
I. FACTUAL AND PROCEDURAL HISTORY
On February 6, 2012, Joseph Grasso, a businessman with interests in numerous companies, filed for bankruptcy. On February 7, 2012, Defendants filed an application pursuant to 11 U.S.C. § 327(a) to represent Mr. Grasso as debtor-in-possession and assist him in performing his duties under the Bankruptcy Code. As required by § 327(a), Defendants’ application represented that Defendants were disinterested persons who did not hold an interest materially adverse to the bankruptcy estate. The Bankruptcy Court approved the application and, as counsel to the debtor-in-possession, Defendants acquired “fiduciary duties to the estate, including ensuring that the rights of creditors are protected.” 1
Plaintiff alleges that Defendants repeatedly breached their duties as counsel for the debtor-in-possession and aided and abetted Mr. Grasso in breaching his duties as debtor-in-possession. Defendants allegedly failed to counsel Mr. Grasso regarding his obligation to disclose his assets, including his interest in several businesses, and allegedly “substantially assisted” Mr. Grasso in improperly transferring more than $488,494.09 from his businesses in order to pay the personal expenses of Mr. Grasso and his wife.2 Plaintiff also alleges that Defendants were “involved” in Mr. Grasso’s undisclosed purchase of a proof of claim filed against the estate by the Wilmington Savings Fund Society, FSB (the ‘WSFS claim”) and thereby “they ceased to be disinterested, they actively put the Debtor’s personal interests ahead of the estate’s collective interests, they failed to disclose the estate’s opportunity in purchasing the WSFS claim at a discount, they failed to disclose their involvement in the transaction, and in fact, misrepresented their involvement to the Court.”3
On December 28, 2012, Defendants filed a Second Interim and Final Application for Compensation in the Bankruptcy Court in order to obtain payment for the fees and costs that the Firm had incurred in its representation of Mr. Grasso during the period of July 1, 2012 to October 31, 2012. On February 5, 2013, one of Mr. Grasso’s creditors, Madison Capital Company, objected to the Firm’s application pursuant to 11 U.S.C. § 328(c) and requested disgorgement of all fees previously paid to the Firm pursuant to 11 U.S.C. § 330(a)(5) on the basis that Mr. Winterhalter had been improperly involved in the purchase of the WSFS claim. Ms. Shubert, acting as trustee of the bankruptcy estate, joined in Madison’s objection.
*550The Firm’s fee application subsequently became the subject of extensive litigation in the Grasso bankruptcy, which culminated in the Bankruptcy Court’s memorandum opinion and order dated January 17, 2014 denying the fee application, ordering disgorgement of all fees previously paid to the Firm, and referring Mr. Winterhalter to the appropriate body for professional discipline.4 Mr. Winterhalter timely appealed to this Court, and by memorandum opinion and order dated July 10, 2014, this Court vacated the Bankruptcy Court’s January 17, 2014 order and remanded the fee application to the Bankruptcy Court for further proceedings.5
On February 10, 2014, while Mr. Win-terhalter’s appeal was pending, Plaintiff filed this case' as a separate adversary proceeding in the Bankruptcy Court. The amended complaint raises five claims against Defendants: 1) Breach of Fiduciary Duty; 2) Negligence; 3) Aiding and Abetting Breach of Fiduciary Duty; 4) Fraudulent Concealment; and 5) Conspiracy to Commit Fraudulent Concealment. Defendants answered the complaint and filed a motion to dismiss for lack of subject matter jurisdiction, which was denied by the Bankruptcy Court on June 27, 2014. Defendants then moved to withdraw the reference and transfer the adversary proceeding to this Court. To date, the Bankruptcy Court has not made any further ruling on the Firm’s application for fees in the Grasso bankruptcy or on any matter in the adversary proceeding filed by Plaintiff.
II. STANDARD OF REVIEW
Pursuant to 28 U.S.C. § 157(a) and the Standing Order of Reference for this District, “any and all proceedings arising under Title 11 or arising in or related to a chapter 7, 11, 12, or 13 case under Title 11 are and shall be referred to the Bankruptcy Judges for the district.” Section 157(d) provides that “the district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or the timely motion of any party, for cause shown.”
Whether a party has shown cause for withdrawal of reference is at the discretion of the district court.6 As a threshold matter, the district court determines whether the proceeding at issue is “core” or “non-core.”7 Pursuant to 28 U.S.C. § 157(b) and (c), bankruptcy courts may enter final judgment in core proceedings, whereas in non-core proceedings the bankruptcy court must submit proposed findings of fact and conclusions of law to the district court, which must review de novo any objections filed by the parties before entering final judgment. Regardless of whether a proceeding is core or non-core, the Bankruptcy Court may conduct a jury trial only with the consent of the parties.8 Thus, the district court may consider whether any party has demanded a jury trial and is constitutionally entitled to trial by jury in determining whether to withdraw the reference.9 District courts also consider factors including: “(1) pro*551moting uniformity of bankruptcy administration; (2) reducing forum shopping; (3) fostering economical use- of resources; (4) expediting the bankruptcy process; and (5)timing of the request for withdrawal.”10
III. DISCUSSION
Defendants contend that withdrawal of reference is warranted for three reasons: 1) this case is a “non-core” proceeding; 2) the Bankruptcy Court is not constitutionally .permitted to enter final judgment on Plaintiff’s claims; and 3) Defendants have a Seventh Amendment right to a jury trial. Defendants contend that withdrawal of reference will therefore avoid “unnecessary duplication of efforts by the District Court, since the District Court would be required to review the Bankruptcy Court’s orders de novo and conduct a jury trial without the benefit of having overseen pretrial matters.”11
A. Core vs. Non-Core
“A proceeding is ‘core’ 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.’ ”12 A nonexclusive list of core proceedings is contained in 28 U.S.C. § 157(b)(2), including matters concerning the administration of the bankruptcy estate. Non-core proceedings are all other proceedings that are “related to a case under title ll”.13
In In re Seven Fields Development Corp. (“Seven Fields”), the Third Circuit held that state law malpractice claims against bankruptcy court-appointed professionals for post-bankruptcy petition conduct are a core proceeding concerning the administration of the bankruptcy .estate.14 Similarly, Plaintiff here alleges that Defendants breached their duties as bankruptcy court-appointed professionals and aided and abetted Mr. Grasso in breaching his duties as debtor-in-possession; these claims arise from post-petition conduct that bears directly on the administration of the bankruptcy estate. Thus, this case is a core proceeding.15
B. The Bankruptcy Court’s Constitutional Authority to Enter Final Judgment
Defendants contend that even if Plaintiff’s claims are a core proceeding, the Bankruptcy Court lacks the constitutional authority to enter final judgment on these claims pursuant to the Supreme Court’s ruling in Stern v. Marshall.16 In Stem, the Supreme Court held that Article III of the United States Constitution prohibits bankruptcy courts from entering final judgment in certain core proceedings, which have come to be known as “Stem claims.”17 At issue in Stem was a state-law counterclaim by the debtor against a *552creditor, which although designated as core by § 157(b)(2)(C),18 “was not related to the creditor’s claims against the estate or the underlying bankruptcy in any way.”19 Whether- Stem extends to any other class of core proceedings remains unsettled in this Circuit.20 Stem itself, however, provides that when “an issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process,” Article III permits bankruptcy courts to enter final judgment.21
This case stems from the Grasso bankruptcy. The alleged misconduct at issue in this case involves breaches of Defendants’ duties to the bankruptcy estate and to counsel Mr. Grasso regarding the administration of the bankruptcy estate. As bankruptcy court-appointed professionals, Defendants’ conduct was also regulated by the Bankruptcy Code, including § 327(a)’s requirement that professionals remain disinterested, and the sanctions of non-payment of fees and disgorgement of fees provided by §§ 328(c) and 330(a)(5). In addition, the Seven Fields court emphasized the importance of the bankruptcy court’s ability to “ ‘to police the fiduciaries,’ ” and that “ ‘[supervising the court-appointed professionals also bears directly on the distribution of the debtor’s estate’ ” because competent estate administration ensures the availability of funds to pay creditors.22 Although Seven Fields predates Stern, these concerns weigh against treating Plaintiffs claims as Stem claims. For these reasons, the Court determines that Stem does not deprive the Bankruptcy Court of constitutional authority to enter final judgment on Plaintiffs claims.
C. Defendants’ Right to a Jury Trial
Defendants contend that the Seventh Amendment confers upon them the right to a jury trial on Plaintiffs claims, which must be conducted in this Court because Defendants will not consent to a jury trial in the Bankruptcy Court. In Granfinan-ciera, S.A. v. Nordberg, the Supreme Court interpreted the Seventh Amendment to confer the right to a jury trial on claims brought in bankruptcy court when the claims are legal rather than equitable in nature.23 Common law claims for money damages, such as those brought by Plaintiffs, are paradigmatic examples of legal claims. The issue, however, is whether Defendants subjected themselves to the equitable jurisdiction of the Bankruptcy Court by submitting an application for attorney’s fees, and if so, whether Plaintiffs claims fall within that jurisdiction.
Although Defendants submitted an application for fees to the Bankruptcy Court, Defendants contend that they retain the right to a jury trial because they did not file a proof of claim. A proof of claim is a creditor’s formal assertion of a right to payment from the bankruptcy estate.24 By filing a proof of claim, the *553creditor “triggers the process of allowance and disallowance of claims, thereby subjecting himself to the bankruptcy court’s equitable power.”25 The claims allowance process includes the equitable power “to disallow [the creditor’s] claims, even though the debtor’s opposing counterclaims are legal in nature and the Seventh Amendment would have entitled creditors to a jury trial had they not tendered claims against the estate.”26 Thus, “[i]t is clear that a creditor who submits a proof of claim against the bankruptcy estate has no right to a jury trial on the issues raised in defense of such a claim,” including in a subsequent action in which those issues are raised as the basis of a claim for money damages.27
Although a professional’s application for fees is governed by a different section of the Bankruptcy Code from a creditor’s proof of claim,28 a professional’s application for fees is also a request for payment from the bankruptcy estate. In Billing v. Ravin, Greenberg & Zackin, P.A., recognizing the essential similarity of a proof of claim and an application for fees, the Third Circuit reasoned that “[c]learly, if the attorneys in this case had demanded a jury trial, their request would be refused on the ground that they had filed a claim for fees with the bankruptcy court.” 29 In In re Simmons, which to the Court’s knowledge is the only reported decision to rule on this issue, the United States Bankruptcy Court for the Western District of Texas relied upon Billing to hold that an attorney’s filing of a fee application forfeited his right to a jury trial.30 For these reasons, the Court determines that Defendants subjected themselves to the equitable jurisdiction of the Bankruptcy Court by filing an application for fees.
Plaintiffs claims for money damages in the adversary proceeding are sufficiently related to her objections to the fee application to fall within the Bankruptcy Court’s equitable jurisdiction. In Billing, the Third Circuit held that when there is a “close connection” between the objections to a fee request and the claims subsequently raised in an adversary proceeding, the claims raised in the adversary proceeding “are part of the process of allowance and disallowance of claims,” and therefore there is no right to a jury trial.31 In her objection to the fee request, Plaintiff alleged that Defendants breached their duties to the bankruptcy estate through their involvement in the purchase of the WSFS claim. Defendants’ alleged involvement in the purchase of the WSFS claim is also a central issue in this case. It is worth noting that as an attorney specializing in bankruptcy law, Mr. Winterhalter knew or should have known of the risk of *554forfeiting his jury trial rights when he filed the application for fees. Because of the close connection between Plaintiffs claims in this case and Plaintiffs objections to Defendants’ fee application, Plaintiffs claims fall within the Bankruptcy Court’s equitable jurisdiction and Defendants are not entitled to a trial by jury.
D. Discretionary Factors
In light of this Court’s determinations that the Bankruptcy Court is statutorily and constitutionally authorized to enter final judgment on Plaintiffs claims, and that Defendants do not have a right to a jury trial, the discretionary factors weigh against withdrawal of the reference. The uniformity of bankruptcy administration will be enhanced by the adjudication of the Grasso bankruptcy and the trustee’s claims against Defendants in the same court. The bankruptcy court is intimately familiar with the history of this case, and although certain of its rulings may have encouraged Defendants to seek another forum, the Court does not consider that a basis to assume jurisdiction. Although Defendants contend that Plaintiffs state-law claims will require the Bankruptcy Court to become acquainted with unfamiliar law, the bankruptcy courts regularly adjudicate state-law claims and this case also involves numerous issues of bankruptcy law. Finally, the timing of Defendants’ request, following several months of litigation in the adversary proceeding and the receipt of an adverse ruling from the Bankruptcy Court, also cuts against withdrawal of reference.
IV. CONCLUSION
For the reasons stated above, Defendants’ motion to withdraw reference will be denied. An appropriate order follows.
ORDER
AND NOW, this 8th day of May 2015, upon consideration of Defendants’ Motion for Withdrawal of Reference of Adversary Proceeding to District Court [Doc. No. 1], and Plaintiffs response in opposition thereto, and for the reasons stated in the accompanying memorandum opinion, it is hereby ORDERED that Defendants’ motion is DENIED. Because there are no further matters at issue in this proceeding, the Clerk of Court shall CLOSE this case.
IT IS SO ORDERED.
.In re N. John Cunzolo Associates, Inc., 423 B.R. 735, 739 n. 5 (Bankr.W.D.Pa.2010) (collecting cases).
.Am. Compl. at ¶ 13; see also Am. Compl. at ¶ 17 (listing alleged transfers).
.Am. Compl. at ¶ 27.
. Exh. E to PL’s Resp. in Opp.
. The fee litigation is described in this Court’s memorandum opinion and order ruling on the appeal. See In re Grasso, 14-cv-1741, 2014 WL 3389119 (E.D.Pa. Jul. 11, 2014).
. In re Cinematronics, 916 F.2d 1444, 1451 (9th Cir.1990).
. In re Pelullo, 1997 WL 535155 at *2 (E.D.Pa. Aug. 15, 1997) (citing Orion Pictures Corp. v. Showtime Networks, Inc., 4 F.3d 1095, 1101 (2d Cir.1993); In re Philadelphia Training Center Corp., 155 B.R. 109, 112 (E.D.Pa. 1993)).
. 28 U.S.C. § 157(e).
. Feldman v. ABN AMRO Mortgage Grp. Inc., 515 B.R. 443, 446 (E.D.Pa.2014).
. Id. at 445-46 (citing In re Pruitt, 910 F.2d 1160, 1168 (3d Cir.1990)).
. Defs. Mot. at ¶ 6.
. In re Pelullo, 1997 WL 535155 at *2 (quoting Torkelsen v. Maggio, 72 F.3d 1171, 1178 (3d Cir.1996)).
. 28 U.S.C. § 157(c)(1).
. In re Seven Fields Development Corp., 505 F.3d 237, 262 (3d Cir.2007).
. Defendants contend that In re U.S. Mortg. Corp., 2012 WL 1372284 (D.N.J. Apr. 19, 2012), an unreported case from the District of New Jersey, stands for the proposition that state law claims of fraud, civil conspiracy and aiding and abetting civil conspiracy are non-core proceedings. However, In re U.S. Mortg. Corp. does not involve claims against bankruptcy court-appointed professionals, and the issue of whether these claims were non-core was not before the court in that case because the plaintiff conceded that these claims were non-core. See id. at *1-2. Thus, In re U.S. Mortg. Corp. is not relevant to this case.
. -U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
. Executive Benefits Ins. Agency v. Arkison, - U.S. -, 134 S.Ct. 2165, 2168, 189 L.Ed.2d 83 (2014) (citing Stern v. Marshall, *552- U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)).
. Stern, 131 S.Ct. at 2608.
. In re New Century Holdings, Inc., 544 Fed. Appx. 70, 73 (3d Cir.2013) (per curiam) (citing Stern v. Marshall,-U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)).
. See Feldman, 515 B.R. at 448 (collecting cases illustrating disagreement among trial courts in the Third Circuit regarding applicability of Stem to fraudulent transfer claims).
. Stern, 131 S.Ct at 2618.
. In re Seven Fields Development Corp., 505 F.3d at 261-62 (quoting In re Southmark, 163 F.3d 925, 931 (5th Cir.1999)).
. 492 U.S. 33, 55, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989).
. See 11 U.S.C. § 501 (stating who may file a proof of claim); see also 11 U.S.C. § 101(5) (defining "claim” as a right to payment).
. Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) (per curiam ) (internal quotations omitted).
. Granfinanciera, 492 U.S. at 59, n. 14, 109 S.Ct. 2782.
. See Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242, 1250 (3d Cir.1994) (stating the quoted language in the context of determining the right to a jury trial in a subsequently filed professional malpractice action) (citing Langenkamp, 498 U.S. at 45, 111 S.Ct. 330 (holding that creditor who had filed proof of claim had no right to a jury trial in subsequently filed adversary proceeding asserting preference claim)).
. Compare 11 U.S.C. § 330 (governing compensation of officers, including professionals) with 11 U.S.C. §§ 501-02 (governing filing and allowance of creditors's proofs of claims).
. Billing, 22 F.3d at 1253.
. In re Simmons, 205 B.R. 834, 850 (Bankr.W.D.Tex.1997) (citing Billing v. Ravin, Greenberg, & Zackin, P.A., 22 F.3d 1242 (3d Cir.1994)).
. Billing, 22 F.3d at 1252. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498336/ | ORDER
TERRENCE W. BOYLE, District Judge.
This matter is before the Court on defendant Theresa Graham’s motion for a referral to the United States Bankruptcy Court for the Eastern District of North Carolina. [DE 24]. Plaintiff has responded and the matter is ripe for ruling. For the following reasons, defendant’s motion is DENIED.
BACKGROUND
On November 24, 2014, plaintiff Hanover Insurance Company (Hanover) filed a complaint for indemnity and equitable relief asserting claims against Cape Fear Paving, LLC (Cape Fear Paving), Mast Development, LLC (Mast) and Ms. Theresa Graham (Graham). The complaint is based upon two indemnity agreements in favor of Hanover dated August 26, 2005, and August 9, 2011. The 2005 indemnity agreement was executed by Cape Fear Paving, Mast, Graham, James Keith Stark (Stark), B & K Coastal, LLC (B & K), Riverfront Company, LLC (Riverfront), and Malmo Asphalt Plant, LLC (Malmo Asphalt). The 2011 indemnity agreement was executed by Cape Fear Paving, Stark, B & K, Malmo Asphalt, and Riverfront. On November 9, 2011, and August 20, *5752013, respectively, B & K and Stark filed separate petitions seeking relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of North Carolina. Hanover has filed proofs of claim in both bankruptcy cases. Each proof of claim is based upon the 2005 indemnity agreement, the 2011 indemnity agreement, and Hanover’s common law right of indemnification, and each asserts a claim in the amount of approximately $1.5 million with a liquidated amount of approximately $100,000.00.
Mast filed a proof of claim in the B & K bankruptcy case based upon two notes under which approximately $2 million is allegedly due and owing. This proof of claim did not mention either the 2005 or 2011 indemnity agreement or any contribution action against B & K and Stark. Graham filed a proof of claim in the Stark bankruptcy case based upon her complaint against Stark in the New Hanover County District Court. This claim is filed in an unknown amount, and does not mention the 2005 or 2011 indemnity agreement or any contribution action against B & K and Stark. Graham subsequently filed the instant motion seeking a referral to Bankruptcy Court.
DISCUSSION
This Court has original jurisdiction over bankruptcy matters and those proceedings related to them. 28 U.S.C. §§ 1334(a), (b). Pursuant to 28 U.S.C. § 151, a bankruptcy court may exercise the district court’s subject matter jurisdiction over bankruptcy proceedings and cases referred by the district court. The subject matter jurisdiction of bankruptcy courts is bifurcated into core and non-core proceedings. Core proceedings either arise under the Bankruptcy Code or arise in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Non-core proceedings are proceedings that are otherwise related to the bankruptcy case. § 157(a)(2)(c). A bankruptcy court may issue a final judgment on a core proceeding, which is subject to appellate review by a district court, but a bankruptcy court may only issue proposed findings of fact and conclusions of law in a non-core proceeding, which are subject to de novo review by the district court. Executive Benefits Ins. Agency v. Arkison, - U.S. -, 134 S.Ct. 2165, 2171-72, 189 L.Ed.2d 83 (2014).
A proceeding is a core proceeding “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.” Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.1987). A proceeding arising under the bankruptcy code “involve[s] a cause of action created or determined by a statutory provision of title 11,” while proceedings arising in a bankruptcy are those that “would have no existence outside of bankruptcy.” Id. at 96-97. This is an indemnity complaint that is in federal court only on the basis of diversity of citizenship. None of the counts in the complaint nor the defenses alleged in the answers are created by the Bankruptcy Code. This indemnity case could have been brought in state court as a stand-alone claim absent the diversity of citizenship between the parties. Because this indemnity action against a non-debtor indemnitor does not involve a right created by the Bankruptcy Code and could exist outside of a bankruptcy case, the Court finds that it is not a core proceeding.
A proceeding is related to a bankruptcy case when “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) overruled on other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 124-25, 116 S.Ct. 494, 133 *576L.Ed.2d 461 (1995). The Fourth Circuit adopted the Pacor test for determining “related to” jurisdiction in Spartan Mills v. Bank of Am. Ill., 112 F.3d 1251 (4th Cir.), cert. denied, 522 U.S. 969, 118 S.Ct. 417, 139 L.Ed.2d 319 (1997). If the outcome of the proceeding “could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and [the proceeding] in any way impacts upon the handling and administration of the bankrupt estate,” the district court, and derivatively the bankruptcy court, has jurisdiction. Spartan Mills, 112 F.3d at 1255-56.
This proceeding is not connected to either the B & K or Stark bankruptcy estate, does not involve either B & K or Stark, and does not affect the amount of property in either estate. Both the 2005 and 2011 indemnity agreements provide that the indemnitors are jointly and severally liable for the losses incurred by Hanover. Accordingly, Hanover had the ability to sue any, all, or none of the parties who executed the 2005 and 2011 indemnity agreements. As in Pacor, however, there is no contractual indemnification provision that would cause an automatic indemnification claim by any of the defendants against either B & K or Stark. Pacor, 743 F.2d at 995. Such a provision might be sufficient to confer related to jurisdiction on the bankruptcy court. See, e.g., In re Brentano’s, 27 B.R. 90, 91 (Bankr.S.D.N.Y.1983); Pacor, 743 F.2d at 995 (implying that automatic creation of liability via a contractual indemnification provision might be sufficient to create jurisdiction). In this case, however, there would be no automatic creation of liability against either B & K or Stark if any of the defendants were found liable in this case. While the defendants here may have contingent rights of contribution against B & K and/or Stark, they are not analogous to the automatic contractual indemnification rights of the non-debtor defendant in Brentano’s. Such an action would be contingent upon a finding of liability in the instant proceeding. Therefore, this proceeding is not related to either bankruptcy case.
This proceeding does not arise under the bankruptcy code or in either the Stark or B & K bankruptcy case because it is not dependent on the bankruptcy code and can exist independently of a bankruptcy case. It is not related to either bankruptcy case because it does not involve either Stark or B & K, will have no effect on the total liabilities of either bankruptcy estate, and does not involve contractually automatic contribution actions. Accordingly, the Bankruptcy Court lacks subject matter jurisdiction and defendant’s motion to transfer is denied.
CONCLUSION
For the foregoing reasons, Graham’s motion to transfer to bankruptcy court [DE 24] is denied.
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498339/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
Brian F. Kenney, United States Bankruptcy Judge
On October 22, 2014, Jenine E. Graves filed an Involuntary Petition under Chapter 7 of the Bankruptcy Code against her former employer, Quinto & Wilks, P.C. (“Quinto & Wilks”). The Involuntary Petition was filed by Ms. Graves as a single creditor petition. Quinto & Wilks agrees that at the time of the petition it had fewer than twelve creditors, excluding employees and insiders. See 11 U.S.C. § 303(b)(2). At the time of the petition, Ms. Graves and Quinto & Wilks were engaged in highly acrimonious (and, as often happens, increasingly expensive) litigation in the Circuit Court of Prince William County.
Quinto & Wilks filed a Motion to Dismiss the Involuntary Petition, and an Amended Motion to Dismiss. Docket Nos. 5, 12. Ms. Graves filed an Opposition, to which Quinto & Wilks filed a Reply. Docket Nos. 9, 16 (Amended Response), 21 (Reply Memorandum). She also filed a Motion for Entry of an Order for Relief. Docket No. 19. Quinto & Wilks filed an Opposition. Docket No. 23. The Court heard the evidence and the arguments of the parties on February 5 and 27, 2015. For the reasons that follow, the Court will dismiss the Involuntary Petition.
Findings of Fact
The Court, having heard the evidence, makes the following findings of fact:'
1. Quinto & Wilks is a Virginia professional corporation. It is a law firm, formed in March 1996. The two shareholders were Mr. Quinto, who was a real estate attorney and is now retired from the practice of law (effective June 2008), and Mr. Wilks, whose practice involves estate planning, estate administration and business matters, and who is still practicing law, though with another firm as more fully discussed below.
2. Mr. Wilks is currently the sole owner, president and sole director of the firm.
3. Quinto & Wilks’ offices are located at 3441 Commission Court, Woodbridge, Virginia, 22192. -> Quinto & Wilks has a Lease for this space with 3441 Old Bridge, LLC (hereinafter, “Old Bridge”), a limited liability company in which Mr. Wilks is a, 50% member and is the managing member. The Lease Agreement calls for the payment of $4,000 per month in rent, plus a 3% annual rent escalator beginning at the end of the first lease year. Pet. Cr. Ex. 26.1 Mr. Wilks testified, however, that Old Bridge never requested the 3% escalator, and has never sought to enforce the rent escalator provision of the Lease.
4. Quinto & Wilks has subleased a portion of its space to KV Acquisition, LLC. The Sublease Agreement is dated as of March 28, 2014. Under this Sublease, KV Acquisitions initially was required to pay $1,500 per month in rent, plus the reim*598bursement of certain expenses. Pet. Cr. Ex. 28; Q & W Ex. 35. That amount was later increased to $1,675 per month.
5. Mr. Wilks testified that, although Quinto & Wilks is not generating any new business, it is not presently winding up its affairs. Rather, it needs to conclude its work for the estates where Mr. Wilks has been appointed as administrator before it can wind up its affairs.
' A. Ms. Graves’ Employment With Quinto & Wilks.
6. Ms. Graves is an attorney. Her practice primarily involves litigation. She was hired by Quinto & Wilks in June 2003, to handle any litigation that might arise out of the administration of decedents’ estates where Mr. Wilks was acting as the administrator of the estate.
7. On or about March 5, 2007, Ms. Graves entered into an Employment Agreement with Quinto & Wilks. Q & W Ex. 1.
8. The interpretation of Section 2 (Compensation) of this Agreement is at the heart of the parties’ dispute. Section 2 provides as follows:
2. COMPENSATION. As compensation for the services provided by Ms. Graves under this Agreement, Quinto & Wilks will pay Ms. Graves Forty Five percent (45%) of receipts of client billings that Ms. Graves has generated on or after September 1, 2005 and mileage and other costs charged to clients. These amounts shall be paid within 15 days of receipt of payment by Quinto & Wilks and subject to this sentence, will be paid in accordance with Quinto & Wilks’ customary payroll procedures. Client deposits and retainers that have been received by Quinto & Wilks shall be applied to client billings at the time the client invoice is approved in its final form by Ms. Graves. Ms. Graves shall not be entitled to any percentage of receipts of client billings relating to services performed by Ms. Graves prior to September 1, 2005.
Q & W Ex. 1 at Sec. 2.
9. Section 3 of the Agreement, relating to expense reimbursements, provides as follows:
3. EXPENSE REIMBURSEMENT. Quinto & Wilks will reimburse Ms. Graves for “out-of-pocket” expenses incurred by Ms. Graves that are reimbursed by the client or as otherwise agreed to between Quinto & Wilks and Ms. Graves.
Id. at Sec. 3.
10. The Agreement also contains an attorney’s fee provision. Section 12 states as follows:
12. ATTORNEY’S FEES. The parties agree that each shall be responsible for their own attorneys’ fees related to the preparation and execution of this Agreement. In the event that either party breaches this Agreement, the non-breaching party shall be entitled to reasonable attorney’s fees and costs relating to an action to enforce the terms of the Agreement, upon the condition that he or she is successful in enforcing the Agreement.
Id. at Sec. 12.
B. Ms. Graves’ Teimination and Mr. Wilks’ Move to the Vanderpool Firm.
11. In early 2013, Mr. Wilks decided to move his practice to the law firm of Van-derpool, Frostick & Nishanian (“VFN”). The effective date of the transition was April 1, 2013.
12. Ms. Graves was not offered a position with the VFN law firm. She was terminated as an employee of Quinto & Wilks as of March 31, 2013.
*59913. VFN did not take an assignment of Quinto & Wilks’ Lease with Old Bridge. Rather, VFN entered into a Lease Agreement directly with Old Bridge. Pet. Cr. Ex. 27. The VFN-Old Bridge Lease Agreement expressly provides that: (a) Quinto & Wilks is relieved of any obligation to pay rent under its Lease with Old Bridge; (b) Quinto & Wilks will not owe any rent to VFN for use of the leased premises to wind down its affairs; and (c) Quinto & Wilks is entitled to retain the rents it receives for the space from its subtenant, KV Acquisitions. Id. at Sec. 2.
14. Mr. Wilks testified that the business agreement reached with VFN provided that: (a) Quinto & Wilks paid VFN a total of $42,510.50, consisting of two checks in the amounts of $26,320.82 and $16,189.68 (Pet.Cr.Ex. 23); (b) Quinto & Wilks would be entitled to retain the KV Acquisitions sublease rent for so long as Quinto & Wilks was winding down its affairs; (c) Quinto & Wilks would retain its accounts receivable; and (d) Quinto & Wilks would cover the rent and other expenses for the Woodbridge office for the first 45 days of operations, post-April 1, 2013, but VFN would be responsible for the rent and other expenses from March 1, 2013, going forward. See Pet. Cr. Ex. 24 (VFN letter to David Wilks: “You will retain your existing accounts receivable. You will use cash flow from those accounts receivable to cover all salaries and overhead incurred by the Lake Ridge office during the first 45 days after the transition which we currently anticipate will be April L”)
15. Mr. Wilks also testified that the firm’s personal property — furniture and artwork — was treated for tax purposes as a distribution to Mr. Wilks, who then contributed it to VFN in exchange for his stock in VFN.
C. The Prince William County Lawsuit.
16. Subsequent to her termination from Quinto & Wilks, Ms. Graves “deduced” (her word) that clients were paying the firm, but that the firm was not remitting any payments to her in accordance with the terms of her Employment Agreement. In July 2013, Ms. Graves filed a Complaint in the Circuit Court of Prince William County against Quinto & Wilks. Q & W Ex. 3.
17. The heart of the dispute is how Ms. Graves’ compensation is to be calculated under the Agreement. Ms. Graves claims that she is entitled to 45% of all firm billings for matters on which she worked, including 45% of time billed by other attorneys and paralegals. The firm disagrees; it asserts that Ms. Graves is entitled to 45% of the amounts charged to clients solely for her own billable time. The firm asserts that this reading of the Agreement is consistent with the manner in which Ms. Graves historically was paid over the years. Ms. Graves argues in response that, if that is how she was paid over the course of her employment (she says she really does not know), then the firm shortchanged her and should have paid her 45% of all attorney and paralegal collections on any file on which she worked.
18. There is a similar disagreement about how much Ms. Graves is entitled to under Section 3 of the Agreement, having to do with her expense reimbursements.
19. The parties also disagree on whether, at this point, if Ms. Graves is paid anything, she should be paid as a W-2 employee of the firm, or as a 1099 independent contractor, now that her employment with the firm has been terminated.
20. At about the time that she left the firm, Anna Reese, a paralegal with Quinto & Wilks, provided Ms. Graves with a hand*600written calculation of amounts that she, Ms. Reese, believed were owed to Ms. Graves, based on the billings the Law Estate. Pet. Cr. Ex. 37. This calculation showed $24,601.50 as being owed to Ms. Graves. Id.
21. Ms. Graves understood that the firm had been paid $84,978.15 on the Law Estate file. Pet. Cr. Ex. 40. She asserts that this is more than the amount represented to her in the Spreadsheet for the Law Estate of $24,601.50. Q & W Ex. 2. Mr. Wilks, on the other hand, testified that the $34,978.15 included his services as administrator of the estate, which were not subject to the 45% payment arrangement with Ms. Graves.
22. Ms. Graves also asserted that the Quinto & Wilks “Transaction Detail by Account” (Pet.Cr.Ex. 7) was not accurate. She compared the amount stated on the Transaction Detail for the Pere matter ($17,001.71) with a check to the firm dated May 28, 2013, in the amount of $23,279.67. Pet. Cr. Ex. 6.
23. Quinto & Wilks is represented in the lawsuit by Robert J. Zelnick of the firm of Zelnick & Erickson, P.C.
24. Quinto & Wilks filed a Demurrer to Ms. Graves’ Complaint, which was overruled by the Circuit Court. Pet. Cr. Ex. 41.
25. The firm then filed an Answer to the Complaint. In its Answer, Quinto & Wilks requested an award of attorney’s fees and costs. Q & W Ex. 8 at 5-6.
26. Quinto & Wilks also filed a Counterclaim against Ms. Graves. Ms. Graves filed a Demurrer, which was sustained with leave to amend. Pet. Cr. Ex. 44. The firm ultimately non-suited the Counterclaim. Pet. Cr. Ex. 46.
27. Quinto & Wilks filed a Motion for Summary Judgment, which was denied by the Circuit Court. Pet. Cr. Ex. 45.
28. The parties engaged in various discovery battles, with varying degrees of success. In February 2014, the Circuit Court granted Ms. Graves’ Motion to Compel the production of a list of client files for the period January 1, 2009, through March 31, 2013. Q & W Ex. 24. The Court also ordered that Quinto & Wilks furnish Ms. Graves with documents that were responsive to her document requests and “that are not stored offsite from defendant’s office for which it would incur a cost of retrieval and that are not available in electronically saved format.” Id. at ¶ 2. Quinto & Wilks filed its own Motion to Compel, which was denied on March 5, 2014. Pet. Cr. Ex. 43.
29. In March and April 2014, Ms. Graves moved for the entry of a Restraining Order, or alternatively, for the appointment of a Receiver for the law firm, on the ground that the firm was receiving client funds and was not remitting any payments to Ms. Graves. Q & W Exs. 18, 19. The Circuit Court denied this Motion on June 20,2014. Q & W Ex. 20.
30. Ms. Graves’ husband represented her in the lawsuit. However, Quinto & Wilks filed a Motion to Disqualify Mr. Graves on the ground that he was a potential fact witness (apparently, he had some role in preparing, or at least reviewing, the Spreadsheet that is Q & W Ex. 2). The Circuit Court agreed. At a hearing on September 30, 2014, the Court ordered that Mr. Graves was disqualified as Ms. Graves’ counsel in the lawsuit. Q & W Ex. 14 at 32.
31. Also at the September 30, 2014, hearing, the Circuit Court ordered the appointment of a Commissioner in Chancery. After some back and forth about who should serve as Commissioner, the parties agreed on John Whittington, Esq., to serve as Commissioner. Id. 100.
*60132. Mr. Zelnick prepared a proposed Order of Reference to the Commissioner in Chancery and mailed it to Ms. Graves (who was now acting pro se) on October 6, 2014. Q & W Ex. 15. Mr. Zelnick followed up with a letter dated October 15, 2014 (“[pjlease advise me no later than this Friday, October 17, 2014, whether you will endorse the Decree of Reference”). Q & W Ex. 16. After hearing no response from Ms. Graves, Mr. Zelnick noticed the entry of the Order of Reference for November 13, 2014. Q & W Ex. 17.
33. Ms. Graves testified that she disagreed with the terms of Mr. Zelnick’s proposed Order of Reference. The Order of Reference provides that the Commissioner shall “report to this Court his findings and recommendation as to whether the Court should order an accounting as prayed for by the plaintiff.” Q & W Ex. 15 (Proposed Order of Reference) (emphasis added). Ms. Graves’ view was that the Circuit Court had already ordered an accounting, and that the Commissioner should conduct the accounting and report to the Circuit Court on the results of the accounting, not “whether the Court should order an accounting,” as the proposed Order of Reference provided. She further testified that she did not respond to Mr. Zelnick’s inquiry concerning the Order of Reference simply because she was certain that any disagreement over its terms would land the parties back in court in any event.
34. The Order of Reference was never entered because Ms. Graves filed the Involuntary Petition against Quinto & Wilks on October 22, 2014, thereby resulting in a stay of the litigation in the Circuit Court. As of the date of the Involuntary Petition, no trial date has been set in the Prince William litigation.
D. The Tender of Payments to Ms. Graves.
35. On December 30, 2013, Quinto & Wilks tendered checks in the following amounts to Ms. Graves: (a) $5,602.50 for the Silvas Construction file; (b) $21,039.67 for the Simmons file; and (c) $447.75 for the Schertler/Didlake file. Pet. Cr. Ex. 31; Q & W Ex. 4.
36. Ms. Graves rejected the tender of these checks because they were sent to her “in full payment and satisfaction of all compensation owed to [her] by Quinto & Wilks, P.C.” for two of the particular matters identified — Silvas Construction and Simmons. Id.2 In Ms. Graves’ view, she would be giving up the right to maintain that she was entitled to additional amounts on these files, had she cashed the checks.
37. Quinto & Wilks admitted during the course of the litigation that it pwed all of these amounts to Ms. Graves. Pet. Cr. Ex. 3 (Admitted Facts), 4 (Second Request for Admissions; Responses).3
E. The Involuntary Petition.
38. Ms. Graves filed the Involuntary Petition against Quinto & Wilks on October 22, 2014. Docket No. 1.
39. At the time of the filing, Quinto & Wilks had $12,199.71 in its bank account with Burke & Herbert Bank. Pet. Cr. Ex. 53. The next day, however, the firm deposited a check for $43,032.85, and subse*602quently has made two additional small deposits, so that by the end of the month (October 2014), the account had a balance in the amount of $52,690.66. Id.
40. The firm’s operating account had a balance of $89,271.44 as of February 2, 2014. Pet. Cr. Ex. 30 at 13. It had a balance of $15,662.90 as of September 30, 2014. Id. at 1. The balance increased to $52,690.66, as of November 2, 2014 (post-involuntary Petition). Pet. Cr. Ex. 53.4
41. At the time of the involuntary petition filing, Quinto & Wilks had the following assets:
(i) Accounts Receivable. Mr. Wilks testified that, as of the petition date, the firm had approximately $80,000 in accounts receivable (of which roughly $70,000 is owed by one client, the Law Estate). This testimony was unrebutted.
(ii) Cash. The firm had $52,690.66 in its operating account by the end of the month in which the Involuntary Petition was filed (October 2014). Pet. Cr. Ex. 53.
(iii) The KV Sublease. As of the filing, the firm had a Sublease with KV Acquisition, LLC, under which KV is currently paying the Debtor $1,675 per month plus certain office expenses. Pet. Cr. Ex. 28; Q & W Ex. 35. Under the terms of the Old Bridge — VFN Lease, Quinto & Wilks is entitled to retain this sublease income through the winding up of its affairs.
(iv) The $10,000 Promissory Note. The firm has a $10,000 Promissory Note from a client, but its collectability is not certain.
42.Also at the time of the involuntary petition filing, Quinto & Wilks had the following liabilities:
(i) The Lease with Old Bridge. Quinto & Wilks had a Lease Agreement with Old Bridge. This Lease called for the payment of $4,000 per month, plus annual escalators of 3%, beginning at the end of the first lease year. Pet. Cr. Ex. 26. Ms. Graves asserts that the firm’s failure to pay the escalators put it into default with the landlord, Old Bridge, and that notwithstanding Old Bridge’s acceptance of VFN as a tenant, Quinto & Wilks remains liable for the unpaid escalator portions of the rent. Mr. Wilks testified that Old Bridge never demanded the escalators, and accepted the rent without protest throughout the course of the Lease with Quinto & Wilks. The Court accepts this testimony, noting that Mr. Wilks is also a member of Old Bridge and is able to state its legal position on the escalators. The Court concludes that Old Bridge was not a creditor of Quinto & Wilks as of the date of the filing of the Involuntary Petition. There is no dispute that VFN is paying the rent to Old Bridge, and that the VFN Lease is not in default.
(ii) The Burke & Herbert Debt. Quinto & Wilks had a commercial loan with Burke & Herbert Bank. Pet. Cr. Ex. 51. As of the bankruptcy filing, the principal balance due on this loan was $76,243.51. Pet. Cr. Ex. 52. The loan history for this loan shows that Quinto & Wilks paid the regularly scheduled monthly payments on this loan, without exception, from its inception in July 2013 (the first *603payment was due in August 2013), through September 2014. Id. There is only a single example during this time frame where more than 40 days’ interest was charged to the loan (2/19/2014-42 days). Id.
(iii) The Firm’s Debt to Ms. Graves. The firm’s debt to Ms. Graves, putting aside the firm’s claim of a set-off for its legal fees under Section 12 of the Employment Agreement, was acknowledged by Quinto & Wilks to be due and owing in the amount of $27,089.92. Pet. Cr. Ex. 31; Q & W Ex. 4 ($5,602.50 + $21,039.67 + $447.75 = $27,089.92). Ms. Graves claims that she is owed more, asserting that she is entitled to be paid 45% of amounts billed by other attorneys and paralegals and 45% of any expenses (not just her own) on the files on which she worked. Quinto & Wilks disputes that she is entitled to these additional amounts, but it acknowledges that she is owed the amount of $27,089.92, subject to its claim of an offset for legal fees under Section 12 of the Employment Agreement. The matter is complicated by the fact that Quinto & Wilks tendered these amounts to Ms. Graves on December 30, 2013. Pet Cr. Ex. 31; Q & W Ex. "4. Ms. Graves rejected the tender of these amounts, because they were tendered “in full payment and satisfaction of all compensation owed to [her] by Quinto & Wilks, P.C. for work performed and time you billed” in the two larger matters (Silvas Construction and Simmons), and Ms. Graves wanted to avoid giving rise to an accord and satisfaction defense in the pending State court litigation.5
(iv) The Credit Card Debts. The firm had five credit cards — American Express (* * * * 23001), Bank of America (* * * * 5028), United Bank VISA (* * * * 4231), Marriott Rewards (* * * * 2996), and SunTrust VISA (* * * * 1838). Q & W Exs. 29-33. The Court finds, with respect to each credit card account, as follows:
(I) American Express (* * * * 23001) — this card had a balance of $9,527.16 as of December 27, 2013. Q & W Ex. 29. Quinto & Wilks regularly paid the minimum monthly payment on this account every month, through December 2014, with the exception of a late charge in the amount of $37 for October 2014. Id. It had a balance as of $9,583.35 as of December 28, 2014. Id.
(II) Bank of America (* * * * 5028) — this card had a balance of $11,192.96 as of January 25, 2014. Q & W Ex. 30. Quinto & Wilks regularly paid the minimum monthly payments on this account through December 2014, with the exception of one late charge ($49) that was charged on the October 25, 2014, statement. Id. It had a balance of $11,898.10 as of December 25, 2014. Id.
(III) United Bank VISA (* * * * 4231) — this card had a balance of $562.25 as of January 17, 2014. Q & W Ex. 31. Quinto & *604Wilks regularly paid the minimum monthly payments on this account through January 17, 2015, with only one late fee of $15 on the November 17, 2014 statement. Id. It had a balance of $61.22 as of January 18, 2015. Id.
(IV) Marriott Rewards (* * * * 2996) — this card had a balance of $20,298.28 as of January 6, 2014. Q & W Ex. 32. Quinto & Wilks regularly paid the minimum monthly payments on this account through December 2014, with the exception of a $39 late charge in August 2014, a second $39 late charge in October 2014, and a third late charge in the amount of $45 in November 2014. Id. It had a balance of $20,042.05 as of January 6, 2015.
(V) SunTrust VISA (* * * * 1838)— this card had a balance of $10,528.22 as of January 16, 2014. Q & W Ex. 33. Quinto & Wilks regularly paid the minimum monthly payments on this account through December 2014, with the exception of a late charge ($49) in June 2014, a late charge ($49) in August 2014, a late charge ($49) in September 2014, and a late charge ($49) in October 2014. Id. The Court further finds that all of these late charges were incurred for payments made within a week of the date that the payment was due. Id. This account had a balance of $10,879.35 as of January 16,2015. Id.
In all, the Court finds that each of the five credit cards was regularly paid when payments were contractually due. The late charges were incurred for failure to pay the minimum monthly payments on time, but these charges were of a de minimis nature, and all of the payments were made before the next monthly payment became due.
(v) Zelnick & Erickson. The Zelnick & Erickson firm represents Quinto & Wilks in Ms. Graves’ lawsuit in the Prince William County Circuit Court. Its invoices are found at Pet. • Cr. Ex. 22. The invoices show that Quinto & Wilks regularly paid Zel-nick &' Erickson, without fail, from the inception of the representation in July 2013, through September 2014. The invoice for October 2014 shows a balance of $3,120 carried over from the previous month’s invoice, but Mr. Wilks testified that he was of the understanding that he could not pay any of Quinto & Wilks’ bills while the involuntary bankruptcy was pending. In sum, Q & W Ex. 22 makes plain that Quinto & Wilks regularly paid the Zelnick firm from the start of the representation through the filing of this involuntary bankruptcy case.
Conclusions of Law
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Order of Reference of the U.S. District Court for this District entered August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate).
Quinto & Wilks’ Motion to Dismiss and Ms. Graves’ Motion for the entry of an Order for Relief are, in essence, two sides of the same issue — whether or not an Order for Relief should be entered. Accordingly, the Court will address both Motions simultaneously. In its Motion to Dismiss, Quinto & Wilks argues: (1) Ms. Graves is not an eligible petitioning creditor, because her claim is the subject of a bona fide dispute as to liability and amount; (2) Ms. *605Graves filed the Involuntary Petition in bad faith; and (3) Ms. Graves has failed in sustaining her burden of proof to show that Quinto & Wilks was not paying its debts as they became due, as required by 11 U.S.C. § 303(h)(1). As more fully stated below, the Court agrees that Ms. Graves’ claim is the subject of a bona fide dispute as to liability or amount. The Court also agrees that Ms. Graves has not met her burden to show that Quinto & Wilks was not paying its debts as they become due. (The Court does not find that Ms. Graves filed the petition in bad faith.) Accordingly, the Court will dismiss the Involuntary Petition.
I. Ms. Graves’ Claim Is the Subject of a Bona Fide Dispute as to Liability or Amount.
Bankruptcy Code Section 303(b)(2) provides that an involuntary petition may be filed by “fewer than 12 such holders,” referring to Section 303(b)(l)’s requirement that the petitioning creditors hold claims that are not “contingent as to liability or the subject of a bona fide dispute as to liability or amountf.]” The phrase “as to liability or amount” was added to the statute as a part of the 2005 BAPCPA Amendments to the Code. The burden of proof to show that the petitioning creditors’ claims are not subject to bona fide dispute rests with the petitioning creditors. In re Byrd, 357 F.3d 433, 437 (4th Cir.2004); Atlas Mach. & Iron Works, Inc. v. Bethlehem Steel Corp., 986 F.2d 709, 715 (4th Cir.1993). The term “bona fide dispute” “clearly entails some sort of meritorious, existing conflict.” Id. A claim is subject to a bona fide dispute when there is a “ ‘genuine issue of a material fact that bears upon the debtor’s liability or a meritorious contention as to the applicability of the law to the facts.’ ” In re Caucus Distribs., Inc., 106 B.R. 890, 917 (Bankr.E.D.Va.1989) (quoting In re Lough, 57 B.R. 993, 997 (Bankr.E.D.Mich.1986)). “The role of the bankruptcy court is not to resolve the dispute, but merely to identify its presence for the purpose of including or eliminating the creditor from the count of petitioning creditors.” In re Caucus Distribs., Inc., 106 B.R. at 917. See also In re Byrd, 357 F.3d at 437 (“The bankruptcy court need not resolve the merits of the bona fide dispute, but simply determine whether one exists.”) A counterclaim related to the subject matter of the petitioning creditors’ claims may be considered by the bankruptcy court in determining whether there is a bona fide dispute as to the petitioning creditors’ claims. In re Green Hills Dev. Co., LLC, 741 F.3d 651, 659 (5th Cir.2014) (“[bankruptcy courts routinely consider the existence and character of pending but unresolved litigation as evidence of a bona fide dispute”); In re TPG Troy, LLC, 492 B.R. 150, 159 (Bankr.S.D.N.Y.2013) (“Pending litigation over a claim strongly suggests, but does not establish, the existence of a bona fide dispute.”)
Ms. Graves asserts that Quinto & Wilks has acknowledged owing her an amount in excess of the statutory requirement of $15,325 under Bankruptcy Code Section 303(b)(2). She argues that the rest of the dispute does not matter, because she inarguably has met the statutory threshold of $15,325. Her position is supported by case law to the effect that once it is acknowledged that the putative debtor owes more than the statutory threshold, any dispute as to remaining amounts is irrelevant. In re Roselli, No. 12-32461, 2013 WL 828304, at *9 (Bankr.W.D.N.C. Mar. 6, 2013); In re Tucker, No. 5:09-bk-914, 2010 WL 4823917, at *6 (Bankr.N.D.W.Va. Nov. 22, 2010) (“[t]he better reasoned authority suggests that a petitioning creditor is not disqualified even if a bona fide dispute exists regarding a portion of its claim”) (emphasis in original). *606Quinto & Wilks, on the other hand, argues that any dispute as to the amount of Ms. Graves’ claim means that Ms. Graves’ debt is in bona fide dispute “as to amount” as now provided under Section 303(b). See Farmers & Merchs. State Bank v. Turner, 518 B.R. 642, 652 (N.D.Fla.2014) (“[a]fter the amendment adding ‘liability or amount,’ the majority of courts that have addressed the issue, or commented on it, have concluded that the 2005 amendment changed the analysis such that now any dispute as to amount (whether implicating the statutory threshold or not) renders a creditor ineligible”); In re Rosenberg, 414 B.R. 826, 846 (Bankr.S.D.Fla.2009) (“As a result of the [2005] amendment, any dispute regarding the amount of the petitioning' creditors’ claims that arises from the same transaction and is part of the underlying claim renders the claim subject to a bona fide dispute.”) See Dean and Ehren-preis, “Courts Reverse Trend on Interpretation of 303(b)(1),” ABI Journal, Vol. XXXIII, No. 10 (October 2014) (comparing the “all or nothing” approach with the “partially disputed” approach).
The Court need not weigh in on the legal issue, however, because in this case Ms. Graves’ entire claim is the subject of a bona fide dispute. Ms. Graves argues that Quinto & Wilks has acknowledged owing her at least $27,089.92. Quinto & Wilks, while acknowledging that amount to be owing in the absence of a setoff for legal fees, claims that it is entitled to an award of its attorney’s fees and costs in the State court litigation, pursuant to Section 12 of the Employment Agreement. Ms. Graves counters by arguing that Section 12 permits an award of attorney’s fees and costs only “to the non-breaching party ... relating to an action to enforce the terms of the Agreement, upon the conclusion that he or she is successful in enforcing the Agreement.” Pet. Cr. Ex. 1 at ¶ 12. The issue of whether Quinto & Wilks ultimately will be entitled to an award of attorney’s fees and costs in the State court action is a matter for determination by the State court.
The Court might be inclined to agree with Ms. Graves’ position that Section 12 of the Agreement does not permit an award of attorney’s fees to Quinto & Wilks, which has not brought an action to enforce the agreement. Many courts have held that, where an agreement provides only for an award of fees to an enforcing party, a party defending an action is not entitled to an award of fees. See Meltzer/Austin Rest. Corp. v. Benihana Nat. Corp., No. A-l 1-CV-542-AWA, 2014 WL 7157110, at *4 (W.D.Tex. Dec. 15, 2014) (“In this context, ‘enforcement’ means proactive steps taken to ensure that Melt-zer complied with its obligations under the Agreement. It does not mean Benihana’s defense of Meltzer’s suit related to the Agreement”); Gadsby v. Am. Golf Corp. of Cal., No. 2:10-ev-680-FtM-38CM, 2014 WL 5473555, at *8 (M.D.Fla. Oct. 28, 2014) (“[ajpplying the plain meaning of ‘enforce,’ the Bylaws, as written, do not clearly and unambiguously provide for entitlement to attorneys’ fees where, as here, the Club is required to defend against another party’s attempt to enforce the Bylaws against the Club”); Hous. Auth. of Champaign Cnty. v. Lyles, 395 Ill.App.3d 1036, 335 Ill.Dec. 463, 918 N.E.2d 1276, 1279-80 (2009); Carr v. Enoch Smith Co., 781 P.2d 1292, 1296 (Utah Ct.App.1989). However, the Virginia Supreme Court recently upheld an award of attorney’s fees to a defending party in similar circumstances in an Unpublished Order. DeCesare v. Godoy (Case No. 141089, April 10, 2015) (http:// www.courts.state.va.us/courts/sev/orders_ unpublished/141089.pdf) (last visited May 27, 2015).
In the DeCesare case, the parties’ Shareholder Agreement provided for an award of fees:
*607In the event a party to this Agreement engages an attorney to enforce the provisions hereof or to secure performance by a defaulting party under the terms herein stated, the prevailing party in litigation arising therefrom shall be entitled to an award of its reasonable attorney’s fees both on trial and the appellate level incurred in enforcing this Agreement and/or securing the performance of the terms herein stated.
Id. Four Justices, reviewing the Circuit Court’s decision to award fees and costs to the defending party de novo, upheld the attorney’s fee award. Three Justices dissented (“Dodging a blow, after all, is not the same thing as delivering one.”) Although an Unpublished Order is only binding on the parties and does not constitute binding precedent, the Court views the Order in DeCesare to be a good indication of how the Virginia Supreme Court might rule on this issue.
This Court finds that Quinto & Wilks’ claim for attorney’s fees is based on a non-frivolous reading of Section 12 of the Employment Agreement, one that this Court cannot conclude has a zero chance of success in the State court in light of the Virginia Supreme Court’s Unpublished Order in DeCesare. Quinto & Wilks clearly has made the claim for an award of attorney’s fees and costs in its Answer. Q & W Ex. 8 at 5-6.
Ms. Graves further claims that Quinto & Wilks’ responses to her Requests for Admissions in the State court action will es-top Quinto & Wilks from claiming that she is owed anything less than $27,089.92. Pet. Cr. Exs. 3, 4. Quinto & Wilks’ admissions in the State court litigation admit that these amounts are undisputed, but they do not admit that Quinto & Wilks has no offsetting claim for attorney’s fees and costs. The issue of any offsetting claim for attorney’s fees was not addressed in any of the Requests for Admission. Further, to the extent that these admissions could be construed in the way that Ms. Graves reads them, they can always be amended by an order of the State court. See Va. Sup.Ct. R. 4:ll(b) (“the court may permit withdrawal or amendment when the presentation of the merits of the action will be subserved thereby and the party who obtained the admission fails to satisfy the court that withdrawal or amendment will prejudice him in maintaining his action or defense on the merits.”) The potential for an award of attorney’s fees and costs in favor of Quinto & Wilks, which would entirely offset the firm’s liability if granted, leads the Court to conclude that Ms. Graves’ claim is the subject of a bona fide dispute.
II. Ms. Graves Did Not File the Petition in Bad Faith.
Quinto & Wilks argues that, in addition to determining damages in the event of a dismissal under Section 303(i)(2) of the Code, the Court must assess the good faith, or the lack thereof, of the petitioning creditor in filing the involuntary petition in the first place. The Fourth Circuit has held that an involuntary petition may be dismissed on bad faith grounds. Atlas Mach. & Iron Works, Inc., 986 F.2d at 716. Other courts have held that a good faith component is implicit in the filing of an involuntary petition. Forever Green Athletic Fields, Inc. v. Dawson, 514 B.R. 768, 785 (E.D.Pa.2014) (“[i]nvol-untary and voluntary bankruptcy petitions — whether seeking Chapter 11 reorganization, Chapter 7 or Chapter 13 — are subject to dismissal if filed in bad faith”); In re Global Ship Sys., LLC, 391 B.R. 193, 202-03 (Bankr.S.D.Ga.2007). In order to dismiss a petition on bad faith grounds, the Court must examine “whether a reasonable person would have filed the petition (objective test) as well as the motivations of the petitioner (subjective test).” Atlas *608Mach. & Iron Works, Inc., 986 F.2d at 716. It is the putative debtor’s burden to show that a petition was filed in bad faith. Id. at 716 n.9; In re Caucus Distribs., Inc., 106 B.R. at 923.
Quinto & Wilks argues that Ms. Graves is guilty of bad faith because she is “forum shopping.” In support of this argument, Quinto & Wilks asserts that Ms. Graves suffered a string of losses in the State court, including the denial of her motion to compel the production of documents that were off-site, and the disqualification of her husband from acting as her counsel in the lawsuit (noting that her husband is now representing her in this Court). But things did not always go against Ms. Graves in the State court. The State court sustained her Demurrer to Quinto & Wilks’s counterclaim against her, albeit with leave to replead, whereupon Quinto & Wilks non-suited its counterclaim. The State court overruled Quinto & Wilks’ Demurrer to Ms. Graves’ complaint. The results in the discovery battles ' were fairly even, with Ms. Graves winning on some issues and losing on others. Her husband was disqualified, but the matter was never set for a trial, so she had plenty of time to replace him as her counsel, had she chosen to engage new counsel.6
The Court further does not ascribe any bad faith motives on Ms. Graves’ part arising out of the timing of the filing of the involuntary petition relative to Mr. Zel-nick’s Motion for the entry of the Decree of Reference. Ms. Graves had a legitimate disagreement with the terms of the proposed Decree (though, she could have communicated her concerns to Mr. Zelnick). It was not entirely clear from the transcript that Judge Finch intended to appoint a Commissioner in Chancery to report to the Court on “whether the Court should order an accounting as prayed for by the plaintiff,” Q & W Ex. 15 (proposed Order of Reference), or whether the Commissioner was expected to conduct the accounting and report back to the Court with the results. This case can be contrasted profitably with that of In re Merrifield Town Center Limited Partnership, No. 09-18119-SSM, 2010 WL 5015006 (Bankr. E.D.Va. Dec. 3, 2010), where the creditors filed an involuntary petition solely in order to avoid a dismissal of their cases in federal court for discovery violations. See id. at *5 (“This is a case, in short, in which an involuntary petition was filed, not merely improvidently, but affirmatively for an improper purpose, namely, derailing the trial in another court.”) In this case, the State court action between Ms. Graves and Quin-to & Wilks was not set for a trial, the Order of Reference to the Commissioner in Chancery had not yet been entered, and Ms. Graves’ case was not on the verge of being dismissed for discovery violations as were the petitioning creditors’ claims in the Merrifield Town Center case.
In considering the allegations of bad faith, it has to be remembered that: (a) Quinto & Wilks admitted in the State court to owing Ms. Graves more than the statutory threshold for an involuntary filing of $15,325 (putting aside its offsetting claim for attorney’s fees); (b) there was a good faith basis for Ms. Graves to argue that the undisputed portion of her claim exceeded the statutory threshold of Section 303(b); (c) Quinto & Wilks has acknowledged that it had less than 12 creditors as of the filing date; and (d) the firm’s oper*609ating account had only $15,662.90 as of September 30, 2014 (there was no way that Ms. Graves could have known that the operating account would be back up to $52,690.66 by the end of October 2014). Prior to filing the involuntary petition, Ms. Graves had formed the reasonable belief that there was very little, if anything, being generated in new revenue by the firm, the firm was paying Burke & Herbert on a monthly basis, and there was only $15,662.90 in the bank. There is no suggestion that Ms. Graves filed the involuntary petition in an effort to put a competitor out of business (she is a litigator; Mr. Wilks is an estate planning and business attorney), nor is there any evidence to support the conclusion that she filed the involuntary petition out of spite, ill will or maliciousness. The involuntary filing in this case can be said to be within the recognized purpose of protecting against “ ‘the threatened depletion of assets or to prevent the unequal treatment of similarly situated creditors.’ ” In re Meltzer, 516 B.R. 504, 514 (Bankr.N.D.Ill.2014) (quoting In re Letourneau, 422 B.R. 132, 138 (Bankr.N.D.Ill.2010)).
The Court finds that Ms. Wilks did not file the involuntary petition in bad faith.
III. Ms. Graves Has Failed to Prove that Quinto & Wilks Generally Was Not Paying Its Debts as They Became Due at the Time of the Involuntary Petition.
Bankruptcy Code Section 303(h)(1) requires a finding that the debtor “is generally not paying such debtor’s debts as such debts become due[.]” The burden is on the petitioning creditor to show that the debtor is not generally paying such debts as they become due. In re Caucus Distribs., Inc., 106 B.R. at 918. This Court has formulated the inquiry as to whether a debtor is generally paying its debts as they become due as follows:
Generally not paying debts includes regularly missing a significant number of payments to creditors or regularly missing payments that are significant in amount in size to the debtor’s operation. Where the debtor has few creditors, the number which will be significant will be fewer than when the debtor has a large number of creditors. Also the amount of debts being paid is important. If the amounts missed are not substantial in comparison to the magnitude of the debtor’s operation, involuntary relief would be improper. Determining that a debtor is generally not paying his debts requires a more general showing of the debtor’s financial condition and debt structure than merely establishing the existence of a few unpaid debts. A court must compare the number of debts unpaid each month to those paid, the amount of the delinquency, the materiality of the nonpayment, and the nature of the debtor’s conduct of its financial affairs. A starting point in the inquiry is to employ what is termed the mechanical test which is composed of five factors: the timeliness of payments on past due obligations; the amount of debts long overdue; the length of time during which the debtor has been unable to meet large debts; any reduction in the debtor’s assets, and the debtor’s financial situation.
In re Caucus Distribs., Inc., 83 B.R. 921, 931 (Bankr.E.D.Va.1988) (citations and quotation marks omitted). “In the final analysis, the determination whether an alleged debtor is generally not paying his or her debts as they become due is a flexible one which admits ‘no hard and fast rules,’ and requires a careful balancing of both the number and amount of the unpaid debts, in proportional terms, viewed in the light of the alleged debtor’s total financial picture.” In re Fischer, 202 B.R. 341, 350 (E.D.N.Y.1996) (quoting In re Einhorn, 59 *610B.R. 179, 185 (Bankr.E.D.N.Y.1986)). The Fischer court identified the following factors to be considered: (1) the number of unpaid claims; (2) the amount of such claims; (3) the materiality of the nonpayments; and (4) the debtor’s overall conduct of its financial affairs. In re Fischer, 202 B.R. at 350 (citing In re Caucus Distribs., Inc., 83 B.R. at 931).
Other than Ms. Graves’ claim, Quinto & Wilks had debts owing to the following creditors as of the date of the involuntary petition: (a) Burke & Herbert Bank; (b) the five credit card obligations; and (c) Zelnick & Erickson. The firm was completely current with Burke & Herbert Bank, with no evidence of a default. The firm paid the credit cards faithfully according to their terms, with only a few late charges, and even where late charges were incurred, the payments generally were made within four or five days of the payment due date. As well, the firm was completely current and not in default with Zelnick & Erickson, until the date that the involuntary petition was filed (at which point, Mr. Wilks understood that he could not pay any of the firm’s debts, and did not make the payment due in October 2014 of $3,120). In terms of the aggregate number of debts, the Court finds that the firm was current and was not in default on all of its obligations during the year preceding the filing of the involuntary bankruptcy case, with the exception of the amounts due to Ms. Graves. The firm did tender the amounts that it thought that it owed to Ms. Graves in December 2013 (Pet. Cr. Ex. 31; Q & W Ex. 4), though with “in full payment and satisfaction” language which was not acceptable to Ms. Graves. The firm never missed payroll. It had no withholding taxes due at the time of the involuntary petition. It never missed a payment to its landlord (in fact, it was no longer obligated on its Lease as of the involuntary filing). It had no pending legal malpractice cases against it at the time of the involuntary filing. It had no judgments against it.
With respect to the amount of the claims, the Court further finds that, with the exception of Ms. Graves’ claim, Quinto & Wilks was regularly paying its debts as they became due during the year preceding the bankruptcy case. Again, the firm was current with Burke & Herbert. The firm incurred late charges on its credit cards, but these were not significant and the payments were made within four or five days of their due date. The firm paid Zelnick & Erickson like clockwork, until the involuntary bankruptcy was filed. The Court finds that the late charges on the credit cards were not material to the Debt- or’s overall financial condition.
The Court also must view the putative Debtor’s overall conduct of its financial affairs. By and large, the firm conducted its financial affairs in a responsible manner as it wound down its financial affairs. There has been no effort to evade financial responsibility on any of its debts — perhaps not surprisingly, since Mr. Wilks is a personal guarantor on many of the corporate obligations. The firm has been attempting to close out the estates that it still has open, but claims that it has been prevented from doing so by Ms. Graves’ assertion of direct claims to legal fees allegedly owed by the estates (as opposed to being owed to her employer, with whom the estates contracted for legal services). The firm attempted to tender what they thought they owed Ms. Graves at the end of December 2013 (Pet. Cr. Ex. 31; Q & W Ex. 4), though Ms. Graves rejected the tender of these funds in order to avoid giving rise to an accord and satisfaction defense in her litigation against the firm. In fact, Ms. Graves acknowledged in her testimony that, other than her own claim, she was not aware of anyone else not being paid on *611a regular basis, prior to the bankruptcy filing.
Finally, Ms. Graves claims that: (a) .Quinto & Wilks paid a total of $42,510.50 to YFN in May 2013, in what appears to be in exchange for Mr. Wilks’ stock in VFN (Pet.Cr.Ex. 23); and (b) the Quinto & Wilks furniture and artwork were distributed to Mr. Wilks, who contributed them to VFN for his stock in VFN. Mr. Wilks testified, however, that all of these terms were part of an agreement between VFN and Quinto & Wilks, under which Quinto & Wilks received value, notably: (a) Quinto & Wilks would retain its accounts receivable; (b) Quinto & Wilks was relieved of its obligations on the Old Bridge Lease because VFN entered into a new Lease with Old Bridge (except for the first 45 days); and (c) notwithstanding the VFN-Old Bridge Lease, Quinto & Wilks would retain the KV Acquisitions Sublease rent (in the amount of $1,675 per month) for so long as it was winding down its affairs. The Court concludes that the payments to VFN were part of a bargained-for exchange, and do not appear to have been fraudulent in nature (and in any event, Ms. Graves retains whatever rights she may have as a putative creditor of the firm).
The Court finds that Ms. Graves has not met her burden to show that the firm was not generally paying its debts as they became due.
Conclusion
For the foregoing reasons, the Court will issue a separate Order, under which the Involuntary Petition will be dismissed.
. The Exhibits submitted by Quinto & Wilks will be referred to as the "Q & W" Exhibits. Ms. Graves' Exhibits will be referred to as "Pet. Cr.” Exhibits, for "Petitioning Creditor.”
. For the third matter, Schertler/Didlake, Mr. Wilks testified that the amount tendered ($447.75) was not tendered in full and final satisfaction because there were still amounts to be collected on this account.
. In addition to the Prince William County lawsuit, there was what might be described as satellite litigation, involving two separate estates.' Ms. Graves has submitted claims against the Simmons Estates and the Law Estate for $36,959.36 and $32,748.07, respectively. Q & W Exs. 7. These disputed claims, according to Mr. Wilks, have prevented him from closing out the estates.
. The fact that the firm's operating account had only $15,662.90 as of September 30, 2014, meant in Ms. Graves' view that the firm "spent” the $27,089.92 tendered to her in December 2013. Ms. Graves, however, did not have a lien on these funds.
. Ms. Graves claims that she is owed additional amounts for work not yet collected from the clients. It is clear, however, under the Employment Agreement that she is only entitled to payment upon payment by the clients. Ms. Graves also claims that she is entitled to an award of attorney’s fees and costs under Section 12 of the Employment Agreement.
. Quinto & Wilks argues that Ms. Graves sought discovery in this proceeding of the very same documents for which her Motion to Compel was denied by the State court judge. This Court never heard any discovery disputes in this matter, so the Court assumes either that Quinto & Wilks produced the documents without objection, or that it objected and Ms. Graves abandoned her efforts to secure the documents. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498340/ | MEMORANDUM OPINION
Robert G. Mayer, United States Bankruptcy Judge
The question presented in this case is the relative priority of various unsecured claims, in particular, whether the claims of creditors who loaned money to the debtor in reliance on security agreements that were ineffective to grant liens on real property have priority over the unsecured claims of a creditor who was not an owner of the debtor but who controlled the debt- or and knew that the security agreements were ineffective to grant liens on the debt- or’s real property.1 The court concludes that the unsecured creditors’ claims have priority over the claims of the creditor in control of the debtor by virtue of the unsecured creditors’ equitable liens, or in the alternative, equitable subordination. The chapter 7 trustee is not a party to the litigation.
*614
I. Findings of Fact
A. Brief Overview
Starlight Group, LLC, the debtor, bought residential real estate at short sales and resold it from January 2009 until November 2011 when it filed bankruptcy.2 During this period, it bought 82 properties and had sold all but four when it filed bankruptcy. Its gross receipts for this period were more than $27.5 million. Statement of Financial Affairs, Question 1. This phase was the idea of J. Gregory Holmes, a top-selling real estate agent who prides himself on his expertise in pricing real estate. He observed that there were many properties in Northern Virginia that were “underwater,” that is, the debt secured by the property was greater than the value of the property; that some of the owners were unable to make the contractual mortgage payments; and, that mortgage lenders were willing to approve short sales — a sale where the lender accepted less than the amount owed to it — at prices less than the market value. He realized that if he purchased a distressed property at a short sale, he could make a quick profit by promptly reselling the property himself at its market value. 1 Tr. 47. These observations gave rise to Holmes’ scheme which the parties called “the Holmes Model.” 5 Tr. 176. There were two key elements: The purchases were cash transactions and Holmes was the real estate agent for the purchase and the sale of the property.3
Holmes approached Spencer C. Brand, a trusted friend and mentor. He proposed that Brand — and at Brand’s suggestion, Starlight, Brand’s single-member limited liability company — purchase the distressed properties at the below-market price with *615money Starlight borrowed from private lenders to conduct its business and not for specific purchases. He would then quickly resell them for a profit and would split the profit, 90% to himself and 10% to Brand.
Starlight’s first purchase was funded solely by Holmes who borrowed $110,000 on his life insurance policy and lent it to Starlight. 1 Tr. 47-48. After the first few transactions proved very successful, Holmes approached W. Michael Dorula and negotiated a loan from him to Starlight. 1 Tr. 68. Dorula became an intermediary for his friends who also lent money to Starlight. At Starlight’s height, it had more than $2.3 million in outstanding loans to the Dorula lenders and $800,000 to Holmes.
Holmes’ key accounting idea was that at the end of each transaction — the purchase' and then the sale of the distressed property — the lenders’ money would be restored to Starlight’s bank account and the profits would be split. 1 Tr. 61-62. Between the real estate owned and the money in the bank, the lenders would be assured of repayment of their loans. 7 Tr. 22-23.
Homes testified that “Starlight was not a money-making entity. Starlight was a bookkeeping entity.” 1 Tr. 61. Starlight received the net proceeds from each sale and made disbursements — principally monthly interest payments to the lenders and the profits to Holmes and Brand as computed by Holmes. Brand ácted on behalf of Starlight in this regard. In addition, once Holmes established the relationship with Dorula, Brand was responsible for lender relations and dealt directly with Dorula who acted on behalf of his friends. 6 Tr. 75; 1 Tr. 61.
The venture ended shortly after Brand admitted to Holmes that he had unsuccessfully invested idle funds in the stock market and had lost more than $400,000. 4 Tr. 92. Holmes later learned that Brand had been paying himself more than the profits Holmes had determined were due to him. This amount, charged to Brand as compensation on Starlight’s books, amounted to several hundred thousand dollars. 3 Tr. 153-155.
When informed of the situation, Holmes and the Dorula lenders agreed to place the proceeds from the sales of the remaining properties owned by Starlight in escrow. 3 Tr. 52. The escrow agent was initially Northern Virginia Title & Escrow. Id.; 5 Tr. 236-239. Although the settlement company was owned by Scott Flanders, Don Olinger, a Dorula lender, was the individual who had authority to disburse money from it. The funds were moved to American Title & Escrow because of concern over the close relationship between Holmes and Flanders. 5 Tr. 59. Olinger distributed the money, in the escrow account to the Dorula lenders, to the exclusion of Holmes. Holmes filed suit against Starlight to stop the distributions to the Dorula lenders and Starlight filed a chapter 7 petition. 3 Tr. 59.
B. Credibility of the Witnesses
There was extensive oral testimony and numerous exhibits at the seven-day trial of this matter. The transcript is 1,788 pages long.4 The principal witnesses were Holmes, Brand and- Dorula. Holmes de*616vised the Holmes Model, lent Starlight substantial amounts of money and was Starlight’s real estate agent. He filed three proofs of claims totaling $1,019,860.09. He found almost all of the properties Starlight purchased and was the primary listing agent for their sale. He earned a real estate commission on each property Starlight purchased and another when it was sold. Brand was responsible for dealing with the lenders, keeping the books and making disbursements. He made no claims against Starlight and was granted a discharge in bankruptcy of his debts on April 30, 2012. Starlight’s business was run ostensibly by Brand, but, in fact, by Holmes. Despite the fact that they started the venture as trusted friends, Holmes trenchantly blames Brand for Starlight’s failure. Brand, in turn, blames Holmes, but acknowledges his errors and accepts responsibility for them and their contribution to Starlight’s failure. Their testimony was not always consistent.
After having heard the testimony of Holmes, Brand and the other witnesses, examined the exhibits, and considered the access of both Holmes and Brand to information, their respective biases, their roles in the business venture, their stakes in the litigation and its outcome,5 and their demeanor, the court finds that neither Holmes nor Brand was wholly reliable and that their testimony should be considered with skepticism. Discrepancies were considered and reconciled when possible. Some testimony of each was disregarded because it lacked credibility. Overall, Brand was more credible than Holmes. The findings of fact are based on the entire record with Holmes and Brand being given credit when appropriate.
Dorula’s credibility was also considered. He lent his money to Starlight and filed a proof of claim for $174,128. He was the liaison between Brand and the other lenders who were his friends. They collectively filed proofs of claims for $1,994,984. They were paid, generally, 14% per annum on their loans. Starlight paid Dorula, generally without the knowledge of his friends, an additional 5% override on their loans. 7 Tr. 204-205. The cost to Starlight was a total of 19% per annum.
Dorula was the spokesman for the lenders when Starlight collapsed and negotiated the establishment of the escrow account from which payments were made to Dorula and his friends within 90 days before Starlight filed bankruptcy. 5 Tr. 90-91. The chapter 7 trustee filed preference suits against Dorula and Robert Meletti, one of Dorula’s friends and a fellow lender, and threatened preference suits against the rest. Docket Entry 88, ¶ 5-6. Prior to the trial in these matters, the Dorula lenders and the trustee reached a settlement. Id. It allowed the Dorula lenders to retain the money they were paid and established a basis for distributing the remaining funds the trustee recovered. Brooks, another creditor, objected to the proposed settlement because it could give the Dorula lenders a more favorable distribution than he would get, depending on the outcome of the objections to Holmes’ and his claims. The proposed settlement was not prosecuted during the trial of these matters but has since been approved. In general, Do-rula was a creditable witness, but he — for himself and his friends — had a clear inter*617est in recharacterizing or subordinating Holmes’ claims. He is the primary moving party on the objections and is the complainant, together with his wife, in the adversary proceeding.
C. Starlight’s Operations.
1. Holmes Relationship with Brand.
Holmes was licensed as a realtor in 1986. 1 Tr. 28. He testified that he was the third highest selling Century 21 agent in the country in 1999, 2000, and 2001. 1 Tr. 29. He met Brand about 1997, and they became close friends. Brand became his mentor and they spoke many times during the week.6 In 2004, Holmes decided, in addition to selling real estate, to start investing in real estate. Brand made the same decision, organized Starlight and invested through it.7 Both financed their purchases through bank loans. In addition, Brand borrowed money from individuals for down payments and to cover carrying costs. 2 Tr. 175.
Brand’s first purchase was a property at Trinity Square. 3 Tr. 54-55. In light of their close relationship, Brand offered to give Holmes a one-half interest in it. The purpose was to show Holmes how to be *618generous and to make gifts. 1 Tr. 33-34. Cf. 2 Tr. 177 (“I [Brand] told Greg that if he negotiated the contract on behalf of Starlight, I would give him fifty percent of the deal, because I wanted to start a relationship that would be fifty/fifty.”) Holmes accepted the gift and the two owned the property as tenants in common.8 Both continued to invest heavily, but separately, in real estate. By 2007, the very strong appreciating real estate market quickly turned downward and both began experiencing financial difficulties. During this adverse market, Holmes learned about short sales. He sold about 20 of his investment properties in this manner. Ex. 2- at 217. He told Brand about short sales and sold some of Starlight’s property as short sales.
A digression about Starlight’s first venture into real estate investment is helpful in understanding Holmes’ relationship with Brand. It is not particularly helpful as it relates to the transactions involved in this case, but is relevant as to Holmes’ knowledge of Starlight’s prior transactions and his relationship with Brand. Prior to Starlight’s venture into short sales, Starlight had purchased 12 properties in the booming real estate market intending to hold them for appreciation. The parties referred to this phase of Starlight’s business as Starlight I and the short-sale period involved in this case as Starlight II. They are one in the same entity. Holmes was Starlight’s real estate agent on a number of the Starlight I purchases. 2 Tr. 173. Holmes sold several of Starlight I’s 12 properties as short sales as Starlight’s real estate agent after the real estate market crashed. Holmes testified that he thought that Starlight had no liabilities when he agreed to use it for the short-sale business because Brand told him that Starlight was a dormant entity with no assets or liabilities. 1 Tr. 54. Had he known that Starlight had liabilities, he testified, he would never have agreed to use it. Ex. 2 at 262. Brand testified that Holmes knew of the existing debt because of his involvement in the sale of Starlight’s properties at short sales. 3 Tr. 142.9 While Holmes denied *619that he knew that Starlight had any existing debt when he began purchasing properties for Starlight at short sales, the court finds that he knew of the existing debt because of his previous work for Starlight as its real estate agent in selling Starlight properties at short sales and his close relationship with Brand.
Starlight’s existing debt, that is, when Holmes began using Starlight as his short sale purchaser, had little impact on the operation of the Holmes Model. The banks that loaned money for the purchase of the 12 properties made loans to Brand individually and not to Starlight.10 Brand testified that they would not make loans to a limited liability company and that he had to purchase the properties and borrow the money in his own name. 3 Tr. 74. They did not have claims against Starlight, only Brand. The required down payments, however, were made from money Starlight I borrowed from individuals. The properties were .not intended to be sold immediately, but to be held so that Starlight could benefit from the rapidly appreciating real estate market. The properties were rented, but the rental income was not sufficient to pay the carrying costs. The money borrowed from the individuals was also used to cover the carrying costs. 2 Tr. 175. With the change in the real estate market, Starlight I was unable to sell the properties at a profit. All but two of the individuals who loaned Starlight 1 money walked away from their losses. Two asserted claims in this case.11 While some money was paid by Starlight II to Starlight I creditors and to others for expenses, the evidence presented does not support the argument that it had any material impact on Starlight II’s operations or its failure. 3 Tr. 141-143; 4 Tr. 188-189.12 However, the two proofs of claims *620for Starlight I loans affect the distribution to the Starlight II creditors.13
2. The Holmes Model.
There were four elements to the Holmes Model: Holmes’ expertise in pricing real estate; Holmes acting as the real estate agent in the transactions; Holmes’ use of a third party to conceal his participation in the real estate transactions; and financing.
a. Holmes ’ Pricing Expertise.
Both Holmes and Brand testified that one of the primary reasons that Holmes was so successful as a real estate agent was his ability to accurately price real estate. As Holmes testified, “I study pricing on a daily basis. And that’s a big majority of my day. I think I’m better at pricing real estate than anybody. I think that my success in real estate is because of being able to price real estate.” 1 Tr. 43.
Holmes noticed a difference in pricing between a conventional real estate sale and a distressed sale (either a foreclosure or a short sale). A foreclosure or short sale sold for considerably less. Holmes testified that there were several reasons for this. When the bank sold a property at foreclosure, it generally was the purchaser and incurred expenses in acquiring, holding and selling the property. Among the expenses, Holmes testified, was an asset manager who generally received a 10-12% commission on the sale. 1 Tr. 45. There was a stigma to a distressed sale that negatively affected its price. 1 Tr. 47. Finally, the bank often would have to repair the property to bring it to a condition to sell. 1 Tr. 45. Due to these factors, mortgage lenders were willing to agree to a short sale to third parties for less than the price the property could reasonably be expected to receive at a traditional sale by the owner.
Holmes believed he could make money by purchasing distressed properties at short sales. His pricing expertise allowed him to accurately calculate the resale price, determine the potential profit in a transaction in light of a mortgage lender’s agreed price and close on the deals with a reasonable amount of profit in them. With his real estate license, he would not have to pay a real estate agent a commission on the purchase or the sale of the distressed property.14
b. Holmes’ Role as Real Estate Agent.
Holmes’ involvement as Starlight’s real estate agent was very important to Holmes. Dorula and Brand characterized Holmes as earning three commissions on each property, two when it was purchased by Starlight and one when it was sold. When the property was purchased, Holmes acted as the buyer’s and the seller’s agent, which Dorula and Brand counted as two commissions because a real estate commission is traditionally split between the seller’s agent who lists the property for sale and the buyer’s agent who brings the buyer to the table. When the property was sold by Starlight, Holmes was again Starlight’s agent, but not generally the buyer’s agent. Holmes generally sought to dismiss this characterization and noted that other agents who were generally part of the “Holmes Team” acted as listing agents and selling agents as well. 3 Tr. 11. The evidence shows that Holmes controlled the transac*621tions, and that he determined the commission split between this team members and himself. The Holmes Team — and the fair inference, Holmes himself — received the lion’s share of the “three” commissions. The real estate commissions were more than $2.7 million.15
c. Holmes’ Use of a Third-Party Purchaser.
Holmes did not want to trade in his own name.16 He wanted a third party to act as the short-sale purchaser. He testified that if he personally bought and sold a property, he expected a purchaser at the resale of the distressed property to argue that the sales price should be reduced by three percent because Holmes, a licensed real estate agent, would be working for himself and not paying a commission to someone else.17 Ex. 2 at 260. He implied that this would reduce his profit because, presumably, he would give in to-the demand to some extent.18 In the same vein, if he was acting as the realtor and not the seller, he felt he had more negotiating strength because he could shift the onus of the decision for accepting or rejecting an offer to the ostensible seller and claim that the seller was not willing to negotiate further, all the while remaining sympathetic to the purchaser’s desires. Ex. 2 at 261. He had similar concerns in negotiating with the bank for the short sale. Ex. 2 at 264.19 *622These considerations required that his interest in the transaction be concealed. His solution was to have a third party be the ostensible purchaser at the short sale and the owner at the sale of the property.
Holmes presented his plan to Brand who agreed to participate, but suggested that they use Starlight as the purchaser rather than himself. Holmes agreed. 1 Tr. 48-51; 53-54. They agreed to split the profits with respect to each property when it was sold. Holmes testified that the split was 90%/10% with the lion’s share to himself. 1 Tr. 53. The profits were calculated after payment of real estate commissions to Holmes and his team members.
d. Financing.
Holmes financed Starlight’s first transactions. He borrowed $110,000 from his life insurance policy and loaned it to Starlight at a 12% interest rate.20 Starlight made its first purchase for $100,000 and sold it for $130,000. Holmes loaned Star*623light an additional $200,000 at 14% interest “to do a bigger deal or do more deals.” 1 Tr. 63. After the first few transactions with his money, he felt that he had a good business model and wanted additional financing to expand the business.
He was limited by two factors. First, it is most likely that Holmes could not qualify for mortgage loans himself. 1 Tr. 42.21 When the real estate market “fell off a cliff’ in 2006 and 2007, Holmes testified, he “had extreme expenses to service” his investment properties. Even if “they were all rented out, I still had a big negative monthly cash flow.” 1 Tr. 36-37. As a real estate professional, he could deduct all of his real estate losses from his taxable income.22 He continued:
A. ... [W]hat I did not foresee and what I was not ultimately a good businessman about, was if the cash flow income that was needed to get to the point where you could get the tax break by owning the properties, came about so that I couldn’t keep up in a cash flow, then I was a sinking ship.
Q. Is that what happened?
A. That’s what happened.
Q. So is — would it be a correct state-, ment to say that you were no longer able to pay the mortgages on the properties you owned?
A. Correct.
Q. And you fell into default on how many mortgages, would you guess?
A. Many
1 Tr. 37. He learned about short sales and sold about 20 of his investment properties at short sales. 1 Tr. 38, 41; Ex. 2 at 217. The lender’s losses would likely have been negative considerations on a loan application and he most likely had little by way of collateral except the property to be purchased. Moreover, lenders would likely have required down payments. While he could have used the money he loaned Starlight for this purpose, it was limited. Second, his business model was time sensitive. 5 Tr. 39. Mortgage loans took too long to get approved and the loan fees and costs were expensive in light of the short time he intended to hold the 'properties. Most mortgage commitments are time limited. The time period for a loan commitment and the time it generally took a lender to approve a short sale were incompatible. A typical loan commitment is relatively short, such as 60 days. Approval of a short sale was longer, from six months to a year according to Holmes. 2 Tr. 81-82.
He turned to Michael Dorula whom he knew from previous real estate transactions they had worked on together. 5 Tr. 43-51. He contacted Dorula to see if he was interested in loaning money to purchase the distressed properties. He was. After Holmes and Dorula reached an agreement on the 14% interest rate and Dorula’s 5% finder’s fee, Holmes — for the *624first time — told Dorula that the borrower would be Starlight. 5 Tr. 47-48. Dorula thought that Starlight was owned by-Holmes and Brand in a 90%/10% ownership split.23 Holmes negotiated the first loans to Starlight. They bore 14% interest, a high rate at that time. Dorula received a finder’s fee of 5% per annum on every loan that he brought to Starlight, including his own. 7 Tr. 204. Starlight’s effective interest rate was 19%. Dorula liked the investment and solicited his friends who began to make loans to Starlight. In February or March of 2004, Thomas Moak loaned $500,000 evidenced by two promissory notes and Andrea Au-non and Christopher Townsend both loaned $200,000 each evidenced by a promissory note. 5 Tr. 207-208.
The initial loans from Dorula and his friends were loans that Starlight could repay at any time without penalty. In August of 2009, Holmes directed Brand to repay Aunon’s and Townsend’s loans. This angered Dorula and his lenders because, as he explained, he felt that Starlight “was taking advantage of my friends.” They had to go through the effort and expense of liquidating other investments in order to fund their loans, to Starlight, who used it for a very short period of time and paid very little interest on the loan. 5 Tr. 54. Dorula expressed his displeasure in an email to Brand that he copied to Holmes. 5 Tr. 55. As a result, Dorula and his lenders decided that any additional loans would have to be for a one-year term with a penalty for early payment equal to the interest due over the remaining portion of the one-year term. Id.
Holmes guaranteed the initial loans, but not the new one-year loans with the prepayment penalties. He was evasive in explaining why he guaranteed the initial loans. He testified when examined on Moak’s note:
Q. Are you guaranteeing the note to Mr. Moak?
A. I did originally.
Q. Why did you do that?
A. I was asked to.
Q. And who asked you to do that?
A. I don’t remember. It wouldn’t have been Mr. Moak, because I never talked to Mr. Moak, never seen or talked to — I don’t know anything about Mr. Moak except Mr. Dorula brought him in. So Mr. Brand would have asked me to do that.
Q. Why did you agree to do it?
A. Because I had no problem guaranteeing it. I—
Q. Okay.
A. I trusted Mr. Brand at that point, you know. I mean, I look pretty foolish now having trusted Mr. Brand, but—
Q. Okay. Did you guarantee other debts, money went to Starlight?
A. Early on I thought — yeah, there were two guarantees, there may have been a third, but the notes that were guaranteed early on Brand ended up repaying those notes, and then saying you no longer have — telling me I no longer had to guarantee notes. That they had a comfortable working relationship.
*625Q. Let me put it to you this way. Would it not be correct that you agreed to guarantee the note because Mr. Brand told you that he needed to guarantee the note or they couldn’t borrow the money?
A. Possibly.
Q. Okay. So your guarantee of the note was in order for Starlight to obtain that loan, isn’t that correct?
A. I don’t know if it was or not; I said possibly.
2 Tr. 109-111.
Dorula testified that Holmes had guaranteed all the loans up to the prepayment incident and that it was Holmes’ decision not to guarantee the loans made after the prepayment incident. He testified:
A. ... Mr. Brand indicated to me that Mr. Holmes was not interested in providing a personal guarantee to this note because it was a twelvemonth note.
Q. Now, let me stop you there. Prior to that Mr. Holmes had guaranteed your notes.
A. Yes. Prior to this ... Mr. Holmes was personally guaranteeing the notes on all of the investors.
Q. I’m sorry. I’ve misunderstood perhaps.
A. Okay. Sorry.
Q. Mr. Holmes had guaranteed the notes prior to this.
A. Yes.
Q. But he was not willing to guarantee these notes.
A. Correct.
5 Tr. 58.
After the August 2009 prepayment incident and the revision in the terms of the notes, Holmes did not guarantee the loans. Dorula, in turn, sought collateral for the loans in lieu of Holmes’ guarantee. He negotiated with Brand who was now handling Starlight’s lender relationships. Starlight granted a lien on “each and every account receivable, all [Starlight’s] real estate holdings and chattel paper of every nature and type, wherever located.” Ex. 100. Thereafter, all the Dorula lenders’ notes were secured. Holmes’ notes were never secured. Needless to say, although the documents asserted that the lenders were granted a lien on Starlight’s real estate holdings, the UCC security interest did not create a lien on Starlight’s real estate. That could only be accomplished by a deed of trust. The UCC hens were not perfected.24
*626From 2009 through 2011, Holmes continued to invest in Starlight. On November 1, 2009, he loaned Starlight $215,000 at 14% interest. He made additional loans on May 17, 2010, for $175,000 at 12% interest; on July 20, 2010, for $130,000 at 8% interest; on August 27, 2010, for $70,000 at 8% interest; and on June 29, 2011, for $45,000 at 8% interest. All were *627evidenced by unsecured promissory notes. Ex. B.
3. The Holmes Model in Operation.
Holmes and Brand agreed on the structure of business, which they referred to as the “Holmes Model.” It involved two transactions for each property. In the first transaction, Starlight purchased a property at a short sale. Holmes looked for suitable properties to purchase and negotiated the sales price with the banks as either the realtor for the homeowner as the seller or for Starlight as the purchaser.25 Holmes testified that in 2009 it took a minimum of six' months to negotiate a price which a bank would accept.26 1 Tr. 70. Holmes negotiated and signed the sales contracts on behalf of Starlight, signing Brand’s name on behalf of Starlight, all without Brand’s involvement or immediate knowledge. Brand did not object to this process. Brand himself signed the settlement statements.
In the second transaction, Starlight sold the same property traditionally. Holmes acted as Starlight’s real estate agent. He negotiated the sales contract without Brand’s involvement or immediate knowledge and signed Brand’s name to the sales contract on behalf of Starlight. Brand himself signed the settlement statements. 2 Tr. 74.
After the property was sold, Holmes sent Brand an email advising him of the amount of the profits and instructing him how to disburse the profits.27 Holmes’ calculations were based on the settlement statements; his records of the costs of the transaction including the amounts he advanced; and Brand’s statement of the interest due to the lenders that month. See generally Ex. L. Brand paid interest to the lenders from cash on hand in Starlight’s bank account. They intended to replace it from the net proceeds from the first sale in each month, or if that was not sufficient, from a subsequent sale. The profits were to be divided on the completion of each sale. Holmes and Brand strongly disagreed on the division of profits due to each, Holmes contending that he was entitled to 90% and Brand to 10%. Brand contended that the profits were to be divided equally. Compare 1 Tr. 53, with 2 Tr. 182.
There was a lot of testimony about the split of Starlight’s profits between Holmes *628and Brand. This case is not a contract case between them in which this dispute must be resolved. It is of interest because it sheds light on Brand’s thinking in withdrawing compensation for himself, but is not determinative of the issues raised by Dorula. Based on the evidence presented, the court finds that the agreed upon split was 90%/10%. There was an objective manifestation of this split when they began the venture. Brand, however, had subjective reservations, perhaps from the beginning. He expressed them, as Holmes testified, by continually seeking further compensation. 1 Tr. 97 (“Spencer [Brand] was always asking for bigger splits on every transaction.”). Overall, there were many transactions in which the split was other than 90/10. While Holmes did not insist on a 90/10 split on each transaction, his concessions did not alter the original agreement.
4. Starlight’s Success.
For the first two years, Starlight put the lenders’ money to good use. The gross income for Starlight was $11,232,895 for 2009; $8,847,891 for 2010; and $7,489,313 for 2011. 4 Tr. 161; Ex. 98 (Statement of Affairs, Question 1). It completed 34 transactions using the Holmes Model in 2009 for a profit of $1,354,713.00. All of the transactions were profitable. In 2010, Starlight completed another 34 transactions for a profit of $1,573,015.00. Only one transaction resulted in a loss. In 2011, Starlight completed 16 transactions for a profit of $257,383.00. Four transactions had a profit between $40,000 and $100,000, seven had a profit of less than $15,000.00, and five had losses between $1,500 and about $36,000.28 Ex. OO
5. Starlight’s Failure.
By 2011, Starlight’s profits had fallen to less than half of what they had been in 2009 and 2010. Holmes and Brand identified several reasons for this, although they dispute the exact reasons and the allocation of blame. One was a change in the banks’ rules on short sales. Originally, the banks had few restrictions on how long a purchaser had to hold a property before he sold it. As time passed and the banks gained more experience in short sales, they began to require properties be held for longer periods of time before the purchaser could sell the property. 4 Tr. 40, 161. This adversely affected Starlight because the longer holding period increased its interest costs on each particular property and reduced the turnover of its inventory resulting in less effective use of the lenders’ money.
Another cause of Starlight’s demise was the uninvested cash on deposit in the bank. Holmes recognized this problem at the beginning when he first sought to repay the Dorula lenders when he did not need their money for a particular transaction. He was seeking to treat them as a line of credit and to pay interest only on the outstanding balance. The Dorula lenders objected and Starlight was required to borrow for one-year terms or pay a prepayment penalty. This resulted in idle funds sitting in Starlight’s checking account. Starlight was paying 19% interest on the idle funds.
Brand was also concerned about the high rate of interest, and, without Holmes’ knowledge, sought to put the idle funds to good use outside of the Holmes Model. He loaned Michael Blank money to pur*629chase several properties in Maryland. Mr. Blank paid Starlight enough interest to cover the interest payments due from Starlight to its lenders. 4 Tr. 169. Brand also purchased a property in Washington, D.C. and renovated it. This was profitable. 4 Tr. 65. His most unsuccessful attempt at cash management was investing the idle funds in the stock market on a short-term basis. While initially successful — Brand testified that in 2010 he made a profit of “more than $100,000” — the effort was ultimately disastrous. He lost more than $400,000. 4 Tr. 166-167. The brokerage account was closed a few months before Starlight’s bankruptcy. 4 Tr. 93.
Another area that contributed to Starlight’s demise was Brand’s and Holmes’ dispute over their respective split of the profits. Holmes contended he was entitled to 90% of the profits. Brand contended that it was 50%. Holmes instructed Brand to disburse his profits, 90% of the total profit, on each deal to Holmes at the end of each transaction. Brand did so. When questioned about why he continued to disburse more to Holmes than he thought Holmes was entitled to, he stated that Holmes needed the money at that time to service his investments and believed that while Starlight “was prepaying [Holmes] profit that was more profit than he was due ... [Holmes and Brand] would settle up the profit that he made at the end.” 4 Tr. 21-22, 27.
However, Brand did not always disburse his share, as computed by Holmes, to himself as directed by Holmes in his email instructions. At times, he did not disburse anything to himself. However, overall, he disbursed more to himself than Holmes instructed. Brand paid himself on an as-needed basis. 4 Tr. 20-21. He disbursed funds to himself or on his behalf three ways. He wrote checks to himself, paid his personal expenses, and wrote checks to his wife.29 All were posted on Starlight’s ledger as income to Brand or his wife. 4 Tr. 20. “[T]he goal ... was that one day it would all even out at fifty-fifty.” 4 Tr. 39. Nonetheless, Brand disbursed more to himself than directed by Holmes in this email instructions. Needless to say, Brand’s conduct violated the basic principle of the Holmes Model, that is, at the end of each transaction, all the lender’s money would be repaid and be safely in Starlight’s bank account. By disbursing more than 100% of the profits on each transaction, that was not possible.
Brand offered another reason for Starlight’s declining profits: Holmes started to buy properties that generated insignificant profits but generated commissions to Holmes. He believed that Holmes entered into transactions solely for the commission and without regard to the potential profit which he testified shrank over time. 6 Tr. 127. In fact, the losses on the transactions and the smaller profits principally occurred in the later months of Starlight’s existence. There was no evidence that Holmes had stopped studying pricing on a daily basis; that he was no longer better at pricing real estate than anybody else; or that his acumen had otherwise dulled. At the time of the trial, he was still engaged in short sales, although with another company. 2 Tr. 155.
6. Starlight’s Collapse.
Starlight’s collapse came in August 2011. Townsend’s note was due on July 29, 2011.30 Meanwhile, Holmes had negotiat*630ed a short sale without Brand’s knowledge, as was customary. When Brand found out that settlement on the purchase was scheduled to occur near July 29, 2011, he realized that Starlight did not have enough money to both close on the property and pay Townsend’s note. Shortly before the scheduled closing, Brand told Holmes of his losses in the stock market and that Starlight did not have enough money to both close on the property and pay Townsend’s note. 4 Tr. 113; 6 Tr. 114-115.
Holmes demanded that Brand turn over Starlight’s ledger to him, which Brand did. 6 Tr. 116-117. When he reviewed the ledger, he was “shocked” to learn that instead of there being $2.1 million in outstanding loans to Starlight as he believed to be the case, there was actually $3.5 million in outstanding loans. 6 Tr. 170. When Holmes learned this, he instructed Brand to put the proceeds of sale of the properties into escrow. 6 Tr. 171. The escrow agent — chosen by Holmes — was originally Scott Flanders, but was changed to Don Olinger, a Dorula lender, on August 11, 2011. 5 Tr. 237-238.
Dorula learned of Starlight’s losses from Brand at the end of July 2011. 5 Tr. 73-74. Shortly after this, Holmes telephoned Dorula and left messages that they needed to speak but without Brand being present. 5 Tr. 74-76. Dorula began to feel uncomfortable with Holmes at this meeting.31 *631Dorula, Townsend and Olinger met with Holmes about the losses at a second meeting. After Townsend and Olinger left, Do-rula spoke with Holmes alone. Dorula suggested a scenario that would permit Starlight to continue in business and generate enough profits to cover the losses. Dorula was “shocked” at Holmes’ summary dismissal of the suggestion.32 After *632that meeting, the relationship between the two broke down. Dorula testified that “it moved from me trusting Holmes very well to the point that I do not trust him at all about anything.” 5 Tr. 88-89.
At the time that Brand informed Holmes and Dorula of the losses incurred in the stock market, Starlight owned eight properties purchased as a part of its short-sale venture. 5 Tr. 236.33 Starlight sold four of the eight properties before it filed bankruptcy and received $1.3 million in net proceeds of sale. The remaining four were sold by the chapter 7 trustee. The net proceeds of sale from the four properties Starlight sold were deposited into the escrow account controlled by Olinger.34 5 Tr. 236-238. Olinger, Dorula and Brand authorized the distributions of these proceeds to the Dorula lenders. 5 Tr. 239-241.
Holmes sued Starlight on November 15, 2011, to recover on his notes and scheduled a hearing on his motion for a temporary restraining order for November 17, 2011. Ex. 8. Starlight filed a petition in bankruptcy on November 16, 2011.
7. Holmes’ Relationship to Starlight
Holmes had a very close relationship to Brand and Starlight. Brand had been a long-time friend and mentor whom Holmes trusted. The close relationship was reflected in Brand giving Holmes a half interest in the Trinity Square property. They spoke frequently and Holmes turned to Brand for guidance. 1 Tr. 32-33. They attended the same Bible study group. Holmes had been Brand’s and Starlight’s real estate agent when Starlight was first organized and was looking for properties to purchase and hold for appreciation. 1 Tr. 42; 2 Tr. 179. Holmes was Starlight’s real estate agent when the market crashed and successfully sold some of Starlight’s original 12 properties at short sales.
The short sale investment scheme was Holmes’ creation. He first approached Jeff Palmucci and offered him the opportunity to act as the ostensible short-sale purchaser. When Palmucci declined, he turned to Brand who accepted. 6 Tr. 194. The critical work was performed by Holmes. He selected the properties Starlight bought, negotiated the short sale purchase price with the bank, signed Brand’s name as manager of Starlight to the sales contracts, hired and supervised contractors for repairs or renovations that were necessary, advanced his own money to pay for utilities and repairs, negotiated with second trust holders, reached agreements with the owners of the distressed properties to handle second trustholders who would not release the owners from further liability on the second trusts, made monthly payments to second trustholders who did not release the owners, negotiated and signed listing agreements for Starlight when Starlight placed the properties for sale, negotiated sales contracts, signed Brand’s name as manager of Starlight on the sales contracts, maintained financial records to determine the profits from each transaction, informed Brand of the profits and directed him how to disburse the profits. ' 2 Tr. 60-61; 7 Tr. 39; 7 Tr. 40. Holmes testified, “I was making the deci- ■ sions on price. I mean, that would not be a normal situation with a buyer and a *633seller. I was — I was managing — I was managing rehabs of properties. I was putting utilities in my name. I was paying expenses that were occurring. I mean, no realtor would do that for a client.” 7 Tr. 42.
Holmes provided Starlight with the funds for its first purchases, initially $110,000 and later $200,000 more. He approached Dorula for loans to Starlight; negotiated the first interest rates, the finder’s fee, his guarantee, and the structure of the notes; and directed Brand how the promissory notes were to be written. 2 Tr. 197-198. He guaranteed the first series of loans. The terms he originally negotiated with Dorula remained essentially the same throughout Starlight’s life. The most significant change was after Holmes first directed Brand to repay the loans when the funds were not immediately available. Dorula and his friends objected and insisted on one-year term notes with a prepayment penalty. As a result of the change in terms, Holmes declined to guarantee further loans and the Dorula lenders believed that their notes were secured by all of the assets of Starlight.
Holmes promised Brand that neither Brand nor Starlight would be responsible for any loss on any transaction, that he would cover all losses.35 2 Tr. 62. When a property did not make a profit, Holmes wrote a check for the loss. See, e.g., Ex. L at 12 (Ascot Way, loss of $8,394.54). He also paid Brand $250 when there was no profit. See, e.g., Ex. L at 4 (Island Place).
Holmes, in addition to his. real estate commissions, received 90% of the profits from each transaction. Brand received 10%. Holmes was not looking for a partner, but a bookkeeper and a way to avoid having a financial interest in the transactions that would trigger disclosures required under Va.Code (1950) § 54.1-2138, 2139; 18 Va. Admin. Code § 135-20-210 and 220.
Holmes dominated Brand, both personally and financially. Brand testified in reference to the split of the profits:
Q. Well, I’m confused about the nature of the pressure. In what way were you pressured to adopt Mr. Holmes’ suggestion that he be paid more than fifty percent?
A. I was too weak to stand up to Greg’s overbearing manner, his haranguing at times, repeated multiple calls, multiple whatever e-mails, et cetera on various issues. And I just went along.
6 Tr. 89-90.
He testified earlier:
Through this whole process, the money became attractive to me, and I became a coward. And there were many times during this business relationship with Greg I should have just said stop, but I didn’t. I went along, because it was beneficial to me to go along. And it was easy — I slipped into kind of instead of an unconditional love, to unconditional acceptance, and I thought I could change things.
We knew that we were running into some kind of problems; I didn’t know—
*634I’ve never seen these documents before — before your deposition. We certainly wouldn’t have done that, because this is all completely off of the HUD-1. It’s backdoor agreements with the second trust holder, with — again, to my knowledge, should the first trust holder ever know that the second trust holder was — I didn’t know any of that.
The concern also raised its head when the FBI pulled files out of Scott Flan-der’s office to look at. And then the news came out that the FBI was investigating Greg. I didn’t stop, but I could have stopped it, in terms of my relationship with Greg. Because, again, Greg is extraordinarily gifted and quite persuasive, and I went along with it.
2 Tr. 207-208.'
Q. What role would you have in determining how much to send to Metro or working out that—
A. Greg would have told me the amounts.
Q. Would you have had any authority to say yes or no, in your view? A. Well, I would have had the authority, but I didn’t exercise it.
Q. Why not?
A. Well, because I withdrew and took kind of a cowardly go-along position with all sorts of things, to be honest with you. I mean, I wish I could say there was another reason, but I just went along.
2 Tr. 222-223.
In testifying about closing on a purchase on August 1, 2011, or paying Townsend’s note when it became due and about speaking with the Dorula and his lenders about Starlight’s losses, Brand testified:
Mr. Keegan [an attorney] and Holmes, at that closing, both of them — you know, sometimes I think my cowardice is staggering to me when I — it is. At that meeting, they told me do not talk to any of the lenders, period. In fact, Greg reiterated that in his e-mail. Don’t talk to anyone. Don’t tell them anything that’s happened. I will handle it. And Greg talked about how he could come up with a strategy to work us out of this mess — and that he would take care of it with the lenders. Vince Keegan reiterated that, that Greg was an extraordinarily gifted salesman. He could figure out a way to work a deal to get us out of this mess. So, Spencer, go home, and shut up, and you should be ashamed of yourself, which, of course, I was. And that’s what I did. So I had no contact with the lenders whatsoever. Now, I knew better than that, but I still did it.
3 Tr. 60-61.
While Brand was certainly seduced by the money, he went along with Holmes and followed his instructions, often against his better judgment.
After Starlight collapsed, Holmes took his “Holmes Model” to Flanders and started a new relationship that pursued the same business with the same business model. Again, the profits were split 90%/10%. This time, however, Holmes had a bank line of credit. 2 Tr. 155-156.
The court finds that Holmes was the de facto manager and owner of Starlight. He effectively controlled Starlight.36 The business model was his idea. It commenced the business of short sales with his money. He obtained the principal financing. He selected the properties Starlight purchased and the price at which they would be purchased and sold. He signed listing agreements and real estate con*635tracts for Brand without Brand knowing that they were signed until after Holmes had signed them. He made the principal corporate decisions. He received the overwhelming financial benefit of the venture and assured Brand that despite the fact that he was the record owner, he would suffer no loss. When he found out about Starlight’s losses, he chose to close on a purchase and not pay Townsend’s maturing note. Immediately before the closing, he promised Brand he would find a way out of the “mess” and instructed Brand to go home and remain silent. Shortly after the closing, he summarily rejected Doru-la’s initial work-out idea and moved the business to a successor corporation he controlled.
Holmes is also an insider as a person in control of Starlight under § 101(31)(B)(iii) of the Bankruptcy Code. The test in the Fourth Circuit is that “the alleged insider ‘must exercise sufficient authority over the debtor so as to unqualifi-ably dictate corporate policy and the disposition of corporate assets.’” Butler v. David Shaw, Inc., 72 F.3d 437 (4th Cir.1996) (quoting Hunter v. Babcock (In re Babcock Dairy Co.), 70 B.R. 662, 666 (Bankr.N.D.Ohio 1986)). This he did.
II. Applicable Law
A. Equitable Liens.
[Ejvery express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, ... a security for a debt or other obligation, ... creates an equitable hen upon the property so indicated which is enforceable against the property. Hoffman, v. First National Bank of Boston, 205 Va. 232, 236, 135 S.E.2d 818, 821 (1964) (adopting and quoting the definition in Pomeroy’s Equity Jurisprudence 5th ed., § 1235); Harper v. Harper, 159 Va. 210, 218, 165 S.E. 490, 493 (1932). The Court of Appeals for the Fourth Circuit applied this definition in Penn Lumber Co. v. Wilson, 26 F.2d 893 (4th Cir.1928) and Stickney v. General Electric Co., 44 F.2d 362 (4th Cir.1930).
There is a difference between the existence of an equitable lien and a bankruptcy trustee’s ability to avoid an equitable lien. Beskin v. Bank of New York Mellon (In re Perrow), 498 B.R. 560, 576 (Bankr.W.D.Va.2013). A bankruptcy trustee has the ability to avoid certain liens. See, e.g., 11 U.S.C. §§ 544 and 547. In Penn Lumber, while the Court of Appeals found that there was no equitable lien, it held that if there had been one, the trustee’s strong arm rights would have, prevailed over Penn Lumber’s equitable hen. The general analysis involves answering two questions. First, is there an equitable lien; and, second, can the trustee in bankruptcy avoid the equitable hen. In this case, the trustee is not involved in the objections or the adversary proceeding. He has not asserted his strong arm rights and they are not a consideration. The contest is between creditors. Only the first question in the analysis needs to be answered.
B. Equitable Subordination.
The equitable remedy of subordination was recognized by the Supreme Court in Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939) and codified by Congress in 11 U.S.C. § 510(c) of the Bankruptcy Code of 1978.37 An equitable remedy is a part of “a complex system of established law and is not merely a reflec*636tion of the chancellor’s sense of what is just or appropriate.” Tiller v. Owen, 243 Va. 176, 179, 413 S.E.2d 51, 53 (1992) (citing Price v. Price, 122 W.Va. 122, 124, 7 S.E.2d 510, 511 (1940)). In bankruptcy, three elements are usually necessary to invoke equitable subordination: (1) inequitable conduct; (2) injury to creditors or an unfair advantage for the claimant; and (3) a remedy that is not inconsistent with the provisions of the Bankruptcy Code. Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 700 (5th Cir.1977). See also United States v. Noland, 517 U.S. 535, 116 S.Ct. 1524, 1528, 134 L.Ed.2d 748 (1996); United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996).
If the creditor against whom equitable subordination is sought is an insider of the debtor, that creditor’s dealings with the debtor are subject to closer examination than that of noninsiders. In re Systems Impact, Inc., 229 B.R. 363 (Bankr.E.D.Va.1998). The initial burden is on the moving party to present “material evidence of unfair conduct” by an insider. Id. The insider creditor must then rebut the evidence by proving “the good faith and fairness of its dealings with the debtor.” Id. (citing Allied Eastern States Maintenance Corp. v. Miller (Matter of Lemco Gypsum, Inc.), 911 F.2d 1553 (11th Cir.1990).
III. Conclusions
A. The Dorula Lenders’ Liens.
The Dorula lenders were promised liens in lieu of Holmes’ personal guarantee after Holmes directed Brand to repay the Dorula lenders’ loans. They agreed to loan new money only if there was a prepayment penalty and the notes were collat-eralized. Starlight and the lenders entered into a UCC security agreement that purportedly encumbered all of Starlight’s assets, both real and personal property. The security agreements, while intending to grant a lien on Starlight’s real estate, were ineffective to do so. That can only be accomplished by a deed of trust.
An equitable lien gives effect to the equitable maxim that equity “regards that as done which ought to be done.” Virginia Shipbuilding Corp. v. United States, 22 F.2d 38, 50 (4th Cir.1927). A recurring application of this maxim is the imposition of an equitable lien on property intended to be collateral for a loan. Hoffman, 205 Va. at 236, 135 S.E.2d at 821-822 (“creates an equitable lien upon the property so indicated which is enforceable against the property”) (quoting Pomeroy’s Equity Jurisprudence, 5th ed., § 1235); Perrow, 498 B.R. at 576 (“The lien created is enforceable against the property.”) The party does not necessarily have to promise to convey, assign, or transfer the collateral for the maxim to apply. It will apply even if the “contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation....” Union Trust Co. of Maryland v. Townshend (In re Smith), 101 F.2d 903, 908 (4th Cir.1939). Here, if the security agreements had been properly drafted as deeds of trusts and recorded, the Dorula lenders would have had priority over all other creditors, including Holmes, as to the real estate.
A second applicable equitable maxim is that he who remains silent when he should have spoken, will not be heard when he should remain silent. Brand and the Do-rula lenders thought that they were receiving security for the loans in lieu of Holmes’ guarantee. 2 Tr. 200-201; 4 Tr. 194-196; 5 Tr. 68.38 Holmes knew of the ineffeetive*637ness of the lien as to the real estate but said nothing. At every closing on the sale of a property by Starlight, he saw the settlement statement and saw that no deed of trust was being paid. He remained silent. Had he spoken, the defect could have been remedied and the Dorula lenders would have obtained a first lien on the real estate. Holmes would have been, effectively, subordinated to them. Instead, he avoided his personal guarantee and left open an opportunity for him to recover on his loans without giving the Dorula lenders what they had bargained for.
An equitable lien is not necessary to create a lien on Starlight’s personal property. The security agreements created liens on Starlight’s personal property in favor of the Dorula lenders. The Mens were effective as between the lenders and StarMght.39 Va.Code (1950) § 8.9A-201(a)40; In re Alford, 1990 WL 10091744 (Bankr.E.D.Va.1990); Felmey v. Household Finance Corp., 9 B.R. 331 (Bankr.E.D.Va.1981). The liens were not perfected.
B. Enforceability of the Liens Against Holmes.
Both the equitable lien on Starlight’s real property and the unperfected UCC lien on Starlight’s personal property are effective against Starlight, a party to the security agreements. Va.Code (1950) § 8.9A-201(a). The question is their effect against Holmes, an unsecured creditor.
An equitable lien is enforceable against the property. Hoffman, 205 Va. at 236, 135 S.E.2d at 821-822; (“creates an equitable lien upon the property so indicated which is enforceable against the property”) (quoting Pomeroy’s Equity Jurisprudence, 5th ed., § 1235); Perrow, 498 B.R. at 576 (“The lien created is enforceable against the property.”) In Harper v. Harper, the *638equitable lien was prior in time to the widow’s dower rights.
An equitable lien may be subject to rights of third parties such as bona fide purchasers for value. Penn Lumber Co. v. Wilson; Perrow, 498 B.R. at 576. The Dorula lenders’ equitable liens are not subject to rights of either the chapter 7 trustee or Holmes. The chapter 7 trustee has not asserted his strong arm rights. Holmes is an unsecured creditor, not a bona fide purchaser for value. He never had an interest in the real property, only an unsecured claim against Starlight.
The security interests in the personal property are binding on Holmes. Va.Code (1950) § 8.9A-201(a) expressly provides that a security agreement is effective against creditors&emdash;in this case, Holmes&emdash; and is enforceable as to him. Va.Code (1950) § 8.9A-203(b). Nor does Holmes have any priority over the Dorula lenders under Va.Code (1950) § 8.9A-317(a) because he never became a lien creditor. Va.Code (1950) § 8.9A-317(a)(2).
While not necessary to finding that Holmes is subject to the Dorula lenders’ equitable liens, the equities of this case favor them. Holmes knew of the intended lien on the real property. While he denies that he was aware that the Dorula lenders had a security interest, the assertion is not credible. He testified that his personal guarantee was released because the Holmes Model had proven itself, 7 Tr. 94, and that he was unaware that the Dorula lenders received security interests, Id. at 93-94, 32 S.Ct. 657. However, he set the initial terms of the loans. He personally guaranteed the initial loans. After the prepayment incident, he knew that the terms were modified. He knew that the new loans were for one-year periods. He did not want to guarantee the longer term loans and knew that he was not personally guaranteeing them because he signed no new guarantees.41 Brand testified that Holmes knew about the security agreements.42 2 Tr. 200; 201.43 But see 7 Tr. 132-133. Considering the evidence as a whole on this issue, the court does not credit Holmes’ denial and finds that he knew the new loans were intended to be secured by all of Starlight’s assets, including the real estate.
Holmes also knew that a deed of trust, not a security agreement, was needed to encumber the real estate. He was an experienced real estate agent who had extensive personal real estate experience and negotiated numerous short sales. Each involved a deed of trust. He saw deeds of *639trust being paid on the settlement statements when the distressed properties were purchased by Starlight, but that there were no deeds of trusts being paid on the settlement statements when the properties were sold by Starlight.
Holmes controlled Starlight. The venture was his idea. The business model was his. The initial money to operate the business was his. He found Dorula and his friends and initially obtained their financial support through loans. The Do-rula lenders were Starlight’s principal lenders. He located and negotiated the purchases of the properties without consulting or seeking the approval of Brand, the ostensible principal of Starlight. He signed Brand’s name to the sales contracts. He calculated the profits.
C.Application of Equitable Subordination.
It is not necessary to apply equitable subordination to give effect to the Dorula lenders’ property rights&emdash;that is, their equitable liens&emdash;as to Starlight’s real property. Their equitable liens arise independently of equitable subordination. Independent of the Dorula lenders’ equitable liens, Holmes’ claims would be equitably subordinated to the Dorula lenders’ claims. In addition, if necessary, equitable subordination would give effect to the priority of the Dorula lenders’ equitable liens.44
If there were no equitable liens, the application of equitable subordination would be appropriate and would result in the same priorities. The three elements required for equitable subordination are present. Holmes’ knowledge of the intended liens, his knowledge that they were not properly effected, and his control of Starlight are inequitable conduct. The Dorula lenders were injured and Holmes would obtain an unfair advantage&emdash;a pro-rata distribution of estate funds when he-should receive a distribution only after the Dorula lenders. Equitable subordination i is not inconsistent with the provisions of the Bankruptcy Code. In fact, it would achieve the same result as if the matter were resolved by a Virginia court under Virginia law. Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 700 (5th Cir.1977).
D.Relief Granted
This case is before the court on the objections to Holmes’ proofs of claims and the complaint to subordinate Holmes’ claims. Holmes is the only adverse party in these proceedings. The relief requested will be granted. Equitable subordination would result in the same relief. It may be granted “only to the extent necessary to offset injury or damage suffered by the creditor in whose favor the equitable doctrine may be effective.” In re Franklin Equipment Co., 418 B.R. 176 (Bankr. E.D.Va.2009). Holmes’ inequitable conduct does not extend to Brooks and Flory who loaned money to Starlight during its first business foray. They never thought that they had a security interest in any of Starlight’s assets and Holmes was not involved in the operations of Starlight at that time except as a realtor. Similarly, other unsecured creditors without security agreements are not adversely affected by Holmes’ conduct. Holmes’ claims should be subordinated only to Dorula’s and his friend’s claims to the extent of the security agreements. The chapter 7 trustee will first pay all administrative expenses and priority claims. He will then determine the prorata distribution of all creditors and disburse that amount to all of them except Holmes. He will disburse Holmes’ portion prorata to the Dorula lenders until their claims are paid in full. If they are paid in *640full, any balance of Holmes’ portion will be paid to him.45
. Six identical objections were filed by creditors to the three proofs of claims filed by J. Gregory Holmes, the person in control of the debtor. Three were filed by W. Michael Do-rula and three by Robert A. Meletti and Julie E. Meletti. In addition, W. Michael Dorula and Donna Dorula filed a complaint requesting that Holmes’ claims be subordinated to all other unsecured claims. The six objections and the complaint were heard together. In addition to seeking equitable subordination, the objections also sought to recharacterize the loans as equity contributions to the debt- or. In light of the disposition of the request for equitable subordination, it is not necessary to reach the recharacterization issue.
. Starlight was organized by Spencer C. Brand in 2004 or 2005. 2 Tr. 172. It purchased 12 residential properties for investment, intending to hold them for appreciation. This phase of Starlight's life ended in the real estate crash of 2007-2008. The parties called this Starlight I. They call Starlight’s second phase, its purchase of real property at short sales from 2009 to 2011, Starlight II.
. There were two transactions for each property, the purchase of the distressed property and its sale. Holmes was the distressed homeowner’s (the seller’s) real estate agent as well as Starlight’s (the purchaser’s) agent. 2 Tr. 12-14. He was again Starlight's agent on the sale of the property. The purchaser of the property at the second transaction generally had his own real estate agent. 2 Tr. 163. In Northern Virginia at this time, there was generally a six percent commission paid to real estate agents on real estate transactions, half to the seller’s agent and half to the purchaser’s agent. It can be thought of as two commissions, each being three percent. Holmes' scheme resulted in him receiving three of the four commissions involved for each property, two on its purchase and one on its sale. 2 Tr. 186-187. He also received a part of the profit when the distressed property was sold by Starlight. Had he acted solely as the distressed owner’s real estate agent and sold the property directly to a purchaser who intended to live in the property, he would have received one of two commissions and none of the benefit of the short sale profit.
Holmes used the services of members of the "Holmes Team” — other real estate agents in the real estate firm who worked closely with him. He largely determined the split of the commission between the members of the Holmes Team and himself. He testified:
Q. ... How often did you use an agent from your team on these part 1 of the Starlight transactions?
A. Most of the time.
Q. Most of the time. Okay. And do I understand your testimony correctly that you would sit down at some point with your team member and decide how much they did and how much you did and what percentage of their commission you should receive. Is that correct?
A. Pretty much.
Q. Okay. Was there ever any discussion about how much of your commission they should receive?
A. No. I was the team leader.
7 Tr. 39-40. See also 2 Tr. 168-169.
. For convenience the transcripts are referred to by volume number. The volume numbers are the daily transcripts which are for Dec. 9, 2013 (1 Tr.); Dec. 11, 2013 (2 Tr.); Dec. 13, 2013 (3 Tr.); Dec. 19, 2013 (4 Tr.); Dec. 20, 2013 (5 Tr.); Feb. 7, 2014 (Vol.6); and Feb. 10, 2014 (Vol.7). In addition, portions of the trial testimony in the Brooks and Flory matter, Dorula v. Brooks (In re Starlight Group, LLC), 519 B.R. 157 (Bankr.E.D.Va.2014), rev’d and remanded for further consideration, were admitted without objection as Exhibit 2 and are referenced as "Ex. 2 at-." The page designation is that of the original transcript.
. Brand filed a voluntary petition in bankruptcy under chapter 7 of the Bankruptcy Code in this court on January 24, 2012. Starlight creditors to whom he was or may have been liable were scheduled. No complaint objecting to his discharge or the discharge-ability of a debt was filed. The trustee filed a Report of No Distribution and Brand was granted a discharge on April 30, 2012. He made no claim in this case and is not listed as a creditor. He is scheduled as a co-debtor with Starlight on Mr. Brooks’ and Mr. Flory’s claims.
. Holmes testified:
A. ... [Brand] was my mentor at this point, and he had been my mentor for seven or eight years.
Q. ...What do you mean, "mentor”?
A. Well, I had accepted Christ as my lord and savior in 1997. And one of the first people I was introduced to by — I was introduced to George Kettle that owned all of the Century 21 franchises, and I was attending a Bible study at Mr. Kettle’s office every Tuesday afternoon, and that was— that was in late 1997. And I was introduced to Mr. Brand who was, I guess, the moderator of that Bible study.
And so from that point on, Mr. Brand took me under my wing — took me under his wing. He taught me the Bible. He taught me. And he became — he became a very big support system in my life. He was a support system so as that I called him eight, ten, twelve times a day. I mean, anything that would come up, I’d go — I would ask him biblically, what would the translation be. I would ask him about almost every situation that came up in my life.
1 Tr. 32-33.
. Brand testified that the twelve properties he purchased belonged to Starlight even though some were titled in his individual name. They were titled in his name, he said, for convenience because banks would not lend to a limited liability company. 2 Tr. 173-174. Prior to Starlight’s bankruptcy, Brand testified that he conveyed the remaining properties to Starlight. Three were listed on Schedule A, Real Property. Each was annotated: "Title in name of Spencer C. Brand and held as Nominee for Starlight Group, LLC.” Brand testified that he quitclaimed his interest to Starlight before it filed bankruptcy. Holmes agreed that Brand’s interest in Trinity was transferred. He testified, "In December of 2012, unbeknownst to me, the ownership changed fifty percent Greg Holmes to fifty percent the Starlight Group. But this was December of 2012 that there was a quitclaim deed filed shifting his interest in the property to that of Starlight Group.” 1 Tr. 35. Brand testified:
Q. Now, in this letter, Mr. Holmes appears to be asking you to transfer a deed to him on Trinity Square. Do you see that?
A. Yes.
Q. Okay. And what was your response to that?
A. I wouldn't do it. First of all, my attorney advised me not to have any business dealings whatsoever of any kind with Mr. Holmes. Secondly, again, what he wanted me to do was quitclaim the deed of this property over to him claiming it had nothing to do with Starlight, but it was the very first Starlight — very first property Starlight bought. The down payment money on this property was Starlight's; the mortgage payments for the first couple of years had been made — been paid by Starlight; the income, rental income collected for the first couple of years until, again, the market collapsed was paid by — was received by Starlight. Then, as the market collapsed, Greg had additional cash, Starlight ran out, Greg assumed the mortgage, and Greg assumed collecting the rents, and so on. But this was a Starlight property from the very beginning.” 3 Tr. 54-55.
. The transaction did not turn out well. Like so many other properties, it lost its value in the real estate crash. The trustee abandoned it. See Notice of Abandonment, Docket Entry 62. Starlight did not list Holmes as a co-debtor of the loan secured by Trinity Square on Schedule G and there was no evidence that Holmes was liable to the bank for the loan secured by Trinity Square. Holmes testified that it ultimately cost him money. ITr. 34-35. Brand agreed. 3 Tr. 54-55.
. Brand testified:
Q. And what debt existed in the Starlight bank account from that Starlight I?
A. Well, in the bank account, there wouldn’t have been any debt....
Q. Well Starlight I had unpaid notes, correct?
A. Well, yes, but that wasn’t in the — I mean, you’re talking about the bank account— Q. Well, I’m trying to—
A. ■ — or the balance sheet.
Q. Yeah. Excuse me.
A. Well, the balance ... sheet has the — ...
Q. So when you s — when Greg Holmes talked to you about forming this agreement, did he ask you about the Starlight bank account?
A. I don’t know if he asked about the bank account, but he knew the situation of the Starlight balance sheet. The bank account, again, is different. You know, the bank— whether there was 100 dollars or 500 dollars, I don’t remember. But Greg knew that we had this substantial debt because we were liquidate — he was representing Starlight as we were selling these properties.
Q. Well, you think — you’ve talked about how astute Mr. Holmes is, correct?
A. Yes.
Q. And you’re telling me that he would allow money to go into Starlight’s bank account or go into the coffers of Starlight when they owed one million dollars in debt?
A. Because Starlight had reached an agreement with all of those lenders. They either just forgave their loan, or we had created *619an agreement with ... Charlie Flory and Billy Brooks.
So, yes, there were — I mean, while it had that debt, those lenders had already walked away. The market had collapsed. They understood that.
Q. But it remained on the books?
A. Yes.
Q. And is it your testimony that Mr. Holmes never asked you about that?
A. No, no, no. We — well, no, we had many discussions as to the status of Starlight, because he knew that we had all these lenders that put money in. He knew that we had short sold all those properties. He knew the lenders had walked away except one guy that kind of a whatever, named Mitch Purcell, and he eventually signed off and walked away too. Again, but Greg was aware of all of that. We had many conversations about this.
3 Tr. 141-143.
.No institutional lenders were scheduled as creditors in Starlight's case. While lenders secured by liens on Starlight’s four properties remained from its first phase (Starlight I), they had no in personam claims against Starlight, only in rem rights against the real estate, all of which the chapter 7 trustee abandoned.
. When Starlight began to become successful in its short sale business, Brand approached the two remaining lenders and compromised their claims. They agreed to a significantly reduced principal with payment over an extended period. Brand who was not personally liable on the loans to Starlight agreed to guarantee the settlement. Starlight paid several hundred dollars a month to service this obligation. There is a dispute in this case over the amount of these creditor's claims. They filed a proof of claim asserting the full amount they loaned, not the reduced settlement amount. Dorula and Mr. and Mrs. Meletti objected to the full amount of the loan, but not the settlement amount. The lenders asserted that the settlement was procured by fraud. See Dorula v. Brooks (In re Starlight Group, LLC), 519 B.R. 157 (Bankr.E.D.Va.2014), rev’d. and remanded for further consideration ; Ex. 2 (portions of transcript of trial on objection to Brooks’ & Flory’s claims).
. Brand testified:
THE COURT: How much of that loss [from Starlight I] was paid out of funds borrowed for Starlight II?
THE WITNESS: None. None of those lenders [Starlight I lenders] received payment from *620Starlight II, except for Charlie Brooks and — excuse me — Charlie Flory and Billy Brooks.
4 Tr. 188. Brooks and Flory received about $19,200 over two years. 4 Tr. 189.
. Dorula and the Melettis objected to the claims. Docket Entries 126-130.
. He expected that the real estate agent for the ultimate purchaser would be paid one-half of the total commission on the sale.
. A real estate commission was paid when a property was purchased and sold. The gross receipts are only when a property is sold. The estimate of the total commissions assumes that the purchase price of the parties does not exceed the sales prices. A six percent commission is then calculated on the purchase price as well as the gross receipts. The buyers' broker on the sales transaction was usually not a member of the Holmes Team. As a result, three quarters of the estimated commissions, about $2.25 million was paid to Holmes’ broker and the Holmes Team, principally Holmes himself.
. Dorula testified that “Greg had explained to me that Starlight needed to be used because he could not be associated with Starlight. It could not appear that he is associated with Starlight in any way." 5 Tr. 43.
. Portions of Mr. Holmes' testimony in the Brooks and Flory matter was admitted into evidence in this case. Mr. Holmes testified:
Q. Mr. Holmes, why was it necessary, again to use the Starlight as a vehicle for the short sale?
A. Negotiation.
Q. Explain please?
A. If you you're a realtor, and you call me as a realtor and you have buyer for a property, and I am also the seller of the property, you will, as a realtor, will make the supposition that I will already discount 3 percent because I do not have to pay a commission because I’m the owner.... So negotiation is much, much easier when I’m — can turn around and say my seller wants this amount for the house. Too bad, take it or leave it. It’s a much better position to be in as a realtor.
Q. Well, would it be true that that’s a much better position personally for you to be in, because in your view, you were entitled to 90 percent profit from the transaction.
A. Exactly, it was my model.
Ex 2 at 260-261.
. While the court recognizes that this situation may arise in negotiations and may be a distraction, the court does not believe Holmes would have acceded to such a demand.
. Holmes testified that the owners were aware of his financial interest in the transactions. He testified:
Q. ... So most of the time you represented the seller. And the sale was to Starlight. And you were rep — you were the listing agent, is that correct?
A. Correct.
Q. Okay. Would you disclose to your client, the seller, that you had a financial interest in Starlight?
A. Oh, yes. Every time. There was huge document that we disclosed that said that I had a huge financial interest in the resell of the property.
Q. Did you disclose that you were going to get ninety percent?
A. Yes.
Q. Okay. So you’re saying that you can produce documents showing that you ad*622vised your client, the seller, that you had a financial interest in the purchaser and were going to take — ultimately realize ninety percent of the profit on the—
A. It doesn't say ninety percent, but it says that I have a huge interest in the resell of the property and that I’m going to make a lot of money.
Q. Okay. Was that document disclosed to any other party? Was it disclosed to the first trust holder?
A. No, it wasn’t an ag — -I didn't have an agreement. I have — I have no agreement with the — with the first trust holder; they're not my client.
2 Tr. 143-144. Exhibit F is one disclosure statement. There are 20 numbered statements, each initialed by the owner of the distressed property. Number 11 states:
I understand that Buyer may make a profit from the resale or immediate resale of this property and that his/her only motivation is to make a profit.
Disclosure 20 addresses Holmes’ involvement. It states:
I understand that the Listing Agent, Greg Holmes of. Samson Properties, has a business relationship with the Purchaser and, as such, may derive financial gain from the Purchaser’s acquisition and subsequent sale of the Property. Whenever the interest of a Buyer or Seller might be affect by the business or financial interests of a real estate agent, there is always a possibility for the existence of such multiple interests to interfere with the Agent's ability to serve one set of interests without adversely affecting other interests. Despite the forgoing, Seller still desires to retain Greg Holmes of Samson Properties as the Listing Agent for the sale of the Property and hereby waives any conflicts of interest that may how [sic] or hereafter exists as a result of Mr. Holmes’ business relationship with the Purchaser.
Ex. F, Affidavit of Understanding for Short Sale of Real Estate, ¶¶ 11 and 20. ’’Buyer” and “Purchaser” refer to Starlight.
Holmes' view of his role with respect to the parties of the transaction is reflected in the following testimony by Holmes:
THE COURT: You were the listing agent on these?
THE WITNESS: Sometimes I was. Sometimes I wasn’t. Myself and my assistant would negotiate with the servicer of the loan.
THE COURT: Well, if you are the listing agent on these, and they ended up that Starlight was the—
THE WITNESS: Buyer.
THE COURT: —was the buyer, who are you negotiating with?
THE WITNESS: Who am I negotiating on the acquisition?
THE COURT: Yes.
THE WITNESS: I’m negotiating — it's different than the traditional sale, in that I’m not really negotiating with the seller, because the seller has different needs on a short sale than they do on traditional sale.
As long as — let’s say that they’re upside down and doesn't matter to them what the price is on the property. Therefore, what they want is out of the loan, out of the house, and out of the debt. But more importantly, they want a full release of liability-
Ex. 2, Transcript of Hearing on Objection to Proofs of Claim of William Brooks and Charles Flory at 263-264.
. This loan was repaid in full. It is not clear when it was repaid.
. Holmes testified:
Q. Now, as a result of this residual liability , and the result — and the fact that you had not been able to service these loans or make payments, and the fact that the mortgages fell into default, would it be a fair statement to say that at that point, after getting rid of those properties, you had no credit or ability to obtain a mortgage in your own name?
A. I had no credit prior to short selling them. The credit started improving once I short sold them.
Q. Okay. But do you believe at that point you could've gotten a mortgage in your own name?
A. No.
1 Tr. 42.
. Taxpayers who are not real estate professionals are limited to a $25,000 deduction. 1 Tr. 36-37.
. Dorula testified that "I had incorrectly assumed that [Starlight, a limited liability company, was] like Mr. Meletti’s LLC and mine, with two partners, and that when, you know, Mr. Holmes was getting ninety percent, I just assumed that he’s buried in the Starlight Group, so the name doesn’t come out, if that's what he was trying, you know, to hide.” 5 Tr. 50.
. The court is troubled by Dorula’s answer to one question:
Q. Mr. Holmes had guaranteed the notes prior to this.
A. Yes.
Q. But he was not willing to guarantee these notes.
A. Correct.
Q. Okay. And what, if anything, did you do as a result of learning that?
A. Well, seeing that there was still indicated that there was great opportunities, the investors were very pleased with receiving a, you know, fourteen percent, you know, monthly payment, which they got timely every month. I knew that they were still interested in invest — they. I understood that Moak, Townsend, Aunon, you know, would be interested in this twelve-month note, because Aunon and Townsend had to come back, because they were the ones that were paid off early.
And so talking with Spencer — talking with Mr. Brand trying to figure out, you know, the solution to this problem, we couldn’t very well get a lien on every property, because that would take forever for the properties, because they’re moving in and out, in and out, in and out, and we’d be signing, you know, the documents. So this is the type of security agreement that we came up with in hopes that it would provide the collateral for the loans.
5 Tr. 58-59.(emphasis added).
If Dorula and his friends did not expect a lien on the real estate, then they were not harmed when they did not get it. An equitable lien would not attach in nonbankruptcy litigation and equitable subordination on this *626basis might not be available. The court finds that the Dorula lenders intended to, and thought that they obtained, a lien on the real estate as is expressly stated in the security agreement. See 5 Tr. 66-68. They thought that because Starlight frequently purchased and sold a property at back-to-back settlements or in a matter of days, that the additional paperwork associated with creating a deed of trust and releasing it would be difficult to accomplish in the brief period of time available and could slow down the process. Slowing down the process did not hurt the Dorula investors. Their money was committed, and interest was to be paid on it, for one-year periods whether it was being used in a transaction or was sitting in Starlight’s bank account. Slowing down the process did hurt Starlight because it slowed the turn-over of the funds available and could affect transactions that Holmes wanted to do. In light of this, they sought another way to obtain a lien on real'estate, as the security agreement expressly states. The mechanism was the security agreement. It was the wrong mechanism and was ineffective to achieve the Dorula investor’s objective of a lien on real estate. Brand and Holmes knew this because they were licensed real estate agents and well experienced in real estate transactions. Dorula and his friends did not recognize this. This situation is very similar to the situation described by the Supreme Court in Sexton v. Kessler & Co., Ltd., 225 U.S. 90, 32 S.Ct. 657, 56 L.Ed. 995 (1912). The Supreme Court stated:
The parties were business men, acting without lawyers, and in good faith attempting to create a present security out of specified bonds and stocks. Their conduct should be construed as adopting whatever method consistent with the facts and with the rights reserved is most fitted to accomplish the result. If an express declaration of an equitable lien, or, again, a statement that th,e New York firm constituted itself the servant / of the English company to maintain possession for the latter, or that it held upon certain trusts, or that a mortgage was intended, or any other form of words, would effect what the parties meant, we may assume that it was within the import of what was done, written, and said.
Id. at 96-97, 32 S.Ct. 657.
In Sexton, the debtor represented to its lender that certain securities had been set aside as collateral for draws on a line of credit. The debtor had the right to substitute the collateral, at its discretion, with collateral of equal value. Id. at 95, 32 S.Ct. 657. The debtor delivered the collateral to the lender before it filed bankruptcy, but within the preference period. The trustee in bankruptcy unsuccessfully brought a preference action against the lender. Id. at 96, 32 S.Ct. 657. The Supreme Court affirmed because there was an equitable lien in favor of the lender. Id. at 98-99, 32 S.Ct. 657.
The idea that recording a deed of trust and releasing it on every transaction would slow down the process is erroneous. There would have been little extra effort on the part of a settlement agent to complete and record a deed of trust in a standard form acceptable to the Dorula lenders or the release. Releases are not ordinarily delivered at the closing. Releases from banks typically trail the closing by several weeks. Recording deeds of trust required paying the recording tax. The state recording tax was 25<t per $100 of the loan and the local recording tax was one-third of the state recording tax. Va.Code (1950) §§ 58.1-803A and 58.1-3800. This would have cost Starlight $333 for every $100,000 of a loan secured by a deed of trust, a relatively large expense for using the money for a few days or weeks. For comparison purposes, if a borrower paid $333 in interest on a $100,000 loan outstanding for one year, the interest rate would be .333%. If the loan were outstanding for one month, the interest rate would be 4.00%. If the loan were outstanding for one week, the interest rate would be 17.00%. Starlight intended to, and did in most cases, flip the properties within a matter of days or a few weeks. For examples of the computation of the recording tax on sales by Starlight to third parties, see, inter alia, Ex. PP at 4-5, 8-9 ($1,276.67 on a deed of trust securing $383,000; $1,316.93 on a deed of trust securing $395,000).
. Holmes explained that he could act as either party's agent or both because the main issue in each short sale transaction was at the price the bank would accept. The seller only wanted to be rid of the property without a deficiency and the buyer wanted to purchase the property at the lowest price possible. Holmes attempted to achieve both objectives. Ex. B at 262:12-263:2.
. One unarticulated assumption of the Holmes Model was that a short sale purchaser would be ready, willing and able to close on the short sale when the bank approved it. The long approval time and the uncertainty of the process are discouraging to individuals who would like to purchase a home to live in. They must remain committed to the transaction for a lengthy and uncertain period of time, be prepared to renegotiate the purchase price, maintain a loan commitment and make living arrangements with a landlord (or the sale of their home) for an indefinite period. These conditions differ from conventional purchasers who would like to move into their new home as soon as possible. Starlight with, in effect, an open line of credit was the ideal short sale purchaser.
.Brand testified:
A. .. .Then Starlight sold that property ... Greg would send me an e-mail saying here's what the gross profit is on that, split it, and — according to the following formula.
Q. Okay. Why was it Greg Holmes sending you that e-mail; why weren't you able to do those calculations yourself?
A. Because Greg was really the driving force behind making this work. And I chose to go along. And that’s why.
2 Tr. 188.
. In some instances, Holmes personally paid off the second deed of trust or paid the settlement demanded by the second trust holder in order to complete the transaction. Holmes conceded that these obligations were not included on Exhibit OO and thus the calculation of the profit. He filed a proof of claim for the payment he made of second deeds of trust but withdrew the proof of claim. See Claim No. 10. These undisclosed payments by Holmes decrease the profits otherwise calculated.
. Starlight’s Statement of Financial Affairs states that Starlight paid Mrs. Brand $58,768 and Mrs. Holmes $71,013. Statement of Financial Affairs, Question 23. Holmes testified that the profits paid to him were, at his instructions, reduced by the amount he instructed be paid to his wife.
. Holmes wanted to reduce the interest Starlight paid and put more of his money in *630Starlight which meant paying Moak's note when it matured. He testified:
I was making money, and the business was going well, I then had excess money and, therefore, I had to put my money somewhere. Unless I could get nineteen percent interest, instead of having to borrow more money at Starlight, it made sense for me to put my money — loan my money to Starlight, and then it became so to the point where it built up so there was 900,000 dollars of my money in there. It just built up to that point. The fund at that point had north of two — two million dollars in it. I didn't see the need for two million dollars in the fund.
I then said, well, let’s- — let's remove the other money that’s nineteen percent out of the fund. I think Mr. Brand had a discussion with Mr. Moak. Mr. Moak wanted to reinvest, and he then told Mr. Moak, well, we don't want you — we don’t want to take your money at nineteen percent. And he goes what are you talking about I'm only getting fourteen percent. And he said no, Mr. Dorula’s getting five percent override on every dollar that you have invested. And Mr. Moak said, heck with Mr. Dorula, I’ll take twelve percent. I want to put the money back in, I know it's a safe place to put it back in.
So Mr. Brand came to me and said do you want to take a half a million dollar note from Mr. Moak at twelve percent with no override to Mr. Dorula. And I said, what I want is to get rid of the nineteen percent money altogether. Mr. Brand said to me, if we get — if we start giving money back, they're all — they will never give us money again. I said at that point, I don’t care if they give us money again; my model is now have a two-year track record and we do not have to pay nineteen percent for money.
2 Tr. 137-138.
Holmes’ decision to reduce reliance on high-inlerest loans and to retire the loans from the Dorula lenders raised questions in Dorula's mind about Starlight's business. He instructed Brand that he was not to reinvest the loans in new purchases after August 2011. 5 Tr. 228-230. Dorula also testified that he and his friends would have continued lending during a workout at reduced rates. The court questions whether Dorula had made the decision to pull the plug on Starlight, but is satisfied that he was willing to stay in to fund a work-out.
. Dorula testified:
Q. And what took place at that meeting?
A. Mr. Holmes comes in with a stack of material and we go into a conference room. And he was extremely upset and was telling me that Brand is — Brand's deranged, that— Q. Mr. Brand is what?
A. Deranged.
Q. Deranged.
A. Deranged.
Q. Okay.
A. And that he’s losing it. He stole all this money. He's just — Mr. Holmes just found out that Mr. Brand staled [sic] all this money and — and then he started showing me different documents that he was trying to *631prove that this took place, that he didn’t know about it.
Q. What documents did Mr. Holmes show you?
A. They were the — we didn't go through all of the documents that he had, but he showed me the exhibit that we have where it's Mr. Holmes' pencil numbers. And that’s what we discussed more at that time. And I don't know the number of that exhibit.
Q. Okay. But what was the nature of the document that you're referring to that Mr. Holmes gave you?
A. It was to show what properties are out in — to be sold and the debts of all of the investors that he knew of.
Q. And what was the purpose, if you — did you have any understanding what the purpose was in Mr. Holmes showing you that document? Why did he show it to you, if you know?
A. I’m sure I would be speculating, but I— there was — to me, for — okay. Wait a minute. Let me- — this is — this is where I — I like facts. I don't like emotion. I like to get the facts, and I saw Mr. Holmes had a lot of emotion. And — but what came out of that was that it appeared that Mr. Holmes was using the word "we” more than I was comfortable with. And the “we” was that he was now placing himself as part of the lenders and not as part of, you know, the partnership, if you will, between him and Starlight and the entity that he placed in this transaction, or his model, to receive these funds. So I was quite taken by that, surprised, and didn't under — so that was the first meeting.
5 Tr. 76-77.
. Dorula was examined by his counsel about the meeting. He testified:
A. ... So [Townsend, Olinger and I] went over to meet with Greg [Holmes], and Greg was providing, again, information that he wanted to share with us. I stayed after they had left and explained to Greg that I think there is a way that this can be worked out, and that based on the properties and based on the funds that he still has use for, I could get the agree — the investors to agree that we could continue with this process.
However, Holmes would have to give up his profits by putting it back in, you know, and then could be used to purchase additional property, which I still thought it was a good deal, because personally I was showing him that you're still receiving three commissions on these short sales. I’m just asking leave the profit in and we can start building 'this up, whatever is missing. We still didn't know what was miss,ing.
Q. Had you analyzed the properties that Starlight had [and] its capital requirements before making that proposal to Holmes?
A. This was just based on Holmes’ numbers—
Q. Okay.
A. —that he provided to me. And it made sense from the standpoint of I knew the lenders — the investors’ loan amount, and I could see from the sheet that he provided that he had the exact purchase price of the properties that were still to be sold.
Q. Okay. So based on the information Holmes gave to you, you proposed a plan that would work out—
A. Just a scenario, you know, to show how we could continue, and to his benefit he would continue to get the commissions, plus he would be able to have these lenders who were still pleased. I mean, you know, you’re getting a cash payment every month, and they still wanted to do that. Even if it was at ten percent they would probably still do that. And that’s what — I mean, part of this was to get them to reduce, you know, that commission down or the interest down.
My commission would go away. I wouldn’t be getting anything on this. We would just continue to build up. Greg’s response to me after I presented this was, wait a minute, that's my profit. And at— and that was when I was more than shocked and, you know, tried to explain to him that if it wasn’t for this money, you wouldn't have had any of this profit. And he just said, this is my profit, and would not give up on that profit. That’s what that note is coming from.
5 Tr. 78-80.
. Starlight owned four more properties from its first real estate venture. Starlight listed eight properties on its schedules when if filed bankruptcy. Each of the four from the Starlight’s first real estate venture was encumbered by a deed of trust. The trustee abandoned them.
. The remaining properties became properties of the estate when the bankruptcy was filed. See In re Starlight Group, LLC, No. 11-18241-RGM, Schedule A (listing the four properties held in Starlight’s name).
. Holmes testified:
Q. ... And do I understand from your earlier testimony that had things gone very horribly wrong, and should there have been a loss suffered, that you would not have asked Brand to — or Starlight to pay any of the deficiency?
A. Correct.
Q. You were going to cover all losses — ■
A. Correct.
Q. —of the transaction. Okay.
1 Tr. 55:15-22.
Q. You were going to cover any losses that occurred. Is that correct?
A. Correct. He [Brand] had upside but no downside.
1 Tr. 49:18-20.
. For Dorula’s perspective, see 5 Tr. 86 ("We came in at your [Holmes’] direction. You were controlling everything. If one of your people that you put in place did something, you bear responsibility, was my feeling.”).
. Bankruptcy Code § 510(c)(1) states:
[Ajfter notice and a hearing, the court may ... under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of any other allowed claim or all or part of an allowed interest to all or part of another allowed interest ...
. Brand testified:
Q. So let me ask you at this point. Can you *637tell me whether or not you understood that should there be some complete catastrophe and Starlight was very suddenly insolvent that the money would first go to those who had given security agreements to before Mr. Holmes was repaid any money on his loans?
A. Oh, yes, absolutely.
2 Tr. 200. ■
Q. Mr. Brand, in response to one of the Court's questions, you said that, we understood that the new lenders would be in a preferred position.
A. Yes.
Q. I have two questions. When you say "we”, whom did you mean?
A. Me and Greg Holmes, and the lenders themselves believed that—
Q. Okay.
A. —the secured lenders.
4 Tr. 194.
Dorula testified:
Q. Okay. And did you understand that you and the other investors who took these notes with the security agreements would be in a preferred position as opposed to other general creditors?
A. Yes.
Q. And why did you think that?
A. The way that the wording is in the agreement, that they would not be able to take— do any actions that would violate' this agreement and that would cause any property not to be available for our collateral and for — that they would not allow liens and all of the other actions that could be taken against the assets.
Q. Could you tell me whether or not that, based on the security agreement, you understood that you would be paid ahead of other general creditors from Starlight funds?
A. Yes.
5 Tr. 68.
. There has been no request to determine the priority of any of the Dorula lenders as among themselves. They appear to accept that all share pro rata and without priority among themselves.
. Va.Code (1950) § 8.9A-201(a) states:
General effectiveness. Except as otherwise provided in the Uniform Commercial Code, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.
. The first guarantees were only for the particular note he guaranteed. He did not issue a blanket guarantee for future indebtedness.
. When asked whether Holmes knew about the security agreements Starlight was giving to its lenders, Brand testified that he did know "from the very beginning, because that enabled him to withdraw his personal security&emdash;his personal guarantee.” 2 Tr. 199. When asked how he knew that Holmes knew about the security agreements, Brand testified that they had “many discussions,” ... "saw them,” ... "understood how the money was coming in, he understood what percentage interest rate we were paying, what finder's fees we were paying, and he understood the security agreement.” 2 Tr. 200.
.Brand testified:
Q. So let me ask you at this point. Can you tell me whether or not you understood that should there be some complete catastrophe and Starlight was very suddenly insolvent that the money would first go to those who had given security agreements to before Holmes was repaid any money on his loans?
A. Oh, yes, absolutely.
Q. Why do you say that?
A. Because that's the way that we structured it, and I believe that’s the way that we all understood it.
2 Tr. 200-201.
. The Dorula lenders’ equitable liens are a prepetition property rights.
. An individual creditor seeking to assert a claim of equitable subordination as to its claim must assert a particularized injury distinct from that of the estate as a whole. See In the Matter of Vitreous Steel Products Co., 911 F.2d 1223, 1231 (7th Cir.1990) ("[Ijndividual creditors must have an interest -in subordination separate and apart from the interests of the estate as a whole.”); Nobska Venture Partners I, LLP et al. v. WWC Capital Fund II, LP et al., 2011 WL 806097, 2011 Bankr. LEXIS 815 (Bankr.D.Md.2011); In re Elrod Holdings Corp., 392 B.R. 110, 114-115 (Bankr.D.Del.2008) (finding that a secured creditor with injury different from that of the estate as a whole had standing to bring a claim for equitable subordination to its claim). In this case, Dorula has shown an injury to himself and the other Dorula lenders, each of whom also had a security agreement, but not the other unsecured creditors.
Although both the Mellettis and the Dorulas assert a claim of equitable subordination of Holmes' claims to the claims of all other unsecured creditors in their objections to Holmes’ proofs of claims and Dorula sought the same relief in his complaint, relief is only granted as to those particular creditors for their particular injury. The trustee does not have exclusive standing to bring these actions. See, St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir.1989) (“If a claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim, and the creditors are bound by the outcome of the trustee’s action.”); In re PHP Healthcare Corp., 128 Fed.Appx. 839, 844-45 (3d Cir.2005) (stating that "an individual creditor of a debtor may not assert a general claim belonging to all creditors.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498341/ | MEMORANDUM OPINION AND ORDER DENYING MOTION TO COMPEL AND REQUIRING THE DEBTORS TO AMEND THEIR SCHEDULE C — PROPERTY CLAIMED AS EXEMPT
Judge Neil P. Olack, United States Bankruptcy Judge
This matter came before the Court for hearing on May 14, 2015 (the “Hearing”) on the Motion to Compel (the “Motion to Compel”) (Dkt.42) filed by Locke D. Barkley, the standing chapter 13 trustee (the “Trustee”), and the Objection to Motion to Compel (the “Response”)1 (Dkt.48) filed by the debtor, Samantha Dye Scott (“S. Scott” or, together with Ollie Leon Scott, Sr., the “Debtors”), in the above-styled bankruptcy case (the “Bankruptcy Case”). At the Hearing, W. Jeffrey Collier (“Collier”) appeared on behalf of the Trustee, and Amanda G. Hill (“Hill”) of the law firm, Chhabra & Gibbs, P.A. appeared on behalf of S. Scott. The Court, being fully advised in the premises, finds as follows:
Jurisdiction
The Court has jurisdiction over the parties to and the subject matter of this case pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (0). Notice of the Motion to Compel was proper under the circumstances.
Facts
1. On October 8, 2014, the Debtors filed a joint petition for relief (the “Petition”) (Dkt.l) pursuant to chapter 13 of the Bankruptcy Code.
2. On October 23, 2014, the Debtors filed their statements and schedules regarding their current income, expenses, and creditors. (Dkt.12). On Schedule B— Personal Property, the Debtors listed a “Claim for personal injuries” as a contingent and unliquidated claim with a current value of “unknown.” (Id. at 5-6). The Debtors listed the contact information of Chhabra & Gibbs, P.A. under the description of the “Claim for personal injuries.” On Schedule C — Property Claimed as Exempt (the “Original Schedule C”) (Id. at 8), the Debtors did not list any property regarding a claim for personal injuries or a worker’s compensation claim nor did the Debtors otherwise mention the law firm of Chhabra. & Gibbs, P.A.
3. On December 4, 2014, the Debtors filed Schedule B — Personal Property— Amended (the “Amended Schedule B”) (Dkt. 34 at 1-4) and Schedule C — Property Claimed as Exempt — Amended (the “Amended Schedule C”) (Id. at 5). In Amended Schedule B, the Debtors changed the description “Claim for personal injuries” to “workers compensation claim.” In Amended Schedule C, the Debtors added the following property:
*642[[Image here]]
(Id.)
2
4. On March 12, 2015, the Trustee filed the Motion to Compel requesting the Court to issue an order compelling Chha-bra & Gibbs3 to file an application for approval to be employed as counsel for S. Scott in compliance with 11 U.S.C. § 327,4 § 328, and Rule 2014.
5. On May 4, 2015, Hill filed the Response on behalf of S. Scott. In the Response, Hill requested the Court to deny the Motion to Compel because § 327 and § 328 are not applicable to an attorney representing a debtor in pursuing a worker’s compensation claim because such claims are exempt under Miss. Code Ann. § 71-&43.
6. At the Hearing, Collier and Hill stipulated that the Scott Worker’s Compensation Claim has been pending since before the Petition date and that it is S. Scott, and not the Trustee, who is pursuing that claim. Collier argued that while the claim may be subject to exemption from distribution to creditors, it is still an asset of S. Scott’s bankruptcy estate. Collier also stated that he understands there is the potential for a settlement of the Scott Worker’s Compensation Claim that would require approval of the Bankruptcy Court. Hill contrarily argued that because the Scott Worker’s Compensation Claim is exempt under Mississippi law, Chhabra & Gibbs is not subject to any of the Bankruptcy Code’s provisions regulating the employment of attorneys, the compensation of attorneys, or the disclosure and approval of settlements or compromises.
Discussion
In the Motion to Compel, the Trustee requests the Court to compel Chhabra & Gibbs to file an application to be em*643ployed as special counsel in compliance with § 327, § 328 and Rule 2014. At the Hearing, the Trustee specifically argued that Chhabra & Gibbs is required to file an application to be employed under § 327(e), which governs the employment of special counsel. Hill, on the other hand, argued that because the Scott Worker’s Compensation Claim is exempt under state law, Chhabra & Gibbs is not subject to § 327(e) or any of the Bankruptcy Code’s provisions regulating the employment of attorneys, their compensation, or the settlements of claims. The Court initially notes that by filing the Petition, the Debtors subjected themselves to the jurisdiction of this Court and its authority under the Bankruptcy Code. See Stanley v. Trinchard, 579 F.3d 515, 519 (5th Cir.2009) (“The subject of bankruptcy falls within the express constitutional powers of Congress, and bankruptcy law therefore takes precedence over state laws under the Supremacy Clause.”) (citing U.S. Const., art. VI). Thus, the Debtors are subject to the Bankruptcy Code’s applicable provisions, including those regulating their employment of counsel and their pursuit of causes of action, without regard to conflicting state law. With that being said, for the reasons stated later in this Opinion, the Court finds that S. Scott’s employment of Chhabra & Gibbs is not subject to the requirements of § 327, § 328, or Rule 2014.
Before considering the applicability of § 327, § 328, and Rule 2014 to S. Scott’s employment of Chhabra & Gibbs in pursuing the Scott Worker’s Compensation Claim, the Court discusses the Debtors’ Amended Schedule C and the general procedure for claiming property as exempt. When a debtor files a petition for relief under the Bankruptcy Code, “all legal or equitable interests of'the debtor in property as of the commencement of the case” generally becomes property of the bankruptcy estate. 11 U.S.C. § 541(a)(1). Property of the estate includes any pre-petition causes of action belonging to the debtor and their proceeds. See Wischan v. Adler (In re Wischan), 77 F.3d 875, 877 (5th Cir.1996). The debtor may then be able to reclaim certain property from the bankruptcy estate by claiming it as exempt. 11 U.S.C. § 522; In re Pace, 521 B.R. 124, 126 (Bankr.N.D.Miss.2014); Viegelahn v. Frost (In re Frost), 744 F.3d 384, 386-87 (5th Cir.2014). A debtor is required to list the property claimed as exempt in their bankruptcy schedules. 11 U.S.C. § 522(i); Fed. R. Bankr. P. 4003(a). Pursuant to § 522(i), property claimed by the debtor as exempt will be determined excluded from the bankruptcy estate “[u]n-less a party in interest objects.” 11 U.S.C. § 522(i). Rule 4003(b) establishes the deadlines for objections to a debtor’s claimed exemptions. Fed. R. Bankr. P. 4003(b). Under Rule 4003(b), a party in interest may object to a debtor’s exemption within thirty (30) days after (a) the § 341(a) meeting of creditors is concluded or (b) after the list of property claimed as exempt is amended, whichever is later. Id.
Here, the Debtors did not list the Scott Worker’s Compensation Claim on Original Schedule C. Instead, on December 4, 2014, the Debtors filed Amended Schedule C, which lists the Scott Worker’s Compensation Claim as property claimed as exempt. Rule 1009(a) provides, inter alia, that a debtor may amend any list, schedule or statement “as a matter of course at any time before the case is closed” but that the debtor must “give notice of the amendment to the trustee and to any entity affected thereby.” Fed. R. Bankr. P. 1009(a). According to the Advisory Committee Note to Rule 1009(a), this notice requirement “is particularly important with respect to any amendment of the schedule of property affecting the debtor’s claim of exemptions.” Fed. R. Bankr. P. 1009, Advisory Committee Note (1983).' *644To ensure that the notice required under Rule 1009(a) is properly given, this Court adopted Local Rule 4003-l(a) (“Local Rule 4003-l(a)”), which provides:
Any amendment to a claim of exemptions pursuant to Fed. R. Bankr. P. 1009 and 4003 shall be filed and served by the debtor on the trustee, the United States Trustee, and all creditors, together with a notice of amendment which states a party in interest may file an objection to the list of property claimed as exempt within the later of (i) 30 days after the meeting of creditors held under section 341(a) is concluded or (ii) 30 days after any amendment to the list or supplemental schedules is filed. The debtor also shall file a certificate of service reflecting that the amendment and notice of amendment were duly served.
Miss. Bankr. L.R. 4003-l(a). In the Bankruptcy Case, the Debtors filed Amended Schedule C, but apparently did not serve the Trustee, the United States Trustee, or all of the Debtors’ creditors with a copy of Amended Schedule C or a notice of the amendment providing the deadlines for objecting to the list of the property claimed as exempt. Indeed, the Debtors have never filed a certificate of service reflecting that Amended Schedule C and an accompanying notice were duly served. For these reasons, the Court finds that the Debtors have not properly amended Original Schedule C under Rule 1009 or Local Rule 4003-l(a). As such, the Debtors have failed to properly claim the Scott Worker’s Compensation Claim as exempt. Accordingly, the Court finds that the Debtors should amend their Original Schedule C again to list the Scott Worker’s Compensation Claim as exempt in compli-anee with the provisions of Rule 1009 and Local Rule 4003-l(a) within fourteen (14) days from the date of this Opinion.
Having addressed the Debtors’ Amended Schedule C and the general procedure for claiming property as exempt, the Court will now turn to the Motion to Compel and § 327, § 328, and Rule 2014. Section 327(e) provides:
The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed
11 U.S.C. § 327(e) (emphasis added). The Trustee requests the Court to apply this subsection to S. Scott, who is neither a trustee nor a person on whom the Bankruptcy Code imposes the functions and duties of a trustee.5 The Court begins its analysis of § 327(e) by noting that “Congress ‘says in a statute what it means and means in a statute what is says there’ ... [and that] when ‘the statute’s language is plain, ‘the sole function of the courts”&emdash;at least where the disposition required by the text is not absurd&emdash;‘is to enforce it according to its terms.’ ” Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (quoting other sources) (internal quotation marks omitted).
In support of Trustee’s position that § 327(e) applies to a chapter 13 debtor’s employment of special counsel despite the *645language of the statute, she cites In re Goines, 465 B.R. 704 (Bankr.N.D.Ga.2012), a case in which a bankruptcy court held that a chapter 13 debtor must file an application to employ special counsel under § 327(e). The bankruptcy court in Goines concluded that a chapter 13 debtor was subject to the § 327(e) requirement to file an application to employ special counsel because the “statutory scheme would make no sense if the Chapter 13 debtor had the authority to pursue, control, litigate and settle pre-petition claims, but the duty to file the application to employ special counsel under § 327 was on the Chapter 13 trustee.” 465 at 707. According to the Goines court, a chapter 13 trustee’s unfamiliarity with the debtor’s claim would impede the trustee’s ability to comply with § 327(e) and Rule 2014 and' allowing a trustee to file such an application would expand the trustee’s duties beyond those provided in § 1302. Id. at 707-08.
The Court does not find Goines persuasive. To the contrary, the Court agrees with the bankruptcy court’s analysis of Goines and § 327(e) in In re Jones, 505 B.R. 229 (Bankr.E.D.Wis.2014). As the Jones court stated, the bankruptcy court in Goines “fell victim to the fallacy of false choice.” 505 B.R. at 232-33. In a situation where a chapter 13 debtor is employing special counsel, the correct approach is that neither the trustee nor the debtor has to seek court approval under § 327(e). Id. Nothing in the Bankruptcy Code suggests that the term “trustee” used in § 327(e) is intended to include a chapter 13 debtor. Id.; In re Powell, 314 B.R. 567, 569-70 (Bankr.N.D.Tex.2004) (“Section 327, both subsections (a) and (e), apply only to ‘the trustee.’ Chapter 13 does not decree that a Chapter 13 debtor has the rights or performs the functions or duties of a trustee.”); 3 Collier ON BANKRUPTCY ¶ 327.01 (16th ed. 2015) (“Because section 327 addresses the retention of professionals by a trustee, it does not by its terms apply to the retention of professionals by a debtor that is not a debtor in possession. Thus, a debtor in a case under chapter 7 or chapter 13 does not need court approval before retaining counsel.”); see also Hartford Underwriters Ins. Co., 530 U.S. at 8,120 S.Ct. 1942 (“[The] theory — that the expression of one thing indicates the inclusion of others unless exclusion is made explicit — is contrary to common sense and common usage.”) Therefore, the Court finds that S. Scott is not required to file an application to employ Chhabra & Gibbs pursuant to § 327.
By its terms, § 328 only applies in scenarios where a professional person is employed under § 327 or § 1103. 11 U.S.C. § 328. Thus, because the Court finds that S. Scott’s employment of Chhabra & Gibbs is not subject to § 327, it follows that § 328 is also inapplicable to the current situation. Likewise, Rule 2014 only applies in scenarios where a professional person is employed under § 327, § 1103, or § 1114, and, thus, is also inapplicable to Chhabra & Gibbs in this instance. Consequently, the Court finds that the Motion to Compel should be denied.
Nevertheless, as the court in Jones noted, special counsel employed by a chapter 13 debtor may still be subject to bankruptcy court oversight through other sections of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure. For example, § 329 requires, inter alia, that any attorney employed by a debtor “in connection with” a case under the Bankruptcy Code “shall file with the court a statement of the compensation paid or agreed to be paid ... and the source of such compensation.” 11 U.S.C. § 329(a). “If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive.” Id. This disclosure under § 329 and *646Rule 2016(b), which implements § 329, is required, regardless of whether the attorney will seek compensation from the estate. In re Ortiz, 496 B.R. 144, 148 (Bankr.S.D.N.Y.2013); 3 Collier on BANKRUPTCY ¶ 329.01-02 (16th ed.2015). The purpose of § 329 is to enable bankruptcy courts to “prevent overreaching by debtors’ attorneys and give interested parties the ability to evaluate the reasonableness of the fees paid.” Ortiz, 496 B.R. at 149 (quoting another source) (citations omitted); see also In re Hackney, 347 B.R. 432, 442 (Bankr.M.D.Fla.2006) (“Congress stated in its legislative history ‘payments to a debtor’s attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor’s attorney, and should be subject to careful scrutiny.’ ”) (quoting H.R.Rep. No. 95-595, at 329 (1977), as reprinted in 1978 U.S.C.C.A.N. 5787, 6285)).
Another section of the Bankruptcy Code that may govern special counsel employed by a chapter 13 debtor is § 330(a)(4)(B), which requires the approval of post-petition payments if they are made from property of the debtor’s bankruptcy estate. 11 U.S.C. § 330(a)(4)(B); In re Cahill, 478 B.R. 173, 176 (Bankr.S.D.N.Y 2012). Further, in the event the Scott Worker’s Compensation Claim is deemed non-exempt and, thus, property of the estate, the potential settlement that Collier mentioned at the Hearing may also be subject to bankruptcy court oversight through Rule 9019. Cf. Peterson-Marone Const., L.L.C. v. McKissack (In re McKissack), 320 B.R. 703, 723, n. 11 (Bankr.D.Colo.2005) (“Rule 9019 is not applicable here because these cases do not deal with motions by trustees to compromise causes of action of the estate.”); In re Barger, No. 01-41926-PWB, 2005 WL 174880, at *1 (Bankr.N.D.Ga. Jan. 21, 2005) (“The claims that are being compromised are not property of the estate, and ... therefore, Fed. R. Bankr. P. 9019 is not applicable.”); see also In re Woodmar Realty Co. v. McLean (In re Woodmar Realty Co.), 306 F.2d 479, 480 (7th Cir.1962) (explaining that a debtor is free to negotiate and settle claims with funds that are not part of its bankruptcy estate).
At this juncture, however, the only issue properly before the Court is whether Chhabra & Gibbs’ employment is subject to § 327, § 328, and Rule 2014. As the Court previously stated, the Debtors are required to amend their Original Schedule C again in compliance with the provisions of Rule 1009 and Local Rule 4003-l(a) within fourteen (14) days from the date of this Opinion. In accordance with Rule 4003(b)(1), parties in interest will then have thirty (30) days to object to the amended list of property claimed as exempt or request an extension of the time in which to file an objection. See Fed. R. Bankr. P. 4003(b)(1). If a party in interest objects, then the Court will determine whether the property claimed as exempt is properly exempt. On the other hand, if no party in interest objects or requests an extension of time to object within the thirty (30) day time limit, then the Scott Worker’s Compensation Claim and its po-' tential proceeds will become exempt pursuant to § 622(Z). 11 U.S.C. § 522(l); see Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). Once the Debtors properly list the Scott Worker’s Compensation Claim as exempt property and any objections are resolved, the Trustee may then file a motion requesting the Court to issue an order compelling Chhabra & Gibbs to comply with any section of the Bankruptcy Code or any Federal Rule of Bankruptcy Procedure that she believes is proper.
Conclusion
For the foregoing reasons, the Court finds that § 327, § 328, and Rule 2014 do *647not apply to Chhabra & Gibbs, special counsel employed by S. Scott. Therefore, the Motion to Compel should be denied. The Court, however, notes that Chhabra & Gibbs may be subject to bankruptcy court oversight through other sections of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure.6 The Court further finds that the Debtors’ Amended Schedule C does not comply with the provisions of Rule 1009 and Local Rule 4003-1(a), and, thus, the Debtors should amend their Original Schedule C again in order to comply with said provisions.
IT IS, THEREFORE, ORDERED that the Motion to Compel hereby is denied.
IT IS FURTHER ORDERED that the Debtors shall hereby amend their Original Schedule C again in compliance with the provisions of Rule 1009 and Local Rule 4003-1(a) within fourteen (14) days, from the date of this Opinion.
SO ORDERED.
. Although the Response is labeled as an "Objection to Motion to Compel," the Court determines that the true nature of the document, according to its substance rather than its label, is a response to the Motion to Compel. See Armstrong v. Capshaw, Goss & Bowers, LLP, 404 F.3d 933, 936 (5th Cir.2005) ("[W]e have oft stated that ‘the relief sought, that to be granted, or within the power of the Court to grant, should be determined by substance, not a label.' ”) (citing Edwards v. City of Houston, 78 F.3d 983, 995 (5th Cir.1996) (quoting Bros. Inc. v. W.E. Grace Mfg. Co., 320 F.2d 594, 606 (5th Cir.1963)).
. Hereinafter, the Court will refer to this added property as the "Scott Worker's Compensation Claim.”
. In the Motion to Compel, the Trustee actually requests the Court to compel Hill and Chhabra & Gibbs, P.A. to file an application for approval to be employed as special counsel. For simplicity and clarity and because Hill is an attorney with Chhabra & Gibbs, P.A., the Court will refer to Hill and Chhabra & Gibbs, P.A. collectively as "Chhabra & Gibbs.”
.Hereinafter, unless otherwise noted, all code sections refer to the Bankruptcy Code found at title 11 of the United States Code, and all rules refer to the Federal Rules of Bankruptcy Procedure.
. Cf. 11 U.S.C. § 1107(a) ("[A] debtor in possession ... shall perform all the functions and duties ... of a trustee serving in a case under this chapter.); 11 U.S.C. § 1203 (“[A] debtor in possession shall have all the rights, other than the right to compensation under section 330, and powers, and shall perform all the functions and duties, except the duties specified in paragraphs (3) and (4) of section 1106(a), of a trustee serving in a case under chapter 11.”).
. The Court notes that the code sections and rules listed as examples in this Opinion are not intended to be exhaustive. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498342/ | ORDER AND OPINION
ROBERT L. PITMAN, District Judge.
Appellant James Corletta appeals the entry of summary judgment in favor of Appellee Texas Higher Education Coordinating Board (“THECB”). For the reasons that follow, the Court affirms the Bankruptcy Court’s grant of summary judgment.
BACKGROUND
The instant appeal concerns whether Corletta’s guaranties of student loans borrowed from the THECB survived his *649Chapter 7 discharge in 1997. When the THECB filed a state court lawsuit in 2011 to collect on Corletta’s guaranty, Corletta moved to reopen his bankruptcy case, seeking a ruling that this debt was discharged in 1997. The background of this case has been thoroughly discussed by the Bankruptcy Court. What follows is an abbreviated overview of the facts particularly relevant to this appeal.
The THECB is an agency of the State of Texas that administers state-sponsored student loan programs. See Tex. Educ. Code AnN. §§ 52.01 et seq., 61.021; 19 Tex. Admin. Code §§ 21.5Í-21.64. It is authorized by the state legislature to issue and sell general obligation bonds of the state of Texas to fund certain loan programs for Texas residents who pursue higher education within the state. See Tex. Const. art. Ill, § 50b-4-50b-7. One such program is the College Access Loan (“CAL”) Program, which exists to “provide[ ] alternative educational loans to Texas students who are unable to meet the cost of attendance.” College Access Loan (CAL) Fact Sheet, Texas Higher Education Coordinating Board, http://www.hhloans.com/index. cfm?ObjeetID=21A41908-C7D3-A868-66 FB91774CF078CB (last visited May 4, 2015). CAL loans often require co-signers, and like all loan programs administered by the THECB, the co-signer “assumes all Lability for the debt and all fees and expenses associated • with the note.” 19 Tex. Admin. Code § 21.53.
In 1993 and 1994, Corletta co-signed three CAL loan promissory notes for his friend Joan Durbin. Each loan agreement contained the following provision regarding co-signors:
This is a guaranty of payment and not of collection. If for any reasons other than death or permanent and total disability of Borrower, the adjacent Borrower’s [ie., co-signer’s] Promissory Note is not paid promptly when due, I will immediately pay the source to the Lender, and I waive any right I might have to require that any action be brought against the Borrower.
(Adv. Dkt. no. 5, Ex. 2, at 9).
In 1997, Corletta filed for Chapter 7 bankruptcy. (DR No. 5, at 9). Corletta included the $18,383.66 CAL loan debt on both his Schedule F and Schedule H, indicating that the debt was a “Co-Signed Student Loan.” Id. Shortly thereafter, the THECB entered a proof of claim on the CAL debt, stating that “[s]inee guaranteed student loans are not dischargeable except as provided for under Title 11 U.S.C. 523(a)(8), we ask that you determine the dischargeability of this debt.” (DR No. 5, at 10). No further action was taken on the CAL debt, and a few months later the Bankruptcy Court entered an order discharging all of Corletta’s dischargeable debts. (DR No. 5, at 11).
After several attempts to collect the student loan debt from Durbin and Corletta, the CAL loans were declared to be in default in November 2005. Id. In 2011, the THECB filed a state court lawsuit against Corletta to collect under the terms of his payment guaranty. Id. In 2014, Corletta filed a motion to reopen his 1997 bankruptcy case, and the Bankruptcy Court agreed to reopen the case “for the limited purposes of ruling on the limited issue of whether the debt owed to the Texas Higher Education Coordinating Board was discharged” in 1997. (Bankr. Dkt. # 28).
On April 15, 2014, the THECB filed a motion for summary judgment, which the Bankruptcy Court granted on September 8, 2014. (DR No. 28). Corletta now appeals this decision.
STANDARDS OF REVIEW
The Bankruptcy Court’s findings of fact are reviewed for clear error and its *650conclusions of law de novo. Century Indem. Co. v. NGC Settlement Trust (In re Nat’l Gypsum Co.), 208 F.3d 498, 504 (5th Cir.2000); In the Matter of Coston, 987 F.2d 1096, 1099 (5th Cir.1992). A finding of fact is clearly erroneous when “although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting United States v. United States Gypsum, Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). Additionally, the Bankruptcy Court’s denial of a Rule 56(d) motion to allow additional time for discovery will be reviewed for abuse of discretion. See American Family Life Assur. Co. of Columbus v. Biles, 714 F.3d 887, 894 (5th Cir.2013).
DISCUSSION
Corletta presents thirteen separate issues on appeal. ' (Appellant’s Brief, at 2-3). These issues amount to one central question: did the Bankruptcy Court properly grant summary judgm'ent for the THECB. For clarity, the Court will divide Corletta’s issues into five general questions: (1) whether the Bankruptcy Court erred in determining that Corletta is responsible for the underlying debt, (2) whether the CAL loan debt was dischargeable under 11 U.S.C. § 523(a)(8) in 1997, (3) whether § 523(a)(8) apples to co-signors who are not related to the borrower, (4) whether the Bankruptcy Court improperly evaluated the parties’ summary judgment evidence, and (5) whether the Bankruptcy Court erred by allowing the THECB to file an application for attorney’s fees.
A. Responsibility for the Debt
As a preliminary matter, Corletta argues that he is not responsible for the CAL loans because he did not sign the promissory notes. (Appellant’s Brief, at 45). Rather, Corletta argues that he was the victim of identity theft, or in the alternative, that the loans were not signed by an authorized member of the THECB. Id. These questions, however, are not properly before this Court. The Bankruptcy Court reopened this case “for the limited purposes of ruling on the limited issue of whether the debt owed to the Texas Higher Education Coordinating Board was discharged” in 1997, not to determine whether the debt was valid. (Bankr. Dkt. # 28). Although these questions are currently being litigated in a related state court action, for the purposes of this litigation, Corletta has stipulated that the signatures on the loan application are his and that the debt is valid.
B. Dischargeability Under 11 U.S.C. § 523(a)(8)
During most of the twentieth century, courts generally allowed for the discharge of student loan debts, just like other pre-petition unsecured debts. Richard B. Keeton, Guaranteed to Work or it’s Free!: The Evolution of Student Loan Discharge in Bankruptcy and the Ninth Circuit’s Ruling in Hedlund v. Educational Resources Institute, Inc., 89 AM. Bankr. L. J. 65, 74 (2015). In the mid-1970s, however, a growing concern about student loan discharge abuse led Congress to begin placing restrictions on the ability to discharge student loan debt through bankruptcy. Id. at 74-75. Over the next few decades Congress continued to expand these restrictions, and by 1996, the Bankruptcy Code prevented the discharge of all “educational ... loans made, insured or guaranteed by a governmental unit or nonprofit institution.” 11 U.S.C. § 523(a)(8) (1996).
Corletta’s primary argument in this action is that when he filed for bankruptcy in 1997, the law permitted him to discharge his guaranty of the CAL debt. (Appel*651lant’s Brief, at 3). The Bankruptcy Court, however, found that the CAL loan was an “educational ... loan[ ] made, insured or guaranteed by a governmental unit,” and as such fell under § 523(a)(8)’s exception to discharge. (DR No. 28, at 15-16 (quoting 11 U.S.C. § 523(a)(8))). On appeal, Corietta disputes (1) that the “educational loans” in § 523(a)(8) refer to loans issued by states, (2) that the THECB is a “governmental unit” under § 523(a)(8), and (3) that the CAL loans were made, insured, or guaranteed by a governmental unit.
1. Are the loans by the state government “educational loans” under 11 U.S.C. § 528(a)(8)?
Corietta first argues that the § 523(a)(8) exemption does not apply because in 1997 “educational loans” only referred to “certain student loan debts guaranteed or insured by the United States.” (Appellant’s Brief, at 14). Since the Bankruptcy Court agreed that the term “educational loan” is not defined in § 523(a) (8), Corietta claims that “the [c]ourt therefore erred in not looking to congressional intent to ascertain the correct,scope of the 1997 statute.” Id. But while it is true that the term “educational loan” was not defined in the statute, a court should only resort to wading through the mire of legislative intent when a statute is ambiguous on its face. Rainbow Gun Club, Inc. v. Denbury Onshore, L.L.C., 760 F.3d 405 (5th Cir.2014). Here, such an endeavor is unnecessary.
Section 523(a)(8), as written in 1997, is not ambiguous regarding whether loans provided by state governments qualify as “educational loans.” First, as the Bankruptcy Court rightly acknowledged, § 523(a)(8) contains no qualification or limitation stating that it only applies to federally funded student loans-something Congress could have easily included had it intended such a limitation. Second, the statute expressly states that it applies to any “loan made, insured, or guaranteed by a governmental unit.” 11 U.S.C. § 523(a)(8) (1997). The Bankruptcy Code defines the term “governmental unit” as the “United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States [...], a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.” 11 U.S.C. § 101(27). Interpretation of the Bankruptcy Code “is a holistic endeavor,” United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988), and as such the only sensible interpretation of § 523(a)(8) is that the loans covered by the statute extend to those made, guaranteed, or insured by the states.
2. Is the THECB a “governmental unit”?
Even if § 523(a)(8) extends to state loan programs, Corietta argues that this statute does not exempt the CAL loans from discharge because the THECB is not a “governmental unit” and therefore, its loans are not exempt.
As previously stated, any “department, agency, or instrumentality of ... a State” is considered a “governmental unit” under the Bankruptcy Code. 11 U.S.C. § 101(27). Despite Corletta’s arguments to the contrary, the THECB clearly falls under this definition. The THECB was created by the Texas State Legislature in the Higher Education Coordinating Act of 1965, later codified as Chapter 61 of the Texas Education Code. Tex. EdugCode § 61.021, et seq. Its powers and responsibilities are specifically delineated by the state legislature. Tex. Educ.Code § 61.021 (“[The THECB] shall perform only the *652functions which are enumerated in this chapter and which the legislature may assign to it”). And it is authorized to issue and sell general obligation bonds of the state of Texas to fund its loan programs. Tex. Const, art. Ill, § 50b^-50b-7. At the very least, this establishes that the THECB is an “agency, or. instrumentality” of Texas.
Corletta, however, asserts that the THECB fails several court-created tests for determining whether an entity is a governmental unit. For example, Corletta cites In re Kahl, 240 B.R. 524 (Bankr.E.D.Pa.1999)-a case which Corletta characterizes as “on all fours with Appellants’ ease.” (Appellant’s Brief, at 31-32)-for the proposition that the THECB fails the so-called “government unit test.” Id As a preliminary matter, in In re Kahl, the court was considering whether the THECB was a government agency for Eleventh Amendment purposes, not whether it was a governmental unit under the Bankruptcy Code. But even so, the court did find that the THECB was a government agency, and therefore granted the agency immunity under the Eleventh Amendment. So rather than cutting against the Bankruptcy Court’s conclusion, In re Kahl supports it.
Similarly, Corletta argues that the THECB fails the “governmental function test” articulated in TI Federal Credit Union v. DelBonis, 72 F.3d 921 (1st Cir.1995). TI Federal Credit Union involved educational loans provided by the Texas Instruments Federal Credit Union. 72 F.3d 921, at 925. The First Circuit held that in order to demonstrate that federal credit unions are instrumentalities of the United States, they must have “an active relationship with the federal government.” Id. at 931. Corletta argues that since the THECB cannot show “an active relationship with the federal government,” it cannot be a governmental unit under 11 U.S.C. § 101(27). Corletta would be correct if the present suit concerned whether the THECB was an instrumentality of the federal government. But the THECB claims to be an instrumentality of the Texas state government, meaning that it must only show that it has “an active relationship” with the State of Texas. And as the discussion above explains, it clearly does.
3. Are the CAL loans made, insured, or guaranteed by the THECB ?
Corletta next argues that the CAL loans are not insured or guaranteed by the THECB or state of Texas, and thus do not fall under § 523(a)(8)’s exception for “educational ... loans made, insured or guaranteed by a governmental unit.” (Appellant’s Brief, at 30-31). But Corletta does not dispute that the CAL loans were at least made by the THECB. As the Bankruptcy Court correctly noted, the THECB is listed on the promissory notes as the lender, making them the “maker” of the loan under any common definition. (Bankr. Op., at 21). So there is no need to determine whether the THECB guaranteed or insured the loans.1
*653C. Unrelated Cosigners
Corletta also contends that the Bankruptcy Court erred in determining that § 523(a)(8) applies to unrelated cosigners. (Appellant’s Brief, at 25). The language of § 523(a), however, provides that it applies to “individual debtor[s]”&emdash; making no distinction between student debtors and non-student co-signors, whether related or not. This language has led Texas Bankruptcy Courts to conclude that the purpose of § 523(a)(8) is “the loan, not the beneficiary of the education.” In re Varna, 149 B.R. 817, 818 (N.D.Tex.1992); see also In re Mackey, 153 B.R. 34, 35 (Bankr.N.D.Tex.1993) (“[T]he statute does not refer to student debtors but limits the discharge of any individual debtor for any debt for covered educational loans.” (citing In re Pelkowski, 990 F.2d 737, 741 (3d Cir.1993))). Corletta has failed to persuade the Court that it should depart from the plain language of the statute and the weight of authority on this issue.
D. Evaluation of Summary Judgment Evidence
Corletta argues that there were several issues with the way the Bankruptcy Court evaluated the parties’ evidence on summary judgment review.2 This Court reviews the Bankruptcy Court’s findings of fact for clear error. Corletta has not met his burden to show that any of the Bankruptcy Court’s findings of fact failed to meet this highly deferential standard. United States v. Rodriguez, 630 F.3d 377, 380 (5th Cir.2011) (holding that a finding of fact was not clearly erroneous merely because the reviewing court would have weighed evidence differently and made different findings).
E. Rule 56(d) Motion For Additional Time for Discovery or to Defer Consideration
Appellant next contends that the Bankruptcy Court abused its discretion by denying Appellant’s Rule 56(d) motion for additional time for discovery or, in the alternative, to defer consideration of the THECB’s Motion for Summary Judgment.3 Appellant claims that “by filing its Motion for Summary Judgment simultaneously with the filling [sic] of its Answer, [t]he THECB has unfairly prejudiced Appellant’s ability to not only respond to the government unit issue but also the other new issues concocted by the THECB.” (Appellant’s Brief, at 46). Beyond this, however, Corletta provides no arguments or authorities that indicate that the Bankruptcy Court decided his Rule 56(d) motion in error. Therefore, Corletta has failed to meet his burden to demonstrate that the Bankruptcy Court abused its discretion by failing to provide additional time for discovery or deferring its consideration of the THECB’s Motion for Summary Judgment.
F. Attorney’s Fees
Finally, Corletta argues that the Bankruptcy Court erred by ordering that the THECB may file an application for attorney’s fees. (Appellant’s Brief, at 47). Corletta claims that there is no statutory ground for awarding attorney’s fees, so the Bankruptcy Court should prohibit the par*654ties from filing an application. But Corlet-ta misreads the Bankruptcy Court’s order. The order did not decide that the THECB would be granted attorney’s fees, it simply set a deadline for the THECB’s application for fees. If Corletta wishes to contest the THECB’s statutory authority to receive attorney’s fees in a § 523(a)(8) case, he may bring these arguments in an objection to the THECB’s application. BANKRUPTCY Looal Rule 7054(a)(2).
CONCLUSION
For the foregoing reasons, the Court holds that CAL debt was not discharged through Corletta’s chapter 7 bankruptcy in 1997. Accordingly, the Bankruptcy Court’s grant of summary judgment to the Texas High Education Coordinating Board is AFFIRMED.
. Governments do not guarantee the loans that they issue themselves. Rather, governments guarantee loans issued by private lenders. For example, until just recently, the federal government ran the Federal Family Education Loans (“FFEL”) program, which allowed private lenders to issue federally guaranteed loans. Under the FFEL program, if a borrower defaulted on their loans, the government would pay the lender the majority of the debtor’s principal balance and assume the right to collect payments on the debt. Contrast this program with the Direct Loan Program ("Direct”)&emdash;a program where loans themselves are issued by the federal government. Under the FFEL program the federal government is guaranteeing the loan. Under the Direct program the federal government is making the loan. The CAL loans are similar to the Direct loans; and thus, there is no reason to examine whether the loans were guaranteed.
. In short, Corletta disagrees with the Bankruptcy Court’s failure to credit his evidence and disregard that of the THECB. This is simply not enough to establish clear error.
. Rule 56(d) provides that "if a nonmovant shows by affidavit that, for specified reasons, it cannot present facts essential to justify its opposition” to the moving party’s motion for summary judgment, “the court may: (1) defer considering the motion [for summary judgment] or deny it, (2) allow time to obtain affidavits or declarations or to take discovery, or (3) issue any other appropriate order.” Fed. R. Civ. P. 56(d). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498343/ | MEMORANDUM OPINION ON SECURED CREDITORS’ MOTION TO STRIKE CERTAIN ITEMS FROM HERRERA’S AMENDED DESIGNATION OF CLERK’S RECORD [Doc. No. 1104]
Jeff Bohm, United States Bankruptcy Judge
I. Introduction
The Court writes this Memorandum Opinion because it concerns a Bankruptcy Rule about which there is a dearth of case law. Bankruptcy Rule 8009(e)(1),1 which became effective on December 1, 2014, requires a bankruptcy court to adjudicate *656disputes about what items can be designated as part of the record on appeal. This Rule contains no language setting forth any guidelines a court should consider in ruling on such a dispute. This Court now attempts to articulate the appropriate analysis for this Rule. Based this Court’s analysis, the Court will strike certain items designated by the appellant in this case.2
II. Findings of Fact
1. On May 30, 2013, Digerati Technologies, Inc. (the “Debtor ”) filed a Chapter 11 petition. [Doc. No. 1].
2. On July 1, 2013, the Debtor filed an Application to Employ Gilbert A. Herrera and Herrera Partners (collectively, “Herrera”) as Investment Banker and Request for Expedited Consideration (the “Employment Application ”). [Doc. No. 68].
3. On July 10, 2013, this Court held a hearing on the Employment Application.
4. On July 12, 2013, this Court signed and entered an order approving the Employment Application. [Doc. No. 94],
5. On April 4, 2014, this Court confirmed a plan (the “Plan ”), and entered an order to that effect. [Doc. Nos. 795 & 795-1]. Article 3.1 of the Plan requires any professional, such as Herrera, to file a fee application within sixty days after entry of the order confirming the Plan, or else be barred from receiving any payment for services rendered.
6. On May 2, 2014 — i.e., within 60 days of the entry of the order confirming the Plan — Herrera timely filed his Final Fee Application of Debtor’s Investment Banker Gilbert A. Herrera and Herrera Partners for Allowance of Compensation for Services and Reimbursement of Expenses for the Period Beginning July 1, 2013 Through April 4, 2014 (the “Fee Application”). [Doc. No. 826], The Fee Application requested this Court to award Herrera fees of $476,245.00 and expenses of $7,726.81, for a total amount of $483,971.81.
7. On May 22, 2014, several individuals and entities filed their objection to the Fee Application. [Doc. No. 850].
8. On May 23, 2014, a second group— comprised of Terry Dishon, Hurley Fairview, LLC, and Sheyenne Rae Nelson Hurley (the “Secured Creditors”) — -filed their own objection to the Fee Application (the “Secured Creditors’ Objection”). [Doc. No. 860],
9. All parties filed their witness lists and exhibit lists prior to the hearing on the Fee Application. Herrera’s witness list indicated that he intended to call the following witnesses: (1) Gilbert A. Herrera; (2) J. Finley Biggerstaff (an associate who works with Herrera); (3) Edward L. Roth-berg (the lead counsel who repre*657sented the Debtor); and (4) Deirdre Carey Brown (an associate attorney supervised by Mr. Rothberg who also rendered legal services to the Debtor). [Doc. No. 859]. Herrera’s exhibit list set forth that he intended to introduce four exhibits. [7d]. This exhibit list reflected that he intended to introduce the following exhibits: (1) Herrera’s Final Fee Application, [Doc. No. 826]; (2) Exhibits to Herrera’s Final Fee Application, [Doc. No. 826-1]; (3) Notice of Final Fee Application, [Doc. No. 828]; and (4) Certificate of Service, [Doc. No. 829]. [Id.].
10. This Court held a multi-day hearing on the Fee Application. Specifically, this Court held hearings on the following dates: July 22, 2014; August 18, 2014; August 20, 2014; September 9, 2014; October 1, 2014; October 14, 2014; and November 7, 2014.3 Throughout this multi-day hearing, Herrera was represented by Keavin McDonald (“McDonald ”), a seasoned lawyer who has frequently appeared in bankruptcy court.
11. During this multi-day hearing, McDonald adduced testimony from Gilbert Herrera and another witness, Vess Hurley. On behalf of Herrera, McDonald introduced five exhibits into the record. Specifically, McDonald introduced the four exhibits that he had described in the exhibit list that he filed prior to the beginning of the hearing on the Fee Application (all of which were pleadings on the docket). He also introduced one additional exhibit (which was not a pleading). Further, those parties objecting to the Fee Application, including the Secured Creditors, introduced a total of twenty-five exhibits, with the Secured Creditors introducing fifteen exhibits and the other objecting creditors introducing ten exhibits.
12. On November 7, 2014, this Court heard closing arguments from all counsel, and then took the matter under advisement.
13. On January 12, 2015, this Court issued a Memorandum Opinion setting forth its reasons for denying the Fee Application in its entirety (the “Fee Application Opinion”). [Doc. No. 1056],
14. On January 12, 2015, this Court entered an order on the docket denying the Fee Application in its entirety (the “Fee Application Order”). [Doc. No. 1057],
15. On January 23, 2015, Herrera filed a Notice of Appeal of the Fee Application Order. [Doc. No. 1069]. This Notice of Appeal was filed not by McDonald,' but rather by R. Alan York of the law firm of God-win Lewis P.C. [Doc. No. 1068]. Thus, for prosecuting the appeal of the Fee Application Order, Herrera decided to replace McDonald with the Godwin Lewis firm.
16. On January 29, 2015, Herrera filed an Amended Notice of Appeal of the Fee Application Order. [Doc. No. 1076],
17. On February 6, 2015, Herrera filed a Statement of Issues on Appeal. [Doc. No. 1080],
18. On February 6, 2015, Herrera also filed his Appellant Designation of Contents for Inclusion in Record on *658Appeal (the “Designation ”) and designated 189 items for inclusion in the record on appeal. [Doc. No. 1081].
19. After Herrera filed his Designation, the Secured Creditors and Herrera participated in several discussions in an attempt to reach an agreement regarding the items to be designated for the record on appeal. [see Doc. Nos. 1095 & 1104],
20. As a result of such discussions, on February 20, 2015, Herrera filed his Amended Designation of Clerk’s Record (the “Amended Designation ”) and reduced the designated items from 189 items to 150 items. [Doc. No. 1095],
21. On March 4, 2015, the Secured Creditors filed their Motion to Strike Certain Items From Herrera’s Amended Designation of Clerk’s Record (the “Motion to Strike”). [Doc. No. 1104], The Secured Creditors objected to 77 of the 150 items designated by Herrera. [Id.].
22. On March 25, 2015, Herrera filed a response in opposition to the Motion to Strike. [Doc. No. 1118].
23. On April 16, 2015, this Court held a hearing on the Motion to Strike and Herrera’s response thereto. Although this Court gave them the opportunity to do so, neither the Secured Creditors nor Herrera adduced any testimony or introduced any exhibits in support of, or in opposition to, the Motion to Strike. Rather, counsel for each of the parties chose to make only oral argument. The Court then requested further briefing by counsel regarding certain issues raised in oral argument, and continued the hearing until May 8, 2015.
24. Following the April 16, 2015 hearing, Herrera and the Secured Creditors engaged in more discussion to which point Herrera agreed to remove an additional 17 items from his Amended Designation. [Doc. No. 1129]. The 60 items to which the Secured Creditors now object (the “60 Items”) are set forth in Exhibit A attached hereto.
25. On April 24, 2015, the Secured Creditors filed their Brief in Support of the Motion to Strike. [Doc. No. 1130],
26. On April 24, 2015, Herrera also filed his supplemental brief in support of his response opposing the Motion to Strike. [Doc. No. 1129].
27. On May 8, 2015, this Court held a hearing and announced orally from the bench that after reviewing the legal authorities submitted by the parties, and further considering the oral arguments of counsel made at the April 16, 2015 hearing, the Court had decided to grant the Motion to Strike. The Court now issues this Memorandum Opinion to memorialize its oral ruling.
III. Conclusions of Law
A. Jurisdiction, Venue, and Constitutional Authority to Sign a Final Order
1. Jurisdiction
The Court has jurisdiction over this dispute pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This dispute is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) because it concerns the designation of the record on the appeal of the Fee Application Order, and the Fee Application Order concerns the administration of this Chapter 11 estate. In re Age Refining, Inc., 505 B.R. 447, 449 (Bankr.W.D.Tex.2014) (“This Court has jurisdic*659tion to rule on the Fee Application. Fee applications and administrative expenses are generally core matters within a bankruptcy court’s jurisdiction pursuant to 28 U.S.C. §§ 157(b)(2)(A, B, 0) and 1334.”). Further, this dispute is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) because it involves the allowance or disallowance of claims against the estate-namely, Herrera’s claim for $483,971.81. Additionally, it is core pursuant to 28 U.S.C. § 157(b)(2)(0) because it involves the adjustment of the debtor-creditor relationship-namely, whether or not Herrera is a creditor entitled to payment under the Plan. Finally, it is core 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.”); De Montaigu v. Ginther (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.”). Here, the dispute concerns Herrera’s designation of items for his appeal of the Fee Application Order-which could only have arisen in the context of the Debtor’s Chapter 11 case.
2. Venue v
Venue is proper pursuant to 28 U.S.C. § 1408(1).
3. Constitutional Authority to Enter a Final Order
In the wake of the Supreme Court’s issuance of its opinion in Stern v. Marshall, - U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this Court is required to determine whether it has the constitutional authority to enter a final order in any dispute brought before it. In Stem, which involved a core proceeding brought by the debtor under 28 U.S.C. § 157(b)(2)(C), the Supreme Court held that a bankruptcy court “lacked 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.” Id. at 2620. The particular dispute at bar is governed solely by Bankruptcy Rule 8009. There is no state law involved whatsoever. Thus, because the facts in the dispute at bar are easily distinguishable from those in Stem &emdash;especially the fact that only bankruptcy law governs this dispute&emdash;this Court concludes that it has the constitutional authority to enter a final order on the Motion to Strike.
B. Bankruptcy Rule 8009(e)(1) Governs This Dispute
Bankruptcy Rule 8009(e)(1) sets forth that:
If any difference arises about whether the record accurately discloses what occurred in the bankruptcy court, the difference must be submitted to and settled by the bankruptcy court and the record confirmed accordingly. If an item has been improperly designated as part of the record on appeal, a party may move to strike that item.
The above-referenced language leaves no doubt that any dispute over designation of items must be adjudicated by the bankruptcy court, and not the district court to which the appeal has been assigned.4 Here, the Secured Creditors, by *660filing the Motion to Strike, want this Court to strike the 60 Items that Herrera has designated. [Findings of Fact Nos. 21 & 24], Thus, there is no question that Rule 8009(e)(1) governs this dispute; and that it is the undersigned bankruptcy judge — not the district judge to whom the appeal of the Fee Application Order has been assigned — who must resolve this dispute. Bankruptcy Rule 8009, however, is fairly new, having become effective on December 1, 2014. There is no case law at this point interpreting this new rule. For example, Rule 8009(e)(1) does not set forth the circumstances describing when an item has been “improperly designated” or what analysis should be done in making this determination. Therefore, this Court will look to case law interpreting the predecessor. to Rule 8009.
C. History of Rule 8009’s Predecessor Prior to December 1, 2014, Bankruptcy Rule 8006 governed designation of items to be included on the record on appeal. Bankruptcy Rule 8006, unlike its successor (i.e., Rule 8009), contained no subsections and read in toto as follows:
Within 14 days after filing the notice of appeal as provided by Rule 8001(a), entry of an order granting leave to appeal, or entry of an order disposing of the last timely motion outstanding of a type specified in Rule 8002(b), whichever is later, the appellant shall file with the clerk and serve on the appellee a designation of the items to be included in the record on appeal and a statement of the issues to be presented. Within 14 days after the service of the appellant’s statement the appellee may file and serve on the appellant a designation of additional items to be included in the record on appeal and, if the appellee has filed a cross appeal, the appellee as cross appellant shall file and serve a statement of the issues to be presented on the cross appeal and a designation of additional items to be included in the record. A cross appellee may, within 14 days of service of the cross appellant’s statement, file and serve on the cross appellant a designation of additional items to be included in the record. The record on appeal shall include the items so designated by the parties, the notice of appeal, the judgment, order, or decree appealed from, and any opinion, findings of fact, and conclusions of law of the court. Any party filing a designation of the items to be included in the record shall provide to the clerk a copy of the items designated or, if the party fails to provide the copy, the clerk shall prepare the copy at the party’s expense. If the record designated by any party includes a transcript of any proceeding or a part thereof, the party shall, immediately after filing the designation, deliver to the reporter and file with the clerk a written request for the transcript and make satisfactory arrangements for payment of its cost. All parties shall take any other action necessary to enable the clerk to assemble and transmit the record.
A review of the above-referenced language reveals that Rule 8006 — just like Rule 8009 — contained no express guidelines as to how disputes over designation of items for an appeal should be resolved. Case law, however, articulated certain parameters.
1. Opinions from the Fifth Circuit
In Zer-Ilan v. Frankford (In re CPDC, Inc.), 337 F.3d 436 (5th Cir.2003), the Fifth *661Circuit, sua sponte, held that the district court erred in allowing the appellant to supplement the record with documents and testimony that were not offered and admitted before the bankruptcy court. Citing to former Bankruptcy Rule 8006, the Fifth Circuit stated that this rule,
[P]rovides that the record on appeal from a bankruptcy court decision consists of designated materials that became part of the bankruptcy court’s record in the first instance. The rule does not permit items to be added to the record on appeal to the district if they were not part of the record before the bankruptcy court.... Thus, we will not consider such untimely-submitted evidence in evaluating [the appellant’s] argument.
Id. at 443.
The Fifth Circuit applied this very hard- and-fast rule again in In re SI Restructuring Inc., 480 Fed.Appx. 327 (5th Cir.2012). In this case, the bankruptcy court granted a motion to strike designated documents on the grounds that they were not admitted at the hearing held by the bankruptcy court. Id. at 328. The losing parties then appealed, and the district court affirmed the bankruptcy Court’s ruling. The losing parties thereafter appealed to the Fifth Circuit, which affirmed the district court’s ruling by citing to Rule 8006:
Rule 8006 provides that the record on appeal from a bankruptcy court decision consists of designated materials that became part of the bankruptcy court’s record in the first instance. The rule does not permit items to be added to the record on appeal to the district court if they were not part of the record before the bankruptcy court.
Id. at 328-29.
In Mehta v. Havis (In re Shah), 204 Fed.Appx. 357, 359 (5th Cir.2006), the Fifth Circuit suggested that there were two exceptions to the otherwise inflexible rule articulated in CPDC and SI Restructuring. In Shah, the district court struck certain record designations made by the appellant, and the appellant appealed. The Fifth Circuit affirmed the district-court’s ruling by holding that:
It is uncontested that the documents [the appellant] sought to designate were not introduced as evidence before the bankruptcy court. [The appellant] does not offer reasons for his failure to provide these documents in the bankruptcy hearing nor does he offer any explanation as to how his case is prejudiced by their exclusion. In short, the district court did not err in refusing to permit [the appellant] to designate documents for appellate review that were never considered by the bankruptcy court.
Id. (emphasis added).
Thus, in Shah, the Fifth Circuit seemed to open the door for a party on appeal to designate items not introduced as evidence before the bankruptcy court if that party could (1) justify his failure for introducing those documents at the bankruptcy hearing; or (2) demonstrate that excluding them on appeal would prejudice the party.
This Court notes that all three of the above-referenced Fifth Circuit opinions concern documents that were not pleadings on the docket, but rather were materials (such as letters or emails) that should have been introduced as exhibits at the hearings in the bankruptcy court. The Court makes this point because in the case at bar, all of the 60 Items are either pleadings that have been docketed in the Debtor’s main case, pleadings that have been docketed in various adversary proceedings instituted in the Debtor’s Chapter 11 case, transcripts of other hearings in the main case, or minute entries on the docket sheet. Herrera contends that this difference is important, and argues that the hard-and-fast rule articulated by the *662Fifth Circuit is inapplicable when the items being designated are pleadings on the docket in the main case and on the docket in adversary proceedings filed in •the Debtor’s case, and minute entries on the docket. Herrera contends that in order to give the appellate court an overview of the entire Chapter 11 case of the Debt- or, he (or any other appellant) has the unfettered right to designate any pleading or minute entry that is on the docket in the main case or on the docket in any adversary proceeding filed in this Chapter 11 case. Based upon the case law discussed below, this Court disagrees.
2. Opinions from Lower Courts Within the Fifth Circuit
In Adkins, the bankruptcy court for the Northern District of Texas was confronted with a fact pattern similar to the one in the case at bar. See 2014 WL 5801679, at 1-2. In Adkins, the appellant designated primarily pleadings filed in Mr. Adkins’ case after the bankruptcy court’s ruling, or pleadings filed in other cases and adversary proceedings, and the appellee filed a motion to strike these items. Id. at *1. The appellant argued that these designated items are “part and parcel of the appellate process and their inclusion will result in a more compete [sic] and understandable appellate record[;]” and he further argued that these items needed to be designated because “[i]t would be wrong to ask the court of appeals to consider the matters being appealed in a vacuum. ...” Id.
The bankruptcy court began its analysis by citing the Fifth Circuit’s bright line test from CPDC and SI Restructuring as if to telegraph that this language alone required striking the designated items. Id. But then, the bankruptcy court, citing an opinion from a district court in Louisiana — In re Heitmeier, No. 13-6787, 2014 WL 1513886, at *1 (E.D.La. Apr. 16, 2014) — made the following statement: “The items need not be formally entered into evidence, but should be of record and available for consideration by the bankruptcy court when it renders its decision.” Id. (citation omitted). The bankruptcy court further stated that, “[i]f an item was not available for consideration by the bankruptcy court in making its determination, then it should be stricken.” Id. Thus, the bankruptcy court focused on whether the designated items in dispute — all of which were pleadings (as opposed to documents such as emails or letters) — were available for consideration by the bankruptcy court at the time it rendered its decision. [Id. at *1-2.] The bankruptcy judge was unconcerned that these items were not entered into evidence during the hearing during the bankruptcy court. [Id.].
Adkins thus seems to have relaxed the Fifth Circuit’s hard-and-fast rule that the items must be formally entered into evidence to be designated for appeal. According to the court in Adkins, if the designated items are pleadings, as opposed to actual documents (such as letters or emails), then it is not required that these pleadings have been formally entered into evidence, but rather only that: (1) they have been entered on the docket in the main case presided over by the bankruptcy court; and (2) are available to the bankruptcy court during the time leading up to the court’s decision. The court in Adkins went on to strike the designated pleadings because these pleadings had been entered on the docket after the court’s ruling or had been entered in other cases and other adversary proceedings. Id. at *2. But, if these designated pleadings had been entered on the docket in Mr. Adkins’ main case prior to the court’s ruling, then it appears that the bankruptcy court would not have stricken these designated items.
This result, however, seems to contradict another statement made in Adkins, to *663wit: “The appropriate standard is not whether the designated items will give the appellate court the same bird’s eye view that the bankruptcy court had.” Id. This statement would suggest that a party on appeal cannot simply designate any items on the debtor’s main case docket merely to provide the appellate court with a “historical context and factual background” to the entire bankruptcy case.
The opinion cited by Adkins —Heitmeier — confirms this last point. The district court in that case unequivocally stated that:
The designation of items should contain all documents necessary to afford a full understanding of the case. In particular, the appellate record should contain all documents and evidence bearing on the proceedings below and considered by the Bankruptcy Judge in reaching his decision. Items not before the Bankruptcy Court and not considered by it in rendering its decision may not be includ-. ed in the record.
Heitmeier, 2014 WL 1513886, at *1. (internal citations omitted) (emphasis added).
Other courts applying former Rule 8006 ''agree with the view that although pleadings do not need to be introduced into evidence to be subsequently designated for appeal, they can only be designated if the bankruptcy court actually considered these pleadings in rendering its ruling. See, e.g., In re Chateaugay Corp., 64 B.R. 990, 995 (S.D.N.Y.1986) (The district court, in applying Bankruptcy Rule 8006, found that this Rule had been construed to mean that “the record on appeal should contain all documents and evidence bearing on the proceeding below and considered by the bankruptcy judge in reaching his decision ”); In re Neshaminy Office Building Associates, 62 B.R. 798, 802 (E.D.Pa.1986).
D. The Analysis that Should be Done Under Rule 8009(e)(1) Based Upon Case Law’s Application of Former Rule 8006
Distilling the holdings in the above-referenced cases applying former Rule 8006 leads this Court to conclude that it should conduct the following analysis in now applying Rule 8009(e)(1) to the dispute at bar, where the 60 Items in dispute are solely pleadings and minute entries in this Chapter 11 case:
(1) Were any or all of the 60 Items actually admitted into the trial record at the multi-day hearing on the Fee Application? See CPDC, 337 F.3d 436; SI Restructuring, 480 Fed.Appx. at 328-29;
(2) Even if the 60 Items were not made part of the trial record at the hearing on the Fee Application, did the undersigned judge consider any of these items in reaching the decision to deny the Fee Application in its entirety? See Heitmeier, 2014 WL 1513886, at *1; Chateaugay, 64 B.R. at 995;
(3) Even if the undersigned judge did not consider any of the 60 Items in reaching his decision, has Herrera offered any reason for his failure to introduce these items into the record at the hearing on the Fee Application? See Shah, 204 Fed.Appx. at 359; and
(4) Even if Herrera has not offered any reason for his failure to introduce the 60 Items into the trial record, has Herrera offered any explanation as to how his appeal of the Fee Application Order is prejudiced if the 60 Items are stricken? Id.
The analysis set forth above leads this Court to conclude that it should grant the Motion to Strike. First, a review of the record made at the multi-day hearing on *664the Fee Application reflects that the trial record comprises the following: (1) the Fee Application, [Doc. No. 826]; (2) the first group’s objection to the Fee Application, [Doc. No. 850]; (3) the Secured Creditors’ Objection, [Doc. No. 860]; (4) the testimony of Gilbert. Herrera; (5) the testimony of Vess Hurley; (6) the fifteen exhibits introduced by the Secured Creditors, [Finding of Fact No. 11]; (7) the ten exhibits introduced by other parties objecting to the Fee Application, [M]; and (8) the five exhibits introduced by Herrera, [Id.] (the “Trial Record ”). The Trial Record does not contain any of the 60 Items. Because the Trial Record does not -comprise any of the 60 Items, this Court finds that it should strike all of the 60 Items, unless: (a) this Court itself relied upon any or all of the 60 Items in issuing its ruling denying the Fee Application; (b) Herrera can offer an explanation as to why his attorney at the time, McDonald, failed to introduce the 60 Items into the Trial Record; or (c) Herrera can show that his appeal of the Fee Application Order would now be prejudiced by this Court’s striking of the 60 Items.
Did this Court rely upon any of the 60 Items in denying the Fee Application? The undersigned judge has reviewed its Fee Application Opinion to determine if it references any of the 60 Items. The Fee Application Opinion does not reference any of the 60 Items. Rather, this Court made its ruling based upon: (1) the sources cited in the Fee Application Opinion, which include the Trial Record and a few pleadings on the main case docket which Herrera has not designated; and (2) several pleadings on the docket which Herrera has designated but to which the Secured Creditors have no objection. Thus, all of the 60 Items must be.stricken unless: (1) Herrera can explain why McDonald failed to make them part of the Trial Record; or (2) Herrera can show that striking the 60 Items will prejudice his appeal.
Why did McDonald fail to introduce the 60 Items into the record during the multi-day hearing on the Fee Application? At the hearing on the Motion to Strike, Herrera failed to introduce any evidence on this issue. He could have, for example, called McDonald to the witness stand and adduced testimony to the effect that McDonald intended to introduce the 60 Items into the Trial Record, but failed to do so because of some plausible explanation.5 However, no such testimony was adduced. Herrera bears the burden of persuasion on this issue, and he has failed to meet it. In re Ames Dep’t Stores, Inc., 320 B.R. 518, 522 (Bankr.S.D.N.Y.2005) (in applying former Rule 8006, the court notes that the party seeking to expand the record on appeal has the burden of persuasion).
Is Herrera prejudiced if the 60 Items are stricken? There is no proof of any such prejudice. At the hearing on the Motion to Strike, this Court expressly inquired whether any party wanted to adduce testimony or introduce exhibits. [Finding of Fact No. 23]. None did. It is Herrera’s burden to show prejudice, Shah, 204 Fed.Appx. at 359, and because he failed to do so, this Court has no basis to refuse to strike the 60 Items. Id.
The Court also notes that Herrera’s retention of new counsel — retaining the God-win Lewis firm to handle the appeal instead of keeping McDonald for this task, [Finding of Fact No. 15] — should not be made part of any consideration as to whether Herrera is prejudiced if the 60 *665Items are stricken. There is no question that the Godwin Lewis firm did not attend the multi-day hearing on the Fee Application — and therefore does not have the same level of participation or knowledge at this point as do the attorneys for the Secured Creditors and the other objecting parties. But, this fact is no basis for allowing the Godwin Lewis firm to now designate the 60 Items on the grounds that it wants to provide the appellate court with a “historical context and factual background” to the Debtor’s Chapter 11 case. [see Doc. No. 1118, p. 5 of 13]. As the court in Adkins stated: “The appropriate standard is not whether the designated items will give the appellate court the same bird’s eye view that the bankruptcy court had.” Adkins, 2014 WL 5801679, at *2. If Herrera wanted to provide an appellate court with such context or background, he should have introduced evidence to do so during the multi-day hearing on the Fee Application. Indeed, he in fact introduced four docketed pleadings as exhibits at this hearing, [Finding of Fact No. 11; see also Finding of Fact No. 9], and he could have attempted to introduce any or all of the 60 Items then; he should not be allowed to do so now.
The Court also notes that the Secured Creditors would themselves be prejudiced if this Court refused to strike the 60 Items. First, Herrera wants to designate certain items relating to the final fee application of the law firm that represented the Debtor (i.e., Hoover Slovacek, LLP),6 but the Secured Creditors point out that they were not participants at that hearing because they did not object to that particular fee application; and therefore, they had no way to object to their introduction into the record then to any of the items that Herrera now wants to designate in the dispute at bar. [Doc. No. 1130, p. 2], Thus, this Court agrees that it is prejudicial to the Secured Creditors to allow Herrera to designate items relating to a hearing on a different fee application that only Herrera, and not the Secured Creditors, participated in.
Further, this Court notes that the hearing on the Fee Application occurred on several days over several months. [Finding of Fact No. 10]. Herrera and his very seasoned attorney at the time, McDonald, had plenty of time to prepare and assess what evidence to introduce. [see id.]. Now that the matter is on appeal, and Herrera has switched attorneys, it would be unfair to the Secured Creditors to allow Herrera’s new counsel to designate items that McDonald had ample time himself to introduce into the record at the hearing on the Fee Application. In a very real sense, Herrera is now attempting to have “two bites at the apple,” and this Court refuses to let him now . bite off more than he originally chewed at the hearing on the Fee Application.
In sum, this Court finds that the 60 Items set forth in Exhibit A should be stricken because: (1) Herrera failed to introduce them as exhibits at the hearing on the Fee Application; (2) this Court did not consider them in issuing its ruling denying the Fee Application; (3) Herrera has failed to meet his burden to explain why he did not introduce them as exhibits at the hearing on the Fee Application; (4) Herrera has failed to meet his burden to show how striking the 60 Items would prejudice his appeal; and (5) the Secured Creditors would be prejudiced if the 60 Items are not stricken.
*666E. Bankruptcy Rule 8009(e)(2) does not Apply to the Dispute at Bar
Herrera also cites Bankruptcy Rule 8009(e)(2) — as opposed to (e)(1) — in support of his contention that the Motion to Strike should be denied. [see Doc. No. 1129, p. 5]. This Court disagrees that Rule 8009(e)(2) applies.
Rule 8009(e)(2) reads as follows:
If anything material to either party is omitted from or misstated in the record by error or accident, the omission or misstatement may be corrected, and a supplemented record may be certified and transmitted:
(A) on stipulation of the parties;
(B) by the bankruptcy court before or after the record has been forwarded; or
(C) by the court where the appeal is pending.
As the language above reflects, for Rule 8009(e)(2) to be applicable, the designated items in dispute must be material and they must have been omitted by error or accident. Herrera has neither pleaded nor argued how the 60 Items are material or that McDonald (when representing Herrera at the multi-day hearing on the Fee Application) failed to introduce the 60 Items into the Trial Record due to error or accident. And, even if Herrera is now pleading or arguing materiality, error and accident, he failed to introduce any evidence to establish these circumstances at the hearing on the Motion to Strike. Indeed, as already noted, at the beginning of the hearing on the Motion to Strike, this Court expressly inquired of all attorneys whether they, on behalf of their respective clients, wanted to adduce testimony or introduce exhibits in support of, or in opposition to, the Motion to Strike. [Finding of Fact No. 23]. All counsel, including Herrera’s counsel (i.e., R. Alan York), chose not to do so. [Id.]. Thus, even if Rule 8009(e)(2) is applicable to the dispute at bar, Herrera has failed to meet his burden of establishing the materiality of the 60 Items and also showing that the 60 Items were not made part of the Trial Record by McDonald due to his error or some accident.
IV. Conclusion
Herrera filed the Fee Application, and this Court afforded him ample opportunity to adduce testimony and introduce exhibits in order to satisfy his burden. Indeed, this Court afforded Herrera several days of courtroom time to put on his case-in-chief and to adduce testimony and introduce exhibits in support of the Fee Application. Herrera could have called more witnesses — in fact, the witness list that he filed indicated that he intended to call more witnesses than he actually did, [Finding of Fact No. 9] — but he chose not to do so, [Finding of Fact No. 11]. He could have introduced more than the five exhibits that he did, but he chose not to do so. [Id.]. Herrera’s attorney at the Fee Application hearing, McDonald, is a seasoned attorney who knows how to make a record. [see Finding of Fact No. 10]. Herrera should not now be allowed to change attorneys and expand the Trial Record that his first attorney (McDonald) made at the multi-day hearing on the Fee Application. Stated differently, Herrera should not be allowed to do an “end run” around the rules which govern both the trial and appellate process.
An order consistent with this Memorandum Opinion will be entered on the docket simultaneously herewith.
Attachment
EXHIBIT A
60 Items Designated to which the Secured Creditors Object and will NOT be Included in the Record orí Appeal
*667[[Image here]]
*668[[Image here]]
*669[[Image here]]
*670[[Image here]]
*671[[Image here]]
. Any reference to a "Bankruptcy Rule” refers to the applicable Federal Rule of Bankruptcy Procedure.
. On May 8, 2015, the Court orally announced from the bench that it had decided to strike certain items designated by the appellant. The Court now memorializes its ruling in this Memorandum Opinion. This Opinion contains this Court's Findings of Fact and Conclusions of Law, which the Court makes pursuant to Bankruptcy Rules 7052 and 9014. To the extent that any finding of fact is construed as a conclusion of law, it is adopted as such; and to the extent that any conclusion of law is construed as a finding of fact, it is adopted as such. To the extent that any of this Court’s written findings and conclusions conflict with this Court's oral findings and conclusions made on the record at the May 8, 2015 hearing, the former shall govern; and to the extent that any of this Court's written findings and conclusions do not encompass all of the oral findings and conclusions, then the latter shall supplement the former.
. The Court intended to begin the hearing on May 27, 2014, but because exhibits had not been timely exchanged under the applicable local rule, the Court actually began hearing testimony and admitting exhibits on July 22, 2014.
. Prior to the enactment of Rule 8009, the courts were split over whether a bankruptcy *660court — as opposed to a district court — could even resolve disputes over designation of items for an appeal. See In re Adkins, No. 12-10314, 2014 WL 5801679, *2-3 (Bankr. N.D.Tex. Nov. 7, 2014) (providing a thorough review of the competing views regarding this issue). The passage of Rule 8009 has resolved this issue.
. It is worth nothing that at the hearing on the Fee Application, four out of five exhibits that Herrera introduced were pleadings that had been docketed in the main case. [Finding of Fact No. 11]. So, there is no question that at the Fee Application hearing, Herrera knew that he could introduce as exhibits any pleadings that had been docketed by that time.
. Herrera has designated the following docket numbers which relate to the final fee application of Hoover Slovacek LLP: 406; 658; 855; 874. These four items are part of the 60 Items described on the list attached hereto as Exhibit A (i.e, the items designated by Herrera to which the Secured Creditors object). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498345/ | MEMORANDUM OPTION ON MOTION FOR PARTIAL SUMMARY JUDGMENT
Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE
Notwithstanding ATP’s failure to give timely notice under its insurance policy, *696Water Quality Insurance Syndicate must reimburse ATP for ATP’s defense costs and expenses incurred in defending United States v. ATP Oil & Gas Corp., et al., C.A. 2:13-cv-00262-NJB-KWR pending in the United States District Court for the Eastern District of Louisiana.
Background
Pursuant to a one-year insurance policy issued on November 17, 2011, Water Quality insured ATP against certain pollution-related losses. On February 11, 2013, the United States sued ATP for discharging pollutants from an offshore platform located in the Gulf of Mexico. The lawsuit seeks damages from ATP. The damages include alleged violations that occurred within the policy period (i.e., between November 17, 2011 and March, 2012).
The insurance policy required ATP to give “immediate notice” of any occurrence that gave rise to a claim under the policy. It is undisputed that ATP failed to give notice as required by the policy. The United States notified ATP of its alleged violations on March 14, 2012. It filed suit on the alleged violations on February 11, 2013. ATP delayed giving notice to Water Quality until September 12, 2013.
The insurance policy excluded coverage arising out of ATP’s “willful misconduct.” The bulk of the lawsuit against ATP alleges willful misconduct by ATP. The United States alleges that ATP constructed and operated a hidden tube to allow ATP to utilize an unpermitted chemical dispersant. The use of this dispersant would mask discharges of oil in wastewater that was discharged from the platform. Nevertheless, the lawsuit does contain a few allegations regarding the negligent operation of the platform. For example, paragraph 75 of the lawsuit alleges that ATP failed to operate the primary float system that would have limited oil in the wastewater “in a manner that is protective of the environment, resulting in the discharge of oil in quantities that may be harmful to the Gulf of Mexico.” Paragraph 77 alleges that ATP failed “to properly operate the wastewater treatment system....”
ATP has been required to defend the lawsuit. Water Quality has refused to reimburse ATP for its defense costs and expenses.
On February 6, 2015, ATP filed a motion for partial summary judgment seeking a declaration of the rights and obligations under the policy with respect to the duty to provide reimbursement. On March 2, 2015, Water Quality responded. Various additional filings were made by both parties after that date.
Summary Judgment Standard
“The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Fed. R. Bankr.P. 7056 incorporates Rule 56 in adversary proceedings.
A party seeking summary judgment must demonstrate: (i) an absence of evidence to support the non-moving party’s claims or (ii) an absence of a genuine dispute of material fact. Sossamon v. Lone Star State of Tex., 560 F.3d 316, 326 (5th Cir.2009); Warfield v. Byron, 436 F.3d 551, 557 (5th Cir.2006). A genuine dispute of material fact is one that could affect the outcome of the action or allow a reasonable fact finder to find in favor of the non-moving party. Brumfield v. Hollins, 551 F.3d 322, 326 (5th Cir.2008).
A court views the facts and evidence in the light most favorable to the non-moving party at all times. Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th Cir.2009). Nevertheless, the Court is not obligated to search the record for the non-moving party’s evidence. Malacara v. Garber, 353 F.3d 393, 405 (5th Cir.2003). A party as*697serting that a fact cannot be or is genuinely disputed must support the assertion by citing to particular parts of materials in the record, showing that the materials cited do not establish the absence or presence of a genuine dispute, or showing that an adverse party cannot produce admissible evidence to support the fact.1 Fed. R.Civ.P. 56(c)(1). The Court need consider only the cited materials, but it may consider other materials in the record. Fed.R.Civ.P. 56(c)(3). The Court should not weigh the evidence. A credibility determination may not be part of the summary judgment analysis. Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir.2007). However, a party may object that the material cited to support or dispute a fact cannot be presented in a form that would be admissible in evidence. Fed.R.Civ.P. 56(c)(2).
“The moving party bears the burden of establishing that there are no genuine issues of material fact.” Norwegian Bulk Transp. A/S v. Int’l Marine Terminals P’ship, 520 F.3d 409, 412 (5th Cir.2008). The evidentiary support needed to meet the initial summary judgment burden depends on whether the movant bears the ultimate burden of proof at trial.
If the movant bears the burden of proof on an issue, a successful motion must present evidence that would entitle the movant to judgment at trial. Malacara, 353 F.3d at 403. Upon an adequate showing, the burden shifts to the non-moving party to establish a genuine dispute of material fact. Sossamon, 560 F.3d at 326. The non-moving party must cite to specific evidence demonstrating a genuine dispute. Fed.R.Civ.P. 56(c)(1); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The non-moving party must also “articulate the manner in which that evidence supports that party’s claim.” Johnson v. Deep E. Tex. Reg’l Narcotics Trafficking Task Force, 379 F.3d 293, 301 (5th Cir.2004). Even if the movant meets the initial burden, the motion should be granted only if the non-movant cannot show a genuine dispute of material fact.
If the non-movant bears the burden of proof of an issue, the movant must show the absence of sufficient evidence to support an essential element of the non-mov-ant’s claim. Norwegian Bulk Transp. A/S, 520 F.3d at 412. Upon an adequate showing of insufficient evidence, the non-mov-ant must respond with sufficient evidence to support the challenged element of its case. Celotex, 477 U.S. at 324, 106 S.Ct. 2548. The motion should be granted only if the non-movant cannot produce evidence to support an essential element of its claim. Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 197 (5th Cir.2005).
Choice of Law
This adversary proceeding was commenced under 28 U.S.C. § 1334. The parties skirmish about whether this Court should apply maritime law or bankruptcy law for the purpose of determining choice of law. Water Quality alleges that Fed. R. Bankr. P. 7009(h)(1) extinguishes any difference. The Court disagrees. Rule 7009(h)(1) applies Fed. R. Civ. P. 14(c), 38(e) and 82 in bankruptcy cases that pertain to admiralty matters. None of those provisions assist in the choice of law analysis.
This Court has jurisdiction over this lawsuit under its “related to” jurisdic*698tion under 28 U.S.C. § 1334(b). Of course, when a matter arises under the Court’s “related to” jurisdiction, the Court must apply the substantive law applicable to the dispute. Choice of law provisions are substantive, not procedural. Boyd Rosene and Assoc., Inc. v. Kansas Mun. Gas Agency, 174 F.3d 1115 (10th Cir.1999). Moreover, in an admiralty case, federal common law requires that choice of law be determined in accordance with the approach in the Restatement (Second) of Conflicts of Laws. Chan v. Soc’y Expeditions, Inc., 123 F.3d 1287 (9th Cir.1997).
The insurance policy is a policy for maritime insurance. Contracts for maritime insurance are “maritime contracts” within the meaning of the Admiralty Clause of the Constitution, and within federal jurisdiction. Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 313, 75 S.Ct. 368, 99 L.Ed. 337 (1955). Part IV, Section B, Paragraph 1 of the insurance policy provides that “the law applicable to the interpretation of this Policy of insurance and the rights and obligations ... hereunder shall be the federal maritime law of the United States or, in the absence of federal maritime law of the United States, the law of the State of New York, without regard for New York’s choice of law rules.”
Although federal maritime law is the primary choice of law in the contract, it is settled that the United States has “not taken oyer the regulation of marine insurance contracts.” Id. Nevertheless, if there is a federally established rule concerning notice, that rule would govern. Id. Neither party can point to such a rule, and the Court has not located one. Accordingly, the choice of law provision must be made in accordance with the policies contained in the Restatement.
The choice of law question may be outcome-determinative in this case. The issue is whether to apply New York law (as required by the policy) or Texas law (as the home of the insured). Here is the conflict:
Texas
. Texas has a straightforward statute that determines applicable law when an insurance policy is sold to a citizen or inhabitant of Texas:
Any contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby, notwithstanding such policy or contract of insurance may provide that the contract was executed and the premiums and policy (in case it becomes a demand) should be payable without this State, or at the home office of the company or corporation issuing the same.
Tex. Ins. Code § 21.42.
Tow cites a Texas trilogy of Supreme Court cases that establish that an insurer must demonstrate prejudice before it will be allowed to enforce a notice provision in its insurance policy. In PAJ, Inc. v. Hanover Insurance Co., 243 S.W.3d 630 (Tex. 2008), the Texas Supreme Court held that a failure to give notice in accordance with the policy would not constitute a defense, unless the failure resulted in prejudice to the insurer.
Fourteen months later, the Texas Supreme Court issued two opinions. In Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Co., 288 S.W.3d 374, 382-83 (Tex.2009) the Court held that “[i]n a claims-made policy, when an insured notifies its insurer of a claim within the policy term or other reporting period that the policy specifies, the insured’s failure to provide notice ‘as soon as practicable’ will not defeat coverage in *699the absence of prejudice to the insurer.” Financial Industries Corp. v. XL Specialty Insurance Co., 285 S.W.3d 877 (Tex. 2009), issued on the same date, relied on Prodigy and reiterated that Texas required a showing of prejudice from untimely notice in a claims-made policy.
New York
New York generally subscribes to the requirement that prejudice must be shown for a notice provision in an insurance policy to serve as a valid defense to coverage. This general policy is embodied in Article 34 § 3420 of the New York Statutes:
No policy or contract insuring against liability for injury to person ... or property ... shall be issued or delivered in this state, unless it contains ... a provision that failure to give any notice required to be given by such policy within the time described therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide notice' has prejudiced the insurer ...
Nevertheless, the provisions of § 3420 are inapplicable to “insurance in connection with ocean going vessels against any of the risks specified in [subsection (a)(21) ].” Subsection (a)(21) deals with marine protection and indemnity insurance.
Although ATP attempts to argue that its vessels were not ocean going vessels (an undefined term in the statute), the Court gives little weight to this argument. The insurance policy is for the “self propelled” vessel the ATP Innovator (ECF No. 18-1, page 2.). The vessel was in the ocean (the Gulf of Mexico). Although the vessel was tethered to the ocean floor, it remained a vessel that was in the ocean. The fact that it wasn’t “going” anywhere at the time of the incident does not make it a vessel that was not an “ocean going vessel” as referenced in New York law.
For insurance policies that are not governed by the “prejudice” requirement of § 3420, New York requires strict compliance with the notice provisions in the policy. Pactrans Air & Seas, Inc. v. New York Marine & General Ins. Co., 387 Fed. Appx. 43 (2d Cir.2010).
Accordingly, a conflict exists between New York law (requiring no showing of prejudice) and Texas law (requiring a showing of prejudice). On the summary judgment record, Water Quality has demonstrated no prejudice.
Ambiguity
The Court notes an ambiguity in the choice of law provision when applicable law is applied to the contract. Any such ambiguity would be resolved against the maritime insurer. Am. S.S. Owners v. Dann Ocean Towing, 756 F.3d 314, 319 (4th Cir.2014). The ambiguity arises from an odd circumstance. The language of the policy itself contains a choice of New York law. However, a policy of insurance, by necessity, incorporates applicable state law insurance requirements into the terms of the policy. When Water Quality issued the policy to a Texas resident, the policy effectively incorporated . applicable Texas law. Westchester Fire Ins. Co. v. Tucker, 512 S.W.2d 679 (Tex.1974). “[Pjolicy provisions ... are invalid if they are inconsistent with express statutory requirements or purposes.” Mid-Century Ins. Co. of Tex. v. Kidd, 997 S.W.2d 265, 271-72 (Tex. 1999). There is no question that Texas may regulate insurance issued for the benefit of her citizens. Hoopestan Canning Co. v. Cullen, 318 U.S. 313, 63 S.Ct. 602, 87 L.Ed. 777 (1943). Thus, there is ambiguity as to whether to apply statutorily mandated Texas law or contract-mandated New York law. Because conflicts within insurance policies are resolved in favor of the insured, maritime law mandates the Court to apply Texas law because Texas *700law is more favorable to the insured. Am. S.S. Owners, 756 F.3d at 319). When a Texas resident is an insured, § 21.42 of the Texas Insurance Code effectively trumps other applicable choices of law. St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 888 F.Supp. 1372 (SD.Tex.1995).
Nevertheless, for the purposes of completeness, the Court will analyze and resolve the conflict under the Restatement. The resolution of the conflict also applies Texas law.
Resolving the Conflict
Resolution of this matter is governed by § 187 of the Restatement. When the parties have chosen the laws of one state in their contract, the Restatement provides:
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
(3)In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
Paragraph (1) does not apply to this dispute. The issue resolved under paragraph (1) of § 187 defines the parties’ abilities to incorporate an agreement that applies a contractual provision by reference to the law of the designated state. It is not a provision that resolves conflicts between states. As set forth in Comment “C” of the Restatement:
The rule of this Subsection is a rule providing for incorporation by reference and is not a rule of choice of law. The parties, generally speaking, have power to determine the terms of their contractual engagements. They may spell out these terms in the contract. In the alternative, they may incorporate into the contract by reference extrinsic material which may, among other things, be the provisions of some foreign law. In such instances, the forum will apply the applicable provisions of the law of the designated state in order to effectuate the intentions of the parties.
Paragraph (2) of § 187 is the applicable paragraph. Subsection (a) is inapplicable. Although ATP argues that New York has no interest in the outcome of the dispute, the Court disagrees. Water Quality is a New York Corporation. It is a party to the contract. It executed the contract in New York. New York has an interest in the outcome of the dispute.
Nevertheless, subsection (b) of paragraph (2) of § 187 provides that the Court must determine whether “application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the *701applicable law in the absence of an effective choice of law by the parties.” Great Lakes Reinsurance (UK) PLC v. Durham Auctions, Inc.) 585 F.3d 236, 242 (5th Cir.2009).
Section 188(1) provides that “[t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.” Section 6, in turn, requires the Court to apply the following principles:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
With respect to the issue of the needs of the interstate and international systems, the issue favors Texas law. The applicability of notice provisions does not appear to be integral to New York’s insurance regulations. For most types of insurance policies, New York requires a showing of prejudice from late notices. For maritime policies, it does not. The Court has been unable to locate — and the parties do not suggest — that New York insurance systems would be impaired by the application of a “prejudice” standard to maritime policies. Indeed, it appears that New York law would allow a policy of maritime insurance to include a “with prejudice” provision. New York merely provides that a maritime insurance policy will be enforced as written on notice issues. Conversely, article 21.42 of the Texas Insurance Code is a broad based protection for Texas insurance consumers. If Texas is unable to regulate insurance sold to Texans by being forced to recognize choice of law provisions in contracts sold to Texans, it would greatly impair the Texas system of laws.
With respect to the relevant policies of the state of the forum, the Court finds that this factor concerns Courts sitting in diversity and is inapplicable to a bankruptcy Court sitting in an admiralty case.
With respect to the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, there are no other interested states other than New York and Texas. The first factor, analyzed above, controls.
With respect to the protection of justified expectations, the factor is neutral. There is no summary judgment evidence that the parties had any particular expectations concerning the notice provisions and the application of a prejudice rule.
With respect to the basic policies underlying the field of law, Texas law is heavily favored. Insurance regulation has largely been a product of state law. Wilburn Boat Co., 348 U.S. at 317, 75 S.Ct. 368. This is also true for maritime insurance. Id. At 320-21. Texas and New York both generally recognize the merits of requiring prejudice to be shown when notice is late. Although New York makes a distinction in the field of maritime insurance, that distinction pales in favor of the overall concerns expressed both in Texas insurance regulatory needs, and the broader implications of requiring a showing of prejudice. Moreover, when a state has enacted a law to protect its citizens who were the intended beneficiaries of insurance policies, that law (depending on the totality of the facts) *702may be recognized as creating a compelling interest in favor of the state’s regulatory insurance scheme. Aqua-Marine Constructors, Inc. v. Banks, 110 F.3d 663, 674 (9th Cir.1997). In Aqua-Marine, the maritime policy contained a Washington choice of law provision. The policy had been issued to an Oregon resident. The issue was whether the insurer was required to post a litigation bond under Oregon law following the arrest of a ship. Under Washington law, the bond would not have been required. The Court, applying the Restatement under federal maritime law, applied Oregon law. The Court’s reasoning is instructive here:
Of those three states, Oregon has a considerably greater interest in the application of its insurance code than do either California or Washington: Oregon has a strong interest in the protection of its citizens, including Aqua-Marine, against ■ the insolvency of a foreign insurer.
Id.
Although the Court is unable to locate a Fifth Circuit maritime insurance case directly resolving the conflict between a choice of law provision and contrary state regulations, the Fifth Circuit has squarely addressed the resolution of Texas law in maritime insurance disputes when Texas law mandates (as in this case) a showing of harm from an insured’s breach. In Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882 (5th Cir.1991), the issue was whether an unintentional misrepresentation in the acquisition of an insurance policy would preclude the insured from claiming under the policy. In explaining why the Court applied Texas law, the rationale is wholly analogous to the situation presented to this Court:
State insurance law generally should not govern marine insurance disputes if the state does not have a substantial and legitimate interest in the application of its law. Federal maritime law
properly controls any maritime dispute in the absence of a substantial and legitimate state interest. Stated conversely, state law should not be applied unless the local state interest materially exceeds the comparative maritime concerns in the' controversy. See Grant Smith-Porter Ship Co. v. Rohde, 257 U.S. 469, 477, 42 S.Ct. 157, 158, 66 L.Ed. 321 (1922); Walter v. Marine Office of America, 537 F.2d 89, 94-95 (5th Cir.1976). It is evident in the instant case that the local state interest is substantial and legitimate. Regulation of insurance relationships, including marine insurance relationships, has historically been a matter of state concern. See Wilburn Boat Co., 348 U.S. at 316, 75 S.Ct. at 371. From their experience, states are far better equipped to balance the risks that each party to an insurance contract endures. The State of Texas has concluded that the burden of unintentional misrepresentations should fall on the insurance underwriter. Texas has a material interest in ensuring that marine insurance underwriters do not invalidate the insurance protection of Texas citizens on the basis of misrepresentations that were neither willfully or intentionally asserted. [Italics in original; bold added ].
Id. at 887-88.
The Fifth Circuit continued its analysis, when choosing whether to apply Louisiana or Texas law. Although Louisiana had a substantial interest in the application of its law, the Court selected Texas law because of its affirmative policies embodied in its insurance regulations:
A review of the first two choice of law rules reveals that both Texas and Louisiana have sufficient contact with the marine insurance policy and the parties to support the application of their insurance laws. Of these two states, Texas *703has a considerably greater interest in the application of its insurance code. Texas has a strong interest in the protection of its citizens, including Anh Thi Kieu, against the overbearing tactics of insurance underwriters. Louisiana’s interest in the protection of citizens of foreign states is less significant. The insurance laws of Texas should have been applied, and appropriately, the district court so applied them. Albany’s argument that Louisiana insurance law governs its dispute with Anh Thi Kieu lacks merit, [bold added].
Id. at 891.
With respect to certainty, predictability, and uniformity of result, the Court finds this factor to be neutral. There is no summary judgment evidence to lead to a different conclusion.
With respect to the ease of determination of the law to be applied, this factor favors the application of New York law. The contract specifies New York law, and the application of the laws of another state (applied through federal maritime law) requires an analysis of factual determinations such as the residence of the insured. Although this factual burden is not heavy, there are no factual issues if the contract’s forum selection clause is followed.
Applying the Restatement, the Court is mandated to apply Texas law. Texas has a substantially greater interest in the outcome of this dispute than New York. The only factor favoring the application of New York law concerns the ease of determination of applicable law. That factor cannot outweigh the strong interests of the State of Texas.
Excluded Acts
As set forth in the Background section above, the lawsuit primarily concerns allegations of willful misconduct by ATP that are likely excluded from coverage under the insurance policy. However, in determining a duty to defend, “[e]ven if a plaintiff’s complaint alleges multiple claims or claims in the alternative, some of which are covered under the policy and some of which are not, the duty to defend arises if at least one of the claims in the complaint is facially within the policy’s coverage.” Matagorda Ventures v. Travelers Lloyds Ins. Co., 203 F.Supp.2d 704 (S.D.Tex.2000). Under Texas law, “[o]nce coverage has been found for any portion of a suit, an insurer must defend the entire suit. St. Paul Ins. Co. v. Tex. Dep’t of Transp., 999 S.W.2d 881, 884 (Tex.App.-Austin 1999, pet. denied).
The policy covers negligent acts. The lawsuit alleges some negligent acts. Accordingly, under the familiar eight-corners rule, Water Quality must defend the lawsuit. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merck Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997).
Conclusion
Whether determined under a plain reading of § 21.42 of the Texas Insurance Code, or under a more thorough analysis under federal maritime law applying the Restatement of Conflicts, Texas law applies to this dispute. Accordingly, Water Quality Insurance Syndicate must reimburse ATP for ATP’s defense costs and expenses incurred in defending United States v. ATP Oil & Gas Corp., et al., C.A. 2:13-cv-00262-NJB-KWR pending in the United States District Court for the Eastern District of Louisiana.
. If a party fails to support an assertion or to address another party’s assertion as required, by Rule 56(c), the Court may (1) give an opportunity to properly support or address the fact; (2) consider the fact undisputed for purposes of the motion; (3) grant summary judgment if, taking the undisputed facts into account, the movant is entitled to it; or (4) issue any other appropriate order. Fed. R.Civ.P. 56(e). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498347/ | OPINION AND ORDER AFFIRMING THE BANKRUPTCY COURT’S ORDER CONFIRMING DEBTOR’S SECOND AMENDED CHAPTER 13 PLAN
PATRICK J. DUGGAN, District Judge.
I. INTRODUCTION
Appellant David Wm. Ruskin, the Chapter 13 bankruptcy trustee, appeals the order of the Bankruptcy Court for the Eastern District of Michigan confirming the second amended Chapter 13 bankruptcy plan of Brenda J. Blackshear, the Appellee and debtor in this case. The trustee claims that the plan should not have been confirmed because Blackshear failed to satisfy three particular conditions of confirmation codified at 11 U.S.C. § 1325, the Bankruptcy Code provision governing confirmation of Chapter 13 plans.
The matter is fully briefed. Upon review of the record and briefs on appeal, the Court concludes that oral argument would not aid the decisional process. See E.D. Mich. LR 7.1(f)(2). For the reasons that follow, the Court will affirm the Bankruptcy Court’s order confirming Black-shear’s second amended plan.
II. BACKGROUND
Blackshear filed her Chapter 13 bankruptcy petition on March 7, 2014. The petition was filed on behalf of herself only; her husband did not join the petition. Blackshear and her husband live together and are not separated.
Together with her Chapter 13 petition, Blackshear filed a “Schedule I,” a form used to calculate monthly income, a “Schedule J,” a form used to calculate *714monthly expenses, and a Form B22C, Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income. The Schedule I and Schedule J were later amended.
On her amended Schedule I, Blackshear indicated that her net monthly income is $4,406. Blackshear also indicated that her husband’s net monthly income is “0.00,” even though the amended Schedule I also reflects that her husband was then employed as a bus driver with the City of Detroit. Although the husband’s income is not reflected on the amended Schedule I, Blackshear wrote on Form B22C that her husband’s average gross monthly income during the six-month period preceding the filing of Blackshear’s bankruptcy petition is $1,995 and furnished to the trustee pay stubs for the husband’s position as a bus driver. In addition, Blackshear indicated on the amended Schedule I that her husband “contributes approximately $600 per month to the household expenses.”1
On her amended Schedule J, Blackshear indicated that her monthly expenses are $2,780, resulting in a monthly surplus after expenses of $1,626 (i.e., $4,406 minus $2,780). Blackshear’s second amended Chapter 13 plan, which was confirmed by the Bankruptcy Court over the trustee’s objection after a hearing on September 25, 2014, calls for monthly plan payments of $1,650 for a period of sixty months.2
The trustee appeals the Bankruptcy Court’s order confirming the second amended Chapter 13 plan. The matter is now fully briefed and ready for decision.
III. ANALYSIS
The requirements for confirmation of a proposed plan under Chapter 13 of the Bankruptcy Code are set forth in 11 U.S.C. § 1325. Shaw v. Aurgroup Fin. Credit Union, 552 F.3d 447, 462 (6th Cir. 2009). Blackshear bears “the ultimate burden of proof to show the requirements of 11 U.S.C. § 1325 have been met,” In re Lofty, 437 B.R. 578, 584 (Bankr.S.D.Ohio 2010), a burden that the trustee contends is not satisfied here.
Specifically, the trustee argues that Blackshear failed to satisfy three particular requirements for confirmation. First, the trustee argues that Blackshear has not shown that all of her disposable income will be allocated to plan payments. See 11 U.S.C. § 1325(b)(1). Under § 1325(b)(1), “[i]f the trustee ... objects to the confirmation of [a Chapter 13] plan,” as the trustee here has done, “then the court may not approve the plan unless ... the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period ... will be applied to make payments to unsecured creditors under the plan.”
Second, the trustee argues that Blackshear has not shown that “the plan has been proposed in good faith,” 11 U.S.C. § 1325(a) (3), a determination “requiring] an inquiry into all the facts and circumstances of a debtor’s proposed plan.” In re Okoreeh-Baah, 836 F.2d 1030, 1033 (6th Cir.1988).
Finally, .the trustee argues that Blackshear has not satisfied the “feasibility” requirement of 11 U.S.C. § 1325(a)(6), requiring a showing that she “will be able to make all payments under the plan and to comply with the plan,” 11 U.S.C. § 1325(a)(6), or, stated differently, “that it is likely that [she] will have the necessary *715resources to make all payments as directed by the plan.” In re Fantasia, 211 B.R. 420, 423 (1st Cir. BAP 1997).
For the reasons that follow, the Court rejects the trustee’s argument that Black-shear failed to satisfy these confirmation requirements and affirms the Bankruptcy Court’s confirmation order.
As the trustee objected to the confirmation of Blackshear’s second amended Chapter 13 plan, the Bankruptcy Court could not confirm the plan unless satisfied that Blackshear is committing all of her disposable income to plan payments. 11 U.S.C. § 1325(b)(1). “Disposable income” is defined as “current monthly income received by the debtor ...' less amounts reasonably necessary to be expended” for certain approved items. Id. § 1325(b)(2), (3). “Current monthly income,” in turn, is defined as “the average monthly income from all sources that the debtor receives” in the six-month period preceding the bankruptcy filing, “including] any amount paid by any entity other than the debtor ... on a regular basis for the household expenses of the debtor or the debtor’s dependents.” Id. § 101(10A). Current monthly income, then, includes “[cjontributions to household expenses by a non-filing spouse.” In re Rodgers, No. 14-41824-13, 2014 WL 4988388, at *1 (Bankr.W.D.Mo. Oct. 7, 2014). Therefore, to calculate the disposable income of a married debtor living with a non-filing spouse, a court must know whether the debtor’s non-filing spouse regularly contributes to the debtor’s household expenses and, if so, the amount of such contributions.
Here, the Bankruptcy Court knew that Blackshear’s husband contributed $600 per month to Blackshear’s household expenses, as Blackshear disclosed this information on her Schedule I. Thus, the Bankruptcy Court had the information it needed about the finances of Blackshear’s husband to calculate Blackshear’s disposable income. See 8 Collier on Bankruptcy ¶ 1325.11[4][b] p. 1325-60 (16th ed. 2015) (“The definition [of disposable income] ... makes clear that the income of other household members, including a nondebtor spouse, can be considered only to the extent that it is regularly contributed to household expenses of the debtor and the debtor’s dependents.” (emphasis added)); In re Quarterman, 342 B.R. 647, 651 (Bankr.M.D.Fla.2006) (“[C]urrent monthly income does not include all the income of the non-debtor spouse, but rather only amounts expended on a regular basis for household expenses.” (emphasis in original)).
However, the trustee argues that without additional information about the husband’s finances — namely, his income and expenses — the Bankruptcy Court had no way of knowing that the husband is contributing to household expenses in an appropriate amount. Whether the husband is contributing to household expenses in an appropriate amount impacts whether Blackshear is devoting all of her disposable income to plan payments, as required by § 1325(b)(1), and whether the plan was proposed in good faith, as required by § 1325(a)(3). This is because (1) without knowing the husband’s income and expenses, and thus how much money he has remaining after paying his own expenses, it is impossible to assess whether $600 per month is too much or too little for him to be paying in household expenses; (2) whether Blackshear’s husband is contributing an appropriate amount to household expenses bears on whether Blackshear is committing all of her disposable income to plan payments because (a) the more her husband contributes to household expenses, the greater Blackshear’s current monthly income, as current monthly income includes amounts paid by a non-filing spouse on a regular basis for the house*716hold expenses; (b) the greater Black-shear’s current monthly income, the greater her disposable income; and (c) the greater Blackshear’s disposable income,, the more money she can devote to plan payments. In other words, as one court has put it, “without ... information as to [the non-filing spouse’s] income and expenses, it is impossible to tell whether the [d]ebtor is, in effect, subsidizing [the non-filing spouse’s] expenses at the expense of [the debtor’s] unsecured creditors.” In re Rodgers, 2014 WL 4988388, at *3.
The trustee also argues that without knowing the income and expenses of Blackshear’s husband, the Bankruptcy Court could not determine whether Black-shear’s proposed second amended Chapter 13 plan is feasible, as required by § 1325(a)(6), because without knowing how much the husband can afford to pay in household expenses, the Bankruptcy Court and Blackshear cannot be sufficiently sure that Blackshear can count on receiving a $600 contribution every month from her husband; if Blackshear does not receive a monthly contribution from her husband in the anticipated amount of $600, she may not have enough money to satisfy her obligation under the plan.
There is case law supporting the trustee’s position that knowing the non-filing spouse’s income and expenses is necessary to determine both whether the debtor is devoting all disposable income to plan payments under § 1325(b)(1), and whether the plan is proposed in good faith under § 1325(a)(3). For example, the Chapter 13 debtor in Rodgers, the principle case on which the trustee relies, lived with his non-filing wife, who earned an estimated $60,000 to $70,000 per year and contributed “some funds” to the running of the household. 2014 WL 4988388, at *1. However, because the spouse “want[ed] no involvement whatsoever in the [d]ebtor’s bankruptcy case and refusefd] to cooperate in providing the Trustee with information about her financial circumstances,” the debtor listed no income attributable to his wife on the Schedule I, nor did the debtor indicate how much his spouse contributed to household expenses, prompting the trustee to object to confirmation of the plan. Id.
The bankruptcy court sustained the trustee’s objection and granted the trustee’s motion to deny confirmation, holding that “a Plan ... cannot be approved without disclosure of regular contributions to the household by a non-debtor.” Id. at *2. The court reasoned that because “§ 1325(b) requires a Chapter 13 debtor to devote all ‘current monthly income’ to plan payments,” and because “ ‘current monthly income’ expressly includes ‘any amount paid by any entity other than the debtor ... on a regular basis for the household expenses of the debtor or the debtor’s dependents,’ .... there is no way of knowing whether [the debtor] is contributing all ‘current monthly income’ to the Plan” “without knowing what [the non-filing spouse] contributes to the household ... expenses.” Id. The court also held that it could not determine whether the plan was proposed in good faith because “without ... information as to [the non-filing spouse’s] income and expenses, it is impossible to tell whether the [d]ebtor is, in effect, subsidizing [the non-filing spouse’s] expenses at the expense of [the debtor’s] unsecured creditors.” Id. at *3. Thus, the court wrote that “disclosure of a non-filing spouse’s income is not ‘voluntary.’ ” Id. at *2.
The bankruptcy courts in In re Cardillo, 170 B.R. 490 (Bankr.D.N.H.1994), and In re Kuhns, No. 11-31518, 2011 WL 4713225 (Bankr.N.D.Ohio Oct. 7, 2011), two additional cases on which the trustee relies, reached the same conclusion on facts similar to those in Rodgers. The court in *717Cardillo denied confirmation of a Chapter 13 plan, concluding that the debtor’s failure to disclose the income and expenses of his non-filing spouse precluded both a determination under § 1325(b)(1) that the debtor was devoting all of his income to plan payments, and a determination under § 1325(a)(3) that the plan was proposed in good faith. In so holding, the court wrote that “a non-debtor spouse’s income and expenses are to be taken into consideration when determining whether all of the debt- or’s disposable income is being applied to the plan.” 170 B.R. at 492.
Similarly, in Kuhns, the court dismissed the debtor’s Chapter 7 ease because the debtor failed to disclose his non-filing wife’s income and the amount she contributed to household expenses. 2011 WL 4713225, at *3. The debtor testified that he did not know his wife’s income or the amount she contributed to household expenses, although the debtor knew that his wife was employed and paid some of the household expenses, because his wife refused to share this information with him. Id. at *1-2. Nevertheless, the bankruptcy court dismissed the case, holding that “while it may not be necessary for a non-filing spouse’s income in excess of that paid on a regular basis for the household expenses of a debtor and the debtor’s dependents to be applied to pay the debtor’s creditors, the spouse’s income information is necessary” to determine whether a Chapter 7 case is abusive under the code provision governing dismissal and conversion of Chapter 7 cases. Id. at *3.
The factual circumstances of Rodgers, Cardillo, and Kuhns are similar to, but not exactly the same as, those in the present case. The crucial difference between the present case and the three cases on which the trustee relies is that the Bankruptcy Court in the present case had more information regarding the financial circumstances of the non-filing spouse than did the courts in the other three cases. First, the Bankruptcy Court here knew the amount that Blackshear’s husband contributed to household expenses, as Blackshear disclosed that information on her Schedule I. Conversely, the bankruptcy courts in Rodgers, Cardillo, . and Kuhns did not know the amount of the non-filing spouses’ contributions to household expenses, as that information was undisclosed.
Second and of equal importance, the Bankruptcy Court in the present case, unlike the courts in the other cases, had a sense for the amount of monthly income earned by the non-filing spouse in the months preceding the debtor’s filing. Blackshear’s counsel indicated during the hearing before the Bankruptcy Court on September 25, 2014 that pay stubs in connection with the husband’s job as a bus driver for the City of Detroit were furnished to the trustee, and offered to furnish additional pay stubs.3 In addition, although Blackshear did not disclose her husband’s income on the Schedule I, she did disclose it on Form B22C. On that form, Blackshear indicated that her husband’s average gross monthly income during the six-month period preceding the filing of the bankruptcy petition was $1,995.46. Of that amount, Blackshear disclosed on her Schedule I that her husband was contributing approximately $600 to household expenses, leaving approximately $1,400 unaccounted for. Blackshear’s counsel represented to the Bankruptcy Court at the September 25 hearing that although he “can’t explain where [the ex*718cess] money goes” due to “[t]he inability [of the husband] to even describe to me what his expenses were,” “what became apparent was that he contributes ... at most on average $600 in any given month” to household expenses and that, regardless of how his remaining income was being spent, if at all, “[Blackshear] wasn’t receiving the benefit of it.” 9/25/14 Hr’g at 5-6 (ECF No. 10).
In sum, the Bankruptcy Court knew how much Blackshear’s husband was contributing per month to household expenses, and it also had a sense of his monthly income. Conversely, in Rodgers, Cardillo, and Kuhns, this critical information about the finances of the non-filing spouses was undisclosed and unknown, making it impossible for the bankruptcy courts in those cases to calculate the disposable income of the respective debtors and to determine whether the plans in those cases were proposed in good faith. Thus, in the present case, significantly less information about the finances of the non-filing spouse was unknown to the Bankruptcy Court. The only pertinent information about the finances of Blackshear’s husband that was unknown to the Bankruptcy Court was what the husband was doing with the portion of his monthly income — approximately $1,400 — that he was not contributing to household expenses. At the September 25, 2014 hearing, the Bankruptcy Court explored this issue with counsel and accepted Blackshear’s position that she was not benefiting from the unaccounted-for portion of her husband’s income. • The Bankruptcy Court concluded that “even if [Blackshear’s husband] had a lavish lifestyle, there’s nothing that [the court] can do ... if it’s not benefiting [Blackshear]” because “there’s nothing [the court] can do to compel [Blackshear’s husband] to contribute [more money] to [Blackshear’s] plan.” 9/25/14 Hr’g at 7. The Bankruptcy Court also noted that no creditors had objected to confirmation of the plan and that “even if [Blackshear’s] husband should contribute a few more dollars, there’s no way to compel him to do so.” Id. at 12. Finding that “th[e] plan is in the best interests of all creditors” and that Blackshear “is contributing the maximum amount she could” to plan payments, the Bankruptcy Court overruled the trustee’s objection and confirmed the plan. 9/25/14 Hr’g at 12.
The Court will affirm the Bankruptcy Court’s order confirming Blackshear’s Chapter 13 plan. The factual differences between the present case and the cases on which the trustee relies render those cases inapplicable here. Although the Bankruptcy Court did not have a complete picture of the finances of Blackshear’s husband, it had enough information about his financial situation to calculate Blackshear’s disposable income and conclude that Blackshear was devoting all of that income to plan payments, that the plan was proposed in good faith, and that the plan is feasible.
The good faith determination “requires an inquiry into all the facts and circumstances of a debtor’s proposed plan,” In re Okoreeh-Baah, 886 F.2d at 1033, and a plan lacks good faith “[o]nly if there has been a showing of serious debtor misconduct or abuse.” 8 Collier on Bankruptcy ¶ 1325.04[1] p. 1325-17. Considering the totality of circumstances here, the present record contains ample support for the Bankruptcy Court’s implicit conclusion that the plan was proposed in good faith, and its conclusion is entitled to deference on review. See id. at 1325-18 (“Because the determination regarding good faith is fact-intensive, it is usually not reversible on appeal unless it is clearly erroneous or based on an error of law.”).
The same goes for the Bankruptcy Court’s implicit conclusion that the plan is feasible. “The bankruptcy court may re*719fuse to confirm a chapter 13 plan if the court finds that the debtor will be unable to make all payments under the plan.” Id. ¶ 1325.07[1] p. 1325-48. “Thus, when a debtor’s budget shows a clear inability to make the proposed plan payments, the plan is not entitled to confirmation.” Id. Here, the Bankruptcy Court was satisfied based on all the information before it that Blackshear would continue receiving a monthly contribution of $600 from her husband;- there is nothing in the record suggesting a “clear inability” of the husband to contribute to household expenses in the designated amount of $600, and there is. thus nothing to suggest that Blackshear will falter on her plan payments because of her husband’s failure to contribute. The Bankruptcy Court’s conclusion on feasibility is entitled to deference on review and will not be disturbed. See id. at 1325-49 (“The determination of feasibility must be done on a case by case basis and is not subject to per se rules. Ordinarily, the bankruptcy court’s findings on feasibility should be given considerable deference.” (footnotes omitted)).
IV. CONCLUSION
For the reasons stated, the order of the Bankruptcy Court confirming Blackshear’s second amended Chapter 13 plan is AFFIRMED.
. Blackshear's net monthly income of $4,406 includes the $600 monthly contribution received from her husband.
. The reasoning underlying the Bankruptcy Court’s decision to confirm Blackshear’s plan is better understood in the context of the legal issues raised and is thus discussed below.
. Counsel also informed the Bankruptcy Court that the pay stubs reflected that the husband’s wages were subject to active garnishment, that "[h]e’s got his own creditors attacking him,” and that he was not "living a lavish lifestyle or ... squirreling away all this money to deal with things.” 9/25/14 Hr’g at 4, 6. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498348/ | MEMORANDUM OF DECISION AND ORDER REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT
John P. Gustafson, United States Bankruptcy Judge
Plaintiffs Kymberly A. Botson and Christopher J. Botson are the debtors in the underlying Chapter 7 case. On May 2, 2014, Plaintiffs commenced this adversary proceeding, requesting injunctive relief against Defendant Citizens Banking Company (“Defendant” or “CBC”) for alleged violations of 11 U.S.C. § 524 and 11 U.S.C. § 524(a)(2). [Doc. # 1], Specifically, Plaintiffs allege that Defendant’s refusal to remove a 2009 UCC-1 financing statement, and Defendant’s filing of a UCC-3 continuation statement, are violations of the discharge injunction. This proceeding is now before the court on Plaintiffs’ Motion for Summary Judgment (“Plaintiffs’ Motion”) [Doc. #23], Defendant’s Combined Motion for Summary Judgment and Memorandum Contra to Plaintiffs’ Motion (“Defendant’s Motion”) [Doc. #24], Plaintiffs’ Response in Opposition to Defendant’s Motion (“Plaintiffs’ Response”) [Doc. #29], and Defendant’s Reply to Plaintiff s Response (“Defendant’s Reply”) [Doc. # 33],
Having considered • the parties’ respective arguments, for the reasons that follow, Plaintiffs’ Motion will be denied, and Defendant’s Motion will be granted.
FACTUAL BACKGROUND1
Unless otherwise indicated, the following facts are not in dispute. In 2009, Plaintiffs and Defendant entered into a loan and security agreement.2 At the time they received the loan, Plaintiffs were the owners of The Fremont Agency, Inc., an insurance agency with two locations. [Case No. 11-36509, Doc. # 12, p. 4]. On March 20, 2009, as part of the loan transaction, Defendant filed a UCC-1 financing statement with the Ohio Secretary of State. [Doc. *722# 1-4, Ex. C]. Pursuant to the terms of the financing statement, Defendant was granted a lien in “[a]ll accounts receivable and all business assets, whether now owned or hereafter acquired by debtor, wherever located, together with any replacements thereof and additions and accessions thereto and all products and proceeds of the foregoing.” [Id.].
On December 8, 2011, Plaintiffs filed for Chapter 7 bankruptcy protection. [Case No. 11-36509, Doc. # 1]. Defendant was not initially notified of Plaintiffs’ Chapter 7 filing, as Plaintiffs did not list Defendant as a creditor in their bankruptcy schedules. [Id., Doc. ## 1, 6].
In its Motion, CBC states that it “happened upon the [Plaintiffs’] bankruptcy filing in February of 2012, when Plaintiffs and Defendant were discussing a possible settlement of the outstanding balance owed to Defendant. [Doc. #24, p. 3]. Upon discovery of Plaintiffs’ bankruptcy filing, CBC discontinued all contact with Plaintiffs. These factual allegations were, also asserted in the affidavit of Misty A. Baker, CBC’s Vice-President, Special Assets Group. [Doc. #24-1, Exhibit A], Ms. Baker’s affidavit avers that between the time of Plaintiffs’ filing on December 8, 2011, and January 31, 2012, CBC was not notified, either informally by Plaintiffs or formally through the court, that Plaintiffs had filed for Chapter 7 protection. [Id., ¶ 4], On March 2, 2012, Plaintiffs filed an Amended Summary of Schedules and an Amended Schedule F, adding CBC to their schedules as a creditor holding unsecured nonpriority claims. [Case No. 11-36509, Doc. # 18]. This caused the adjournment of the § 341 Meeting of Creditors, which was continued to April 2, 2012. [Id., Doc. #19].
On August 2, 2012, the Plaintiffs received tbeir order of discharge from the court. [Id., Doc. #49]. The Debtors’ Chapter 7 was an asset case, and court records reflect that Citizens Banking Company received a dividend of $324.32 on its claim for $49,987.10. [Id., Doc. # 59-1].
At an unspecified point in time, between August 2, 2012 and January 1, 2014, Plaintiffs allege that they contacted Defendant and requested that CBC remove the UCC-1 filing, based upon the underlying obligation having been discharged in their bankruptcy. Plaintiffs further allege in their Motion that CBC replied that the UCC-1 would “only be withdrawn after Plaintiff surrendered the full amount demanded by [CBC].” [Doc. # 23, p. 3]. On January 1, 2014, Plaintiffs’ attorney sent a letter to CBC, requesting that CBC withdraw the UCC filing, as “11 USC 524 of the bankruptcy code requires that all collection actions on the part of a creditor be discontinued” after debtors receive their discharge. [Doc. 1-6, Ex. E]. CBC did not respond to Plaintiffs’ request.
On January 14, 2014, Defendant filed a UCC-3 continuation statement with the Ohio Secretary of State. Several months later, on May 2, 2014, Plaintiffs filed the Complaint now before the court, requesting the court to find that CBC violated the discharge injunction. Plaintiffs seek in-junctive relief, in the form of the court ordering that Defendant remove the UCC-1 filing. Plaintiffs also request punitive damages in the amount of $10,000.00, along with legal fees “and any other remedy this Court would find appropriate.” [Doc. # 1].
In its answer to the Complaint, CBC states that it is a secured creditor, and as such, may file pursuant to 11 U.S.C. § 362(b)(3) “a UCC continuation statement to continue perfection of its security in its collateral.” [Doc. #5, ¶2], CBC also maintains that filing a UCC continuation statement in am effort to maintain its perfection of a security interest in collateral is *723not a violation of the discharge injunction under 11 U.S.C. § 524(a)(2).
LAW AND ANALYSIS
I. Summary Judgment Standard
Under Rule 56 of the Federal Rules of Civil Procedure, made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7056, summary judgment is proper only where there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). In reviewing a motion for summary judgment, however, all inferences “must be viewed in the light most favorable to the party opposing the motion.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
The party moving for summary judgment always bears the initial responsibility of informing the court of the basis for its motion, “and identifying those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits if any’ which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the moving party has met its initial burden, the adverse party “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.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
A genuine issue for trial exists if the evidence is such that a reasonable factfin-der could find in favor of the nonmoving party. Id. “The non-moving party, however, must provide more than mere allegations or denials ... without giving any significant probative evidence to support” its position. Berryman v. Rieger, 150 F.3d 561, 566 (6th Cir.1998).
Where the parties have filed cross-motions for summary judgment, the court must consider each motion separately on its merits, since each party, as a movant for summary judgment, bears the burden to establish both the nonexistence of genuine issues of material fact and that party’s entitlement to judgment as a matter of law. Lansing Dairy v. Espy, 39 F.3d 1339, 1347 (6th Cir.1994); Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 463 n. 6 (6th Cir.1999).
The fact that both parties simultaneously argue that there are no genuine factual issues does not in itself establish that a trial is unnecessary, and the fact that one party has failed to sustain its burden under Rule 56 does not automatically entitle the opposing party to summary judgment. See, Parks v. LaFace Records, 329 F.3d 437, 444-445 (6th Cir.2003); B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d 587, 593 (6th Cir.2001); 10A Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice and Procedure: Civil 3d § 2720 (1998).
II. Plaintiffs’ Claims Under § 524 and Motion for Summary Judgment
Plaintiffs move for summary judgment on their claims seeking injunctive relief, punitive damages, and legal fees, arguing that Defendant committed a contemptuous act and violated the discharge injunction set forth in 11 U.S.C. § 524(a)(2), in both refusing to remove the UCC-1 financing statement and in filing a UCC-3 continuation statement in January 2014.
Once an order granting a discharge is entered, § 524(a) of the Bankruptcy Code gives rise to an injunction against “an act, to collect, recover or offset any such debt [discharged under § 727] as a personal *724liability of the debtor....” 11 U.S.C. § 524(a)(2).
In the Sixth Circuit, there is no statutory private right of action for damages under 11 U.S.C. § 524 or 11 U.S.C. § 105 for violation of the discharge injunction. Pertuso v. Ford Motor Co., 233 F.3d 417, 421-23 (6th Cir.2000). However, violation of the discharge injunction does expose a creditor to potential contempt of court. Id.; Cox v. Zale Del., Inc., 239 F.3d 910, 916 (7th Cir.2001); Lohmeyer v. Alvin’s Jewelers (In re Lohmeyer), 365 B.R. 746, 749 (Bankr.N.D.Ohio 2007). “A creditor who undertakes to collect a discharged debt from a debtor violates the discharge injunction and is in contempt of the court that issued the discharge order.” Former v. Overdorf (In re Former), 262 B.R. 350, 358 (Bankr.W.D.Pa.2001)3. If the contempt is established, the injured party may be able to recover damages as a sanction for the contempt. Chambers v. GreenPoint Credit (In re Chambers), 324 B.R. 326, 329 (Bankr.N.D.Ohio 2005).
To prevail in a civil contempt proceeding, a plaintiff must prove that the defendant “ ‘violated a definite and specific order of the court requiring him to perform or refrain from performing a particular act or acts with knowledge of the court’s order.’ ” Liberte Capital Group, LLC v. Capwill, 462 F.3d 543, 550 (6th Cir.2006)(quoting, Glover v. Johnson, 934 F.2d 703, 707 (6th Cir.1991)). In the context of a discharge injunction, a debtor must demonstrate that the defendant (i) violated the discharge injunction (and thus the order granting the discharge) and (ii) did so with knowledge that the injunction was in place. In re Franks, 363 B.R. 839, 843 (Bankr.N.D.Ohio 2006). The plaintiff bears the burden of proving both elements, violation and knowledge, by clear and convincing evidence. Liberte Capital Group, 462 F.3d at 550. The Sixth Circuit requires that actual knowledge give rise to contempt, as opposed to merely constructive knowledge. See, Newman v. Ethridge (In re Newman), 803 F.2d 721 (table), 1986 WL 17762 at *1, 1986 U.S.App. LEXIS 29820 at *3 (6th Cir.l986)(“Notice of the bankruptcy need not be formal; the court is to look to whether the creditor had actual knowledge.”); Franks, 363 B.R. at 843.
The focus of Plaintiffs’ Motion is that Defendant’s filing of the UCC-3 continuation statement is a violation of the discharge injunction, due to the “after-acquired property clause” contained within the UCC-1 financing statement, and that *725the clause “is invalid under 11 U.S.C. § 552.” [Doc. #23, p. 4], Plaintiffs believe that the financing statement, which lists as collateral, “[a]ll accounts receivable and all business assets, whether now owned or hereafter acquired by debtor ...” (emphasis added), allows Defendant to collect on discharged debt, by going after property “hereafter” acquired by the Debtors.
Similarly, in Plaintiffs’ Response, the primary focus is on again on 11 U.S.C. § 552(a), which reads, in relevant part, that “property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.” [Doc. #23, p. 6]. Therefore, Plaintiffs allege, Defendant’s refusal to remove the financing statement and the act of renewing the financing statement, that contains an after-acquired property clause, violates the discharge injunction as a matter of law.
In the case at bar, Plaintiffs have not satisfied the first element.necessary for a finding of contempt: clear and convincing evidence that the discharge injunction has been violated. As will be discussed in Section III of this Opinion, the court finds that the allegations, and the evidence submitted, are insufficient to find that a violation of the discharge injunction has occurred. Defendant’s actions in not removing the lien, and in renewing it, do not violate the discharge injunction as a matter of law, as Plaintiffs contend. Accordingly, Plaintiffs’ Motion for Summary Judgment will be denied.
III. CBC’s Motion for Summary Judgment on Claims under § 552(b)(Z)
Defendant asserts that neither its renewal of its prepetition lien nor its refusal to release the UCC financing statement is an action in violation of the Debtors’ discharge injunction.4
It is well-established that the purpose of the discharge injunction of § 524 is to promote the fresh start policy of the Bankruptcy Code by protecting debtors against actions brought on prepet-ition debts. In re Jarrett, 293 B.R. 127, 131 (Bankr.N.D.Ohio 2002) (citing, Hassanally v. Republic Bank (In re Hassanally), 208 B.R. 46, 49 (9th Cir. BAP 1997)); In re Zarro, 268 B.R. 715, 720 (Bankr.S.D.N.Y.2001)). However, as the Supreme Court has stated: “a bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, an action against the debt- or in personam — while leaving intact another — namely, an action against the debt- or in rem.” Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 2154, 115 L.Ed.2d 66 (1991)
Ordinarily, valid prepetition liens pass through bankruptcy unaffected. Dewsnup v. Timm, 502 U.S. 410, 417-418, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); Farrey v. Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991), In re Medcorp., 472 B.R. 444, 449 (Bankr.N.D.Ohio 2012); In re Rountree, 448 B.R. 389, 401-402 (Bankr.E.D.Va.2011). More precisely, if valid liens have not been disallowed or avoided, they survive the in per-sonam discharge of the underlying debt. *726See, Estate of Lellock v. Prudential Ins. Co. Of America, 811 F.2d 186, 189 (3rd Cir.1987); Stevenhagen v. Helms, 900 F.2d 260 (Table), 1990 WL 47474,1990 U.S.App. LEXIS 6133 (6th Cir. April 18, 1990); In re Cusato, 485 B.R. 824, 828 (Bankr.E.D.Pa.2013); In re Johnson, 439 B.R. 416, 428 (Bankr.E.D.Mich.2010); In re Johnson, 386 B.R. 272, 281 (Bankr.D.Idaho 2008); United Presidential Life Ins. Co. v. Barker, 31 B.R. 145, 148 (N.D.Tex.1983). Thus, “[i]n the absence of a lien avoidance action, a secured creditor may look to the property securing the claim for satisfaction of its prepetition lien, but may not look to the debtor personally for payment.” In re Mayes, 294 B.R. 145, 150 (10th Cir. BAP 2003).
The issue in this case is: does CBC’s refusal to remove its valid prepetition lien, and the renewal of that lien, constitute an action taken against Debtors in personam, violating the discharge injunction of Section 524?
As a general proposition, where liens have “passed through bankruptcy unaffected”, a creditor may exercise valid lien rights postdischarge without violating the discharge injunction. “Creditors are not prevented from postdischarge enforcement of a valid lien on property of the debtor that existed at the time of the entry of the order for relief, if the lien was not avoided under the Code.” 4 Collier on Bankruptcy, ¶ 524.02[2][d] at 524-31 (16th ed. 2015); see also, In re Kinion, 207 F.3d 751, 757 (5th Cir.2000)(“the injunction may not prevent a secured creditor from exercising its legal remedies against the collateral if the secured status of the loan has not been challenged by appropriate and customary bankruptcy procedures”).
There are number of decisions that have specifically held that renewal of a prepetition lien, securing a debt where the underlying personal liability has been discharged, is not a violation of the discharge injunction. See, In re Jarrett, 293 B.R. 127, 132 (Bankr.N.D.Ohio 2002)(citing cases); In re Dinatale, 235 B.R. 569, 573 (Bankr.D.Md.1999)(“the court finds that such an attempt to revive or renew the existing tax lien on Debtor’s property post-discharge does not violate the discharge injunction.”); In re McCorkle, 209 B.R. 773, 777 (Bankr.M.D.Ga.1997)(“any attempt to renew or continue a lien’s enforceability is an in rem action which would not violate the section 524- discharge injunction.”); In re Johnson, 2014 WL 5812418 at *4, 2014 Bankr.LEXIS 4666 at *9 (Bankr.N.D.Ala. Nov. 10, 2014)(“the 2007 lien renewal did not violation the discharge injunction”); Pan coast v. McColl’s Corp. (In re Pan coast), 2007 WL 1079969 at *2, 2007 Bankr.LEXIS 13218 at *4 (Bankr.N.D.Cal. April 4, 2007)(“Because CCBC’s post-discharge conduct in attempting to renew its lien through state court procedures constituted in rem actions, CCBC did not violate the bankruptcy discharge.”); In re Transtrum, 2006 WL 2556699 at *3, 2006 Bankr.LEXIS 2313 at *8 (Bankr .D.Idaho June 1, 2006)(“Because Creditor’s lien was unaffected by Debtor’s discharge, Creditor could proceed in rem against Debtors’ property after bankruptcy. Creditor did not violate the discharge injunction when it sought to renew its judgment lien or to satisfy its claim from any proceeds realized from the sale of the Loop Road property.”); and Cf, In re Larson, 979 F.2d 625, 627 (8th Cir.1992)(filing necessary addendum to mortgage required for continued validity under state law did not violate the automatic stay); In re O’Callaghan, 342 B.R. 364, 367 (Bankr.M.D.Fla. 2006)(“the renewal or continuance during a bankruptcy case of an existing, prepetition lien does not violate the automatic stay.”).
The Debtors arguments focus on the “after-acquired” language in the financing statement’s description of the collateral. *727There are two aspects of the description of the collateral in the UCC-1 that are forward looking: 1) the described collateral includes “products and proceeds”; and, 2) the collateral includes property “hereafter acquired”. The Bankruptcy Code deals with these two types of collateral very differently.
Section 552(b)(1) specifically provides: [I]f the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, products, offspring, or profits of such property, then such security interest extends to such proceeds, products, offspring, or profits acquired by the estate after the commencement of the case to the extent provided by the security agreement....
Thus, the “products and proceeds” provision of the security agreement remains in effect to the extent allowed by this specific provision of the Bankruptcy Code. To the extent there are postpetition “products and proceeds” of the described collateral (accounts receivable and all business assets), CBC’s lien can attach to those assets.5 See, In re Bumper Sales, Inc., 907 F.2d 1430, 1436 (4th Cir.1990)(“[p]ro-ceeds coverage, but not after-acquired property clauses, are valid under title 11”).
In contrast, Section 552(a) sets forth a clear line of demarcation for all other property that is acquired postpetition based upon a security agreement:
Except as provided in subsection (b) of this section, property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.
This provision cuts off the application of the after-acquired property clause, meaning that any property acquired by the debtors after the commencement of the Chapter 7 case (other than products and proceeds) is not subject to the security interest of CBC. As the Supreme Court recently stated in Harris v. Viegelahn: “a Chapter 7 estate does not include the wages a debtor earns or the assets he acquires after the bankruptcy filing. § 541(a)(1). Thus, while a Chapter 7 debt- or must forfeit virtually all his prepetition property, he is able to make a 'fresh start’ by shielding from creditors his postpetition earnings and acquisitions.” Harris v. Viegelahn, — U.S. —, 135 S.Ct. 1829, 1835, 191 L.Ed.2d 783 (2015)(emphasis in original).
Accordingly, § 552(a) prevents the after-acquired property language in CBC’s security agreement and financing statement from creating a lien against accounts receivable or business assets acquired by the Debtors after the filing of the Chapter 7 petition. In re Skagit Pacific Corp., 316 B.R. 330, 335 (9th Cir. BAP 2004)(“Section 552(a) cuts off security interests on property acquired.by the debtor after the petition date even if there is an “after-acquired” clause in the security agreement.”); In re Ledis, 259 B.R. 472, 477 (D.Mass.2001). Renewal of the lien does not change the fact that the after-acquired property clause was cut off by Section 552(a).
The fact that there may be some potential for confusion6 regarding the extent of CBC’s lien does not make renewal of that *728lien a violation of the discharge as a matter of law. Instead, the law is clear that validly secured creditors may proceed in rem against prepetition assets, including filing renewals of liens or continuation statements. Where there is a prepetition security agreement, Chapter 7 debtors are protected by § 552(a)’s prohibition7 against post-filing attachment of the lien to after-acquired property, even if the nature of the lien, or the language of the security agreement, might suggest otherwise.
Accordingly, Debtors cannot prevail on a Motion for Contempt that is based upon the legal position that renewal of the lien with after-acquired property language violates the discharge injunction as a matter of law.
For a finding of contempt for violation of the discharge injunction, Debtors would have to plead and prove more than just the renewal of a lien with after-acquired property language. There would have to be a showing of: 1) attempts to collect the discharged debt from the Debtors; 2) attempts to collect the discharged debt by seizure or liquidation of assets that the Debtors acquired postpetition; or 3) that the actions taken in regard to the lien were not actions taken in rem against prepetition assets, but were, instead, a pretext or subterfuge being used to coerce payment from the Debtors or their postpe-tition assets.
The only factual allegation that might support an inference that the renewal of the lien was not an in rem action is the general assertion that CBC refused to release the lien without payment. [Doc. # 1, ¶ 5]. However,' this type of demand for payment by a secured creditor (particularly in response to a demand for a lien release) has been held not to be a violation of the discharge injunction. “A secured creditor’s demand for payment as a condition of satisfying a valid lien on property is not an act to collect a debt ‘as a personal liability of the debtor’ prohibited by § 524(a)(2).” In re Cusato, 485 B.R. 824, 828 (Bankr.E.D.Pa.2013); In re Gomez, 2014 WL 5454227, 2014 Bankr. LEXIS 4517 (Bankr.D.P.R. Oct. 24, 2014).8
This does not mean that a creditor’s decision to refuse to release a lien, or to renew or continue a lien, will never result in a finding of contempt for violation of § 524(a). The Jarrett decision discusses one way in which a violation of the discharge injunction may be shown:
... a violation of the discharge injunction will be found to exist if a creditor, by renewing its prepetition lien, is attempting to gain a lien on any postpetition property acquired by a debtor, subject, however, to this one specific limitation: the underlying debt held by the creditor must have been discharged in the debt- or’s bankruptcy.
In re Jarrett, 293 B.R. at 133.
There is also case law holding that a creditor may be held in contempt where a debtor can show that refusal to release a lien, or renewal or continuation of a lien, is being done for pretextual reasons or as a subterfuge. In other words, where the action is taken for purposes of coercion and not to continue a security interest in prepetition assets, there may be a basis to hold the creditor in contempt. See, In re Paul, 534 F.3d 1303, 1308-1310 (10th Cir.2008)(discussing the “Objective-Coer*729cion Principle”); In re Pratt, 462 F.3d 14, 19 (1st Cir.2006)(“In assessing violations of the automatic stay and the discharge injunction, the core issue is whether the creditor acted in such a way as to “coerce” or “harass” the debtor improperly.”); In re Evans, 289 B.R. 813, 826 (Bankr.E.D.Va.2002)(“That, however, does not permit the bank to cloak its efforts to recover on the discharged debt in the false rubric of seeking the recovery of its leased car”).
In examining whether a creditor is, in fact, proceeding to preserve and protect its in rem rights, versus acting in a way that is “objectively coercive”, one factor that courts have looked at is whether there was any value in the underlying collateral, and thus any legitimate economic reason for maintaining the lien. See, In re Casarotto, 407 B.R. 369, 377-378 (Bankr.W.D.Mo.2009).
For example, if a creditor were to renew a lien knowing that there was no remaining prepetition property subject to that lien, or that the collateral was valueless, that might be grounds for finding a violation of the discharge injunction. However, determining whether actions taken under the guise of exercising in rem rights were proper, or improper, is something courts struggled with. “[T]he line between forceful negotiation and improper coercion is not always easy to delineate, and each case must therefore be assessed in the context of its particular facts.” In re Canning, 706 F.3d 64, 73 (1st Cir.2013), quoting, In re Pratt, 462 F.3d at 19.
The absence of a legitimate economic reason to maintain the lien is not something the court will assume. It is up to the Plaintiffs to establish and plead facts, like the non-existence of collateral or the absence of value, and in response to a motion for summary judgment, offer proof in support of those allegations. While this puts a burden on debtors who have property subject to continuing prepetition liens, the protections against in personam actions for the collection of discharged debts are simply not automatically extended to actions in rem.
Plaintiffs’ Complaint did not address the status of the accounts receivable, or the other business assets that were part of the security agreement. Nor was any proof regarding the underlying collateral offered in support, or opposition, to summary judgment.9 Accordingly, there is no genuine issue of material fact properly before the court regarding CBC’s actions being a pretext or subterfuge used in an attempt to coerce collection of a discharged debt from either the Debtors’ personally, or property that was acquired after the filing of the Chapter 7 case.
Accordingly, Defendant is entitled to summary judgment on the claim asserted in Plaintiffs’ Complaint because the Debtors have neither pled nor alleged facts that would support a finding that the discharge injunction was violated.
CONCLUSION
Plaintiffs have not met their burden of proof and have not provided the court with clear and convincing evidence that Defendant has attempted to collect on after-acquired property obtained by the Plaintiffs postpetition in violation of the discharge injunction and § 552(a). Although Plaintiffs briefly allege that Defendant is attempting to obtain “Plaintiffs’ current accounts receivable,” they provided the court with no evidence of Defendant’s actions. [Doc. #23, p. 7], Conversely, by means of the uncontested *730affidavit of Misty Baker [Doc. #24-1, Exhibit A], Defendant has provided the court with unrebutted evidence that it has not demanded any payment from Plaintiffs nor attempted to collect upon, or claim a lien upon, any property that the Plaintiffs may have acquired postpetition. As such, Defendant is entitled to summary judgment, and its Motion for Summary Judgment will be granted.
For the foregoing reasons, good cause appearing,
IT IS ORDERED that Plaintiff s Motion for Summary Judgment [Doc. #23] be, and hereby is, DENIED; and
IT IS FURTHER ORDERED that Defendant’s Combined Motion for Summary Judgment and Memorandum Contra to Plaintiffs’ Motion [Doc. # 24] be, and hereby is, GRANTED.
. The court takes judicial notice of the contents of its case docket and the Debtors’ schedules. Fed. R. Bankr.P. 9017; Fed. R.Evid. 201(b)(2); In re Colder, 907 F.2d 953, 955 n. 2 (10th Cir.1990); St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins. Corp., 605 F.2d 1169, 1171-72 (10th Cir.1979)(stating that judicial notice is particularly applicable to the court’s own records of litigation closely related to the case before it).
. Copies of the note(s) and security agreements) were not offered into evidence by either Plaintiffs or Defendant.
. "The distinction between a statutory right of action and civil contempt is more titan just nomenclature.” In re Lohmeyer, 365 B.R. 746, 755 n. 2 (Bankr.N.D.Ohio 2007). "The primary purpose of a civil contempt order is to compel obedience to a court order and compensate for injuries caused by noncompliance.” McMahan & Co. v. Po Folks, Inc., 206 F.3d 627, 634 (6th Cir.2000)(quoting TWM Manuf. Co. v. Dura Corp., 722 F.2d 1261, 1273 (6th Cir.1983)). The party alleging contempt has the burden of establishing contempt by clear and convincing evidence, Rolex Watch U.S.A., Inc. v. Crowley, 74 F.3d 716, 722 (6th Cir.1996), not just by a preponderance of the evidence as is routine in civil matters. The sanctions for contempt are intended to be either compensatory, based on evidence of actual loss. United States v. Bayshore Assocs., Inc., 934 F.2d 1391 (6th Cir.1991), or coercive through payments to the court to abate violation of the order, id. at 1400. Punitive damages as requested in the complaint in this case are not compensatory in nature. The weight of authority is that bankruptcy courts lack authority to punish and impose sanctions for criminal contempt. See, Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1192-1195 (9th Cir.2003); but see, In re Perviz, 302 B.R. 357, 373 (Bankr.N.D.Ohio 2003). Finally, the imposition of sanctions for civil contempt is within the sound discretion of the bankruptcy court and reviewed for abuse of discretion. Musslewhite v. O’Quinn (In re Musslewhite), 270 B.R. 72, 78 (S.D.Tex.2000).
. CBC’s citation to § 362(b)(3) as authority allowing renewal of its lien is not persuasive. Upon the granting of the Debtors' discharge on August 2, 2012, the automatic stay terminated, and it was immediately replaced by the injunction against the collection of discharged debts. See, § 362(c)(2)(C); § 524(a)(2); In re Koper, 516 B.R. 707, 714 (Bankr.E.D.N.Y.2014). Section 362(b)(3)'s exception to the automatic stay appears to reflect an approach that is consistent with the case law discussing the exercise of postdischarge in rem rights, including renewal and continuation of liens. However, because the automatic stay was previously terminated by- operation of law, § 362(b)(3) is not controlling on these issues.
. No evidence regarding the identity or value of the collateral has been submitted by the parties to this action.
. Debtors asserted in their Complaint that they were denied a business loan because of the CBC UCC filing. [Doc. #1, ¶5], No evidence was offered in support of this allegation.
. “Security agreement”, as used in § 552(a), is a defined term in the Bankruptcy Code. See, § 101(50). A more difficult legal analysis is involved in determining when and how statutory liens and judgment hens are cut off.
. Where the underlying facts are different— for example where the creditor acknowledges that the collateral securing the hen is valueless — the law may view a refusal to release a hen differently. See, In re Pratt, 462 F.3d 14 (1st Cir.2006).
. Plaintiffs did not file any affidavits in this adversary proceeding, nor were any documents filed that related to the status of the underlying assets. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498350/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
Jack B. Schmetterer, United States Bankruptcy Judge
Lemire Schmeglar, (“Schmeglar”) owns a home located at 2715 N. Paulina in Chicago, IL. On October 24th, after a state court judgment of foreclosure in favor of Plaintiff in that case (U.S. Bank National Association v. Schmeglar et. al., Circuit Court of Cook County, Illinois, 11 CH 34711), but before a foreclosure sale took place, Debtor filed for bankruptcy relief under Chapter 11. A plan of reorganization (“Plan”) was confirmed on July 8, 2013, and an order was entered granting a final decree on March 21, 2014. The Plan provided that Schmeglar would not pay U.S. Bank on its asserted first mortgage until after the validity of its lien was finally adjudicated. The bank did not object to the plan which was confirmed.
Schmeglar filed this interpleader as an adversary proceeding under Rule 7022, F.R. Bankr.P., to determine what party is entitled to payment among parties named by the debtor-plaintiff. The Complaint asserted that many entities claimed ownership of the mortgage interest and demand*737ed payment of the mortgage. Pursuant to an earlier order, Schmeglar is depositing mortgage payments into escrow pending that determination. (Dkt.20.) U.S. Bank N.A., as Trustee for Adjustable Rate Mortgage Trust 2005-5, Adjustable Rate Mortgage Backed Pass Through Certificates, Series 2005-5 (“US Bank as Trustee”), Wells Fargo Bank, N.A., (“Wells Fargo”), Credit Suisse First Boston Mortgage Securities Corp., Adjustable Rate Mortgage 2005-5, and Mortgage Electronic Registration Systems, Inc. (“MERS”) (collectively, the “Appearing Defendants”) appeared through counsel and answered the complaint. The other named defendants did not appear, and it is found by separate order that they were not properly served with summons and thus have been dismissed.
Previously, Appearing Defendants moved for judgment on the pleadings under Rule 12(c), F.R. Civ. P., [as incorporated by F.R. Bankr.P. 7012]. That motion was denied (Dkts. No. 80, 82), and the adversary proceeding was set for trial. The issue as to what party has possession of the original signed note was the essential issue under Illinois law cited in the Opinion denying the motion.
Trial was held and the parties rested. After trial, the parties submitted final arguments in writing.
The Court now makes and enters the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1. In 2005, the Debtor-Plaintiff Lemire Schmeglar obtained a mortgage loan from PHM Financial, Inc. (“PHM") in the amount of $875,000, evidenced by a note (“Note”) and mortgage (“Mortgage”) on his primary residence located at 2715 North Paulina, Chicago, Illinois.
2. In his amended complaint herein, Schmeglar alleged that, “In all, more than five entities have claimed an ownership or interest in the Mortgage and/or Note since 2010.” (¶ 54.)
3. Further, Schmeglar alleged in this proceeding that it is necessary “to determine which party is the owner of the Mortgage and Note due to the conflicting representations by Wells Fargo Bank, ASC, its agents, and its attorneys.” (¶ 55.)
4. The original Note was presented at trial, and the Note and Mortgage contain Schmeglar’s original signature. It is found that PHM indorsed the Note “in blank” by executing an allonge which is affixed to the Note. The original Note is in the custody of Defendants’ counsel, who has custody on behalf U.S. Bank, who in turn possesses the Note as trustee of the Trust.
5. Pursuant to the Pooling and Servicing Agreement (dated as of May 1, 2005) (“PSA”) that created the Trust, the “depositor” is Credit Suisse First Boston Mortgage Securities Corp, the trustee is U.S. Bank, N.A. (“U.S.Bank”), Wells Fargo acts as both the “master servicer” and also the “servicer” of Schmeglar’s loan. Pursuant to the PSA, Schmeglar’s Note, indorsed in blank, was transferred to U.S. Bank as trustee for the Trust.
6. Under the PSA, Wells Fargo is empowered to collect payment on mortgage loans that it services.
7. Pursuant to terms of the PSA, Wells Fargo, as master servicer and servicer, has been advancing payments to U.S. Bank in the amounts owed by Schmeglar. As discussed below, these payments do not affect Schmeglar’s liability to make payments.
8. Persons and entities also refer to the Trust by other names, such as the “Adjustable Rate Mortgage Trust 2005-5, Adjustable Rate Mortgage-Backed Pass Through Certificates, Series 2005-5,” “CSFB Ad*738justable Rate Mortgage Trust 2005-5,” and “Credit Suisse First Boston ARMT 2005-5,” and those names all refer to the same Trust. The PSA itself refers to the Trust in different ways. For example, PSA § 2.01 refers to, “the Adjustable Rate Mortgage Trust 2005-5” (the ‘Trust’).” PSA Ex. T refers to, “Adjustable Rate Mortgage Trust 2005-5, Adjustable R ate Mortgage-Backed PassThrough Certificates, Series 2005-5 (the ‘Trust’).” PSA § 3.06 refers to “Wells Fargo Bank, N.A., as Servicer for Adjustable Rate Mortgage Trust 2005-5, Adjustable Rate Mortgage-Backed Pass Through Certificates, Series 2005-5.” PSA Ex. R provides “in relation to the Credit Suisse First Boston Mortgage Securities Corp., Adjustable Rate Mortgage Trust 2005-5, Adjustable Rate Mortgage-Backed Pass-Through Certificates, Series 2005-5.” However, as discussed in the Conclusions of Law below, none of these name references affect Schmeglar’s liability.
9. Schmeglar’s confirmed Plan provided as to U.S. Bank that “Debtor disputes that U.S. Bank N.A. has a valid mortgage and note, and is seeking to challenge the priority, extent, and validity of its lien. The Debtor will not be disbursing any dividends or payments to U.S. Bank, N.A. until the validity and priority of the lien has been fully adjudicated.” (12-bk-4228S Dkt. 90 at § 3.01)
10. Even though Schmeglar had the opportunity to testify and offer other evidence that he had received conflicting or confusing demands for payment, he did not take the stand, and offered no evidence of his supposed confusion as to whom he should pay, or evidence of conflicting demands upon him for payment.
11. All further factual matters set forth in the Cónclusions of Law will stand as additional Findings of Fact.
CONCLUSIONS OF LAW
Jurisdiction
Jurisdiction for this adversary proceeding is provided by 28 U.S.C. § 1334. The matter is referred here,by Internal Procedure 15(a) of the District Court for the Northern District of Illinois. This adversary proceeding seeks to determine the nature and extent of a lien and is therefore core under 28 U.S.C. § 157(b)(2)(E). Under terms of the confirmed Chapter 11 Plan, the party entitled to payment on the mortgage note must be determined before the reorganized debtor is to make payments on the note. Therefore, this matter “stems from the bankruptcy itself,” and may constitutionally be decided by a bankruptcy judge. Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011).
The holder of the Note is
ENTITLED TO PAYMENT
Evidence showed and it is held that U.S. Bank possesses the original Note on behalf of the Trust. There was no evidence to the contrary. Under the Illinois Uniform Commercial Code, a person in possession of a promissory note payable to bearer is deemed the “holder” of the instrument. 810 ILCS 5/1 — 201(b)(21). A holder is entitled to enforce a mortgage instrument. 810 ILCS 5/3-301. Here, the evidence showed that Schmeglar signed the Note, and that Note was then endorsed in blank. Accordingly, U.S. Bank is the holder of the note, and is entitled to enforce it and mortgage rights related to it, and to receive payments and collect the debt from Schmeglar under terms of the Note and Mortgage on behalf of the Trust. Wells Fargo, as servicer, is entitled to collect payments from Schmeglar on behalf of U.S. Bank.
The other named defendants were not properly served with summons by *739Schmeglar, and did not appear. They will each be dismissed without prejudice by separate order.
The effect of Wells Fargo’s Payments to US Bank
In pursuing discovery, Schmeglar found out that Wells Fargo had advanced payments to U.S. Bank in the amount of his mortgage payment. Schmeglar contends, because Wells Fargo made advances to the Trust pursuant to the PSA when Schmeglar was not making his mortgage payments, that Schmeglar’s Loan is not and was never in default and Schmeglar is excused from making his mortgage payments that became due during the periods of those advances. In effect he asserts that his home ownership is mortgage free for any period when Wells Fargo did or ever will advance such payments.
Other courts have been unanimous in rejecting that contention. See, e.g., In re Rivera, No. 14-54193, 2015 WL 1515572, at *5-6 (Bankr.N.D.Cal. Mar. 30, 2015); Pulliam v. PennyMac Mortg. Investment Trust Holding I LLC, No. 2:13-CV-456-JDL, 2014 WL 3784238, at *3-4 (D.Me. July 31, 2014); Ouch v. Federal National Mortg Ass’n, No. 11-12090-RW2, 2013 WL 139765, at *3-4 (D.Mass. Jan. 10, 2013); Casault v. Federal National Mortg. Ass’n, 915 . F.Supp.2d 1113, 1132-36 (C.D.Cal.2012).
As those courts have recognized, Schmeglar’s argument fails for a number of reasons. First, Wells Fargo’s advances were not made on behalf of or for the benefit of Schmeglar; instead the advances were made pursuant to Wells Fargo’s separate contractual obligations under the PSA. (See PSA § 5.01.) Schmeglar is not a party to or beneficiary of the PSA; the PSA was created for the benefit of the “Certificateholders,” not for the benefit of Schmeglar, (see PSA at 10, §§ 3.01, 3.03). See Pulliam, 2014 WL 3784238, at *4; Ouch, 2013 WL 139765, at *3; Casault, 915 F.Supp.2d at 1135.
Second, Wells Fargo’s advances are required under the PSA to be reimbursed to it, (see PSA §§ 3.01, 3.08, 3.11(e), 5.01); in fact, Wells Fargo is only required to make the advances to the extent they are anticipated to be recoverable from future payments, foreclosure proceeds, or other proceeds or collections, (see PSA § 5.01). Thus, because Wells Fargo’s advances are reimbursable, Schmeglar’s debt to the Trust is not satisfied by those advances. See Casault, 915 F.Supp.2d at 1135.
Third, the PSA expressly authorizes Wells Fargo to initiate a foreclosure against Schmeglar when he has failed to make his mortgage payments or is otherwise in default, (see PSA §§ 3.01, 3.11). Thus, because the PSA authorizes a foreclosure against Schmeglar even when Wells Fargo is making advances to the Trust for Schmeglar’s delinquent mortgage payments, those advances cannot be seen as being made for the benefit of Schmeglar or on his behalf. See In re Rivera, 2015 WL 1515572, at *6.
Finally, contrary to Schmeglar’s contention that he was and is not in default, the Note clearly defines “default” as his failure to make his mortgage payments when due, (Note ¶ 7(B)), which Schmeglar admits he has failed to do, See Casault, 915 F.Supp.2d at 1136. (holding that the payments made by a servicer are not “on behalf’ of the borrower.)
Accordingly, it is held and found that Wells Fargo’s advances did not satisfy Schmeglar’s repayment obligations under the Note and Mortgage, that Wells Fargo’s advances do not excuse Schmeglar from making any of his mortgage payments during the period of those advances or otherwise, and that Schmeglar is in default under the terms of the Note and *740Mortgage by his admitted failure to make timely mortgage payments.
The DIFFERENT NAMES OF THE TrüST Do Not Affect Debtor’s Obligations
Schmeglar argues that the fact that the Trust is known by many names puts him at risk for multiple liability. He offered no evidence of any such risk.
Under its terms, the Pooling and Servicing Agreement, (the “PSA” at Defendant’s Exh. 5), is subject to New York law. (PSA § 12.03.)
The trust here is created by a conveyance to the Trustee, “The Depositor does hereby establish [the Trust] and sells, transfers, assigns, delivers, sets over and otherwise conveys to the Trustee in trust for the benefit Certifieateholders, without recourse, the Depositor’s right, title and interest in ...” (PSA § 2.01(a).) Under New York state law, only the trustee may sue under the rights embodied in trust property. “Except as otherwise provided in this article, an express trust vests in the trustee the legal estate, subject only to the execution of the trust, and the beneficiary does not take any legal estate in the property but may enforce the trust.” N.Y. Est. Powers & Trusts Law § 7-2.1(a) (McKinney).
Trusts lack capacity to sue except to enforce the trust against the trustee, “as the statute vests the legal estate of an express trust in the trustees.” Ronald Henry Land Trust v. Sasmor, 44 Misc.3d 51, 52, 990 N.Y.S.2d 767 (S.Ct., Appellate Term, 2d Div. 2014). This is consistent with the Restatement definition, that, “A trust ... is a fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.” Restatement (Second) of Trusts § 2 (1959); see generally Presta v. Tepper, 179 Cal.App.4th 909, 914, 102 Cal.Rptr.3d 12 (4th Dist.2009) (explaining that unless some other law allows otherwise, “a trust itself can neither sue nor be sued in its own name. Instead, the real party in interest in litigation involving a trust is always the trustee.”).
Under New York state law, investment trusts, such as the one created by the PSA, may hold property in their own name, but that other powers, such as the power to sue, are vested in the trustee. N.Y. Est. Powers & Trusts Law § 7-2.1 (McKinney) (the Practice Commentaries by Margaret Valentine Turano provides, “The legislature wanted to make these trusts parallel to partnerships, which can hold property in the partnership name, so it enacted subparagraph (c) by L.1973, ch. 1031, § 1, to permit these trusts to acquire property in the name of the trust.”) That is, a trust cannot sue or take any other action except through a trustee. By contrast, U.S. Bank, as a national banking association, is empowered by statute to sue or be sued “as fully as natural persons.” 12 U.S.C. § 24.
Accordingly, Schmeglar derives neither obligation nor rights that flow from different names for the trust. The use of different names for the Trust have not changed the identity of the trustee. US Bank is due what he owes because it is the trustee. Unlike a trust which lacks the capacity to sue under New York law, U.S. Bank can sue to collect or foreclose the mortgage as a national banking association. 12 U.S.C. g 24. Neither the Trust— however it is named—nor the certificate holders, has the capacity to sue or foreclose. The precise name of the Trust is only a matter between U.S. Bank, the trustee, and the beneficiaries of the. trust. Even though Schmeglar argues that the name of the trust is critical, he does not cite authority to show that when the Trust acts under any different name, it consti*741tutes a separate entity that may sue him for the same debt in the future.
CONCLUSION
For the foregoing reasons, judgment will separately be entered in favor of U.S. Bank and Wells Fargo. Judgment will enter in favor of U.S. Bank because it possesses the original signed Note, endorsed in blank. Accordingly, it is legally entitled to enforce the Note. Wells Fargo, as servicer, is empowered under the PSA to collect payment on behalf of U.S. Bank. Under terms of the PSA, U.S. Bank is trustee of a trust, known as Adjustable Rate Mortgage Trust 2005-5, among other names. The obligations that U.S. Bank owes to the Trust as trustee do not affect or change the party is entitled to payment from Schmeglar. No other entity has or is entitled to collect anything on the Note unless and until the Note is assigned to it.
The court has completed its duty under the plan to determine who is entitled to payment of the mortgage note. The final judgment entered herein this date fully adjudicates the issue reserved in the confirmed plan subject only to possible appeal. The automatic bankruptcy stay has expired by operation of law as a result of the entry of the final Chapter 11 decree. 11 U.S.C. § 362(c)(2)(A); 12-bk42283 Dkt. 201. Accordingly, U.S. Bank is entitled to enforce any remedies it may have under the Note and mortgage in state court unless Schmeglar cures his payment defaults.
Judgment will be entered separately under Rule 58(a), F.R. Civ. P., as incorporated by F.R. Bankr.P. 7058. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498351/ | *743AMENDED MEMORANDUM OPINION ON FRANKFURT’S MOTION FOR SUMMARY JUDGMENT
Jack B. Schmetterer, United States Bankruptcy Judge
This Adversary Proceeding relates to the bankruptcy case filed by debtor-defendant Arthur Friedman (“Friedman”) under Chapter 7 of the Bankruptcy Code. Creditor-plaintiff Vladimir Frankfurt filed his Complaint (Dkt.l) pro se on June 6, 2014 seeking judgment that a debt due from Debtor to him be held nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), (a)(6) and (a)(19). Volunteer counsel was requested, and Devon Eggert and Elizabeth L. Janczak volunteered to represent Frankfurt. Once counsel appeared, Frankfurt filed his motion for summary judgment on Count I based on the asserted collateral estoppel effect of an Illinois Secretary of State order. Friedman argues that the Secretary of State’s order is void as it was entered in violation of the automatic stay. For the following reasons, summary judgment will be granted in favor of Frankfurt on Count I.
UNCONTESTED FACTS
In the Bankruptcy Court for the Northern District of Illinois, a motion for summary judgment must be accompanied by a statement uncontested of material facts setting forth the material facts in numbered paragraphs. Local Rule 7056-l(A). In response, the party opposing summary judgment must file its own statement, responding specifically to each numbered paragraph. Local Rule 7056-2(A)(l)(a). “All material facts set forth in the statement required by the moving party will be deemed to be admitted unless controverted by the statement of the moving party.” Local Rule 7056-2(B). The Seventh Circuit has repeatedly upheld strict application of the District Court’s local rule on summary judgment, which requires the same statement, counterstatement, and consequences for default. Cracco v. Vitran Exp., Inc., 559 F.3d 625, 632 (7th Cir.2009) (collecting cases). In this case, Frankfurt filed his statement as required by Local Rule 7056-1 (Dkt.46), but Friedman did not file his. Moreover, it appears from Friedman’s response that he is only interested in contesting legal issues, not the facts or events asserted by Frankfurt. Accordingly, the facts set forth in Frankfurt’s statement are deemed admitted.
1. Prestige Leasing, Inc. (“Prestige”) was an Illinois corporation that maintained a business address at 88 Dundee Road in Buffalo Grove, Illinois. (Statement ¶ 15.)
2. Friedman was an owner and officer of Prestige. (Statement ¶ 16.)
3. In May of 2007, Frankfurt lent Prestige, Friedman, and Leon Bilis (“Bilis,” collectively the “Borrowers”)), another owner and officer of Prestige, $100,000 at 12% interest as documented by a promissory note (the “Note”). (Statement ¶¶ 17-22).
4. In May of 2008, Frankfurt and the Borrowers agreed to extend the term of the Note to May 31, 2009.
5. In June of 2009, when the note had not been paid when it became due, Frankfurt learned through discussions with Friedman that the Note was not registered in accordance with Section 5 of the Illinois Securities Law of 1953, codified as 815 ILCS 5. (the “Act). (Statement ¶ 29.)
6. In June 2009, Frankfurt issued a notice of demand and demand for payment to the Borrowers. (Statement ¶ 32.)
7. In July, 2009, Frankfurt issued a notice of demand for rescission (the “Demand for Recision”) via certified mail to Friedman and Bilis, stating their offer for sale of the Note was in violation of the Act and requesting that Friedman and Bilis *744repurchase the Note for cash, plus applicable interest. (Statement ¶ 38.)
8. The Illinois Secretary of State, Department of Securities (“Securities Department”) commenced an investigation with respect to the Note known as file number 1800023. (Statement ¶ 34.)
9. On October 10, 2012, Friedman filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. (Statement ¶ 6.)
10. The bankruptcy court extended the deadline to object to dischargeability of Frankfurt’s debt on several occasions in light of the pending investigation of the Securities Department. (Statement ¶ 7.)
11. On April 11, 2013, the Illinois Secretary of State issued a Notice of Hearing to the Borrowers and Boris Weiserman (collectively, the “Respondents”) alleging that the Respondents violated the Act by selling an unregistered security and engaged in fraudulent practices with respect to the Note. (Statement ¶ 35.)
12. Friedman received a copy of the Notice of Hearing prior to the hearing. (Statement ¶ 36.)
13. Friedman filed an answer to the Notice of Hearing in November 1, 2013. (Statement ¶ 37.)
14. Friedman’s counsel appeared at the hearing held December 10, 2013 before James L. Kopecky, hearing officer for the Securities Department. (Statement ¶ 38.)
15. At the hearing, Friedman’s counsel withdrew Friedman’s answer to the Notice of Hearing, withdrew his appearance, and refused to participate in the hearing. (Statement ¶ 39.)
16. Frankfurt testified before hearing officer James Kopecky at the hearing regarding the investigation into Prestige, Friedman, and Bilis with respect to the offer and sale of the Note. (Statement ¶ 40.)
17. James Kopecky issued a Hearing Officer Report and Recommendation dated January 29, 2014, (the “Hearing Officer Report”) which contained proposed findings of fact and conclusions of law. (Statement ¶ 41.)
18. Friedman received a copy of the Hearing Officer Report. (Statement ¶ 42.)
19. On February 13, 2014, the Illinois Secretary of State issued an Order of Prohibition and Fine (the “Prohibition Order”) which adopted James Kopecky’s proposed findings of fact and conclusions of law. (Statement ¶ 43.)
20. The Prohibition Order found that Friedman violated Sections 12.A, 12.D, 12.F, and 12.G of the Act. (Statement ¶ 44.)
21. The Prohibition Order found that Friedman:
a. Sold the Note to Frankfurt in violation of the Act.
b. Failed to file with the Illinois Secretary of State an application for registration of the Note as required by the Act
c. Engaged in a practice in connection with the sale of the Note that worked a fraud or deceit upon Frankfurt, and
d. Obtained money through the sale of the Note to Frankfurt by means of an untrue statement of material fact or omission. (Statement ¶ 45.)
22. The Prohibition Order stated that any action for judicial review of the order must be taken within 35 days of the date of the order. (Statement ¶ 46.)
23. Although Friedman received a copy of the Prohibition Order prior to the deadline to appeal, Friedman did not seek judicial review. (Statement ¶ 47.)
*745DISCUSSION
Jurisdiction and Venue
Subject matter jurisdiction lies under 28 U.S.C. § 1334. The district court may refer bankruptcy proceedings to a bankruptcy judge under 28 U.S.C. § 157, and this proceeding is thereby referred here by District Court Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue lies under 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (I), and (0). It seeks to determine the dischargeability of a debt. Therefore, it “stems from the bankruptcy itself,” and may constitutionally be decided by a bankruptcy judge. Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011).
Summary Judgment Standard
A motion for summary judgment may be brought by a party at any time. Fed. R. Civ. P. 56(b), as incorporated by F.R. Bankr. P. 7056; Brill v. Lante Corp., 119 F.3d 1266, 1275 (7th Cir.1997). Summary judgment is appropriate if the “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(e); See Celotex Corp. v. Catrett, 477 U.S. 317, 330, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In ruling on a motion for summary judgment, the courts must evaluate admissible evidence in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Police Powers Exception to the Automatic Stay
Friedman argues in his response that the Illinois Secretary of State’s Order was void as a violation of the automatic stay. If the Order is void, then there is no collateral estoppel effect. Accordingly, that argument will be taken up first.
Section 362(a) of the Bankruptcy Code provides that the commencement of a bankruptcy case,
operates as a stay, applicable to all entities, of-
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title,
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title,
(6) any act to collect, assess or recover a claim against the debtor that arose before the commencement of the case under this title.
Actions taken in violation of the automatic stay are “invalid.” In re Klarchek, 508 B.R. 386, 398 (Bankr.N.D.Ill.2014) (Barnes, J.). That is, “actions taken in violation of the stay have no legal effect unless and until a creditor seeks retroactive relief from the bankruptcy court pursuant to Code § 362(d) to validate the otherwise invalid act.” In re Richardson, 497 B.R. 546, 555 (Bankr.S.D.Ind.2013) (distinguishing invalid from “void,” which would mean that nothing could give the act legal effect, or “voidable,” which would require action by the debtor to declare the act void.).
The automatic stay is subject to exceptions. Section 362(b) provides that the commencement of bankruptcy case,
does not operate as a stay—
(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the com*746mencement or continuation of an action or proceeding by a governmental unit ... to enforce such governmental unit’s ... police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s ... police or regulatory power.
As the legislative history explains, “where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay.” S.E.C. v. Brennan, 230 F.3d 65, 71 (2d Cir.2000) (quoting H.R.Rep. No. 95-595, at 343, U.S. Code Cong. & Admin. News at 6299; accord s.Rep. No. 95-989, at 52, U.S. Code Cong. & Admin. News at 5838.). “[T]he purpose of this exception is to prevent a debtor from ‘frustrating necessary governmental functions by seeking refuge in bankruptcy court.’ ” Id. (citing City of New York v. Exxon Corp., 932 F.2d 1020, 1024 (2d Cir.1991).
The administrative proceeding held before the Securities Department fits squarely within the Section 362(b)(4) exception to the automatic stay. “It is well established that the governmental unit exception of § 362(b)(4) permits the entry of a money judgment against a debtor so long as the proceeding in which such a judgment is entered is one to enforce the governmental unit’s police or regulatory power.” Id. By the terms of the Notice of Hearing, the hearing before Hearing Officer Kopecky was to consider the imposition of a permanent order of prohibition, censure, or a monetary fine. (Dkt. 46, Exh. G. at 1.) In addition to charging the sale of unregistered securities, the Notice of Hearing charged fraudulent practices on the part of the Respondents. ( at 4-5.)
Accordingly, the proceeding before the Securities Department was not stayed as a result of the automatic stay.
Section 523(a)(19)
Section 523(a)(19) provides that a discharge does not apply to any debt that—
(A) is for—
(i) the violation of ... any of the State securities laws, or any regulation or order issued under such ... State securities laws; or
(ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and
(B) results before, on, or after the date on which the petition was filed from—
(i) any judgment, order, consent order, or decree entered in any ... State judicial or administrative proceeding.
Collateral estoppel, also known as issue preclusion, applies in bankruptcy discharge exception proceedings. Meyer v. Rigdon, 36 F.3d 1375, 1378-79 (7th Cir.1994). Normally, collateral estoppel applies when:
(1) the issue sought to be precluded must be the same as that involved in the prior litigation,
(2) the issue must have been actually litigated,
(3) the determination of the issue must have been essential to the final judgment, and
(4) the party against whom estoppel is invoked must be fully represented in the prior action.
Id. at 1379.
Normally, collateral estoppel does not apply to default judgments because a default judgment has not been actually litigated. However, Section 523(a)(19) alters the normal collateral es-toppel rules. It provides that preclusion *747applies when “any judgment, order, consent order, or decree entered in any ... State judicial or administrative proceeding.” § 523(a)(19)(B)(i) (emphasis supplied). Nearly identical language in Section 523(a)(ll) was held to trump the usual collateral estoppel doctrine. Meyer, 36 F.3d at 1380. Accordingly, preclusive effect must now be given to default judgments before administrative tribunals subject to § 523(a)(19). Id.
The Prohibition Order issued by the Secretary of State states by its own terms that “This is a final order.” (Statement Exh. G p. 8.) It conclusively found that Friedman violated Sections 12.A, 12.D, 12.F and 12.G of the Act in connection with the offer and sale of the Note to Frankfurt. The Order of Prohibition found that the sale of the Note to Frankfurt was a “transaction ... which work[s] or .tends to work a fraud or deceit upon the purchaser.” Id.
Even though the Prohibition Order by its terms did not award damages to Frankfurt, it did find that Friedman’s conduct in the sale of the Note to Frankfurt constituted fraud. Thus, while the debt due to Frankfurt on the Note is not for a debt that is “for” the violation of a securities law under § 523(a)(19)(A)(i), it is a debt for “common law fraud, deceit, or manipulation in connection with the purchase or sale of any security.”
§ 523(a)(19)(A)(ii). It did result in a final order entered by a state administrative tribunal. Thus, § 523(a)(19) is satisfied, and Friedman’s debt to Frankfurt as a result of the sale of the Note is nondis-chargeable.
No Damages ARE Awarded Here
Friedman also argues in his response that Frankfurt is asking for damages in an amount unsupported by an affidavit. In his affidavit, Frankfurt declared that as of May 31, 2009, Friedman owed him $100,000 (Statement, Exh. A ¶ 17.) The Statement calculated interest due as of March 10, 2015.
At any event, no dollar damages award was requested. Frankfurt only seeks in Count I of his Complaint a declaration of nondischargeability. Nor does the motion for summary judgment on Count I seek an award of damages. Even if a dollar judgment for damages were requested, it is not entirely clear that jurisdiction exists to enter such judgment under 28 U.S.C. § 1334. A proceeding seeking the dischargeability of a debt under 11 U.S.C. § 523 is one “arising under title 11.” 28 U.S.C. § 1334(a). A proceeding to enforce a contract by an award of damages does not arise under the Bankruptcy Code. Nor would a proceeding seeking damages be “related to a case under title 11.” Id. A proceeding is only “related to” if “it affects the amount of property available for distribution or the allocation of property among creditors.” Matter of Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987). Therefore, the Judgment will declare the debt nondischargeable, and any interest can be finally calculated if and when Frankfurt seeks an award of damages before a court of competent jurisdiction.
CONCLUSION
For the foregoing reasons, the summary judgment will be granted in favor of .Frankfurt by separate order.
ORDER DISMISSING COUNTS II-IV
Having separately granted summary judgment in Count I for grounds asserted in that Count, Friedman’s debt to Frankfurt has been declared nondischargeable. Counts II-IV seek a declaration of nondis-chargeability of the same debt. Thus, all the relief sought by Frankfurt in Counts II-IV has been granted in Count I. Ac*748cordingly, Counts II, III, and Tv are dismissed as moot. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498352/ | MEMORANDUM OPINION DENYING LVNV’S MOTION. TO DISMISS
Jack B. Schmetterer, United States Bankruptcy Judge
This Adversary Proceeding relates to the bankruptcy case filed by debtor-defendant Rose I. Avalos (“Debtor”) under Chapter 13 of the Bankruptcy Code. LVNV Funding, LLC (“LVNV”) and Resurgent Capital Services LP (“Resurgent,” collectively the “Claimants”) filed proofs of claim for debts that were past the statute of limitations. Avalos objected to the proofs of claim, which were subsequently disallowed. (Bankruptcy Dkts. 92 & 93.) She also filed this adversary proceeding seeking damages, alleging that filing the proofs of claim violated the Fair Debt Collection Practices Act (“FDCPA”) 15 U.S.C. § 1692 et seq. The Claimants moved to dismiss this proceeding for failure to state a claim, arguing that filing a proof of claim based on a debt that is past the statute of limitations cannot constitute a violation of the FDCPA as a matter of law. But as found below, such a filing may violate the FDCPA, and accordingly, dismissal will be denied.
BACKGROUND
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). The facts regarding the complained of conduct are considered as they are alleged in the Complaint, and are assumed to be true. Since deciding this motion involves the procedural history of the bankruptcy case *750in this court, judicial notice of that history-may be taken. F.R. Evid. 201(c); F.R. Bankr. P. 9017; see In re Salem, 465 F.3d 767, 771 (7th Cir.2006).
The facts as alleged are simple. As part of its business practice, LVNV purchased credit card debt owed by Debtor. Resurgent services debts purchased by debt buyers such as LVNV, and services the debts here. After Debtor filed her chapter 13 petition, LVNV filed the proofs of claim in issue here on February 17, 2014. Proof of Claim 8 asserted credit card debt had been charged off in 2005, with the last payment and last transaction in September, 2007. Proof of Claim 9 asserts credit card debt had been charged off in 2005, with no last payment or last transaction asserted. Debtor has not used or paid either credit card account since 2007, at the latest. It was earlier determined that the applicable statute of limitations for credit card debt in Illinois is five years. (Bankruptcy case Dkts. 92 & 93.) Therefore, both claims were denied as barred by limitations when filed in the related bankruptcy case.
DISCUSSION
Jurisdiction and Venue
Subject matter jurisdiction for this proceeding lies under 28 U.S.C. § 1334. The district court may refer bankruptcy proceedings to a bankruptcy judge under 28 U.S.C. § 157, and this proceeding was thereby referred here by District Court Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue lies under 28 U.S.C. § 1409.
This proceeding is not “core” under the Judicial Code because it neither “arises under” nor “arises in” a bankruptcy case. “Bankruptcy Judges may hear and determine ... all core proceedings arising under title 11, or arising in a case under title 11.” 28 U.S.C. § 157(b)(1). “If the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy it is not a core proceeding; it may be related to the bankruptcy because of its potential effect, but under section 157(c)(1) it is an “otherwise related” or non-core proceeding.” Barnett v. Stern, 909 F.2d 973, 981 (7th Cir.1990) (emphasis in the original).
This proceeding does not arise under title 11 because “[a] cause of action under the FDCPA ‘arises under’ Title 15, not under Title 11.” LaGrone v. LVNV Funding, LLC, 525 B.R. 419, 421-22 (Bankr.N.D.Ill.2015) (Wedoff, J.) It does not arise in a case under title 11 because “[a]rising in” proceedings are those “that arise during the bankruptcy proceeding and concern the administration of the bankrupt estate, such as whether to discharge a debtor.” Zerand-Bernal Grp., Inc. v. Cox, 23 F.3d 159, 162 (7th Cir.1994). Rather, this proceeding is an action that could have independently been commenced as a civil action in the District Court under federal question jurisdiction. 28 U.S.C. § 1331; LaGrone v. LVNV Funding, LLC, 525 B.R. at 422-23 (citing Buckley v. Bass & Assoc., 249 F.3d 678 (7th Cir.2001), or in a state court.
A proceeding is “related to” the bankruptcy case if it affects the “amount of money 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). The Debtor’s FDCPA proceeding here is related to his Chapter 13 bankruptcy case because it could have an effect on payments to his creditors. As in LaGrone, Debtor’s plan provides for a fixed amount to be paid to creditors. (Bankruptcy case Dkt. 31.) Therefore, as in LaGrone, any recovery Debtor receives from the FDCPA action could be a basis *751for increased plan payments under § 1329(a)(1) of the Code.
In a noncore proceeding, a bankruptcy judge may hear the proceeding and submit proposed findings of fact and conclusions of law for review by a District Judge. 28 U.S.C. § 157(e)(1). With consent of the parties, a bankruptcy judge may also enter final judgment. 28 U.S.C. § 157(c)(2); Wellness Int’l Network, Ltd. v. Sharif, — U.S.—,—, 135 S.Ct. 1932, 191 L.E.2d 911, No. 13-935, at *9 (U.S. May 26, 2015) (“Applying these factors, we conclude that allowing bankruptcy litigants to waive the right to Article III adjudication of Stern claims does not usurp the constitutional prerogatives of Article III courts.”). The Claimants here have not stated whether they consent or not, nor are they required to do so until an Answer is filed. Rule 7012(b), F.R. Bankr. P. (“A responsive pleading shall admit or deny an allegation that the proceeding is core or non-core. If the response is that the proceeding is non-core, it shall include a statement that the party does or does not consent to entry of final orders or judgment by the bankruptcy judge.”). Whether there is such consent or not, an initial motion to dismiss ordinarily does not call for a final adjudication. LaGrone v. LVNV Funding, LLC, 525 B.R. 419, 422-23 (Bankr.N.D.Ill.2015). When appropriate, dismissal with prejudice can be recommended to the District Court. Therefore, the present motion to dismiss is within authority of a bankruptcy judge to decide.
Motions to Dismiss Under Rule 12(b)(6)
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).
Filing Stale Proofs of Claim Violates the FDCPA
Claimants argue that the facts alleged— that the Claimants filed proofs of claim in the Debtor’s bankruptcy case based on debts barred by the statute of limitations — do not constitute a ground for relief because filing such proofs of claim did not violate the FDCPA. However, the FDCPA provides that “A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C.A. § 1692e. Section 1692e goes on to enumerate examples of prohibited conduct “[wjithout limiting the general application of the foregoing.” Id. In particular, the Complaint alleges that filing a proof of claim on a stale debt is a misrepresentation of the legal status of the debt (§ 1692e(2)(A)), a threat to take action that cannot legally be taken (§ 1692e(5)), and the use of a deceptive means to collect or attempt to collect a debt (§ 1692e(10)).
There has been much litigation on the question of whether filing proofs of claim for stale debt violates the FDCPA. A recent opinion in this District by Judge Bucklo carefully explained the history as is relevant in the Seventh Circuit. Since the *752opinion is unpublished, the illuminating history is quoted here at length:
Whether the FDCPA prohibits debt collectors from filing time-barred claims in bankruptcy has produced a split between the Eleventh Circuit, on the one hand, and the Second and Ninth Circuits on the other. Compare Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1262 (11th Cir.2014) (holding that filing a time-barred claim in a bankruptcy case violates the FDCPA), petition for cert. denied, — U.S. —, 135 S.Ct. 1844, 191 L.Ed.2d 724 (2015)), with Simmons v. Roundup Funding, LLC, 622 F.3d 93, 96 (2d Cir.2010) (holding that “filing a proof of claim in bankruptcy court cannot form the basis for an FDCPA claim”); In re Chaussee, 399 B.R. 225, 235-41 (9th Cir. BAP 2008) (same). In the Second Circuit’s view, “[t]here is no need to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by [the][B]ankruptcy [Code] itself.” Simmons, 622 F.3d at 96. The remedies available to a debtor in bankruptcy who faces time-barred claims include (1) objecting to the claim under 11 U.S.C. § 502(a) and Bankruptcy Rule 3007 and (2) seeking sanctions against the would-be claimant under 11 U.S.C. § 105 and Bankruptcy Rule 9011(c). The Second and Ninth Circuits think these remedies are exclusive such that they preclude FDCPA suits premised on the filing of time-barred claims in bankruptcy.
The Seventh Circuit has not weighed in on whether filing a time-barred claim in bankruptcy is actionable under the FDCPA. But see Buckley v. Bass & Assoc., 249 F.3d 678, 681 (7th Cir.2001) (stating, in dicta, that “the filing of a claim in bankruptcy ... [is] outside the scope of the Fair Debt Collection Practices Act”). I do not read Buckley to say that a claim filed in bankruptcy can never, under any circumstances, violate the FDCPA’s ban on false, deceptive, or misleading debt collection practices. Buckley offers no rationale for such a rule, perhaps because the only holding in the case was that inquiring whether a debtor has filed for bankruptcy without including the disclosure required by 15 U.S.C. § 1692e(ll) is not a per se violation of the FDCPA. Buckley mentioned the bankruptcy claims filing process in the context of discussing how a “have you filed for bankruptcy” inquiry might be construed — i.e., as “a prelude not to a dunning letter but to the filing of a claim in bankruptcy” — in a future case. Buckley, 249 F.3d at 681. In short, Buckley does not establish a per se rule that filing a claim in bankruptcy never violates the FDCPA no matter how false, deceptive, or misleading the claim might be.
The most relevant guidance from the Seventh Circuit on the question presented in this case comes from Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir.2004), which holds that the Bankruptcy Code and FDCPA provide overlapping remedies unless there is an “irreconcilable conflict between the statutes.” Id. at 730; accord Simon v. FIA Card Servs., N.A., 732 F.3d 259, 274 (3d Cir.2013). Randolph went on to hold that a debtor who receives a dunning letter after filing for bankruptcy may .sue under the FDCPA — on ground that the demand for payment is a false statement in light of the Bankruptcy Code’s automatic stay on certain debt collection activities, 11 U.S.C. § 362(a) — notwithstanding the availability of contempt sanctions under the Bankruptcy Code, id. at § 362(k)(l). See Randolph, 368 F.3d at 730; contra Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 510-11 (9th Cir.2002). It was “easjf’ to enforce both the Bankruptcy Code’s contempt provision and the *753FDCA’s ban on false or misleading representations despite the existence of “operational differences” between the statutes. Randolph, 368 F.3d at 730; cf. Buckley, 249 F.3d at 681 (rejecting a reading of the FDCPA that would place it on “a collision course” with the Bankruptcy Code).
Randolph implicitly overruled two district court decisions holding that the Bankruptcy Code provides the exclusive means to challenge allegedly inflated claims filed in bankruptcy and precludes parallel FDCPA claims. See Gray-Mapp v. Sherman, 100 F.Supp.2d 810, 814 (N.D.Ill.1999) (Kennelly, J.); Baldwin v. McCalla, Raymer, Padrick, Cobb, Nichols & Clark, LLC, No. 98 C 4280, 1999 WL 284788, at *4 (N.D.Ill. Apr. 26, 1999) (Coar, J.).
Since Randolph, district courts in this circuit have generally declined to dismiss FDCPA suits that challenged the filing of time-barred claims in bankruptcy as a false, deceptive, or misleading debt collection practice. (Citing Taylor v. Midland Funding, LLC, No. 14 C 9277, Dkt. No. 47, —F.Supp.3d —, 2015 WL 1456442 (N.D.Ill. Mar. 20, 2015) (Guzman, J.); Elliott v. Cavalry Investments, LLC, No. l:14-cv-01066-JMS-TAB, 2015 WL 133745 (S.D.Ind. Jan. 9, 2015) (Magnus-Stinson, J.); In re Brimmage, 523 B.R. 134 (Bankr. N.D.Ill.2015) (Cox, J.); Grandidier v. Quantum3 Grp., LLC, No. 1:14-CV-00138-RLY-TAB, 2014 WL 6908482 (S.D.Ind. Dec. 8, 2014) (Young, C.J.); Patrick v. PYOD, LLC, 39 F.Supp.3d 1032 (S.D.Ind.2014) (Young, C.J.); Smith v. Asset Acceptance, LLC, 510 B.R. 225 (S.D.Ind.2013) (Lawrence, J.). There are, however, two exceptions to this trend, (citing Robinson v. eCast Settlement Corporation, No. 14 C 8277, 2015 WL 494626, at *3 (N.D.Ill. Feb. 3, 2015) (Shah, J.); In re LaGrone, 525 B.R. 419, 426 (Bankr.N.D.Ill.2015) (Wed-off, J.) Reed v. LVNV Funding, LLC, No. 14 C 8371, 2015 WL 1510375, at *3 (N.D.Ill. Mar. 27, 2015))
The Seventh Circuit recently denied an interlocutory appeal petition asking the court to resolve the split over whether filing an untimely claim in bankruptcy is a false, deceptive, or misleading debt collection practice. See In re PYOD, LLC, No. 14-8028, Dkt. No. 6 (7th Cir. Nov. 21, 2014)
Reed v. LVNV Funding, LLC, No. 14 C 8371, 2015 WL 1510375, at *2-3 (N.D.Ill. Mar. 27, 2015) (Bucklo, J.) (citation updated to reflect denial of certiorari in Crawford), denying a motion to dismiss.
Filing Proofs of Claim Here Sought to Collect a Debt
Section 1692e prohibits the “use any false, deceptive, or misleading representation or means in connection with the . collection of any debt.” 15 U.S.C. § 1692(e) (emphasis supplied). Claimants argue that filing a proof of claim is not an act to collect a debt. However, filing a proof of claim in a Chapter 13 bankruptcy case is certainly a means in connection with the collection of any debt, since that proof of claim is directed at a debtor and seeks payment out of future income. Claimants argue that filing a proof of claim is not an act to collect a claim, but merely “a request to participate in the distribution of the bankruptcy estate under court control.” Quoting In re McMillen, 440 B.R. 907, 912 (Bankr.N.D.Ga.2010). That is belied by their own argument regarding the “clock-work” nature of the claims allowance process. Creditors file proofs of claim to receive payment on their claims. In a Chapter 7 case, the assets in the estate are fixed as of the filing of the' petition, and so ordinarily the debtor is not affected. In a Chapter 13 case, on the other hand, once a proof of claim is al*754lowed the claim is paid out of a debtor’s post-petition income.
Claimants also maintain that there is no prohibition against filing proofs of claim for stale debt, arguing that even if a debt is stale, it is still a “claim” under § 101(5). But stale debt does not give rise to a claim. A claim is a “right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” § 101(5). A debt barred by the statute of limitations gives rise to at most a moral obligation to pay. Without more, a moral obligation is not a claim under § 101(5).
Claimants further argue that if filing a proof of claim were an action to collect on a debt, the automatic stay would prohibit filing proofs of claim, and therefore the structure of the Bankruptcy Code leads to the conclusion that a proof of claim is not an action to collect on a debt. However, as the opinion in LaGrone explains, “it is well established that the automatic stay does not prohibit actions in the bankruptcy itself.” LaGrone, 525 B.R. at 425.
Filing Proofs of Claim for Stale Debt May Be Deceptive
The Eleventh Circuit’s reasoning extending the prohibition to filing proofs of claim for stale debt is simple and correct:
The reason behind LVNV’s practice of filing time-barred proofs of claim in bankruptcy court is simple. Absent an objection from either the Chapter 13 debtor or the trustee, the time-barred claim is automatically allowed against the debtor pursuant to 11 U.S.C. § 502(a)-(b) and Bankruptcy Rule 8001(f). As a result, the debtor must then pay the debt from his future wage's as part of the Chapter 13 repayment plan, notwithstanding that the debt is time-barred and unenforceable in court.
Crawford, 758 F.3d at 1259.
In coming to his conclusion that filing a stale proof of claim does not violate the FDCPA, Judge Wedoffs scholarly opinion in LaGrone disagrees with that assessment. The first area of disagreement is as to what the FDCPA prohibits. The La-Grone opinion begins its analysis of whether proofs of claims for stale debts violates the FDCPA by reasoning that “[t]he FDCPA sets out no prohibition against a debt collector pursuing collection of a debt subject to a limitation defense.” Instead, the LaGrone opinion reasons that the FDCPA only prohibits conduct set forth in particular provisions, such as false representations (§ 1692e(2)(A)), threats of illegal action (§ 1692e(5)), deceptive means of collection (§ 1692e(10)), and unconscionable conduct (§ 1692f).
To the contrary, the FDCPA does not merely prohibit particular conduct set forth in various provisions. Rather, it “ ‘imposes open-ended prohibitions on, inter alia, false, deceptive, or unfair’ debt-collection practices.” Crawford, 758 F.3d at 1257 (citing Jerman v. Carlisle, MeNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573, 587, 130 S.Ct. 1605, 176 L.Ed.2d 519 (2010)). The FDCPA prohibits by its own terms, “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e. The particular provisions in the various subsections cited are by their own terms examples of that prohibition. Id. The FDCPA also prohibits “unfair or unconscionable means to collect or attempt to collect any debt.” 15 U.S.C. § 1692f.
Although the collection of stale debts is not specifically prohibited in any subsection of § 1692e or § 1692f, courts have interpreted the broad general prohibition to prohibit the filing of untimely lawsuits *755against consumer debtors. A panel of the Seventh Circuit Court of Appeals has ruled that state court lawsuits to collect stale debt violates the FDCPA:
Indeed, the unfairness of such conduct is particularly clear in the consumer context where courts have imposed a heightened standard of care&emdash;that sufficient to protect the least sophisticated consumer. Because few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts, such consumers would unwittingly acquiesce to such lawsuits.
Phillips v. Asset Acceptance, LLC, 736 F.3d 1076, 1079 (7th Cir.2013) (quoting Kimber v. Federal Financial Corp., 668 F.Supp. 1480, 1487 (M.D.Ala.1987).
The LaGrone opinion disagrees on four grounds. First, in bankruptcy, a debtor has the benefit of a trustee who is charged with a fiduciary duty to examine proofs of claim and object. LaGrone, 525 B.R. at 423-24. Second, a proof of claim seeks payment from a limited fund even in a chapter 13. Id. Third, debtors in bankruptcy often have counsel. Id. at 12. Finally, objecting to a proof of claim would be easier and less embarrassing than defending a state court lawsuit. Debtor argues at length that the supposed advantages the LaGrone opinion finds from bankruptcy proceedings might in fact be illusory. In reply, the Claimants support the analysis in Lagrone. The analysis below supports the Debtor.
Stale proofs of claim may be deceptive OR MISLEADING TO UNSOPHISTICATED Chapter 13 debtors
In determining whether an act is deceptive, “the court asks whether a person of modest education and limited commercial savvy would be likely to be deceived.” Evory v. RJM Acquisitions Funding L.L.C., 505 F.3d 769, 774 (7th Cir.2007). Evory was an opinion in multiple consolidated appeals from cases in different procedural postures. Id. at 772. It presented the question of what standard should apply in determining whether conduct is deceptive under the FDPCA, among other questions. Id. at 773. Judge Posner held that because “the statute is intended for the protection of unsophisticated consumers,” a communication is misleading if it would deceive “a person of modest education and limited commercial savvy.” Id. at 773. It does not matter whether the actual client was deceived, only whether a hypothetical unsophisticated customer would be deceived. Id.
The unsophisticated consumer standpoint should apply in bankruptcy as well as outside bankruptcy because the same rationale for the unsophisticated consumer test applies. The FDCPA protects the unsophisticated consumer by deterring debt collectors from using deceptive and unconscionable tactics. The structure of the FDCPA further supports this deterrence regime. In order to give consumers with uncertain actual damages an incentive to sue, the statute provides for liquidated damages and attorney’s fees. 15 U.S.C. § 1692k(a)(2)(A) & (a)(3). More tellingly, the statute instructs that the determination of damages should take into account “the frequency and persistence of noncompliance by the debt collector, the nature of such noncompliance, and the extent to which such noncompliance was intentional.” § 1692k(b)(l). An unsophisticated consumer is unlikely to sue under the FDCPA because she does not know about it, just as she does not know about a statute of limitations defense she may have.
An unsophisticated consumer receives no protection by virtue of having a right to sue that she does not know about. She may be protected only because (as here) some more sophisticated consumer will hire a lawyer and sue under the FDCPA. *756Without the FDCPA, a savvy consumer who knows about her statute of limitations defense would just throw away the letter dunning for stale debt, secure in the knowledge that the debt collector cannot collect. But with the FDCPA’s statutory damages and attorney’s fees provisions at hand, she may sue instead. A classic “Catch-22” would result if the debt collector could successfully argue that its collection acts are not deceptive as to the more savvy consumer who sues because that consumer was never deceived.
Debtor here will be given the opportunity to introduce evidence as to whether a proof of claim for stale debt filed in a Chapter 13 bankruptcy case is deceptive or misleading. Whether a communication is deceptive is a matter of fact, not law. Evory 505 F.3d at 776. As Judge Posner explained,
The intended recipients of dunning letters are not federal judges, and judges are not experts in the knowledge and understanding of unsophisticated consumers facing demands by debt collectors. We are no more entitled to rely on our intuitions in this context than we are in deciding issues of consumer confusion in trademark cases, where the use of survey evidence is routine.
Id.
One way to prove deception is with survey evidence, such as might be used to prove confusion in trademark cases. Evory v. RJM Acquisitions Funding L.L.C., 505 F.3d at 776. The Evory opinion disapproved of the survey evidence introduced in one of the cases reviewed by that opinion, remarking that leading questions in surveys are improper. Id. at 778. Here, however, bankruptcy proofs of claim are a matter of public record. Plaintiffs may be able to show deception by conducting an empirical study of whether stale proofs of claim are paid, or looking at evidence obtained from defendants as to their success in obtaining payment on stale claims in Chapter 13 cases.
There is likely a tendency to deceive or mislead some debtors by filing proofs of claim for stale debt. Otherwise, there would be no point filing them. By definition, stale debt is debt that is no longer owed.1 Debt collectors may get paid by a Chapter 13 debtor despite having no right to payment. Claimants’ own argument that creditors are “invited” to file proofs of claim shows how deception would take place. Section 502(a) provides that a proof of claim is “deemed allowed unless a party in interest ... objects.” This “clock-work mechanism” (Claimants’ term) puts the burden on the debtor, the trustee, or another creditor to object. Otherwise, the trustee must pay pro rata on the claim out of debtors’ plan payments according to the Chapter 13 plan. *757§§ 1322(a)(3), 1326(c). The very fact that debt collectors are systematically engaged in this practice suggests that the practice succeeds in deceiving some part of the debtor population.
Debt buyers probably file proofs of claim in Chapter 13 cases because the usual allowance of many proofs of claim may result in debtors in Chapter 13 bankruptcies paying them out of future income. A debtor may thereby be misled into paying debts that she has no legal obligation to pay. See Evory v. RJM Acquisitions Funding L.L.C., 505 F.3d at 775 (explaining the difference between deceptive and misleading). Why else would a Chapter 13 debtor fail to object on a stale claim?
The Seventh Circuit opinion in McMahon v. LVNV Funding, LLC declined to hold that attempting to collect stale claims was automatically deceptive because some people might feel a moral obligation to repay debts that are not legally collectible. 744 F.3d 1010, 1020 (7th Cir.2014). But Chapter 13 trustees have statutory obligations, not moral ones. Chapter 13 trustees would not pay on a debt they knew did not have to be paid. After all, they “have a fiduciary duty to all parties to ‘examine proofs of claim and object to the allowance of any claim that is improper’ ” LaGrone, 525 B.R. at 426 (citing 11 U.S.C. §§ 704(a)(5) & 1302(b)(1)). Thus, Chapter 13 trustees would only pay on a stale claim on behalf of debtors if they have been deceived or misled.
Because there is no good reason to allow proofs of claim for stale debt, the frequent allowance of and payment on such claims would be enough to show deception. It would be sufficient proof to assemble a large enough representative sample of proofs of claim filed by debt collectors, isolate the proofs of claim for stale debt, and analyze that set to determine how often those proofs of claim are allowed. That would show the rate at which courts, trustees, and debtors are deceived into paying those claims.
Perhaps LVNV or Resurgent have discoverable records analyzing their success from filing proofs of claim for stale debt. It is likely that they keep a record of the proofs of stale claims they file and the success rate of those proofs of claim.
There is Another Prohibition Against Filing Stale Claims
There is separate prohibition against filing stale proofs of claim if the creditor knows the claim is stale. Rule 9011, F.R. Bankr. P., provides that by signing a proof of claim, “the claims, defenses and other legal contentions therein are warranted by existing laws or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.” F.R. Bankr. P. 9011(b)(2). See Matter of Sekema, 523 B.R. 651, 653 (Bankr.N.D.Ind.2015). Certainly Claimants know this rule because the Sekema court imposed sanctions of $1000 against Resurgent and LVNV. Id. at 655.
CONCLUSION
For the foregoing reasons, the motion to dismiss will be denied by separate order.
ORDER DENYING LVNV’S MOTION TO DISMISS
For reasons stated in the Opinion Denying LVNVs Motion to Dismiss, the motion to dismiss (Dkt.3) is denied. Defendants must file their Answer to the Complaint on or before July 2, 2015.
Set for status on July 6, 2015 at 10:30 AM, at which time the proceeding will be scheduled for trial, having consideration for preparation time required by counsel.
. Once the statute of limitations period expires, a debtor is under no legally enforceable obligation to pay, and the creditor has no legally enforceable right to collect. "[A] statute of limitations is by definition an arbitrary period after which all claims will be cut off.” Barragan v. Casco Design Corp., 216 Ill.2d 435, 448, 297 Ill.Dec. 236, 837 N.E.2d 16 (2005). Claimant’s argument that it has a "right to payment” but is "shut out of ... its state court remedies” is nonsense. "Whether a debt is legally enforceable is a central fact about the character and legal status of that debt.” McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020 (7th Cir.2014). An absent landowner may lose its title to land by adverse possession through the running of a statute of limitations. See 735 ILCS 5/13— 101. Nor is it of any moment that the statute of limitations must be pleaded as an affirmative defense and may be waived. Rule 8(c), F.R. Civ. P., lists affirmative defenses in federal pleading, including "statute of limitation,” and also "payment.” A debt that has been paid is not a debt that is owed. Nor is a debt owed when it has been cut off by the statute of limitations. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498353/ | ORDER ON BANKRUPTCY APPEAL
SARAH EVANS BARKER, District Judge.
Appellant Abdul G. Buridi appeals the Bankruptcy Court’s approval of the final confirmation orders entered in the chapter 11 cases of debtors KMC Real Estate Investors, LLC (“KMC”) and its affiliate Kentucldana Medical Center, LLC (“Ken-tuckiana”). For the following reasons, the *761Bankruptcy Court’s approval of the confirmation orders is AFFIRMED.
Factual Background
General Background
Between 2005 and 2007, Cardiovascular Hospitals of America, LLC (“CHA”) and Kentuckiana Investors, LLC (“KI”) formed KMC to develop and operate a new hospital facility in Clarksville, Indiana. CHA and KI each owned 49% of KMC and the membership interests of KI were held by approximately thirty (80) physicians who practiced in the greater Louisville, Kentucky, area, including Dr. Buridi. In order to obtain financing for the KMC project, CHA, KI, and the physician-members of KI guaranteed various loans and other financial obligations of KMC to lenders and equipment providers. Unfortunately, KMC immediately encountered financial difficulties when its construction loan proceeds and working capital were exhausted before the hospital was completed and stabilized.
Concurrently with the formation of KMC, many of the physician-members of KI invested in and acquired membership interests in KMCREI, which purchased the real estate and financed construction of the hospital facility through a $21 million loan from Branch Banking & Trust Company (“BB & T”). There was no requirement that the physician-members of KI acquire membership interests in KMCREI, however. KMCREI’s membership interests were divided proportionately, not equally, among the physicians who did choose to invest. Dr. Buridi owned a 1.03% membership interest in KI and a 1.65% membership interest in KMCREI. As owner of the hospital building, KMCREI depended entirely on its sole tenant, KMC, for its revenues, and therefore when KMC encountered financial issues, KMCREI also suffered.
Chapter 11 Filings
On September 19, 2010, KMC filed its voluntary petition for relief under chapter 11 of the Bankruptcy Code and KMCREI similarly filed under chapter 11 on April 1, 2011. Although both debtors continued to lose significant amounts of money after their bankruptcy cases were filed, they managed to reach tenuous agreements with several key creditors that enabled them to continue operating.
From the outset of KMC’s bankruptcy, it became clear that the only way in which the hospital could become financially viable would be through a cash infusion of millions of dollars to complete construction of the hospital and purchase required equipment. In June 2012, KMC and KMCREI each obtained confirmation of their respective plans of reorganization but were unable to consummate the plans when their investor refused to fund the reorganization. Instead, both debtors remained in Bankruptcy Court and continued to solicit new investments while continuing to accrue substantial post-petition liabilities through normal business operations. By June 2013, KMC and KMCREI carried a combined debt load of more than $31 million in secured claims, $6 million in post-petition administrative claims, and $5 million in unsecured claims.
The Confirmed Plans of Reorganization
. Prior to commencement of KMCREI’s chapter 11 case, RLBB Financial, LLC (“RLBB”)1 acquired the KMCREI construction loan originally advanced by BB & T. After KMC’s and KMCREI’s failures to consummate their original plans of reorganization, they engaged in extensive negoti*762ations with RLBB in the months prior to June 2013 to develop the framework for each debtor’s Third Amended Plan of Re- v organization. The KMC Plan called for RLBB or its affiliate, as “Exit Investor,” to provide approximately $10 million to complete the hospital and pay claims against KMC. The KMCREI Plan provided for the restructuring of RLBB’s $20 million secured loan and cash payments to satisfy past due real estate taxes.
Under the KMC Plan, KMC’s secured liabilities were significantly restructured, holders of administrative claims received 20% of their claims in cash and notes payable over five years, and holders of unsecured claims received cash payments equal to their pro rata share of a $500,000 pool of funds, in most cases equal to a fraction of their overall indebtedness. All pre-confirmation equity membership interests in. KMC were cancelled on the effective date of the KMC Plan, and the Exit Investor acquired 100% of the new membership interests in KMC.
Under the KMCREI Plan, only the secured claims owed to RLBB and the real estate tax lienholder were to be satisfied through distribution of money or property. All unsecured claims against KMCREI were to be discharged pursuant to 11 U.S.C. § 1141(d), and all membership interests in KMCREI were cancelled. The KMCREI Plan originally provided that 80% of the new membership interests in reorganized KMCREI would be issued to the Exit Investor while the remaining 20% of the new membership interests were to be issued to Drs. Christodulos Stavens, Eli Hallal, Jeffrey Campbell, and Renato La-Rocca, four of the physician-owners of KI “in consideration of their ongoing commitment to the hospital and importance to the feasibility of [the KMCREI Plan] and the KMC Plan.” Dkt. No. 2 at 8. These four physicians comprised the KI contingent on KMC’s board of managers (the remaining board members consisted of representatives of CHA). Dr. Stavens served as KMC’s Chief Executive Officer as well as the manager of KI. These four physicians were also responsible for admitting 70-80% of all patients to the hospital during the time period relevant to this litigation.2
Drs. Stavens, Hallal, and Campbell asserted Allowed Administrative Claims pursuant to 11 U.S.C. § 503(b)(1)(A) for salary and on-call services earned but not paid during the KMC bankruptcy case. Dr. LaRocca acquired an Allowed Secured Claim against KMC by assignment, which enabled KMC to retain operating room and anesthesiology equipment for its continued operations during the bankruptcy case. According to KMC, the 20% distribution of KMCREI’s equity interests was in consideration of the four physicians’ compromise - of their respective Allowed Administrative Claims against KMC.
As described below, however, the Bankruptcy Court ultimately ordered that the 20% that was to go to Drs. Stavens, Hallal, Campbell, and LaRocca could not be transferred if that transfer would violate applicable federal healthcare laws. In that *763case, RLBB would hold 100% of the new equity in the reorganized KMCREI following confirmation of the plan.
Appellant’s Objections to Confirmation
On July 26, 2018, Dr. Buridi, among others, filed objections to confirmation of the KMC and KMCREI Plans (“the Plan Objections”). The Plan Objections raised four arguments in opposition to confirmation of the plans: (1) that the proposed distribution of 20% of the equity interests in KMCREI to Drs. Stavens, Hallal, Campbell, and LaRocca violated 11 U.S.C. § 1129(b)(2)(B)(ii), the so-called “absolute priority rule”; (2) that the plans unfairly discriminated against Dr. Buridi’s subro-gation claim arising from amounts collected pursuant to his personal guaranty; (3) that the KMC Plan was filed in bad faith because a secured creditor of KMC with personal guaranties filed a collection suit against Dr. Buridi and several other doctors; and (4) that the plan did not satisfy 11 U.S.C. § 1129(a)(ll) because it was likely to be followed by liquidation or further financial reorganization.
Amendment to KMC Plan
. The proposed KMC Plan included an injunction intended to prevent creditors from pursuing claims against KMC and its property or any guarantor or co-obligor of KMC and their property. As a personal guarantor, Dr. Buridi falls within the injunction’s protection. At the hearing on the disclosure statement, Dr. Buridi had requested clarification about the injunction and its effect on two state court cases he had filed against third-party non-debtors, including Drs. Stavens and Hallal. At that hearing, KMC’s counsel stated that the injunction was unrelated to Dr. Buridi’s state court claims and would not prevent him from pursuing those lawsuits. With this assurance, Dr. Buridi did not pursue his objection of the original injunction.
On July 29, 2013, the day before the Confirmation Hearing was scheduled to occur, KMC filed an amendment to the KMC Plan that altered the injunction. Specifically, the following language was added to the end of the injunction:
Notwithstanding anything in this Confirmation Order and in Article XI of the Plan to the contrary, in the event that any guarantor or any co-obligor of the Debtor either (a) becomes a debtor under title 11 of the U.S. code or (b) commences or continues any action against the Debtor, KMCREI, or any equity holder in the reorganized Debtor or KMCREI, then the injunctions set forth in this Confirmation order shall automatically terminate and shall not apply to such guarantor or such eo-obli-gor and/or their property.
Dkt. 4-33-at 16.
Confirmation Hearing
On July 30, 2013, the confirmation hearing was held at which both the KMC Plan and the KMCREI Plan were considered simultaneously. In addition to the Plan Objections already detailed, Dr. Buridi raised two oral objections to confirmation. First, he argued that the amended language of the injunction targeted him and was designed to prevent his state court action against Drs. Stavens and Hallal. Specifically, Dr. Buridi contended that in contradiction to KMC’s representations at the disclosure hearing, the amended language would render him vulnerable to creditor lawsuits if he chose to continue pursuing his state court action against Drs. Stavens and Hallal, given that they would be KMCREI equity holders following reorganization. The second oral objection put forth by Dr. Buridi was based on his concern that the award of a 20% equity distribution in KMCREI to Drs. Stavens, Hallal, Campbell, and LaRocca in order to satisfy, claims of KMC circumvented the federal “Stark Laws” set forth in 42 U.S.C. § 1395, a series of statutes governing phy*764sician self-referral for Medicare and Medicaid patients.
The Bankruptcy Court expressed concern regarding Dr. Buridi’s objection based on possible violations of healthcare law, but ultimately overruled the Plan Objections and entered orders confirming both the KMC Plan and the KMCREI Plan on August 19, 2013.
Appellant’s Rule 9023 Motions
On September 2, 2013, Dr. Buridi and others filed a motion to alter, amend, or vacate the confirmation orders, pursuant to Federal Rule of Bankruptcy Procedure 9023 and Federal Rule of Civil Procedure 59 (“the Rule 9023 Motions”). In the Rule 9023 Motions, Dr. Buridi again argued that the respective confirmed plans and confirmation orders were potentially violative of federal healthcare laws. The Bankruptcy Court held a hearing on the Rule 9023 Motions at which the court granted Dr. Buridi’s motions, and adopted the following language suggested by counsel for RLBB in an attempt to address Dr. Buri-di’s concerns:
Compliance with Applicable Norir-Bank-rwptcy Health Care Laws. Notwithstanding anything in the KMCREI Plan or KMC Plan to the contrary, and for the purposes of clarification and to resolve the Rule 9023 Motion, the Plans shall be deemed construed and deemed amended, as necessary, to provide as follows: (a) implementation of the Plans and all transactions necessary to consummate the Plans including, without limitation, distributions of equity or other property to doctors that provide services and/or referrals to the KMC hospital, shall comply with all applicable health care laws and regulations including, without limitation, the anti-kickback and so-called “Stark Laws” found in Title 42 of the U.S. Code (“the Applicable Healthcare Laws”); (b) Section 8.4 of the KMCREI Plan and Section 9.04 of the KMC Plan are amended to add, as a condition precedent to the Effective Date, that the Exit Investor is satisfied that implementation of the Plans will comply with Applicable Health Care Laws; and (c) in the event that the proposed distributions to Drs. Stevens, Hallal, Campbell, and/or LaRocca, or the proposed treatment of the administrative claims held by such doctors, is determined by the Exit Investors to violate or risk violating the Applicable Health Care Laws, the distribution and/or treatment of such claims shall be modified or eliminated to the extent necessary to ensure full compliance with the Applicable Health Care Laws.
Dkt. No. 2-29 at 6-7; Dkt. No. 4-29 at 17-18.
On September 11, 2013, the Bankruptcy Court entered amended confirmation orders containing this language.
Consummation of the Plans
Although the Rule 9023 Motions were granted, Dr. Buridi subsequently appealed entry of both the KMCREI and KMC Confirmation Orders. However, he did not seek a stay of either Confirmation Order from the Bankruptcy Court or this Court, and did not post a supersedeas bond. Despite Mr. Buridi’s appeals, KMC, KMCREI, and the Exit Investor elected to waive, conditions to the effective dates of each plan in accordance with the Confirmation Orders, and began making plan distributions on November 7, 2013.
The Exit Investor contributed more than $10 million in cash to enable KMC and KMCREI to comply with the Confirmation Orders and to improve KMC’s ability to generate revenue. In addition to the cash infusion required by the Confirmation Orders, the Exit Investor contributed more funds to cover KMC operating shortfalls during its transition out of bankruptcy. During this time period, KMC also *765entered into post-confirmation contracts with new venders, a management agreement with Galichia Hospital Group, LLC, and retained a new chief operating officer. Also in accordance with the Confirmation Orders, all of the pre-confirmation equity interests in KMC and KMCREI were extinguished and the Exit Investor acquired, and presently owns, 100% of the membership interests in both reorganized KMC and reorganized KMCREI.
The Instant Litigation
Dr. Buridi filed notices of appeal from the confirmation orders on September 25, 2013. KMC and KMCREI each filed motions to dismiss in their respective cases. On February 14, 2014, the court consolidated Dr. Buridi’s appeals of the KMCREI and KMC Plans. Both KMC’s and KMCREI’s motions to dismiss were denied by this Court on September 29, 2014, based on the narrow relief Dr. Buridi was seeking. Dr. Buridi’s bankruptcy appeal is now fully briefed and ripe for ruling.
Legal Analysis
I. Standard of Review
This Court has power to review the final judgment of the United States Bankruptcy Court for the Southern District of Indiana pursuant to 28 U.S.C. § 158(a)(1). We review the legal conclusions reached by the Bankruptcy Court de novo. Ojeda v. Goldberg, 599 F.3d 712, 716 (7th Cir.2010); In re Midway Airlines, Inc., 69 F.3d 792, 795 (7th Cir.1995). The Bankruptcy Court’s findings of fact are reviewed for clear error. In re Crosswhite, 148 F.3d 879, 881 (7th Cir.1998).
II. Objections as to both the KMC and KMCREI
The majority of Dr. Buridi’s arguments on appeal are identical as to the KMC and the KMCREI Plans, and thus, we address them together. Plan-specific objections are addressed separately below.
A. Improper Delegation of Judicial Authority
Dr. Buridi first argues that by amending the KMC and KMCREI Plans to address his Rule 9023 motion by including the language set forth in Paragraph 4 of the Final KMC Confirmation Order and Paragraph 5 of the Final KMCREI Confirmation Order, the Bankruptcy Court ceded its authority to the Exit Investor to determine whether distribution of equity to the four physicians would violate federal healthcare laws, which he contends constitutes an unconstitutional delegation of judicial authority. In support of his argument, Dr. Buridi relies primarily on the decision of the United States Supreme Court in Whitman v. American Trucking Associations, 531 U.S. 457, 121 S.Ct. 903, 149 L.Ed.2d 1 (2001). Quoting Whitman, Dr. Buridi argues that the Constitution’s text permits “no delegation” of powers and that a government department may authorize an individual or body to act on its behalf only by designating “ ‘an intelligible principle to which the person or body authorized to act is directed to conform.’ ” Id. at 472, 121 S.Ct. 903 (citations and quotation marks omitted). However, the case-law relied upon by Dr. Buridi addresses an unrelated body of law, to wit, the constitutional principles underlying the nondelegation of legislative authority only; he has failed to point us to (nor has our research revealed) relevant caselaw that would support the application of such principles to the situation at hand. Accordingly, we find that Dr. Buridi has failed to raise a cognizable constitutional claim based on the Bankruptcy Court’s inclusion of Paragraph 4 in the KMCREI Plan and Paragraph 5 in the KMC Plan.
Even if Dr. Buridi could establish that constitutional nondelegation principles are applicable to the judiciary in the manner he contends, he has failed to present any *766authority for the proposition that before confirming a plan, the bankruptcy court is required to determine whether potential future actions of a reorganized debtor might subject it to civil or criminal penalties for violations of non-bankruptcy law such that it could be said to have improperly delegated its judicial authority through the inclusion of Paragraph 4 in the KMCREI Plan and Paragraph 5 in the KMC Plan.
For example, in his Rule 9023 motion, Dr. Buridi did not make a constitutional argument, but instead argued that the 20% equity distribution violated the Stark Laws and thus was in violation of 11 U.S.C. § 1129(a)(3), which requires a bankruptcy court to determine before confirming a plan of reorganization, that the plan was “proposed in good faith and not by any means forbidden by law.” Id. But courts addressing the issue have “uniformly held” that this provision “does not require that the contents of a plan ‘comply in all respects with the provisions of all nonbank-ruptcy laws and regulations.’ ” In re Gen. Dev. Corp., 135 B.R. 1002, 1007 (Bankr.S.D.Fla.1991) (quoting In re Buttonwood Partners, Ltd., 111 B.R. 57, 59 (Bankr.S.D.N.Y.1990); In re Food City, Inc., 110 B.R. 808, 812-13 (Bankr.W.D.Tex.1990)).
Rather, “Section 1129(a)(3) requires only that the plan’s proposal, as opposed to the contents of the plan, be in good faith and in compliance with all non-bankruptcy laws.” 135 B.R. at 1007 (citing 111 B.R. at 59-60, 110 B.R. at 811) (emphasis in original). Thus, “[bjecause only the proposal of the plan must not be by a means forbidden by law, plans proposing terms that arguably violate some statute or common law doctrine have passed muster under Section 1129(a)(3).” Richard M. Cieri, Barbara J. Oyer, and Dorothy J. Birnbryer, “The Long and Winding Road”: The Standards to Confirm a Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (Part I), 3 J. Bankr. L. & Prac. 3 Nov.-Dec.1993, at 39-40 (citing Gen. Dev. Corp., 135 B.R. at 1007 (holding that plan proposing payment of a municipality’s claims in stock and notes despite prohibition by the state constitution on ownership of a corporate stock by a municipality satisfied Section 1129(a)(3))); Buttonwood Partners, 111 B.R. at 60 (holding that possible violation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 did not prevent confirmation of a plan under Section 1129(a)(3)). This does not mean that the potential illegality of a substantive provision of a reorganization plan is an irrelevant consideration in the confirmation process. Courts have recognized, for example, that “the legal consequences which might flow from the implementation of a substantive provision which is prohibited by law could affect the plan’s feasibility under section 1129(a)(ll).” Food City, Inc., 110 B.R. at 812 n. 10. We take up this issue in detail below in addressing Dr. Buridi’s separate contention that the Bankruptcy Court’s confirmation of the KMC and KMCREI Plans was in violation of § 1129(a)(ll). But this is a statutory not a constitutional question. Simply put, if the Bankruptcy Court erred, it was not an error of a constitutional magnitude.
B. Automatic Post-Confirmation Amendment
Dr. Buridi’s next argument is that the language added by the Bankruptcy Court to address his Rule 9023 motion violates 11 U.S.C. § 1127(b), which requires notice and a hearing prior to any post-confirmation amendment to a plan of reorganization. Specifically, Dr. Buridi argues that Paragraph 4 in the KMCREI Plan and Paragraph 5 in the KMC Plan, in effect, provide that the KMC and KMCREI Plans are automatically deemed amended and modified post-confirmation if *767the Exit Investor determines that the equity distribution to the four named physicians risks violating the federal health care laws, which Dr. Buridi contends “effectively eircumvent[s] full disclosure under 11 U.S.C. section 1125 of the proposed amendment, as well as the notice and hearing due process requirement that section 1127(b) requires.” Dkt. No. 16 at 27.
It is true that the Bankruptcy Court amended the Plans by including the language challenged by Dr. Buridi. But that amendment was made in response to Dr. Buridi’s Rule 9023 motion and following a hearing on that motion. Accordingly, we do not find that the Bankruptcy Court’s amendment of the Plan through the addition of such language was in contravention of § 1127(b). Under § 1127(b), a plan proponent or the reorganized debtor may modify the plan at any point after confirmation and before substantial consummation “if circumstances warrant such modification and the court, after notice and a hearing, confirms such plan as modified, under section 1129 of this title.” Id. Here, Dr. Buridi was given both notice and a hearing before the Bankruptcy Court amended the Plan. Contrary to Dr. Buri-di’s characterization of the added language, it does not allow the Plan to be freely amended post-confirmation without compliance with 11 U.S.C. § 1127(b), but rather simply enables the KMCREI and KMC Plans to be implemented without requiring further modifications in the event that the equitable distributions at issue are deemed to risk violating federal health care laws. Therefore, in our view, the challenged language itself does not even implicate, much less violate § 1127(b) in the manner Dr. Buridi contends.
C. Substantive Consolidation
Dr. Buridi argues that the Bankruptcy Court also erred by treating KMCREI’s Chapter 11 bankruptcy case as if it were substantively consolidated with KMC’s Chapter 11 case. Here, substantive consolidation was not sought by KMC or KMCREI; the Bankruptcy Court did not order substantive consolidation, and neither reorganization plan contained a “deemed consolidation” provision.3 Dr. Buridi contends that the Bankruptcy Court nonetheless treated the two cases as substantially consolidated, pointing to the provision in the Final Confirmation Orders describing the potential distribution of KMCREI’s equity interests to Drs. Sta-vens, Hallal, Campbell, and LaRocca in consideration of the doctors’ compromise of their respective Allowed Administrative Claims against KMC as permitted (but not required).
We are not persuaded by Dr. Buridi’s argument. First, we note that, although Dr. Buridi’s counsel expressed concern during the confirmation process regarding the fact that the four physicians were being offered equity in KMCREI to settle administrative claims against KMC, there is no indication that Dr. Buridi specifically objected to either the KMC Plan or the KMCREI Plan on the basis of a purported consolidation at any point throughout the pendency of the bankruptcy cases. Accordingly, this argument is waived.
Even if not waived, Dr. Buridi has pointed to no authority to support the position that individual creditors’ consent to a compromise of particular administrative claims in this manner constitutes a substantive consolidation. Rather, “[s]ub-*768stantive consolidation usually results in, inter alia, pooling the assets of, and claims against, the two entities; satisfying liabilities from the resultant common fund; eliminating inter-company claims; and combining the creditors of the two companies for purposes of voting on reorganization plans.” In re Augie/Restivo Baking Co., 860 F.2d 515, 518 (2d Cir.1988) (citation omitted). Here, however, KMC and KMCREI maintained separate assets, had distinct creditor bodies, set forth distinct plans for satisfaction of claims and interests, and solicited votes on separate plans of reorganization.
Moreover, even if the Bankruptcy Court had effected substantive consolidation in this case, Dr. Buridi has failed to establish the impropriety of the Bankruptcy Court’s conduct under the facts before us. Substantive consolidation is not addressed in the Bankruptcy Code. Rather, it is an equitable doctrine that “treats separate legal entities as if they were merged into a single survivor left with all the cumulative assets and liabilities.In re Owens Corning, 419 F.3d 195, 205 (3d Cir.2005) (internal citations and quotations omitted). Courts generally hold that substantive consolidation is an “extraordinary remedy” to be used sparingly because of the potential harm to creditors of a more solvent debtor if forced to share equally with creditors of a less solvent debtor. E.g., In re Doctors Hosp. of Hyde Park, Inc., 507 B.R. 558, 707 (Bankr.N.D.Ill.2013); In re Archdiocese of Milwaukee, 483 B.R. 693, 700 (Bankr.E.D.Wis.2012).
Here, however, Dr. Buridi has failed to show any negative effect or harm he suffered as a result of the purported consolidation. In fact, Dr. Buridi does not dispute that but for the compromise of the administrative claims of the four named physicians, KMC would have been required to disburse additional money or property to satisfy those claims in advance of lower priority unsecured claims such as his. See 11 U.S.C. §§ 503(b), 507(a)(2), and 1129(a)(9)(A). Accordingly, Dr. Buridi has failed to establish on the facts before us that the Bankruptcy Court violated the Bankruptcy Code or abused its broad equitable powers by purportedly effecting a substantive consolidation.
D. Feasibility
Dr. Buridi argues that the Bankruptcy Court confirmed the KMC and KMCREI Plans in contravention of the feasibility requirement of 11 U.S.C. § 1129(a)(ll), which requires a determination 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.” Id. Under Seventh Circuit law, to determine that a plan is feasible, “the bankruptcy court need not find that it is guaranteed to succeed; only a reasonable assurance of commercial viability is required.” Matter of 203 N. La Salle Street Partnership, 126 F.3d 955, 961-62 (7th Cir.1997) (internal quotation omitted), rev’d on other grounds, 526 U.S. 434, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999). The feasibility of a plan is a finding of fact reviewed for clear error. See In re Lewis, 459 B.R. 281, 290 (N.D.Ill.2011).
Dr. Buridi argues that the Plans are not feasible under 11 U.S.C. Section 1129(a)(ll) because the 20% equity distribution to Drs. Stavens, Hallel, Campbell, and LaRocca is “an apparent contravention scheme of federal healthcare law.” Dkt. No. 16 at 45. It is true that courts have recognized that “the legal consequences which might flow from the implementation of a substantive provision which is prohibited by law could affect the plan’s feasibility under section 1129(a)(ll).” *769Food City, Inc., 110 B.R. at 812 n. 10. However, Dr. Buridi has failed to provide a developed argument explaining how the challenged provision impacts the feasibility, to wit, the ability to fund, the Plan beyond merely citing the possible penalties for violations of the federal healthcare statutes at issue.
Here, at the time of confirmation, the Plans provided sufficient prospects of success to satisfy § 1129(a)(ll), particularly considering that the Confirmation Orders provide that distributions should not be made under the Plans if they are deemed by the Exit Investor to be potentially violative of applicable healthcare laws. The Bankruptcy Court’s finding that the Plans were feasible at the time of confirmation is only supported by hindsight, given the fact that, today, approximately 20 months into the Plan, the hospital remains open and operational and there are no civil or criminal proceedings pending against KMC or KMCREI based on any of the alleged violations of the healthcare laws about which Dr. Buridi remains concerned. Accordingly, we cannot find that the Bankruptcy Court clearly erred in determining that the Plans satisfied § 1129(a)(ll) at the time of confirmation.
III. Objection to KMC Plan Based on Modifications to Injunction
Dr. Buridi argues that the Bankruptcy Court erred in allowing what he contends were “material” modifications of the injunction set forth in the KMC Plan. The injunction provides, in relevant part, as follows:
... [A]ll parties that have held, currently hold or may hold any claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action or liabilities against the Debtor or KMCREI that are compromised, settled or otherwise provided for pursuant to the Plan shall be enjoined from [pursuing collection actions] against the Debt- or, its property or any guarantor or co-obligor of the Debtor, and said guarantor’s or co-obligor’s property, on account of such claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action or liabilities....
Dkt. 4-33 at 15. Dr. Buridi objects to the following language added to the injunction the day before the confirmation hearing:
[I]n the event that any guarantor or co-obligor of the Debtor ... commences or continues any action against the Debtor, KMCREI, any equity holder in the reorganized Debtor or KMCREI, or any enjoined Class of elaimaint(s) for claims arising prior to the Date of this Confirmation Order, then the injunctions set forth in this Confirmation Order shall automatically terminate and shall not apply to such guarantor or co-obligor and/or their property.
Dkt. 4-33 at 16.
According to Dr. Buridi, the modification is discriminatory because its intent is to prevent him from pursuing a state court lawsuit against Drs. Stavens and Hallel. However, Dr. Buridi has failed to identify any actual cause of action or judgment in his favor that has been enjoined nor has he established that he is under any threat of defending against claims or liabilities that should have been enjoined. Although not entirely clear, it appears he faults the Bankruptcy Court for failing to give him sufficient time to review the modified language, given that the amended language was submitted the day before the confirmation hearing. But Dr. Buridi has failed to point to a provision of the Bankruptcy Code he contends the amended injunction violates or what remedy he seeks. It is not the court’s duty to flesh out these arguments for him. For these reasons, we cannot find clear error in the Bankruptcy *770Court’s treatment of the modification to the injunction in the KMC Plan.
IV. Objection to KMCREI Plan Under 11 U.S.C. § 1129(b)
Section 1129(b) creates an exception to the general rule that a Chapter 11 plan may only be approved if each class of creditors affected by the plan consents by permitting confirmation of nonconsensual or “cramdown” plans if the following two requirements are met: (1) all conditions of § 1129(a) are met (other than § 1129(a)(8), which requires acceptance by each impaired class of claims or interests); and (2) “the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1). A plan is “fair and equitable” to a dissenting class of impaired unsecured claims if: (1) the allowed value of the claim is to be paid in full, 11 U.S.C. § 1129(b)(2)(B)®; or (2) “the holder of any claim or interest that is junior to the claims of such [impaired unsecured] class will not receive or retain under the plan on account of any such junior claim or interest any property,” 11 U.S.C. § 1129(b)(2)(B)(ii), which is known as the “absolute priority rule.”
Dr. Buridi contends that the equity distribution set forth in the KMCREI Plan violates § 1129(b) because it both discriminates unfairly against him and contravenes the absolute priority rule. We address these arguments in turn below.
1. Absolute Priority Rule
Dr. Buridi contends that the Bankruptcy Court’s confirmation of the KMCREI Plan was in contravention of the absolute priority rule. The underlying principle of the absolute priority rule is that “[creditors in bankruptcy are entitled to full payment before equity investors can receive anything.” In re Castleton Plaza, LP, 707 F.3d 821, 821 (7th Cir.2013) (citing 11 U.S.C. § 1129(b)(2)(B)(ii)). Dr. Buridi maintains that the equity distribution to Drs. Stavens, Hallel, Campbell, and La-Rocca violates the absolute priority rule.
Dr. Buridi has failed, however, to identify any senior objecting class of claims in the KMCREI case or any junior class that is retaining equity in KMCREI. The confirmation order provides that, “[o]n the Effective Date, holders of Class 4 Interests shall have their membership [i.eeq-uity] interests canceled.” Sec. Am. Conf. Order (KMCREI Plan) at 11. Accordingly, there is no junior class of claims that will “receive or retain under the plan on account of any such junior claim or interest any . property.” 11 U.S.C. § 1129(b) (2) (B) (ii). Nor did Dr. Buridi show a senior class of creditors who objected to this treatment. Accordingly, the Bankruptcy Court was correct in finding that the absolute priority rule is not implicated in this case.
2. Unfair Discrimination
Dr. Buridi also objects to the 20% equity distribution, arguing that it violates § 1129(b)(1), which requires that the plan “not discriminate unfairly” against a “class of claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1). Dr. Buridi argues that the KMCREI Plan unfairly discriminates against him because Drs. Stavens, Hallel, Campbell, and LaRocca may receive distributions of equity from the Exit Investor post-confirmation, while he will not. However, as noted above, all Class 4 interests were canceled as of the Effective Date. Dr. Buridi has failed to rebut KMCREI’s contention that nothing in the Bankruptcy Code limits the rights of creditors to transfer or receive non-estate property in this manner, given that the Exit Investor will not be allocating to other parties distributions or dividends from the *771bankruptcy estate, but new equity in a reorganized entity.
Y. Conclusion
For the reasons detailed above, the Bankruptcy Court’s confirmation of the KMC and KMCREI Plans is AFFIRMED.4 Final judgment shall enter accordingly.
IT IS SO ORDERED.
. RLBB is often referred to as “Rialto” in Bankruptcy Court pleadings and transcripts in the record on appeal.
. When KMC was formed, it was anticipated that the physician-owners of KI would increase KMC’s value through regular admission of patients to the hospital for surgeries, exams, and other necessary procedures. However, the physician-owners of KI .admitted patients to varying degrees. Dr. Buridi, for example, did not admit any patients to the hospital and, according to Appellees, did not otherwise contribute any time or services throughout the pendency of the Chapter 11 Cases. Dr. Buridi rejoins that while he may not have referred patients to the hospital, he, along with other equity members of KI, contributed in other ways, namely through judgment liens, wage garnishments, and other judgment enforcement actions, all arising from their guaranty of the debt of KMC and KMCREI.
. The Bankruptcy Court did keep the KMC and KMCREI cases on a unified schedule for purposes of hearings related to the disclosure statements and plans. But this procedure alone does not show that the Bankruptcy Court treated the cases as substantively consolidated. Moreover, Dr. Buridi never objected to such a procedure and thus has waived any claim related to that conduct.
. We note that confirmation of the Plans does not mean that the Debtors are insulated from subsequent enforcement actions for illegal conduct. As Dr. Buridi points out, enforcement actions of federal healthcare law viola- - tions may be brought by the Department of Health and Human Services or under the False Claims Act. However, "a rule which requires a court to seek out possible future violations from which confirmation will not shelter the debtor anyway invites advisory rulings and wastes valuable judicial resources.” Food City, 110 B.R. at 813. If the offer of equity or the 20% distribution indeed does violate healthcare laws as Dr. Buridi contends, enforcement mechanisms exist to address such a violation. But Dr. Buridi has failed to show that the Bankruptcy Court erred in its treatment of this issue in the bankruptcy context, which is the basis of the appeal before us. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498354/ | FEDERMAN, Chief Judge.
In this adversary proceeding, the Bankruptcy Court avoided a lease of farmland between Debtor Keeley and Grabanski Land Partnership, and Louis Slominski, as a fraudulent transfer. Pertinent to this appeal, the Court also held that Slominski was obligated under § 550(a) to pay the Trustee the fair market rent for the time he occupied the land prior to the avoidance, rather than the lower rent called for by the lease. And, the Court awarded Slominski an offset, as a good faith transferee pursuant to U U.S.C. § 550(e), for the costs of his improvements to the land, namely, the wheat crops he planted there *774and certain taxes he paid. Both parties appeal the Court’s calculation of the money judgment under § 550, and the Chapter 11 Trustee appeals the Court’s refusal to grant a new trial based on newly-discovered evidence relating to whether the lease was executed pre- or post-petition. For the reasons that follow, we AFFIRM, IN PART, and REVERSE, IN PART.
STATUTORY BACKDROP
This dispute involves the application of § 550, which provides the remedy in the event of an avoided fraudulent transfer. Section 550(a) provides, in relevant part, that to the extent that a transfer is avoided under § 548, “the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property” from the transferee.1 Section 550(e)(1) then provides for a lien (in effect, a setoff) against the trustee’s recovery for good faith transferees: Such good faith transferees are entitled to receive a setoff for the lesser of (A) the costs of improvements made after the transfer and (B) any increase in the value of the property as a result of the improvements.2 Here, both parties assert that the Bankruptcy Court erred in its application of § 550.
FACTUAL BACKGROUND
John and Dawn Keeley filed an involuntary Chapter 11 bankruptcy petition against Debtor Keeley and Grabanski Land Partnership on December 6, 2010. The Keeleys had been co-owners of the Debtor with Thomas and Mari Grabanski, but'had had a falling out with them. The Bankruptcy Court granted the order for relief on January 7, 2011, and Kip Kaler wa^ Appointed as the Chapter 11 Trustee on April 5, 2011.
The Debtor’s principal assets consisted of two separate pieces of farm property located in Texas (collectively, the “Texas Properties”), which were the subject of a lease by the Debtor to Louis Slominski, a friend of Thomas Grabanski. Slominski and the Debtor asserted that the lease between them started as a verbal lease in November 2010, but just a few days prior to the December 6, 2010 involuntary bankruptcy filing, the lease had been reduced to writing via a “Farm Lease Crop Share” dated December 1, 2010 (the “Lease”). As discussed more fully below, the Trustee asserts that the Lease was actually executed postpetition (no earlier than April 2011), and that it had been backdated to December 1, 2010 to make it appear to have been entered prepetition.
In any event, the written Lease provided for a three-year term commencing December 1, 2010, and expiring November 1, 2013, thus covering the 2011, 2012, and 2013 crop years. The Lease called for Slominski, as the tenant, to pay the Debt- or, as the landlord, twenty percent of the gross proceeds derived from the land, with a minimum annual payment of $300,000. Lease payments were due in arrears on the first day of November of each year between 2011 and 2013. Slominski farmed the Texas Properties in 2011 without objection from the Trustee and, on November 10, 2011, Slominski deposited into his attorney’s trust account a check in the amount of $314,464.55, representing the rent calculated under the terms of the Lease for 2011.
Meanwhile, the Trustee was trying to sell the Texas Properties. However, potential buyers did not want to buy the properties with the Lease in place, so the Trustee filed this adversary proceeding on August 26, 2011, seeking to avoid the *775Lease as being entered postpetition without authorization under 11 U.S.C. § 549 or, alternatively, as a fraudulent transfer under § 548(a)(1), asserting that the rent under the Lease was less than fair market value.
While that adversary proceeding was pending, the case was converted to Chapter 7 on October 11, 2011. Kip Kaler has continued to act as trustee in the Chapter 7 case.
In the adversary proceeding, the Bankruptcy Court held, by Order entered March 7, 2012, that the Lease had been entered into prepetition, so § 549 did not apply. However, the Court found that the fair market rent under the Lease was $490,845 per year and, therefore, the rent charged to Slominski under the Lease was below fair market value. Thus, the Court avoided the Lease as a fraudulent transfer under § 548 on that basis, and terminated the Lease.
The Court also held that Slominski was a good faith purchaser under § 550(e), but that Slominski had failed to prove the value of his improvements to the land at that point. Nevertheless, the Court held that Slominski was entitled to the crops growing on the land, but, in order to receive those crops (or their proceeds), Slominski was required to pay the 2011 rent under the terms of the Lease, plus a pro-rata share of the 2012 fair market rent for the time Slominski occupied the property. The Court ordered that the $314,464.55 being held in Slominski’s attorney’s trust account for the 2011 rent be paid over to the Trustee. At that point, no money judgment was entered because the Court determined it lacked the necessary evidence to make full and proper determinations as to ■ Slominski’s setoff under § 550(e).
At about this same time as the March 2012 Order, the Trustee sold the Texas Properties. As was later clarified, those land sales included alfalfa crops growing on them, but not the growing wheat crops. After the Lease was terminated, the Trustee hired a local farmer to harvest the wheat crops, and the bankruptcy estate netted $442,218.09 from the wheat after harvest costs and management fees. Slo-minski claimed below, and does here, that he is entitled to those crop proceeds for the year 2012.
After several requests to clarify, reconsider, and amend orders in the adversary proceeding, the Court entered an Order dated October 7, 2013, concerning the remedy under § 550 for the fraudulent transfer. In that Order, the Court held that the estate was entitled to fair market rent for the entire time Slominski was in possession of the property. After prorating the 2012 crop year and making an adjustment for three months while the parties shared possession during the transition from Slominski to the Trustee’s local farmer, the Court held that Slominski owed fair market rent of $490,000 for 2011, plus $255,200 for 2012, for a total of $745,200. After crediting Slominski the $314,464.55 he previously paid against the 2011 rent, the Court held that ■ Slominski owed the Trustee a net $431,200 in fair market rent for the time Slominski had occupied the property.
The Court further found that Slominski had proven that he had compensable costs for improving the land under § 550(e)(1)(A) totaling $578,577.95. This was comprised of $563,698 for costs associated with planting the wheat crops, plus $14,879.95 Slominski paid for property taxes. The Court further found that Slomin-ski had failed to prove any increase in value to the Texas Properties under § 550(e)(1)(B) as a result of any improvements but, nevertheless, held that Slomin-ski was entitled to an offset under § 550(e)(1)(A) for the costs of improve*776ments. As will be seen, such holding is not consistent with § 550(e).
Then, offsetting the $431,200 Slominski owed the estate for fair market rent under § 550(a) against Slominski’s $578,577.95 in compensable expenses under § 550(e)(1)(A), the Court determined that Slominski was entitled to a judgment for $147,377.95 against the Debtor’s estate.
After the Court entered judgment in that amount, both parties again moved to alter or amend the judgment. In addition, the Trustee moved for a new trial, asserting he had newly-discovered evidence that the Lease had been backdated. On October 27, 2014, the Court entered the last Order from which this appeal springs, denying all post-judgment motions. Both sides appeal the calculation of the money judgment, and the Trustee appeals the denial of his motion for a new trial based on newly-discovered evidence.
STANDARD OF REVIEW
We review conclusions of law de novo and findings of fact for clear error.3 A factual finding is clearly erroneous when a reviewing court is left with the definite and firm conviction that a mistake has been committed.4 The clearly erroneous standard does not entitle a reviewing court to reverse the trier of fact simply because it would have decided the case differently: “[W]hen there are two permissible views of the evidence, we may not hold that the choice made by the trier of fact was clearly erroneous.”5 And, “where the factual findings call for an assessment of witness credibility, even greater deference to the trier of fact is demanded.”6 Because § 550(a) is permissive and expressly provides for alternative remedies, we review the bankruptcy court’s decision as to whether the award recovery of the property, or its value, and its determination of value, for abuse of discretion.7
DISCUSSION
11 U.S.C. § 550
Neither party appeals from the Bankruptcy Court’s finding that the rent under the Lease was below fair market value and, therefore, that the Lease was an avoidable fraudulent transfer under § 548. The dispute here concerns the remedy.
Again, § 550(a) provides, in relevant part, that to the extent that a transfer is avoided under § 548, “the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property” from the transferee.8 Section 550(d) provides that a trustee “is entitled to only a single satisfaction” under § 550(a).9 Section 550(e)(1) then provides for an offset, in the form of a lien, against that recovery for good faith transferees:
(e)(1) A good faith transferee from whom the trustee may recover under subsection (a) of this section has a lien on the property recovered to secure the lesser of—
(A) the cost, to such transferee, of any improvement made after the transfer, less the amount of any profit *777realized by or accruing to such transferee from such property; and
(B) any increase in the value of such property as the result of such improvement, of the property transferred.10
“The purpose of § 550 is to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred .... The primary goal is equity and restoration, ie., putting the estate back where it would have been but for the transfer.”11 “[T]he purpose of fraudulent transfer law is remedial rather than punitive.” 12 “Allowing the estate to profit by taking value that should be returned to a good faith transferee does not promote the purpose of § 550 to restore equity.”13
The Trustee’s Recovery under § 550(a)
As Slominski points out, § 550(a) provides for the recovery of the property fraudulently transferred or the value of such property, and § 550(d) prohibits a double recovery. As stated, the purpose of this provision is to return the estate to its financial condition as of December 1, 2010 (the effective date of the Lease). Slo-minski asserts that, when the Trustee received the property transferred&emdash;which, he acknowledges, was the leasehold interest, and not title to the land&emdash;and turned around and sold the Texas Properties at a combined price of $7.8 million (which was $960,000 more than the Debtor paid for it), the estate was thereby returned to its prior financial condition as of December 1, 2010. Slominski asserts that terminating the Lease, returning the property so it could be sold, and ordering him to also pay rent resulted in a double recovery of both the property transferred and the value of that property.
Arguably, Slominski failed to raise this double-recovery argument before the Bankruptcy Court.14 Even so, we reject it. Although Slominski acknowledges that it was the leasehold interest (and not title to the land) which was transferred and thus avoided, his argument misapprehends the nature of what was avoided and what was (or should have been) awarded under § 550(a).
As everyone acknowledges, if the Debtor had transferred title of the land to Slominski, and that transfer were avoided,' then the Trustee would be entitled to either the return of the title to the land or the land’s value. The remedy for avoidance of a lease does not fit so comfortably in § 550. Since it was the Lease which was avoided here, and a year and a half of the Lease had been consumed by the time it was avoided, it was not possible for the Court to order the return of that portion of the leasehold interest. “Courts will generally allow the trustee to recover the value of the property where the subject property itself is unrecoverable.”15 Since the Court could not order Slominski to turn over the Lease for the period of time in which Slominski had already occupied the land, the Court was limited to awarding the *778Trustee the value of the Lease for that period of time.
As to the period of time after the avoidance, Slominski asserts it was error for the Court to award the Trustee the leasehold interest itself in addition to the pre-termi-nation rent. We disagree. The Lease only had value up to the date it was terminated by the avoidance; after the termination, the Lease had no value because it had been terminated. Possession of the land (and any future ability to lease or sell the land) reverted to the Trustee not as a remedy under § 550(a), but because Slo-minski’s basis for possession — the Lease— was terminated and no longer in effect.
As the Trustee asserts, if the point of § 550(a) is to put the estate back into the position it would have been had the fraudulent transfer not occurred, and if the Trustee had had possession of the leasehold interest as of December 1, 2010, then he would have received fair market rent from another tenant for that period of time (or would have been able to sell it sooner). Awarding the Trustee fair market rent for the period up until termination did, in fact, put the estate back into the position it would have been had the transfer not occurred. There was expert testimony as to fair market rent, which was adopted by the Court. Slominski here asserts no error in the Court’s acceptance of the expert’s testimony concerning the fair market rent amount. The Bankruptcy Court did not err in awarding the estate that fair market rent for the time Slominski was in possession of the Texas Properties.
Slominski also asserts that, since he was not in possession of the Texas Properties on November 1, 2012, the date when the rent ,became due for that year, he would not have been contractually obligated to pay any of the 2012 rent and so the Court should not have awarded the 2012 rent. This argument is wrong because the amount of rent awarded under § 550(a) was based on the fair market value of the possession of the property ’ for the time Slominski occupied it, not the rent due under the terms of the avoided Lease.
For those reasons, we conclude that the Bankruptcy Court did not err in holding that Slominski owed the Trustee $431,200 in net fair market rent.
Slominski’s Offset under § 550(e)
Having established the Trustee’s recovery under § 550(a), and having concluded that Slominski was a good faith transferee, which we discuss below, the Bankruptcy Court correctly turned to the setoff provided under § 550(e). Again, the primary goal here is “equity and restoration, i.e., putting the estate back where it would have been but for the transfer.”16 The purpose of § 550(e) is to prevent a windfall to the estate or its creditors.17
As the Trustee asserts, under the plain language of § 550(e), Slominski is entitled to a setoff for the lesser of: (A) the cost, to Slominski, of any improvement made after the transfer and (B) any increase in the value of such property as the result of such improvement. Slominski bore the burden of proving his setoff for the improvements under this section.18
*779The Bankruptcy Court held that Slomin-ski failed to prove that there had been an increase in value of the Texas Properties under paragraph (B), so Slominski was limited to the costs of the improvements under paragraph (A), which the Court found was $578,577.95 ($563,968 for the cost of planting the 2012 wheat crops plus $14,879.95 in property taxes).
The Trustee asserts this was error, and we agree. Since Slominski bore the burden under § 550(e), and if — as the Court held — Slominski failed to prove any value to the improvement of the property under paragraph (B), then the amount under paragraph (B) would be zero, and the lesser of $578,577.95 and zero is zero. Under the plain language of the statute, the Bankruptcy Court erred in holding that Slominski was entitled to the costs of improving the property while proving no value to the improvements.
But, the Court’s analysis misses the mark for another reason, which again highlights the awkwardness of applying § 550 to an avoided lease. Here, there are two potential compensable “improvements”: payment of the taxes and the growing wheat crop. But, again, the “property transferred” was the leasehold interest, not the land itself. Arguably, neither the payment of taxes nor the planting of crops “improved” the leasehold interest. But, as we have said, the purpose of § 550 is to avoid a windfall to either the estate or the transferee. To require that Slominski pay the estate rent on the property while he was entitled to occupy it under the later-avoided Lease, but to also require that the resulting crop go to the estate, would create such a windfall.
As to the taxes, “improvements” is defined in § 550 to expressly include “payment of any tax on such property.”19 It is undisputed that Slominski paid $14,879.95 in property taxes on the Texas Properties. The cost of paying the taxes under paragraph (A) is equal to the value of having the taxes paid under paragraph (B), and so Slominski is entitled to a setoff under §, 550(e) in the amount of $14,879.95.
Unlike taxes, the crops are not specifically identified within § 550(e)’s definition of “improvement.” And, the Bankruptcy Court’s decision was not entirely clear on that point because, although the Court found that the cost of planting the wheat crop was a cost of improvement under (A), it gave no value to the crop itself as an improvement under (B).
Although the parties cited no authority on the question of whether crops are an “improvement” to the land or the leasehold under § 550(e), and we found none, the Trustee concedes that, if Slominski were a good faith transferee, he would be entitled to the value of the crop, but not the higher cost awarded by the Court.
But Slominski argues that he need not rely on § 550(e) at all. That is so because he asserts he owned the crop that he planted while lawfully in possession of the land. Under Texas law,20 “growing annual crops are in their nature personalty, and therefore sales thereof are not within the statutes governing the sales of real property.”21 “As, however, the crops are separate and distinct in their value from the land upon which they grow, the ownership of the one, even on mortgaged property, may be in one person and the title to the other in another.”22
*780It is the rule in this State that crops produced by annual cultivation, either growing or mature, are distinct in nature from the land on which they are grown. It is only in some instances, such as a sale of the land upon which crops are growing, without reservation of the crops, that they are considered a part of the land. The rule is well established that crops, whether growing or mature, may be segregated from the land by the act of the owner.23
The wheat crops were not sold with the land, and, although the Trustee argues to the contrary with regard to his new trial motion, discussed below, the Court held that the written Lease Slominski operated under had been entered into by the parties before the bankruptcy. Based on that Lease, Slominski had the right to plant the crop and is entitled under Texas law to the proceeds of that crop.24 This is so, regardless of whether he was a good faith transferee under § 550(e).
Regardless of whether the wheat crop is Slominski’s separate personal property under Texas law — thus not subject to § 550 — or whether it would constitute an “improvement” to the land or leasehold interest under § 550(e), we conclude that, if Slominski is charged rent for the time he planted and cultivated the crop, he is entitled to the proceeds from the crop. This result, once again, makes the estate whole, but prevents the estate from reaping a windfall at Slominski’s expense. Slominski is, therefore, entitled to the proceeds from the wheat crop in the amount of $442,218.09.
Finally, Slominski asserts he is also entitled to compensation for wheat he planted into the alfalfa which was sold with the land. However, the Court found no such value, relying on evidence at trial that the buyer gave no value to that wheat and that it actually detracted from the value of the alfalfa. That finding is not clearly erroneous. Slominski is not entitled to a setoff for the cost of planting the wheat into the alfalfa because doing so produced no increase in value to anything.
As a result, Slominski is entitled to a setoff of $442,218.09 for the wheat crop proceeds, plus the taxes of $14,218.09.
The Trustee’s Motion for New Trial or Relief from Judgment Based on Newly-Discovered Evidence25
As it relates to Slominski’s setoff under § 550(e), the discussion above assumes *781that Slominski was a good faith transferee, as the Court found. The Trustee asserts that, after the Court entered its October 2013 Order and Judgment, he discovered new evidence which, he says, proves that the Lease was not created until April 2011. That evidence consisted primarily of an unexecuted lease, computer activity on GrabansM’s and his attorney’s computers suggesting that the Lease document was created in April, and the parties’ inability to produce the Lease when first asked to do so.
The Trustee asserts that if the Lease was not executed until postpetition, then it is void, and the parties were actually operating under an oral lease starting in November or December 2010. Since oral leases are only valid for one year under Texas law,26 the Trustee asserts Slominski had no authority to plant the 2012 wheat crop and he should be entitled to nothing from it, apparently regardless of whether the setoff is made under § 550(e) or as his separate personal property. He asserts that the Court erred in denying his motion for a new trial based on the newly-discovered evidence.
Rule 59 provides that a party may obtain a new trial in a non-jury case “for any reason for which a hearing has heretofore been granted in a suit in equity in federal court.”27 “Newly-discovered evidence” is recognized as such a reason.28 Similarly, Rule 60(b)(2) provides that a court may relieve a party from a final judgment based on newly-discovered evidence.29
The Eighth Circuit has addressed the standard for considering newly-discovered evidence in the context of a motion to alter or amend under Rule 59(e) as such: “A [trial] court has broad discretion in determining whether to grant or deny a motion to alter or amend judgment pursuant to Rule 59(e), and this court will not reverse absent a clear abuse of discretion.”30 “Under an abuse of discretion standard, this court cannot reverse the bankruptcy court’s ruling unless it ‘has a definite and firm conviction that the bankruptcy court committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors.’ ”31
To prevail on a Rule 59(e) motion based on newly-discovered evidence, the movant must show that: (1) the evidence was discovered after trial; (2) the movant exercised due diligence to discover the evidence before the end of the trial; (3) the evidence is material and not merely cumulative or impeaching; and (4) a new trial considering the evidence would probably produce a different result.32 The same standard applies under Rule 60(b)(2).33 The moving party under Rule 60(b)(2) “bears a heavy burden.”34
*782Although the Bankruptcy Court found in favor of the Trustee as to the first three elements, it held that, even if the new evidence proved the Lease was not signed until April 2011, the result would be the same.
First, irrespective of whether the Lease was executed on December 1, 2010, or in April 2011, Slominski planted the 2012 crops under the authority of that Lease, not under an expired oral lease. If the Lease was executed in April 2011, as the Trustee asserts, then it was not void, but was avoidable as an unauthorized postpetition transaction under § 549. Thus, regardless of whether the avoidance was under § 548 or 549, the Lease was in place when Slominski planted the 2012 crop, and he is not a squatter entitled to nothing on that basis.
As it relates to the good faith question under § 550(e), the Bankruptcy Court held that its finding that Slominski was a good faith transferee would not change based on the unexecuted lease documents found on computers not belonging to Slominski and the Trustee’s conclusory deductions from them. The Court reasoned that the good faith transferee question under § 550(e) focuses on the intent of the transferee35&emdash; here, Slominski&emdash;and the Court found his testimony regarding good faith to be credible. And, the Court held, Slominski had remained adamant he signed the crop share lease on December 1, 2010, and the Court detailed several reasons why it continued to believe Slominski’s testimony, despite the new evidence. In sum, the Court was simply not persuaded that Slominski was incorrect or untruthful about the lease, despite the newly-discovered evidence.
“Credibility questions are peculiarly within the discretion of the [trial] court” and are virtually unreviewable on appeal.36 “[W]here the factual findings call for an assessment of witness credibility, even greater deference to the trier of fact is demanded.”37 The Bankruptcy Court provided ample explanation for concluding that its credibility determinations would not change based on the newly-discovered evidence and, therefore, did not err in concluding that the Trustee failed to meet his burden of showing that the result would be different. The Bankruptcy Court did not abuse its discretion in denying the Trustee’s requests for relief based on newly-discovered evidence.
CONCLUSION
For the foregoing reasons, the Bankruptcy Court’s determination that Slomin-ski owes the estate $431,200 in net fair market rent pursuant to 11 U.S.C § 550(a) is AFFIRMED. The Bankruptcy Court’s determination as to Slominski’s setoff is REVERSED. Slominski’s setoff against such rent for the 2012 crop is $457,098.04 (representing $442,218.09 for the wheat crop proceeds, plus the taxes of $14,879.95). The Bankruptcy Court’s denial of the Trustee’s motions based on newly-discovered evidence is AFFIRMED. This matter is REMANDED to the Bankruptcy Court for entry of Judgment in favor of Louis Slominski, and against the *783Debtor’s bankruptcy estate, in the amount of $25,898.04.
. 11 U.S.C. § 550(a).
. 11 U.S.C. § 550(e)(1).
. Doeling v. Grueneich (In re Grueneich), 400 B.R. 688, 690 (8th Cir. BAP 2009).
. Id-
. Id. (citation omitted).
. Id. (citation omitted).
. In re Bremer, 408 B.R. 355, 357 (10th Cir. BAP 2009) (citing In re Straightline Invs., Inc., 525 F.3d 870, 882 (9th Cir.2008) (bankruptcy court’s choice of remedies under 550 is reviewed for an abuse of discretion); In re Armstrong, 304 B.R. 432, 435 (10th Cir. BAP 2004) (matters of discretion are reviewed for abuse of discretion)).
. 11U.S.C. § 550(a).
. 11 U.S.C. § 550(d).
. 11 U.S.C. § 550(e)(1).
. Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102, 1111-12 (9th Cir.2010) (citations and internal quotation marks omitted); see also In re Grueneich, 400 B.R. at 694 (“As a general proposition, the purpose of 11 U.S.C. § 548, in conjunction with § 550, is to return the estate to the position it would have been in if a fraudulent transfer had not occurred.”).
. In re Tronox, Inc., 464 B.R. 606, 618 (Bankr.S.D.N.Y.2012).
. In re JTS Corp., 617 F.3d at 1116.
. "[IJssues raised for the first time on appeal are ordinarily not considered by an appellate court as a basis for reversal.” In re Hervey, 252 B.R. 763, 767 (8th Cir. BAP 2000).
. Armstrong v. Vedaa (In re Vedaa), 49 B.R. 409, 411 (Bankr.D.N.D.1985).
. In re JTS Corp., 617 F.3d at 1111-12.
. In re Interstate Cigar Co., Inc., 285 B.R. 789, 796 (Bankr.E.D.N.Y.2002) (quoting 5 Collier on Bankruptcy ¶ 550.06 (15th ed. 2002)).
. See Braunstein v. Crawford (In re Crawford), 454 B.R. 262, 276 n. 8 (Bankr.D.Mass.2011); Sanders v. Hang (In re Hang), Bankr. No. 05-30655, Adv. No. 06-02274-C, 2007 WL 2344958, at *6 (Bankr.E.D.Cal. Aug. 16, 2007); In re American Way Serv. Corp., 229 B.R. 496, 525-26 (Bankr.S.D.Fla.1999) ("Defendants, as transferees, have the burden of proving elements of value, good faith, and lack of knowledge in support of any good faith defense they may assert under §§ 548(c) or 550(b) or 550(e).”).
. 11 U.S.C. § 550(e)(2)(C).
. "Property interests are created and defined by state law.” Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979).
. Kreisle v. Wilson, 148 S.W. 1132, 1134 (Tex. Civ. App.1912).
. Id. (citation omitted).
. McGarraugh v. McGarraugh, 177 S.W.2d 296, 300 (Tex.Civ.App.1944) (citations omitted).
. In addition, Texas recognizes the common law doctrine of emblements, In re Waldron, 65 B.R. 169, 175 (Bankr.N.D.Tex.1986), which is defined as ''[t]he crops or products of the land legally belonging to a tenant.” Fruin v. Gorden (In re Gorden), 47 B.R. 245 (Bankr.W.D.Wis.1985) (quoting American Heritage Dictionary 447 (2d ed. 1982)). See also Dinwiddie v. Jordan, 228 S.W. 126, 127 (Tex. Comm'n App.1921); Andersen v. Bureau of Indian Affairs, 764 F.2d 1344, 1347 (9th Cir.1985). The parties dispute whether this situation fits neatly within the doctrine because the Lease was not of indefinite duration, one of the generally-applied elements of the doctrine. We need not decide that issue, however, because, as discussed herein, we conclude that Slominski planted the crops under an unavoided written Lease and he therefore has both a legal and equitable interest in them.
.Although the Trustee focuses on Rule 59 on appeal, the Court technically found that the Trustee’s Rule 59 motion for new trial was untimely because it was filed more than fourteen days after the October 10, 2013 judgment was entered. However, the-.Court found that the motion was timely under Rule 60, but nevertheless denied it. As discussed below, however, the standard for "reconsideration” based on newly-discovered evidence is the same under both rules, so the distinction is not determinative here.
. See Mayberry v. Campbell, 356 S.W.2d 827, 828 (Tex.Civ.App.1962) (under Texas statute, since the land was being farmed under an oral agreement, the lease could not be enforced for a period longer than one year.).
. Fed.R.Civ.P. 59(a)(1)(A), made applicable here by Fed. R. Bankr.P. 9023.
. See, e.g., United States v. Metropolitan St. Louis Sewer Dist., 440 F.3d 930, 933 (8th Cir.2006); In re Paulson, 477 B.R. 740, 746 (8th Cir. BAP 2012).
. Fed.R.Civ.P. 60(b)(2), made applicable here by Fed. R. Bankr.P. 9024.
. U.S. v. Metropolitan St. Louis Sewer Dist., 440 F.3d at 933.
. Kieffer v. Riske (In re Kieffer-Mickes, Inc.), 226 B.R. 204, 210 (8th Cir. BAP 1998).
. Id. See also Schedin v. Ortho-McNeil-Janssen Pharms., Inc. (In re Levaquin Prods. Liab. Litig.), 739 F.3d 401, 404 (8th Cir.2014); Greyhound Lines, Inc. v. Wade, 485 F.3d 1032, 1036 (8th Cir.2007).
. Id.; Greyhound Lines, Inc. v. Wade, 485 F.3d at 1036.
. In re Kieffer-Mickes, 226 B.R. at 210 ("Rule 60 provides extraordinary relief; and, therefore, it is viewed with disfavor.”).
.See, e.g., In re Grueneich, 400 B.R. at 693 (holding that, whether a transferee has knowledge of the debtor’s insolvency is determined objectively, with a focus on what the transferee knew or should have known).
. Landscape Properties, Inc. v. Whisenhunt, 127 F.3d 678, 684 (8th Cir.1997) (citing United States v. McCarthy, 97 F.3d 1562, 1579 (8th Cir.1996)).
. In re Grueneich, 400 B.R. at 690 (citation omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498357/ | ORDER ON APPEAL
JAMES DONATO, District Judge
Eight law firms that provided legal services to former clients of debtor How-rey LLP appeal the bankruptcy court’s denial of their motions to dismiss. The debtor’s trustee filed complaints in the bankruptcy court seeking to recover profits from the eight firms after they hired former Howrey partners and were engaged by former Howrey clients. Some of the defendants acquired the partners before Howrey dissolved, others both before and after. Interpreting the law of the District of Columbia, where Howrey operated as a limited liability partnership (“LLP”), the bankruptcy court held that the trustee could pursue profits associated with the partners who left post-dissolution under a fraudulent transfer theory, and profits associated with the pre-disso-lution partners through an unjust enrichment claim.
The Court acknowledges the analysis of an esteemed colleague on the bankruptcy court in this district, but comes to different conclusions on these legal issues, which are not specific to bankruptcy law. Whether a bankrupt partnership has a property interest in substantively new representations of its former clients by competing firms has not been directly addressed in District of Columbia case law. The Court finds that the highest court in the District, the District of Columbia Court of Appeals, is likely to join recent state and federal decisions holding that the third-party firms’ representations are new matters and not partnership property, and that the partnership cannot recover profits associated with the post-dissolution partners earned by the new firms. Since the new matters are not the bankrupt partnership’s property, unjust enrichment theories cannot apply to seize profits associated with the pre-disso-lution partners, either. Consequently, the motions to dismiss are granted and the matters are dismissed with prejudice.
FACTUAL BACKGROUND
In 2011, Howrey LLP, a large and well-known national law firm, collapsed. As Howrey’s troubles began to mount, a number of partners left to join new law firms. See Jones Day’s Excerpts of Record (“ER”) 107 at ¶¶ 114-15, Dkt. No.14-1.1 The final curtain fell on March 8, 2011, when Howrey’s bank prohibited it from using its cash collateral without the bank’s express consent. ER 108 at ¶ 118. Six *818days later, Howrey’s remaining partners voted to dissolve the partnership, effective March 15, 2011. ER 110 at ¶ 129.
At the time of the dissolution vote, How-rey’s partners approved a “Jewel waiver,” named after the California Court of Appeal case of Jewel v. Boxer, 156 Cal.App.3d 171, 203 Cal.Rptr. 13 (1984). Jewel, which was issued by an intermediate appellate court and not the California Supreme Court, held that a former partner owes a duty to account to the other ex-partners for profits “derived by the partner in the conduct and winding up” of the firm’s “unfinished business” — that is, client matters pending at the time of the firm’s dissolution. See Jewel, 203 Cal.Rptr. at 19. The Jewel waiver purported to waive all rights of Howrey’s partners and the partnership itself to the partnership’s “unfinished business.” ER 110 at ¶ 128.
The law firms appealing the bankruptcy court’s order took on one or more former Howrey partners, some of whom left before Howrey’s dissolution, and some after-wards.2 The firms were sued by Howrey’s Chapter 11 bankruptcy trustee for the profits associated with hourly fee work they performed on various client matters that the trustee claimed was Howrey’s “unfinished business.” After two rounds of motions to dismiss, the bankruptcy court allowed the trustee to proceed against the firms. See In re Howrey LLP (Howrey I), Ch. 11 Case No. 11-31376-DM; Adv. No. 13-3095-DM, 2014 WL 507511, at *11-13 (Bankr.N.D.Cal. Feb. 7, 2014); In re Howrey (Howrey II), 515 B.R. 624, 628, 630-32 (Bankr.N.D.Cal.2014).
The bankruptcy court sustained the pre- and post-dissolution claims on different grounds. For the post-dissolution claims, the bankruptcy court held that the trustee could pursue a fraudulent transfer theory because the client matters pending at the time of dissolution were Howrey’s partnership property and the Jewel waiver improperly transferred this property to the partners without reasonably equivalent value provided in return. See id. Since Howrey was insolvent at the time of the transfer, the trustee could “avoid” or nullify the transfer under 11 U.S.C. § 548(a)(1)(B). Howrey I, 2014 WL 507511, at *11. The bankruptcy court also found that the Howrey partners transferred “the right to complete the unfinished business without having to account for any profits” to the law firm defendants, making them immediate transferees of the Howrey partners, and hable to the trustee under 11 U.S.C. § 550(a)(2). Id.
For the pre-dissolution claims, the court allowed the trustee to go forward on an unjust enrichment theory. For this* claim, the trustee alleges that partners who left pre-dissolution conferred an unfair benefit on the law firm defendants by transferring to them the right to profits associated with client matters Howrey had been handling, and that allowing the firms to keep profits generated by the ex-partners would be unjust. Howrey II, 515 B.R. at 630-32.
Defendants each filed timely notices of appeal and motions for leave to appeal. The Court granted leave to appeal in each case, see Dkt. No. 9, and has jurisdiction pursuant to 28 U.S.C. § 158(a)(3).3
*819LEGAL BACKGROUND AND STANDARDS
The Court reviews the bankruptcy court’s legal conclusions de novo. Kontrabecki v. Oliner, 318 B.R. 175, 180 (N.D.Cal.2004). The parties agree that, for purposes of this appeal, District of Columbia law applies, and the decisions of the District of Columbia Court of Appeals, the highest court of the District of Columbia, are therefore binding on this Court. See C.I.R. v. Bosch’s Estate, 387 U.S. 456, 465, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967) (“The state’s highest court is the best authority on its own law.”); Companhia Brasileira Carbureto de Calicio v. Applied Indus. Materials Corp., 640 F.3d 369, 371 (D.C.Cir.2011) (“The D.C. Court of Appeals is of course the controlling authority for interpretation of D.C. law....”); Vernon v. City of Los Angeles, 27 F.3d 1385, 1391 (9th Cir.1994) (“[A] federal court interpreting state law is bound by the decisions of the highest state court.”). The Court must apply District of Columbia law as it has been decided and not how the Court believes it ought to be. Cabrera v. City of Huntington Park, 159 F.3d 374, 378-79 (9th Cir.1998). But if the District of Columbia Court of Appeals has not directly resolved or ruled on an issue, this Court is charged with determining how it would likely hold based on all relevant authorities, including decisions from other courts. See Lewis v. Telephone Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir.1996) (“In the absence of such a decision, a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance.”).
The trustee argues that two cases from the District of Columbia Court of Appeals, Beckman v. Farmer, 579 A.2d 618, 636 (D.C.1990) and Young v. Delaney, 647 A.2d 784, 789 (D.C.1994), control this case. But these cases involved specific facts far removed .from the ones before this Court. Beckman involved a three-partner firm, two of whom spent much of their time working on a contingent-fee antitrust case on behalf of the trustee of Laker Airlines, a defunct air carrier, while the third partner attended to the firm’s other clients to enable his colleagues to concentrate on the Laker matter. See Beckman, 579 A.2d at 624-25, 636 n. 24. Eventually, the two partners who worked on the Laker matter&emdash;Beckman and Kirstein&emdash;fell out with the third partner, Farmer, separated their practice from his, and completed the Laker matter on their own, without sharing the contingent fee with him. See id. at 624-25. Even before completion of the Laker matter, Farmer sued, demanding an accounting of the Laker fee. See id. at 625. The Court of Appeals agreed that Beckman and. Kirstein, “in performing post-dissolution work on the Laker antitrust case and collecting the fee, acted as fiduciaries for the benefit of all the partners,” and held that they were obligated to account to Farmer for his share of the profits. See id. at 636.
Young also involved a small partnership that fell apart. Three partners in a four-person firm decided to cut the remaining partner out and continue on their own. See Young, 647 A.2d at 787. The new firm comprised of the three partners continued to use the old partnership’s funds to pay the partners’ monthly draws, as well as various expenses that allegedly benefitted both the dissolved partnership and the new partnership, like rent and the salary of an administrative assistant. See id. at 788. The fourth partner sued, alleging that the other partners breached their fiduciary duty to her. See id. The trial court granted the defendants’ motion for summary judgment, but the District of Columbia Court of Appeals reversed, holding that the trial court had not appropri*820ately dealt with the undisputed fact that “appellees paid expenses associated with the former partnership and the new partnership out of assets belonging to the former partnership.” Id. at 792.
Neither Beckman nor Young involved an attempt by a bankrupt law partnership to claim the profits earned by preexisting third-party firms subsequently hired by its former clients. It is undisputed that the Court of Appeals has not yet directly confronted this issue. Other courts have, and the emerging consensus is that trustees have no right to those profits under general principles of partnership law.
The New York Court of Appeals addressed this issue under New York partnership law in In re Thelen LLP, 24 N.Y.3d 16, 995 N.Y.S.2d 534, 20 N.E.3d 264 (2014), after the Second Circuit asked for its views while reviewing federal district court decisions that had split on the issue. Specifically, the Second Circuit posed two questions: (1) is a client matter billed on an hourly basis the property of a law firm; and (2) if so, how does New York define a “client matter” for purposes of the unfinished business doctrine? In re Thelen, 736 F.3d 213, 225 (2d Cir.2013).
The New York Court of Appeals expressly held that “pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ ” under New York partnership law. Thelen, 24 N.Y.3d at 22, 995 N.Y.S.2d 534. The court acknowledged that courts in other jurisdictions had held that “profits arising from work begun by former partners of dissolved law firms are a partnership asset that must be finished for the benefit of the dissolved partnership, absent an agreement to the contrary.” Id. at 28, 995 N.Y.S.2d 534. But the court found that this approach confused the rules for dividing the property of a dissolved partnership with defining partnership property itself. See id. According to the Court of Appeals, New York partnership law, which is drawn from the same Uniform Partnership Act that formed the basis of California partnership law at the time of Jewel and District of Columbia partnership law at the time of Beckman and Young, “supplies default rules for how a partnership upon dissolution divides property” but “has nothing to say about whether a law firm’s ‘client matters’ are partnership property.” Id. Looking specifically at the property definition issue, the court held that a client’s legal matter belongs to the client and not the lawyer or her firm. See id. at 29, 995 N.Y.S.2d 534. Clients have the unqualified right to hire and fire attorneys at will, with no obligation to the attorney at all except to pay for completed services. See id. at 28, 995 N.Y.S.2d 534. Based on that fundamental truth about the attorney-client business relationship, which is recognized throughout the United States, the court concluded that “no law firm has a property interest in future hourly legal fees because they are ‘too contingent in nature and speculative to create a present or future property interest.’ ” Id. (citation omitted).
The New York Court of Appeals also discussed the “numerous perverse effects” that would attend to treating a client matter as partnership property. Id. at 31, 995 N.Y.S.2d 534. These unhealthy outcomes include: (1) giving an “unjust windfall” of profits to the dissolved firm for work it did not perform; (2) creating a “run-on-the-bank mentality” that incentivizes partners to bolt early with clients and exacerbates a partnership death spiral; (3) and poisoning the marketability of partners who stay to the bitter end and then cannot offer their new firms any profits from ongoing client relationships. Id. at 32, 995 N.Y.S.2d 534. Tellingly, the Court of Appeals saw no potential upside whatsoever to the unfinished business doctrine that might ameliorate these harmful effects in any way.
*821Shortly before the publication of Thelen, Judge Breyer in this federal district reached similar conclusions about the unfinished business doctrine under California law. In Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP, 527 B.R. 24 (N.D.Cal.2014), appeal docketed, Nos. 14-16314, 14-16315, 14-16317, 14-16318 (9th Cir. Jul. 11, 2014), the court reviewed a decision by the same bankruptcy court on review here that allowed the trustee for the defunct Heller Ehrman LLP law firm to pursue profits made by third-party firms under the unfinished business doctrine. The court addressed whether a dissolved law firm has a property interest in hourly fee matters pending at dissolution and found that a “law firm&emdash;and its attorneys&emdash;do not own the matters on which they perform their legal services. Their clients do.” Id. at 25.
Because the case involved a California partnership, the court analyzed Jewel in detail and concluded that the California Supreme Court was unlikely to treat that intermediate appellate court decision as good law. Id. at 26. The court also distinguished Jewel on several grounds, including the fact that Jewel involved successor firms consisting entirely of partners from the defunct firms who continued to work on existing client matters under the old firms’ fee agreements. Id. at 29. That contrasted to the situation with Heller, where the new firms were “preexisting third-party” firms with substantial resources and service capabilities unrelated to Heller, and which took on former Heller clients under new engagement letters. Id. The court also found that the Revised Uniform Partnership Act, which California adopted after Jewel was decided, has no provision “that gives the dissolved firm the right to demand an accounting for profits earned by its former partner under a new retainer agreement with a client.” Id. at 29-30.
Like the New York Court of Appeals, the court in Heller recognized many fairness and policy reasons to reject the unfinished business doctrine. As a starting point, the court noted that the “dozens of cases” relying on Jewel cited it “ ‘reflexively and uncritically,’ that is, without much analysis or consideration of the changes in law firm practice or law.” Id. (quoting Geron v. Robinson & Cole LLP, 476 B.R. 732, 739 n. 2 (S.D.N.Y.2012), aff'd, In re Thelen LLP, 762 F.3d 157 (2d Cir.2014)). When the equities are properly considered, the court found that Jewel is unfair because it gives the fruits of the third-parties’ hard work to a dissolved partnership that did nothing to earn those profits. See id. at 30-32. Jewel also creates the other types of perverse policy effects that the New York Court of Appeals highlighted in its opinion. Id. at 32-33.
While neither controlling nor prece-dential in this case, Heller and Thelen inform the context in which the Court decides this appeal. As “well-reasoned decisions from other jurisdictions,” Burns v. Int’l Ins. Co., 929 F.2d 1422, 1424 (9th Cir.1991), they are useful in answering the central question in this case-a question that has not yet been addressed by the District of Columbia Court of Appeals: When a client decides to discharge a firm and hire a competing firm, does the old firm have a right to profit from the new firm’s work?
DISCUSSION
I. POST-DISSOLUTION CLAIMS
The linchpin of the bankruptcy court’s orders is that a defunct partnership can assert a property interest in client matters handled by entirely different, preexisting firms under new retention agreements, based solely on the allegation that the new firms hired members of the old partnership. In the bankruptcy court’s view, the client may think that it *822simply exercised its “unfettered right to discharge an attorney” and hire another, In re Mance, 980 A.2d 1196, 1203 (D.C. 2009), but in reality, it was the departing partner who grabbed a firm asset and took it over to his new firm, as surely as if he “walk[ed] out of his firm’s office carrying a Jackson Poll[o]ck painting he ripped off the wall of the reception area.” See Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 480 B.R. 145, 157 (S.D.N.Y.2012), rev’d in part, In re Coudert Bros. LLP, 574 Fed.Appx. 15 (2d Cir.2014). The Court respectfully disagrees, and finds that Beckman and Young allow a defunct partnership to claim a third-party firm’s client profits only in the limited circumstance where the matters are performed pursuant to the same retention agreements by firms that came into existence directly out of the dissolution of the former partnership. Outside of this specific context, third-party client matters are substantively new matters, and the dissolved firm does not own them.
The bedrock of this conclusion is the universally-accepted truth that a firm does not own new client matters taken on by other firms. The bankruptcy court and the District of Columbia have recognized this principle. See In re Brobeck, Phleger & Harrison LLP, 408 B.R. 318, 332 n. 16 (Bankr.N.D.Cal.2009) (“the Brobeck partners could not be liable for taking on what would be considered ‘new’ business, even if that ‘new’ business involved representing former Brobeck clients”); see also. Howrey I, 2014 WL 507511, at *1 (duty to account “does not ... extend to business created after dissolution, even if that business comes from a client of the dissolved firm”); Beckman, 579 A,2d at 638 (“The duty to wind up partnership business does not disable the former partners in a law firm from accepting employment from former clients of the dissolved partnership, provided the new employment does not relate to work in progress at the time of dissolution.”); D.C.Code § 33-106.03(b)4 (RUPA § 603(b)) (“Upon a partner’s dissociation: ... the partner’s duty of loyalty under § 33 — 104.04(b)(1) [to account for partnership profits] ... continued] only with regard to matters arising and events occurring before the partner’s dissociation, unless the partner participates in winding up the partnership’s business pursuant to § 33-108.03.”).
But the District of Columbia Court of Appeals has not delineated precisely what a “new matter” is. Consequently, this Court is obliged to make its best prediction, as a matter of first impression under District law, whether the allegations in the trustee’s complaint are sufficient to state a claim because the defendants’ matters are not new.
The Court believes the Court of Appeals would adopt a rule that is faithful to the new matter principle and that is clear and practical in application. Clarity and simplicity are vital here because a vague rule would condemn the courts and litigants to endless speculation about when a client matter is new and when it is a carry-over of a prior engagement. Without a clear rule, defining a new matter would entail almost metaphysical inquiries such as: Are matters the same only when they involve the same client and court case? If so, what is the result for lawyers with counseling practices who are engaged on an open-ended basis by a client to handle issues as the come up? What if a client retained Howrey at the trial court level and switched to Jones Day on appeal after Howrey dissolved? What if the client would have switched even if Howrey had *823survived, because it preferred Jones Day’s appellate practice? What if a client retained Jones Day after Howrey dissolved and then a former Howrey partner joins afterwards to work on the matter? Or what if after Howrey dissolved, a client first switched to a law firm that did not take on any Howrey partners,. but then moved on to retain Jones Day, where former Howrey partners work on its matter?
The Court predicts that the District of Columbia Court of Appeals, informed by well-reasoned decisions from other jurisdictions, would want to avoid countless splintered inquiries in favor of the practical rule that client matters performed by pre-existing third-party firms pursuant to new retention agreements are at least presumptively new matters. See Heller, 527 B.R. at 29. The lawyers working on these new matters are not engaged in “winding up” unfinished business, because any unfinished business was wound up when the clients terminated their former firm and the firm’s lawyers finished “filing motions for continuances, noticing parties and courts that [they were] withdrawing as counsel, packing up and shipping client files back to the clients or to new counsel, and getting new counsel up to speed on pending matters,” to the extent those activities were necessary. Id. at 32.
Beckman itself indicates that continuity of a retention agreement is the touchstone under District of Columbia law for determining when an ex-partner usurped her former partnership’s matter. Beckman states that the rationale for "the “unfinished business rule” is that “dissolution does not terminate or discharge pre-exist-ing contracts between the partnership and its clients, and ex-partners who perform under such contracts do so as fiduciaries for the benefit of the dissolved partnership.” Beckman, 579 A.2d at 636 (emphasis added); see also Robinson v. Nussbaum, 11 F.Supp.2d 1, 6 (D.D.C.1997) (holding that the “crux of the Beckman opinion” was that “dissolution of a law partnership does not terminate existing contracts with its clients” and “former partners who hon- or these éxisting contracts do so as fiduciaries for the benefit of the former partnership”). This narrow continuity principle drove the holdings in Beckman because the profits being claimed there were earned under the original contract entered into by the dissolved firm. Beckman, 579 A.2d at 636 n.24.5 While Beckman noted that former partners can accept “employment from former clients of the dissolved partnership, provided the new employment does not relate to work in progress at the time of dissolution,” it did not specify what it meant for the new employment to “relate” to work in progress. Id. at 638. Consequently, it is perfectly consonant with Beckman to hold, as the Court does, that the District of Columbia Court of Appeals would find that a third-party firm’s matter relates to a matter handled by the dissolved partnership only if it is performed under the same engagement contract.6
*824The trustee’s complaint falls on the wrong side of this line. Significantly, the trustee’s complaints do not allege any continuity of engagement agreements here. They specifically do not allege that the law firm defendants did any work on matters previously connected to Howrey under Howrey’s old retention agreements. To the contrary, as appellants’ counsel represented at oral argument with respect to lead appellant Jones Day, the law firm defendants signed new retention agreements with Howrey’s former clients. See Hearing Transcript at 11:20-12:7, Dkt. No. 89.
In addition to the logic of Beck-man, the Court finds that the District of Columbia Court of Appeals is likely to reach this holding because it fully captures a client’s unqualified right to hire and fire counsel whenever it chooses. The District of Columbia Court of Appeals has recognized “the client’s unbridled prerogative to walk away from the lawyer” and to “choose his or her counsel.” See, e.g., Mance, 980 A.2d at 1203-04 (quoting In re Cooperman, 83 N.Y.2d 465, 473, 611 N.Y.S.2d 465, 633 N.E.2d 1069 (1994)). The District of Columbia Rules of Professional Conduct also enshrine this principle. See D.C. Rule of Prof 1 Conduct 1.7(b) cmt. 8 (“Clients have broad discretion to terminate their representation by a lawyer and that discretion may generally be exercised on unreasonable as well as reasonable grounds.”). And the New York Court of Appeals relied on this untrammeled right for the outcome in Thelen. See 24 N.Y.3d at 28-29, 995 N.Y.S.2d 534 (citing the client’s “unqualified right to terminate the attorney-client relationship at any time” in holding that firms do not have rights to future hourly legal fees); see also Verizon New England, Inc. v. Transcom Enhanced Servs., Inc., 21 N.Y.3d 66, 71, 967 N.Y.S.2d 883, 990 N.E.2d 121 (2013) (holding that a party’s “ability to terminate the relationship at any time without penalty ... cannot support a finding that a transferrable property right existed”).
The trustee also has no claim to the client matters handled by defendants because they are truly separate firms from, and not remnants of, Howrey itself. In Beckman and Young, the “new” firms came into existence only upon the dissolution of the old firm, and were composed entirely of former partners of the old firm. Beckman, 579 A.2d at 625; Young, 647 A.2d 787. In Beckman, the client matter in dispute was handled by exactly the same partners pre- and post-dissolution, and under the same retention agreement. See Beckman, 579 A.2d at 624-25. Those circumstances are not present here. When, as here, a client discharges a firm and retains preexisting third-party firms— indeed, competitors of the discharged firm — it has launched a new matter. See Heller, 527 B.R. at 29.
Beckman and Young contain occasional statements possibly implying that pending client matters may under certain circumstances be partnership property. See, e.g., Beckman, 579 A.2d at 642 (holding that “pending contingent fee cases are partnership property and, therefore, assets subject to distribution on dissolution”); Young, 647 A.2d at 793 (“Pending cases are uncompleted transactions requiring winding up after dissolution, and are *825therefore assets of the partnership subject to post-dissolution distribution.”)- These periodic comments read much more like asides than reasoned holdings.7 But in any event the Court of Appeals made clear that if such a property right exists, it is subject to qualifications. The court expressly stated that pending matters are partnership assets only when “one partner has exercised his right to compel liquidation and distribution of surplus,” but not where the outgoing partner “permits continuation of the business by the other partner(s),” indicating that client matters are not always and everywhere a form of partnership property. Beckman, 579 A.2d at 634. And it is more than possible that the D.C. Court of Appeals, if it revisits these issues, will join the New York Court of Appeals in finding that these statements were merely intended to “suppl[y] default rules for how a partnership upon dissolution divides property as elsewhere defined,” rather than hold that a “law firm’s ‘client matters’ are partnership property” for all purposes. Thelen, 24 N.Y.3d at 28, 995 N.Y.S.2d 534. Ultimately, this is a matter for the District of Columbia Court of Appeals to decide, and the Court’s holdings here are not based on the assumption that Beckman and Young are not good law.
The trustee raises two final considerations in favor of finding a claim on the law firm defendants’ profits. He suggested at the hearing that reading Beckman and other District of Columbia cases as grounded in their specific facts — small firms with continuity of engagement letters and attorney personnel — would unfairly afford special status to big firms like the defendants here. Not true. Large national firms are not entitled to any special consideration or treatment merely because of what they are. What drives the outcomes here are dispositive differences in the facts alleged in the trustee’s complaints, and the facts relied on in the District of Columbia cases for their holdings.
The trustee also suggests that the new-matter approach would allow unscrupulous lawyers to cut their partners out of lucrative cases by spinning off a new firm and inducing their clients sign new agreements with them. That fear is overblown. As a preliminary matter, there is no indication that this potential problem must necessarily be solved by creating a property right in client matters, or that that is the solution the District of Columbia courts would choose. See, e.g., Thelen, 24 N.Y.3d at 30-31, 995 N.Y.S.2d 534 (describing case that addressed the issue through action for breach of fiduciary duty against usurping partners); LaFond v. Sweeney, 343 P.3d 939, 946 n. 3 (Colo.2015) (noting that a similar cause of action would be available if ex-partner induced former client to discharge old firm). More immediately, the Court does not need to decide whether a “bad faith” safety valve should be consid*826ered because the facts here would not satisfy such an exception, whatever its contours. The post-dissolution Howrey partners did not choose to leave because they wanted to cheat their colleagues. They were forced to leave because their law firm went bankrupt. ER 108 at ¶¶ 118-19. Neither the post-dissolution nor the pre-dissolution partners started their own firms to continue working on the cases they had worked on before; rather, they joined preexisting firms with a number of lawyers, clients, and business resources of their own. The trustee itself, has not alleged that the law firm defendants’ supposed unfinished business is being performed pursuant to new retention agreements made in bad faith, and so the bad faith issue is not before the Court for decision.
Consequently, in light of these considerations, the Court parts company with the bankruptcy court. The motions to dismiss the post-dissolution claims are granted.
II. PRE-DISSOLUTION CLAIMS
The bankruptcy court’s order allowing the trustee to pursue pre-dissolution claims under unjust enrichment is also reversed. In Heller, the trustee conceded that a partner leaving a firm before dissolution had no obligation “to account for unfinished business being taken to another firm” unless the partner had breached a fiduciary duty. Heller, 527 B.R. at 28. “[0]nly as a result of Heller’s dissolution were departing Shareholders burdened with a duty to account for unfinished business taken from the firm.” Id. at 31.
In this case, the trustee has taken a different path and has sued to seize profits associated with client matters that former Howrey partners worked on at other firms even before Howrey collapsed. The bankruptcy court found that the District of Columbia allows an unjust enrichment claim “where a plaintiff has an expectation of the benefit that it loses to a third party” and allowed the trustee to proceed on that theory. Howrey II, 515 B.R. at 630.
As an initial and dispositive matter, this claim- fails for the same reasons the post-dissolution claims fail. The fact that How-rey does not own substantively new representations undertaken by third-party firms is a definitive bar to the pre-dissolution claims because those claims depend on a property right that does not exist.
The unjust enrichment claims also fail for additional, independent reasons. First among these is that the District of Columbia Court of Appeals, in the very decision the trustee cites, has rejected the notion that the unfinished business rule applies when the partnership continues after a partner’s departure, as Howrey did when the pre-dissolution partners left. See Beckman, 579 A.2d at 634-35; Robinson, 11 F.Supp.2d at 4 n. 3 (“The Court of Appeals in Beckman made clear that this rule applies only when a partner insists on his right to compel liquidation of the partnership by seeking a winding up of partnership business and a final accounting. ... This rule does not apply, then, if a partner consents to the continuation of the partnership.”).
The trustee, conceding the absence of any support in the governing case law for his position, relies solely on a misreading of D.C. Code § 33-106.03(b) (RUPA § 603(b)). See Hearing Tr. 24:19-25:13. That statute states in part:
Upon a partner’s dissociation: ...
(3) the partner’s duty of loyalty under § 33-104.04(b)(l) [to account for partnership profits] ... continued] only with regard to matters arising and events occurring before the partner’s dissociation, unless the partner participates in winding up the partnership’s business pursuant to § 33-108.03.
*827D.C. Code § 33-106.03(b) (RUPA § 603(b)). The trustee argues that “matters arising.and events occurring” includes all of the firm’s pending client matters at the time the partner dissociates. The problem is that this interpretation renders entirely superfluous the clause following the final comma-a clause that was elided out of the text by the trustee’s quote in his briefing. The import of this section is to limit a dissociating partner’s duty to account “only ... to matters arising and events occurring before the partner’s dissociation,” except upon dissolution of the partnership, when the partner participates in winding up the partnership business-in which event the duty to account is potentially broader. But if, as the trustee suggests, “matters arising and events occurring” refers to all pending client matters, there is no way that the duty to account could be any broader, and the final clause would serve no purpose. See Robert W. Hillman et al., The Revised Uniform Partnership Act § 603, authors’ cmt. 3e (West-law June 2015) (“The better approach [in cases where the firm does not dissolve] is to distinguish pre-dissociation and post-dissociation work and limit the firm’s claim to fees that relate to work done prior to dissociation.”). The textual difficulty generated by the trustee’s interpretation disappears if the term “matters arising and events occurring before the partner’s dissociation” refers, as the Court holds, only to work that the partner actually performed at the prior firm before leaving. A pre-dissolution dissociating partner’s duty to account is limited to such work, and does not include work performed at her new firm.
In addition, the trustee’s unjust enrichment claim fails because District of Columbia law does not recognize a claim for unjust enrichment where the alleged benefit is conferred by a third-party. The District of Columbia Court of Appeals has clearly held that “[ujnjust enrichment occurs when: (1) the plaintiff conferred a benefit on the defendant; (2) the defendant retains the benefit; and (3) under the circumstances, the defendant’s retention of the benefit is unjust.” News World Comm’ns, Inc. v. Thompsen, 878 A.2d 1218, 1222 (D.C.2005). Federal courts applying this law have rejected unjust enrichment claims where the benefit was conferred by a third party rather than the plaintiff. Nevius v. Africa Inland Mission Int’l, 511 F.Supp.2d 114 (D.D.C.2007); Oceanic Exploration Co. v. ConocoPhillips, Inc., No. 04-332(EGS), 2006 WL 2711527 (D.D.C. Sept. 21, 2006).
The bankruptcy court suggested that the District of Columbia courts and federal courts applying District law had not yet been confronted with a case where the benefit was conferred by a third party with some connection to the plaintiff. See Howrey II, 515 B.R. at 631. It noted that the Restatement (Third) of Restitution and Unjust Enrichment, other provisions of which the D.C. Court of Appeals has adopted, has recognized unjust enrichment claims based on benefits conferred by third parties. Id. And it cited to decisions in other jurisdictions that recognize indirect unjust enrichment claims. Id. That all may or may not be right. But those considerations are all by the wayside because a claim for unjust enrichment, as currently stated by the District’s highest court, requires as an element that “the plaintiff confer[] a benefit on the defendant.”
That element is missing here. Howrey is the plaintiff in this case and there is no allegation that Howrey conferred any benefit on th'e defendant law firms. At most, any benefit they received would necessarily have come from third-parties who are not plaintiffs in this case. That sinks any possibility of an unjust enrichment claim in this case.
*828Finally, the trustee’s conception of the claim abandons any meaningful connection to equity. The purpose of unjust enrichment is to correct a bad situation where a person unfairly gets a benefit that he should not in good conscience be allowed to keep. See News World Comm’ns, 878 A.2d at 1222 (unjust enrichment requires as an element that “the defendant’s retention of the benefit [be] unjust.”). On these facts, and any other reasonably conceivable set of facts the trustee could plead, the trustee cannot possibly have a stronger equitable claim than the law firm defendants to the profits they earned by the sweat of their brow. The law firm defendants performed the work; they deserve the pay. See Thelen, 24 N.Y.3d at 31-32, 995 N.Y.S.2d 534 (“By allowing former partners of a dissolved firm to profit from work they do not perform, all at the expense of a former partner and his new firm, the trustees’ approach creates an ‘unjust windfall’ ... ”); Heller, 527 B.R. at 30 (“Balancing the equities, it is simple enough to conclude that the firms that did the work should keep the fees.”). Giving that money to the dissolved firm is an undeserved boon that equity should not condone.
The trustee’s conception of the unjust enrichment claim also leads to bad public policy. Lateraling between firms is the reality of law practice today and has been the reality for many years. As the trustee candidly'acknowledged at the hearing, its unjust enrichment theory threatens to impose the heavy hand of court-ordered “equity” on these completely normal career moves:
THE COURT: When you lateral, part of your charm to the new firm is you’re bringing your, quote/unquote, book. That means your existing works in progress to put it in the terms of these cases....
So you port it over and you’re saying&emdash; tell me yes or no. You are saying that person, that lateral owes money to his prior employer for the lifetime of those cases?
MR. MURRAY: Yes. And I will tell you why, but that is definitely our position, and I think it is supported by 603’s text, even if policy and the reality of law firms may have .evolved since then&emdash;
Hearing Tr. at 22:15-23:3. This goes too far, and loses all tether to the purposes of unjust enrichment law.
CONCLUSION
Because the facts alleged by the trustee do not state claims to the profits earned by the law firm defendants, and there is no prospect that they can be fixed by amendment, the Court dismisses them with prejudice. Since this holding disposes of the appeal in its entirety, the Court does not reach the appellants’ other arguments.8 The clerk is directed to enter judgment in favor of the appellants.
IT IS SO ORDERED.
. Docket cites refer to the lead case, 3:14-cv-04889-JD.
. Neal, Gerber & Eisenberg LLP; Seyfarth Shaw LLP; Hogan Lovells U.S. LLP; and Kasowitz, Benson, Torres & Friedman LLP only took on "pre-dissolution partners.” Perkins Coie LLP; Pillsbury Winthrop Shaw Pittman LLP; Sheppard Mullin Richter & Hampton LLP; and Jones Day took on both “pre-” and "post-dissolution partners.”
. The appellants filed eight separate appeals, which the Court consolidated. See Dkt. No. 12. Jones Day filed appellants’ primary briefing, which the other appellants joined in whole or part. Each appellant filed its own excerpts of the bankruptcy record from its respective case below.
. The relevant statutory sections were renumbered in March 2013, but this opinion uses the prior numbering for consistency with the bankruptcy court’s opinion and the parties' briefing.
. Under UPA, which was in effect in the District of Columbia when Beckman was decided, a “dissolution” was not limited to situations like Howrey's; rather, “every partner dissociation resulted] in the dissolution of the partnership, most of which triggered] a right to have the business wound up unless the partnership agreement provide[d] otherwise.” See RUPA § 603, official cmt. 1 (citing UPA § 38). The two partners who continued to work on the contingent fee matter in Beckman likely regarded themselves as the continuation of the old firm and therefore continued working under the same retention agreement after the third partner left, though his departure triggered a technical dissolution. See Beck-man, 579 A.2d at 634. Unlike UPA, RUPA distinguishes partner dissociation from dissolution.
. Young does not compel a different result. In that case, the parties agreed that appellees had "paid expenses associated with the for*824mer partnership and the new partnership out of assets belonging to the former partnership.” Young, 647 A.2d at 792. The court therefore did not need to resolve, and did not resolve, what distinguishes "new matters” from partnership assets. In addition, while stating that "[p]rofits derived from the corn-pletion of legal cases or uncompleted transactions” were assets of the dissolved partnership, Young did not define what a "legal case” or "transaction” is, or even state whether the clients in that case signed new retention agreements after the partnership dissolved.
. The Beckman majority appeared to concede that its discussion of the unfinished business rule was, as Judge Steadman’s concurrence put it, “functional dicta,” since all that was necessary to dispose of the appeal was the court’s holding that the trial court erred in granting summary judgment that Farmer was a partner of Beckman and Kirstein’s. See Beckman, 579 A.2d at 632 n. 19; see also id. at 659 (Steadman, J., concurring). It nevertheless proceeded to discuss the issues regarding partnership property for reasons of efficiency. See id. at 632 n. 19. Similarly, as previously noted, the parties in Young did not dispute whether client matters constituted partnership property, and consequently that decision’s statements on whether client matters constitute assets may also fairly be considered dicta. See Young, 647 A.2d at 792. Even so, the Court recognizes that when it sits in diversity, it is "generally bound by the dicta of state courts,” and has treated all of Beckman and Young as having controlling force. See Homedics, Inc. v. Valley Forge Ins. Co., 315 F.3d 1135, 1141 (9th Cir.2003).
. Including, for instance, that Beckman and Young are inapplicable outside the contingent fee context, that they have been superseded by RUPA, and that the entirety of the law firm defendants' profits constitute "reasonable compensation” under RUPA § 401(h). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498358/ | ORDER
KIMBERLY J. MUELLER, District Judge.
This matter is before the court on defendants’ motion for judgment on the plead*830ings under Federal Rule of Civil Procedure 12(c). ECF No. 56. Also before the court are defendants’ and plaintiffs requests for judicial notice. ECF Nos. 57, 66. Plaintiff1 opposes and defendants have replied. ECF Nos. 65, 67. This matter is decided on the papers. For the following reasons, defendants’ motion is denied.
I. REQUESTS FOR JUDICIAL NOTICE
Defendants request judicial notice of seven documents related to the City of Vallejo’s (City’s) bankruptcy: (1) the City’s Voluntary Chapter 9 Petition, filed May 23, 2008; (2) the Order Fixing Bar Date for Claims Other Than Those Based on Retiree Health or Pension Benefits; (3) the Second Amended Plan for the Adjustment of Debts of City of Vallejo, California, as Modified August 2, 2011; (4) the Order Confirming City of Vallejo’s Second Amended Plan for the Adjustment of Debts of City of Vallejo, California, as Modified August 2, 2011; (5) the Notice of November 1, 2011 Effective Date; (6) the July 28, 2008 Stipulation and Proposed Order to Stay Entire Action Pursuant to 11 U.S.C. Section 362 in the matter entitled Deocampo v. City of Vallejo, No. 2:06-cv-1283-WBS (E.D.Cal.), executed by John Burris; and (7) the Claims Register for In re City of Vallejo, California, Case No. 08-26813, in the Bankruptcy Court for the Eastern District of California. Defs.’ RJN, ECF No. 57. Plaintiff opposes, conceding the documents are noticeable, but not for the truth of the matters asserted in the documents. Opp’n at 3.
Plaintiff requests judicial notice of a pleading filed by the City in its bankruptcy proceedings on May 23, 2008. ECF No. 66-1.
Each document covered by a party’s request is a court document, and a matter of public record subject to ready determination of'its accuracy. Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n. 6 (9th Cir.2006). Accordingly, the request for judicial notice of each document is GRANTED, with recognition of the limitation that the judicially noticed fact in each instance is the existence of a document, not the truth of the matters asserted in the documents. Rowland v. Paris Las Vegas, No. 3:13-CV-02630, 2014 WL 769393, at *3 (S.D.Cal. Feb. 25, 2014).
II. PROCEDURAL BACKGROUND
On December 10, 2012, plaintiff Andrea Jarreau-Griffin filed a complaint against the City and City police officer Kent Trib-ble. Compl., ECF No. 1. Plaintiff filed the operative first amended complaint on June 25, 2013. ECF No. 15(FAC). The complaint alleges violations of the Fourth and Fourteenth amendments under 42 U.S.C. § 1983 against defendant Tribble and municipal liability under Monell against the City. The claims arose on December 11, 2010, during the pendency of the City’s bankruptcy petition, filed on May 23, 2008. Req. for Judicial Notice (“RJN”), Ex. 1, ECF No. 39-1. Despite receiving and filing plaintiffs claim for damages, there is no evidence and the City does not argue it notified plaintiff of the bankruptcy proceedings, and plaintiff never filed a proof of claim. Plaintiffs’ RJN, Ex. 1; Defs.’ RJN Ex. 6.
Defendants filed a motion to dismiss the first amended complaint on July 9, 2013, ECF No. 16, and filed a motion for judgment on the pleadings on September 23, 2013, ECF No. 23. On November 6, 2013, the court denied without prejudice defendants’ motion for judgment on the plead*831ings, ECF No. 80. On December 9, 2013, the court granted in part defendants’ motion to dismiss, dismissing without leave to amend the third claim to the extent it was premised on the Fourteenth Amendment; the fourth claim to the extent it is premised on the Fourth Amendment; and plaintiffs’ claims for punitive damages. ECF No. 32. The court dismissed the fifth claim with leave to amend. Id.
On February 10, 2014, defendants filed a second motion for judgment on the pleadings, which the court denied without prejudice on April 15, 2014. ECF Nos. 38, 48, 49. Defendants filed the instant third motion for judgment on the pleadings on December 23, 2014. ECF No. 56. Plaintiff filed her opposition and request for judicial notice on February 27, 2015. ECF Nos. 65, 66. Defendants filed a reply on March 6,2015. ECF No. 67.
III. ALLEGATIONS OF THE COMPLAINT
Plaintiff is Andrea Jarreau-Griffin, mother of decedent Guy J. Jarreau, Jr., who sues on behalf of herself and the decedent’s estate. FAC at 1. When filing the claim-for-damages form with the City, plaintiff was represented by John Burris.2 This litigation was initiated by current counsel, Corey Evans. Defendant Tribble, employed by defendant City as a peace officer, shot and killed Jarreau, Jr. at approximately 3:00 p.m. on December 11, 2010. FAC ¶ 7. Jarreau, Jr., a “community activist, mentor, and student at Napa Valley Community College” was assisting with the filming of “an anti-violence music video.” Id. ¶ 9. Officers arrived at the scene, and ordered the film crew to disperse. Id. ¶ 10. As Jarreau, Jr. and the film crew dispersed, more officers arrived, commanding the film crew to get on the ground. Id. ¶ 11. Jarreau, Jr., a short distance away, walked in the direction of the alley. Id. ¶ 11. Officer Tribble, in plainclothes, gave no warning and shot Jarreau, Jr. while his hands were in the air, holding only a green cup. Id.
After waiting an “unreasonably long” time before calling for medical assistance, defendant Tribble and other City officers directed the ambulance to take Jarreau, Jr. to John Muir Medical Center, which was “unreasonably far,” especially because other emergency medical facilities were closer in proximity. Id. ¶ 16.
The City has and had a duty of care to hire, train, supervise and discipline peace officers to avoid such harm and to provide emergency medical care to individuals. Id. ¶¶ 18-19. This failure to train is “a factual and proximate cause of Mr. Jar-reau’s death and plaintiffs’ damages.” Id. ¶ 19. '
IV. TIMELINE OF BANKRUPTCY PROCEEDINGS
The City filed for bankruptcy on May 23, 2008. Ex. 1, RJN. Shortly thereafter, in July 2008, plaintiffs former attorney John Burris, who also was counsel in the separate case of Deocampo v. City of Vallejo, supra, executed a stipulation to stay the action due to the bankruptcy filing. Ex. 6, RJN. Under the terms of the Bankruptcy Order, the bar date for filing any existing claims against the City was August 16, 2010. Ex. 2, RJN. The shooting giving rise to the instant claims took place on December 11, 2010, and plaintiff, through attorney Burris, submitted a claim under the Government Tort Claims Act on May 17, 2011. Ex. A, Faruqui Decl. The bankruptcy court confirmed the City’s plan for adjustment of debts on August 4, 2011, Ex. 4, Defs.’ RJN, and provided that upon the plan’s Effective Date of November 1, 2011, the City would be discharged from *832all of its debts other than those excepted by the plan or statute. Exs. 3, 5, Defs.’ RJN. Although the shooting took place after the Bankruptcy Order’s bar date of August 16, 2010, the plan’s November 1, 2011 Effective Date bars any claims seeking monetary relief for incidents occurring prior to the Effective Date not filed within 30 days. Ex. 5 at 2, Defs.’ RJN. Plaintiff filed the instant action in this court on December 10, 2012.
V. LEGAL STANDARD
A motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) is “functionally identical” to a motion to dismiss under Rule 12(b)(6). Dworkin v. Hustler Magazine, Inc., 867 F.2d 1188, 1192 (9th Cir.1989). It is properly granted where “the moving party clearly establishes on the face of the pleadings that no material issue of fact remains to be resolved and that it is entitled to judgment as a matter of law.” George v. Pacific-C.S.C. Work Furlough, 91 F.3d 1227, 1229 (9th Cir.1996). In considering both motions to dismiss and for judgment on the pleadings, the court’s inquiry focuses on the interplay between the factual allegations of the complaint and the dispositive issues of law in the action. See Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984). Courts “must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the non-moving party,” Usher v. City of L.A., 828 F.2d 556, 561 (9th Cir.1987). This rule does not, however, apply to “a legal conclusion couched as a factual allegation,” Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986), quoted in Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), or to “allegations that contradict matters properly subject to judicial notice,” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir.2001).
While generally, “matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56,” Fed.R.Civ.P. 12(d), the court “may consider certain materials without converting the motion for judgment on the pleadings into a motion for summary judgment. Such materials include ... matters of judicial notice.” Tumlinson Group, Inc. v. Johannessen, No. 2:09-cv-1089, 2010 WL 4366284, at *3 (E.D.Cal. Oct. 27, 2010) (citations omitted); see also Lee v. City of L.A., 250 F.3d 668, 688-89 (9th Cir.2001) (holding court may properly take judicial notice of “matters of public record” without converting to summary judgment motion).
VI. DISCUSSION
As this court found in its previous order, “[ujnless an exception applies, the City’s debt to Jarreau’s estate and heirs was discharged upon confirmation [August 4, 2011].” Order, ECF No. 49 at 5. The court denied the motion because, “on the instant record, the court is unable to find as a matter of law that plaintiff had either notice or actual knowledge of the City’s bankruptcy proceedings.” Id. at 6. In order to overcome the inferences drawn in favor of the nonmoving party at this stage, “defendants must show beyond ‘reasonable dispute,’ on the basis of ‘sources whose accuracy cannot reasonably be questioned,’ ” Fed.R.Evid. 201(b), that Burris’s professional involvement in the bankruptcy began in July 2008, such that he had notice of the bankruptcy when he filed plaintiffs claim with the City in 2011, In re Perle, 725 F.3d 1023, 1025 (9th Cir.2013) (noting, for notice or knowledge of bankruptcy to be imputed to other client, an individual lawyer must represent a party in bankruptcy proceedings while simultaneously representing client in other case). Because the burden is on the debtor to show *833notice to the creditor, In re Maya Const. Co., 78 F.3d 1395, 1399 (9th Cir.1996), it is defendant’s burden to show that, as a matter of law, plaintiff had actual or imputed notice of the City’s bankruptcy. As noted above, given the posture of this case, the court draws all inferences in favor of the nonmoving party.
Defendants argue, as they did in their previous motion, that plaintiffs former counsel had personal notice of the City’s bankruptcy at the time he submitted plaintiffs government tort claim, and that knowledge is imputed to plaintiff. Therefore plaintiff is assumed to have had notice of the bankruptcy case, as well as the impending discharge of her claims, at least as of 2011 when Burris was assisting with her Government Tort Claims Act claim. Defendants cite In re Price, 871 F.2d 97, 99 (9th Cir.1989). In Price, knowledge was imputed to the plaintiff because plaintiffs counsel was given actual notice of the bankruptcy proceedings in time to file a complaint, or at least to file a timely motion for an extension of time. At the time of his representation of the plaintiff in that case, the lawyer was pursuing the same claim plaintiff sought to have declared non-dischargeable in state court. The Ninth Circuit held that “under these circumstances notice to counsel constituted notice to [the plaintiff].” Id. at 99. This case, however, concerns actual notice made during the representation of a different client in a different matter, three years prior to his representation of this plaintiff. The Ninth Circuit has expressly rejected the notion that notice of bankruptcy in the representation of one client is imputed to plaintiffs in a different matter. In re Perle, 725 F.3d at 1028 (“Because [counsel] ... learned of the bankruptcy filing only in the. course of representing a different client, we are unwilling to impute the notice or actual knowledge of [defendant’s] bankruptcy filing that he had to [client]”). The Ninth Circuit precedent takes account of the practical burden it would place on counsel to have his knowledge imputed to another client in an unrelated matter and in a different context: “[A]n attorney given notice of the bankruptcy on behalf of a particular client is not called upon to review all of his or her files to ascertain whether any other clients may also have a claim against the debtor.” Id. Here, Burris no longer represents plaintiff and has not represented her in this civil action; he only assisted her in filing a damages form with the City of Vallejo to exhaust the California Tort Claims Act’s jurisdictional requirement. Ex. A, ECF No. 40-1. Burris, in a sworn declaration, states he never told plaintiff about the bankruptcy, which is consistent with plaintiffs assertion she was unaware of the bankruptcy until April 2013. Burris Deck at 1, ECF No. 65-2. Although counsel in Perle was notified of the bankruptcy after representing the client to whom the Ninth Circuit declined to impute knowledge, the defendants do not address, let alone attempt to distinguish Perle from the present case; they do not meet their burden to show that, as a matter of law, plaintiffs claim is discharge-able.
VII. CONCLUSION
For the foregoing reasons, defendants’ motion is DENIED. This order resolves ECF No. 56.
IT IS SO ORDERED.
. As in the court’s previous order (ECF No. 49), the court refers to Jarreau-Griffin as the only plaintiff but acknowledges she acts on behalf of herself and the estate.
. The court took judicial notice of this fact in its previous order, ECF No. 49 at 4. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498788/ | ORDER
KATHY A. SURRATT-STATES, Chief United States Bankruptcy Judge
The matter before the Court is Plaintiffs’ Complaint to Determine Discharge-ability of Debt. For the reasons set forth in the Court’s Findings of Fact and Conclusions of Law entered separately,
IT IS ORDERED THAT the relief requested in Plaintiffs’ Complaint to deny dischargeability pursuant to Section 523(a)(2)(A) is DENIED; and
IT IS FURTHER ORDERED THAT the relief requested in Plaintiffs’ Complaint to deny dischargeability pursuant to Section 523(a)(3) is DENIED; and
IT IS FURTHER ORDERED THAT the relief requested in Plaintiffs’ Complaint as to Caroline N. Labrayere is DENIED; and
IT IS FURTHER ORDERED THAT the relief requested in Plaintiffs’ Complaint to deny dischargeability pursuant to Section 523(a)(14A) is GRANTED IN PART in that $3,238.66 of the State Court Judgment comprising of $2,038.66 for the Labrayere Cashiers Check and $1,200.00 for the Link Cashiers Check is a debt for taxes and is nondischargeable as to Debt- or, Tara Nicole Link only, and judgment in the total amount of $3,238.66 is entered in favor of Plaintiffs and against Debtor, Tara Nicole Link only, and said judgment is NOT DISCHARGEABLE as to Debtor, Tara Nicole Link, pursuant to 11 U.S.C. § 523(a)(14A) and DENIED IN PART in that the remaining amount of the State Court Judgment is discharged as to Debt- or, Tara Nicole Link; and
IT IS FURTHER ORDERED THAT the relief requested in Plaintiffs’ Complaint for attorneys fees is DENIED and this is the final judgment and Order of this Bankruptcy Court in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498789/ | MEMORANDUM OPINION AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT, GRANTING GMAC’S MOTION AND DENYING THE TRUSTEE’S MOTION
Dale L. Somers, United States Bankruptcy Judge
Plaintiff Christopher J. Redmond, the Chapter 7 Trustee of Debtor Brooke Capital Corporation, seeks to recover from Defendant GMAC- Insurance Management Corporation (GMAC) as preferential transfers and fraudulent conveyances approximately $1 million in premium payments transferred' by Brooke Capital to GMAC within the 90 days before Brooke Capital filed for relief under Title 11. The parties filed cross-motions for summary judgment, and arguments on the motions were heard on June 25, 2015. Plaintiff appeared in person and by his counsel, Michael J. Fielding of Husch Blackwell LLP. GMAC appeared by John W. McClelland of Armstrong Teasdale LLP. The Court has jurisdiction.1
INTRODUCTION.
Brooke Agency Services Company, LLC (BASC), a non-debtor and a wholly-owned subsidiary of Debtor Brooke Corporation (Brooke Corp), was an agent of record for GMAC, an insurance carrier. BASC’s producers or subagents collected insurance premiums for GMAC policies from insureds and transferred them to BASC, which then transferred them to Debtor Brooke Capital, a subsidiary of Debtor Brooke Corp. During the 90-day preference period, Brooke Capital in turn transferred over $1 million of these premiums to GMAC. The Trustee of Brooke Capital seeks to avoid these transfers.
UNCONTROVERTED FACTS.
A.- General Background.
Brooke Corp owns approximately 81% of the stock of Brooke Capital and is the one-hundred-per-cent owner of BASC.
Brooke Corp operated primarily through its operating subsidiaries: Brooke Credit Corporation, which later changed its name to Aleritas Capital Corporation, and Brooke Franchise Corporation, which later changed its name to Brooke Capital. Unless otherwise noted, Brooke Corp and its various subsidiaries are collectively referred to as Brooke.
B. Brooke’s Insurance Business.
During the first ten years of its existence, Brooke primarily sold administrative services to bank-owned insurance agencies. In 1996, to expand its business, Brooke established a franchise model whereby insurance agencies would operate under the Brooke umbrella. A lending program was developed to facilitate the acquisition of existing insurance agencies *608by Brooke franchisees. Brooke Capital served as the franchise arm of Brooke. Through the end of 2003, all Brooke franchises were conversion agencies, meaning that the franchisee owned or acquired an existing agency when it signed up to be a Brooke franchisee. When a franchise was acquired, Brooke would typically loan the franchisee the entire amount it needed to purchase the agency. Commissions earned by Brooke insurance agents provided a source of revenue to pay the loans and to pay Brooke Capital for services it provided to the Brooke agencies. In 2003, Brooke started securitizing the agency loans. Bank of New York Mellon (BONY) served as the trustee for the securitized loans. In 2004, Brooke also began a program of start-up agencies under which the franchisee was recruited and created a new agency without the benefit of existing business.
BASC was a Delaware limited liability company wholly owned by Brooke Corp that was organized in 2002. BASC was the entity that contracted with the insurance carriers and was the insurance agent of record for policies sold by the Brooke franchisees. There were separate agreements with each carrier, based upon the carrier’s own template. Subject to the approval of the individual carriers, the agents of each of the Brooke franchisees were appointed as sub-producers under BASC’s contracts with the insurance carriers. The carriers paid the commissions to BASC as the agent of record.
Brooke’s system accommodated three insurance policy payment methods: direct bill; agency bill; and online bill. Premiums for direct-bill policies were remitted by the insured directly to the insurance carriers. Premiums for agency-bill and online-bill policies were transmitted to the agents (Brooke franchisees) who, in turn, transferred them to BASC for transmission to the carriers.
The online-bill-payment method was used by many carriers, including GMAC. A general description of the Brooke Insurance Transactions System used to process online bill payments is as follows. An agent received premiums from each insured. The agent would go into Brooke’s proprietary computer software system and indicate the receipt of the premiums. The agent would simultaneously go to the website of the insurance carrier for which it had received premiums and inform the carrier of the receipt of the funds. The agent would then deposit the premiums into one of approximately 90 sweep accounts that BASC maintained across the country. A reconciliation team at Brooke would then verify that the total funds had been deposited as the agent indicated. After a successful verification, those funds would be swept into the Consolidated Receipts Trust Account (CRTA) held in the name of BASC at First National Bank of Phillipsburg, Kansas. Commissions paid by insurance carriers were also transferred to the CRTA.
The transfer of funds from the CRTA changed over the preference period, but generally the funds were distributed either to the Master Receipts Trust Account (MRTAj in the name of BASC at BONY (for the benefit of the securitization trusts) or to the primary account Brooke Capital owned at First National Bank of Phillips-burg, Kansas (“Primary Account” or “FNB Primary Account”). Funds returned by BONY to Brooke Capital and other funds of Brooke Capital, including transfers from its operating account, also were deposited into the Primary Account. Brooke Capital maintained online sweep accounts for 133 carriers,2 and transferred *609sufficient funds to these accounts for the carriers to withdraw the premiums owed to them. At least as to GMAC, the payments were accomplished through an ACH (Automated Clearing House) request that GMAC submitted for its particular sweep account.
The Trustee’s expert, Kent E. Barrett, has provided a report concluding that it is not possible to trace individual receipts through BASC’s and Brooke Capital’s bank accounts to their ultimate disbursement to the insurance carriers involved because of the extensive commingling of funds. In addition, the expert concluded that tracing is not possible because of the delay (typically 3 to 7 days for online-bill payments) between the date of receipt from the franchisee agents and the date of disbursement to the insurance carriers. GMAC has not provided a report to the contrary and has not attempted to trace any funds, but does point out that Brooke reconciled the amount of deposits daily, and maintained records for each premium payment identifying the specific customer, the insurance carrier, and the amount paid. Whether tracing the premiums is possible is not material to the Court’s decision. The important fact for this opinion is that premiums, commissions, and Brooke Capital’s operating funds we.re commingled. This is not disputed.
C. The Agency Relationship with GMAC.
GMAC generally provided insurance coverage for anything with wheels: automobiles, recreational vehicles, motorcycles, and commercial vehicles. Brooke Corp established an agency relationship with GMAC in 2000. In conjunction with this agreement, GMAC was given authority to sweep customer premiums from a Brooke Corp account at First National Bank & Trust in Phillipsburg, Kansas. In 2002, the GMAC agency agreement was assumed and transferred to BASC. The 2002 agreement is referred to as the “Agency Agreement.” Article V, “Direct Billed or Premium Financed Policies,” of the Agency Agreement provides as follows:
A. With respect' to direct billed or premium finance business (premium financing is not permissible in all states):
1. The Agent agrees to collect and remit to the Company the initial premium (either down payment or full payment as required by Company on a direct billed policy or down payment or full payment as required by Company on a premium financed policy) within the time period set forth from time to time by the Company together with each completed application.
2. The Company shall bill all renewal or adjustment premiums direct to the insured or to a designated lending institution or servicing agency holding such premiums in escrow or reserve, and such premiums shall be payable in gross to the Company.
3. Should any renewal, additional or endorsement premiums on business written pursuant to this Agreement come into the Agent’s hands, the Agent shall remit said premium in gross to the Company within the time period set forth from time to time by the Company. Further, Agent agrees to hold all premiums collected by him as a fiduciary in trust for the Company until payment shall have been duly made to the Company.3
*610In connection with the Agency Agreement, GMAC was given authority to withdraw premiums from a “GMAC Sweep Account,” an account owned by Brooke Capital at First National Bank of Phillipsburg, Kansas.4
Brooke franchisees selling GMAC insurance used the online method of premium payment. GMAC provided each Brooke producer agent with access to an on-line “E-agency” system that allowed the producer to input information concerning the proposed insured and their vehicle or vehicles, and provide an immediate quote to the customer. Upon approval of the quote by the customer and receipt of the required premium, the producer had the authority to bind the policy (that is, to bind GMAC to provide the coverage specified in the policy). In accord with the online payment described above, the premium would be deposited into the agency account, swept into,a BASC sweep account, and then transferred to the CRTA. Four business days after the producer entered the information into the “E-agency” system, GMAC would initiate an ACH transfer from the GMAC Sweep Account at First National Bank of Phillipsburg, Kansas, in the name of Brooke Capital, for the amount of the premium. Until six days before Brooke Capital filed for relief under Chapter 11, when the GMAC Sweep Account was closed, Brooke Capital always had sufficient funds in the account to satisfy GMAC’s withdrawals.
At the GMAC level, the process was fully automated. GMAC did not know that the GMAC Sweep Account was in the name of Brooke Capital rather than BASC, or that GMAC premium funds were commingled with premiums and commissions of other carriers, commingled with other funds of Brooke Capital, and diverted by Brooke Capital for uses other than paying premiums. Because the ACH withdrawals initiated by GMAC always cleared, GMAC did not consider BASC to be “out of trust” until six days before Brooke Corp and Brooke Capital filed for relief under Chapter 11, when GMAC was notified that the GMAC Sweep Account had been closed. During the preference period, Brooke Capital transferred $1,115,123 to the GMAC Sweep Account. Of this amount, $1,109,673 had been transferred by Brooke Capital from its FNB Primary Account to the GMAC Sweep Account, and the remainder represents adjustments that GMAC had credited back to the GMAC Sweep Account.5
D. The BONY Action and Brooke’s Bankruptcy.
On September 11, 2008, the Bank of New York Mellon (BONY), in its capacity as the trustee for the Brooke securitiza-tions, filed a complaint against Brooke and others in the United States District Court for the District of Kansas, Case no. 08-CV-2424. BONY contended that under the direction of Robert Orr, Brooke was depositing funds into an account at Brooke Savings instead of into an account at BONY that had been established to collect payments claimed to be owed to certain securitization entities and other lenders. BONY sought the appointment of Albert A. Riederer as a receiver, which Brooke opposed. By a consent order, Riederer was appointed as a Special Master pursuant to Federal Rule of Civil Procedure 53. Special Master Riederer continued Brooke’s relationship with GMAC until Oc*611tober 22, 2008, when he notified GMAC, other carriers, and Brooke franchisees that the payment method was being terminated. As a result, the GMAC Sweep Account was closed.
Brooke Corp and Brooke Capital filed voluntary Chapter 11 petitions on October 28, 2008.6 On October 29, 2008, the Bankruptcy Court entered an order appointing Riederer as the Chapter 11 Trustee of Brooke Corp and Brooke Capital. On June 28, 2009, the Bankruptcy Court entered an order converting the Debtors’ bankruptcy cases to Chapter 7 and noted the U.S. Trustee’s decision to appoint Riederer as the Chapter 7 Trustee of the Debtors upon conversion of the cases. On November 3, 2011, the Bankruptcy Court issued a notice of Riederer’s resignation as Trustee and Christopher J. Redmond’s appointment as the successor Trustee for each of the Debtors.
E. The Complaint.
Trustee Riederer filed the original complaint against GMAC on October 25, 2010, alleging various causes of action. An Amended Complaint against GMAC was filed on July 12, 2012. When moving for summary judgment, Trustee Redmond seeks the following: (1) a finding that $1,109,567.677 in transfers from Brooke Capital to GMAC between July 30, 2008, and October 21, 2008, are avoidable preferential transfers pursuant to § 547(b); (2) a finding that the Trustee may recover the $1,109,567.67 from GMAC pursuant to § 550; (3) an award of prejudgment interest retroactive to October 10, 2010; and (4). an award of the Trustee’s costs in bringing this action. The Trustee acknowledges that if the Court finds that the transfers to GMAC were on account of antecedent debts under § 547(b), then the fraudulent conveyance claim is moot.8
GMAC moves for summary judgment on the preferential transfer claims. First, GMAC asserts that the Trustee cannot meet his burden to prove that the transfers were transfers of property of the Debtor and that GMAC was a creditor of the Debtor. GMAC also moves for summary judgment on the rationale that the uncontroverted facts establish that the Trastee may not avoid the transfers because GMAC has proven the ordinary-course and contemporaneous-exchange defenses.
F. The Trustee’s Motion in Limine is Moot.
In conjunction with his summary judgment pleadings, the Trustee .also filed a motion in limine to exclude certain opinions expressed in the deposition testimony of GMAC’s expert. The motion is limited *612to testimony on the subject of business standards in the insurance industry.9 The basis for the objection is that such testimony is beyond the scope of the written expert report of the same witness.10 When moving for summary judgment, GMAC twice refers to the challenged testimony. The Court finds that it can rule on the summary judgment motions without considering the cited testimony and for that reason finds the motion in limine to be moot.
DISCUSSION.
A. The Trustee has established a pri-ma facie preference case.
1. The elements of avoidable preferential transfers.
Section 547(b) provides:
[T]he trustee may avoid any transfer of an interest of the debtor in property —
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made ... on or within 90 days before the date of the filing of the petition; ... 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.
To establish a prima facie case regarding the transfers Brooke Capital made to GMAC, the Trustee must prove all of these elements. The Trustee argues that he has done so. GMAC challenges only the first element, which requires that the transfers be of an interest of Debtor Brooke Capital in property, and the second element, which requires that GMAC be a creditor of Brooke Capital. The Court concludes that the , Trustee has satisfied the elements of a prima facie case and rejects GMAC’s challenges to the first and second elements.
2. Brooke Capital’s transfers to GMAC were of an interest in Brooke Capital’s property, as required by § 547(b).
Brooke Capital’s transfers of funds to GMAC were of an interest of Brooke Capital in property. Because of the purpose of the avoidance provisions of the Bankruptcy Code, “property of the debtor” subject to recovery as a preferential transfer “is best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.” 11 Property of the estate is defined broadly by § 541, which, in turn usually looks to state law to define property interests. In a case where property interests were defined by Kansas law, the Tenth Circuit adopted a dominion or control test for defining an interest in property for purposes of § 547.12 “Under this test, a transfer of property will be a transfer of ‘an interest of the debtor in property’ if the debtor exercised dominion or control over the transferred property.”13
*613There is no doubt that Brooke Capital had dominion or control over the funds which were transferred to GMAC. The ACH requests which initiated the transfers were made to the GMAC Sweep Account at First National Bank of Phillipsburg, Kansas, that was in the name of Brooke Capital.
When contending the Trustee has not proven that Brooke Capital had an interest in the funds, GMAC relies on the earmarking doctrine, a judicially-created doctrine excepting certain transfers from § 547.14 A respected treatise describes the doctrine as follows:
The earmarking doctrine is accepted as a valid defense to a preference action. It is an equitable doctrine which provides that when a new lender makes a loan to enable a debtor to pay a specified former lender, those funds are “earmarked” for that creditor. If the debtor exercises no control over the disposition of the earmarked funds, the funds do not become part of the debtor’s estate, and no preference occurs.15
Three requirements must be met for earmarking to apply:
(1) the existence of an agreement between the new lender and the debtor that the new funds will be used to pay a specified antecedent debt, (2) performance of that agreement according to its terms, and (3) the transaction viewed as a whole (including the transfer in of the new funds and the transfer out to the old creditor) does not result in any diminution of the estate.16
The earliest enunciations of the doctrine were in cases where the new creditor providing the new funds to pay off the old debt was obligated to pay off the old debt, such as a guarantor or surety.17 Although some “courts have extended the doctrine . beyond the guarantor situations,”18 the Tenth Circuit BAP has declined to do so,19 and the Tenth Circuit has expressed doubt about the expansion.20 This is clearly not a guarantor situation. There is no evidence that BASC, or any other entity, guaranteed Brooke Capital’s obligation to GMAC. For this reason alone the Court does not find the doctrine applicable here.
But, in addition, even if the doctrine would be applicable where there is no guarantor, the Court finds that the necessary élements are not present. “[T]here are three parties required in an earmarking situation: an ‘old creditor’ (the preexisting creditor who receives payment within the 90-day preference period), a ‘new creditor’ or ‘new lender’ (who supplies the funds to pay off the ‘old creditor’), and the debtor.”21 GMAC identifies the three parties as the insured, the Brooke agent, and GMAC. Brooke Capital, the debtor who made the challenged trans*614fers and is therefore a necessary party to any earmarked transaction, is missing from GMAC’s analysis. If the earmarking doctrine were applicable, the three parties involved would necessarily be GMAC (the pre-existing creditor of Brooke Capital), BASC (who supplied the funds to pay GMAC), and Brooke Capital (the debtor who paid GMAC). But even this trio does not fit the earmarking pattern. Under the Brooke Insurance Transactions System, although BASC supplied the funds for Brooke Capital to pay GMAC, by doing so, BASC did not become a “new creditor” of Brooke Capital. BASC had no expectation that Brooke Capital would pay back the funds it transferred to Brooke Capital that were then used to pay GMAC. Further, GMAC did not become a creditor of Brooke Capital until BASC transferred the premium funds to Brooke Capital. In other words, GMAC was not a pre-existing creditor of Brooke Capital. Finally, the central element of earmarking — an agreement for the payment of a debt using earmarked funds — is not present. There is no evidence of an agreement between Brooke Capital and BASC identifying or earmarking specific funds for the payment of GMAC. The Court rejects GMAC’s reliance on the earmarking doctrine.
3. The transfers to GMAC were for the benefit of a creditor in payment of an antecedent debt of Brooke Capital, as required by § 547(b)(2) and (3).
The Bankruptcy Code defines a “creditor” as an “entity that has a claim against the debtor.”22 A “claim” is a “right to payment, whether or not such right is reduced to judgment, liquidated, unliqui-dated, fixed, contingent, matured, unma-tured, disputed, undisputed, legal, equitable, secured, or unsecured.”23 A “debt” is a “liability on a claim.”24 The Agency Agreement between BASC and GMAC required BASC to pay collected premiums to GMAC. Brooke established the Brooke Insurance Transactions System to fulfill this obligation. The system provided for the transfer of the collected premiums by BASC to Brooke Capital, followed by Brooke Capital’s payment to GMAC from the GMAC Sweep Account in the name of Brooke Capital. GMAC agreed with BASC that such payment would be accomplished by GMAC initiating an ACH request for payment from the GMAC Sweep Account four business days after the agent or producer entered the policy information into the computer system. In this manner, GMAC became a creditor of Brooke Capital.
GMAC argues that it did not knowingly consent to a debtor-creditor relationship between itself and Brooke Capital. Based upon the Agency Agreement, GMAC understood that its debtor-creditor relationship was with BASC, not Brooke Capital. It observes that the legal issue of whether a debtor-creditor relationship can arise only with the consent of the parties has been raised in another Brooke adversary proceeding, Redmond v. CJD.25 GMAC submits that if the Court holds in the CJD case that mutual consent is required, the ruling should also apply to this case. The Court has recently issued its opinion in *615CJD, finding, among other things, that mutual consent is not required to establish a debtor-creditor relationship.26 The Court therefore denies GMAC’s argument that the Trustee has failed to establish the existence of a debtor-creditor relationship as required for avoidance of a transfer under § 547(b)(2).
4. The Trustee has established the elements of § 547(b)(3), (4), and (5).
To prove the insolvency of Brooke Capital as required by § 547(b)(3), the Trustee relies upon § 547(f), which provides that for purposes of § 547, “the debtor is presumed to have been insolvent on and during the 90 days immediately preceding'the date of the filing of the petition.” GMAC does not attempt to rebut the presumption. Section 547(b)(4) is satisfied because all of the transfers which the Trustee seeks to avoid were made on or within the 90-day period preceding Brooke Capital’s filing of its petition. Finally, the Trustee argues that § 547(b)(5), which requires comparing what the creditor actually received in the challenged transfers to what it would have received under § 726 of the Code, is satisfied because the claims against Brooke Capital greatly exceed its total current assets and potentially recoverable litigation claims. GMAC does not argue otherwise.
B. The Trustee may not avoid the allegedly preferential transfers to GMAC because they were made in the ordinary course of business under § 547(c)(2).
Under § 547(c)(2), the Trustee may not recover ordinary-course preferential transfers. There are two elements to the defense: (1) the “transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;” and (2) the transfer was either (a) “made in the ordinary course of business or financial affairs of the debtor and the transferee” or (b) “made according to ordinary business terms.” GMAC contends that this defense applies to the avoidable preferential transfers from Brooke Capital to GMAC. As the preference defendant, GMAC has the burden of proving the defense, which is narrowly construed.27
As this Court’s recent decision in Redmond v. CJD states, “Courts do not agree on the interpretation of the debt-incurred element of § 547(c)(2).”28 There are two . competing interpretations. One is the subjective test which asks “whether the debt incurred was ordinary as between the debtor and the defendant.”29 Liberty Livestock,30 which relied upon the Tenth Circuit’s opinion in Fidelity,31 is an example. The second is the objective test which looks to “whether the debt was incurred in the ordinary course of each party’s business, as viewed separate from their dealings with one another.”32 C.W. Mining,33 *616recently decided by the Tenth Circuit, is an example of the second approach. In CJD, after reviewing the case law, with an emphasis on the cases in the Tenth Circuit, this Court stated:
The Court finds merit in both the subjective and objective tests ... There is no apparent reason why courts should adopt either the subjective or objective alternatives as controlling for all circumstances. The Bankruptcy Code requirement that the transfer be “in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee” does not specify that the test must be either subjective or objective. This is in contrast ■ to the requirement of § 547(c)(2) that the transfer satisfy one of two tests, the subjective test stated in § 547(c)(2)(A) or the objective test stated in § 547(c)(2)(B). The Tenth Circuit’s directive that the incurrence of the debt requirement “be read in light of the ‘general policy of the preference section to discourage unusual action by either the debtor or [its] creditors during the debtor’s slide into bankruptcy’ ”34 does not require a choice between the two alternatives. An objective test was applied by the Tenth Circuit in C.W. Mining because there was no history of transactions between the debtor and its creditor. Ahaza Systems, the Ninth Circuit opinion relied upon by the Tenth Circuit when adopting an objective test for first-time transactions, states, “[t]o determine what is ‘ordinary’ among parties who have interacted repeatedly, we inquire into the pattern of interactions between the actual creditor and the actual debtor in question, not about what transactions would have been ‘ordinary’ for either party with other debtors or creditors.”35 With respect to the requirement of § 547(c)(2) that the debt be incurred in the ordinary course of business or financial affairs of the debt- or and the transferee, in some cases, the circumstances will render the subjective test predominant, and in others, the objective test will be the most important. By having both tests available, courts can be gatekeepers to assure that the ordinary-course defense applies to promote the purpose of the defense — to discourage unusual action by either the debtor or [its] creditors during the debt- or’s slide into bankruptcy.36
In this case, GMAC relies on the subjective test and the long history of dealings between GMAC and Brooke Capital. The Trustee relies on the objective test and contends it is not satisfied because BASC and Brooke Capital commingled the insurance premiums, contrary to the Agency Agreement and state law governing insurance agents’ handling of premiums.37
*617There is no doubt that Brooke Capital’s debts to GMAC were incurred in the ordinary course of business between the two parties. From GMAC’s perspective, the procedures for paying it premiums collected by Brooke agents did not change from 2002 until October 22, 2008, when the Special Master terminated the procedures. Throughout the agency relationship, including the 90 days prior to the filing of the bankruptcy petition, in accord with the Brooke Insurance Transactions System, premiums were collected by Brooke-affiliated agents and deposited into bank accounts in the name of BASC. The premiums were paid to GMAC through ACH requests on the GMAC Sweep Account in the name of Brooke Capital. Brooke Capital’s debt to GMAC arose because of the Brooke Insurance Transactions System under which the premiums collected by Brooke agents for GMAC policies were initially transferred to a BASC sweep account and then to BASC’s Consolidated Receipts Trust Account (the CRTA), and finally transferred to Brooke Capital for accounting, paying securitized-debt obligations, and paying GMAC from a GMAC-specific deposit account in the name of Brooke Capital. There were no unusual transfers made to GMAC and no unfulfilled requests for payment made by GMAC during the preference period. In addition, it is undisputed that the procedures for paying premiums to GMAC were not unique.38 The Brooke Insurance Transactions System utilized for processing GMAC’s premiums was the same as that for other insurance carriers having agency relationships with BASC.
Nevertheless, the Trustee contends that the ordinary-course defense is not available to GMAC because Brooke Capital’s debt to GMAC was not a typical arms-length creation of debt arising in the open market, which the Trustee asserts is the hallmark of an objectively-ordinary transaction. The Trustee argues that the commingling of insurance premiums with commissions paid by other carriers, with premiums from other carriers, and with Brooke Capital’s other funds constituted a breach of trust, therefore making the defense unavailable:
The Court rejects these arguments. First, as stated above, the Court finds that the debt was incurred in the ordinary course .of business based upon the long history of transactions which did not change (except inside Brooke Capital) in response to Brooke’s financial difficulties. Under the circumstances of this case, whether the debts were incurred in arms-length transactions is not the controlling test. Second, the Court has examined the allegations and finds there was no breach of trust which precludes the ordinary-course defense.
The Tenth Circuit’s C.W. Mining decision does not support the Trustee’s argument that a breach of trust, if it occurred, overcomes GMAC’s evidence that the debt was incurred in the ordinary course. Nevertheless, because the Tenth’s Circuit’s decision in Fidelity39 suggests that the source of the transactions should be examined, the Court will examine whether there was a breach of trust. In Fidelity, the court addressed “whether § 547(c)(2) ... applies to a transfer unrelated to the payment of trade debt.”40 Debtor Fidelity had been in the business of making small, high-interest consumer loans, and it did this by regularly borrowing money *618through selling certificates to small investors and then lending the proceeds out at higher rates. Suit was brought to recover distributions made to small investors during the preference period. Prior to an amendment in 1984, § 547(c)(2) had applied only to the payment of a trade debt incurred within 45 days before the transfer. After reviewing the legislative history and case law, the Circuit held that the subsection as amended in 1984 was not limited to trade debt. It also affirmed the finding that Fidelity’s long-term debt represented by the certificates sold to small investors “was a regular part of its daily business, much like a bank or savings and loan institution.”41 The Circuit rejected the contention that the lower court’s ordinary-course finding was erroneous on the basis that the defense did not apply to “transactions which, from their inception, were designed to work a fraud”42 and that Fidelity had engaged in such activity. Although Fidelity’s securities registration had been suspended by the state, the Tenth Circuit affirmed the lower court reasoning that Fidelity’s funding of its loan operations through the selling of certificates was a legitimate form of capitalization, and that there was no evidence of a Ponzi scheme or other inherently fraudulent operations. “While the subsequent conduct of its business may have been deficient, these deficiencies were not so pervasive as to render the whole of Fidelity’s operations outside of the ordinary course of business.”43
The Court therefore turns to a consideration of whether Brooke Capital’s commingling of GMAC’s premium payments precludes satisfaction of the debt-incurred element of the ordinary-course defense. The Trustee has two prongs to his argument that the debts were suspect. First, he contends that the BASC-Brooke payment procedures violated the GMAC Agency Agreement. Second, he contends that the procedures violated Kansas law.
The Trustee’s argument that the debt was incurred in breach of the Agency Agreement relies upon the last sentence of Article V(3).44 That sentence • states, “Agent agrees to hold all premiums collected by him as a fiduciary in trust for the Company until payment shall have been duly made to the Company.” The Trustee interprets this sentence to mean that all collected premiums are to be held in trust by depositing them into accounts where they could be traced as premiums attributable to GMAC policies. According to the Trustee, since in his view the GMAC premiums were commingled and cannot be traced, there was a breach of the Agency Agreement.
The Court rejects this interpretation of the Agency Agreement. The Trustee’s broad reading of the Agency Agreement is not supported by the plain meaning of the contract. The full subsection three of Article V provides:
3. Should any renewal, additional, or endorsement premiums on business written pursuant to this Agreement come into the Agent’s hands, the Agent shall remit said premium in gross to the Company within the time period set forth from time to time by the Company. Further, Agent agrees to hold all premiums collected by him as a fiduciary in trust for the Company until payment *619shall have been duly made to the Company.45
Subsection two of Article V provides that GMAC (the “Company”) will directly bill all renewal or adjustment premiums. A plain reading of subsection three, on which the Trustee relies to establish a breach of trust, in conjunction with subsection two, shows that the requirement that premiums be held in trust is limited to renewal, additional and adjustment premiums, which GMAC will directly bill to the insured and are not expected to come into the possession of the agent. There is no evidence that any of the preferential transfers were for renewal, additional, or adjustment premiums. Subsection one of Article V applies to initial premiums, which are the premiums in issue here. It provides that the agent shall collect and remit to GMAC the initial premium within the time period determined by GMAC, which was four business days after a transaction was entered into the computer systems. There is no contractual requirement in the Agency Agreement that the initial premiums be held in trust.
The Court’s construction of the Agency Agreement as not requiring trust treatment of collected initial premiums is supported by the deposition testimony of Douglas Hanes, the designated representative of GMAC. When asked if GMAC expected BASC to hold premiums in trust until they were transmitted to GMAC, he testified that GMAC really didn’t think about that, it “just wanted to make sure when we swept the account from BASC that the money was there.”46 “As long as we sweep the account and there’s money in that trust account, then we are deeming that it’s in trust.”47 In GMAC’s view of its arrangement with BASC, premiums would be out of trust if a request sent to the GMAC Sweep Account was dishonored.48 It didn’t matter to GMAC what happened before that.49 There'is no evidence that funds were not available when requested by GMAC.
The Court’s construction is also in harmony with insurance law. A respected treatise states:
While the agent of the insurer is under the duty to account to the insurer, and while the relationship of an insurer and agent is fiduciary in character, the agent does not ordinarily hold the premiums received by him or her as a trustee nor as trust funds, but merely as a debtor who owes the insurer as creditor the amount of the premiums received by him or her in a separate account, nor remit to the insurer the identical money received by him or her from the insureds, but merely the net amount due the insurer.
The agency contract may, however, stipulate that the agent holds the premiums as trustee for the insurer. Even under this type of clause, ... the agent is not required to keep the identical money collected intact and turn it over to the company in that form.50
The Court therefore rejects the Trustee’s contention that the transfers were made in breach of the Agency Agreement.
The Court also finds that the handling of the GMAC premiums under the Brooke *620Insurance Transactions System was not in violation of Kansas statutes. The statute on which the Trustee relies is K.S.A.2014 Supp. 40-247(a), which provides in relevant part:
(a) An insurance agent or broker who acts in negotiating or renewing or continuing a contract of insurance, ... and who receives any money or substitute for money as a premium for such a contract from the insured ... shall be deemed to hold such premium in trust for the company making the contract. If such agent or broker fails to pay the same over to the company after written demand, ... such failure shall be prima facie evidence that such agent or broker has used or applied the premium for a purpose other than paying the same over to the company.
Section (b) provides that if an agent or broker violates the statute, he or she shall be guilty of a felony or a misdemeanor, depending on the value of the insurance premium involved. The leading Kansas case construing the statute51 has identified its three purposes. First, it benefits an insured who pays the premium on a policy to an agent of the insurer by protecting his rights under a policy “irrespective of defalcations of the broker or agent respecting his payment to the insurer.”52 Second, it gives the insurer “a greater remedy to collect from the broker or agent who has collected from the insured than is given ordinarily by statute for the collection of an ordinary account.”53 Third, it provides that an agent who fails to account to the insurer is prima facie guilty of a crime.54
There is no Kansas case law construing the statute to mandate that all insurance premiums collected by an agent be held in trust in a segregated account or be traceable. The wording of the statute does not invite such a construction, since it merely says that the premiums shall be “deemed” to have been held in trust, not that such premiums shall be held in a segregated account and not commingled with other funds.
If, as opined by the Trustee’s expert, BASC’s and Brooke Capitol’s method for handling the premiums was contrary to the industry custom and practice,55 this does not mean that the premium transactions from their inception were designed to work a fraud, which Fidelity suggests would be sufficient to render the ordinary-course defense unavailable. The purpose of the ordinary-course exception is to “ ‘leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor’s slide into bankruptcy.’ ”56 “With respect to incurrence of the debt, the requirement must be read in light of the ‘general policy of the preference section to discourage unusual action be either the debtor or [its] creditors during the debtor’s slide into bankruptcy.’ ”57 In the Court’s view, the *621suggested uniqueness of Brooke Capital’s method of handling premiums does not constitute a reason to disrupt the normal financial arrangements of GMAC, BASC, and Brooke Capital. The method was not inherently fraudulent. It accomplished the timely payment of collected premiums to GMAC until the method was terminated by the Special Master six days before Brooke Capital filed for bankruptcy relief. If the GMAC premiums had been collected by BASC, transferred to Brooke Capital, and paid to GMAC through ACH transfers from the GMAC Sweep Account in the name of Brooke Capital without any commingling, as the Trustee contends should have been done, the antecedent debt and the transfer payments would not have changed. In other words, the fact that premiums collected on GMAC’s behalf may not be traceable had no impact on the preferential transfers.
The second requirement of the ordinary-course defense is stated in § 547(c)(2). It requires that the “transfer was (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms.” GMAC contends that § 547(c)(2)(A) is satisfied because of the. long-standing course of business between GMAC and the Debtor, which from GMAC’s perspective did not change during the 90 days prior to the filing of the petition. The Trustee emphasizes that the transfers must be ordinary for both the creditor and the debtor, alleges that they were not ordinary-course events for Brooke Capital because the details of the Brooke Insurance Transactions System changed during the preference period, and argues that GMAC’s lack of knowledge of these changes is not relevant.
The Court finds that the transfers were in the ordinary course of the financial affairs of both GMAC and Brooke Capital. Courts commonly look to the following four factors to determine whether a payment was made in the ordinary course of business of the debtor and the transferee:
(1) length of time the parties were engaged in the type of dealing at issue;
(2) whether the amount or form of tender differed from past practices;
(3) whether the debtor or creditor engaged in any unusual collection or payment activities; and
(4) the circumstances under which the payment was made.58
“Absent other peculiar circumstances, a payment made shortly before or at the due date will satisfy the statutory requirement.” 59
The Court finds that these factors are satisfied. GMAC established its agency relationship with BASC by the Agency Agreement Addendum dated October 4, 2002, and from that date forward, for each policy sold, received payment from Brooke Capital four business days after the entry of the transaction into the system by initiating an ACH withdrawal from a designated Brooke Capital account. Neither the timing nor the method of payment changed throughout this period. GMAC never contacted BASC or Brooke Capital regarding the payments. GMAC was unaware of Brooke’s financial difficulties, including the BONY litigation which resulted in the appointment of the Special Master. Brooke Capital’s changes in the flow of funds within Brooke did not affect payments to GMAC.
The Trustee contends that the transfers were not ordinary course because during the preference period, Brooke Capital *622made dramatic changes in the flow of monies in the accounts which were part of the Brooke Insurance Transactions System. He relies primarily upon Milwaukee Cheese.60 In that case, a preference action was brought to recover alleged preferential payments made by the debtor to employees and others participating in the debtor’s “thrift savings plan,” which actually constituted unsecured debt investments in the debtor: The plan was a long-term investment, and for a participant to demand payment in full was abnormal. Yet during the preference period, the debtor repaid all the “depositors,” whether they asked to withdraw their investments or not. The circuit held that the ordinary-course defense was not available. “Even if these transactions were ordinary from the transferees’ perspectives (they weren’t), they must be ordinary from the debtor’s perspective too.”61 The evidence showed that the transfers were not normal for the debtor. The debtor’s managers knew the firm was in financial trouble; the managers knew that the plan was a major source of the firm’s working capital, not a savings account of any kind; the depositors were repaid whether or not they asked for their money back; and the disbursements constituted approximately 15% of the firm’s total value, greatly exceeded its cash on hand, and were funded by a bank loan.
The Trustee argues that factually, Milwaukee Cheese is “on point with this situation,” 62 but the Court disagrees. The similarity stops with the fact that GMAC, like some of the participants in Milwaukee Cheese, was unaware of the Debtor’s financial distress. Brooke Capital’s unusual circumstances are the facts that it changed the flow of funds within the Brooke Insurance Transactions System and that the Special Master was appointed. But these events did not directly impact the transfers to GMAC. As the Milwaukee Cheese, the court observed:
A sudden payment in full of all debts in a discrete category, in anticipation of bankruptcy and for the purpose of helping a favored class of creditors, is the paradigm of a preference. Section 547 is designed to discourage (by eliminating the fruits of) a race immediately before bankruptcy to get all of one’s own debt repaid, and let the devil take the hindmost — for this race, costly to the runners, can impose even greater costs on other creditors (who must strive to protect themselves, perhaps by filing premature bankruptcies, and bear extra losses if they do not) and the firm itself, less able to compete in product markets with its assets scattered. The exceptions in § 547(c) identify cases where there is little risk that the pre-bankrupt-cy payments will give rise to this race and to the concomitant costly self-protection. A debtor who routinely receives a phone bill on the 5th of the month and pays on the 20th acts in the ordinary course; even if the phone company turns out to be a favored creditor (because the debtor neglects to pay other bills at the same time), the routine payment of regular bills is some distance from the problem at which § 547 itself is directed, and the cost of tracking down and retrieving each payment would be excessive. So if Milwaukee Cheese paid its regular bills in the three months before bankruptcy on a regular schedule, the recipients would be protected by § 547(c)(2), even if the bills were attributable to its illegal banking operations. Just so if the “depositors” received regu*623lar monthly payments from their “accounts.” 63
The transfers at issue here are much more similar to the regular payment of a utility bill than to the payment of the “depositors” in Milwaukee Cheese. During the preference period, the flow of premiums to BASC and then to Brooke Capital did not change, and the transfers to GMC did not change. The operating capital of Brooke Capital was not impacted. The situation is far removed from the problematic transfers which § 547 seeks to discourage. The transfers to GMAC are protected, even though those transfers were processed through a system that was changing because of Brooke’s financial problems.64
For the foregoing reasons, the Court sustains GMAC’s ordinary-course-of-business defense to the Trustee’s preference claims.
C. GMAC has not shown that the transfers were contemporaneous exchanges for new value under § 547(c)(1).
GMAC also relies on the contemporaneous-exchange defense of § 547(c)(1). “[U]nder section 547(c)(1) a transfer that would otherwise be considered preferential is insulated from attack by the trustee if (1) the preference defendant extended new value to the debtor, (2) both the defendant and the debtor intended the new value and reciprocal transfer by the debtor to be contemporaneous and (3) the exchange was in fact contemporaneous.”65 The purpose of this exception to preferential transfers, “like that of the other section 547(c) exceptions, is to encourage creditors to continue to deal with troubled debtors without fear that they will have to disgorge payments received for value given.” 66 The defendant has the burden of proof.67
The overarching deficiency in GMAC’s presentation of this defense is the failure to identify the new value it provided to Brooke Capital. “New value” for purposes of § 547(c)(1) is defined by § 547(a)(2) to include “money or money’s worth in goods, services, «or new credit.”' GMAC did not provide goods, services, or new credit to Brooke Capital. The insureds to whom GMAC provided services were customers of BASC’s agents, who had no relationship with Brooke Capital.
GMAC therefore argues that new value may be present in a three-party situation, citing Jones Truck Lines, an Eighth Circuit decision.68 In Jones, the trustee sought to avoid contributions the debtor had made within the preference period to Central States, an employee pension and *624health and welfare plan established through collective bargaining. Central States asserted the contemporaneous-exchange defense. With respect to the new value element, the circuit held that although no new value flowed from Central States to the debtor, the debtor received new value in exchange for the transfers in the form of services from its employees on whose behalf the transfers were made as part of their compensation.69 The three parties involved were (1) the debtor, who made the transfers sought to be avoided, (2) Central States, who received the transfers but provided no goods, services, or credit directly to the debtor, and (3) the debtor’s employees, who provided current services to the debtor in return for compensation that included the transfers to Central States. In other words, £he transfers to Central States were made for the benefit of the employees in exchange for their ongoing services.
But even assuming that this three-party new-value analysis would be accepted by the Tenth Circuit, GMAC has failed to identify the third party who provided new value to Brooke Capital in a manner analogous to the employees in Jones Truck Lines. The three parties identified by GMAC are (1) Brooke Capital,70 who made the transfers, (2) GMAC, who received the transfers, and (3) the purchasers of GMAC insurance. But there is no evidence that the purchasers of GMAC insurance provided any goods, services, or new credit to Brooke Capital. GMAC was the only beneficiary of the transfers Brooke Capital made to it.
GMAC also argues that it provided new value in exchange for the payments in multiple indirect ways in the form of goods and services. Paying GMAC allowed BASC to continue its ongoing relationship with Brooke Capital’s franchisees. The sale of insurance policies provided Brooke Capital with an income stream. Payment of the premiums allowed the Brooke agents to continue their relationships with their customers. None of these benefits from the payment of premiums to GMAC qualify as new value under § 547(c)(1). “The ‘new value’ described, in § 547(c)(1) ... must be ‘given to the debtor’ by the creditor as part of a ‘contemporaneous exchange.’ Thus, it is the precise benefit received from the creditor, and not the secondary or tertiary effects thereof, that must fit within the” definition of new value.71 Further, since § 547(c)(1) protects transfers only “to the extent” the transfer was a contemporaneous exchange for new value, the new value given to the debtor must approximate the worth of the assets transferred to the creditor.72
In addition to proving the extension of new value, a preference defendant relying on § 547(c)(1) must prove that both the defendant and the debtor intended the new value and reciprocal transfer by the debtor to be contemporaneous and that the exchange was in fact contemporaneous. The Trustee argues that these elements are not present. But because the new value GMAC extended to the Debtor has not been identified, the Court finds it impossible to analyze these elements.
*625CONCLUSION.
After careful consideration of the uncon-troverted facts and applicable law, the Court finds that summary judgment should be granted to GMAC and that the Trustee’s motion for summary judgment should be denied. As discussed above, the Court finds that the Trustee has prevailed on his contention that the $1,109,567.67 transferred by Brooke Capital to GMAC between July 30, 2008, and October 21, 2008, was preferential under § 547(b), but that the Trustee may not avoid those transfers because GMAC has shown the transfers were made in the ordinary course of the financial affairs of Brooke Capital and GMAC, as defined by § 547(c)(2). However, the Court also finds that GMAC has not shown that the contemporaneous-exchange defense of § 547(c)(1) is applicable. Because the Court finds that the funds transferred to GMAC were the property of Brooke Capital, the Trustee’s fraudulent conveyance claim is moot. Likewise, because the Court grants GMAC’s motion for summary judgment on the preferential transfer claim, the Trustee’s claim for prejudgment interest is also moot.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the Federal Rules of Civil Procedure applicable to this proceeding. A judgment based upon this ruling will be entered on a separate document as required by Federal Rule of Bankruptcy Procedure 7058, which makes Federal Rule of Civil Procedure 58 applicable to this proceeding.
IT IS SO ORDERED.
. This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b), and the Amended Standing Order of Reference of the United States District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the District's bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective June 24, 2013. D. Kan. Standing Order No. 13-1, printed in D. Kan. Rules of Practice and Procedure at 168 (March 2014). Furthermore, this Court may hear and finally adjudicate this matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F) and (H). There is no objection to venue or jurisdiction over the parties.
. Doc. 153-9 at 11 n. 15 (Expert Report of Kent E. Barrett).
. Doc. 153-1 at 4.
. Overtime, different accounts were designated as the GMAC Sweep Account. These included accounts * * *835 (Doc. 153-1 at 4) and * * *789 (Doc. 155-4 at 3).
. Doc. 153-9 at 33 (Expert Report of Kent E. Barrett).
. Brooke Investments filed a voluntary Chapter 11 petition on November 3, 2008. The Brooke Investments proceeding has been administratively consolidated with those of Brooke Corp and Brooke Capital, but Brooke Investments otherwise plays no role in this action.
. The Expert Report of Kent E. Barrett (Doc. 153-9) on page 8 states, "The $1,109,567.67 of online bill funds disbursed to GMAC from Brooke Capital during the Preference Period was funded by transfers from Brooke Capital’s primary account at First National Bank of Phillipsburg, Kansas.” Page 33 of the same report states, “[T]he total $1,115,123 transferred into the [GMAC Sweep Account] during the Preference Period consisted of $1,109,673 transferred in from Brooke Capital’s FNB Primary Account (per review of disbursements posted to the FNB Primary Account bank statements) and $5,450.03, apparently representing adjustments credited back to the GMAC Sweep Account by GMAC.” The Court finds that the minor inconsistency in the amount transferred is not material.
.Doc. 157 at 31.
. Doc. 151.
. Id. The Trustee cites Gust v. Jones, 162 F.3d 587, 592 (10th Cir.1998), and Ciomber v. Cooperative Plus, Inc., 527 F.3d 635, 642 (7th Cir.2008), to support the objection.
. Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990).
. Parks v. FIA Card Services, N.A. (In re Marshall), 550 F.3d 1251, 1255-56 (10th Cir. 2008).
. Id. at 1255.
. Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990).
. 4 William L. Norton, Jr., and William L. Norton III, Norton Bankr. Law & Practice 3d, § 66:16 at 58-6 (Thomson Reuters 2015).
. McCuskey v. Nat’l Bank of Waterloo (In re Bohlen Enters., Ltd.), 859 F.2d 561, 566 (8th Cir.1988).
. Id. at 565.
. Id. at 566.
. Manchester v. First Bank & Trust Co. (In re Moses), 256 B.R. 641, 645-49 (10th Cir. BAP 2000).
. Marshall, 550 F.3d at 1257 n. 5.
. Official Comm. of Unsecured Creditors v. Sharp Elecs. Corp. (In re Phelps Techs., Inc.), 245 B.R. 858, 868 (Bankr.W.D.Mo.2000).
. 11 U.S.C. § 101(10)(A).
. 11 U.S.C. § 101(5)(A).
. 11 U.S.C. § 101(12). '
.Redmond v. CJD & Assocs., LLC (In re Brooke Corp.), 536 B.R. 896, Memorandum Opinion and Order on Cross-Motions for Summary Judgment, Granting CJD’s Motion and Denying .the Trustee’s Motion (Bankr. D.Kan.2015).
. Id. at 911-12, 2015 WL 5301557 at *11.
. Jubber v. SMC Elec. Prods., Inc. (In re C.W. Mining Co.), 798 F.3d 983, 987-88 (10th Cir. 2015); Jobin v. McKay (In re M & L Bus. Mach. Co., Inc.), 84 F.3d 1330, 1339 (10th Cir. 1996).
. Redmond v. CJD, 536 B.R. 896, 912, 2015 WL 5301557 at *11.
. Fitzpatrick v. Central Communications and Electronics, Inc. (In re Tennessee Valley Steel Corp.), 203 B.R. 949, 953 (Bankr.E.D.Tenn. 1996).
. Redmond v. Ellis County Abstract & Title Co. (In re Liberty Livestock Co.), 198 B.R. 365 (Bankr.D.Kan.1996).
. Fidelity Sav. & Inv. Co. v. New Hope Baptist, 880 F.2d 1172 (10th Cir. 1989).
. In re Tennessee Valley Steel Corp, 203 B.R. at 954.
. In re C.W. Mining Co., 798 F.3d 983, 988-90.
. Id. at 11 (quoting Union Bank v. Wolas, 502 U.S. 151, 160, 112 S.Ct. 527, 116 L.Ed.2d 514(1991)).
. Wood v. Stratos Pro. Devel., LLC (In re Ahaza Sys., Inc.), 482 F.3d 1118, 1124 (9th Cir.2007).
. Redmond v. CJD, 536 B.R. 896, 911-12, 2015 WL 5301557 at* 11.
. The summary judgment motions and related pleadings in this case were filed before the Court announced in CJD its approach to resolving the competing considerations under the subjective and objective tests, and before the Tenth Circuit issued its opinion affirming the BAP’s opinion in C.W. Mining. The Trustee's arguments in support of the objective test and GMAC’s arguments in support of the subjective test were therefore presented as if the Court would select and apply one test to the exclusion of the other. Nevertheless, the Court finds no need to request additional briefs addressing § 547(c)(2) since the parties' positions under the CJD test can be clearly understood from the extensive briefs already before the Court.
.See doc. 153-9 at 11 n. 15 (Expert Report of Kent E. Barrett) ("Brooke Capital had online sweep accounts for 133 carriers.”).
. Fidelity Savs. & Inv. Co. v. New Hope Baptist, 880 F.2d 1172 (10th Cir.1989).
. Id. at 1173.
. Id. at 1173.
. Id. at 1178.
. Id.
. Article V- is quoted in full above in Part C of the Uncontroverted Facts.
. Doc. 153-1 at 4.
. Doc. 155-2 at 8-9 (Hanes depo. at 37:22 to 38:4).
. Id. at 10 (Hanes depo. at 46:6-9).
. Id. at 20 (Hanes depo. at 104:20-24).
. Id. at 20 (Hanes depo. at 104:25 to 105:2).
. Steven Plitt, et al., 4 Couch on Insurance, § 54:5 (3d ed., database updated June 2015), obtained from Westlaw at 4 Couch on Ins. § 54:5.
. Riddle v. Rankin, 146 Kan. 316, 69 P.2d 722 (1937).
. Id., 146 Kan. at 322, 69 P.2d at 726.
. Id.
. Id.
. See doc. 153-11 at 4-8 (Expert Report of Jim Leatzow). But the evidence in this case is that 133 carriers had online sweep accounts with Brooke Capital. Doc. 153-9 at 11 n.15 (Expert Report of Kent E. Barrett).
. 4 Norton Bankruptcy Law & Practice 3d § 66:19 at 66-79 (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. 373 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 88 (1978)); see also In re Hedged-Invs. Assocs., Inc., 48 F.3d 470, 475 (10th Cir.1995).
. In re C.W. Mining, 798 F.3d 983, 989-90 (quoting Union Bank v. Wolas, 502 U.S. at 160, 112 S.Ct. 527).
. In re C.W. Mining, 798 F.3d 983, 990-91.
. Id. at 990-91.
. In re Milwaukee Cheese, 112 F.3d 845 (7th Cir.1997).
. Id. at 848.
. Doc. 161 at 33.
. Id. at 847-48 (citations omitted).
. In support of his position, the Trustee argues that the ordinaiy-course defense also fails because "GMAC has ... not created a sufficient baseline record to show that the preference period payments were ordinary when compared to the pre-preference period dealings.” Doc. 161 at 33. This refers to the absence of evidence showing how the funds flowed through Brooke Capital's accounts, so there is no baseline for comparing the pre-preference and preference periods. But as the Court has held, these internal transactions are not relevant; what matters is the flow of premium dollars to Brooke Capital and then on to GMAC within four business days. The uncontroverted facts are that this did not change.
. 5 Collier on Bankruptcy, ¶ 547.04[1] at 547-41 to -42 (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th ed.2015).
. Id. at 547-42.
. See 11 U.S.C. § 547(g).
. Jones Truck Lines, Inc., v. Central States, Southeast and Southwest Areas Pension Fund (In re Jones Truck Lines, Inc.), 130 F.3d 323 (8th Cir. 1997).
. Id. at 327.
. GMAC’s brief identifies this party simply as “Brooke.” Doc. 159 at 10. Since the debtor must be included in the new value analysis, the Court construes "Brooke” to mean Brooke Capital.
. Baker Hughes Oilfield Operations, Inc., v. Cage (In re Ramba, Inc.), 416 F.3d 394, 399 (5th Cir.2005).
. Lowrey v. U.P.G., Inc. (In re Robinson Bros. Dulling, Inc.), 877 F.2d 32, 34 (10th Cir. 1989). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498790/ | ORDER DENYING MOTION TO REOPEN TO COMPEL SURRENDER OF REAL PROPERTY [ECF 23]
John K. Olson, Judge, United States Bankruptcy Court
This case came before the Court on September 15, 2015 on Creditor Green Tree Servicing LLC’s (“Green Tree”) Motion to Reopen Case to Compel Surrender of Real Property [ECF 23],
Background
This Chapter 7 case was filed on October 22, 2009. The Debtor’s Statement of Intentions indicated that the Debtor was surrendering her interest , in the subject real property (the “Property”) located at 7615 NW 72nd Avenue, Tamarac, FL and that the Property was not claimed as exempt [ECF 1], The Debtor listed the Property on Schedule A reflecting that the value of the Debtor’s interest in the Property was $178,500.00. On Schedule D, the Debtor listed a secured claim on the Property in the amount of $211,396.00, and the claim was not listed as disputed.
On December 8, 2009, the Trustee filed her -Chapter 7 Trustee’s Report of No Distribution [ECF 14], Shortly thereafter, on February 3, 2010, this Court entered an Order Discharging the Debtor [ECF 19]. On April 21, 2010, this Court entered its Final Decree and closed the case [ECF 21],
On July 23, 2015, more than 5 years after the case was closed, Green Tree filed its Motion to Reopen to Compel Surrender of Real Property [ECF 23]. Green Tree moves this Court to enter an order, pursuant to 11 U.S.C. § 521(a)(2)(B), “barring the Debtors [sic] from continuing to contest the Foreclosure Action” styled Green Tree Servicing LLC v. Anastasia Kourgenis, et al., in the Seventeenth Judicial Circuit in and for Broward County Florida, case number CACE0902297 (the “Foreclosure Action”).
Analysis
11 U.S.C. § 521(a)(2)(B) states:
, The debtor shall ... (2) if an individual debtor’s schedule of assets and liabilities includes debts which are secured by property of the estate — (B) within 30 days after the first date set for the meeting of creditors under section 341(a), or within such additional time as *628the court, for cause, within such 30-day period fixes, perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph.
Here, the Debtor did not claim the Property as exempt and marked surrender on the Statement of Intentions [ECF 1]. However, it would appear, that the Debtor has continued to defend the foreclosure action in Broward County Circuit Court.
Laches
“Laches is a defense sounding in equity that serves to bar suit by a plaintiff ‘whose unexcused delay, if the suit were allowed, would be prejudicial to the defendant.’ ” See Black Warrior Riverkeeper, Inc. v. U.S. Army Corps of Engineers, 781 F.3d 1271, 1283 (11th Cir.2015) (citing Russell v. Todd, 309 U.S. 280, 60 S.Ct. 527, 84 L.Ed. 754 (1940)). One of the most fundamental principles of equity jurisprudence is that equity aids the vigilant, not those who sleep on their rights.1 This general rule was brilliantly summarized in the late 18th century by the English Lord Chancellor Camden2 in Smith v. Clay, 3 Brown Ch. 638:
A court of equity, which is never active in relief against conscience or public convenience, has always refused its aid to stale demands, where the party has slept upon his rights, and acquiesced for a great length of time. Nothing can call forth this court into activity but conscience, good faith, and reasonable diligence.
See 1 Pomeroy’s Equity Jurisprudence § 419 (1905).
This case was filed on October 22, 2009 [ECF 1], On February 3, 2010, this Court entered an order discharging the Debtor, thereby effecting stay relief to Green Tree. More than 5 years later, Green Tree seeks to reopen this bankruptcy case because the Debtor allegedly did not “perform her intention with respect to the real property” within 30 days of her statement of intention. Green Tree and its predecessors have slept on their rights. This Court, as a court of equity, will not assist it.
A fundamental premise of the bankruptcy system is to give honest debtors a fresh start. This Debtor completed her Chapter 7 bankruptcy and was issued a discharge on February 3, 2010. If this Court were to grant Green Tree’s Motion to Reopen [ECF 23], the Debtor’s fresh start would be undone, the Debtor would be dragged back into a bankruptcy that ended more than 5 years ago, and every aspect of the Debtor’s intervening financial life would be subject to being scrutinized years after the fact.
Green Tree’s Motion to Reopen'[ECF 23] seeks relief that could have been sought long ago. Reopening this case would prejudice the Debtor. Accordingly, the elements of the defense of laches are met and Green Tree is barred from the relief it seeks.
Additional analysis
A homeowner’s ability to fight a foreclosure action after agreeing to surrender the subject real property on his or her Statement of Intention in a prior bankruptcy case is not an issue of first impression in the Florida Bankruptcy Courts.
Judge Williamson, in In re Metzler, analyzed the meaning of the term “surrender” under 11 U.S.C. § 521. See In re Metzler, 530 B.R. 894 (Bankr.M.D.Fla.2015). In Metzler, the Court confirmed the Debtor’s Chapter 13 Plan (the “Plan”). The Plan *629indicated that the Debtor intended to surrender her homestead. After confirmation, the Debtor actively defended secured lender Wells Fargo’s foreclosure action in state court.
Judge Williamson concluded that, pursuant to 11 U.S.C. § 521, the Debtor had a duty to “perform her intention [to surrender the property] within 30 days after the date first set for the meeting of creditors,” See Metzler, 530 B.R. at 898. The Court concluded that “ ‘[surrender’ must mean something.” Id. at 900. Pulling from analysis in the First3 and Fourth4 Circuits, Judge Williamson concluded that surrender means that the debtor must relinquish secured property and make it available to the secured creditor by refraining from taking any overt act that impedes a secured creditor’s ability to foreclose its interest in secured property. Judge Williamson concluded that opposing a foreclosure action would constitute such an impermissible overt act.
Chief Judge Jennemann, in In re Plummer, also engaged in a critical discussion of the term “surrender.” However, in Plummer, the Court determined that
“ ‘surrender’ does not require the debtor to turn over physical possession of the collateral; the Bankruptcy Code uses the word ‘deliver’ when it intends physical turnover of property. Moreover, construing ‘surrender’ to require the debtor to deliver property to the secured creditor would circumvent state law obligations by allowing the secured creditor to bypass state foreclosure requirements. ‘Surrender’ is not equivalent to ‘foreclosure.’ Section 521 was not designed to provide a mechanism by which creditors may avoid obligations imposed by state law.”
In re Plummer, 513 B.R. 135, 143 (Bankr. M.D.Fla.2014).
This Court concludes that Chief Judge Jennemann’s nuanced approach in Plummer appropriately distinguishes between “surrender” and “foreclosure.” Whatever the meaning of “surrender” under Section 521, it cannot possibly mean that a party who, for instance, does not own the note and mortgage can nonetheless foreclose on the property, without the Debtor being heard, solely because the Debtor indicated an intent to surrender.
That is not to say that a Debtor who indicated an intent to surrender property in her bankruptcy case gets a free pass. Rather, she could properly be confronted in the state court foreclosure case with the legal consequences of her indicated intent to surrender. Having indicated an intent to surrender, and having obtained the benefits of her bankruptcy filing (including the issuance of a Chapter 7 discharge), she could be confronted by the foreclosing plaintiff with an argument that her continued defense of the foreclosure case is barred by judicial estoppel.
Judicial estoppel is an equitable doctrine applied at the discretion of the court. New Hampshire v. Maine, 532 U.S. 742, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001). The Eleventh Circuit considers two factors in the application of judicial estoppel in cases pending in a federal court and arising under federal law: (1) “it must be shown that the allegedly inconsistent positions were made under oath in a prior proceeding;” and (2) “such inconsistencies must be shown to have been calculated to make a mockery of the judicial system.” Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 at 1285 (11th Cir.2002). The doctrine of judicial estoppel is not *630fully developed in this Circuit, or indeed anywhere in the federal courts.5 Judicial estoppel has traditionally been applied to fact questions: Was the light red or green? Can the accident victim raise his arm above his head, or not? See K.A. Davis, Judicial Estoppel and Inconsistent Positions of Law Applied to Fact and Pure Law, 89 Cornell L.Rev. 191 (2003). The application of the doctrine to questions of pure law, or to mixed questions of fact and law, is far less developed. Over the last few years, it has been applied to debtors in bankruptcy who fail to disclose assets or contingent assets in their bankruptcy schedules but then later seek to pursue a known claim in post-bankruptcy litigation. In re Knight-Celotex, LLC, 695 F.3d 714 (7th Cir.2012); Guay v. Burack, 677 F.3d 10 (1st Cir.2012); Pavlov v. Ingles Markets, Inc., 236 Fed.Appx. 549 (11th Cir.2007).
The doctrine of judicial estop-pel has long been recognized in the Florida courts, beginning with the lead case of Palm Beach Co. v. Palm Beach Estates, 110 Fla. 77, 148 So. 544, 549 (1933), abrogated on other grounds, Ed Ricke & Sons Inc. v. Green, 609 So.2d 504, 506 (Fla. 1992). For judicial estoppel to apply under Florida law, (a) the position assumed in the prior trial must have been successfully maintained; (b) the positions must be clearly inconsistent; (c) the parties and issues must be the same; and (d) the party claiming estoppel must have been misled and have changed its position. Chase & Co. v. Little, 116 Fla. 667, 156 So. 609, 610 (1934). More recently, Florida courts have declined to apply judicial estoppel where the party sought to be estopped did not use “intentional self-contradiction to obtain an unfair advantage in litigation.” Grau v. Provident Life & Accident Insurance Co., 899 So.2d 396, 399 (Fla.4th DCA 2005). It is clear that the application of judicial estoppel in a Florida state court is nuanced, balanced, and discretionary.
But in all these cases dealing with judicial estoppel, the decision to apply judicial estoppel to bar a claim is always made in the second court: having taken a position in the bankruptcy court, a former debtor may be estopped from taking an inconsistent position in a second forum as a matter of judicial discretion as exercised by the second court. New Hampshire v. Maine, supra. Judicial estoppel can never be asserted in the prior forum so as to bind the subsequent forum, for to do so in a situation like that presented here would be for the bankruptcy court to intervene in post-bankruptcy litigation pending elsewhere. It is not this Court’s place to exercise the judicial discretion entrusted to the Circuit Court for Broward County in which the foreclosure case at issue is pending. To do so would be to interfere in the judicial deliberations of another sovereign and would turn federalism on its head. Just as federal courts below the Supreme Court cannot act in an appellate capacity over state court' judgments under the Rooker-Feldman Doctrine,6 so too are federal courts without jurisdiction to intervene in pending state court litigation to tell the state court how or if it should exercise its judicial discretion in cases pending before it. This Court rejects the notion that it can act as a quasi-theatrical deus ex machina to intervene in pending state *631court proceedings to “solve” them on behalf of a lender who has to date been unable to complete a foreclosure.7
Conclusion
The movant before the Court slept on its rights for 5 years. The equity jurisdiction of this Court cannot be exercised in favor of a creditor which has failed to be diligent. Laches bars the relief sought by the movant.
Even if laches did not bar the relief sought here, that relief is nonetheless unavailable because it is outside the jurisdiction of this Court. Federal courts simply cannot intervene in pending state court litigation to give instruction to a state court on how it should exercise its judicial discretion. Resolution of the foreclosure dispute in state court does not mean that the ex-Debtor gets a free pass. The foreclosing lender is fully entitled to argue judicial estoppel in the foreclosure case. It is in the forum of the state court that the lender may argue that the ex-Debtor is now barred by the equitable doctrine of judicial estoppel from raising whatever defenses the ex-Debtor is now asserting.
Accordingly, it is hereby ORDERED that Green Tree’s Motion to Reopen [ECF 28] is DENIED.
ORDERED.
. Vigilantibus non dormientibus aequitas sub-venit.
. Charles Pratt, the First Earl Camden, served as Lord Chancellor from 1766-70.
. In re Pratt, 462 F.3d 14 (1st Cir.2006).
. In re White, 487 F.3d 199 (4th Cir.2007).
. As the Supreme Court noted in New Hampshire v. Maine, the analytical factors it listed there were neither “inflexible prerequisites [n]or an exhaustive formula.” 532 U.S. at 751, 121 S.Ct. 1808.
. Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923); District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983).
. The Court certainly understands and sympathizes with the frustrations of a litigant whose efforts to assert its post-bankruptcy creditor rights have been thwarted, and understands the motivation to "do something” reflected in Metzler and similar cases. This Court is satisfied that principles of federalism preclude it from "doing something” in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498791/ | MEMORANDUM OF DECISION FOLLOWING JOINT TRIAL ON COMPLAINTS OBJECTING TO DISCHARGE
ALBERT S. DABROWSKI, United States Bankruptcy Judge
I.INTRODUCTION
The captioned jointly-tried and consolidated adversary proceedings were commenced by Samuel Bromberger and Henry Bromberger (hereinafter, together, the “Plaintiffs”) through the filing of complaints (hereinafter, together, the “Complaints”) objecting to the Debtor’s discharge. Through the Complaints the Plaintiffs collectively assert five statutory predicates for denial of discharge under Bankruptcy Code Section 727(a).
The Court, having now reviewed and considered the evidence presented at trial, and the parties’ respective briefs, determines the Debtor is not entitled to a discharge as more fully explained and particularized hereinafter.
II. JURISDICTION
■ The United States District Court for the District of Connecticut has subject matter jurisdiction over the instant adversary proceeding by virtue of 28 U.S.C. § 1334(b); and this Court derives its authority to hear and determine this matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1). This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(J).
III. BACKGROUND
A. Bankruptcy Case No. 06-308351
On June 7, 2006, the Debtor commenced Bankruptcy Case No. 06-30835 by the filing of a voluntary petition under Chapter 11 of the United States Bankruptcy Code staying pursuant to the automatic stay of 11 U.S.C. § 362(a) a State Court Action2 against the Debtor commenced by the Plaintiffs here. On April 30, 2007, the Debtor filed the Disclosure Statement, ECF No. 212, and Chapter 11 Plan of Reorganization, ECF No. 211, required by *634§ 1125(b) to which the Plaintiffs, as creditors, timely and vehemently objected3 in their Creditors Consolidated Objection to Approval of Debtor’s Disclosure Statement (hereinafter, the “Consolidated Objection”),4 ECF No. 235. Hearings scheduled for June 13 and June 27, and July 25, 2007, to consider the whether the Disclosure Statement contained “adequate information” as required by § 1125(a)(1) were continued to August 1, 2007, to, inter alia, provide the Debtor an opportunity to file an amended disclosure statement on or before July 30, 2007.
On July 30, 2007, the Debtor filed a First Amended Disclosure Statement, ECF No. 257, and an Amended Chapter 11 Plan of Reorganization, ECF No. 256, to which Colduct Partners, as unsecured creditors, vehemently objected in their Objection of Colduct Partners, to the First Amended Disclosure Statement of Dominic Pebum (hereinafter, the “Colduct Objection”), ECF No. 258.5 Following a hearing held August 1, 2007, the Court entered an Order converting the case to a case under Chapter 7, and a Chapter 7 Trustee (hereinafter, the “Trustee”) was appointed. ECF No. 259.
B. The Adversary Proceedings
1. Adversary Proceeding No. 08-S003 (Plaintiff Samuel Bromberger)
On January 9, 2008, Plaintiff Samuel Bromberger commenced Adversary Proceeding No. 08-3003. Specifically, through his complaint Samuel Bromberger seeks an order denying the Debtor a discharge under § 727(a)(2)(A) (pre-petition transfer of property with intent to hinder, delay or defraud creditors) (Count One), § 727(a)(2)(B) (post-petition transfer of property with intent to hinder, delay or defraud creditors) (Count Two), § 727(a)(3) (concealment or failure to keep or preserve information related to financial condition or business transactions) (Count Three), § 727(a)(4) (false oaths and accounts) (Count Four), and § 727(a)(5) (failure to account for loss of assets) (Count Five).6
*635
2. Adversary Proceeding No. 08-S00k (Plaintiff Henry Bromberger)
On January 10, 2008, Plaintiff Henry Bromberger commenced Adversary Proceeding No, 08-3004. Specifically, through his complaint Henry Bromberger seeks an order denying the Debtor a discharge under § 727(a)(2)(B) (Count One) and § 727(a)(2)(A)(Count Two).
C. The Trial
Trial on the Complaints commenced on July 22, continued on August 26 and November 3, and concluded the evening of November 6, 2014. At the commencement of the trial, the parties estimated they required only that morning for the presentation of evidence. However, at the end of that day, the Plaintiffs expressed their need for at least another day. The protracted nature of the trial was, in part, the product of the pro se nature of the Plaintiffs. During the trial they marked numerous documents for identification, less were actually offered, and far less were actually admitted in evidence, many for a lack of simple authentication (e.g., failure to offer certified records otherwise admissible). In addition, a significant cause of the prolonged nature of the trial, as discussed in more detail hereinafter, was the Debtor’s non-responsive, evasive and intentionally obstructive answers to the Plaintiffs’ questions which repeatedly derailed their inquiries, as was obviously intended.
During the trial the Court heard testimony from eight witnesses: the Debtor Dominic Peburn, Attorney Anthony Frau-lo, Robert Jaquish, Joline Peburn, Kenneth Lathrop, Yong Suk Seo, Debra Seip-mann, and Eric Shields.7 The parties submitted their respective briefs on January 8 and 9, 2015. No trial transcript was ordered.8
IV. DISCUSSION
“One of the central purposes of the Bankruptcy Code and the privilege of discharge is to allow the “honest but unfortunate debtor” to begin a new life free from debt”. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In the interest of protecting creditors, however, § 727 provides for denial of the discharge under twelve enumerated subsections, see 11 U.S.C. § 727(a)(l-12), four of which are asserted in the Plaintiffs’ Complaints as a basis for denying entry of a discharge in this case.9
Because § 727 imposes an extreme penalty it “must be construed strictly 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) (quoting Bank of Pa. v. Adlman (In re Adlman), 541 F.2d 999, 1003 (2d Cir.1976)).
In the instant proceedings, the determination of the Debtor’s entitlement to a discharge begins and ends upon a consideration of Count Three of Plaintiff Samuel Bromberger’s Complaint requesting a de*636nial of discharge pursuant to Bankruptcy-Code Section 727(a)(3) which provides:
(a) The court shall grant the debtor a discharge, unless—
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;
Distilled to its essence, Count Three alleges the Debtor to be masquerading as an honest and unfortunate debtor when in fact he deliberately concealed, falsified, and failed to keep, preserve and produce without justification documents and records related to his financial condition and business transactions precluding, obstructing and impeding creditors’ ability to “disentangle”, his financial affairs. See Samuel Bromberger Complaint, ¶¶ 149-180 (incorporating by reference ¶¶ 1-148).
In In Re Cacioli, 463 F.3d 229, 234 (2d Cir.2006),10 a panel of the Second Circuit, addressing the purpose and intent of § 727(a)(3), stated:
The purpose and intent of [§ 727(a)(3) ] of the Bankruptcy Act is to make the privilege of discharge dependent on a true presentation of the debt- or’s financial affairs.” In re Underhill, 82 F.2d 258, 260 (2d Cir.1936); see also Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir.1992) (stating that the purpose of § 727(a)(3) is “to give creditors and the bankruptcy court complete and accurate information concerning the status of the debtor’s affairs and to test the completeness of the disclosure requisite to a discharge”); In re Martin, 554 F.2d 55, 57-58 (2d Cir.1977) (stating that “[t]he denial of discharge serves both to deter inadequate record-keeping and to protect creditors whenever a failure to preserve records may have been motivated by fraud”). Section 727(a)(3) also ensures that “creditors are supplied with dependable information on which they can rely in tracing a debtor’s financial history.” Meridian Bank, 958 F.2d at 1230.
The Circuit Panel then discussed the two-step approach bifurcating the burden of proof under § 727(a)(3) as follows:
To implement this record-keeping requirement § 727(a)(3) provides a two-step approach. The initial burden lies with the creditor to show that the debtor failed to keep and preserve any books or records from which the debtor’s financial condition or business transactions might be ascertained. White v. Schoenfeld, 117 F.2d 131, 132 (2d Cir.1941). If the creditor shows the absence of records, the burden falls upon the bankrupt to satisfy the court that his failure to produce them was justified. White, 117 F.2d at 132; see also, In re Sandow, 151 F.2d 807, 809 (2d Cir.1945) (“The statute puts the burden squarely upon the bankrupt who produces no financial records to produce at least a satisfactory explanation of their absence.”); Underhill, 82 F.2d at 260 (“[Each] ease must stand upon its own facts with the inquiry always as to whether the bankrupt has sustained [the] burden of justification *637which the statute places upon him for his failure to keep adequate records.”).
Id. at 235 (Emphasis added).
A. Step One — The Plaintiffs Have Met Their Initial Burden And Established That The Debtor Concealed, and Failed To Disclose and Produce Books Or Records From Which His Financial Condition And Business Transactions Might Be Ascertained
With regard to Count Three, the Debt- or’s Post-Trial Brief, Adv. P. 08-3003, ECF No. 141, at 5-6, simply argues an alleged failure of the Plaintiffs’ to satisfy their initial burden to demonstrate an absence of records,11 and merely states:
[Count Three] requires the plaintiff to prove that Peburn has concealed, destroyed, mutilated, falsified, or failed to keep or preserve recorded information from which his financial condition might be ascertained.
The objecting creditor must prove that Peburn failed to provide or maintain sufficient records to allow creditors or the Trustee to evaluate or reconstruct the present condition of the bankrupt estate. The plaintiff states in excess of thirty paragraphs to support his claim of a violation of this subsection.
Peburn state[s], in objection, that none of the allegation[s] contained in this [Count] are supported by any admitted document or testimony.
Therefore, the plaintiff has not sustained his burden.
(Emphasis added).
The Debtor’s assertion in his Post-Trial Brief that the Plaintiffs have not satisfied their initial burden, defies the trial record, and, in fact, is directly contrary to the Debtor’s own testimony that he produced no financial records.12 The Plaintiffs clearly satisfied their initial burden under Cacioli, causing the burden shift to the Debtor “to satisfy the court that his failure to produce [records] was justified”. Id.
B. Step Two — The Debtor’s Failure To Keep, Preserve And Produce Books And Records From which his Financial Condition And Business Transactions Might Be Ascertained Was Not Justified.
The Bankruptcy Code does not specify or define “justified” as that word is used in § 727(a)(3). However, Cacioli instructs that:
whether a debtor’s failure to keep books is justified is “a question in each instance of reasonableness in the particular circumstances.” Underhill, 82 F.2d at 259-60; see also, Meridian Bank, 958 F.2d at 1231 (stating that “[t]he issue of justification depends largely on what a normal, reasonable person would do under similar circumstances”). It is a “loose test, concerned with the practical problems of what can be expected of the type of person and type of business in*638volved.” Morris Plan Indus. Bank of N.Y. v. Dreher, 144 F.2d 60, 61 (2d Cir.1944).
Id.
In addressing this issue the Court, of course, is fully cognizant of Cacioli’s reference to In re Martin, 554 F.2d 55 (2d Cir.1977), and the determination therein that it was error to hold a debtor strictly responsible for the loss of financial records regardless of fault stating:
where records have been lost or destroyed through no fault of the bankrupt, any prophylactic function to be performed by [§ 727(a)(3)] becomes minimal any is outweighed by the Bankruptcy Act’s general policy in favor of giving the bankrupt a fresh start”,
and holding that
[discharge should not be denied unless the [bankruptcy judge] finds this testimony to be false or concludes that the bankrupt was remiss in his efforts to trace the missing records.
Id. at 57-58.
At the outset the Court notes that the Debtor’s Posh-Trial Brief fails to discuss Cacioli’s second step on which the Debtor now has the burden. Notwithstanding this failure, the Court has reviewed the trial record in its entirety to. ascertain whether through his testimony, or any other component of the record, the Debtor has satisfied this burden.
1. The Debtor’s Testimony Explaining His Failure to Produce Records As They Were No Longer Available To Him Through No Fault Of His Own Was Not Credible And He Was Made No Effort To Trace Or Recover Them
The Debtor was engaged in a business involving numerous complex commercial real estate transactions.13 The nature, volume, extent and complexity of the Debt- or’s many numerous business transactions compelled the creation and preservation of meticulous records (i) as necessary and essential to his business operations, and (ii) with such records being indispensable to decipher the financial condition and aspects of that business activity. In light of the sheer number and complexity of his property and other business transactions, the Debtor could not have functioned without keeping and maintaining such records. And, the records and documents related to the Debtor’s business activities, transactions and engagements, were originally created, maintained, and preserved by the • Debtor himself, who was responsible for the direction of the financial side of his business, its day-to-day management, and maintenance and custody of the requisite books and records.
Nevertheless, upon repetitive demands of the Trustee incident to Section 341 meetings, the Debtor represented he could not find any documents, expanding that statement at trial with the explanation that some were lost in a basement flood, others *639were in the exclusive possession of his spouse, with the balance being records and documents he could not find. The Court finds this testimony incredible.
The Debtor’s testimony in this regard finds no support or corroboration in the record and is simply a bald assertion by the Debtor who, as noted hereinafter, enjoys no credibility of any kind with this Court. It defies common sense that the Debtor’s voluminous, extensive and important business records would all be lost or no longer available to him. Furthermore, as to what appear to be a substantial quantity of documents that he simply could not find, the Debtor made no effort to trace them as required for a discharge. See Martin, 554 F.2d at 58 (“[discharge should not be denied unless the referee finds this testimony to be false or concludes that the bankrupt was remiss in his efforts to trace the missing records”).
Moreover, the testimony of Eric Shields,14 a personal friend of the Debtor, contradicted the testimony of the Debtor that he had no records. Shields was initially understood by both the Court and the Plaintiffs to have been called to testify by the Debtor as an. expert witness. Of significance was Shield’s preliminary testimony that during the last three and one half years, the Debtor, as his sole source, provided him with documents and records from which he and the Debtor were able to piece together a synopsis of what really happened which he planned to convey to the Court.15 Shield’s testimony stands in stark conflict with and impeaches the Debtor’s own testimony that he, himself, had no records, and is indicative of a concealment of records by the Debtor.
The Court also notes that the Debtor had a strong motivation to cover up his fraudulent activities and conduct, and the related conduct of others he directed and controlled. The record is replete with credible testimony from others that the Debtor engaged in fraudulent or otherwise egregious behavior. Inter alia, there was credible testimony from Fraulo that the Debtor conspired to defraud the FDIC,16 used and threatened his former spouse to implement his fraudulent schemes, and engaged his own attorney to implement and achieve illicit agendas. There was credible evidence that he conspired with others to defraud banking institutions causing his spouse to sign false financial documents to obtain increasingly larger amounts of monetary lending which, absent the fraudulent representations, would clearly never have been approved. For example, Seipmann *640credibly testified that she signed multiple false lending and mortgage documents regarding property at Stilson Hill at the direction of the Debtor so as not to endure his physical abuse, including being thrown up against a wall. Moreover, she testified that in connection with every mortgage she took out cash that went to the Debtor, who controlled all aspects of this transactions. He deliberately and wilfully used other parties and their accounts to conceal illicit business transactions and to conceal and cover his own involvement therein.
In certain instances, such as his misapplication bankruptcy estate funds, where his own wrongful conduct was clear and could not practically be imputed to others, the Debtor at trial admitted to his wrongful conduct. Specifically, he admitted to wrongful payments from bankruptcy estate funds to himself without authority “justifying” , such conduct by the simple statement “I needed the money”. He acknowledged false information on his schedules and Monthly Operating Reports reflecting non-existent alimony payments. However, in most other instances, being sophisticated and experienced enough to know he should not be the one to make false representations, the Debtor arranged, convinced and coerced others to assume that role and risk. Consequently, in these latter instances his own records might not present a citadel of crystal clear information regarding his own misconduct in those ventures. Nevertheless, as the Debtor controlled and benefitted from most if not all of these schemes, it is transparently obvious that production of his own records would have added depth and color to his role in directing and controlling the illicit conduct of others and illuminated his own benefit therefrom.
In addition, the Court finds that the Debtor’s extensive trial testimony and related conduct was virtually never responsive, but far beyond that, was regularly obstructive, and deliberately evasive. The sarcasm and disdain attending many of the Debtor’s non-responsive answers to admittedly poorly framed questions posed by the pro se Plaintiffs was a calculated attempt to derail their inquiries, to confuse, confound and scramble the record beyond the brink of intelligibility attended by his objective to conceal the truth.17
In many respects, the Debtor’s behavior in this case can be fairly viewed as an extension of his conduct in the State Court Action. During the trial of these proceedings the Debtor acknowledged that in connection with the State Court Action he was “under the gun,” by virtue of multiple asset disclosure orders which he ignored. Ultimately, the Debtor defied disclosure orders issued by four (4) state court judges, and upon the eve of a contempt citation for such defiance, filed the present bankruptcy petition staying the State Court Action by operation of the automatic stay.
While the Debtor avoided the likely imposition of sanctions in the State Court Action through operation of the automatic bankruptcy stay, he was then, sanctioned by the undersigned judge in these proceedings for his wilful defiance of this Court’s Consolidated Order ... of Contempt and for Imposition of Sanctions, ECF No. 73, and for “obstructive and dilatory conduct which has impeded the orderly progress of these proceedings”. See Second Consolidated Order ... of Contempt and For Sanctions, ECF No. 93, pp. 2 & 3 (fnl).
*641Watching this sophisticated Debtor’s further pursuit of his strategy of deliberate non disclosure of information at trial by his obstructive, non-responsive, and evasive trial testimony and conduct, intended and employed to confuse, confound and obstruct the pro se Plaintiffs’ legitimate attempts to inquire into his financial and business affairs, confirmed what was already evident from the record by conduct that preceded the trial, that this is a debtor pursuing an abusive bankruptcy agenda. Indeed, in this case the Debtor’s conduct in virtually every respect depicts the polar opposite of the fair and honest debtor requisite for discharge relief.
Working with Attorney Fraulo to achieve illicit agendas,18 masking his control of property by placing it in trust or the hands of others, causing his wife to transfer property to her sister as “the Brombergers were after it”, coercing his wife at times by physical abuse, including throwing her up against a wall, to encumber property with ever increasing mortgages 19 based upon false information, were all part of this illicit agenda.
The Debtor at various times during his testimony explained false statements as well as documents formed for illegitimate purposes now surfacing in his financial wake by repeatedly stating, inter alia, “I didn’t understand,” “I relied on my attorney to fix it later,” or it was a fraud perpetrated by others without my knowledge. Coming from the sophisticated Debtor here who devised, implemented and controlled the underlying schemes, the Court finds these explanations pure nonsense. The Debtor is an experienced and well-informed businessman who knew at all times precisely what he was doing. The Court finds the Debtor’s testimony coloring himself innocent of and oblivious to his former spouse’s false financial representations and conduct, to be a bold faced lie intended to shield himself from the consequences of his own control and direction of her fraudulent conduct.20
Having observed and heard the Debtor’s testimony at trial, the Court views the Debtor like the captain of a ship who sails wherever he desires without reference to any moral compass, and then, when the vessel runs aground, falsely proclaims he was below deck fast asleep, unjustifiably faulting the crew for the wreck. The Debtor’s failure to produce records was nothing more than a simple strategy calibrated to avoid the light of day being cast upon his illicit business related conduct evidenced by those records.
In summary, the Debtor, motivated to conceal fraudulent and egregious conduct by himself and others acting at his direction, failed to produce any records or documents from which his financial condition and .relevant business transactions might be ascertained. The Court finds the Debtor’s explanation that he had no records to produce was false, and there was no other evidence to support a finding that his failure to produce any of the requisite records and documents was justified.
*642
2. The Records Eventually Produced To the Trustee By Attorney Fraulo Were Not Business Records of the Debtor, And Were Not Otherwise Documents From Which The Debtors Financial Condition or Business Transactions Could be Ascertained.
During his testimony the Debtor noted that Fraulo had provided documents to the Trustee and, at one point, made a supercilious statement in the form of advice to the Plaintiffs, that “you can get [certain documents] from Fraulo”, or words to that effect. However, at no time did the Debt- or testify that he delegated to Fraulo or relied him to keep or maintain his business records. Nor was there an assignment to or division of roles wherein Fraulo was responsible for, or evidence the Debtor relied upon him to be responsible for, making or maintaining the Debtor’s business records. And Fraulo did not consider himself to be a record maker or keeper for the Debtor. See Cacioli, 463 F.3d at 238, citing as instructive Lansdowne v. Cox (In re Cox), 41 F.3d 1294, 1300 (9th Cir.1994) (appeal from the bankruptcy court’s decision on remand from Cox I) (“Cox II”), noting that in Cox II “the court focused closely on whether the partnership had a clear division of partnership roles .... ” (Emphasis added).
While Fraulo eventually produced to the Trustee a substantial quantity of his own documents, those documents were related to his legal actions and related assistance to the Debtor in certain matters. There was no argument in the Debtor’s Post-Trial Brief or testimony of the Debtor, that Fraulo, who was one of the Debtor’s several attorneys, was responsible for the much different and broader direction of the financial side of the Debtor’s business, its day-to-day management, or for the maintenance and custody of the Debtor’s books and records.
Furthermore, Fraulo belatedly produced his records in response to a subpoena and requests by the Trustee only after the Debtor claimed at 341 meetings that he could find no documents. Moreover, the documents produced by Fraulo were provided in piecemeal fashion, were neither chronological, alphabetical, or organized in any manner, and were described by Fraulo as a “document dump”. Even if timely produced these documents were limited to projects in which Fraulo was engaged representing only a small part of the Debtor’s broad ranging and extensive business activities. As such, the belated, gradational production of Fraulo’s own documents was insufficient to permit any party to timely, reasonably and effectively trace, evaluate, and reconstruct the Debtor’s relevant financial condition or business transactions.
Finally, at trial the Debtor denounced Fraulo as a “liar” and conspirator against him.21 In light of this testimony, the Debt- or cannot credibly maintain that the records Fraulo provided to the Trustee reflected a “true presentation of the debtor’s financial affairs,” provided “creditors and the bankruptcy court with complete and accurate information,” and “ensured creditors are supplied with dependable information on which they can rely in tracing a debtor’s financial history.” See page 636, supra, noting Cacioli’s discussion of the purpose and intent of § 727(a)(3) (citations omitted) (emphasis added). In summary, even if the Debtor’s reference to Fraulo’s production of records and/or his gratuitous trial comment that the Plaintiffs could get *643documents from Fraulo was an attempt to justify his own failure to produce records, that attempt falls woefully short of satisfactory explanation of their absence.
y. CONCLUSION AND ORDER
The Plaintiffs has established that the Debtor deliberately concealed, and failed to keep, preserve and produce any documents and records from which the Debt- or’s financial condition or business transactions might be ascertained, and the Court has further determined that there is no credible evidence that the Debtor’s act of concealment and his failure to produce such documents was justified.
Accordingly,
IT IS HEREBY ORDERED that the objection to the Debtor’s discharge based upon Bankruptcy Code Section 727(a)(3) is SUSTAINED and entry of a discharge is DENIED.22
This Memorandum of Decision shall constitute this Court’s Findings of Fact and Conclusions of Law pursuant to Fed. R. Bankr.P. 7052, and, as the Plaintiffs’ joined each other in prosecuting their respective complaints, a Judgment shall enter simultaneously herewith in favor of each Plaintiff in the above-referenced Adversary Proceedings, and an Order Denying Discharge shall enter simultaneously herewith in Case No. 06-30835.
. The Debtor, having commenced three prior bankruptcy cases, is no stranger to this Court (Case No. 94-24265 (Chapter 7 filed December 12, 1994, discharge ordered June 3, 1995, closed August 31, 1995); Case No. 96-23097 (Chapter 11 filed September 6, 1996, dismissed May 21, 1997, closed August 26, 1997) (docket reflects no schedules filed); Case No. 06-30265 (Chapter 11 filed March 8, 2006, dismissed on motion of Debtor June 7, 2006, closed June 20, 2006)).
. On or about December 10, 2003, the Plaintiffs initiated a lawsuit in the Superior Court for the State of Connecticut, Bromberger v. Peburn, Case No. CV-06-5002722S, Judicial District of New Britain at New Britain (heretofore and hereinafter, the "State Court Action”) seeking damages, attorney's fees and costs allegedly arising from the sale of real property.
. The Internal Revenue Service also filed an Objection to Approval of Debtor’s Disclosure Statement, ECF No. 227.
. Through the Consolidated Objection the Plaintiffs asserted, inter alia, that the Disclosure Statement failed to provide "adequate information,” see 1125(a)(1), ¶ 3, contained "misleading” and inconsistent valuation information "rendering it impossible ... to determine whether approval or disapproval of the Plan is in a creditor’s best interest,” ¶ 4, asserting the valuation information was “useless,” ¶ 7, citing the Debtor’s repeated failures of recollection, ¶¶ 9 & 13, and alleging that the Debtor’s behavior included a “breach of terms of an Operating Agreement,” "theft,” "embezzlement” and "misappropriation of assets,” "misapplication of funds,” noncompliance with tax obligations, and "excessive litigiousness”. V 12.
. The Colduct Objection asserted the First Amended Disclosure Statement, inter alia, lacked “adequate information,” was connected to a "plan that cannot be confirmed as a matter of law,” ¶¶ 3, 22-26, with "much incorrect” and "false” information contained therein, ¶ 7, failed to disclose relevant and important information and assets, ¶¶ 9 & 10, 12-16, and was otherwise "vague” and "useless”, ¶ 17, and other deficiencies, appearing to the Court, like the assertions in Consolidated Objection as to the original Disclosure Statement, see fn. 4, to have considerable merit, and which paved the road to the Court’s Order converting the Chapter 11 case to a case under Chapter 7, as noted above.
.In his complaint, Samuel Bromberger labels his causes of actions “Claims” with the "First Claim bifurcated into two "counts” each related to a specific property. In his complaint Henry Bromberger labels his causes of action "First (& Second) Cause of Action”. For purposes of this Memorandum of Decision the Court refers to Samuel Brom-berger’s "Claims” and Henry Bromberger’s "Causes of Action” as "Counts”.
.The Debtor testified over the course of three days — July 22, November 3 and November 6, 2014. Attorney Fraulo testified on July 22, and was recalled on November 6, 2014. Ja-quish, Joline Peburn and Lathrop testified on July 22, 2014. Seo testified on August 26, and was recalled on November 6, 2014. Se-ipmann testified on August 26, and continued on November 3, 2014. Shields testified on November 6, 2014.
. The Court has reviewed the digital audio recordings of the trial in their entirety.
. Sub-sections 727(a)(2),(3), (4) & (5). As previously noted the Plaintiffs assert both pre-petition and post-petition transfers of property each with intent to hinder, delay or defraud creditors, under (A) & (B), respectively, of subsection 727(a)(2).
. In Cacioli, the panel affhyned a decision by the United States District Court in D.A.N. Joint Venture, L.P. v. Cacioli (In Re Cacioli), 332 B.R. 514 (D.Conn.2005), affirming the decision by this Court in Cadlerock Joint Venture, L.P. v. Cacioli (In Re Cacioli), 285 B.R. 778 (Bankr.D.Conn.2002).
. The remaining balance of the response asserts:
"[t]he fact that the trustee has not filed an adversary proceeding, or joined in this proceeding is sufficient evidence that the debt- or has not violated the provisions of this section and the trustee has not been prevented from determining the condition of the bankrupt estate”.
The trustee’s failure to commence an independent adversary proceeding, and/or formally join the Brombergers in the present proceedings, is irrelevant. The Debtor's assertion that Trustee has not been prevented from determining the condition of the Debt- or’s bankrupt estate is not supported or suggested by the record of this case and proceeding.
. The Debtor’s explanation for the absence of records is discussed in Part IV(B), infra.
. For example, as one part of his business ventures, the Debtor located, developed and eventually sold parcels of real property, including approximately 300 condominiums in and about New Milford, Connecticut. This finding is consistent with a prior determination by the undersigned judge in its February 26, 2013 Memorandum of Decision on Chapter 7 Trustee’s Complaint to Recover Funds in this case in Chorches. Chapter 7 Trustee v. Trinity Lutheran Church, Adv. P. No. 10-03022, p.4, ¶ 2, ECF No. 72 (At all relevant times, the Debtor [Peburn] was a sophisticated real estate broker, developer and contractor, with over fifty years of experience in developing commercial properties, including approximately 200 to 300 commercial units of real property in and about New Milford, Connecticut.”).
. Shields testified that the essence of a prior professional relationship with the Debtor was simply finding property for him to develop. Subsequently, he owned and operated a restaurant, and then become a car salesmen.
. Shields initially testified on the afternoon of November 6, 2014, that he had been present during all the testimony, on July 22, August 26, November 3, and the morning and early afternoon of November 6, 2014. When the Plaintiffs, on voir dire, queried Shields as to what he intended to add to the matter, he responded that he planned to assist the Court and the Plaintiffs to understand the evidence. Upon further inquiry by the Court counsel for the Debtor stated he was not offering Shields as an expert and excused him from further testimony.
.The Debtor’s role in attempting to recover property from the Federal Deposit Insurance Corporation is illustrative of his use of others to implement fraudulent schemes for his benefit. According to Fraulo, in a negotiated sale of the Debtor’s former residence foreclosed upon by the FDIC, the Debtor, being unable to take title back himself in light of an FDIC policy precluding a foreclosed former title holder from obtaining such property without paying the full amount on the outstanding debt thereon, the Debtor, represented and assisted by Attorney Fraulo in, a manner Attorney Fraulo testified was constructed for the ultimate benefit of the Debtor, the Debtor needed and caused a third party to take title.
. Leading the Court on numerous instances to instruct him to confine his testimony to simply answering the Plaintiffs questions.
. In response to questioning by the Debtor’s attorney, Fraulo testified, inter alia, "as you know, what I was doing could be ethically challenged”.
. For example, the Debtor, assisted by an accommodating loan officer, coerced his spouse to sign blatantly false loan applications on a two bedroom residence starting with applications in the monetary amount of $160,000, increasing to $260,000, then to $620,000 — loans far in excess of value of the collateral.
.Seipmann credibly testified that on numerous occasions she signed documents without knowing what she was signing, more specifically, that she "was directed by the Debtor to go to Attorney Fraulo's office to sign documents — I did not pay attention — -just signed”, or words to that effect.
. In response to questioning by the Debtor’s own attorney, Fraulo provided insight into the nature of his activity on behalf of the Debtor stating "as you know, what I was doing could be ethically challenged,” suggesting Fraulo may have conspired with the Debtor, not against him.
. Having determined that the Debtor is not entitled to entry of a discharge on the Count Three discussed herein, it is unnecessary for the Court to consider the balance of Counts set forth in the Complaints. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498793/ | *679BENCH DECISION1 ON REQUEST FOR STAY
Robert E. Gerber, United States Bankruptcy Judge
In this contested matter in the chapter 11 case of debtor Motors Liquidation Company, the Ignition Switch Plaintiffs2 move, under Fed.R.Bankr.P. 8007(a),3 for a stay pending their appeal from the June 1, 2015 Judgment4 of a contemplated $135 million distribution from the GUC Trust to its unitholders (the “Unitholders”). I’m granting the request for a stay, subject to the posting of a bond in the amount of $10.6 million. My Findings of Fact, Conclusions of Law, and bases for the exercise of my discretion in connection with this determination follow.
Findings of Fact
Background facts are set forth in the Motion to Enforce Decision,5 familiarity with which is assumed. As additional Findings of Fact, I find as facts each of the facts stipulated to between the two sides.6 I also accept as true (a) the underlying factual information in the declaration and subsequent testimony of the GUC Trust’s expert, Andrew Scruton, and (b) the tables and graphs showing market information submitted by (x) Mr. Scruton and (y) the Ignition Switch Plaintiffs— though I rely on the superseding Scruton Decl. Supplemental Exhibits (B-l through F-l). I then draw my own factual conclusions, and substitute my own judgment, based on the evidence presented to me as to the projected yields that GUC Trust Beneficiaries could reasonably be expected to obtain if distributions to them were not stayed.
I find particularly significant the following facts, which bear on the exercise of my discretion on this motion:
As of June 30, 2015, about 32 million units of beneficial interest in the GUC Trust (each, a “GUC Trust Unit” or “Unit”) were outstanding, corresponding to about $32 billion in Allowed General Unsecured Claims.
As of June 30, 2015, there was only one remaining Disputed General Unsecured Claim, in an asserted amount of approximately $20 million, which claim is subject to pending objections filed by the GUC Trust. The Ignition Switch Plaintiffs have expressed the intention to file one or more late proofs of claim (including one or more class proofs of claim for amounts as high as $10 billion), but they have not yet done so.
After recent dispositions of New GM stock and warrants received by Old GM incident to the 363 Sale of the bulk of its assets to New GM, the GUC Trust holds approximately $809.9 million, all or substantially all of which has been invested in “Permissible Investments,” as defined in the GUC Trust Agreement, which are very safe investments but which as a result get a very low yield.
*680Under the Plan and its organizational documents, the GUC Trust needs to reserve approximately $792 million, for a variety of administrative costs and future obligations. But it expects to distribute approximately $135 million of its assets in mid-November 2015, and will do so unless enjoined.
Additionally, the GUC Trust anticipates that it will be in a position to make a further distribution of approximately $109 million to holders of Units at a later time, expected to be a year or more from now. Thus there is a total of $244 million that the GUC Trust has or expects to have available for distribution that the Ignition Switch Plaintiffs, sooner or later, wish to freeze.7
Prior to the Stock Sale, to the limited extent the GUC Trust then held cash, it held such cash in certain Permissible Investments as well. The average rate of return for such investments was approximately 0.08% per annum for 2013, 0.15% per annum for 2014, and 0.10% per annum for 2015. The GUC Trust now has quite a bit more cash. It is investing its assets in U.S. Treasury obligations, and expects to continue to do so. The GUC Trust Administrator anticipates that through year end, the average rate of return on these investments will be approximately 0.12% per annum.
The U.S. Treasury obligations in which the GUC Trust intends to invest its funds are Permissible Investments, but there may be other Permissible Investments that draw somewhat higher yields. The Ignition Switch Plaintiffs contend that the GUC Trust has been unduly cautious in choosing to invest its assets solely in U.S. Treasury obligations when there are other Permissible Investments that draw higher yields — which may be as high as “ten times that amount”8 (ie., up to about 1.2% per annum). Mr. Scruton understood the reason for investing in U.S. Treasury obligations alone to be the GUC Trust’s desire to avoid the risk of being deemed to be an “investment company” under the Investment Company Act of 1940, and'thus being subject to the additional regulation and resulting expense of such status.9 No evidence was submitted to me that the GUC Trust’s explanation for investing its assets in U.S. Treasury obligations was pretextual, and I accept the facts on the ground as they are. Thus I find that for as long as a stay is imposed, the GUC Trust can reasonably be expected to earn a very modest 0.12% on the investments — U.S. Treasuries — that it now is holding.
Each side provided information on yields that might be obtained on alternative investments by GUC Trust Beneficiaries if they received the distributions that the Ignition Switch Plaintiffs wish to enjoin. They were set forth in Scru-ton. Decl. Supp. Exhs. B-l through F-1, and PI. Exhs. B, C, D, and F. The Court has no reason to doubt the accu*681racy of the underlying data in any of those exhibits, and accepts that data as accurate. But it forms its own view as to the use of that data — which to avoid repetition, appears only in the discussion below.
Under a feature of the Sale Agreement,10 called the “Accordion Feature,” New GM is obligated to provide additional consideration in the form of additional shares of New GM Common Stock if the aggregate amount of Allowed General Unsecured Claims against the Debtors exceeds $35 billion — though it is capped at an incremental $7 billion, i.e., at the level of $42 billion in total Allowed General Unsecured Claims. As of June 30, 2015, the current aggregate value of Allowed General Unsecured Claims is a little less than $32 billion, more than $3 billion below that threshold amount. I thus find that based on the claims filed and allowed or disallowed to date, and on the one disputed claim (for $20 million) that is still pending, there is no reasonable expectation that the amount of General Unsecured Claims would reach $35 billion.
If the aggregate value of Allowed General Unsecured Claims reaches $42 billion, then New GM would be required to contribute the full value available pursuant to the Accordion Feature, which is 3.0 million shares of New GM Common Stock, worth approximately $921.6 million as of market-close on September 14, 2015.
The Ignition Switch Plaintiffs say their claims are “conservatively worth $10 billion.” (I used a $7 to $10 billion figure earlier in the Motion to Enforce Decision, but then and now, I have been merely reporting accounts of what was being sought). I cannot and do not express a view as to whether they’re right. But assuming, for the sake of argument, that claims of that amount were allowed, those claims could push the overall claims amount over the $35 billion level, and, perhaps, to the $42 billion level.
The Ignition Switch Plaintiffs seek to tap the $244 million which the GUC Trust now has on hand and that it wishes to distribute in November and in the future, and the $921.6 million in value that would be allowed under the Accordion Feature if the $42 billion threshold were reached.
Discussion11
Determining .this motion requires me to decide:
(1) whether any stay of distributions can be granted at all (as against the contention that doing so would amount to an impermissible modification of the Plan);
(2) if so, whether the requirements for a stay have been satisfied;
(3) if so, whether a bond should be imposed as a condition to the requested stay; and
*682(4) if so, in what amount.
I conclude that under the facts here:
(1) a stay can be granted, assuming that the requirements for obtaining a stay are otherwise met;
(2) the requirements for a stay have been satisfied (or, more precisely, would be satisfied if, but only if, a satisfactory bond were posted);
(3) a bond must indeed be posted, to protect GUC Trust Unitholders from the substantial loss they would suffer by reason of unjustified delay in receiving their GUC Trust distributions; and
(4) the amount of the bond must be set at $10.6 million.
1. Would a Stay Be Violative of the Plan?
As a threshold matter, the GUC Trust contends that I should not even consider the potential grant of a stay delaying distributions — arguing that “[pursuant to the Plan and the GUC Trust Agreement, the GUC Trust is not only authorized, it is required to make quarterly distributions to GUC Trust Unitholders to the extent that assets of the GUC Trust are available for distribution and exceed certain thresholds.”12 On that premise, the GUC Trust further argues that “[a]ny attempt to enjoin a liquidating trustee from making a distribution to creditors as required by a plan and liquidating trust agreement constitutes a proposed plan modification that is governed by Section 1127(b) of the Bankruptcy Code” and that there has been no compliance with section 1127(b).13
While I agree that additional requirements that section 1127(b) would impose plainly have not been satisfied, I otherwise cannot agree.
As the predicate for this contention, the GUC Trust cites a provision of the Plan— its Paragraph 6.2© — but does not quote it. That paragraph, in an Article 6.2 captioned “The GUC Trust” and itself labeled “Distribution of GUC Trust Assets,” provides, in relevant part:
Subject to Section 5.2(a) hereof, the GUC Trust Administrator shall distribute quarterly (to the extent there are sufficient assets available for distribution in accordance with the GUC Trust Agreement), beginning on the first Business Day following the Effective Date, or as soon thereafter as is practicable, the appropriate amount of New GM Securities (and other distributions of Cash, if any) to holders of Allowed General Unsecured Claims and/or GUC Trust Units, as applicable.14
That provision follows a separate provision of the Plan, its Paragraph 4.3(a) (in an earlier Article 4.3 providing for the treatment of general unsecured claims), providing (along with other unsecured creditor entitlements) for an initial distribution to Old GM unsecured creditors on or about the Plan’s Effective Date of New GM stock and warrants, and GUC Trust Units, which would provide Old GM creditors with the bulk of their distributions.
Especially when read in context, Paragraph 6.2(i) is a timing provision, calling for supplemental distributions to Unithold-ers (who would be a combination of initial Old GM unsecured creditors and subsequent purchasers of GUC Trust Units) “to the extent there are sufficient assets available for distribution,” and then the “appropriate amount.” But it does not specify how those matters are to be determined, or what the GUC Trust should do when a court determines that assets should not be *683regarded as available for distribution or the distribution of assets is inappropriate.
That is not to say that interfering with Unitholder distributions isn’t serious business. Unitholders have a justified expectation of receiving those distributions in the absence of very good reasons to the contrary. In fact, that very important concern underlies several of my mootness conclusions as discussed back at the time of the Motion to'Enforce Decision. But with appropriate protections, a judicial determination that payment now isn’t “appropriate” — and a stay making funds temporarily unavailable for distribution— wouldn’t be violative of the Plan.15
2. Requirements for a Stay
Though I’m not as persuaded as the Ignition Switch Plaintiffs seem to be that the standards applicable to a Rule 8007(a)(1)(C) injunction motion should be regarded as the same as those to a Rule 8007(a)(1)(A) motion for a stay of an order or judgment itself, I don’t need to decide that, as I don’t think the difference here matters. The applicable standards on similar requests have been stated slightly differently, but they can be distilled into a requirement of irreparable injury; the degree of prejudice to the party to be enjoined; a showing of a likelihood of success (albeit to somewhat varying degrees); and the public interest.
(a) Irreparable Injury
First, I think there’s no doubt that the Ignition Switch Plaintiffs have shown irreparable injury. I don’t need to decide, and don’t decide, whether the possibility that .an appeal would be mooted or further mooted is sufficient by itself to constitute irreparable injury — since here, as a practical matter, it would be impossible or very difficult to get any distributions back. So I consider this factor satisfied, and consider it in a major way.
(b) Prejudice to the Other Side
The second factor, prejudice to the other side, can be looked at in two separate ways. At one level (the level at which the Ignition Switch Plaintiffs prefer to examine it), the requested relief amounts to a preservation of the status quo, which by itself represents no more than modest injury. But as the GUC Trust properly observes, that view ignores an obvious injury of another type. The GUC Trust has shown that the yields that the GUC Trust gets on its invested cash, in the current interest rate environment, are extraordinarily low — only 0.12%. That’s quite a bit less than 1% — very close to zero. And investing in instruments that might generate materially higher yields isn’t an option, because the GUC Trust is limited to investing in Permitted Investments, and for very good reason. The GUC Trust is holding its reserves as a fiduciary, with the *684duty to protect the principal for its beneficiaries.
So there’s what one might call a species of negative arbitrage here. Holding on to cash equivalents that generate such a low yield is dreadful from a business perspective. Thus I conclude that the GUC Trust — and in particular, its beneficiaries — would be prejudiced too, because it’s been shown to my satisfaction that GUC Trust Unitholders could get greater yields once they received their distributions, and they’ll suffer material losses by reason of the difference.
Generally, and here as well, I consider prejudice to the party to be enjoined to be weighed quite heavily. But I also recognize that prejudice of this character can at least often be addressed by a bond, so we’ll come back to this momentarily.
(c) Likelihood of Success
Then I turn to the requirement for a showing of likelihood of success. How much of a likelihood of success needs to be shown depends somewhat on whether we look at this as we might if this were an application for a stay pending appeal— which it is in one sense, but not in another — or an ordinary request for a TRO or preliminary injunction.
I say in one sense but not in another because the Ignition Switch Plaintiffs are not asking for a stay of the underlying Judgment itself — ie., of the order or judgment appealed from. Instead they’re asking me to enjoin a separate event, the fairness of proceeding with an act which could be affected by the outcome of a now ongoing appeal. As previously noted,16 that is properly regarded as being covered by Bankruptcy Rule 8007(a)(1)(C) — “an order granting an injunction while an appeal is pending” — rather than (a)(1)(A), “a stay of judgment, order, or decree of the bankruptcy court pending appeal.”
I’m not as persuaded as the Ignition Switch Plaintiffs are that the standards— and in particular, the likelihood of success standards — for a stay pending appeal under (a)(1)(A) and for an injunction under (a)(1)(C) are the same. The cases the Ignition Switch Plaintiffs cite all precede the 2014 revisions in the 8000 series of Bankruptcy Rules. Rule 8007, which comes from former Rule 8005,17 now has, in its subsection (a), separate subpara-, graphs relating to the different types of relief18 — and none of the Ignition Switch Plaintiffs’ cited cases, including Judge Haight’s 1994 decision in Bidermann,19 says, directly or by implication, that there is no distinction between the Second Circuit’s standards for a stay pending appeal and for an injunction pending appeal. Rather, the likelihood of success requirement for a stay pending appeal is “a substantial possibility, although less than a likelihood,” of success on appeal.20 The comparable requirement for ordinary preliminary injunction analysis is either a likelihood of success or serious issues going to the merits, and a substantial tipping of the hardships in the applicant’s favor.21
Here I don’t find either a likelihood of success on the appeal nor a substantial *685possibility (although less than a likelihood) of success on appeal on the mootness issue. I was well aware of the Accordion Feature when I issued the Motion to Enforce Decision and the resulting Judgment. In fact, I expressly discussed the Accordion Feature in the Motion to Enforce Decision,22 and again in a later decision before entry of the Judgment when addressing the form of Judgment that would implement the former’s rulings.23 Thus, in the Form of Judgment Decision, I noted that when people invested in GUC Trust Units, they had no reasonable basis for a concern that the accordion feature would be triggered:
When Old GM creditors received distributions under the Plan, and when Unit-holders — even if as aftermarket acqui-rors of GUC Trust Units — acquired their units, they had a reasonable expectation that the total universe of claims filed against Old GM would not increase. And while they knew that there was an accordion feature, they also knew that claims exposure would result, with exceptions exceedingly difficult to show, only from previously filed claims.24
So I don’t see it as particularly likely that a reversal would be forthcoming based on a failure on my part to have considered the Accordion Feature. And importantly, the Ignition Switch Plaintiffs are trying to access not just value that might become newly available under the Accordion Feature but also funds already in the GUC Trust that GUC Trust Beneficiaries would reasonably have expected to tap. Even if the Ignition Switch Plaintiffs were right in their contention that they could access incremental value that might come in under the Accordion Feature, they would be particularly unlikely to succeed in arguing on appeal that they should access the funds now in the GUC Trust— which are the funds whose distribution the Ignition Switch Plaintiffs want to block— unless they came up with a different argument, which they haven’t made yet if they ever will.
Nevertheless, I find that the Ignition Switch Plaintiffs have shown enough in the way of likelihood of success to meet the requirements for injunctive relief now. A traditional alternate basis for injunctive relief in this Circuit — as a substitute for showing a likelihood of success — has been “sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.”25 The Ignition Switch Plaintiffs’ mootness arguments do raise sufficiently serious issues going to the merits, and though I believe, as noted above, that GUC Trust Unitholders would also be prejudiced by a stay, the balance of hardships still tips decidedly in the Ignition Switch Plaintiffs’ favor.
(d) Public Interest
Finally, I turn to the public interest. The GUC Trust properly notes what I said in Chemtura26: that “the' public interest ... recognizes the desirability of implementing the legitimate expectations of creditors ... to get paid.”27 And in Borders-Bankruptcy, Judge Glenn found that a stay of interim distributions to creditors pending an appeal would not serve the *686public’s interest because “Congress and the courts have stressed the need for parties to be able to rely on the finality of chapter 11 plans and related orders in conducting business and in dealing with the reorganized debtor.28 But there is also a public interest in protecting the right to appellate review when it can be done without undue prejudice to the side that won below. And I don’t see that issuing a stay would impair the public interest, especially if the resulting loss were protected by the requirement of a bond.
(e) Stay Conclusions
Looking at the factors as a whole, and weighing the first two factors most heavily, I believe that if a satisfactory bond were posted, the requirements for a preliminary injunction delaying the distributions would then be satisfied. So I’ll issue the requested stay. The real issue is the amount of the bond that I should require to compensate the GUC Trust Unitholders, through the GUC Trust itself, for the delay in receiving their distributions.
3. Bond
On the matter of the bond, there is no dispute as to the underlying legal framework. The purpose of requiring a bond in this context is to indemnify the party prevailing in the original action against loss caused by an unsuccessful attempt to reverse the holding of the bankruptcy court.29
It is agreed that the posting of a bond is a matter within my discretion.30 It is also agreed that a bond is not mandatory, and that in theory, I could issue the requested injunction without a bond. But it is also the case that “if the movant seeks imposition of a stay without a bond, the applicant has the burden of demonstrating why a court should deviate from the ordinary full security requirement.”31
Preliminarily, I agree with the GUC Trust that a bond is necessary. There can be no serious dispute that GUC Trust Unitholders will be prejudiced by a delay in distributions when the underlying assets would continue to draw a 0.12% yield while the stay is in place, and those assets would generate much higher yields after receipt by their recipients. Though the prejudice here is not as large as it was in the Adelphia chapter 11 case on my watch (where the estate suffered monetary losses of $2.33 million per day (and $49 million in the aggregate) during a period of an unbonded stay before the district court required a bond),32 the prejudice still is quite substantial. For reasons discussed below in connection with my computation of the necessary bond that should be imposed, GUC Trust Unitholders would be prejudiced to the extent of millions of dol*687lars if their distributions were enjoined during the pendency of the appeal.33
So I then must determine how large a bond should be required. The principles incident to setting an appropriate level of bond here are very much like those employed by Judge Carey in Tribune-Bankruptcy — in which he required a $1.5 billion bond in the largely similar, though not identical, context of a request to stay confirmation, in an analysis later stated in Tribune-Circuit to be as “well-considered and as convincing as the alchemy of valuation in bankruptcy can be.”34
Here, I consider one element in particular of the several types of losses analyzed in Tribune-Bankruptcy — opportunity costs to GUC Trust Unitholders whose distributions would be delayed. After doing so, I consider the $18.4 million for ■ which the GUC Trust argues, and the zero for which the Ignition Switch Plaintiffs argue, to be way too high and low, respectively. I conclude, contrary to the positions taken by each of them, that the opportunity cost should be regarded as $10.6 million — based on an annual estimated yield of 9.23% (compounded) for what I believe should be estimated to be a 10-month delay — resulting in the $10.6 million that I fix as the bond.
The yield that we should assume as the alternative yield that we could expect the universe of GUC Trust Beneficiaries to obtain if their distributions were not stayed is a function of (1) the duration of the time during which the distribution would be delayed if stayed, and (2) the yield on the alternative investments that could be made if the distribution could be made as planned. The latter, in turn, is a function of the particular yields that could be obtained on various types of alternate investments, and, if more than one type of investment were considered, the mix — and • consequent weighting — of the investments that GUC Trust Unitholders might make.
(a) Duration
The Ignition Switch Plaintiffs note that (at Judge Furman’s direction), they filed a motion for an expedited appeal (which was unopposed), and that as a result, I should assume a stay of a duration less than the 12 months that the GUC Trust assumed. As of the time of this writing, the Second Circuit has not ruled on the motion, and there can be no assurance that it will be granted. But assuming that it is, I note the timing the Ignition Switch Plaintiffs proposed. Their motion contemplated the filing of the last round of briefs on February 22, and oral argument on March 8, 2016 or the earliest possible date thereafter.35 Thus, if the Circuit were to rule on the day of argument itself,' there would still be a delay of approximately four months from the mid-November 2015 date upon which the GUC Trust expects to make its $135 million distribution.
In a demonstrative handed up to the Court, the Ignition Switch Plaintiffs ran numbers assuming stay durations of from 4 to 12 months. But I consider all but the *688last two of them to be unrealistic, and believe that I should assume a period of 10 months — ie., assuming a ruling 6 months from the requested date of oral argument. The Circuit will have to deal with a raft of appeals and appellate issues, from parties who are variously appellants with respect to some issues and appellees with respect to others. My opinion had to run 134 pages, by reason of the number and difficulty of the issues to be addressed. The same reasons underlying my certification of the foreseeable appeals for direct review by the Circuit (and, presumably, that caused the Circuit to grant a direct appeal) underscore the importance of the issues to be decided; the appeal will have a significant effect on chapter 11 practice (and section 363 sale practice, in particular) going forward. The parties to the appeal (understandably) sought a relaxation of the page limits for the briefs to be submitted, for those reasons and others. In light of these factors, and others,36 I believe it is most reasonable to anticipate a Circuit opinion about 6 months after argument— 10 months after the date the distribution would otherwise go out.
(b) Alternate Yields
Turning now to the alternate yields, there is little dispute (and in any event I find) that the Unitholders’ prospective loss should be measured by comparing the GUC Trust’s projected returns of 0.12% on the Permitted Investments in which it expects to hold its cash (e.g., a mix of short-term U.S. Treasuries)37 against the rate of .return that Unitholders could reasonably earn if they were able to invest the anticipated GUC Trust distributions during the life of the stay.
Here, as in Tribune-Bankruptcy, evidence of the yield on alternative investments was offered by the party opposing the stay. In Tribune-Bankruptcy, Judge Carey was provided with a declaration from an investment banker at Lazard, drawing conclusions from yield information taken from a commonly-used index to analyze the high yield — sometimes called “junk bond” — market.38 Here I was given information of a somewhat similar character, but GUC Trust expert Scruton, recognizing that a meaningful percentage (at least 47%) of the GUC Trust’s Unitholders were hedge funds, principally based his opinion on a mix of returns reported by hedge funds,39 equity investments,40 fixed *689income investments (of a grade materially higher than junk bonds),41 and money market quality yields.42 Without needing to decide whether the type of yield evidence presented here is superior to that presented to Judge Carey (or vice-versa), or whether “Best Practices” would call for use of a mix of different kinds of investment data (by reason of differing investor goals and practices), I find the use of a mix of different kinds of investments here at least to be appropriate.43
But different types of investments generate different yields, and those yields can fluctuate over time. The two sides thus debate whether I should go with a historical mean (or “trimmed” mean, discarding outlier years), on the one hand, or a yield high enough to minimize likely prejudice to Unitholders (a “Protection Return Rate”) (recognizing that use of a mean would result in a 50% likelihood of providing insufficient protection), on the other. They also debate how I should weigh the yields on the alternative investments that GUC Trust Unitholders might make, given the lack of data I have on what particular Unitholders’ investment goals and practices might be.
I agree with the GUC Trust that use of some kind of Protection Return Rate — -and not just a 10-year mean — is generally necessary and appropriate. By definition, use of a mean will understate results, on a weighted basis, 50% of the time.44 If, as we all agree (or should), the purpose of a bond is to protect the side that prevailed below, I think a 50% risk of getting it wrong is too high a risk.
But by the same token, I believe that particular Protection Rate methodology proposed by the GUC Trust — one based on the weighted average of the third-best year from the last ten years of annual investment returns for each asset class (the “3rd Highest Return”)45 is too aggressive. The effect of that methodology, as Mr. Scruton testified at the hearing on this motion, would be to cover approximately 80% of all possible outcomes.46 That is overkill; I can’t agree that a bond “giving effectively 80 percent protection” to Unitholders is required to protect against injury resulting from a stay.47 For lack of more or better data, I use the trimmed mean calculated by Mr. Scruton (adjusted as described below), with an additional upward adjustment of 1/3 of the difference between the trimmed mean and the rate that would result using the 3rd Highest Return.
Then, with respect to weighting, the evidence showed that yields obtained by hedge funds would typically exceed— *690sometimes by significant amounts — the yields obtained on equities and, especially, fixed income and money market type investments. Thus the weighting of the different types of investments would make a material difference. It was established that 47% of the Unitholders — actively represented in this case by a single counsel (the “Participating Unitholders”) — were hedge funds. But while it was suggested that a significant number of the other Un-itholders were too, no evidence was offered to back up that assumption, possibly because of the unavailability of such evidence or possibly because of hedge funds’ historic aversion to disclosure as to their investments in the cases in which they invest.48 In any event, in determining weighted yields for the universe of GUC Trust Unit-holders — who would make individualized decisions as to whether to invest in hedge fund investments, equities, fixed income, or money market type investments — I estimate the mix based on the 47% of Unit-holders of whom we are aware, and (for ■lack of a better alternative) assume that the remaining 53% would invest in the four types of investments in equal numbers— i.e., with 13.25% (1/4 of the 53%) investing in each.
That would result in 60.25% of GUC Trust Unitholders being assumed to invest in hedge fund type investments (47% + 13.25%), and 13.25% in each of the other three kinds.49
Then we turn to the yields I should assume for each class of investment. In each case, GUC Trust expert Scruton used historic data, trimmed to peel off what some might regard as outlier data — the, highest and lowest historical returns.50 I find that approach appropriate as a general matter, but with an exception — where we have better data upon which to form a view.
Historic data is appropriate — and, in fact, necessary, in my view — -with respect to hedge fund, equities and fixed income investments, for lack of any better basis upon which to make an intelligent decision as to investment results in the upcoming 10 months. But we know more with respect to money market equivalents. I think I can assume with nearly total certainty that given the present level of money market interest rates, and recent events in the economy and actions by the Federal Reserve Board, that yields on U.S. Treasuries will not climb to the 3.21% trimmed mean — much less the 4.29% Protection Return Rate for which the GUC Trust argues — in the upcoming year. We know (and the Ignition Switch Plaintiffs showed, by their Exh. C, showing the Department of the Treasury’s Yield Curve Rates) that a 1-Year Treasury would have a yield of 0.36% and even a 10-Year Treasury would have a yield of only 2.20% (each, as of the day before the evidentiary hearing on this matter). As I consider it reasonable to assume that in this environment, with no more than modest increases in interest rates likely in the next 10 months, there would be at most modest *691declines in the value of a November 2015-purchased 10-Year Treasury over that period. Therefore, I use 2.2% as the yield on money market equivalents, as contrasted to the 4.29% and 3.21% upon which Scru-ton relied.51
Accordingly, I choose to work with Scru-ton Deck Exh. D-l’s “Scenario 3” “Trimmed Mean” data, as modified in two respects: (1) to substitute 2.2% (in place of 3.21%) as the rate of return for the 13.25% of Unitholders who would be assumed to be making money market-type investments; and (2) to increase the assumed yield on each of the four classes of investments by adding 1/3 of the difference between the trimmed mean, as adjusted above, and the 3rd Highest Return to the adjusted trimmed mean to provide a less aggressive (and less inclusive) Protection Return Rate than the one proposed by the GUC Trust, but that is more inclusive than a rate based on the historical trimmed mean. That results in a new “Scenario 4”, adapted from “Scenario 3,” as follows:
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Thus, instead of the 13.82% Weighted Average Protection- Return Rate proposed by the GUC Trust, I consider it more appropriate to use a “Court-Determined Protection Return Rate” of 9.23%. That assumed alternative yield, in the exercise of my discretion — informed by the data discussed above — most fairly protects the GUC Trust in connection with the distribution that would be delayed by reason of the imposition of a stay.
*692
(c) Resulting Size of Appropriate Bond
Then I need to determine the size of the bond that would compensate the GUC Trust and its Unitholders for the delay in making that $135 million distribution. Conceptually, that is roughly ($135 million) x (9.23% per year) x (10/12 of a year)-or about $10.38 million.53 But it is not exactly that, because of the effect of compounding.
Scruton testified upon my questioning under Rule 614 that compounding would result in about a 10% increase (over this time period) as compared to a simple interest computation.54 But he also provided a table,55 submitted as another supplemental exhibit to his declaration, setting forth computations for lost opportunity costs as functions of various illustrative Protection Return Rates (in increments of 1.00%) and numbers of months of lost opportunity costs (ranging from 4 months to 18 months), which presumably did take into account compounding. Those Protection Rates used in that table that were closest to the Court-Determined Protection Rate were 9.0% (resulting in a bond, for a 10-month delay, of $10.3 million) and 10.0% (resulting in a bond of 11.5 million). Assuming linear ratios,56 and then multiplying the lower $10.3 million by the ratio of 9.23%/9.00%, I reach a bond size of approximately $10.6 million, and set the bond in that amount.
. Conclusion
The bond is fixed in the amount of $10.6 million. But distributions by the GUC Trust will be stayed for a period of 14 days from this order to allow the Ignition Switch Plaintiffs time to post the bond, or, if they are so advised, to pursue an appellate modification of this determination.57
This order takes effect immediately. But either party may settle a more formal order if it is so advised.
SO ORDERED.
. I use bench decisions to lay out. in writing decisions that are too long, or too important, to dictate in open court, but where the circumstances don't permit more leisurely drafting or more extensive or polished discussion. Because they often start as scripts for decisions to be dictated in open court, they tend to have a more conversational tone.
. Unless otherwise noted, terms here are as defined in the Stipulations of Fact Regarding Request for Stay (ECF # 13441).
. The Ignition Switch Plaintiffs don’t specify the exact subsection of Bankruptcy Rule 8007(a) under which they rely. Since they aren’t seeking a stay of the Judgment itself, it must be Rule 8007(a)((l)(C): • "an order ... granting an injunction while an appeal is pending....”
. ECF # 13177 (the “Judgment”).
. In re Motors Liquidation Co., 529 B.R. 510 (Bankr.S.D.N.Y.2015).
. ECF # 13441.
.However, presumably because the second distribution is anticipated to be so far in the future, the Ignition Switch Plaintiffs did not press what I understood to be a request that I stay the distribution of the entire $244 million, and the resulting argument focused on the first $135 million. I do likewise, and my determination of the appropriate bond is based on the prejudice resulting from a stay of the $135 million alone. In what I believe to be the unlikely event that the Second Circuit has not decided the mootness issues by the time any additional distribution is imminent, the parties will have their respective rights with respect to any follow-up stay request.
. Tr. of Hrg. of 9/24/15 at 9:15-19.
. Tr. of Hrg. of 9/22/15 at 114:9-20, 159:21-25.
. Preliminarily, I note that while the Ignition Switch Plaintiffs are correct in their observation that I said, earlier in these proceedings, that if a request for a similar stay had been made in the fall of 2014, I'd have granted that in a heartbeat, that was before two events that I now need to take into account: the showing of prejudice to GUC Trust Unit-holders that has been made on this application, and my rulings of April 15, 2015 with the benefit of briefing and judicial consideration at that time. Thus I look at the issues here based on the present record, and certainly can't regard anything I previously said as law of the case.
. GUC Trust Br. (ECF # 13256) at 5.
. Id. at 6-7.
.Plan Paragraph 6.2(1) (i.e., the lower case letter "1”) (emphasis added).
. In further support of its contentions, the GUC Trust points to Judge Glenn’s decision on a similar stay request in the Borders Books chapter 11 case, In re BGI, Inc., 2012 Bankr.LEXIS 5244, 2012 WL 5392208 (Bankr.S.D.N.Y. Nov. 2, 2012) (“Borders-Bankruptcy"), aff’d In re BGI, Inc., 2013 U.S. Dist. LEXIS 77740, 2013 WL 10822966 (S.D.N.Y. May 22, 2013). There Judge Glenn considered plan modification concerns to be among the several reasons he denied a stay to the applicants there. I fully concur with the conclusions and reasoning in Borders-Bankruptcy, but note the obvious: the starting point for any analysis of whether a stay of distributions would be violative of the Plan starts with an analysis of what the Plan actually says. Thus it is unnecessary to fully discuss other distinctions between the facts in Borders-Bankruptcy and here, such as the fact that in Borders-Bankruptcy, the stay was sought by parties whose claims already had been disallowed, a fact not present here.
. See n.3 above.
. See 10 Collier on Bankruptcy {“Collier") ¶ 8007.RH (16th ed.2015).
. See 10 Collier ¶ 8007.05[1].
. Bidermann v. RHI Holdings (In re Bidermann), 1994 U.S. Dist. LEXIS 9700, 1994 WL 376090 (S.D.N.Y. July 18, 1994) (Haight, J.).
. Hirschfeld v. Board of Elections, 984 F.2d 35, 39 (2d Cir.1993).
. See, e.g., Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979) ("Jackson Dairy").
. See 533 B.R. at 538 & n. 58.
. See In re Motors Liquidation Co., 531 B.R. 354 (Bankr.S.D.N.Y.2015) (the “Form of Judgment Decision’’).
. 531 B.R. at 360.
. Jackson Dairy, 596 F.2d at 72.
. In re Chemtura Corp., 2010 Bankr.LEXIS 3988, 2010 WL 4638898 (Bankr.S.D.N.Y. Nov. 8, 2010).
. 2010 Bankr.LEXIS 3988 at *26, 2010 WL 4638898 at *8.
. 2012 Bankr.LEXIS 5244 at *20, 2012 WL 5392208 at *6.
. See Tribune Media Co. v. Aurelius Capital Mgmt., L.P. (In re Tribune Media Co.,) 799 F.3d 272, 281 (3d Cir.2015) (“Tribune-Circuit").
. See, e.g., In re Overmyer, 53 B.R. 952, 955 (Bankr.S.D.N.Y.1985) (Schwartzberg, J.); In re General Motors, Corp., 409 B.R. 24, 30 (Bankr.S.D.N.Y.2009) (Gerber, J.) (“General Motors-Stay").
. Triple Net Investments IX, LP v. DJK Residential, LLC (In re DJK Residential, LLC), 2008 U.S. Dist. LEXIS 19801 at *6, 2008 WL 650389 at *2 (S.D.N.Y. March 7, 2008) (Lynch, J.). See also General Motors-Stay, 409 B.R. at 30; In re Tribune Co., 477 B.R. 465, n. 11 (Bankr.D.Del.2012) (“Tribune-Bankruptcy")', In re W.R. Grace & Co., 475 B.R. 34, 209 (Bankr.D.Del.2012).
. See General Motors-Stay, 409 B.R. at 34 (discussing the Adelphia episode, and explaining why I would require a bond in an amount no less than $7.4 billion before staying the 363 Sale).
.I assume that if I made the bond prohibitively high, it could result in the bond not being posted, and thus that the $135 million at issue here (and, though less likely, the $109 million to be distributed farther out in the future) would be distributed before appellate review. But I'm not at all persuaded by the Ignition Switch Plaintiffs’ argument (Motion at 15), that a bond requirement “may chill participation in the appeal.” The plaintiffs could and undoubtedly would appeal the mootness ruling anyway, even if the $135 million went out, in an effort to access the remaining $109 million-and, more importantly, the $922 million in incremental value that might exist under the Accordion Feature.
. See Tribune-Circuit, 799 F.3d at 282.
. See Motion, Elliott v. General Motors L.L.C., No. 15-2844 (2d Cir., filed Sep. 29, 2015) at 2.
.In his declaration (see Scruton Decl. ¶ 21), GUC Trust expert Scruton noted that it took the Second Circuit 18 months (from appeal filing to decision, and apart from time getting views from the Delaware Supreme Court) to decide the other appeal that I certified for direct view by the Circuit — one involving the mistaken filing of a UCC-3 that caused the security interest in a $1.5 term loan to come to an end. The earlier appeal involved a perfect storm of issues, and this one does too, and after that the similarity ends. The issues here axe more difficult, but that was not an expedited appeal. On balance, I believe 6 months from the proposed date for oral argument (which is about 13 months from the 9/9/2015 appeal filing and about 10 months from the date of the contemplated distribution) represents the best estimate of when the Circuit might reasonably be expected to rule.
. I’m unpersuaded by the Ignition Switch Plaintiffs’ contention that I should assume a higher yield by the GUC Trust on the cash it now has, because they disagree with the GUC Trust’s determination to avoid making investments creating a risk that it would be deemed to be subject to the Investment Company Act of 1940, like mutual funds. I find the GUC Trust's concern entirely reasonable.
. See Kurtz Decl., In re Tribune Company, No. 08-13141-KJC, ECF # 12217-2 (Bankr. D.Del.), at 6 & n.6 (basing conclusions on the Merrill Lynch U.S. High Yield Master II Index ("High Yield Index”).
. Measured by the Credit Suisse Event Driven Multi-Strategy Hedge Fund Index ("Hedge Fund Index”).
. Measured by the S & P 500 Index.
. Measured by the Bank of America Merrill Lynch U.S. High Grade Master Index. Note that the concepts of “High Grade” and "High Yield” are largely inconsistent, and that this index is quite different than the one presented to Judge Carey in Tribune-Bankruptcy.
. Measured by historic yields on the U.S. Treasury 10-Year note.
. I don't need to address that further because here (and I think it is only by coincidence), the High Yield Index “Yield to Worst,” used in Tribune-Bankruptcy, would be 7.17%, and the weighted average mean, for reasons addressed below, would be 7.13% and its weighted Protection Return Rate would be 8.34% — figures in the former case very close, and in the latter case relatively close, to the 7.17% figure.
. Using a median — where half of the results would be higher, and half lower — would present similar conceptual difficulties, with the only difference being less sensitivity to the highs and lows of investment performance in given years.
. Scruton Decl. ¶ 18.
. Tr. of Hrg. of 9/22/15 at 135:22-136:3.
. Id. at 136:14-21.
.For example, the Participating Unitholders declined to provide information as to their own actual yields, even though it is quite possible that their actual yields would have been higher than the Hedge Fund Index upon which they rely. I don't penalize them for that (nor do I either require them to provide that information or draw an adverse inference from their failure to do so), but this once again causes me to be reluctant to make assumptions as to their yields where they have not given me a firm evidentiary basis for doing so.
. This type of weighting was the premise of "Scenario 3” in the GUC Trust’s "Protection Return Rate Estimates,” Scruton Decl. Exh. D-l, and it is the data appearing in this Scenario, with the "Rates of Return” shown on 'Exh. D-l, with which I start going forward.
. See Exh. D-l n.l.
. I would do likewise for fixed income investments if the Ignition Switch Plaintiffs had given me information like that in PL Exh. C to provide an alternative. But as they did not, I use the historic data the GUC Trust provided.
. The exact result of that computation is $10.38375 million.
. Tr. of Hrg. of 9/22/15 at 171:17-172:12.
. See Scruton Decl. Exh. F-l.
. That may or may not be appropriate given the compounding, but I believe it to be sufficiently close for the purposes of this analysis.
. I’ve considered, and rejected, the possibility of any lengthier stay. Fed.R.Bankr.P. 8007(a)(l)'s requirement that motions for stays ordinarily should be made first in the bankruptcy court has effectively been satisfied, and any further request should be made only in a higher court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498794/ | MEMORANDUM OPINION AND ORDER DENYING DISCHARGE OF PLAINTIFF’S STATE COURT JUDGMENT AGAINST THE DEBTOR
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
This adversary proceeding arises from an assault during which Sultan R. Solimán (“Solimán” or the “Debtor”) forcefully bit Lev Vyshedsky (“Vyshedsky” or the “Plaintiff,” together with the Debtor, the “Parties”) on the nose (the “Assault”). Photographs of Vyshedsky taken after he was hospitalized and treated show that Soliman’s bite caused serious injury to Vyshedsky’s nose, requiring numerous stitches to close the wounds. Solimán pled guilty in New York Criminal Court to the crime of assault in the third degree. He was sentenced to probation and fifteen (15) days community service.1 Vyshedsky sued Solimán for damages, initially in New York State Supreme Court and then transferred to the New York City Civil Court (the “Civil Court”). Following a lengthy litigation and Soliman’s ultimate default, the Civil Court entered a default judgment (the “Judgment”) against Solimán in the amount of $110,695, consisting of $85,000 of compensatory damages and $25,000 of punitive damages (plus costs). Thereafter, Solimán filed a chapter 7 bankruptcy petition. Vyshedsky countered with this adversary proceeding seeking to declare the debt, arising from the Judgment, non-dis-chargeable on the ground that the Debtor caused his injury “willfully and maliciously.” 11 U.S.C. § 523(a)(6). On September 4, 2014, the Court denied the Parties’ cross-motions for summary judgment without prejudice.2
On September 16, 2015, the Court held an evidentiary hearing to determine whether Soliman’s actions caused “a deliberate and intentional injury” to Vyshedsky, “not merely a deliberate or intentional act that leads to injury.” See Soliman, 515 B.R. at 188; see also Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). Only two witnesses testified at trial: Solimán and Vyshedsky. The Parties presented conflicting accounts of the events that gave rise to the Assault. During trial, Solimán asserted self-defense as an affirmative defense to the denial of discharge claim. As explained below, the Court concludes that Soliman’s guilty plea to the assault charge precludes him from ■ asserting self-defense here. But even if preclusion does not bar a claim of self-defense, the Court concludes that Solimán failed to carry his burden of proof with respect to self-defense. The Court finds that Vyshedsky established by a preponderance of the evidence that Solimán caused VydsHedsky’s injury willfully and maliciously.
Based on the Court’s opportunity to see and hear the Parties’ testimony, the Court finds that Soliman’s testimony lacked credibility; Vyshedsky’s testimony, on the other hand, was credible. Accordingly, to the extent there were any discrepancies between Soliman’s testimony, on the one hand, and the Vyshedsky’s testimony, on the other hand, the Court 'credits Vyshed-sky’s testimony.
*696The findings set forth herein constitute the Court’s findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Rule 7052 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). In making the findings of fact, the Court considered the credibility of the witnesses based on the Court’s observation of their live testimony and the rest of the evidence submitted at trial. The Court concludes that the Vyshedsky is entitled to a judgment that his damages are NON-DIS-CHARGEABLE under section 523(a)(6) of the Bankruptcy Code.
I. BACKGROUND
On July 27, 2000, Solimán, Vyshedsky, and a third-person, Sobon, met one another at an elevator bank in an apartment building located at 99 Hillside Avenue, New York, New York (the “Premises”), where they all lived. (Joint Pretrial Order at 2 (ECF Doc. #51); Def.’s FoF ¶2 (ECF Doc. # 54).) Solimán lived on the twenty-first floor (Hr’g Tr. at 16); Vyshed-sky lived on the nineteenth floor (Hr’g Tr. at 6). Solimán and Sobon quickly got into an argument about the order of protection that Sobon had previously obtained against Solimán.3 (Sept. 16, 2015 Hr’g Tr. at 8, 17-18.) Because of the order of protection, Solimán insisted that Sobon should not ride on the same elevator as him. (Def.’s FoF ¶ 5; Hr’g Tr. at 8, 17-18.) Solimán asked Sobon to wait for the next elevator. A senior citizen, who also lived in the building, soon arrived at the scene.4 (Hr’g Tr. at 8,18.) The presence of the senior citizen silenced the argument regarding whether Solimán and Vyshedsky should ride in the same elevator car. (Hr’g Tr. at 18.) Solimán, Sobon and Vydshedsky remained in the elevator while it ascended.
Vyshedsky testified that, while on the elevator, Sobon asked Vyshedsky whether he was willing to serve as a witness to the events that had unfolded (ie., that Solimán rode the elevator with Sobon, in violation of the order of the protection). (Hr’g Tr. at 8.) Vyshedsky agreed to corroborate Sobon’s story. (Id.) Despite their close proximity in the elevator, Solimán denies hearing this conversation. (Hr’g Tr. at 19.) Sobon got out of the elevator on the eighteenth floor, leaving Solimán and Vyshedsky together in the elevator. (Hr’g Tr. at 9,19.)
What happened next is mostly disputed. Both Vyshedsky and Solimán testified that Vyshedsky got out of the elevator on the nineteenth floor and that Solimán — despite living on the twenty-first floor — followed Vyshedsky off of the elevator. (Hr’g Tr. at 9, 19-20.) The encounter quickly became more heated. (See id.)
Vyshedsky testified that Solimán screamed at him as Vyshedsky walked away from the elevator. (Hr’g Tr. at 9.) Solimán yelled “you don’t know who you’re dealing with here.” (Id.) Vyshedsky further testified that Solimán used vulgar and obscene language towards him and, while Vyshedsky’s back was turned, Solimán charged him and slammed him against a wall, grabbed him by the throat, forcefully bit down on his nose, and spat on his face numerous times. (Id.)
Solimán, on the other hand, testified that he followed Vyshedsky off of the ele*697vator to explain the situation with Sobon. (Hr’g Tr. at 20.) However, for reasons unknown to Solimán, Vyshedsky turned around and, unprovoked, spat in Soliman’s face twice. (Id.) Solimán admits that he used profanity against Vyshedsky, as Vyshedsky walked away from Solimán. (Id. at 21.) When Vyshedsky was approximately 30 feet down the hall, Solimán testified that Vyshedsky turned around, facing in Soliman’s direction, brandished a knife, and began walking towards Solimán. (Id. at 21-22.) Solimán then “ran towards [Vyshedsky]” and struggled with Vyshed-sky to restrain him up against a wall. (Id: at 23.) As Solimán restrained Vyshedsky with both hands, Vyshedsky pointed the knife towards him. (Id. at 23-24.) Soli-mán responded by biting Vyshedsky’s nose. (Id. at 24.) Solimán testified that while he was biting down on the Vyshed-sky’s nose, he told Vyshedsky to “stop.” (Id.) Vyshedsky nodded his head in agreement, which allowed the two men to break free from one another. (Id.) Vyshedsky testified that he did not have a knife. (Id. at 10.)5
Solimán was arrested for the Assault, and an order of protection was issued against Solimán (the ‘Vyshedsky Protection Order”), requiring him to stay away from Vyshedsky. (Pl.’s FoF ¶¶ 6-7.) On March 7, 2001, Solimán pled guilty to assault in the third degree, a misdemeanor. (See the “Prior Opinion,” ECF Doc. #42 at 5.) In his plea allocution, Solimán admitted that he assaulted Vyshedsky by biting his nose. (Id.) The plea allocution does not mention self-defense.
On July 5, 2001, Vyshedsky filed a civil action in New York State Supreme Court seeking damages for assault and battery. (Id.) The case was transferred to the Civil Court on February 6, 2004. (Id.) After Solimán and his counsel failed to appear for either the scheduled trial, or the subsequent damages inquest, the court conducted the Inquest. (Id.) On July 21, 2011, the Civil Court entered the Judgment against Solimán in the amount of $110,695. (Id.) The judgment was not appealed, vacated, or modified, and is now final.
On October 30, 2012, Solimán filed a voluntary petition for relief under chapter 7. (Case No. 12-14444, ECF Doc. # 1.) The Debtor moved for relief from the automatic stay to seek to have the state court default judgment vacated (the “Lift Stay Motion,” ECF Doc. # 12, Case No. 12-14444) and the Court entered an Order Granting Debtor’s Motion for Relief From Automatic Stay to Vacate Default Judgment (the “Order,” ECF Doc. # 17, Case No. 12-14444). The Debtor further filed a Motion to Stay Adversary Proceeding (the “First Stay Motion,” ECF Doc. # 18). The motion was unopposed, and on October 10, 2013, the Court entered the Order Granting Motion to Stay Adversary Proceeding (the “Stay Order,” ECF Doc. #21), staying the Adversary Proceeding for six (6) months and requiring the Defendant to commence an action in state court to seek to avoid the Judgment.
On October 21, 2013, the Solimán moved to vacate the default judgment in Civil Court. Vydshedsky opposed the Soliman’s motion. (Prior Opinion at 6.) On December 13, 2013, the Civil Court denied the Soliman’s motion. (Id.) The Civil Court found that the Solimán failed to meet his burden of showing that he (1) had a reasonable excuse for his failure to appear in the original proceeding and (2) has a potentially meritorious defense to the underlying action. The Civil Court found that, even if the Solimán could demonstrate a *698reasonable excuse for his failure to appear at the Inquest, he cannot establish any potentially meritorious defense to the action because of his guilty plea. Vyshedsky submitted to the Civil Court the plea allo-cution transcript in which Solimán admitted that he assaulted Vyshedsky on July 27, 2000 by biting into his nose. (See Vyshedsky Aff. Ex. D; Moss Decl. Ex. Á.) The Civil Court determined that the guilty plea should be given collateral estoppel effect in the subsequent civil proceeding.
This Court denied Debtor’s second stay motion on April 10, 2014, and directed the parties to file their cross-motions for summary judgment.6 On September 4, 2014, the Court denied both summary judgment motions without prejudice, finding that an evidentiary hearing was required on the issue “whether Soliman’s actions were ‘a deliberate and intentional injury’ to Vysh-edsky — ‘not merely a deliberate or intentional act that leads to injury.’” (Prior Opinion at 4 (quoting Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998)).)
II. DISCUSSION
A. Section 523(a)(6): The Legal Elements
A bankruptcy discharge covers all prepetition debts, other than debts expressly excepted from discharge by section 523 of the Bankruptcy Code. Consistent with the Bankruptcy Code’s fresh start policy, courts nevertheless construe the exceptions enumerated in section 523 narrowly against the creditor in favor of the debtor. Soliman, 523 B.R. at 190-91; Lubit v. Chase (In re Chase), 372 B.R. 125, 128 (Bankr.S.D.N.Y.2007) (citing Nat’l Union Fire Ins. Co. v. Bonnanzio (In re Bonnanzio), 91 F.3d 296, 300 (2d Cir. 1996)). As relevant to the facts in this case, section 523(a)(6) of the Bankruptcy Code excepts from discharge a debt “for willful and malicious injury by the debtor to another entity.” 11 U.S.C. § 523(a)(6).7 “The terms ‘willful’ and ‘malicious’ are separate elements, and both elements must be satisfied.” In re Greene, 397 B.R. 688, 693 (Bankr.S.D.N.Y.2008) (citing Rupert v. Krautheimer (In re Krautheimer), 241 B.R. 330, 340 (Bankr.S.D.N.Y.1999)). “The willful element is satisfied when a person deliberately causes an injury to another, while the malicious prong requires that such action be unjustified or without just cause.” In re Greene, 397 B.R. at 695. The plaintiff bears the burden of proving that the debtor acted willfully and maliciously by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
a. Willful
To establish that a debtor acted willfully under section 523(a)(6), the plaintiff must demonstrate that the injury in question was “a deliberate or intentional injury, not merely a deliberate or inten*699tional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998); Ball v. A.O. Smith Corp., 451 F.3d 66, 69 (2d Cir.2006) (quoting Kawaauhau, 523 U.S. at 61-62, 118 S.Ct. 974). A willful injury does not include “recklessly or negligently inflicted injuries.” Kawaauhau, 523 U.S. at 64, 118 S.Ct. 974. Rather, a person intends to cause injury when he “desires to cause consequences of his act, or ... he believes that the consequences are substantially certain to result from it.” Restatement (Seoond) OF Torts § 8A (1965). “[T]o satisfy the ‘willful’ element of Bankruptcy Code [section] 523(a)(6), the plaintiff must prove by a preponderance of the evidence that the debtor actually intended to injure the victim, or engaged in conduct that was substantially certain to cause injury.” In re Margulies, 2013 WL 2149610, at *3 (Bankr.S.D.N.Y.2013) (citing Jendusa-Nicolai v. Larsen, 677 F.3d 320, 324 (7th Cir.2012); Maxfield v. Jennings (In re Jennings), 670 F.3d 1329, 1334 (11th Cir. 2012); Morris v. Brown (In re Brown), 489 Fed.Appx. 890, 895 (6th Cir.2012); Guerra & Moore Ltd. v. Cantu (In re Cantu), 389 Fed.Appx. 342, 344-45 (5th Cir.2010); Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010); Blocker v. Patch (In re Patch), 526 F.3d 1176, 1180 (8th Cir.2008); In re Granoff, 250 Fed.Appx. 494, 495 (3d Cir.2007); Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir.2004)).
b. Malicious
To establish that a debtor acted maliciously, the plaintiff must prove that the debtor’s act was “wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Navistar Fin. Corp. v. Stelluti (In re Stelluti), 94 F.3d 84, 87 (2d Cir.1996). In determining whether a debtor acted maliciously, courts will consider the totality of the circumstances. Id. at 88 (stating that “[i]m-plied malice may be demonstrated ‘by the acts and conduct of the debtor in the context of [the] surrounding circumstances’ ” (quoting First Nat’l Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664, 668 (4th Cir.1995))). Malice is implied when “anyone of reasonable intelligence knows that the act in question is contrary to commonly accepted duties in the ordinary relationships among people, and injurious to another.” Navistar Fin. Corp. v. Stelluti (In re Stelluti), 167 B.R. 29, 33 (Bankr. S.D.N.Y.1994) (internal quotation marks omitted), aff'd, 94 F.3d 84 (2d Cir.1996).
c. Solimán Acted Willfully and Maliciously When He Assaulted Vyshedsky
There was no real dispute at trial that Solimán acted willfully when he bit Vysh-edsky’s nose in their altercation. In fact, in Soliman’s pretrial brief (Def.’s PT Br. at 4), and later at trial (Sept. 16, 2015 Hr’g Tr. at 22-24), Solimán attempted to justify his actions by claiming that he bit the Vyshedsky’s nose in self-defense. This is tantamount to an admission that Vyshed-sky’s injury was willfully caused. See In re Greene, 397 B.R. at 695 (citing to In re Taylor, 322 B.R. 306, 309 (Bankr.N.D.Ohio 2004) (raising the self-defense justification in effect constitutes an admission that the underlying act was done willfully)). Irrespective of the Debtor’s self-defense claim, the evidence demonstrates that Soliman’s actions were willful. It is indisputable that when a person pins a victim up against a wall and uses his teeth to forcefully bite down on the victim’s flesh, that the person’s actions were either intended to injure the victim or were substantially certain to cause injury.
The facts at trial also establish that Soli-mán acted maliciously. As described above, the malicious prong of section 523(a)(6) requires that an action be wrong*700ful and without just cause or excuse. There is no dispute that Solimán acted wrongfully when he bit Vyshedsky’s nose in their altercation. Photographs of Vysh-edsky taken after the Assault clearly show that the Vyshedsky suffered severe injuries from the Assault. (Pl.’s Ex. 3.) Vysh-edsky’s nose contained deep bite marks along the bridge of his nose reaching down to the columella. The bite marks, which spanned over three-quarters of the colu-mella, required numerous stitches. Absent a valid self-defense claim, there, is no just cause or excuse for Soliman’s actions. Moreover, in light of the self-defense claim, “it cannot be overlooked that by raising an affirmative defense ... [Soli-mán] has ostensibly admitted that he acted with malice ...thus satisfying the malicious prong of section 523(a)(6). In re Taylor, 322 B.R. at 309. ' Accordingly, the crux of the issue turns on whether Solimán is precluded from asserting self-defense, and even if he may do so, whether he has established self-defense by a preponderance of the evidence.
B. Self-Defense Is an Affirmative Defense
Unless preclusion principles ' bar assertion of self-defense, a debtor may raise self-defense as an affirmative defense to a non-dischargeability claim under section 523(a)(6). See In re Taylor, 322 B.R. at 309 (“Acts properly taken, therefore, in self-defense provide a valid defense to an action brought under § 523(a)(6); this has always been understood.”); see also In re Greene, 397 B.R. at 695 (recognizing that a debtor’s claim of self-defense could “provide[ ] justification or cause for [the debt- or’s] willful action”). A self-defense claim is an affirmative defense and, as such, the debtor bears the burden of proof with respect to self-defense. In re Taylor, 322 B.R. at 309.
In Greene, the court concluded that “[i]n the State of New York, a guilty plea is accorded the same preclusive effect as a conviction after a trial. Although the elements of the crime have not been litigated, the issues have necessarily been judicially determined by the plea. Furthermore, a defendant pleading guilty has had a full and fair opportunity to litigate his case, even though he has elected not to contest the accusations. He should not expect the courts to look behind convictions based on such pleas in order to relieve [him] from civil consequences which may follow.” 397 B.R. at 694 (internal quotation marks and citations omitted). Since New York recognizes self-defense as a possible defense to a criminal assault charge, a guilty plea precludes a criminal defendant from later asserting self-defense in a civil assault case, or as here, as a defense to a denial of discharge.8 N.Y. Penal Law § 35.15; see also In re Graham, 455 B.R. 227 (Bankr.D.Colo.2011) (stating that the “[d]efendant’s guilty plea ... ha[d] the consequence of waiving the affirmative defense of self-defense”); In re Granoff, No. 05-33028, 2006 WL 1997408 (Bankr.E.D.Pa. June 6, 2006) (stating that “the criminal conviction is preclusive on the issue of self-defense as a justification for his conduct”); Cf. Grayes v. DiStasio, 166 A.D.2d 261, 262-63, 560 N.Y.S.2d 636 (1990) (stating that “a criminal conviction, whether by plea or after trial, is conclusive proof of its underlying facts in a subsequent civil action and collaterally estops a party from relitigating the issue”).
But even if preclusion does not bar the assertion of self-defense here, the *701Court concludes that Solimán failed to establish by a preponderance of the evidence the necessary elements for self-defense under both state and federal standards.
a. Self-Defense Under Federal Common Law
In federal courts, the law pertaining to self-defense is a matter of federal common law. In re Greene, 397 B.R. at 695 (citing to United States v. Desinor, 525 F.3d 193, 199 (2d Cir.2008); United States v. Butler, 485 F.3d 569, 572 (10th Cir.2007)).
[The Tenth Circuit has held] that a claim of self-defense requires a party to show the following: (i) that he was under an unlawful, imminent and impending threat of death or serious bodily injury; (ii) that he had not recklessly or negligently placed himself in such a situation; (iii) that he had no reasonable, legal alternative to violating the law — a chance both the refuse to do the criminal act and to avoid the threatened harm; and (iv) that a direct causal relationship would have been reasonably anticipated between the criminal action taken and the avoidance of the threatened harm.
In re Greene, 397 B.R. at 695 (citing United States v. Butler, 485 F.3d. 569 (10th Cir.2007)).
Soliman’s actions fail under the four prongs of the self-defense doctrine as construed under federal common law. First, Solimán was not under imminent threat of death or serious bodily injury. There is no evidence to substantiate Soliman’s allegation that the Vyshedsky brandished a knife. Vyshedsky denied it, and the Court credits his testimony. Moreover, even if Vyshedsky had brandished a knife during the Assault, Vyshedsky would have been standing approximately thirty feet away— the length of two minivans — from Solimán when Vyshedsky allegedly brandished a knife. Solimán was not under imminent threat of death or serious bodily injury, under these facts. He could have safely retreated and avoided the Assault.
Second, the sequence of events demonstrates that Solimán placed himself in the situation. Solimán (i) rode on the elevator with Sobon and Vyshedsky, despite Soli-man’s argument with Sobon; (ii) followed Vyshedsky off of the elevator; and (iii) ran towards Vyshedsky when Vyshedsky allegedly brandished a knife from thirty feet away, if Soliman’s version of events is credited (which it is not).
Third, once Solimán followed Vyshedsky off of the elevator, Solimán could have avoided any confrontation by retreating instead of confronting Vyshedsky. If Vyshedsky drew a knife from thirty feet away, Solimán did not need to bite Vysh-edsky’s nose in self-defense.
Finally, there is no reasonable causal relationship between Soliman’s act and the avoidance of the threatened harm. Even if Soliman’s version of the events is credited, the bite was not a reasonable use of force in the totality of the circumstances. Davis v. Strack, 270 F.3d 111, 129 (2d Cir.2001).
b. Self-Defense Under New York Law
Under New York law, a person is permitted to use physical force only to the extent reasonably necessary to defend oneself from the imminent use of unlawful ordinary physical force. N.Y. Penal Law § 35.15 (emphasis added).9 Accordingly, “the force permitted [in self-defense] is related to the degree of force reasonably believed necessary to repel various *702threats.” Collins v. Artus, No. 08 Civ. 1936(PKC)(JCF), 2009 WL 2633636, at *5 (S.D.N.Y. Aug. 26, 2009) (internal quotation marks and citation omitted). For example, a person may use deadly'force to defend against another’s use of deadly force, subject to the circumstances. See id.
Deadly physical force is defined very broadly in the Penal Law as “physical force which, under the circumstances in which it is used, is readily capable- of causing death or other serious physical injury.” N.Y. Penal Law § 10.00(11) (emphasis added). Serious physical injury is defined as “physical injury which creates a substantial risk of death, or which causes death or serious and protracted disfigurement, protracted impairment of health or protracted loss or impairment of the function of any bodily organ.” N.Y. Penal Law § 10.00(10). As a matter of law, under New York law, “the use of a knife constitutes deadly physical force.” In re Greene, 397 B.R. at 696.
A duty to retreat, under New York law, arises in the context of self-defense to repel deadly force.10 Bulla v. Lempke, No. 06 Civ. 1156(JSR)(GWG), 2006 WL 2457945 (S.D.N.Y. Aug. 25, 2006) (“In New York, before using deadly physical force in self-defense, a defendant has a duty to retreat if he or she may do so in complete safety. However, there is no duty to retreal before defending oneself with ordinary physical force.” (emphasis added)). Under N.Y. Penal Law § 35.15(2)(a), deadly physical force cannot be used if retreat can be made in complete safety. And such duty does “not arise until the point at which [the other person’s use of] deadly physical force against him is imminent.” Davis v. Strack, 270 F.3d at 126 (internal quotation marks and citation omitted).
In evaluating an individual’s claim of self-defense, a court must determine the “reasonableness of a defendant’s fear” and base such a determination “on the circumstances facing a defendant or his situation.” Id. at 129 (citations omitted). This analysis includes consideration of “any relevant knowledge the defendant had about that person, including the perceived assailant’s physical attributes and any prior experiences [the debtor] had which could provide a reasonable basis for a belief that [the] person’s intentions were to injure ... him.” Id. (internal quotation marks and citation omitted).
Solimán relies on a self-defense claim to justify the injury that he caused to Vysh-edsky. However, Solimán may only invoke a self-defense claim to the extent that he faced actual or imminent harm of physical force during the course of the altercation. The Court credits Vyshedsky’s testimony (and rejects Soliman’s testimony) that Vyshedsky did not threaten Solimán with a knife. Aside from Soliman’s allegation that Vyshedsky brandished a knife, there is no evidence that Vyshedsky used any force against Solimán, let alone deadly *703force. Given that the Court finds that Vyshedsky did not use or attempt to use physical force against Solimán, there is no justification for Soliman’s actions.
Notably, even if the Court were to find that Vyshedsky brandished a knife during the Assault, Soliman’s self-defense claim nevertheless fails because, among other things, there was no imminent threat of harm.
i. The Facts and Circumstances Do Not Demonstrate that There was a Reasonable Basis to Believe that Solimán was in Threat of Imminent Harm
The Court finds that Solimán did not prove that he faced imminent harm.11 A condition precedent to the use of a self-defense claim is that a person must face “the use or imminent use of unlawful physical force.” N.Y. Penal Law § 35.15(1); see also People v. Wimberly, 19 A.D.3d 518, 519, 798 N.Y.S.2d 470 (2d Dept.2005) (stating that “^Justification is not a defense to the use of deadly physical force unless the defendant reasonably believed that the victim was about to use deadly physical force against her and she was unable to retreat safely”). Accordingly, there can be no self-defense claim where there is no actual or imminent harm.
Solimán testified that Vyshedsky was approximately thirty feet away when he allegedly brandished the knife. Under these facts, the Court finds that Solimán was not under imminent threat of death or serious bodily injury. Accordingly, Soli-mán does not have the right to rely on justification as defense.
ii. Soliman’s Actions Were Not Reasonable Under the Circumstances
Soliman’s actions do not support a self-defense claim under New York law. As described above, New York’s self-defense standard is largely based on the reasonableness of the defendant’s fear and actions. Vyshedsky and Solimán testified that they were strangers before the date of the Assault. As such, Solimán would have had little to no relevant knowledge regarding Vyshedsky’s attributes, other than those attributes that Solimán could reasonably perceive on the day of Assault (e.g., Vyshedsky’s physical characteristics and general demeanor).
Soliman’s chosen course of action — biting Vyshedsky’s .nose — was not reasonable under the circumstances. Based on the Court’s observations, there are notable differences in the physique and demeanor of Vyshedsky and Solimán. Vyshedsky is of short to average stature and thin build; Solimán is much taller and powerfully built and with military training. Based on the physical differences between the two men, it is questionable whether Soliman’s alleged fear of Vyshedsky was reasonable. Solimán initiated each escalation of the altercation; his actions were not responses *704made in self-defense, but rather served to incite the physical confrontation.
III. CONCLUSION
Based on the findings of fact and conclusions of law, the Court concludes that Soli-manes judgment debt owed to Vyshedsky is not dischargeable. Plaintiffs counsel shall submit a proposed form of Judgement on presentment.
IT IS SO ORDERED.
. Solimán also pled guilty to a second count of assault in the third degree involving a separate incident against another individual, Andrzej Voy Sobon (“Sobon”), who is not party to this adversary proceeding.
. Amended Memorandum Opinion and Order Denying Without Prejudice Plaintiffs Motion For Summary Judgment (the "Summary Judgment Opinion,” ECF Doc.- # 42); Vyshedsky v. Soliman (In re Soliman), 515 B.R. 179 (Bankr.S.D.N.Y.2014).
. On July 5, 2000, Solimán assaulted' Sobon (the "Sobon Assault"). ("Complaint," ECF Doc. # 1 ¶¶ 9, 11.) As a result of the Sobon Assault, an order of protection was issued against Solimán. (Joint PT Order at 2; Pl.’s FoF ¶ 2 (ECF Doc. # 52).)
. Solimán and Vyshedsky testified that the senior citizen rode the elevator with the three men. The senior citizen did not testify at trial.
. While Vyshedsky and Solimán did not stand side-by-side in the courtroom, the Court saw both of them clearly: Solimán is considerably taller and more solidly built than Vyshedsky, who is short, with a small frame.
. See Plaintiff's motion for summary judgment (the "Plaintiff's Motion,” ECF Doc. #32). In support of the Plaintiff's Motion, the Plaintiff filed his affidavit (the "Vyshedsky Aff.,” ECF Doc. # 33), the Plaintiff’s Statement of Undisputed Material Facts in Support of Motion for Summary Judgment (the "Plaintiff's Facts,” ECF Doc. # 34), and the Declaration of Gilbert A. Lazarus, Esq. (the "Lazarus Decl.,” ECF Doc. # 35). The Debtor filed a cross-motion for summary judgment (the "Debtor’s Motion,” ECF Doc. # 36). In support of the Debtor's Motion, the Debtor filed the Declaration of Tina Moss (the "Moss Decl.,” ECF Doc. # 36) and the Debtor’s Statement of Undisputed Facts (the "Debtor's Facts,” ECF Doc. # 38).
. The word "entity” is broader and inclusive of the word "person.” 11 U.S.C. § 101(15) (stating that "[t]he term 'entity' includes person, estate, trust, governmental unit, and United State trustee”).
. As already stated, in denying the motion to vacate the default judgment and applying collateral estoppel, the Civil Court concluded that Solimán could not establish any potentially meritorious defense to the action because of his guilty plea.
. New York’s stance on the justification of self-defense has been recognized as "likely” different "in various respects from the less precisely formulated common-law rules followed by federal courts.” United States v. Jackson, 351 F.Supp.2d 108, 115 (S.D.N.Y. 2004).
. "New York is more strict [sic] on the obligation to retreat than other states.” Holden v. Miller, No. 00 Civ. 0926(RMB)(AJP), 2000 WL 1121551, at *14 (S.D.N.Y. Aug. 8, 2000) ("Among the states, there is a difference of opinion as to the necessity of retreating before one is justified in taking the life of an assailant. In some jurisdictions, the view is taken that retreat is not required in the case of a felonious attack, but that where the attack is without felonious intent, the person attacked may not stand his or her ground and kill the adversary if there is any means of escape open. For the most part, New York adheres to this position, although the felonies to repel which deadly physical force may be used without obligation to retreat are limited by statute. In other jurisdictions, however, the right to stand one’s ground is given broader scope.” (internal quotation marks omitted) (quoting 35 N.Y. Jur.2d, Defenses to Criminal Liability § 3484 (1995)).
. Presuming that Solimán faced actual or imminent use of deadly force against him, the validity of Soliman's self-defense claim would have been dependent on whether Solimán had a duty to retreat. As described herein, under New York law, retreat is not a condition precedent of the use of ordinary physical force in self-defense; rather, retreat is a condition precedent to the use of deadly physical force in self-defense. Given that Solimán did not face a threat of imminent harm and therefore does not have right to rely on justification as a defense, the Court does not reach the question of whether Soliman’s actions constituted ordinary or deadly physical force. However, the Court notes that there is case law to support that the act of biting a person’s facial extremity can constitute deadly physical force, since it is readily capable of causing serious physical injury. See, e.g., People v. Dinghy, 50 A.D.2d 361, 378 N.Y.S.2d 90 (3d Dept. 1976) (holding that a bite that removed portion of ear constituted deadly physical force), rev’d on other grounds, 42 N.Y.2d 888, 397 N.Y.S.2d 789, 366 N.E.2d 877 (1977). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498798/ | MEMORANDUM OPINION
Paul M. Black, UNITED STATES BANKRUPTCY JUDGE
This matter comes before the Court on confirmation of a Chapter 13 Plan filed by the Debtor, Sandra Boggs Colston (the “Debtor” or “Ms. Colston”). Confirmation of the plan is supported by the Chapter 13 Trustee, Christopher T. Mieale (the “Chapter 13 Trustee”). An objection to confirmation and motion to dismiss were filed by Jacqueline Fay Alexander (“Ms. Alexander”), a disputed creditor of the Debtor, based on lack of good faith and lack of feasibility. Notwithstanding the Chapter 13 Trustee’s recommendation in favor of confirmation, this is essentially a two-party dispute involving allegations of undue influence, fraud, and willful and malicious injury to property by the Debtor. A lengthy evidentiary hearing was conducted on confirmation, the objection, and the motion to dismiss on September 16, 2015. For the reasons set forth below, the Court will sustain the objection to confirmation and dismiss this case.
FINDINGS OF FACT
1
Ms. Colston moved to Grayson County, a rural county in southwest Virginia, in 2012, where she currently works as a special education teacher. There, she formed three separate limited liability companies: Kickin Chicken Poultry & Game Bird Farm, LLC was established to sell poultry locally raised by Ms. Colston; Farmers Friend Old Time General Store, LLC was established to run a general store, café, and coffee shop; and S. Colston Properties, LLC was formed to own the real estate where the general store operated. The businesses are now each defunct.
*741Prior to moving to Grayson County, the Debtor lived in Virginia Beach, Virginia, approximately 300 miles to the east, for most of her life. In Virginia Beach, she worked for the public school system, also as a teacher, having taught for a total of 23 years. In the course of her teaching in Virginia Beach, she became acquainted with Ms. Alexander, a teacher’s aide. Both worked at Princess Anne High School in Virginia Beach, where the Debt- or was a special education teacher. Testimony at trial, -including that from Ms. Alexander’s sister, Judy Walsh (“Ms. Walsh”), indicated that, due to a near drowning accident as a child, Ms. Alexander became mentally impaired, which Ms. Alexander herself described as a “learning disability.” Ms. Walsh also described her sister as “slow.” Ms. Walsh further described her sister as “gullible,” and unsophisticated in handling money, sometimes having trouble recognizing the differences in dollar values. Ms. Walsh related one specific instance of Ms. Alexander having an issue distinguishing between $100.00 and $10,000.00. Despite her intellectual challenges, Ms. Alexander was able to obtain a certificate to be a teacher’s aide,2 which led her to Princess Anne High School, where she met and became personally close to Ms. Colston.
Ms. Alexander’s parents owned and operated a successful electrical contracting company in Virginia Beach. Until her death in 2010, Ms. Alexander’s mother managed Ms. Alexander’s finances. Ms. Alexander’s father had predeceased her mother. In addition to income from a trust that was set up for the benefit of the three children in the family, including Ms. Walsh and Ms. Alexander, Ms. Alexander received approximately $403,000.00 when her mother died in the form of a direct distribution from her mother’s pension plan at the electrical construction company. The funds were not left in trust. Ms. Walsh helped her sister set up an account at a local bank to hold these funds, although Ms. Walsh had no oversight or control over that account. Ms. Walsh apparently believed, incorrectly, that the bank officer who assisted her in opening the account for Ms. Alexander would be “watching over it.”
Ms. Colston testified at trial that she became friends with Ms. Alexander at Princess Anne High School, and they would go to happy hours3 and school functions together. Their relationship progressed and became more involved, and although Ms. Colston denied any romantic interests with Ms. Alexander, she testified she believed Ms. Alexander wanted such a relationship. She further testified that Ms. Alexander was unhappy when Ms. Colston moved to Grayson County, and they continued to communicate with each other extensively by text and Facebook messaging. Ms. Colston also testified that Ms. Alexander would become upset with her if she did not respond as fast as Ms. Alexander expected. On one occasion, Ms. Alexander visited Ms. Colston in Grayson County and left an envelope of money with Ms. Colston when she departed. Ms. Col-ston stated that she did not ask for the money, but Ms. Alexander wanted her to have it. Recognizing Ms. Alexander had *742access to substantial funds, and apparently emboldened, Ms. Colston began “receiving” money from Ms. Alexander on a regular basis. Ms. Colston characterized these monetary transfers as gifts. Ms. Alexander believed them to be loans. Ms. Col-ston said there were times when she tried to pay money back to Ms. Alexander, but she would not accept the money, getting angry when Ms. Colston offered to do so. However, no testimony was elicited of any specific dollar amount offered to be paid back, or the source of the funds.
In whatever fashion she acquired the money, it was apparent that Ms. Colston preyed upon Ms. Alexander’s weakness of mind and clear affection for her at the time. From July 2012 to January 2014, Ms. Alexander made 60 monetary transfers to Ms. Colston or entities controlled exclusively by her, totaling $414,590.00. Alexander Exhibits 2 & 3. An additional $39,755.05 in credit card or point of sale purchases were charged to Ms. Alexander as well. See Alexander Exhibit 3. These transfers completely depleted the bequest to Ms. Alexander from her mother’s pension fund. During this time frame, Ms. Walsh testified Ms. Alexander had lost contact with her family, being highly focused on Ms. Colston. The transfers to Ms. Colston were discovered by Ms. Alexander’s family in early 2014, when Ms. Alexander revealed to her older sister, Ms. Walsh, that she was unable to pay her bills. None of these transfers was evidenced by a check, as Ms. Walsh testified at trial that Ms. Alexander did not know how to write checks without assistance. Instead, the vast majority of the transfers were either cash deposits taken by Ms. Alexander from her account and deposited into one of Ms. Colston’s accounts, or into accounts of entities controlled by Ms. Col-ston. Two wire transfers in the amounts of $60,000.00 and $50,000.00, respectively, were made a week apart in November 2013 to Ms. Colston directly. Alexander Exhibit 2. Ms. Alexander stated that Ms. Colston asked for money because she was having financial issues, and she also provided Ms. Colston funds to remodel her home in Grayson County.4 According to Ms. Colston, some of the funds were used to acquire and remodel the general store property, among other things.5 The manner in which these transfers were made, the magnitude and frequency of the transfers, and the Court’s own observation of the witnesses’ demeanor and testimony on the stand do not lend credibility to Ms. Colston’s testimony that these alleged “gifts” were made by Ms. Alexander free from sway by Ms. Colston.
When the family discovered the transfers to Ms. Colston, they started probing Ms. Alexander for information about her dealings with Ms. Colston, of whom Ms. Walsh was becoming clearly suspicious. *743Ms. Colston had driven to Virginia Beach to get some beds from Ms. Alexander that formerly belonged to Ms. Alexander’s and Ms. Walsh’s mother. Ms. Colston testified that Ms. Alexander contacted her in early 2014 asking about the acquisition of the general store, stating that Ms. Alexander had told her that her sister was “upset” and that she needed something to document her interest in the building “for tax purposes.” Ms. Colston testified that Ms. Alexander had previously offered to buy the building for her, and that Ms. Alexander had declined any offer of ownership. Ms. Colston indicated she had offered to put Ms. Alexander’s name on the building,6 which was also declined.
Instead, after the transfers came to light, on February 28, 2014, Ms. Colston sent Ms. Alexander a Limited Liability Investment Agreement, backdated to September 27, 2013, purporting to convey to Ms. Alexander an ownership interest in S. Colston Properties, LLC, of “point zero one percent (0.01%).” Alexander Exhibit' 5. Ms. Colston said that it was Ms. Alexander’s idea to put the smallest amount possible in the agreement, although Ms. Colston actually suggested the 0.01%. ■ The agreement was not executed, and shortly thereafter, Ms. Walsh retained a law firm in Virginia Beach to investigate the matter.7
In late 2013 to early 2014, Ms. Colston was also using Ms. Alexander’s credit card, and plying Ms. Alexander for money. Alexander Exhibit 6 is a series of emails between Ms. Colston and Global Restaurant Solutions where Ms. Colston was attempting to charge items to Ms. Alexander’s credit card for $6,115.55. The supplier could not verify the charge with Ms. Alexander, the owner of the card, and the order was cancelled. In addition, Alexander Exhibit 7 is a series of text messages from Ms. Colston to Ms. Alexander, including one dated March 20, 2014, reading “I hate to ask but ... Do you have any money I can borrow till pay day ... I’m hurting until the 31st ... i will pay it back I promise. I’m so tight on money I’m even packing food from home to take this weekend instead of eating out.” Ms. Alexander’s reply was simply, “No.” See Alexander Exhibit 7. Ms. Colston’s text messages to Ms. Alexander continued after Ms. Alexander retained counsel.
On April 23, 2014, Ms. Alexander filed a Complaint in the City of Virginia Beach Circuit Court against Ms. Colston and her three limited liability companies, seeking judgment for fraud in the inducement, undue influence, unjust enrichment, constructive trust, resulting trust, and rescission. See Docket No. 43, Alexander Exhibit 1. Ms. Colston retained counsel, discovery was conducted, and a trial date was set for May 26, 2015. On May 11, 2015, Ms. Colston filed the current Chapter 13 case, and on May 21, 2015, she filed an Emergency Motion to Extend Automatic Stay, requesting an expedited hearing for May 22, 2015. A Motion for Default Judgment on an Amended Complaint in the Virginia Beach action was filed and also set for hearing on May 26, 2015.8 The “Emergency Motion” was in reality a request for injunctive relief, on scant notice to Ms. Alexander’s counsel, seeking to enjoin the litigation in Virginia Beach from going forward against Ms. Colston’s limited liability *744companies.9 Notwithstanding the questionable notice and improper procedural posture of the request, the Court conducted an evidentiary hearing and the request for injunctive relief was denied. See Docket Nos. 9-11, 14. The Virginia Beach Circuit Court conducted a hearing on May 26, 2015 at which time it took evidence, and issued a separate written opinion dated July 2, 2015, and a subsequent Judgment Order on July 8, 2015. The Judgment Order and written opinion were entered into evidence as collective Alexander Exhibit 10.
In part, the Virginia Beach Circuit Court found as follows:
In this case, [Ms. Alexander] is entitled to a presumption of undue influence and has sufficiently established a claim for fraud and rescission of the contracts and repayment of her loans and money invested in each of the three entities. While [Ms. Alexander’s] incapacity may not rise to the level of legal incompetency, [she] has established she suffers from the continued effects of a brain injury she incurred as a child. Considering this injury and the relationship that developed between Colston and [Ms. Alexander], it follows that the transactions [Ms. Alexander] entered into were entered under suspicious circumstances with these companies created by Colston, of which Colston was the sole owner and member. The grossly inadequate consideration of 00.01% interest in the general store in exchange for [Ms. Alexander’s] investment of $190,000, given [Ms. Alexander’s] great weakness of mind is further support of the findings of undue influence. Furthermore, the failure of the companies to perform their promise to return the money that was loaned to them in order to induce [Ms. Alexander] to lend the money was also fraudulent.
Alexander Exhibit 10. The Court found grounds for rescission against all defendants other than Ms. Colston, and also awarded Ms. Alexander money damages in the amount of $224,905.45. In addition, Ms. Alexander obtained an award of attorney’s fees of $167,521.61. Ms. Alexander filed a motion before this Court to allow the Virginia Beach Circuit Court to liquidate her claim against Ms. Colston individually, but not to permit enforcement of any judgment, which the Court granted. Docket No. 46.
On July 31, 2015, Ms. Colston filed an Amended Chapter 13 Plan, providing that Ms. Colston will pay' $28,000.00 to unsecured creditors, and that the estimated ■ distribution will be 33%. Docket No. 38. In reality, given that Ms. Alexander filed a claim for $621,875.66, $28,000.00 would result in a dividend closer to 4% to unsecured creditors with the other claims filed.10 Moreover, in order to make the proposed $955.00 per month payment into the plan, Ms. Colston’s 75-year old mother, Martha Boggs (“Ms.Boggs”), would have to commit to making monthly payments to the Chapter 13 Trustee on Ms. *745Colston’s behalf in the amount of $433.00. Ms. Colston’s disposable income is not sufficient to make the proposed plan payments on her own, and almost 50% of the regular monthly payments would have to be made by Ms. Boggs for the life of her daughter’s plan.11 Ms. Boggs testified that she is in good health, that longevity runs in her family, that she has the financial wherewithal to make the payments for the life of Ms. Colston’s plan, and that she is willing to do so. The Chapter 13 Trustee recommended confirmation.12
Ms. Alexander takes a different view. On September 2, 2015, Ms. Alexander filed an Objection to Confirmation of Modified Chapter 13 Plan and Discharge and Motion to Dismiss Bankruptcy Case, upon which the Court conducted the hearing on September 16, 2015. Among other things, Ms. Alexander contends Ms. Colston’s Chapter 13 Petition and the Amended Chapter 13 Plan were filed in bad faith, in violation of 11 U.S.C. §§ 1325(a)(3) and (7), respectively. Further, she contends the plan is not feasible under 11 U.S.C. § 1325(a)(6) in that five years of payments dependent upon assistance from her mother for a substantial monthly contribution is simply too speculative to be feasible. Ms. Colston asserts the Petition and Plan are both filed in good faith, and that the Plan is feasible. It is with this factual background the Court decides the issues before it.
CONCLUSIONS OF LAW
Evaluating the good faith requirement for confirmation of a Chapter 13 plan pursuant to Section 1325(a)(3) is a fact-intensive, case-by-case determination made by the Court based on the totality of the circumstances. Neufeld v. Freeman, 794 F.2d 149, 152 (4th Cir.1986); Deans v. O’Donnell, 692 F.2d 968, 972 (4th Cir. 1982). This case presents a real world conundrum. Can a person who has engaged in pre-petition misconduct still be “a good debtor?”13 Are there circumstances when a debtor who has engaged in significant pre-petition misconduct can maintain a confirmable Chapter 13 plan? Pre-petition misconduct is but one factor to consider in a totality of the circumstances test, *746and in the proper case the answer is undoubtedly yes. However, the Court is not persuaded that this is one of those cases.
I. Burden of Proof
Section 1325 of the Bankruptcy Code outlines the various requirements for confirmation of a Chapter 13 plan. Included among those are requirements that the plan be filed in good faith, that the debtor will be able to make all payments under the plan and to comply with the plan, and that the action of the debtor in filing the petition be in good faith. 11 U.S.C. § 1325(a)(3),(6), and (7). The second requirement above is generally referred to the “feasibility” requirement. Ms. Alexander’s objection and motion to dismiss implicate all three of these requirements in this case. As stated in In re Tomer, “[t]he obligation of good faith is imposed on the debtor at two stages in a Chapter 13 proceeding; first, the debtor must file the petition for Chapter 13 bankruptcy in good faith, and second, the debtor must file the Chapter 13 plan in good faith.” In re Tomer, 2009 WL 2029798, at *4, 2009 U.S. Dist. LEXIS 60261, at *12 (citing In re Smith, 286 F.3d 461, 465 (7th Cir.2002); In re McFadden, 383 B.R. 386, 388-89 (Bankr.D.S.C.2008); In re Bowen, No. 07-05485-JW, 2008 Bankr.LEXIS 16, at *6 (Bankr.D.S.C. Jan. 9, 2008)).
The debtor bears the burden of proof at confirmátion, including as to good faith. In re Taylor, 261 B.R. 877, 885 (Bankr.E.D.Va.2001). The burden of proving the “good faith” filing of a Chapter 13 plan under Section 1325(a)(3), distinct from the burden under Section 1307(c),14 is plainly on the debtor. In re Love, 957 F.2d at 1355. Section 1325(a)(3) provides that “the court shall confirm a plan if — ... the plan has been proposed in good faith and not by any means forbidden by law.” 11 U.S.C. § 1325(a)(3). Thus, the debtor bears the burden of proving by a preponderance of the evidence that a plan is proposed in good faith under Section 1325(a)(3). See In re Harrison, 203 B.R. 253, 255 (Bankr.E.D.Va.1996); see also Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904, 918 (9th Cir. BAP 2011).
Likewise, at confirmation, a debtor also has the burden of proof under 11 U.S.C. § 1325(a)(7) to establish that “the action of the debtor in filing the petition was in good faith.” 11 U.S.C. § 1325(a)(7). As stated in In re Ellsworth, “[i]t is thus true now that the debtor, as plan proponent, has the burden of proof on the confirmation issues of whether both the case and the plan were filed in good faith.” 455 B.R. at 918 (emphasis in original). Section 1325(a)(7) was added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Because this code section is relatively new, case law is still evolving. In In re Bateman, the court indicated that, in the context of Section 1307(c), the “proper good faith inquiry is “whether or not under the circumstances of the case there has been an abuse of the provisions, purpose, or spirit of [the Chapter] in the proposal or plan.’ ” Branigan v. Bateman (In re Bateman), 515 F.3d 272, 283 (4th Cir.2008) (quoting Deans v. O’Donnell, 692 F.2d 968, 972 (4th Cir.1982)). See also In re Bland, No. 06-1159, 2008 WL 2002647, at *3, 2008 Bankr.LEXIS 1331, at *7 (Bankr.N.D.W.Va. May 6, 2008). Because the analytics of Sections 1325(a)(3) and (7) *747are not identical, the Court will address them separately.
A. Section 1325(a)(3) Factors
It is well established that in the Fourth Circuit a totality of the circumstances test is used for determining whether a Chapter 13 plan has been proposed in good faith. The “totality of the circumstances” test was originally set forth in Deans v. O’Donnell, 692 F.2d at 972, and expanded in In re Solomon, 67 F.3d 1128, 1134 (4th Cir.1995), and Neufeld v. Freeman, 794 F.2d at 152. The non-exclusive factors to be considered include the following:
(1) the percentage of proposed repayment to creditors;
(2) the debtor’s financial situation;
(3) the period of time over which creditors will receive payment;
(4) the debtor’s employment history, and current and future employment prospects;
(5) the nature and amount of unsecured claims;
(6) the debtor’s past bankruptcy filings;
(7) the debtor’s honesty in disclosing facts of the case;
(8) the nature of the debtor’s pre-petition conduct that gave rise to the case;
(9) whether the debts would be dis-chargeable in a Chapter 7 proceeding; and
(10) any other unusual or exceptional problems the debtor faces.
The foregoing factors are each still relevant in cases following BAPCPA. In re Edmunds, 350 B.R. 636, 649 (Bankr.D.S.C. 2006). Accordingly, the factors of the percentage of proposed repayment and debt- or’s actual financial situation at the time of filing are still elements of good faith. Id. at 648-49. Courts have “at least implicitly view[ed] substantial repayment” to unsecured creditors “as an essential element of ‘good faith.’ ” Deans v. O’Donnell, 692 F.2d at 970 (citing In re Rimgale, 669 F.2d 426 (7th Cir.1981); In re Terry, 630 F.2d 634 (8th Cir.1980)).
In this case, the Court finds that the Debtor has not met her burden under Section 1325(a)(3) of proving that her plan was proposed in good faith. Several factors warrant this conclusion. First, Ms. Colston’s proposal to pay unsecured creditors an estimated distribution of 33% in her Chapter' 13 Plan is illusory. Ms. Alexander has filed a claim in the amount of $621,875.66, which has not been objected to and for present purposes is deemed allowed. See 11 U.S.C. § 502(a). Factoring in that claim brings the proposed dividend to unsecured creditors closer to 4%. Based on the unsecured claims filed to date, and excluding the claim of Ms. Col-ston’s mother (who is providing approximately half the funding for this case), Ms. Alexander’s claim comprises 96.8% of the claimant pool.15 “Such a nominal payment on a potentially nondischargeable claim is evidence of bad faith.” In re Herndon, 218 B.R. 821, 825 (Bankr.E.D.Va.1998).
The elements of (i) “the nature and amount of unsecured claims,” (ii) “the nature of the debtor’s pre-petition conduct that gave rise to the ease,” and (iii) “whether the debts would be nondis-chargeable in a chapter 7 proceeding” can be taken together. The Fourth Circuit in Neufeld v. Freeman specifically referred to a debtor’s prepetition conduct and the possible nondischargeability (under Chapter 7) of objecting creditors’ claims as factors “a majority of the courts addressing the [good faith inquiry] have expressly *748considered.” 794 F.2d at 152.16 As the testimony and the claims register made clear, this is a two-party dispute. Ms. Colston would not be before this Court had Ms. Alexander’s family not discovered her siphoning off Ms. Alexander’s inheritance. The timing of the petition filing in relation to the pending state court trial date, and Ms. Colston’s own testimony, reflect that this case was filed for the sole purpose of impeding Ms. Alexander and her family from attempting to recover the assets taken by Ms. Colston. While the Court recognizes that a confirmation hearing should not be converted into a nondischargeability trial, the Court finds that Ms. Alexander has presented compelling evidence that that there is a substantial likelihood the debt she seeks to recover would be declared nondischargeable in a Chapter 7 proceeding. Ms. Colston did not present evidence sufficient to persuade the Court otherwise. In fact, Ms. Colston’s testimony on the stand was unremorseful, bordering on defiant in the belief that she did anything wrong.
Moreover, Ms. Colston has engaged in post-petition activity, namely falling short on her disclosure obligation, that does not reflect that she fully appreciates the burdens upon her as a debtor in this Court. Ms. Colston’s petition was filed on May 11, 2015. Her Schedules and Statement of Financial Affairs (“SOFA”) were filed on May 22, 2015. Docket No. 15. Her Schedule B, Personal Property reflects no interest in a valuable home generator that she purchased with funds obtained from Ms. Alexander. However, her SOFA required her to address the following statement: “List all other property, other than property transferred in the ordinary course of business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of the case.” SOFA at 5. Ms. Colston answered “None.” To date, this schedule has not been amended. At trial, upon questioning by Ms. Alexander’s counsel, it became apparent that Ms. Colston transferred the home generator to her mother a short time before filing this case, allowing her to take a $10,000.00 credit against a debt she allegedly owes her mother, reducing the debt from $58,000.00 to $48,000.00. Ms. Colston also failed to disclose this transfer under the “Payments to creditors” section of her SOFA as well. SOFA at 2. While the generator is not of extraordinary value, the failure to disclose this transfer without probing by opposing counsel is not consistent with good faith, but is more consistent with Ms. Colston’s focus on protecting herself, and to a lesser extent, her mother. It is also not consistent with a focus on repayment of her creditors or her responsibilities as a debtor. “Neither the trustee nor the creditors should be required to engage in a laborious tug-of-war to drag the simple truth into the glare of daylight.” In re Bland, 2008 WL 2002647, at *3, 2008 Bankr.LEXIS 1331, at *8 (citing Boroff v. Tully (In re fully), 818 F.2d 106, 110 (1st Cir.1987)).
The Court is mindful that the mere presence of a nondischargeable debt is not a barrier to Chapter 13 confirmation. The Bankruptcy Code contemplates that Chapter 13 can and should be available even to those whose pre-petition misdeeds are the source of their current financial problems. Indeed, Section 1328(a)(2) specifically does not include debts nondis-*749chargeable under 11 U.S.C. § 523(a)(6)17 as included in-the class of debts excepted from a Chapter 13 discharge.18 See 11 U.S.C. § 1328(a)(2). Whereas debts under Sections 523(a)(2) and (4), once properly litigated and established under 11 U.S.C. § 523(c), are excepted from discharge, Section 523(a)(6) debts are not. This reflects Congress’s intent that, in a proper case, the “super discharge” of pre-BAPCPA survives and a Section 523(a)(6) debt can be discharged in Chapter 13. This does not mean, however, the presence of a potential Section 523(a)(6) claim cannot or should not be considered under a good faith analysis. The presence of other factors, such as a meaningful divi- • dend to unsecured creditors (including ones with potentially nondischargeable debts), an extended plan repayment period over the minimum required,19 and the absence of any post-petition or filing misconduct may counterbalance and in fact weigh in favor of confirmation, possibly heavily so. This is consistent with Fourth Circuit precedent providing that “[a] Chapter 13 plan may be confirmed despite even the most egregious pre-filing conduct where other factors suggest that the plan nevertheless represents a good faith effort by the debtor to satisfy his creditors’ claims.” Neufeld, 794 F.2d at 153 (emphasis added). Those “other factors” simply do not exist here in a manner sufficient to support confirmation.
Therefore, because of the Debtor’s pre-petition and post-petition conduct, the lack of a meaningful dividend to unsecured creditors, and the nature of likely non-dischargeable debt to Ms. Alexander, the Court finds that the Debtor has not met her burden of proving good faith pursuant to Section 1325(a)(3), and thus, confirmation of the Debtor’s Chapter 13 Plan is denied.20
B. Section 1325(a)(7) Factors
In addition to the good faith required in the filing of the plan as stated above, good faith is also required in the filing of the Chapter 13 petition. See 11 U.S.C. § 1325(a)(7). The 2005 addition of Section 1325(a)(7) in BAPCPA has vexed courts and commentators regarding how the provision interacts with Section 1325(a)(3) and Section 1307(c).21 As one commentator *750has noted, the addition of Section 1325(a)(7) may have “had more to do with resolving a judicial split over whether pre-petition conduct should be considered in determining good faith rather than with codifying the court’s dismissal authority” considering that “some courts excluded prepetition conduct from the pre-BAPCPA plan good-faith analysis.”22 Under Section 1325(a)(7), “if a lack of good faith in filing a chapter 13 petition mandates a denial of confirmation, it would appear that this defect would be irremediable,” and “[i]f so, a chapter 13 case in which the debtor is unable to confirm any plan warrants dismissal under section 1307(c).” In re Manno, 2009 WL 236844, at *7 n. 9, 2009 Bankr.LEXIS 142, at *22 n. 9 (citing Carolin Corp. v. Miller, 886 F.2d 693, 700-01 (4th Cir.1989)).
Like under Section 1325(a)(3), the debtor “bears the burden of proving, by a preponderance of the evidence, that her plan was proposed in good faith” under Section 1325(a)(7). In re Page, 519 B.R. at 913-14 (internal citations omitted). However, “[u]nder § 1307(c), the party seeking to dismiss the debtor’s ease has the burden of proving that the debtor’s bad faith warrants dismissal.” Id. at 913 (citing Love, 957 F.2d at 1355). Thus, where the debtor does not meet her burden of proving her Chapter 13 petition was filed in good faith under Section 1325(a)(7), denial of plan confirmation is the appropriate remedy, whereas where the movant proves by a preponderance of the evidence that the debtor filed her bankruptcy petition in bad faith under Section 1307(c), dismissal or conversion of the case is warranted.
While limited guidance exists on what a debtor must prove to obtain confirmation under Section 1325(a)(7), the standards used in a Section 1307(c) good faith analysis are helpful. See In re Bland, 2008 WL 2002647, at *3, 2008 Bankr.LEX-IS 1331, at *8; In re Tomer, 2009 WL 2029798, at *4-5, 2009 U.S. Dist. LEXIS 60261, at *12-15. Moreover, the debtor’s intent is central to determining good faith in the filing of a petition, but less so when considering confirmation of the Chapter 13 plan. Tomer, 2009 WL 2029798, at *5, 2009 U.S. Dist. LEXIS 60261, at *17. Factors generally accepted in determining good faith under Section 1307(c) include: “the nature of the debt, including the question of whether the debt would be nondis-chargeable in a chapter 7 proceeding; 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.” Love, 957 F.2d at 1360. “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 Bankruptcy Code.” In re Dickenson, 517 B.R. 622, 634 (Bankr. W.D.Va.2014) (citing Love, 957 F.2d at 1357). This is consistent with the Fourth Circuit’s more holistic statement in In re Bateman that the “proper good faith inquiry is ‘whether or not under the circumstances of the case there has been an abuse of the provisions, purpose, or spirit of [the Chapter] in the proposal or plan.’ ” Bateman, 515 F.3d at 283 (quoting Deans, 692 F.2d at 972).
Numerous courts have applied the Love factors to good faith in the context of a *751Chapter 13 petition. In re Uzaldin, 418 B.R. 166, 173-74 (Bankr.E.D.Va.2009) (citing Love, 957 F.2d at 1355). In Uzaldin, the court stated as follows:
Situations where a debtor seeks to misuse the Bankruptcy Code to hinder or prejudice one particular creditor and where the underlying debt could be non-dischargeable have been addressed in other cases. In one, the debtor filed a chapter 7 petition and announced his intention to pay every debt except his support and equitable distribution obligations owed to his former spouse. The Fourth Circuit upheld the dismissal of ' his case as an abuse of the bankruptcy process. In re Kestell, 99 F.3d 146 (4th Cir.1996). In another, the debtor owed money to a creditor whom he had assaulted and who had obtained a judgment against him. The court found that the motivation for filing the petition was solely to hinder and delay collection of the debt by the creditor. The filing was not precipitated by any negative financial event. The chapter 13 case was dismissed with prejudice. In re Shaheen, 268 B.R. 455 (Bankr.E.D.Va.2001). In a third case, the debtor listed on her schedules in her chapter 13 case money allegedly owed due to her fraud and embezzlement. The embezzlement claim constituted by far the largest unsecured debt of the debtor. The court dismissed her case because of the likely nondischargeability of the embezzlement claim and the relatively small six-percent distribution proposed in her chapter 13 plan. In re Herndon, 218 B.R. 821 (Bankr.E.D.Va.1998).
In re Uzaldin, 418 B.R. at 174. See also In re Bland, 2008 WL 2002647, at *3-5, 2008 Bankr.LEXIS 1331, at *8.
This case has the hallmarks of a petition not filed in good faith. Not unlike in In re Shaheen, where the debtor’s motivation was solely to hinder and delay collection efforts by a creditor, the Debtor in the instant case filed her bankruptcy petition shortly before the scheduled trial date of the Virginia Beach Circuit Court action in order to avoid an adverse judgment against her individually. That, in itself, is not unusual. If every two-party dispute resulting in litigation automatically resulted in a bad faith filing, there would be little for this Court to do. However, the last minute filing coupled with a de min-imis offering to Ms. Alexander on her claim based on a potentially, if not highly likely, nondischargeable undue influence debt does support a finding of lack of good faith. Ms. Colston’s lack of disclosure about the generator transfer bolsters that point. Ms. Colston’s intent in filing this case is manifest. Her design was to stop Ms. Alexander from attempting to recover what was improperly taken from her, and setting good faith aside under Section 1325(a)(3), confirm a plan using contributions from her mother that would put Ms. Alexander in her past by paying Ms. Alexander the bare minimum the law would permit in an effort to confirm a plan and get a discharge. The circumstances of this case call for far more.
Concluding that Ms. Colston has filed her petition with a lack of good faith, the Court must determine the proper remedy. Because Section 1325(a)(7) arises in the context of confirmation, “Congress has presumably indicated that denial of confirmation, rather than dismissal, is the appropriate way to prevent such conduct.” 8 Collier on Bankruptcy ¶ 1325.08, at 1325-51 (Alan N. Resnick & Henry J. Sommer eds.-in-chief,16th ed. rev.2014). However, under Section 1307(c), the Court may dismiss a case, or convert a case to one under Chapter 7, whichever is in the best interest of creditors, “for cause,” including “denial of confirmation of a plan under section 1325 of this title and denial of a request *752made for additional time for filing another plan or a modification of a plan.” 11 U.S.C. § 1307(c)(5). The Debtor has proposed two unsuccessful plans. The first proposed to sell a piece of real estate not owned by the Debtor, but owned by one of her limited liability companies. When it became apparent the state court litigation would go forward and that was no longer an option, the Debtor proposed the most recent plan. The Court concludes that authorizing additional time to file a second amended plan is not in the best interests of creditors as such a plan would no doubt suffer, the same infirmities of the last plan. See In re Keith’s Tree Farms, 519 B.R. 628, 643 (Bankr.W.D.Va.2014), aff'd, Keith’s Tree Farms v. Grayson Nat’l Bank, 535 B.R. 647 (W.D.Va.2015). As stated by the District Court in Keith’s Tree Farms,23 “ ‘Bankruptcy courts are given a great deal of discretion to say when enough is enough’ when it comes to granting or denying the opportunity to amend reorganization plans.” - 535 B.R. at 653 (citing Matter of Woodbrook Assocs., 19 F.3d 312, 322 (7th Cir.1994)).
Because further amendment of the plan would be fruitless given the facts before the Court, the Court believes dismissal is appropriate at this juncture.24 Ms. Col-ston has limited assets and limited income. Ms. Colston’s primary creditors are Ms. Alexander, the holder of the mortgage on her house, her mother, an ex-girlfriend, and the law firm formerly representing her in the litigation with Ms. Alexander. The evidence reflects the only creditor seriously pressing her is Ms. Alexander. Increasing her contribution to an amended plan from her own income sources is unlikely given the evidence before the Court. Given that over half the funding from her “bare minimum” plan is proposed to come from monthly gifts from her mother, some of which would go' right back to her mother in the form of a distribution on her own claim, it is unlikely that Ms. Colston could propose a more advantageous plan for the repayment of her debts. The Court believes the best remedy for the Debtor’s lack of good faith in filing her Chapter 13 petition is to dismiss her Chapter 13 case under Section 1307(c)(5). Further, as Ms. Colston does not appear to have significant assets to be liquidated for the benefit of her creditors, and there is no allegation of any significant avoidable transfers to be recovered for the estate (other than the potential generator transfer), the Court does not believe that conversion to Chapter 7 is in the best interests of her creditors. With the passage of time, should Ms. Colston gain more lucrative employment or obtain additional assets from which she can refile and perhaps file a more meaningful plan, she is not precluded from doing so.25 As the Court will dismiss the case under its own volition, the Court need not reach Ms. Alexander’s motion to dismiss.
*753
CONCLUSION
For the foregoing reasons, the Court will deny confirmation of Ms. Colston’s Chapter 13 Plan and dismiss her bankruptcy case by Order entered contemporaneously herewith.
. Where appropriate, findings of fact shall be construed as conclusions of law and conclusions of law shall be construed as findings of fact. See Fed. R. Bankr. P. 7052, 9014(c).
. Ms. Alexander testified that she obtained special accommodations from the professor at the community college where she obtained her teacher’s aide certificate, which included recording the classes. Ms. Alexander further testified that she would take the recordings home and have her sister help her with the work.
. Ms. Alexander also testified that when she went out after school with Ms. Colston, she often "had trouble calculating the tip on the bill" and stated that "[Ms. Colston] would do that for me.”
. The evidence at trial indicated that Ms. Col-ston had begun a new relationship with Sandra K. Edwards, who was also involved with her general store business. See Alexander Exhibit 4. This relationship appears to have soured her relationship with Ms. Alexander. Ms. Edwards is also a creditor in the case, having filed a claim for $5,800.00 for "Money Loaned.” See Claim No. 3. Ms. Colston testified that she used Ms. Edward's Home Depot card to buy kitchen cabinets and flooring for her Grayson County home. Ms. Edwards did not testify arid Ms. Colston stated that their relationship had ended.
. Ms. Colston paid $30,000.00 for the general store, purchasing it from Grayson National Bank. Another item acquired from the funds obtained from Ms. Alexander was a home generator estimated to have a value of $10,000.00. The generator, which will be discussed later, was transferred to Ms. Colston's mother by Ms. Colston shortly before filing bankruptcy. As counsel for Ms. Alexander correctly pointed out at trial, the generator transfer was not disclosed in the Debtor's schedules.
. On cross-examination, when questioned about offering Ms. Alexander ownership in the building, Ms. Colston testified that she meant putting Ms. Alexander’s name on the title.
. Ms. Alexander’s sister now has power of attorney for her and control over her finances.
. Ms. Colston’s counsel had withdrawn in the Virginia Beach action for non-payment of fees.
. The automatic stay of 11 U.S.C. § 362(a) went into effect as to Ms. Colston individually upon filing her petition on May 11, 2015. One of the grounds for the requested injunc-tive relief was that Ms. Colston planned to sell property owned by the limited liability companies to pay her individual creditors.
. Ms. Alexander filed a proof of claim for $621,875.66, listing $74,172.00 as secured. The basis for perfection is identified as "Filing of Lis Pendens.” Claim 5-1. However, Ms. Alexander has no judgment against Ms. Colston personally, and has no lien against any property of the estate. She has a recorded lien against S. Colston Properties, LLC, the owner of the now defunct general store. The parties stipulated a 60-month plan would provide approximately a 4% dividend based upon claims filed, including Ms. Alexander’s claim at $621,875.66.
. A previous Chapter 13 plan proposed selling the general store to provide funds for the plan, but Ms. Alexander has a recorded judgment lien against S. Colston Properties, LLC, and that plan provision was removed in the amended plan. Although Ms. Colston acquired the property for $30,000.00 only a few years ago, it is currently tax assessed at $217,700.00. This discrepancy in value was unexplained. Ms. Alexander expects to pursue a creditor's bill in state court to enforce her judgment against that property.
. Section 1302(b)(2)(B) provides that "The trustee shall ... appear and be heard at any hearing that concerns ... confirmation of a plan.” 11 U.S.C. § 1302(b)(2)(B). Nevertheless, the Court notes the Chapter 13 Trustee’s strenuous advocacy in support of the Debtor's plan in this case, particularly at trial. The best description of the Trustee’s position appears similar to that taken in In re Tomer, where the Court held that "the Trustee's assessment [was] that the plan was technically sound and therefore, made in good faith.” Romar Elevators, Inc. v. Tomer (In re Tomer), No. 4:09CV008, 2009 WL 2029798, at *5, 2009 U.S. Dist. LEXIS 60261, at *15 (W.D.Va. July 14, 2009). Tomer went on to observe that this mechanical view “blurs the proper duel [sic] analysis into a single determination that imbues itself on the question of whether the petition was filed in good faith. The Trustee is a trustworthy source with sophisticated technical knowledge of Chapter 13 plan construction. However, the technical sufficiency of a chapter 13 plan does not necessarily satisfy good faith in filing a bankruptcy petition.” Id.
.See, Rebecca B. Connelly, Can a Debtor who Files Chapter 13 in Bad Faith Survive Dismissal?, Am. Bankr.Inst. J. 52, 59 (Feb. 2010). The author of this article was a Chapter 13 trustee at the time it was published and is now Chief Judge of the United States Bankruptcy Court for the Western District of Virginia.
. Section 1307(c) provides that a petition may be dismissed "for cause,” which courts have interpreted to mean that the party moving for dismissal must demonstrate cause, not that the debtor must show an absence of cause. In re Love, 957 F.2d 1350, 1355 (7th Cir. 1992).
. The claims register reflects that, excluding Ms. Colston’s mother’s claim of $48,000.00, there is $642,466.20 in unsecured claims filed to date. Ms. Alexander’s claim of $621,875.66 comprises 96.8% of that class.
. "Resort to the more liberal discharge provisions of Chapter 13, though lawful in itself, may well signal an 'abuse of the provisions, purpose or spirit’ of the Act, especially where a major portion of the claims sought to be discharged arises out of pre-petition fraud or other wrongful conduct, and the debtor proposes only minimal repayment of these claims under the plan.” Neufeld, 794 F.2d at 153.
. Section 523(a)(6) provides that a discharge under 11 U.S.C. § 727 does not discharge an individual debtor of 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).
. At least one court has held that facts supporting an undue influence case can maintain a nondischargeability action under 11 U.S.C. § 523(a)(6). See Necaise v. Necaise (In re Necaise), Case No. 11-52718-KMS, A.P. No. 12-05011-KMS, 2013 WL 4590890, 2013 Bankr.LEXIS 3601 (Bankr.S.D.Miss. Aug. 28, 2013).
. Ms. Colston has proposed a 60-month plan, even though her B22 reflects she is a below median income debtor and is eligible for a shorter plan. See Trustee’s Exhibit 5. This is a factor in her favor, as is the fact she has filed no previous bankruptcy petitions, but these facts are not enough to persuade the Court the good faith burden is met here.
. Because the Court finds confirmation of the Debtor's plan is not appropriate under Section 1325(a)(3), the Court need not reach the question of feasibility under 11 U.S.C. § 1325(a)(6). However, the Court agrees with those Courts that have held that "some gratuitous contributions are allowed, particularly when the funds come from a non-filing spouse or pursuant to a legal obligation.” See In re Page, 519 B.R. 908, 915 (Bankr. M.D.N.C.2014), and cases cited therein. Depending on the facts of a given case, a family member's gratuitous payments to a debtor may not constitute “regular income” within the scope of 11 U.S.C. § 109(e).
. See, e.g., In re Manno, No. 08-15588BF, 2009 WL 236844, at *7 n. 9, 2009 Bankr.LEXIS 142, at *22 n. 9 (Bankr.E.D.Pa. Jan. 30, 2009) (discussing the confusion among courts following the enactment of 11 U.S.C. § 1325(a)(7) and its interaction with 11 U.S.C. § 1307(c)); Bloomberg Bankruptcy *750Treatise, Part VII: Adjustment of Debts of Individuals with Regular Income, Chapter 232: Bankruptcy Code § 1325 — Confirmation of Plan (BNA 2015) ("Few courts have had occasion to interpret section 1325(a)(7) and there is scant legislative history to suggest why Congress added the new provision.”).
. Connelly, supra note 13, at 53.
. Keith’s Tree Farms interpreted 11 U.S.C. § 1208(c)(5) as opposed to Section 1307(c)(5), but the provisions are virtually identical.
. Dismissal is also consistent with 11 U.S.C. § 105(a), which allows the Court to “issue any order that is necessary to carry out the provisions of the Code.” While the Debtor has not made a formal request "for additional time for filing another plan or a modification of a plan,” the Court will not require the Debtor to do a useless act. See In re Marett, No. 96-75003-W, 1996 WL 33340790, at *13 (Bankr.D.S.C. Nov. 13, 1996) (“[Where] no plan which the debtor could propose would be feasible,” the case should be dismissed without leave to amend.).
.Chapter 13 relief may or may not be available to Ms. Colston, depending on the amount of her noncontingent, liquidated unsecured debts at the time she files. The claim against her personally has yet to be liquidated in state court. The current limit on such unsecured debt is $383,175.00. 11 U.S.C. § 109(e). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498799/ | MEMORANDUM OPINION
DOUGLAS D. DODD, UNITED STATES BANKRUPTCY JUDGE
Tower Credit, Inc. sued for a determination that its claim against debtors Martin and Ora Carter is not dischargeable under 11 U.S.C. § 523(a)(2)(A) and (B). This memorandum opinion sets forth the reasons the obligation is nondischargeable.
Facts
The Tower Loan Application
Martin and Ora Carter applied to Tower on September 7, 2010 to borrow $2,000 to pay for home improvements.1 Both debtors signed the face of the four-page application and also a separate document reciting that the information on their loan application was true and correct and included all their debts.2 Another document comprising other.financial and personal information bore their signatures below language warning that failure to disclose all information “truly and completely will constitute fraud.”3 The loan process culminated with Mr. and Mrs. Carter’s signing a $5,376.14 promissory note.4
The debtors eventually defaulted on the loan and Tower obtained a judgment against them in the Baton • Rouge City Court.5 On October 28, 2014, the Carters filed a joint chapter 13 petition. The debtors’ joint bankruptcy case was severed on June 12, 2015 (P-53) after which Mrs. Carter proceeded with a chapter 7 liquidation.6
The Debtors’ Alleged Misstatement
The Carters’ application recited that they wanted the loan to make unspecified “home improvements.” This proved to be untrue: Ora Carter testified at the meeting of creditors that they used the money to open a restaurant.7 The defendants *756sought to shrug off the testimony as an error, insisting that Mrs. Carter was “thinking about loan we had make [sic] in 2011 with Pioneer Credit for the restaurant.” 8 But at trial both Martin and Ora Carter admitted that the restaurant project only came into existence in 2011, nearly a year after the 2010 Tower loan. Still, they reiterated their claim that they borrowed the money for the restaurant from Pioneer Credit. They notably offered no evidence that they’d at first planned to make the home repairs but later changed their minds.
The Carters also offered no evidence to corroborate that they’d borrowed money from Pioneer to open a restaurant. In fact, the only documentary evidence of the debtors’ dealings with Pioneer refutes their contention. Specifically, the debtors’ original schedules, as well as the amended schedules Ora Carter filed in her severed case, listed a debt to Pioneer for a loan in 2009, well before the defendants embarked on the restaurant project.9 In addition, the only proof of claim Pioneer filed in either bankruptcy was in Ora Carter’s case, for a 2011 loan to Tamara Cage (Ora Carter’s daughter) to make car repairs. Ora Carter was a co-maker on that obligation.10
Tower’s Loan Process
Stephen Binning, Tower’s president, testified at trial concerning the 2010 loan to the Carters. Mr. Binning didn’t take the debtors’ application and the evidence left some doubt concerning his personal knowledge of Tower!s dealings with them when they applied for the loan. However, Binning stated that the debtors either filled out the loan application or helped Tower staff to do so. In any case he identified the loan documents and verified that they bore the debtors’ signatures.
Binning did not know of the debtors’ plan to use the loan proceeds to open a restaurant rather than for home repairs until he questioned them at the meeting of creditors. The revelation prompted Tower to file the dischargeability complaint. According to Mr. Binning, Tower would not have .made the loan had the debtors disclosed their plan to use the funds to open a restaurant. Binning explained that his company considered a loan for that purpose too risky. Tower needed to know that the debtors had a stable income in order to be able to repay their loan. Binning did not consider opening a new restaurant a sufficiently stable source of income to make the loan payments.
The Debtors’ Failure to Respond to Discovery
The Carters failure to reply to Tower’s discovery requests also bears on the outcome of this proceeding.
Tower served interrogatories, requests for production of documents and requests for admissions on the defendants on June 4, 2015.11 The plaintiff asked the Carters to admit:
(1) that at the time of the Tower loan application they planned to use the loan proceeds to open a restaurant;
*757(2) that they used the extension of credit from the 2010 loan to open a restaurant;
(3) that the assertion in their answer that they borrowed money from Pioneer to open the restaurant is a fabrication; and
(4) that they obtained the extension of credit by means of false representations, fraud and materially false financial statements with the intent to deceive.12
The debtors never answered or objected to the requests for admission, nor did they respond to any of the other Tower discovery requests.
Analysis
Tower Proved its Debt is Not Discharge-able Under 11 U.S.C. § 528(a)(2)(A)
Tower alleges that the Carters’ actions render their debt to Tower nondis-chargeable under 11 U.S.C. § 523(a)(2)(A),13 which excepts from discharge any debt:
“for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s ... financial condition.... ”
Section 523(a)(2)(A) applies to debts obtained by fraud “involving moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made.” Matter of Martin, 963 F.2d 809, 813 (5th Cir.1992).
To prevail under 11 U.S.C. § 523(a)(2)(A), Tower must prove that: (1) the Carters made a representation; (2) they knew the representation was- false; (3) they made the representation with the intent to deceive Tower; (4) Tower actually and justifiably relied on the Carters’ representation; and (5) Tower sustained a-loss as a proximate result of its reliance on the representation. Matter of Acosta, 406 F.3d 367, 372 (5th Cir.2005).
The Carters have not argued or offered any evidence supporting relief from the consequences of their failure to respond to Tower’s discovery requests. Because the Carters did not timely reply or object to Tower’s requests for admissions, the matters listed in the requests were admitted. Fed. R. Bankr.P. 7036(a)(3). Thus, the defendants have admitted that the reason they gave for borrowing from Tower — to make home improvements — was false when they gave it, and also that they knew it was false because they planned to use the loan proceeds to open a restaurant. The Carters also have admitted that they made the false representation to obtain credit with the intent to deceive Tower. These admissions satisfy Tower’s burden of proving the first three elements of section 523(a)(2)(A).
*758Pretermitting the defendants’ failure to make discovery, the evidence supports a finding that the defendants made a false representation with the intent to deceive Tower. “ ‘When it is not disputed that a loan application was signed by the [djebtor, then the contents of the application should, in general, be attributed to the [djebtor and entitled at least to great weight, and perhaps decisive effect.’ ” In re Williams, 431 B.R. 150, 155 (Bankr. M.D.La.2010), quoting In re Kabel, 184. B.R. 422, 425 (Bankr.W.D.N.Y.1992). The debtors’ contradictory statements regarding their plans for the 2010 Tower loan proceeds, coupled with the lack of evidence to corroborate their claims, undermines their credibility. Rather, the evidence established that the Carters were at least indifferent to the complete accuracy of the loan application. Lack of care when signing loan documents evidences a reckless disregard for the correctness of the information in the application, and thus establishes intent to deceive for purposes of applying section 523(a)(2). In re Butski, 184 B.R. 193, 195 (Bankr.W.D.N.Y.1993), citing In re Coughlin, 27 B.R. 632, 636 (1st Cir. BAP 1983).
The next issue is whether Tower relied on the defendants’ misstatement in deciding to extend credit to them. Tower must prove that in deciding to loan the Carters money, it justifiably relied on their misrepresentation to render its claim non-dischargeable under Bankruptcy Code section 523(a)(2)(A). Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Justifiable reliance is gauged by “ ‘an individual standard of the plaintiffs own capacity and the knowledge which he has, or which may fairly be charged against him from the facts within his observation in the light of his individual case.’ ” In re Vann, 67 F.3d 277, 283 (11th Cir.1995), quoting Prosser & Keaton on Torts § 108 at 751 (5th ed.1984) (emphasis in original). “ ‘It is only where, under the circumstances, the facts should be apparent to one of the plaintiffs knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make an investigation on his own.’ ” Vann, at 283, quoting Prosser & Keaton on Torts at 752.
The evidence established that the Carters had been Tower customers since June 2009.' No evidence supported an inference that Tower had any reason to investigate any information the Carters gave it to obtain the 2010 loan. Accordingly Tower established that it justifiably relied on the information in the defendants’ loan application and carried its burden of proving that the Carters’ debt to it is non-dis-chargeable under 11 U.S.C. § 523(a)(2)(A).14
Tower also Proved that the Debt is Non-dischargeable Under 11 U.S.C. § 523(a)(2)(B)
Bankruptcy Code section 523(a)(2)(B) renders nondischargeable á 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;
*759(in) on which the creditor to whom the debtor is liable for such ... credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.”
A written statement is materially false under 523(a)(2)(B) if it “ ‘paints a substantially untruthful picture of a financial condition by misrepresenting information of the type which would normally affect the decision to grant credit.’ ” Matter of Norris, 70 F.3d 27, 30 (5th Cir.1995), quoting In re Jordan, 927 F.2d 221, 224 (5th Cir.1991) (Emphasis added).
In contrast to section 523(a)(2)(A), a declaration of nondischarge-ability under section 523(a)(2)(B) requires proof that the creditor reasonably relied on the debtor’s false statements:
The reasonableness of a creditor’s reliance ... should be judged in light of the totality of the circumstances. The bankruptcy court may consider, among other things: whether there had been previous business dealings with the debtor that gave rise to a relationship of trust; whether there were any “red flags” that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and whether even minimal investigation would have revealed the.inaccuracy of the debtor’s representations.
Matter of Costow, 991 F.2d 257, 261 (5th Cir.1993).
Tower proved that the debtors’ loan application contained a materially false statement within the meaning of section 523(a)(2)(B). They misrepresented the reason for the loan, information that Binning indicated Tower normally would use to decide whether 'to grant the loan. The defendants do not challenge Tower’s claim of reliance: they contend' that their statement on the application was correct. The record belies their argument. The Carters’ claim that Ora Carter merely misspoke at the meeting of creditors when she claimed that the defendants had used the Pioneer Credit loan to open a restaurant was not corroborated and not credible given its inconsistency with sworn testimony at the meeting of creditors. The debtors’ reckless disregard for the truth of what was in the loan application further evidences their intent to deceive Tower with a false representation of the purpose for the loan. ,See Butski, 184 B.R. at 195, Coughlin, 27 B.R. at 636.
Tower also proved that it reasonably relied on the debtors’ misrepresentation. No party offered any evidence suggesting that “red flag” that should have warranted Tower’s further investigation of the information on the debtors’ 2010 credit application, especially in light of the parties’ prior relationship. Accordingly, Tower reasonably relied on information the debtors gave it in September 2010. The Carters’ debt to Tower therefore is nondischargeable under section 523(a)(2)(B).
CONCLUSION
Tower Credit proved that Martin and Ora Carters’ debt to it is nondischargeable under both 11 U.S.C. § 523(a)(2)(A) and 11 U.S.C. § 523(a)(2)(B). The debt to Tower is nondischargeable under Bankruptcy Code section 523(a) in Martin ' Carter’s chapter 13 case as well as in Ora Carter’s chapter 7 liquidation. 11 U.S.C. § 1328(a)(2).
. September 7, 2010 credit application (Exhibit Tower 1).
. September 13, 2010 credit application verification page (Exhibits Tower 4 for Ora Carter and 5 for Martin Carter).
. September 13, 2010 loan application addendum (Exhibits Tower 2 for Ora Carter and 3 for Martin Carter).
. September 13, 2010 promissory note (Exhibit Tower 6). The $5,376.14 the debtors borrowed comprised among other amounts $2,301.11 to pay off their 2009 loan with Tower. The 2010 loan netted the debtors $2000 in new money.
. December 17, 2012 judgment in "Tower Credit, Inc. v. Ora Carter and Martin Carter,” Baton Rouge City Court case no. 12-09123, for $4,272.46 plus interest, attorneys’ fees and costs (Exhibit Tower 7). •
. Tower filed the complaint commencing this adversary proceeding on January 19, 2015, prior to the severance.
. Transcript of December 1, 2014 meeting of creditors, p. 21, 11. 1-23 (Exhibit Tower 8).
. Answer to Complaint, ¶ 7 (P-6).
. Schedule F filed in case number 14-11368(P-2); amended schedule F filed in case number 15-10687 (P-61). Both debtors testified at their chapter 13 meeting of creditors in 2014 that they had read and signed their schedules and that they were true and correct. Transcript of December 1, 2014 meeting of creditors, p. 3, 11. 13-20 (Exhibit Tower 8).
. Pioneer proof of claim in case number 15-10687 (Exhibit Tower 9).
. Interrogatories (P-14), Requests for Production of Documents (P-15), Requests for Admissions (P-16) and Certificate of Service (P-17).
. Requests for Admissions Nos. 5, 6, 7 and 8.
. Because the debtors’ allegedly false representation was contained in their written loan application, section 523(a)(2)(B), not section 523(a)(2)(A), seemingly would govern the dis-chargeability of their debt to Tower because that section addresses false written statements concerning a debtor's financial condition. 4 COLLIER ON BANKRUPTCY ¶ 523.08, p. 523-43 (16th ed. 2015) (“False financial statements are dealt with separately in section 523(a)(2)(B) and the exclusion from paragraph (A) makes clear that the false financial statement exception falls within a category separate from the false representation or actual fraud exception and is subject to special conditions to be met before the exception becomes effective. Paragraphs (A) and (B) of section 523(a)(2) are mutually exclusive”). However, although the defendants' false representation was written it did not relate directly to their financial condition, bearing instead on the Carters’ reason for the loan. Accordingly, section 523(a)(2)(A) is applicable.
. That the September 2010 loan comprised in part renewal of an existing obligation (because the defendants borrowed enough in 2010 to pay the 2009 loan balance) makes no difference to this analysis. Section 523(a)(2) also makes nondischargeable a debt for renewal of an earlier loan when the lender does not advance new funds, even if the borrower’s false representation came at loan renewal and not when the loan was first made. Matter of Norris, 70 F.3d 27, 29-30 (5th Cir.1995). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498800/ | AMENDED TRIAL OPINION1
Thomas J. Tucker, United States Bankruptcy Judge
I. Introduction
The Court held a joint bench trial in these two adversary proceedings, followed by two. rounds of briefing filed after the close of evidence. The Court has considered all of the arguments of the parties; all of the exhibits admitted into evidence at trial, namely Stipulated Exhibit Nos. 1-10 and Debtor’s Exhibit B; and all of the testimony of the trial witnesses, namely Defendants Delores Ziole and Glory Demeter; and James Demeter. This opinion constitutes the Court’s findings of fact and conclusions of law regarding these two adversary proceedings.
The Plaintiff in each of these adversary proceedings, Stuart Gold, is the trustee in the Chapter 7 bankruptcy case of James L. Demeter and Glory L. Demeter, Case No. 12-44593. In Adv. No. 12-5212, Plaintiff Trustee seeks a judgment denying the Debtor Glory L. Demeter a discharge, based 11 U.S.C. § 727(a)(2)(A).2
In Adv. No. 12-5284, the Trustee’s First Amended Complaint3 contains four counts against Defendant Delores Ziole, who is the mother of the Debtor Glory Demeter. The Trustee describes those counts in the Final Pretrial Order in this way:
Plaintiff seeks a money judgment against the Debtor’s mother, Delores Ziole (the “Defendant”) on Count I and II of Plaintiffs complaint avoiding *762and recovering certain cash transfers pursuant to 11 U.S.C. §§ 548(a), 544(b), 550(a)(1) and M.C.L. § 566.34(l)(a). Plaintiff also seeks a money judgment against the Defendant on Count III of Plaintiffs complaint for turnover of the value of the Debtor’s remaining inheritance interest in her late father[’s] estate pursuant to M.C.L. § 700.105 (1979) and 11 U.S.C. § 542(a). Finally, Plaintiff seeks a judgment on Count IV of Plaintiffs complaint, disallowing the Defendant’s proof of claim, if any, pursuant to 11 U.S.C. § 502(d). Counts I & II
Plaintiff seeks to avoid and recover two (2) transfers totaling $177,539.00 made on February 6, 2012, from two (2) bank accounts held jointly between the Debtor and Defendant to two (2) bank accounts held exclusively by Defendant (the “Transfers”). Prior to the Transfers, the cash balances in the bank accounts were comprised exclusively of the proceeds of liquidated Treasury Direct accounts held jointly by the Debtor and the Defendant. The Debtor and Defendant inherited the money used to initially fund the Treasury Direct Account from the Debtor’s late father who died intestate on December 6, 1989 (the “Decedent’s Estate”).
The Transfer[s were] made to an insider, within a month of filing for bankruptcy, for less than reasonably equivalent value, while the Debtor was insolvent. Further, the Transfers were made with actual intent to hinder, delay, or defraud the Debtor’s creditors and the Trustee by attempting to remove the cash balance to ... bank accounts that would not constitute property of the bankruptcy estate upon the Debtor’s bankruptcy filing.
Count III
Plaintiff seeks a money judgment for the value of the Debtor’s remaining inheritance intérest in the Decedent’s Estate. The Debtor has an interest by intestate succession in the portion of the Decedent’s Estate not used to fund the Treasury Direct Account pursuant to M.C.L. 700.105 (1979). The Plaintiff requests] this amount be deducted from the Defendant’s interest in the Transfers.
Count IV
Plaintiff seeks judgment disallowing the Defendant’s proof of claim, if any, against the bankruptcy estate because Defendant maintains possession of property that is recoverable from her by the Trustee pursuant to 11 U.S.C. §§ 542 & 550.4
For the reasons stated in this opinion, the Court will enter judgment for each of the Defendants in these adversary proceedings.
II. Jurisdiction
This Court has subject matter jurisdiction over each of these adversary proceedings under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D.Mieh.). Adversary proceeding No. 12-5212 (Gold v. Demeter) is a core proceeding under 28 U.S.C. §§ 157(b)(2)(J). Adversary proceeding No. 12-5284 (Gold v. Ziole) is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(E), 157(b)(2)(H), and 157(b)(2)(0).
III. Background and facts
Initially, the Court notes that each of the parties to these adversary proceedings have stipulated to the following facts, as stated in the final pretrial order entered in each adversary proceeding. The Court *763now adopts and incorporates the following stipulated facts into its findings of fact and conclusions of law:
c. On February 28, 2012 (“petition date”), Glory Demeter (the “Defendant” and/or “Debtor”) and her husband James Demeter filed a voluntary joint petition under Chapter 7 of Title 11 of the United States Code.
d. Plaintiff Stuart A. Gold is the duly appointed Chapter 7 Trustee of the debtorsf] bankruptcy estate.
e. Delores Ziole (“Ziole”) is the debtor’s mother who resides at 13732 Cambridge Street, Apt. 302, South-gate, Michigan, located within this judicial district.
f. At all times relevant to this Complaint, Ziole is an insider of the Debt- or within the meaning of 11 U.S.C. § 101(31)(A)(i) and M.C.L. § 566.31(g).
g. Prior to the petition date, the Debtor’s name appeared jointly with Ziole on a Fifth Third Bank account, account number ending 6539 (“Fifth Third Account”) and a PNC Bank account, account number ending 6672 (“PNC Account”) (collectively, the “Accounts”).
h. On or about February 6, 2012, the Debtor requested and/or permitted Ziole to request Fifth Third Bank and PNC Bank to remove the Debtor’s name from both the Fifth Third Account and PNC Account (the “Transfers”).
i. The cash balance in the Fifth Third Account immediately prior to the Transfers totaled $167,854.71.
j. The cash balance in the PNC Account immediately prior to the Transfers totaled $10,846.89.
k.As a result of the request to remove Debtor’s name from the Fifth Third Account, Fifth Third Bank immediately closed the Fifth Third Account and deposited the cash balance held in the Fifth Third account in a new bank account, account number ending 0514, held exclusively in Ziole’s name.
m. As a result of the request to remove Debtor’s name from the PNC Account, PNC Bank immediately removed the Debtor’s name from the PNC Account. As a result, a new bank account was immediately opened on the same day exclusively in Ziole’s name, account number ending 0578, and named the Debtor as the beneficiary of the new bank account.. Approximately $9,684.83 was immediately transferred from the PNC Account to the new PNC bank account, account number ending 0578.
k. The total amount alleged to be transferred is $177,539.54.
n. At approximately the same time as the Transfers, American Express Bank FSB and Capital One Bank had pending lawsuits against the Debtor for unpaid credit card debt totaling approximately $31,543.64. Additionally, Discover Bank had already obtained a judgment against the Debtor for $15,912.45. At the time of the Transferfs], and at approximately the same time as the funds from the Treasury Direct account began to be deposited into the Fifth Third Account, the Debtor[s] ceased making their mortgage payments.
o. At the time of the Transfer[s] the Debtor owed approximately $43,400.00 in unsecured non-priority debt as scheduled on Schedule F.5
*764The Court makes additional findings in the next section of this opinion.
IV. Discussion
A. Ownership of the funds in the joint accounts at issue
A key dispute in both of these adversary proceedings concerns the ownership of the two joint bank accounts at issue. Until February 6, 2012, Defendant Ziole had an account with PNC Bank and an account with Fifth Third Bank, each of which was in the name of both Ziole and her daughter, the Defendant-Debtor Glory Demeter. These two joint accounts (the “Joint Accounts”) had been in the name of both Ziole and Glory Demeter for many years. On February 6, 2012, Ziole and Glory Demeter went to these banks and, in effect, caused Debtor Glory Demeter’s name to be removed from the accounts. The resulting change in account status, and the account balances involved, can be summarized this way:
The Fifth Third bank account:
The Fifth Third account (account number ending in “6539”), jointly in the name of “Delores I. Ziole” and “Glory L. Demeter,” contained an account balance just before the change made on February 6, 2012 of $167,854.71;6 and just after the change the Fifth Third account (with new account number, ending in “0514”) was in the name of “Delores I. Ziole” only, with a balance of $167,854.71.7
The PNC Bank account:
The PNC Bank account (account number ending in “6672”), jointly in the name of “Delores I. Ziole” and “Glory Lee Demeter,” contained an account bal-anee just before the change made on February 6, 2012 that included the sum of $9,684.83, which was withdrawn on February 6, 2012,8 and deposited into a new PNC Bank account (account number ending in “0578”). This second, new PNC Bank account was titled in the name of “Delores I. Ziole” only (with Glory Lee Demeter listed as a beneficiary only), and then contained the $9,684.83 deposited on February 6, 2012.9
The Trustee’s primary contention is that until the events of February 6, 2012, the Debtor Glory Demeter owned one-half of the $167,854.71 in funds in the joint Fifth Third Bank account (ie., $167,854.71 -p 2 = $83,927.35), and one-half the $9,864.83 in funds that were in the joint PNC Bank account and withdrawn on February 6, 2012 (ie., $9,864.83 -s- 2 = $4,932.41). If the Trustee is correct about this, then clearly there was a transfer on February 6. 2012 of a total of $88,859.76 ($83,927.35 + $4,932.41 = $88,859.76) of the Debtor’s funds to the Debtor’s mother, Defendant Ziole. The Trustee contends that this was a fraudulent transfer, and seeks to avoid and recover it for the benefit of the Debtor Glory Demeter’s bankruptcy estate and creditors.
Both of the Defendants contend that none of the funds in either of the Joint Accounts was property of the Debtor Glory Demeter, but rather that all the funds were the sole property of Ms. Ziole, even though the accounts were titled jointly in the names of both Ms. Ziole and Glory Demeter.
*765There is a presumption under Michigan law that funds held in a joint bank account are owned equally by both account holders. As applied in this case, therefore, there is a presumption that one-half of funds in the Joint Accounts were the property of Glory Demeter, and the other half were the property of Defendant Delores Ziole. See Danielson v. Lizoski, 209 Mich.App. 623, 531 N.W.2d 799, 801-02 (1995) and cases cited therein. That presumption of equal ownership may be rebutted, however, by evidence showing that one of the two joint account holders owns more than one-half of the funds in the account. Id. Normally, such evidence would include evidence of how much of the funds in the joint account each account holder supplied. Evidence to rebut the presumption may include the testimony of the account holders themselves, but the trier of fact is not required to believe such testimony. Compare Muskegon Lumber & Fuel Co. v. Johnson, 338 Mich. 655, 62 N.W.2d 619, 622-23 (1954) (testimony of the account holders was not disputed by any other evidence, and the trial court believed such testimony) with American Nat’l Bank & Trust Co. of Michigan v. Modderman, 37 Mich.App. 639, 195 N.W.2d 342, 343-44 (1972) (affirming decision of the trial court, which found the presumption of equal ownership not rebutted and did not believe the testimony of the account holders).
In this case, the evidence regarding the two Joint Accounts indicates that the Debtor Glory Demeter had the ability to withdraw funds unilaterally, just as Defendant Ziole did. The accounts were joint, in both names, and Glory Demeter testified that “years ago” she signed signature cards for these accounts.10 And Ms. Ziole testified that one of the purposes of having Glory Demeter’s name on the accounts was so that Ms. Demeter could get money out for Ms. Ziole if Ms. Ziole became ill and needed money.11 This clearly implies that Glory Demeter and Ms. Ziole each had the ability unilaterally to withdraw all the funds from these Joint Accounts.
But the fact that Glory Demeter could unilaterally withdraw all the funds from these Joint Accounts does not necessarily mean that any of the funds in the Joint Accounts were her property. And the Court concludes that the Defendants have indeed rebutted the presumption under Michigan law that Glory Demeter owned a one-half interest in the funds in these Joint Accounts. The Court finds and concludes, based on a preponderance of the evidence, that at all times before the transfers at issue were made on February 6, 2012, Glory Demeter did not own any of the funds in either of the Joint Accounts.
The evidence, including the testimony of Ms. Ziole and Glory Demeter, which the Court finds to be credible, established the following facts, which demonstrate that Glory Demeter did not own any of the funds in either of the Joint Accounts.
First, all of the funds that were in the Joint Accounts came from among the following sources, and no other source:
1. of the funds in the PNC Bank joint account, from Delores Ziole’s monthly social security benefit, which she had been receiving continuously since her husband’s death in 1989, and the amount of which as of February 2012 was $1,457.00 per month;12
2. from a life insurance benefit paid to Ms. Ziole due to the death of her hus*766band in 1989, in an amount not now known with certainty, but which Ms. Ziole thinks was $45,000;13
3. from funds that were in one or more joint bank accounts owned by Ms. Ziole and her husband, which accounts passed to the sole ownership of Ms. Ziole upon her husband’s death in 1989; 14
a. the source of the funds in these accounts, before the death of Ms. Ziole’s husband, may have included, in amounts not now recalled or documented, money earned by Mr. Ziole’s employment before his death;15 the proceeds of the sale of a home owned jointly by Ms. Ziole and her husband; 16 and the sale of a boat owned solely by Ms. Ziole’s husband; 17 all in amounts that Ms. Ziole could not re- • call or document at the time of trial;
4. from the sale of a building, owned by Ms. Ziole’s husband and possibly also by Ms. Ziole, that had been used for Mr. Ziole’s business before his death; in amounts that were paid to Ms. Ziole in monthly payments for a year or two, in an amount that Ms. Ziole could not recall for sure at the time of trial but which she thinks was $800 per month, plus a lump sum payment in an amount that Ms. Ziole could not recall or document at the time of trial; 18 and
5. from the collection of money that was owed to Ms. Ziole’s husband or his business; in amounts that Ms. Ziole could not recall or document at the time of trial.19
It is not surprising that Ms. Ziole could not recall or document the amounts just discussed at the time of trial, because these concern events that occurred before or soon after 1989, more than 20 years before trial, and because Ms. Ziole did not retain records from that long ago.
Second, both of the Defendants testified that none of the funds in either of the Joint Accounts came from Glory Demeter or from proceeds of any property of Glory Demeter.20
Third, the following argument by the Trustee is unavailing. The Trustee points out, and it appears to be undisputed, that as much as $130,000.00 of the funds in the Fifth Third Bank joint account came from Ms. Ziole having liquidated U.S. Treasury bonds that Ms. Ziole had acquired many years earlier, and which Ms. Ziole had placed in the joint names of herself and Glory Demeter. The Trustee cites federal regulations, including 31 C.F.R. 315.5(a), which states that with an exception not applicable here, “[rjegis-tration [of savings bonds] is conclusive of ownership,” and that: “Savings bonds are issued only in registered form. The registration must express the actual ownership of, and interest in, the bond.” This may well mean, as the Trustee contends, that during the time the $130,000 in funds were invested in Treasury bonds titled jointly, federal law deemed Ms. Ziole and Glory Demeter to be co-owners of the bonds. But this does not mean' that the proceeds of such Treasury bonds, once the bonds were liquidated, must be considered in any part the property of Glory Demeter. When “equitable interests” exist that show grounds to do so, the Michigan courts, applying Michigan law, will find or impose “constructive or resulting trusts upon the proceeds of U.S. Treasury bonds.” See Klapp v. Beverly Hall Found. (In re Es-*767tote of Freedland), 38 Mich.App. 592, 197 N.W.2d 143, 149 (1972) (citing numerous cases). An example of this is where the clear intent of the person who acquired the Treasury bonds would be “frustrated solely by the legal technicalities of the treasury regulations.” See id. at 150.
The funds that Ms. Ziole used to acquire these Treasury bonds came from one or more of the sources in the list in Item “First” above, item nos. 1-5, and no other source (and therefore not from any property or funds belonging to Glory Demeter). And the Court credits Ms. Ziole’s testimony, that she put Glory Demeter’s name on the Treasury bonds only so that Glory would own them automatically if Ms. Ziole passed away before the bonds were cashed in.21 (And such result would occur under the treasury regulations cited by the Trustee. See 31 C.F.R. 315.70(b)(1).) And, finally, when the Treasury bonds were liquidated by Ms. Ziole, she put the proceeds of the bonds in the joint Fifth Third Bank account.
Given the foregoing, the federal treasury regulations cited by the Trustee do not undercut Defendants’ contention that Glory Demeter did not own any of the funds in the joint Fifth Third Bank account.
Fourth, both Ms. Ziole and Glory Demeter understood and intended that all of the funds in the two Joint Accounts at issue, as well as all of the funding sources for those two Joint Accounts, were owned entirely by Ms. Ziole, and not in any portion by Glory Demeter. And this shared understanding long predated the events of February 2012.22
Fifth, none of the sources of funds listed in Item “First” above, item nos. 1-5, can be deemed to be, in any part, property or funds belonging to Glory Demeter due to any right she may have had in 1989 to inherit from her father, who died intestate.
Under Michigan law in effect in 1989, when Glory Demeter’s father died without a Will, Glory Demeter would have been entitled to inherit one half of the residue of the “intestate estate,” after payment of the first $60,000.00 to the surviving spouse (Ms. Ziole). See former Mich. Comp. Laws Ann. § 700.105(c) (repealed in 2000). This law was changed by the repeal of § 700.105, and its replacement with Mich. Comp. Laws Ann. § 700.2102, effective April 1, 2000. If the latter section were applied, it would mean that Glory Demeter would have been entitled to inherit one half of the residue of her father’s “intestate estate” after payment of the first $150,000.00 to the surviving spouse (Ms. Ziole). See Mich. Comp. Laws Ann. § 700.2102(b).23
The parties dispute which version of the intestacy statute would apply — the pre-2000 version or the post-2000 version. But the Court concludes that it is not necessary to decide that issue.
The evidence at trial was not sufficient for the Court to determine or estimate what the value or amount of Mr. Ziole’s “intestate estate” was, within the meaning of the intestacy statutes. But the evidence did show that Ms. Ziole took and kept all of the “intestate estate” of her late husband for herself, with the knowledge and acquiescence of Glory Demeter;24 that no *768probate estate was opened;25 and that Glory Demeter never asked that a probate estate be opened after her father’s death.26 Nor did Glory Demeter ever indicate to Ms. Ziole that she (Glory) was entitled to any money from her father’s estate.27 If Ms. Ziole ended up with more of her statutory share of Mr. Ziole’s “intestate estate,” under either version of the intestacy statute cited above, a fact not proven at trial, the evidence showed, and the Court finds, that Glory Demeter waived any right she may have had to claim any share of the “intestate estate,” many years before the February 2012 transfers at issue in this case. By February 2012, therefore, Glory Demeter had no claim or right to any share of her late father’s “intestate estate.”
Sixth, in unilaterally causing and continuing to cause Glory Demeter’s name to be on the two joint bank accounts at issue, for many years before the events of February 2012, Ms. Ziole never had any intention of giving Glory Demeter any ownership of any portion of the funds in the accounts. Rather, as she testified, Ms. Ziole put Glory Demeter’s name on the accounts for these reasons:
Q Okay. . Why was Glory’s name put on the [PNC Bank] bank account?
A Well, I just thought in ease I would ever become ill and I needed her maybe to write a check for me.
Q Why was Glory’s name put on the [Fifth Third Bank] bank account?
A ... In case I would become ill and I would need her to write a check for me.
Q ... After your husband’s death—
Q —did you add Glory Demeter’s name to the Fifth Third and PNC account, or whatever they were named then?
A After he had passed away.
Q Do you know how long after he passed away?
A Well, probably not too long, but not immediately.
Q A year, two years?
A Well, maybe within the year.
Q And why did you do that?
A Well, like I said, if anything happened to me, I wanted her to have whatever I had.
Q Did anybody recommend that you do that?
A Oh, all my friends absolutely. They were all doing it.28
For all of these reasons, the Court finds and concludes that Defendants have successfully rebutted the presumption that they each owned a one-half interest in the Joint Accounts at issue. And the Court finds and concludes that the Debtor, Glory Demeter, did not own any of the funds in the two Joint Accounts.
B. Why all of the Trustee’s claims fail
1. Counts I and II (fraudulent transfer claims) in Adv. No. 12-5284
It follows that when Glory Demeter induced her mother, Ms. Ziole, to move the money in the Joint Accounts to accounts that were solely in Ms. Ziole’s name, and helped Ms. Ziole do so, on February 6, 2012, there was no transfer of any property of the Debtor Glory Demeter. As a *769result, the Trustee’s fraudulent transfer claims against Delores Ziole, Counts I and II in Adv. No. 12-5284, must fail. The Trustee cannot avoid the alleged transfers under any provision of Bankruptcy Code § 548, because such avoidance requires the Trustee to prove that there was a transfer of “an interest of the debtor in property” (or the incurring of an obligation by the debtor). See 11 U.S.C. § 548(a)(1).
Nor can the Trustee avoid the alleged transfers under the Michigan’s version of the Uniform Fraudulent Transfer Act (“UFTA”). That Act’s definition of “transfer” is limited to disposing of “an asset or an interest in an asset.” See Mich. Comp. Laws Ann. § 566.31(l)(í). And the fraudulent transfer avoidance provisions of the UFTA apply only to a “transfer” by a debtor (or the incurring of an obligation by a debtor). Here the “debtor” (Debtor Glory Demeter) did not dispose of “an asset or an interest in an asset.” Rather, only a non-“debtor” (Delores Ziole) did so. So the alleged transfers cannot be considered “transferís]” that can be avoided under any of the provisions of the UFTA. See Mich. Comp. Laws Ann. §§ 566.34(1), 566.35(1), 566.35(2).
For these reasons, the Trustee’s fraudulent transfer claims fail.
2.Count III in Adv. No. 12-5284
Count III in Adv. No. 12-5284 seeks an order requiring Delores Ziole to turn over to the Trustee, under 11 U.S.C. § 542(a), alleged property of the Glory Demeter bankruptcy estate. Such property of the bankruptcy estate is alleged to be “the [DJebtor’s interest in the estate of Walter Ziole.”29
To prevail on this claim, the Trustee had the burden of proving that as of the February 28, 2012 date of her Chapter 7 bankruptcy petition, the Debtor Glory Demeter had an interest in the estate of her late father Walter Ziole, who died 23 years earlier, in 1989, and to prove what the value of that interest was. The Trustee did not meet his burden of proof on either score. For this reason, and for the reasons stated in Part IV.A of this opinion, this claim by the Trustee fails.
3. Count IV in Adv. No. 12-5284 (dis-allowance of claim under 11 U.S.C. § 502(d))
Count IV in Adv. No. 12-5284 seeks the disallowance, under 11 U.S.C. § 502(d), of any claim filed by Delores Ziole in Glory Demeter’s bankruptcy case. Ms. Ziole has not filed a proof of claim in the bankruptcy case, and the deadline for filing claims was April 17, 2013, according to the Clerk’s notice entitled “Notice of Need to File Proof of Claim Due to Recovery of Assets” filed and served in the bankruptcy case (Docket # 91 in Case No. 12-44593).
In any event, the relief sought in Count IV cannot be granted because the Court today has determined that the Trustee’s other counts fail. Given that, there is no basis under § 502(d) for disallowing a claim filed by Delores Ziole.
4. Count I in Adv. No. 12-5212 (objection to the Debtor Glory Demeter’s discharge)
In Count I of the Trustee’s complaint in Adv. No. 12-5212 (the only remaining count), the Trustee seeks the denial of Debtor Glory Demeter’s discharge, based on 11 U.S.C. § 727(a)(2)(A). The success of this count depends on the Trustee meeting his burden of proving, among other elements, that the Debtor Glory Demeter transferred “property of the debtor, within one year before the date of filing of the [bankruptcy] petition.”
*770Based on the Court’s findings and conclusions, above, the Trustee has failed to meet his burden of proving this element of his objection to discharge. As a result, this count also fails.
V. Conclusion
For the reasons stated in this opinion, the Court will enter a judgment in Adv. No. 125212, dismissing the remaining count of the Trustee’s complaint with prejudice; and the Court will enter a judgment in Adv. No. 12-5284, dismissing all four counts of the Trustee’s First Amended Complaint, with prejudice.
. This amended opinion makes several non-substantive changes/corrections to the Trial Opinion filed on October 16, 2015. No substantive changes were made.
. This is Count I of the Trustee's complaint in Adv. No. 12-5212 (Docket # 1). The other count in that complaint, Count II, was voluntarily dismissed as part of the Final Pretrial Order entered in Adv. No. 12-5212 (Docket # 25), at 2.
.Docket # 16 in Adv. No. 12-5284. '
. Final Pretrial Order (Docket # 33 in Adv. No. 12-5284) at 2-3.
. These stipulated facts are quoted from the Final Pretrial Order entered in Adv. No. 12-5212 (Docket # 25) at 3-4. (The mis-lettering of the paragraphs is in the original). The same stipulated facts, with some minor, non-substantive differences in wording, appear in *764the Final Pretrial Order entered in Adv. No. 12-5284 (Docket # 33) at 4-5.
.See Stipulated Exhibit 2, Statement Period ending 2/6/2012, at 1. (The Stipulated Exhibits are cited in this opinion as “SX-_ ”).
. See SX-3, at 1.
. See SX-4, Statement Period ending 2/13/2012, at 2.
.See SX-5 at 1.
. Trial Transcript (Docket # 47 in Adv. No. 12-5284) at 71. Later in this opinion, citations to this trial transcript will be to “Tr. at
. Tr. at 34, 44.
. See Tr. at 32, 41, 58-59; SX-4, Statement ending 2/13/2012 at 1.
. Tr. at 39.
. See Tr. at 35, 44, 45, 54, 55.
. Tr. at 35-36.
. Tr. at 56.
. Tr. at 48.
. Tr. at 46-47, 64-65.
. Tr. at 48.
. Tr. at 54, 84.
. See Tr. at 46 (Ms. Ziole testified that she opened the Treasury bonds with Glory’s name on them as well "[f]or the reason because she was my only child and I thought if I would pass away I would want her to have whatever monies that I had.”).
. See Tr. at 43-44. 45-46. 71. 84.
. The statements above, about Glory Demeter's statutory share of the "intestate estate,” are based on the fact, proven at trial, that Glory Demeter is the only child of both Ms. Ziole and her husband.
. Tr. at 56.
. Tr. at 50-51.
. Tr. at 61.
. Tr. at 61-62.
. Tr. at 34, 44, 62-63.
. First Amended Complaint in Adv. No. 12-5284 (Docket # 16) at 5, ¶¶ 27-28. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498801/ | MEMORANDUM OF DECISION AND ORDER
PRESENT: HONORABLE SCOTT W. DALES, Chief United States Bankruptcy Judge
I. INTRODUCTION
This non-dischargeable debt action is before the court on a motion for summary judgment premised largely on the preclu-sive effect of a state court judgment that is on appeal. At issue is the claim that chapter 7 debtor Jay D. Spencer converted $180,000.00 in retirement assets belonging to Jolan Jackson.
Although the state court’s order is not yet entitled to collateral estoppel effect, the record in the bankruptcy court (including the state court’s orders) nevertheless establishes an unrebutted case for declar*772ing the debt excepted from discharge under § 523(a)(6). Accordingly, the court will enter summary judgment notwithstanding the pendency of the appeal.
II. JURISDICTION
The court has jurisdiction over Mr. Spencer’s bankruptcy case pursuant to 28 U.S.C. § 1334(a). The bankruptcy case, and related proceedings, including this adversary proceeding, have been referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a) and W.D. Mich. LCivR 83.2(a). Proceedings to determine the dis-chargeability of debts are “core” proceedings as to which the bankruptcy court may enter final judgment, both as a statutory matter, and a matter of constitutional authority. See 28 U.S.C. § 157(b)(2)(I) (determinations as to the dischargeability of certain debts); Hart v. Southern Heritage Bank (In re Hart), 564 Fed.Appx. 773, 776 (6th Cir.2014) (authorizing bankruptcy court to enter final orders in proceedings to except debts from discharge, notwithstanding constitutional challenge under Stern v. Marshall, — U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)).
The court finds that it has statutory and constitutional authority to enter final judgment resolving this controversy.
III. ANALYSIS
1. Background
Jolan Jackson, individually and as beneficiary of an individual retirement account, sued Jay D. Spencer (and others) in the Kent County Circuit Court on several theories, including common law and statutory conversion.1 Mr. Jackson alleged that Mr. Spencer cheated him out of his retirement savings, essentially diverting the funds away from their intended purpose by paying his own personal expenses and otherwise lining his own pockets.2
While the litigation in the Kent County Circuit Court remained pending, Mr. Spencer filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code, which automatically stayed the State Court Case. In response, Mr. Jackson timely filed a complaint in the bankruptcy court seeking an order excepting Mr. Spencer’s debt from discharge under 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6). Given the pendency of the State Court Case, this court stayed the adversary proceeding to permit the parties to litigate the claim in Kent County, reserving for the federal court the decision about whether the resulting debt, if or to the extent established, should be excepted from discharge. See Order for Stay dated April 3, 2014 (DN 13); 11 U.S.C. § 523(c).
The State Court Case proceeded according to the rules of that forum, resulting in a “Final Judgment”3 against Mr. Spencer, premised on at least three, substantial opinions of the Hon. Christopher P. Yates rendered in response to Mr. Jackson’s motion for summary disposition and related motions. Mr. Spencer has appealed from the Final' Judgment, and that appeal is pending before the Michigan Court of Appeals.
As contemplated in the Order for Stay, Mr. Jackson returned to the bankruptcy court, and filed a motion for summary judgment premised initially on the preclu-*773sive effect of the Final Judgment and the underlying opinions of Judge Yates. See Plaintiffs Motion for Summary Judgment on Non-Dischargeability Under 11 U.S.C. § 523(a)(6) and supporting briefs (DNs 15, 16 and 23, collectively the “Motion”). Mr. Spencer, ostensibly pro se,4 responded to the Motion. See Defendant’s Response to Plaintiffs Motion for Summary Judgment on Non-Dischargeability Under 11 U.S.C. § 523(a)(6) (DN 20), and Defendant’s Answer to Plaintiffs Brief in Support of Motion for Summary Judgment ón Non-Dis-chargeability (DN 24, and with DN 20, referred to collectively as the “Response”). The court heard oral argument on the Motion and the Response in Grand Rapids, Michigan, on October 7, 2015, and took the matter under advisement. For the following reasons, the court will grant the Motion.
2. Summary Judgment Standards
The Plaintiffs Motion is one for summary judgment under Fed. R. Civ. P. 56. The court’s task in resolving such a motion is to determine whether there is a genuine issue of material fact warranting a trial on the merits, or whether the record is such that no fact finder could find for the non-moving party. “Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for trial.’ ” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citation omitted).
Relying on documentary evidence (e.g., bank records, e-mail, and a “Direction of Investment”) and transcripts from Mr. Spencer’s deposition, Judge Yates held that Mr. Jackson entrusted $241,000.00 to Mr. Spencer, to be used by Mackinac Advisory Services, LLC for particular investments, but that Mr. Spencer caused $180,000.00 of the funds to be transferred, through a title company, to Mackinac Realty, a company controlled by Mr. Spencer. Judge Yates succinctly observed: “Spencer ran his life out of the Mackinac Realty account, using money that Jackson had entrusted to Mackinac Advisors.” See Opinion and Order Granting Plaintiffs’ Motion for Summary Disposition Under MCR 2.116(c)(10) (DN 16-7) at p. 5.
Judge Yates specifically rejected Mr. Spencer’s suggestion that he was an unwitting converter, noting that “Spencer himself committed that conversion by obtaining the funds for Mackinac Advisory and then diverting the funds to Mackinac Realty, and ultimately to himself.” See Order Granting in Part, and Denying in Part, Defendant’s Motion for Reconsideration (DN 16-8) at p. 4. Mr. Spencer was obviously involved in the transaction, aware of Mr. Jackson’s Direction of Investment, and (according to Judge Yates’s findings), “poured tens of thousands of dollars” into the account that he used for his personal expenses, contrary to the direction' from Mr. Jackson when he entrusted the funds to Mr. Spencer. Judge Yates described the record as establishing a “flagrant” case of conversion.
Under the Full Faith and Credit Statute, a bankruptcy court must give the Final Judgment the same effect that it would receive in a Michigan court. See 28 U.S.C. § 1738; Spectrum Health Continuing Care Group v. Anna Marie Bowling Irrevocable Trust, 410 F.3d 304, 309 (6th Cir.2005); Corzin v. Fordu (In re Fordu), 201 F.3d 693, 703 (6th Cir.1999). Mr. Jackson’s Motion was principally, though not exclusively, premised on the collateral estoppel effect of the Final Judgment (and *774Judge Yates’s several opinions), but Mr. Spencer’s appeal from the Final Judgment makes the Motion premature, at least to the extent premised on the collateral es-toppel effect of prior rulings, as counsel conceded during oral argument. See also Leahy v. Oñon Township, 269 Mich.App. 527,711 N.W.2d 438, 441 (2012).5
Although we typically associate the Full Faith and Credit Statute with the doctrines of res judicata and collateral es-toppel, or more modernly “claim preclusion” and “issue preclusion,” the idea of Full Faith and Credit goes beyond these doctrines. As the court noted during oral .argument, orders from courts of record in Michigan have evidentiary significance, independent of any collateral estoppel or res judicata effect: “any order, judgment or decree, of any court of record in this state ... shall be prima facie evidence ... of all facts recited therein.” M.C.L. § 600.2106; see also Kasishke v. Frank (In re Frank), 425 B.R. 435, 443 (Bankr. W.D.Mich.2010) (citing M.C.L. § 600.2106 in resolving summary judgment motion premised on prior state court order). Accordingly, even without considering the Plaintiffs other submissions, Judge Yates’s findings, embodied in various orders, constitute prima facie evidence in support of the Plaintiffs case. The' Defendant, however, has brought forward no evidence challenging the findings in these prior orders, including his factual findings touching on “willfulness” as it applies to state law conversion or for that matter, of malice as required in 11 U.S.C § 523(a)(6).
The Plaintiffs Reply Brief in Support of Motion For Summary Judgment on Non-Dischargeability Under 11 U.S.C. § 523(a)(6) (DN 23, the “Reply”) fortifies its reliance on Judge Yates’s findings by including many of the documents and admissions upon which Judge Yates opined, thereby permitting the court to consider them independently. See, e.g., Reply at Exh. 2 (transcript of Mr. Spencer’s deposition in the State Court Case); Exh. 3 (Direction of Investment); Exh. 4 (bank records showing $180,000.00 in deposits into Mackinac Realty accounts).
Willfulness under § 523(a)(6) requires “a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (emphasis in original). To find a “willful injury” within the meaning of § 523(a)(6), the court must conclude that the debtor ‘“desires to cause [the] consequences of his act, or ... believes that the consequences are substantially certain to result from it.’ ” Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir.1999) (quoting Restatement (Second) of Torts § 8A, at 15 (1964)); Kawaauhau, 523 U.S. at 61, 118 S.Ct. 974 (noting that this “formulation triggers in the lawyer’s mind the category ‘intentional torts,’ as distinguished from negligent or reckless torts”). Establishing intent is a *775difficult undertaking, but the second possibility under Markowitz — that the debtor believed that the injurious consequences of his actions were “substantially certain” to occur — is frequently easier to find, even drawing reasonable inferences in favor of a debtor.
As for malice, an injury is “malicious” under § 523(a)(6) when a debtor acts “in conscious disregard of [his] duties or without just cause or excuse; it does not require ill-will or specific intent to do harm.” Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir.1986); Monsanto Co. v. Trantham (In re Trantham), 304 B.R. 298, 308 (6th Cir. BAP 2004). To except a debt from discharge under § 523(a)(6), the court must find that the alleged injury is both willful and malicious. Without this two-fold finding, a creditor will not prevail. Markowitz, 190 F.3d at 463.
The court' regards Judge Yates’s award of treble damages to the Plaintiff for the Defendant’s “brazen” conversion as prima facie evidence that the debtor inflicted a willful and malicious, utterly unjustified, injury within the meaning of § 523(a)(6). See Motion, Exh. 8 (DN 16-9) at p. 3. Judge Yates found that treble damages were appropriate because “Spencer’s conduct constitutes the most egregious form of statutory conversion.” Id. at p. 8. In addition, in his opinion regarding the Defendant’s motion for reconsideration, id. at Exh. 7 (DN 16-8), Judge Yates stated that after Mr. Spencer had signed various notes promising to invest Mr. Jackson’s money under a specific directive and repay him his entire principal amount plus interest, he “almost immediately diverted at least $180,000 in ... funds to his ... bank account ... and then used the money to cover his personal ex-pénses ... in the end, Spencer did not return a single dime to Jackson or his IRA.” Id. at p. 3. The court, after reviewing the opinions from the State Court Case, and reviewing the evidence adduced with the Reply, sharés Judge Yates’s view of the evidence, and finds that the Plaintiff has established a prima facie case that the Defendant deliberately and intentionally meant to injure the Plaintiff, not simply to cause the act that resulted in injury. The summary judgment record permits no other conclusion.
In response to the Plaintiffs showing, the Defendant simply argued that Judge Yates’s opinions are not final — a point the Plaintiff concedes — and that Judge Yates should have applied various payments before trebling the $180,000.00 that the Defendant purloined. The court is unpersuaded. Given the procedural context of Rule 56, and given the prima facie eviden-tiary showing in support of the Plaintiffs claims attached to the Motion and the Reply, it was incumbent upon the Defendant to raise a genuine issue of fact warranting trial. His argument, unadorned by any affidavit or documentary evidence, does not suffice. See Fed.R.Civ.P. 56(c)(1). Because he was assisted by shadow counsel, Mr. Spencer’s supposed pro se status provides no reason to relax the rule.
In other words, the record establishes that the Defendant acted willfully and maliciously because he knew that the consequences of diverting the Plaintiffs retirement funds were substantially certain to result in harm to the Plaintiff and in fact did cause harm — the Defendant never returned the funds. Furthermore, he acted in conscious disregard of his duties, without just cause or excuse, when, after he promised the Plaintiff to invest the funds in a specific way, he immediately used them for his own purposes, contrary to the Plaintiffs clear directives. Because the Defendant’s appeal does not undermine the prima facie evidentiary effect of Judge Yates’s opinions, and because the Defendant has failed to provide any meaningful *776challenge to this and the other evidence offered in support of the Motion, the court finds that no trial on the merits is warranted because no reasonable fact finder could find for the Defendant in this matter.
As for the trebling, this portion of Judge Yates’s award is also excepted from discharge under the rationale of Cohen v. De La Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (“Because § 523(a)(2)(A) excepts from discharge all liability arising from fraud, treble damages (plus attorney’s fees and costs) awarded on account of the debtor’s fraud fall within the scope of the exception.”).
For the foregoing reasons, the court will grant the Plaintiffs Motion, and declare the debt represented by the Final Judgment to be excepted from discharge under § 523(a)(6).
IV. CONCLUSION AND ORDER
In making this decision to except the debt from discharge, the court is mindful of two practical concerns relating to collection activity and the possibility that Mr. Spencer may succeed on appeal from the Final Judgment. First, to the extent the court’s decision is premised on the Final Judgment, reversal may undermine the basis for today’s ruling to some extent. That concern, however, is addressed by the ample evidentiary support (generally in the form of Mr. Spencer’s admissions during deposition in the State Court Case, the Direction of Investment, and the bank records) for finding that he willfully and maliciously injured the Plaintiff by diverting the funds, all of which independently establish a right to relief under § 523(a)(6). Moreover, if the Final Judgment is reversed, Rule 60(a)(5) provides tailor-made relief. See Fed.R.Civ.P. 60(b)(5)(applieable to bankruptcy court judgments by Fed. R. Bankr.P. 9024).
Second, if Mr. Spencer is correct that he should have received credits against the amount that Judge Yates ultimately awarded, any reduction will not affect this court’s conclusion that the remaining debt, in whatever amount, arises from his willful and malicious injury under § 523(a)(6). In other words, the judgment that the court will enter concurrently with this opinion will be declaratory in nature. The precise amount and manner of collecting money damages will be a matter for the state courts, if and when they are called upon to enforce the Final Judgment. Mr. Spencer may seek to persuade the state courts to stay enforcement of the Final Judgment pending appeal, and nothing in today’s decision should be construed to interfere with the state courts’ independent authority to stay enforcement of the Final Judgment. The bankruptcy court judgment, in other words, will simply declare that the discharge injunction will not affect the Plaintiffs collection of the debt represented by the Final Judgment.
Third, anticipating this practical problem, the court asked Plaintiffs counsel whether his client would consent to holding any collection proceeds in counsel’s trust account, pending appeal from the Final Judgment. After consulting with his client, counsel confirmed that he would hold any collections in a trust account, effectively in escrow, pending appeal. As a practical matter, this addresses the court’s concerns and balances the Plaintiffs interest in avoiding further delay in securing the return of his retirement funds and the Defendant’s state court appellate rights. Today’s judgment will include this collection-related escrow requirement as part of the declaratory relief.
NOW, THEREFORE, IT IS HEREBY ORDERED as follows:
(1) the Plaintiffs Motion for Summary Judgment (DN 15) is GRANTED;
(2) the Clerk shall enter a separate judgment (i) declaring the debt represent*777ed by the Final Judgment excepted from discharge under § 523(a)(6), and (ii) incorporating the escrow requirement discussed above, pending the conclusion of all appeals from the Final Judgment.
IT IS FURTHER ORDERED that the Clerk shall serve a copy of this Memorandum of Decision and Order. pursuant to Fed. R. Bankr.P. 9022 and LBR 5005-4 upon Stephen J. Hulst, Esq., Harold E. Nelson, Esq., and Jay D. Spencer.
IT IS SO ORDERED.
.See Jolan Jackson and Jolan Jackson as beneficiary of Equity Trust Company FBO Jolan Jackson IRA No. 118410 v. Jay Spencer, Mackinac Realty Group, LLC, Tate Jesky and Mackinac Advisory Services, LLC (Case No. 13-04271-NZB) (the "State Court Case”).
. For convenience, the court will refer to Mr. Jackson in both of his capacities as “Mr. Jackson” or the “Plaintiff.” Similarly, the court' will refer to Mr. Spencer as "Mr. Spencer” or the "Defendant.”
. See DN 16-10 (the “Final Judgment”).
. The quality of Mr. Spencer’s papers prompted the court to inquire whether he had the assistance of counsel in preparing them. He indicated that a member of the bar has been providing assistance, though not signing Mr. Spencer's submissions. See DNs 25 and 26.
. In Michigan, the pendency of an appeal deprives the decision under review of issue preclusive effect, but the doctrine of res judi-cata applies irrespective of an appeal. See Southfield Educ. Ass'n v. Southfield Bd. of Educ., Slip. Op. 12-CV-11030, 2013 WL 1432524 (E.D.Mich. April 9, 2013). Res judi-1 i cata or claim preclusion, however, does not I apply to the discharge aspects of the present controversy: although Judge Yates certainly had authority to resolve the State Court Case after this court modified the automatic stay, ' federal law reserves to the bankruptcy court the exclusive authority to determine whether a debt should be excepted from discharge under § 523(a)(2), (a)(4), or (a)(6). See 11 U.S.C. § 523(c); In re Wilcox, 529 B.R. 231 (Bankr.W.D.Mich.2015); In re Stewart, 499 B.R. 557 (Bankr.E.D.Mich.2013). Under the Supremacy Clause, state common law doctrines cannot preempt federal law, including § 523(c). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498802/ | MEMORANDUM OF DECISION
John P. Gustafson, United States Bankruptcy Judge
This adversary proceeding is before the Court for decision after trial on the amended complaint [Doc. # 22] of Plaintiff Daniel M. McDermott, United States Trustee (“the UST”) alleging that Defendants’ discharge of debts should be denied under claims made pursuant to 11 U.S.C. §§ 727(a)(2)(A) (Count 1), (a)(3) (Count II), (a)(4)(a) (Count III), and (a)(5) (Count TV).
The district court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) as a civil proceeding arising in a case under or arising under Title 11. This proceeding has been referred to this court by the district court under its general order of reference. 28 U.S.C. § 157(a); General Order 2012-7 of the United States District Court for the Northern District of Ohio. Proceedings to determine objections to discharge are core proceedings that the court may hear and decide. 28 U.S.C. § 157(b)(1), (b)(2)(J).
This Memorandum of Decision constitutes the court’s findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52, made applicable to this adversary proceeding by Fed. R. Bankr.P. 7052. Regardless of whether specifically referred to in this Memorandum of Decision, the court has examined the submitted materials, weighed the credibility of the witnesses, considered all of the' evidence, and reviewed thé entire record of the case. Based upon that review, and for the reasons discussed below, the court finds that Defendant Joseph A. Spencer’s discharge will be denied pursuant to 11 U.S.C. § 727(a)(4)(A).
FINDINGS OF FACT
Defendants Joseph A. Spencer (“Mr.Spencer”) and Dee V. Spencer (“Mrs.Spencer”) are the joint debtors in the underlying Chapter 7 case filed on October 16, 2013. Mr. Spencer, over the course of the past thirty-nine (39) years, has worked, among other positions, as a teacher, a theater set designer, an associate dean at the University of Toledo, a management consultant in the field of manufacturing, and as a Vice President and Partner at Findlay Davies, and has an advanced degree. Mrs. Spencer worked for a security company and Goodwill over the of course of their marriage, but she' has largely spent her time as a homemaker.
Mr. Spencer testified that in early April 2013, he had originally consulted with a bankruptcy attorney regarding a possible bankruptcy filing, but after several meet*780ings, Mr. Spencer decided not to employ the first attorney he consulted. Mr. Spencer informed the court that one of the reasons he declined to employ the attorney had to do with the change in the amount a debtor could claim as an Ohio homestead exemption. Based on Mr. Spencer’s own research on filing for bankruptcy, he learned that Ohio’s homestead exemption, that had been capped at $21,625.00, had recently increased to $132,900.00. When this information was brought to the first attorney’s attention, Mr. Spencer testified that the attorney was unaware that any change had occurred.
Using a different bankruptcy attorney, Mr. and Mrs. Spencer (collectively, “Defendants”) filed their petition on October 16, 2013. [Case No. 13-34284, Doc. # 1]. At the same time, they filed their bankruptcy Schedules and the Statement of Financial Affairs (“SOFA”), signed under penalty of perjury (the “Original Schedules”) [Jd].
On Defendants’ Original Schedules, they listed personal property with a total value of $10,866.00. [Pl.Ex. A, p. 22], The personal property listed in Defendants’ Original Schedules consisted of the following: $1,800 in an account listed as “PNC Bank”; “[m]isc. furniture and household goods” valued at $2,000.00; “[m]isc. wearing apparel” valued at $700.00; a “TIAA Cref Retirement Annity” valued at $4,000.00; a “1994 Oldsmobile Bravada” valued at $522.00; and a “2003 Saab” valued at $1,844.00. [Id. at pp. 20-21].
On Defendants’ Original Schedule F, they scheduled $79,311.40 of unsecured nonpriority claims, mostly from credit cards and other consumer debt. [Id. at pp. 26-31]. On their SOFA, filed with their Original Schedules, Defendants checked the box indicating “none” when describing the “gifts or charitable contributions they made within one year immediately preceding the commencement of the case except ordinary and usual gifts to family members aggregating less than $200 in value per individual family member.” [Id. at 38]. Additionally, on Question 10 of their SOFA, Defendants described as “none” the “property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as a security within two years preceding the commencement of the case.” Id. at 39.
Mr. Spencer testified at trial that their initial petition and Schedules were filled out by the bankruptcy attorney they employed to file their Chapter 7 case. Mr. and Mrs. Spencer testified that they both sat down and answered questions asked by their bankruptcy attorney as he prepared their petition. The Defendants stated that they did not fill anything out, and their attorney “wrote down the numbers.” Mr. Spencer, when asked at trial whether his answer to SOFA question 7 (regarding gifts made in the previous year), was indeed “none” when originally asked by his attorney, confirmed that his answer on that day was “none.” Mr. Spencer did not remember being asked any questions regarding Question 10 of the SOFA. He believed that his bankruptcy attorney had “paraphrased” the question, but he could not recall with specificity whether the question was read to him verbatim, or if the question had been paraphrased. “It was my recollection that we were talking about the prior year,” as opposed to the two year period of property transfers set forth in Question 10. See also, Pl.Ex. G, pp. G21-G23.
Mrs. Spencer testified that she “vaguely” remembered sitting in the attorney’s office and going over Question 7 on their SOFA, regarding gifts. As for Question 10, Mrs. Spencer recalled thinking that the question was asking about real estate or *781real property. See also, PLEx. G, pp. G21-G23.
After Defendants’ petition had been filed, and prior to the § 341 meeting of creditors, attorney Ben Randall (“Attorney Randall”) contacted Patti Baumgartner-Novak (“the Chapter 7 Trustee” or “Trustee”), the Chapter 7 Trustee assigned to Defendants’ case. At the trial, the Trustee testified that Attorney Randall had reached out to her based upon his personal knowledge and “made a referral” that Defendants assets were not accurately listed on their petition, and the Trustee noted in her testimony that there was no jewelry listed on Defendants’ Original Schedules. [Pl.Ex. A, p. 20, Line 7].
In response to the “referral”, the Trustee requested that debtor’s counsel and Defendants produce more detailed schedules. Specifically, the Trustee wanted a breakdown of what constituted the $2,000.00 listed as “[m]isc. furniture and household goods” in Defendants’ Schedule B. It was at this point, the Trustee stated, that she sent a referral to the UST that “something was not passing the smell test.” The Trustee also contacted debtors’ attorney regarding the accuracy of the Schedules, [Pl.Ex. E, pp. E 10-Ell] putting Defendants on notice, heading into the meeting of creditors, that information provided in connection with their bankruptcy needed to be accurate.
Debtors’ attorney, per the Trustee’s request, filed an Amended Summary of Schedules and Amended Schedules B & C, that Defendants signed under penalty of perjury. [Case. No. 13-34284, Doc. # 15; PLEx. C]. Defendants’ Amended Schedule B, Line Item 4 was amended to include a $11,219.00 value for “[m]isc. furniture and furnishings, household goods, wearing apparel, books, artwork, sports equipment and musical instrument.” Line Item 7 was amended to list a $2,015.00 value for [m]isc. jewelry. On their Amended Schedule C, Defendants’ claimed an exemption of $24,500.00 for their furniture and furnishings [Id.], to which the Trustee filed an objection. [Case. No. 13-34284, Doc. #16],
Prior to the § 341 meeting, the Trustee had received Exhibit H-2A. [PLEx. H, p. H-2A] from Defendants. The Trustee stated that she thought the document was an insurance rider, and she could glean •from the insurance document, which had an effective date of “08-31-12”, that Defendants appeared to own a piece of property or artwork titled “Ancient View of the River Glass House,” (“Glass House”) with an insurance value of $16,000.00. Also listed were item numbers “28” and “33”, which were two items of jewelry valued, for insurance purposes, at $1,500 and $1,400 respectively. [Id.]
The Trustee received an itemized list of Defendants’ household items on December 4,2013. [Pl. Ex. D],
The Trastee conducted the § 341 meeting of creditors on December 10, 2013. Defendants and Defendants’ attorney appeared at the hearing in person. The Trustee testified at the trial that she specifically wanted to ask Defendants at the hearing if they had transferred any property to their daughter,1 and she also wanted to discover the location of the “Glass House” artwork. At the meeting of creditors, each Defendant testified in the affirmative that they signed their petition, and they each testified in the affirmative that they reviewed the petition and made sure it was true and correct at the time they signed it. [PLEx. E, pp. E-3 — E-4], Each Defendant answered “No” when *782asked if they had given away, sold or transferred any property in the last year. [Id. at p. E-5].
The Transcript of the First Meeting of Creditors further reflects:
THE TRUSTEE: Transferred property into the names of friends or family members in the last four years?
MRS. SPENCER: No.
MR. SPENCER: No.
[Id. at p. E-6].
The Trustee also asked several questions about the daughter, and transfers that may have been made to her:
THE TRUSTEE: Okay. Have you forwarded any property or jewelry to your daughter in Ann Arbor-
MRS. SPENCER: No.
THE TRUSTEE: -in the last year?
MRS. SPENCER: No.
THE TRUSTEE: Did you transfer property to storage, to a third party-
MRS. SPENCER: No.
THE TRUSTEE: -to your daughter prior to filing?
MRS. SPENCER: No. The only thing was in February of ’12 we sold the one major piece we had to live use-to live on.
[Id. at p. E-12],
Regarding the Defendants’ answers at the meeting of creditors in relation to transferring property to their daughter, the Trustee testified at trial that “[biased on what I know today, [those answers were] untrue.”
Before the hearing concluded, the Trustee requested that Defendants provide her with a list of paintings and/or prints that they owned, where they were purchased, and for what price the items were purchased. [Id. at pp. E-14 — E-15]. Finally, the Trustee requested a complete version of Defendants’ insurance policy, as Pl.Ex. H-2A appeared incomplete. Specifically, the Trustee wanted Defendants’ insurance police from August of 2012 through August of 2013, as well as a copy of the policy providing coverage from August of 2013 to August of 2014. [Id. at pp. E-16 — E-17].
The Trustee testified that she received the completed insurance policy [Pl.Ex. H, pp. H-3 — H-5] within sixty (60) days of her request at the meeting of creditors. As of August 31, 2012, less than fourteen (14) months before Defendants filed their petition, they maintained insurance riders through the “The Hartford Insurance Group.” These riders included thirty-two (32) unique pieces of jewelry, insured for between $250 and $15,500.00, with a total replacement value for all the pieces listed as $58,985.00. [Id.]. The insurance riders also included three furs insured for a total of $10,300.00 and the “Glass House” artwork, with an insurance value of $16,000.00.
After the meeting of creditors, Defendants again filed an Amended Summary of Schedules and an Amended Schedule C, in which Defendants claimed an exemption of $21,400.00 in their furniture and furnishings. [Case No. 13-34284, Doc. # 19]. The court held a hearing on the previously-filed Amended Schedules and the Trustee’s Objection [Id. at Doc. ## 15-16] on January 23, 2014. The hearing was adjourned to March 27, 2014, as the Trustee wanted to obtain further information from the Defendants regarding a valuation of their household furnishings and jewelry. [Id. at Doc. # 26].
On February 10, 2014, the UST filed the initial complaint against Defendants, seeking a denial of their discharge. In connection with the UST’s Complaint, Defendants appeared for a deposition. During Defendants’ deposition on June 6, 2014, Mr. and Mrs. Spencer reviewed their signed Declaration Re: Electronic Filing of Documents *783and Statement of Social Security Number. [Case No. 13-34284, Doc. # 5]. They each stated that they signed the document, and that when they signed the document indicating that the petition, statements, and schedules were true, correct, and complete, they understood that they were signing it under penalty of perjury. [Pl.Ex. G, pp. 14-15].
During their deposition, Defendants testified that they sold the following during the two years immediately preceding the commencement of their Chapter 7 case: a “Runkle painting” and a “Russell painting” for approximately $400; two fur coats for approximately $650; a “Red Arnold painting” and a “Marty glass piece” for approximately $475; a lady’s Gucci watch for approximately $500; two V-shaped 0.26-carat diamond baguettes and a 0.12 carat diamond ring for approximately $700; a sapphire and diamond bracelet and diamond necklet for approximately $1,000; a diamond pendant and 14k gold chain for approximately $450; two Movado watches for approximately $1,650; and a wood sculpture and large glass vase for approximately $325. [Pl.Ex. G].
Defendants also testified that within one year immediately preceding the commencement of their bankruptcy case, they gifted the following; to their daughter Christina M. Spencer, a 14k two-tone pendant with a European cut diamond, and a 14k two-tone snake chain; and to Bob Meeker, a “black and white Arnold painting”. [M]. The gifted items were valued by Defendants at $50, $127, and $350, respectively, in their most recent filing of an Amended Statement of Financial Affairs. [Case No. 13-34284, Doc. # 58]. None of the aforementioned items which were sold and/or gifted were disclosed in Defendants’ Original Schedules, nor were they disclosed by Defendants when they were questioned by the Trustee at the § 341 meeting of creditors.
The court also notes that Mrs. Spencer testified during the 341 Meeting, [Pl.Ex. E, pp. E-12 — E-13] and in the deposition [Pl.Ex. G, pp. G-51 — G-53] that the Debtors sold the “Glass House” to Dr. Nickolai Talanin (“Dr Talanin”) in February 2012 for cash, whereas Mr. Spencer testified at the trial that the Glass House was sold in “mid 2010”. Dr. Talanin averred in an affidavit provided at trial that he “purchased the sculpture around mid-February, 2010 for $15,000, paid in cash.” [Def. Ex. A].
At the trial on the UST’s Complaint, Defendants each testified that they had reviewed their petition and schedules before signing them under penalty of perjury.
LAW AND ANALYSIS
The UST objects to Defendants’ possible discharge and seeks a determination that Defendants discharge be denied pursuant to 11 U.S.C. §§ 727(a)(2)(A) (Count 1), (a)(3) (Count II), (a)(4)(a) (Count III), and (a)(5) (Count IV). A plaintiff must prove exceptions to dis-chargeability and the elements of a § 727(a) claim objecting to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Keeney v. Smith (In re Keeney), 227 F.3d 679, 683 (6th Cir.2000); Fed. R. Bankr.P. 4005. The provisions of § 523(a) and § 727(a) are to be strictly construed against the creditor (or plaintiff) and liberally in favor of the debtor. Keeney, 227 F.3d at 683; Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998).
The UST’s post-trial brief [Doc. #43] focuses on his claim brought under Section 727(a)(4)(A), and it is pursuant to this section that the court shall grant judgment in *784favor of the UST, and will deny Defendant Joseph A. Spencer’s discharge.
I. 11 U.S.C. § 727(a)(4)(A)
A bankruptcy discharge is a privilege and not a right and should be granted only to the honest but unfortunate debt- or. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “[T]he bankruptcy court must balance the policy in favor of liberally applying the Bankruptcy Code to grant discharge to the honest debtor against the policy of denying relief to debtors who intentionally engage in dishonest practices and violate the Bankruptcy Code provision.” Yoppolo v. Walter (In re Walter), 265 B.R. 753, 758 (Bankr.N.D. Ohio 2001(quoting, Solomon v. Barman (In re Barman), 237 B.R. 342, 352 (Bankr.E.D.Mich.1999)).
A prerequisite to the privilege of discharge is complete financial disclosure. Keeney, 227 F.3d at 685. Thus, under § 727(a)(4)(A), a debtor is denied a discharge if “the debtor knowingly and fraudulently, in or in connection with the case ... made a false oath or account[.]” In order to prevail, a plaintiff must prove, by a preponderance of the evidence that:
l)the debtor made a statement under oath; 2) the statement was false; 3) the debtor knew the statement was false; 4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case.
Id. at 685. The Sixth Circuit explained fraudulent intent as contemplated under this section as follows:
[I]ntent to defraud “involves a material representation that you know to be false, or, what amounts to the same thing, an omission that you know will create an erroneous impression.” In re Chavin, 150 F.3d 726, 728 (7th Cir.1998). A reckless disregard as to whether a representation is true will also satisfy the intent requirement. See id. “ ‘[C]ourts may deduce fraudulent intent from all the facts and circumstances of a case.’ ” Williamson v. Fireman’s Fund Ins. Co., 828 F.2d 249, 252 (4th Cir. 1987). However, a debtor is entitled to discharge if false information is the result of mistake or inadvertence.
Id. at 685-86. A false oath is material if it “ ‘bears a relationship to the bankrupt’s .business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.’ ” Id. at 686 (quoting, Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir.1992)).
“The fundamental purpose of § 727(a)(4)(A) is to insure that the trustee and creditors have accurate information without having to do costly investigations.” U.S. Trustee v. Zhang (In re Zhang), 463 B.R. 66, 86 (Bankr.S.D.Ohio 2012); see also, Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir.l987)(“Neither the trustee nor the creditors should be required to engage in a laborious tug-of-war to drag the simple truth into the glare of daylight”). A bankruptcy trustee has neither the time nor the resources to conduct an in-depth review of each and every debt- or, necessitating accurate initial disclosures as a key feature of the U.S. bankruptcy system. Carlucci & Legum v. Murray (In re Murray), 249 B.R. 223, 230 (E.D.N.Y.2000); Roudebush v. Sharp (In re Sharp), 244 B.R. 889, 891-92 (Bankr. E.D.Mich.2000).
In his complaint, the UST alleges that Defendants made a false oath or account in their original SOFA, signed under penalty of perjury, when they described as “none” both the “gifts or charitable contributions they made within one year immediately preceding the commencement of the case except ordinary and usual gifts to family members aggregating less than *785$200 in value per individual family member”, and the “property, other than property transferred .in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as a security within two years immediately preceding the commencement of the case.” [Doc. # 38, p. 3, ¶¶ 11-12].
The UST also argued at trial and in his post-trial brief [Doc. # 43] that Defendants again made a false oath or account at the 341 meeting of creditors. While under oath, each Defendant answered “No” when asked if they had given away, sold or transferred any property within the last year. Each Defendant also answered “No” when asked if they had transferred property into the names of friends or family members in the last four years. [Pl.Ex. E, p. E-6]. Their testimony at the deposition [Pl.Ex. G] and trial, and their final amended SOFA [Doc. # 58] confirms that Defendants gifted property within one year immediately preceding their Chapter 7 filing [Pl.Ex. G, pp. G-68 — G-69] and transferred property within the two year period immediately preceding their Chapter 7 filing. In addition, Defendants transferred a substantial amount of jewelry to their daughter within the four years prior to filing [Pl.Ex. G, p. G-67 — G-68], contrary to their testimony at the § 341 Meeting. [PLEx. E, p. E-6].
Moreover, while the Trustee’s questioning may not have been as precise as it could have been in regards to the substantial gifting of jewelry in 2010 in connection with Defendants’ daughter’s wedding, the Trustee made inquiries about transfers to the daughter and jewelry. [Pl.Ex. E, pp. Ell — E-12]. While Debtors were responsive to inquiries about the sale of the “Glass House”, which occurred on either February of 2012 (more than one and a half years prior to filing) or in mid-2010 or earlier (3 + years prior to filing), the gifts to their daughter were not disclosed. To the extent Defendants’ defense is based upon misunderstanding the time frames in the questions, or the meaning of “property” on the one hand, and not responding to the import of the questions the Trustee asked about transfers* of jewelry to their daughter based on a hyper-technical parsing of the Trustee’s questions — the court finds those positions contradictory and unpersuasive. Moreover, the Chapter 7 Trustee did specifically asked about the transfer of jewelry in the previous year, [PI Ex. E, at p. E-12], Defendants answered “no”, [M] when in fact two items of jewelry, with insurance values of $1,450 and $625, had been gifted to the daughter within the previous year. [Pl.Ex. G, pp. G-68 — G-69; Def. Ex. B], While the amended SOFA asserts an aggregate dollar value on the gifts made to Defendants’ daughter as being below $200, those valuations appear to have been arrived at after the failures to properly disclose the gifts of two pieces of jewelry on Question 7 of the SOFA. Moreover, the Trustee’s question about gifts to the daughter in the previous year was asked without any dollar limitation. [Pl.Ex. E, p. E-12],
Defendants admitted at trial that they made statements under oath, meeting the first element set forth in Keeney. They also admitted that the statements included in their originally filed Schedules and SOFA were false, as were the statements made in their testimony at the' § 341 Meeting, satisfying the second element. Skipping to element five (5), materiality of a statement requires that a debtor’s false statement “bears a relationship to the bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence or disposition of his property.” Sheehan & Assocs. v. Lowe, 2012 WL 3079251, at *7 (E.D.Mich.2012); Ditree & Assocs., P.C. v. Dunn (In re Dunn), 2014 WL 1612232, at *4 (Bankr.E.D.Ky.2014). In the case at *786hand, there is no question that the fifth element has been met, as false statements made in both Defendants’ Schedules and SOFA concern the discovery of assets and the existence or disposition of their property. It should also be noted, the Trustee eventually secured a'Five Thousand Dollar ($5,000) settlement from Defendants’ daughter [Pl.Ex. J; Doc. # 47] for transfers which were not disclosed during the § 341 Meeting in response to the question regarding the transfer of property to friends or family members in the previous four years. [Pl.Ex. E, p. E-6].
This brings the court to an analysis of the third and fourth Keeney elements, which are the most commonly contested elements of a § 727(á)(4)(A) action. U.S. Tr. v. Halishak (In re Halishak), 337 B.R. 620, 627 (Bankr.N.D.Ohio 2005). In considering the third element, the court in Ayers v. Babb wrote, “[k]nowledge that a statement is false can be evidenced by a demonstration that the debtor knew the truth, but nonetheless failed to give the. information or gave contradicting information.” Ayers v. Babb (In re Babb), 358 B.R. 343, 355 (Bankr.E.D.Tenn.2006). Here, the UST demonstrated that Defendants knew the truth but failed to give the information. Through their testimony at the deposition and trial, Defendants'made it clear to the court that they were well aware of, if not the exact description of certain items given away or sold, the fact that they sold numerous pieces of personal property within the two years preceding their filing and gifted several other items within one year before they filed, with some of the transfers occurring just five to seven months before they filed their petition. [Def. Ex. C]. Thus, the third Keeney element has been satisfied.
Fraudulent intent is a factual issue determined by the court based on the totality of the circumstances. In re Keeney, 227 F.3d at 686; Hamo v. Wilson (In re Hamo), 233 B.R. 718, 724 (6th Cir. BAP 1999). It “requires that the debtor ... made or failed to make the statement with the intention of being fraudulent.” Hunter v. Sowers (In re Sowers), 229 B.R. 151, 159 (Bankr.N.D.Ohio 1998). Demonstrating fraudulent intent “involves a material representation that [Defendants] know to be false, or, what amounts to the same thing, an omission that [Defendants] know will create an erroneous impression.” In re Keeney, 227 F.3d at 685. A reckless disregard or an indifference for the truth will also demonstrate fraudulent intent. Id. at 686; Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992). And, intent can be inferred from Defendants’ conduct, and a continuing pattern of false statements and/or omissions in bankruptcy schedules exhibit a reckless indifference for the truth. In re Hamo, 233 B.R. at 725.
In this case, the court infers a fraudulent intent on the part of Defendants based upon their conduct, as the UST proved by a preponderance of the evidence a continuing páttern of false statements and omissions in Defendants’ bankruptcy Schedules, SOFA, and in their testimony at the § 341 Meeting, demonstrating at least a reckless indifference for the truth. Defendants also omitted from their SOFA several gifts of jewelry and artwork they had given to friends and family in the year prior to their filing, and numerous pieces of personal property they had sold in the two years prior to their filing. Their petition was filed with their declaration stating under penalty of perjury the documents were true, correct, and complete. [Pl.Ex. B]. They were also under oath during their testimony regarding gifts and other transfers of property at the § 341 Meeting.
Despite being put on notice by the Trustee’s request for a detailed listing of their *787household goods on Schedule B, just seven (7) days prior to their 341 Meeting, they did not file an amended SOFA at that time. At the 341 meeting of creditors, Defendants testified that they reviewed their petition and made sure it was true and correct at the time they signed it. [Pl.Ex. E, pp. E-3 — E-4]. They each answered “No” when asked if they had given away, sold or transferred any property in the last year. Each Defendant also answered “No” when asked if they had transferred property into the names of friends or family members in the last four years. [Id. at pp. E-5 — E-6]. These statements were false.
The Trustee specifically asked the Defendants if they had “forwarded any property or jewelry to your daughter in Ann Arbor ... in the last year?” Mrs. Spencer answered, “[n]o.” The Trustee continued, asking “[d]id you transfer property to storage, to a third party ... to your daughter prior to filing?” Mrs. Spencer again answered, “[n]o.” [Id. at p. E-12], These statements were also false, as based upon testimony and their Amended SOFA [Def. Ex. C; Case No. 13-34284, Doc. # 58, Q. 7], which was not filed until after the trial on this matter, Defendants had given property to their daughter earlier that year, as well as having sold several pieces of jewelry to third parties within the previous two years. [Def. Ex. C].. It was only after requests by the Trustee for complete insurance riders, and a deposition conducted by the UST, wherein the UST conducted a line-by-line review of Defendants’ insurance riders, that the Defendants answered truthfully regarding the disposition of their personal property prior to filing. Even after the deposition was conducted and it became clear that numerous items were sold and/or gifted such that they should have been listed under questions 7 and 10 of their SOFA, Defendants failed to amend said SOFA for over a year.
At the trial, the court had the opportunity to observe the demeanor and credibility of Defendants during their testimony, and it does not credit Defendants’ testimony that these omissions in their Schedules and SOFA were innocent oversights on the part or their attorney, or that they simply misheard the questions being asked of them at the time their petition was being filled out or at their meeting of creditors. Defendants had numerous opportunities to correct the record, and they chose not to do so, nor did they ask for clarification of what was being asked of them at the meeting or creditors. Therefore, the court finds that Plaintiff has proven by a preponderance of the evidence, pursuant to the elements set forth in the Keeney decision, that Defendants knowingly made false statements under oath with the requisite fraudulent intent, and the statements were materially related to their bankruptcy case.
The court then turns to Defendants attempt to rebut the evidence presented by the UST regarding the false oaths or omissions. Defendants’ testimony and rebuttal, that they misunderstood their lawyer’s questions and that they misheard and/or misunderstood the Trustee’s questions, and that the misstatements were not material, are not well-taken as to Joseph A. Spencer. The evidence of the number of errors in the statements that were made under oath has not been sufficiently rebutted by contrary evidence. The UST has shown at least a “reckless disregard or an indifference for the truth” regarding the false statements that were made under oath by Mr. Spencer in both the SOFA, signed under penalty of perjury, and the responses to the Chapter 7 Trustee’s questions during the § 341 Meeting. The facts presented by the UST regarding the statements made, and the number of transfers which were not disclosed, combined with Debtor Joseph A. Spencer’s education and *788background in business, prevent the court from accepting the defenses offered for the conduct of Mr. Spencer.
It is a much closer case for Debtor Dee V. Spenefer. While she was the primary person testifying as to some issues during the § 341 Meeting, she does not have the same level of education or a business background. Attorney for the Defendants presented some evidence as to the medication^) Mrs. Spencer was taking, and that it caused memory and other cognitive problems for her. The court also had an opportunity to observe Dee V. Spencer’s ability to process information as she testified, which standing alone, may not have been enough to warrant the granting of discharge in this case. However, there was some corroborating evidence in her ■ handing of Defendants’ homeowner’s insurance.
There was testimony that Mrs. Spencer was responsible for handling the Defendants’ homeowner’s insurance. The evidence presented, by both the UST and Defendant-Debtors, demonstrated that insurance remained in place for pieces of jewelry long after they had been gifted or sold. Obviously, there is a cost associated with the insurance coverage for items that did not need to be insured, and despite an economic incentive, at the time, to be accurate regarding items that remained in the Debtors’ possession, updated information was not provided to the insurance company.
As several courts have stated, completely denying a debtor’s discharge is an extreme step and should not be taken lightly. See e.g., Rosen v. Bezner, 996 F.2d 1527, 1581 (3rd Cir.1993). That admonition is reinforced by holdings that exceptions to a debtor’s discharge under § 727(a) are to be construed liberally in favor of the debtor. See e.g., United States Trustee v. Zhang (In re Zhang), 463 B.R. 66, 78 (Bankr.S.D.Ohio 2012). Accordingly, despite a strong prima facie case for denial of discharge, the court finds that the UST has not met its burden of proof under Federal Rule of Bankruptcy Procedure 4005 as to Defendant Dee V. Spencer.
CONCLUSION
The UST has successfully met his burden of proof on his claims against Defendant Joseph A. Spencer under 11 U.S.C. § 727(a)(4)(A), and a judgment on the complaint will be entered in favor of Plaintiff Daniel M. McDermott, United States Trustee, thereby denying Defendants Joseph A. Spencer’s discharge.
A separate judgment in accordance with this Memorandum of Decision will be entered by the court.
. The “daughter'1 is Mr. Spencer’s biological daughter, and Mrs. Spencer’s step-daughter. At trial, Mrs. Spencer indicated she was comfortable with simply using "daughter”. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498803/ | MEMORANDUM OPINION ON COMPLAINT TO DETERMINE DIS-CHARGEABILITY OF CERTAIN DEBT
C. KATHRYN PRESTON, United States Bankruptcy Judge
This cause came on for trial on February 19, 2015, on Complaint of Lawrence Bank To Determine Dischargeability of Debt Pursuant to 11 U.S.C. § 523(a)(2)(A) & (B) (Doc. # 1) (the “Complaint”) filed by the Plaintiff, Lawrence Bank 1, the Answer of Defendant John S. Brent to Complaint of Plaintiff Lawrence Bank (Doc. # 6) (the “Answer”) filed by the Defendant, John S. Brent, the Post Trial Briefs (Docs. #29 and # 30) filed by the Lawrence Bank and John S. Brent respectively. Present at the trial were attorney Geoffrey J. Peters representing Lawrence Bank (“the Bank”), and attorney Sarah A. Williams representing John S. Brent (“Dr.Brent”). The Complaint seeks a judgment of nondis-chargeability of debt pursuant to 11 U.S.C. § 523(a)(2)(A) and (B).
I. Jurisdiction
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334 and General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Findings of Fact
The Court makes the following findings of fact based on the evidence adduced at trial including the stipulations by the parties, the exhibits admitted into evidence and the testimony elicited from the witnesses.
On August 22, 2013, Dr. Brent filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. In due course, the Court entered the Discharge of Debtor (Doc. # 33) whereby Dr. Brent was granted a discharge under 11 U.S.C. § 727 of the Bankruptcy Code.
Sometime during 2007, Dr. Brent was introduced to a real estate investment company My Investing Place (“MIP”) by his brother, Tim Brent. Tim Brent had had a successful experience with MIP in the past. MIP solicited investors for its clients, one of which was the Indian Ridge Resort Community (the “Indian Ridge Project”) located in Branson, Missouri. The Indian Ridge Project was presented to Dr. Brent by Liz McCleery (“Ms. McCleery”), a representative of MIP. The Indian Ridge Project was a high-end residential development with several luxury amenities, such as a water park and a golf course. MIP tried to locate individual investors that were willing to be “credit partners” for the Indian Ridge Project. An individual willing to be a credit partner would use his or her credit to obtain a construction loan in order to provide financing for the construction of individual residential units, such as condominiums or duplexes which were being built by Western'' Site Services (‘Western”). A credit partner was not required to make any financial contributions other than the use of his credit, and in exchange for that use of credit, the credit partner would be compensated $5,000. Credit partners were not expected to have any out-of-pocket ex*793penses for a down payment or interim interest payments for the construction loan. Western represented that it would make the monthly interest payments on the loan until maturity. At maturity, the credit partner was supposed to obtain end loan financing if the credit partner wanted to retain the residential unit, or the unit was to be sold to satisfy the loan obligation.
Dr. Brent was interested in the Indian Ridge Project because he wanted to own a vacation home closer to where his brother lived in California so that they could spend more time together. After several communications between Ms. McCleery and Dr. Brent, he decided he would participate in the Indian Ridge Project as a credit partner and agreed to provide his credit for the construction of two duplexes.2 Ms. McCleery advised Dr. Brent that he would be contacted by one Brent Clarkson (“Mr.Clarkson”) who owned a company known as Top Flight Lending.
Mr. Clarkson worked with MIP and was responsible for facilitating a relationship between the “lending partners,” which were banks that were interested in funding the construction loans, and the credit partners. Mr. Clarkson contacted Dr. Brent and indicated that Lawrence Bank had agreed to be a lending partner with respect to the construction of the one duplex. Mr. Clarkson helped Dr. Brent assemble his paperwork for obtaining approval of the loan, including Dr. Brent’s Charles Schwab statement, individual income tax return for the year 2006, TIAA-CREF statement and U.S. Bank statements. Mr. Clarkson also advised Dr. Brent that Wells Fargo had agreed to provide the end loan financing for the transaction. Mr. Clark-son never disclosed to Dr. Brent during this process that Lawrence Bank required that a down payment be made by him in order to. obtain financing. Dr. Brent was under the impression that Mr. Clarkson would be forwarding the loan documentation to the Bank for its consideration and approval.
Contrary to Dr. Brent’s understanding, Mike Platt (“Mr.Platt”), a representative from Wells Fargo Mortgage, referred Dr. Brent’s loan application to the Bank.3 David Clark (“Mr.Clark”) was the lending officer at the Bank that handled Dr. Brent’s loan application and oversaw its approval. Mr. Clark had prior experience working with Mr. Platt and loan referrals from him. The Bank and Mr. Clark did not communicate with Dr. Brent directly but instead only communicated with Mr. Platt regarding Dr. Brent’s loan application. Mr. Clark reviewed and assembled the loan packet for Dr. Brent’s loan and submitted it to the Bank’s loan committee for approval (the “Loan Presentation”). The Bank required the following items be provided before it would approve a construction loan for the Indian Ridge Project: (1) a loan application; (2) income verification; (3) asset verification; (4) credit report; (5) appraisal; and (6) an end loan commitment. In addition, the Bank required a 20% down payment be made by the applicant for the purchase of the duplex. The Bank communicated these requirements to and requested these documents from the Wells Fargo Mortgage representative, but not Dr. Brent. All the information received by the Bank was received from the Wells Fargo Mortgage representative.
*794The Loan Presentation indicated that the construction costs and lot costs related' to Dr. Brent’s duplex were $490,000, and that a down payment of $98,000 would be provided leaving a total loan amount of $392,000. The Bank expected Dr. Brent to make the $98,000 down payment (the “Down Payment”), but this expectation was only communicated to the Wells Fargo Mortgage representative. In fact, the Bank had no direct contact with Dr. Brent until after default of the loan occurred. The repayment schedule for the construction loan called for interest payments monthly with principal being paid at maturity.4
The Bank allegedly believed the Down Payment was being paid by Dr. Brent because of various documents it received. One of which was the loan application signed by Dr. Brent (the “Loan Application”) which indicated the source of the down payment was from stocks, bonds and checking and savings accounts. In addition, the Loan Application indicates that no part of the down payment was borrowed. The second document is a certification and authorization form (the “Certification”) signed by Dr. Brent that certifies, among other things, that all the information provided by Dr. Brent regarding the amount and source of any down payment is true and complete. The Bank also received a copy of a letter (the “Confirmation Letter”) authored by Western indicating it was in receipt of funds in the amount of $98,000 representing a 20% down payment with respect to Dr. Brent’s loan transaction. And finally, the Bank believed that the Down Payment had been made by Dr. Brent because the settlement statement (the “HUD Statement”) signed by Dr. Brent at the closing of the loan contains a line item for deposit or earnest money in the amount of $98,000.
The Bank ultimately approved Dr. Brent for the construction loan. The Bank chose to use Great Lakes Title & Escrow Corporation (“Great Lakes”) as the title company for closing the loan with Dr. Brent. The Bank reviewed the HUD Statement prior to the closing. The Bank’s standard procedure for verifying whether a down payment was received is to require a copy of the check and a letter from the seller that the down payment was received. Contrary to the Bank’s standard procedures, for Dr. Brent’s transaction, the Bank only required a copy of the Confirmation Letter when it reviewed the HUD Statement related to Dr. Brent’s loan in order to verify whether the Down Payment had been received. The Bank varied from its normal procedures based on a recommendation from Great Lakes.
Great Lakes then forwarded the loan closing documents to a notary and agent in the Columbus, Ohio area to meet with Dr. Brent. On January 10, 2008, Dr. Brent met the notary at a public library in Wor-thington, Ohio to execute the documents. The loan documents had been faxed to the notary earlier that day, and he brought them to the library for Dr. Brent to sign. The stack of loan documents that the notary public presented to Dr. Brent for execution were each flagged with a red arrow sticker to alert Dr. Brent where he needed to place his signature. Dr. Brent did not read the documents prior to signing them. They were hardly legible anyway.
For a period of time after Dr. Brent closed on his construction loan, Western made the interim interest payments pursuant to the repayment terms of the loan. However, during the late summer (August or September) of 2008, the development of the Indian Ridge Project stopped, and Western ceased making the interim inter*795est payments for the loan. Although Dr. Brent did not expect to have any financial requirements as a “credit partner”, he recognized that he was ultimately liable for the debt, and made three interim interest payments. Thereafter, Dr. Brent defaulted on the construction loan, and the Bank sued Dr. Brent in state court in the Circuit Court of Stone County, Missouri (the “State Court Action”). The State Court Action resulted in a judgment against Dr. Brent in the amount of $487,742.88 (the “Judgment”). The Bank now seeks a determination that the Judgment is nondis-chargeable on the basis that Dr. Brent (1) made 'material misrepresentations about making the Down Payment in order to receive financing for the construction loan, and the Bank relied upon same, and (2) never intended to pay the loan.
III. Discussion
“The principal purpose of the Bankruptcy Code is to afford a ‘fresh start’ to the ‘honest but unfortunate debtor.’ ” Oster v. Clarkston State Bank (In re Oster), 474 Fed.Appx. 422, 424 (6th Cir.2012) (quoting Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). However, “[t]he provisions for discharge of a bankrupt’s debts, 11 U.S.C. §§ 727, 1141, 1228, and 1328(b), are subject to exception under 11 U.S.C. § 523(a), which carries ... subsections setting out categories of nondischargeable debts.” Field v. Mans, 516 U.S. 59, 64, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).
“Section 523(a)(2) contains two independent grounds for nondischargeability, both sounding in fraudulent conduct.”. First Knox Natl. Bank Div. of PNB v. Welling (In re Welling), 2013 WL 3760112, *2, 2013 Bankr.LEXIS 2890, *5 (Bankr.N D.Ohio 2013). 11 U.S.C. § 523(a)(2)(A) provides in pertinent part as follows:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition^]
11 U.S.C. § 523(a)(2)(A). ■
The elements for a § 523(a)(2)(B) action are found within the statute, which states that the discharge does not cover a debt to the extent it was 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.
Welling, 2013 WL 3760112 at *3, 2013 Bankr.LEXIS 2890 at *6 (quoting 11 U.S.C. § 523(a)(2)(B)).
Subsections (A)' and (B) are mutually exclusive. All statements regarding a debtor’s financial condition, whether written or oral, are expressly excluded from subsection (A). Rather, such a creditor must proceed under subsection (B) and satisfy the requirement that the statement of financial condition be in writing. A debt based upon an oral misrepresentation of financial condition is not actionable and will be dischargea-ble. Conversely, a debt obtained through fraudulent written statements about a debtor’s financial condition will be nondischargeable. As a result of this construction, whether a debt under this section is dischargeable or nondis-chargeable depends on whether the fraudulent misrepresentation (i) is oral or in writing and (ii) whether the state*796ment concerns the debtor’s financial condition.
Prim Capital Corp v. May (In re May), 2007 WL 2052185, *5, 2007 Bankr.LEXIS 2835, *14-15 (6th Cir. BAP 2007) (citations omitted).
The Plaintiff bears the burden of proof when pursuing an exception to discharge against the Debtor. Abroms v. Kern (In re Kern), 289 B.R. 633, 637 (Bankr.S.D.Ohio 2003). The standard of proof for establishing an exception to discharge pursuant to 11 U.S.C. § 523(a) is “the ordinary preponderance-of-the evidence standard.” Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
The burden of establishing a fact by a preponderance of the evidence requires the [judge] to believe that the existence of a fact is more probable than its nonexistence before [he] may find in favor of the party who has the burden to persuade the [judge] of the fact’s existence. Thus, a preponderance of the evidence is evidence which is more convincing than the evidence offered in opposition to it. In a case where the evidence is evenly balanced, the [party with the burden of persuasion] must lose.
Inderwish v. Luong (In re Luong), 2013 WL 1385674, *3, 2013 Bankr.LEXIS 1363, *7-8 (Bankr.D.Colo.2013) (internal quotation marks, footnotes and citations omitted). Further, exceptions to discharge are to be strictly construed against the party seeking the same. Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277, 281 (6th Cir.1998) (citation omitted).
In the present case, all of the statements that the Bank asserts are misrepresentations made by Dr. Brent are written statements, so either subsection of 11 U.S.C. § 523(a)(2) could apply. Accordingly, the Court must determine whether the written statements are statements respecting Dr. Brent’s financial condition.
A. Statements respecting the debt- or’s financial condition
The phrase “respecting the debtor’s ... financial condition” is not defined in the Code and is thus subject to interpretation. The Court of Appeals for the Sixth Circuit has not directly addressed this issue. The Sixth Circuit has, however, implied that statements showing a debtor’s net worth are statements respecting an individual’s financial condition. See Investors Credit Corp. v. Batie (In re Batie), 995 F.2d 85, 89-90 (6th Cir.1993) (explaining that a debtor made “ ‘statements in writing respecting the debtor’s or an insider’s financial condition’ ... because [the debtor] submitted written statements at the closing which plainly showed his net worth”).
May, 2007 WL 2052185 at *6, 2007 Bankr.LEXIS 2335 at *15-16.
The “broad interpretation” includes any communication that has a bearing on the debtor’s financial position. In other words, any communication addressing the status of a single asset or liability qualifies. The “strict interpretation,” on the other hand, limits statements “respecting the debtor’s ... financial condition” to communications that purport to state the debtor’s overall net worth, overall financial health, or equation of assets and liabilities.
May, 2007 WL 2052185 at *6, 2007 Bankr.LEXIS 2335 at *16-17 (citations omitted). “The strict interpretation, limiting statements concerning the debtor’s financial condition only to those that actually claim to state the debtor’s overall financial health, net worth or assets and liabilities, is most consistent with the text and structure of the Bankruptcy Code.” May, 2007 WL 2052185 at *6, 2007 *797Bankr.LEXIS 2335 at *17 (citation omitted). In contrast, “[a] broad interpretation simply brings too many statements under the rubric ‘concerning the debtor’s financial condition,’ rendering the limitation meaningless.” May, 2007 WL 2052185 at *6, 2007 Bankr.LEXIS 2335 at *18 (citation omitted). Moreover, bankruptcy courts are frequently reminded that exceptions to discharge are to be narrowly construed in favor of a debtor, and a strict interpretation of the statute is more consistent with that approach.
1. Exhibit 2 is Admissible
Prior to addressing whether the Loan Application should be analyzed under § 523(a)(2)(A) or (B), the Court must first address the admissibility of the Loan Application into evidence. During the trial, the Bank requested admission of the Loan Application into evidence as Plaintiff’s Exhibit No. 2 (“Exhibit 2”). Counsel for Dr. Brent objected to its admission on the basis that the copy of the Loan Application presented in the trial exhibit binder was illegible. The Loan Application is a Uniform Residential Loan Application form created by Fannie Mae and Freddie Mac, and the version date of the form appears to be November 10, 2007, though that date is not entirely legible. The Court agreed that the Loan Application presented for admission was mostly illegible, but that it could read some portions of it.5 Because the Bank anticipated the possibility of the Loan Application’s illegibility being an issue, it also provided a blank copy of a Uniform Residential Loan Application form created by Fannie Mae and Freddie Mac (the “Blank Form”).that is legible to be included as part of Exhibit 2 in an attempt to help parties read the language in the Loan Application more easily. The version date of the Blank Form, however, differs from the Loan Application. Counsel for Dr. Brent objected to the admission of the Blank Form into evidence because it was a different version than the form used for the Loan Application. The Court conditionally admitted Exhibit 2 and allowed the parties an opportunity to brief the issue regarding its admissibility.
Upon consideration of the record, the Court finds that the partial illegibility of the Loan Application goes to the weight of the exhibit and not the admissibility. See United States v. Brooks, 1990 WL 152545, *6 n. 2, 1990 U.S.App. LEXIS 17872, *8 n. 2 (6th Cir.1990) (deciding whether a partially inaudible tape should be admitted, the Sixth Circuit Court of Appeals noted that “[a] writing would not be rendered inadmissible just because some of the words were illegible ... ”). Accordingly, the objection to the admission of the Loan Application is overruled
According to Mr. Clark, the Blank Form is largely the same as the Loan Application, and the language is identical in the sections of the Loan Application that the Court must reference in order to decide this case. The rules of evidence allow admission of relevant evidence, and this Court notes that “[a] principal reason for admitting all relevant evidence is that the probability of ascertaining the truth increases as the trier’s knowledge grows.” 2 Jack B. Weinstein & Margaret A. Berger, Weinstein’s Federal Evidence, § 402.02 (3d ed.2015) (citations omitted); see generally Fed.R.Evid. 401, 402. Accordingly, the Court also overrules the objection to the admission of the Blank Form. The *798Loan Application and the Blank Form are admitted as Exhibit 2.
2. Applicability of § 523(a)(2)(A) and § 523(a)(2)(B)
In this case, the Bank referenced the following four separate documents as evidencing Dr. Brent’s misrepresentations about the Down Payment: (1) the Loan Application; (2) the Certification; (3) the HUD Statement; and (4) the Confirmation Letter.
The Loan Application is a statement respecting Dr. Brent’s financial condition because within that document he listed information regarding his employment, monthly income and expenses, assets and liabilities. The information in the Loan Application represents Dr. Brent’s overall financial health, net worth or assets and liabilities so it constitutes a statement respecting the debtor’s financial condition and must be evaluated under 11 U.S.C. § 523(a)(2)(B).
None of the other documents are statements respecting Dr. Brent’s financial condition, so the Bank must proceed under 11 U.S.C. § 523(a)(2)(A) in order to seek a determination of nondis-chargeability with respect to the Certification, the HUD Statement and the Confirmation Letter. The Certification does not contain any specific information regarding Dr. Brent, but instead is simply a boilerplate form that essentially certifies that Dr. Brent provided correct information to the Bank and that the Bank may verify same. As such, the Certification . is not a statement respecting the debtor’s financial condition. Similarly, the HUD Statement is not a statement respecting the debtor’s financial condition because the information contained therein is specific to one transaction (i.e., the construction loan closing) and does not list any information regarding Dr. Brent’s assets, liabilities, income or other information to indicate his overall financial health or net worth. And last, the Confirmation Letter states that Western is in receipt of a down payment in the amount of $98,000; the Confirmation Letter is not a statement respecting the debtor’s financial condition because it contains no information regarding Dr. Brent’s assets, liabilities, income or other information to indicate his overall financial health or net worth.
B. 11 U.S.C. § 523(a)(2)(A)
“Under § 523(a)(2)(A), there is an exception to discharge of a debt ‘for money ... to the extent obtained by ... false pretenses, a false representation, or actual fraud....’” Jennings v. Bodrick (In re Bodrick), 509 B.R. 843, 854 (Bankr. S.D.Ohio 2014) (quoting 11 U.S.C. § 523(a)(2)(A)). The party seeking a determination that a debt is nondischargeable must prove that:
(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss.
Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277, 280-281 (6th Cir.1998).
A false representation has been defined as an expressed misrepresentation. In contrast, false pretenses involve an implied representation or conduct that is intended to create and foster a false impression. Actual fraud is a broader concept that has been defined as any deceit, artifice, trick or design involving a direct and active operation of mind, used to circumvent and cheat another— something said, done or omitted with the *799design of perpetrating a cheat or deception.
Bod/rick, 509 B.R. at 855 (internal quotation marks and citations omitted).
1. Material Misrepresentation
“Generally, a material misrepresentation can be defined as substantial inaccuracies of the type which would generally affect a lender’s or guarantor’s decision .... On the other hand, [a] misrepresentation is not material if the creditor knows it is false or possesses information sufficient to call the representation into question.... ” Haney v. Copeland (In re Copeland), 291 B.R. 740, 761 (Bankr. E.D.Tenn.2003) (internal quotation marks and citations omitted).
a. The Certification
The Bank specifically relies upon the first paragraph in the Certification which provides as follows:
1. I (and ■ co-applicant if applicable), John Brent, have applied for a loan from Lender. In applying for the loan, I completed a loan application containing various information about me and the requested loan, such as the amount and source of any downpayment, income information, and assets and liabilities. I certify that all of the information is true and complete. I made no misrepresentations in the loan application or in any related documents, nor did I omit any important information.
Certification, Pl.’s Ex. 26. The Bank asserts that this language in the Certification led it to believe that Dr. Brent would be making a down payment for the construction loan, and that by signing the Certification, Dr. Brent agreed to advise the Bank of the amount and source of any down payment. In addition, the Bank argues that a certification by Dr. Brent that he made no misrepresentations in the Loan Application nor omitted any important information is a misrepresentation by him because the Loan Application indicates the sources for a down payment were “stocks and bonds, checking savings” when in fact, he did not make any Down Payment. Further, the Bank believes the failure of Dr. Brent to disclose the credit partner arrangement and his receiving $5,000 compensation for participating as a credit partner was important information that was omitted. In contrast, Dr. Brent was under the impression that the Bank knew about the financial arrangement with respect to the credit partner arrangement and was not aware of the requirement that he had to provide the Down Payment.
The Certification when read in conjunction with the Loan Application may contain inaccuracies. The Certification, signed by Dr. Brent, certifies that the information regarding the source of any down payment was true and complete, and that there are no misrepresentations in the Loan Application. The Loan Application contains a section in which the applicant is directed to identify the source of down payment, settlement charges, and/or subordinate financing (the “Source Box”). The Source Box on the Loan Application identifies “stocks and bonds, checking savings” as the source. See Loan Application, Pl.’s Ex. 2. The text in the Source Box begs the question: If Dr. Brent was not required to make a down payment, why is there any information in the Source Box? If Dr. Brent intended to deceive the Bank about making the Down Payment, the information in the Source Box would be the genesis of some concern. But as discussed more fully elsewhere in this opinion, the Court finds that Dr. Brent did not intend to deceive the Bank. He did not prepare the Loan Application; rather it was provided to him with the loan documents by the notary. He did not give the Source Box information to anyone for preparation *800of the Loan Application, or authorize anyone to insert the representation in the Source Box. In light of these circumstances, the Court views the Source Box text as merely harmless non sequitur.
b. The HUD Statement
The HUD Statement does not constitute a material misrepresentation because nothing on it identifies who was responsible for paying the Down Payment or who, in fact, made it. The HUD Statement states in part as follows:
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HUD Statement, Pl.’s Ex. 10. The HUD Statement was prepared by Great Lakes, and Mr. Clark acknowledged that either he or someone else at the Bank reviewed it prior to the closing. Dr. Brent signed the HUD Statement at the closing oh January 10, 2008. The Bank argues that because Dr. Brent signed the HUD Statement, he misrepresented that he made the Down Payment. The HUD Statement, however, does not specifically identify who contributed the “deposit or earnest money.” In fact, the title of that informational box identifies the line items as “AMOUNTS PAID BY OR IN BEHALF OF BORROWER.” HUD Statement, Pl.’s Ex. 10 (emphasis added). Thus, there is no affirmative statement indicating Dr. Brent contributed the funds, and no misrepresentation by him.
c. The Confirmation Letter
The Confirmation Letter does not constitute a material misrepresentation made by Dr. Brent because any statement made in the Confirmation Letter cannot be attributed to him. Prior to the closing, the Bank received a copy of the Confirmation Letter which is dated December 19, 2007. The Confirmation Letter is authored by the Managing Member of Western and was addressed to the owner of Great Lakes. The Confirmation Letter indicates Western was in receipt of funds in the amount of $98,000 representing a 20% down payment with respect to Dr. Brent’s transaction. The Confirmation Letter does not identify who made the down payment to Western. Nothing in the Confirmation Letter indicates that Dr. Brent was also sent a copy of the letter when it was sent to Great Lakes, or that he was otherwise aware of its existence. There is no evidence that Dr. Brent requested the Confirmation Letter be sent to the Bank. Dr. Brent’s signature does not appear on the Confirmation Letter. Accordingly, the Confirmation Letter does not constitute a misrepresentation by Dr. Brent.
None of the statements contained in the HUD Statement, or the Confirmation Letter constitute a material misrepresentation by Dr. Brent. Statements in the Certification may constitute a misrepresentation, but not as to whether Dr. Brent was making the Down Payment. Nor can the Bank satisfy its burden of proving other elements necessary to have the Judgment deemed nondischargeable under 11 U.S.C. § 523(a)(2)(A).
2. Intent to Deceive
The Bank did not prove by a preponderance of the evidence that Dr. Brent possessed an intent to defraud the Bank because the record shows that Dr. *801Brent was never aware of the Down Payment requirement, nor did he expect to have any out-of-pocket expenses for participating as a credit partner in the Indian Ridge Project. “Whether a debtor possessed an intent to defraud a creditor within the scope of § 523(a)(2)(A) is measured by a subjective standard ... Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277, 281 (6th Cir.1998) (citing Field v. Mans, 516 U.S. 59, 116 5.Ct. 437, 444, 133 L.Ed.2d 351 (1995)). “The debtor’s intent is ascertained by looking at the totality of the circumstances, and all exceptions to discharge are to be strictly construed against the creditor.” Keeley v. Grider, 590 Fed.Appx. 557, 560 (6th Cir.2014) (citation omitted). Dr. Brent was never made aware of the Down Payment requirement during the process of applying for and receiving the construction loan from the Bank. To be sure, the marketing brochure from MIP (“MIP Brochure”) that Dr. Brent received from Ms. McCleery specifically states in part in the “MIP — Credit Partner Prospectus” as follows:
Fees & Expenses
All expenses and fees for the construction financing are paid for you. There will be no out of pocket cost to close on the construction financing.
MIP Brochure, Def.’s Ex. C. In addition, Dr. Brent received an email from Ms. McCleery (the “McCleery Email”) confirming his understanding that no down payment was required to participate as a credit partner in the Indian Ridge Project. The McCleery Email specifically states, in part, that “[w]e6 are trying to structure this with no money down for you....” McCleery Email dated May 30, 2007 and time-stamped 12:28 P.M., Def.’s Ex. D. Dr. Brent testified that had he known about the Down Payment requirement, he would not have applied for the construction loan with the Bank. Dr. Brent further stated that he did not even have enough funds available at the time he completed the Loan Application to afford the Down Payment. Moreover, the Bank never communicated to Dr. Brent, orally or in writing, ■that the Down Payment was a condition precedent to receiving the construction loan. Mr. Clark only communicated that information to Mr. Platt. Mr. Clark admitted that he was not sure whether Mr. Platt was communicating the information regarding the Down Payment to Dr. Brent.
The Bank counters that Dr. Brent acted recklessly by signing the loan documents without reviewing them, and that this mandates a determination that the debt is nondischargeable. Dr. Brent admits that he did not review the documents before signing them. This Court staunchly adheres to the philosophy that failure to read documents does not constitute a defense. See Oster v. Clarkston State Bank (In re Oster), 474 Fed.Appx. 422, 427-28 (6th Cir. 2012) (declining to adopt the debtor’s defense that he did not know the statements were untrue because he did not read the contents of the loan agreements). However, as noted above, the documents do not contain misrepresentations that support a finding of nondischargeability. The Court has already discussed the many deficiencies in the various documents and need not repeat that discussion here. Dr. Brent did not prepare the Loan Application provided to him for signature, he did not give the Source Box information to anyone to include in the Loan Application, or authorize anyone to insert the representation in the *802Source' Box. There, were multiple people involved in putting together the loan transaction; Dr. Brent had been assured repeatedly that there would be no cash demands on him for entering into the transaction. And the documents were largely illegible when presented to Dr. Brent for signature. In light of the circumstances surrounding the transaction, the Court is unable to find that Dr. Brent acted recklessly in connection with execution of the documents such that the debt should be found nondischargeable.
In light of the documentary evidence substantiating Dr. Brent’s belief that no down payment or out-of-pocket costs were expected of him, the fact that Dr. Brent did not have liquid assets available to him in sufficient amount to even afford the Down Payment, and the fact that the Bank cannot demonstrate that the Down Payment requirement was communicated to Dr. Brent, the Court finds that Dr. Brent did not intend to deceive the Bank based on the totality of the circumstances.
3. Justifiable Reliance
The Bank cannot satisfy the justifiable reliance element because the fact that Dr. Brent did not make the Down Payment would have been revealed if only a cursory examination or investigation had been performed by the Bank. Justifiable reliance “is a matter of the qualities and characteristics of the particular [creditor], and the circumstances of the particular case, rather than of the application of a community standard of conduct....” Field v. Mans, 516 U.S. 59, 71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).
Justifiable reliance means that a creditor is “required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.”
Bodrick, 509 B.R. at 855 (quoting Field, 516 U.S. at 71, 116 S.Ct. 437).
Where banks have established a history of dealing, involving trust and confidence, they may be justified in rely-' ing on that customer’s representations. On the other hand, where there is no history, the bank is sophisticated, the sums are significant, and the lender restricts its inquiry to information provided by the borrower, it is more difficult to establish justifiable reliance.
Liberty Sav. Bank, FSB v. McClintic (In re McClintic), 383 B.R. 689, 694 (Bankr. S.D.Ohio 2008) (citations omitted). In this case, no documents or verbal representations indicated Dr. Brent was the source of the Down Payment; if the source of the Down Payment was important to the Bank, the Bank should have closed that loophole. The Bank did not show that it had an established transactional history with Dr. Brent such that it may be justified in relying solely on their history in order to have confidence that the Bank’s requirements were being met. Thus, there is no basis for justifiable reliance illustrated.
The Bank is a sophisticated lending institution with significant experience in approving and funding loans. It has internal procedures established for approval of loans such as requiring certain documentation be provided by an applicant after which a formal presentation is made to a loan committee for final approval. More specifically, the Bank has an internal operating procedure that requires a borrower provide a copy of the down payment check in addition to a letter from a third party that acknowledges receipt of the down payment funds, before the Bank will fund a loan. Contrary to the Bank’s normal business procedures, it did not request a copy of the Down Payment check prior to funding the construction loan for *803Dr. Brent. The Bank indicated that it varied from its normal operating procedures based on the recommendation from Great Lakes who performed the closing. The Bank, however, could not .indicate why Great Lakes made such a recommendation. The Court finds it curious that the Bank would choose to ignore its own internal operating procedures based on a recommendation from an outside and unrelated entity. Clearly, the Bank had procedures in place to ensure that a down payment is actually made and reeeivéd prior to funding a loan, but in this case, the Bank chose not to follow those procedures. This simple requirement of requesting a copy of the Down Payment check prior to funding would have clearly prevented the loan from closing without the Down Payment having been made. Accordingly, the Bank did not prove justifiable reliance because it failed to utilize its opportunity to make a cursory examination or investigation into whether the Down Payment had actually been paid by Dr. Brent.
The Bank having failed to demonstrate (1) material misrepresentations (2) made with intent to deceive, (3) on which the Bank justifiably relied, the Bank’s request for a determination of nondischargeability under 11 U.S.C. § 523(a)(2)(A) must fail.
4. False Pretenses
A “false pretense” involves an implied misrepresentation or conduct intended to create or foster a false impression. A false pretense has been defined to include a “mute charade,” where the debtor’s conduct is designed to convey an impression without oral representation. A “false representation,” on the other hand, is an expressed misrepresentation.
James v. McCoy (In re McCoy), 114 B.R. 489, 498 (Bankr.S.D.Ohio 1990) (citations omitted). The Complaint alleges that Dr. Brent engaged in false pretenses in that he did not intend to pay the loan; however, only a few questions were asked at the trial that arguably related to such a cause . of action. Moreover, false pretenses were not discussed during closing argument. Nonetheless, the Court finds that the evidence is insufficient to establish that Dr. Brent obtained the construction loan by false pretenses. Dr. Brent did not expect to have any out-of-pocket expenses related to the construction loan. As a result, Dr. Brent did not personally intend on paying the monthly interest payments; he did, however, intend on those payments being made by someone else as a result of the financing arrangement established by MIP with the lending partners. Accordingly, the Court finds that at the time Dr. Brent incurred the debt for the construction loan, he intended that the Bank be paid, and the fact that he thought a third party would make the interest payments did not amount to being a false pretense.
Furthermore, the Court finds that Dr. Brent’s failure to disclose the credit partner financing arrangement to the Bank, did not constitute a false pretense or mute charade for purposes of excepting the debt under 11 U.S.C. § 523(a)(2)(A) because the evidence before the Court does not demonstrate that the omission was meant to mislead the Bank into approving and funding the construction loan. Dr. Brent did not disclose the credit partner arrangement to the Bank because he was under the mistaken impression that the Bank was aware of same. The Bank admitted that it did not have any personal contact with Dr. Brent prior to the loan closing, so he would not have had any opportunity to communicate directly with the Bank. Nothing in the Loan Application solicits this information sufficiently clearly to place Dr. Brent under a duty to disclose it. In addition, Dr. Brent was advised by Mr. Clarkson that he would obtain banks that were willing to be lending partners, so *804it is reasonable that Dr. Brent was under the impression that the Bank was fully aware of the credit partner financing arrangement. No false pretenses by Dr. Brent have been proven.
C. 11 U.S.C. § 523(a)(2)(B)
11 U.S.C. § 523(a)(2)(B) provides in pertinent part as follows:
(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). Each of the five elements listed in § 523(a)(2)(B) must be satisfied for the Court to make a finding of nondischargeability of debt.
“As long as the written statement is written, signed, adopted or used by the debtor, the-basic precondition concerning the writing requirement to the non-dis-chargeability complaint under section 523(a)(2)(B) is met.” Insouth Bank v. Michael (In re Michael), 265 B.R. 593, 598 (Bankr.W.D.Tenn.2001) (citations omitted). As previously discussed, the Loan Application is the only document referenced by the Bank that constitutes a statement in writing respecting Dr. Brent’s financial condition. Dr. Brent acknowledged his signature on the Loan Application, and despite the fact that he did not personally complete the information in the Loan Application or read the contents before signing it, the Loan Application still satisfies the first element of 11 U.S.C. § 523(a)(2)(B). See Michael, 265 B.R. at 598; see also Dice v. Akron, Canton & Youngstown R.R. Co., 155 Ohio St. 185, 191, 98 N.E.2d 301 (1951) (“A person of ordinary mind cannot say that he was misled into signing a paper which was different from what he intended to sign when he could have known the truth by merely looking when he signed.... If a person can read and is not prevented from reading what he signs, he alone is responsible for his omission to read what he signs.” (citations omitted)).
1. Material Falsity
“The ‘materially false’ prong of Code § 523(a)(2)(B)(i) requires more than a merely erroneous or untrue written statement.” Hudson Valley Water Res., Inc. v. Boice (In re Boice), 149 B.R. 40, 45 (Bankr.S.D.N.Y.1992). “A statement is materially false if the information offers a substantially untruthful picture of the financial condition of the debtor that affects the creditor’s decision to extend credit.” Insouth Bank v. Michael (In re Michael), 265 B.R. 593, 598 (Bankr.W.D.Tenn.2001) (citation omitted).
A statement is materially false under section 523(a)(2)(B)® if it “paints a substantially untruthful picture of a financial condition by misrepresenting information of the type which would normally affect the decision to grant credit.” Borg Warner Cent. Envtl. Sys., Inc. v. Nance (In re Nance), 70 Bankr.318, 321 (Bankr.N.D.Tex.1987); see also In re Bogstad, 779 F.2d 370, 375 (7th Cir. 1985) (“A recurring guidepost used by courts [for determining material falsity] has been to examine whether the lender would have made the loan had he known of the debtor’s true financial condition.”) (citing cases); Boice, 149 Bankr.at 45 (“The information must not only be substantially inaccurate, but it must also be *805information which would have affected the creditor’s decision making process.”).
Bethpage Fed. Credit Union v. Furio (In re Furio), 77 F.3d 622, 625 (2d Cir.1996). In this case, the Bank asserts that two sections of the Loan Application represent materially ■ false statements made by Dr. Brent. The first is the statement contained in section “VIII. DECLARATIONS” (the “Declaration Section”). See Loan Application, Pl.’s Ex. 2. The Declaration Section of the Loan Application consists of a number of statements to which the applicant/borrower must respond “yes” or “no” by checking the appropriate box that corresponds to his response. One of the questions asked in the Declaration Section reads as follows: “Is any part of the down payment borrowed?” See Loan Application, Pl.’s Ex. 2. Dr. Brent indicated his response to that question was “no.” This declaration by Dr. . Brent is not inaccurate because Dr. Brent did not believe he had to make a down payment. The Declaration Section of the Loan Application does not provide for any responses by the applicant other than “yes” or “no.” Dr. Brent had to choose either “yes” or “no” to the inquiry as there was no option for choosing “not applicable” or something similar. Because Dr. Brent believed there was no. requirement to make a down payment, he would be accurate in indicating that he did not borrow funds for something that was not needed..
The second statement the Bank asserts ' is materially false in the Loan Application is the information listed in the Source Box of the Loan Application. As noted previously, the Source Box identifies “stocks and bonds, checking savings” as the source for the Down Payment. Loan Application, Pl.’s Ex. 2. If a Down Payment was not required, as Dr. Brent asserts, then there would be no need to indicate a source for same. Dr. Brent’s indication in the Loan Application that the ’ source of the Down Payment was “stocks • and bonds checking savings” could be viewed as a false statement, but in light of this Court’s finding that Dr. Brent did not intend to deceive the Bank, the Court views the information in the Source Box as a non sequitur. And even if Dr. Brent’s statement in the Source Box is false, the Loan Application is not materially false.
Dr. Brent’s Loan Application is not materially false because it does not offer a substantially untruthful picture of his financial condition that affected the Bank’s decision to fund the construction loan. First, the Bank did not illustrate that the Loan Application offers a substantially untruthful picture of Dr. Brent’s financial condition. The Bank did not allege that Dr. Brent misstated the amount of his income, assets or liabilities in the Loan Application. Furthermore, there is no evidence that the statement in the Source Box somehow impacts the overall net worth of Dr. Brent. To be sure, the Loan Application does not even identify the amount of the Down Payment. Accordingly, the Loan Application does not offer a substantially untruthful picture of the financial condition of Dr. Brent on account of the statement in the Source Box, because reading same does not affect the understanding of the overall net worth of Dr. Brent. Therefore, it does not constitute a materially false statement about Dr. Brent’s financial condition.
Second, the Loan Application and statement in the Source Box did not ultimately affect the Bank’s decision to fund the construction loan.
“Materiality” ... for purposes of § 523(a)(2)(B) requires more than merely examining the truth of the information provided. A second step is required. The information must not only be substantially inaccurate, but also *806must be information which affected the creditor’s decisionmaking process.... The information must have actual usefulness to the creditor and must have been an influence on the extension of credit. Although there is substantial similarity between such analysis of “materially” and the element of “reasonable reliance[,]” ... analysis of the creditor’s use of the requested information is appropriate in both contexts.
In re Hunt, 30 B.R. 425, 440 (M.D.Tenn. 1983) (citation omitted). In this case, the Bank indicates that it never would have approved and funded the construction loan for Dr. Brent had it known that he would not be making the Down Payment. The Bank’s conduct in ultimately approving and funding the loan, however, belies this assertion. If indeed the requirement that Dr. Brent make the Down Payment was imperative to the Bank’s decision making process as to whether to approve and fund the loan, the fact that the Bank chose not to abide by its own internal operating procedures of receiving a copy of a down payment check prior to approving and funding a loan suggests to the Court that, at least in this case, the existence of the Down Payment did not truly affect the Bank’s decision to approve and fund the loan for Dr. Brent.
2. Reasonable Reliance
The Bank did not demonstrate that it reasonably relied upon Dr. Brent’s statements in the Loan Application. “Exactly what constitutes ‘reasonable reliance’ in compliance with 11 U.S.C. § 523(a)(2)(B)(iii) in relation to a creditor’s reliance upon a written financial statement is not statutorily defined by the Code.” Insouth Bank v. Michael (In re Michael), 265 B.R. 593, 598 (Bankr.W.D.Tenn.2001) (citation omitted). “Generally, courts have held that ‘reasonable reliance’ is a question of fact to be determined in light of the totality of the circumstances.” Buckeye Ret. Co., LLC v. Kakde (In re Kakde), 382 B.R. 411, 422 (Bankr.S.D.Ohio 2008) (citations omitted).
The Sixth Circuit has identified five factors that may affect the reasonableness of a creditor’s' reliance: (1) whether the creditor had a close personal relationship or friendship with the debtor; (2) whether there had been previous business dealings with the debtor that gave rise to a relationship of trust; (3) whether the debt was incurred for personal or commercial reasons; (4) whether there were any “red flags” that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and (5) whether even minimal investigation would have revealed the inaccuracy of the debtor’s representations.
Jennings v. Bodrick (In re Bodrick), 509 B.R. 843, 857 (Bankr.S.D.Ohio 2014) (quoting Oster v. Clarkston State Bank (In re Oster), 474 Fed.Appx. 422, 425 (6th Cir. 2012)). In this case, the Bank did not have a close personal relationship with Dr. Brent. To be sure, the Bank did not have any direct contact or communication with Dr. Brent until after the construction loan went into default status with the Bank. The Bank did not have any previous business dealings with Dr. Brent. The debt was incurred by Dr. Brent for personal reasons (i.e., as a real estate investment and/or vacation home). Finally, and most significantly, had the Bank performed even a minimal investigation regarding the existence of the Down Payment by requiring a copy of the check be submitted to it, in accordance with its own procedures, the inaccuracy would have been revealed. In light of the totality of the circumstances in this case, the Bank has failed to demonstrate that it reasonably relied upon Dr. Brent’s statements in the Loan Application
*8073. Published with Intent to Deceive
“[The Court does] not require proof of the debtor’s subjective intent to satisfy [its] inquiry under this prong. In this Court, § 523(a)(2)(B)(iv) is met if ‘the debtor either intended to deceive the Bank or acted with gross recklessness ... Oster v. Clarkston State Bank (In re Oster), 474 Fed.Appx. 422, 427 (6th Cir.2012) (citations omitted).
In the Sixth Circuit, the standard for determining intent includes actual intent to deceive as well as gross recklessness .... A determination of intent to deceive focuses on circumstantial evidence and is generally “inferred if the totality of the circumstances presents a picture of deceptive conduct by the debt- or which indicates an intent to deceive or cheat the creditor.” If there is room for an inference of honest intent, the question of nondischargeability must be resolved in the debtor’s favor.
Buckeye Ret. Co., LLC v. Kakde (In re Kakde), 382 B.R. 411, 427 (Bankr.S.D.Ohio 2008) (citations omitted). For all the same reasons discussed previously regarding intent as it related to the Bank’s claims under 11 U.S.C. § 523(a)(2)(A), the totality of the circumstances in this case do not present a picture of deceptive conduct by Dr. Brent. Dr. Brent was not aware that he was required to make the Down Payment which is substantiated by the MIP Brochure and the McCleery Email. The Bank never communicated with Dr. Brent whether orally or in writing about the requirement that he make the Down Payment. In this case, there is ample room for an inference of an honest intent on behalf of Dr. Brent, and thus, the Court must find in favor of him.. Accordingly, the Judgment is not excepted from the operation of the discharge under 11 U.S.C. § 523(a)(2)(B).
IV. Conclusion
For the foregoing reasons, the Plaintiff, Lawrence Bank, has failed to demonstrate that it is entitled to judgment under 11 U.S.C. § 523(a)(2)(A) and (B). A separate final judgment will be entered in accordance with this opinion.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
. Parties stipulated to substitution of Great American Bank for Lawrence Bank as the true party in interest based on the merger of the two banks. Notwithstanding, for clarity purposes the Court will continue to refer to the Plaintiff as Lawrence Bank since the testimony and argument by the parties at the trial referred to Lawrence Bank as the Plaintiff.
. Dr. Brent only financed one of the duplexes with the Bank; the construction of the other duplex was apparently financed with Wacho-via Bank.
. There is no evidence in the record of what, if any, relationship Mr. Clarkson had with Mr. Platt. Nor is it known how Dr. Brent's loan application ended up in the hands of Mr. Platt for referral to Mr. Clark.
. The original maturity date for the construction loan was May 19, 2008; however, that date was extended by the Bank sometime in June 2008 to the end of December 2008.
. Mr. Clark offered to provide the Court the Bank's original copy of the Loan Application with Dr. Brent’s signature in blue ink for consideration as it was a little more legible than the copy proposed for admission into the Court’s record. The Court accepted Mr. Clark’s offer and is currently in possession of same.
. “The evidence before the Court is that Ms. McCleery was working with MIP to find investors for the Indian Ridge Project, so the Court will conclude that the use of the pronoun "we” in the context of the McCleery Email represents MIP and its representatives and/or agents. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498804/ | MEMORANDUM
Nicholas W. Whittenburg, UNITED STATES BANKRUPTCY JUDGE
This case is before the court on the Debtor’s Motion to Convert Case to a Case Under Chapter 13 filed on August 18, 2015. Having considered the undisputed material facts and the arguments and briefs of the parties, the court will deny the motion.
The pertinent facts are as follows. The debtor commenced this chapter 11 case on May 30, 2014. His Schedule D reflects $1,281,000.00 in secured debts, and it does not indicate that any of the debts is contingent, unliquidated, or disputed. The schedule also indicates that the “unsecured portions” of the secured debts total $438,943.00. One of those debts is a $700,000.00 obligation to Peoples Bank secured by real property located at 105 North Ocoee Street in Copper Hill, Tennessee, which the schedule indicates is unsecured to the extent of $250,000.00. The Schedule E filed by the debtor lists priority claims totaling $3.00 and his Schedule F lists nonpriority unsecured debts totaling $853.00.
On July 14, 2014, Peoples Bank of East Tennessee filed a motion for relief from the automatic stay and, on August 29, 2014, the court entered an agreed order resolving that motion. Among other things, the order granted stay relief with respect to the Ocoee Street property. It also provides that “Peoples Bank shall not seek a deficiency against the Debtor following foreclosure of its deed of trust in the event that the Ocoee Property does not bring sufficient money to satisfy the debt owed.” Peoples Bank thereafter foreclosed on that collateral.
The debtor proposed a chapter 11 plan on December 15, 2014, but that plan was ultimately withdrawn on July 16, 2015. Peoples Bank of East Tennessee filed a motion to dismiss this case or convert it to chapter 7 on July 21, 2015. At the hearing on that motion, the debtor requested 10 days to file a motion to convert the case to chapter 13. Peoples Bank did not oppose the request and, accordingly, on August 14, 2015, the court entered an order affording the debtor 10 days to file a motion to convert this case to a case under chapter 13 of the Bankruptcy Code and further provided that, if such a motion is timely filed, Peoples Bank’s motion to dismiss or convert would be deemed moot and denied without prejudice. On August 8, 2015, the debtor filed the motion to convert presently before the court, pursuant to 11 U.S.C. § 1121(d). Peoples Bank responded that *809the debtor is not eligible to be a debtor under chapter 13 on account of the debt limits set forth in 11 U.S.C. § 109(e).
Section 1112(d) of the Bankruptcy Code authorizes the court to convert a case under chapter 11 to a case under chapter 13 only if the debtor requests conversion and the debtor has not received a discharge under 11 U.S.C. § 1141(d). As the debtor has not received a discharge and has voluntarily requested the conversion, § 1112(d) would appear to apply conversion would seem appropriate. However, subsection (f) of § 1112 provides that “a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.” Consequently, if a debtor is ineligible for chapter 13, he may not convert to that chapter from chapter 11.
Section 109(e) of the Bankruptcy Code sets forth the eligibility requirements for chapter 13. It provides, in pertinent part, that “[o]nly an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525 ... may be a debtor under chapter 13 of this title.” Those limits do apply when a debt- or seeks to convert a case to chapter 13 from another chapter. See Marrama v. Citizens Bank, 549 U.S. 365, 372, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). The Sixth Circuit has held that, in determining whether the debtor satisfies the chapter 13 eligibility requirements, “a court should rely primarily upon the debtor’s schedules checking only to see if the schedules were made in good faith.” Comprehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751, 756 (6th Cir.1985). In so holding, the court noted that § 109(e) is analogous to the “amount in controversy” requirement when a plaintiff seeks to invoke a federal court’s “diversity” jurisdiction, quoting Supreme Court authority holding that “the sum claimed by the plaintiff controls if the claim is apparently made in good faith.... The inability of plaintiff to recover an amount adequate to give the court jurisdiction does not show his bad faith or oust the jurisdiction.” Id. at 757 (quoting St. Paul Indem. Co. v. Red Cab Co., 303 U.S. 283, 288-90, 58 S.Ct. 586, 82 L.Ed. 845 (1938)). The court is to “look beyond the schedules only if the court determines that they were not filed in good faith.” In re Fuson, 404 B.R. 872, 874 (Bankr.S.D.Ohio 2008).
Peoples Bank does not dispute the debt- or’s good faith in preparing and filing his schedules of liabilities. Rather, it relies on those schedules. Irrespective of whether the court treats the debts listed on Schedule D as fully secured or bifurcates those claims into secured and unsecured components, there is no question that the debts as listed in the schedules exceeded § 109(e)’s limits. If the claims are not bifurcated, Schedule D lists debts on the date of the filing of the petition of $1,281,-000.00 — about $130,000 over the secured debt limit. If the claims are bifurcated,1 the unsecured portions of the debts listed on Schedule D plus the debts listed on Schedules E and F total $439,799.00— about $56,000 over the unsecured debt limit.
The debtor responds that Peoples Bank’s foreclosure on the Ocoee Street *810property pursuant to the August 29, 2014, order reduced the amount of the debtor’s secured debts (if they are not bifurcated) by $700,000 — to $581,000, which is well below the secured debt limit — and that the alleged forgiveness of the unsecured portion of. the bank’s debt2 reduced the amount of the debtor’s unsecured debts (if secured debts are bifurcated) by $250,-000 — to $189,799, which is well below the unsecured debt limit, order granting relief from the automatic stay. The court must determine, therefore, whether the postpe-tition event of foreclosure or the postpetition order precluding Peoples Bank from seeking a deficiency may be taken into consideration in evaluating Chapter 13 eligibility.
The conclusion that postpetition events should not normally factor into the determination of chapter 13 eligibility is grounded in the text of § 109(e) of the Bankruptcy Code, because it expressly provides that eligibility is to be determined by reference to secured and unsecured debts owing “on the date of the filing of the petition.” The date of the filing of the petition commencing this case was May 30, 2014, which was prior to the foreclosure on the Ocoee Street property, prior to the entry of the August 29, 2014, order granting Peoples Bank relief from the stay, and prior to the filing of the pending motion to convert. As of the petition date, the debtor was ineligible for relief under chapter 13 because his debts exceeded the applicable debt limits according to the schedules, which speak as of the petition date.
Notwithstanding the plain language of § 109(e), the debtor asserts that events subsequent to the original petition and pri- or to the filing of the motion to convert should be considered when determining the debtor’s chapter 13 eligibility. He essentially argues that the date of the filing of the motion to convert and not the date of the filing of the petition should be the date for measuring chapter 13 eligibility. However, the debtor’s argument, in addition to ignoring the text of § 109(e), is inconsistent with § 348(a) of the Bankruptcy Code, which states, in pertinent part, that “[cjonversion of a case from a case under one chapter of this title to a case under another chapter of this title ... does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.” As the conversion of a case from chapter 11 to chapter 13 does not alter the date of the filing of the petition, it follows that the date for measuring the debtor’s eligibility for chapter 13 must be the original petition date. In re Rohl, 298 B.R. 95, 99-100 (Bankr.E.D.Mich.2003).3 The reasoning of the Sixth Circuit in Pearson supports this conclusion.
The bankruptcy court in Pearson held that it should consider the original schedules, not amended schedules that increased the unsecured debt above the chapter 13 limit. The Sixth Circuit concurred:
We therefore also agree with the bankruptcy judge, the district judge, and the rationale of the Supreme Court in the St. Paul Indemnity case that the fact *811that some later resolution of the conflict might render more certain the precise nature of the debt itself and the extent to which it is ultimately found to be secured is relatively immaterial in determining the debtors’ financial condition and Chapter 13 eligibility on the date the petition was filed. The bankruptcy judge and the district judge both looked realistically to the state of the debtors’ affairs as it reasonably appeared on the date of filing. We do not believe that the statute requires any more.
Pearson, 773 F.2d at 758.4
The following year, the United States District Court for this district was asked to dismiss preference proceedings because the debtor, having been converted into an industrial bank pursuant to its chapter 11 plan of reorganization and later merged into another bank, was no longer eligible to be a chapter 11 debtor. The court noted Pearson’s holding that “events occurring after the filing of a Chapter 13 petition did not deprive the Bankruptcy Court of jurisdiction,” and held that “[tjhere appears to be no substantive reason why this Court should treat a Chapter 11 petition differently from a Chapter 13 petition. This court, therefore, holds that SIBC was an eligible debtor at the time the Chapter 11 petition was filed on March 10, 1983, and that subsequent changes in its corporate status had no effect upon the ability of the Trustee to bring these suits for preferential transfers.” DuVoisin v. Anderson (In re S. Indus. Banking Corp.), 59 B.R. 978, 986 (E.D.Tenn.1986).
This court also finds decisions from sister bankruptcy courts persuasive. For example, in In re Hansen, 316 B.R. 505 (Bankr.N.D.III.2004), a chapter 7 debtor sought to convert his case to chapter 13 after a large debt had been forgiven post-petition. The court disregarded the forgiveness in holding that the debtor was ineligible for chapter 13 relief because “Section 109(e) states plainly that eligibility to proceed under chapter 13 depends on what the debtor owes ‘on the date of the filing of the petition.’ Post-petition changes in what the debtor owes are therefore beside the point.” Id. at 509 (citing In re Stairs, 307 B.R. 698, 701 (Bankr.D.Colo.2004); In re Rohl, 298 B.R. 95, 100 (Bankr.E'.D.Mich.2003)). In Stairs, the court held the debtor ineligible to convert to chapter 13 even though post-petition, payments by a nondebtor reduced a large debt by 75%. In Rohl, the court held the debtor ineligible to convert to chapter 13 even though certain scheduled debts were no longer owing as a result of postpetition events. See also In re Faulhaber, 269 B.R. 348, 353 (Bankr.W.D.Mieh. 2001) (noting that “Pearson also prohibits the bankruptcy court from taking into consideration events which occurred subsequent to the petition date in evaluating the debtor’s eligibility for Chapter 13 relief.”).
This court . agrees that postpetition events may not be taken into account in determining chapter 13 eligibility. First and foremost, the statute itself provides that eligibility is to be determined “on the date of the filing of the petition.” Thus, both the Sixth Circuit and our district court have held that postpetition events do not affect a debtor’s eligibility to be a debtor under a particular chapter. Just as *812the Supreme Court has made clear that a good faith complaint controls whether a federal court has diversity jurisdiction, whether or not the claim actually turns out to exceed the jurisdictional amount, so too schedules filed in good faith reflecting the state of the debtor’s financial affairs on the date of the filing of the petition control whether a debtor is eligible for chapter 13 relief, whether or not the claims actually turn out to be different than stated in the schedules. The court holds, therefore, that the satisfaction of Peoples Bank of East Tennessee’s secured debt through a postpetition foreclosure and its alleged forgiveness of the deficiency remaining after the foreclosure have no bearing on the debtor’s eligibility to be a debtor under chapter 13 of the Bankruptcy Code as of the date of filing of his chapter 11 petition.
For the foregoing reasons, the court will enter an order denying the debtor’s motion to convert his chapter 11 case to chapter 13.5
. Although the Sixth Circuit has not addressed the issue, "a vast majority of courts, and all circuit courts that have considered the issue, have held that the unsecured portion of undersecured debt is counted as unsecured for § 109(e) eligibility purposes.” Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir.2001) (citing Brown & Co. Securs. Corp. v. Balbus (In re Balbus), 933 F.2d 246 (4th Cir. 1991); Miller v. United States, 907 F.2d 80 (8th Cir. 1990); In re Day, 747 F.2d 405 (7th Cir.1984)).
. The agreed order granting relief from the stay did not, as a technical matter, forgive the deficiency; rather, the bank agreed not to pursue a deficiency.
. The exception to § 348(a) found in subsection (b) (providing that “order for relief under this chapter” as used in certain specified sections means conversion) and the exception found in subsection (c) (providing that "Sections 342 and 365(d) of this title apply in a case that has been converted ... as if the conversion order were the order for relief”) do not apply here. Indeed, § 348(a) governs only the effect of conversion, and so does not come into play until conversion takes place. Nevertheless, its general rule that conversion is not equivalent to the filing of a petition is relevant in construing § 109(e)’s language "on the date of the filing of the petition.”
. The debtor attempts to distinguish Pearson because the consideration of the postpetition events in that case would have destroyed chapter 13 eligibility that existed at the time the petition was filed while, in this case, postpetition events would create chapter 13 eligibility that did not exist at the time the petition was filed. Pearson simply does not make that distinction, and this court will not do so, particularly considering the plain language of § 109(e) requiring that the debts fall with in the chapter 13 debt limits "on the date of the filing of the petition.”
. Since the court holds that postpetition events are not taken into account in determining eligibility to convert a case to chapter 13, it need not consider factual and legal issues relating to the effect of the foreclosure and the agreed order granting relief from the automatic stay. Such issues include whether the bank was left with a deficiency after the foreclosure and, if so, how large the deficiency is and whether it would need to be considered in applying § 109(e)’s unsecured debt limit considering that the bank agreed not to seek a deficiency. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498805/ | ORDER
KATHY A. SURRANT-STATES, Chief United States Bankruptcy Judge
The matter before the Court is the Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010, Objection of the United Mine Workers of America to Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010, Objection of the UMWA 1992 Benefit Plan and the UMWA Combined Benefit Fund and Joinder to the Objection of the United Mine Workers of America to the Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010, Memorandum of Law in Support of the Objection of the UMWA 1992 Benefit Plan and the UMWA Combined Benefit Fund and Joinder to the UMWA Objection to the Motion to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010, Debtors’ Objection to the Motion of Peabody Energy Corporation to Reopen Bankruptcy Case Pursuant to Sections 105(A) and 350(B) of the Bankruptcy Code and Fed. R. Bankr.P. 5010, Joinder of the Official Committee of Unsecured Creditors to the Objections of the United Mine Workers of America and the Debtors’ [sic] to Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Section 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010 and Corrected Consolidated Reply in Support of Peabody Energy Corporation’s Motion to Reopen the Debtors’ Bankruptcy Case.
A hearing on this matter was originally scheduled for September 22, 2015 and was continued to October 1, 2015 at the request of Peabody Energy Corporation. At the hearing held on October 1, 2015, the parties appeared by counsel and presented oral argument. Based upon a consideration of the record as a whole the Court makes the following FINDINGS OF FACT:
On July 9, 2012, Debtor Patriot Coal Corporation and a number of its affiliates (hereinafter collectively “Debtors”) filed Voluntary Petitions for relief under Chapter 11 of the Bankruptcy Code in the Southern District of New York (hereinafter “First Patriot Bankruptcy Cases”). These Chapter 11 cases were jointly administered pursuant to Federal Rule of Bankruptcy Procedure 1015(b) as well as the Joint Administration Order entered on July 10, 2012. Debtors were authorized to operate their businesses and manage their properties as Debtors In Possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. On December 19, 2012, the First Patriot Bankruptcy Cases were transferred to the Bankruptcy Court for the Eastern District of Missouri following the Southern District of New York’s Memorandum Decision entered on November 27, 2012, which instructed that the First Patriot Bankruptcy Cases would be transferred.
On or about October 4, 2013, Debtors, Peabody Energy Corporation (hereinafter “Peabody”), United Mine Workers of America (hereinafter “UMWA”) on behalf of itself, Debtors’ UMWA represented employees (hereinafter “UMWA Employees”) by and through UMWA as their authorized representative and Debtors’ UMWA represented retirees (hereinafter “UMWA Retirees”) by and through UMWA as their *815authorized representative entered into a settlement agreement (hereinafter “Peabody Settlement Agreement”). The Peabody Settlement Agreement provides for funding of the Patriot Retirees Voluntary Employee Benefit Association (hereinafter “VEBA”), a trust established by UMWA to provide healthcare benefits for thousands of retirees and their families, by Peabody paying $310 million to the VEBA and Debtors over 4 years and to provide credit support through posting letters of credit or surety. In exchange the litigation between Debtors and Peabody regarding healthcare obligations for approximately 3,100 retirees and their dependents (hereinafter “Attachment A Retirees”), the investigation into potential causes of action including fraudulent transfer in connection with the spin-off of Patriot from Peabody in 2007 and Lowe v. Peabody Holding Co. litigation that was pending in District Court for the Southern District of West Virginia, between UMWA, some retirees and Peabody alleging violation of ERISA were all resolved.
On October 16, 2013, Debtors filed Notice and Motion of the Debtors for Entry of an Order Pursuant to 11 U.S.C. §§ 105(a), 363(b), 1113, and 1114(e) and Fed R. Bankr.P. 9019(a) Approving the Settlement With Peabody Energy Corporation, and the UMWA, on Behalf of Itself and in Its Capacity as Authorized Representative of the UMWA Employees and UMWA Retirees (hereinafter “Peabody Settlement Motion”). In the Peabody Settlement Motion, Debtors stated that “[t]he Peabody Settlement is one of three agreements that are the cornerstones of Debtors’ plan of reorganization.” Peabody Settlement Motion, ¶ 3. Debtors also stated the “the Peabody Settlement represents a key component of the Debtors’ ability to monetize the VEBA Funding Amount in a manner and amount satisfactory to the UMWA” thereby resolving the remaining issues between Debtors and UMWA. Peabody Settlement Motion, ¶ 9. The Peabody Settlement was further described as resolving “the risks and uncertainties created by the parties’ ongoing litigation and would help provide the Debtors with necessary liquidity and credit supports to exit chapter’ll.” Peabody Settlement Motion, ¶ 25.
On November 7, 2013, an Order Authorizing and Approving Pursuant to 11 U.S.C. §§ 105(a), 363(b), 1113, and 1114(e) and Fed R. Bankr.P. 9019(a) the Settlement with Peabody Energy Corporation, and the UMWA, on Behalf of Itself and in Its Capacity as Authorized Representative of the UMWA Employees and UMWA Retirees (hereinafter “Peabody Settlement Order”) was entered approving the Pea- ' body Settlement Agreement. The Peabody Settlement Agreement includes the following language at Paragraph 16.8:
For so long as the Chapter 11 Cases remain open, the Bankruptcy Court shall retain exclusive jurisdiction to resolve any dispute arising out of or relating to this Settlement Agreement. The Parties hereby consent to the Bankruptcy Court’s entry of a final order with respect to any such dispute. After the close of the Chapter 11 Cases, if the Bankruptcy Court declines to exercise jurisdiction, the United States District Court for the Eastern District of Missouri (or, in the event such court declines to exercise jurisdiction, the courts of the State of Missouri sitting in the city of St. Louis) shall have exclusive jurisdiction of all matters ' arising out of and related to disputes arising in connection with the interpretation, implementation or enforcement of this Settlement Agreement, and each of the Parties irrevocably (a) submits and consents in advance to the exclusive jurisdiction of that court for the purposes described in this sentence; and (b) waives any objection that such *816Party may have based upon lack of personal jurisdiction, improper venue or forum non conveniens.
Peabody Settlement Agreement, ¶ 16.8 (emphasis added).
On December 17, 2013, the Order Confirming Debtors’ Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code was entered. On December 18, 2013, an Amended Order Confirming Debtors’ Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (hereinafter “Amended Confirmation Order”) was entered. The Amended Confirmation Order incorporated by reference the Peabody Settlement Agreement and the Peabody Settlement Order. See Amended Confirmation Order, ¶ 34. The Amended Confirmation Order also provided for retention of jurisdiction by this Court “[t]o hear and resolve any disputes relating to ... the Peabody Settlement or the Peabody Settlement Order ... ”. Amended Confirmation Order, ¶ 84(u).
On September 30, 2014, the last of the First Patriot Bankruptcy Cases were closed by this Court.
On May 12, 2015, Debtors filed Voluntary Petitions for relief under Chapter 11 of the Bankruptcy Code in the Eastern District of Virginia (hereinafter “Second Patriot Bankruptcy Cases”) and these cases are currently pending. On or about August 18, 2015, in the Second Patriot Bankruptcy Cases, Debtors filed Debtors’ Motion for Entry of an Order (A) Authorizing, But Not Directing, The Debtors to Reject Certain Executory Contracts by And Among Certain of The Debtors And Peabody Energy Corporation and Certain of Its Affiliates, Effective Nunc Pro Tunc to The Date of This Motion or to a Later Date Chosen by The Debtors in Their Sole Discretion, And (B) Granting Related Relief (hereinafter “Rejection Motion”) in which Debtors seek to reject the Peabody Settlement Agreement. The • Rejection Motion has not yet been ruled upon.
On August 28, 2015, in the First Patriot Bankruptcy Cases, Peabody filed Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Section 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010 (hereinafter “Motion to Reopen”) in which Peabody seeks to reopen the First Patriot Bankruptcy Cases to allow Peabody to file an adversary complaint to determine, what, if any, ongoing obligations Peabody, UMWA, UMWA Employees and UMWA Retirees have under the Peabody Settlement Agreement once it is rejected by Debtors in the Second Patriot Bankruptcy Cases (hereinafter “Dispute”).
On September 24, 2015, Objection of the United Mine Workers of America to Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010 (hereinafter “UMWA’s Objection”) was filed in which UMWA argues that no grounds to reopen were established, that the claim asserted is a third party dispute over which this Court lacks jurisdiction, there is no actual controversy in that the matter is not ripe, the reopening will interfere with the Second Patriot Bankruptcy Cases, Peabody consented to jurisdiction in the Second Patriot Bankruptcy Cases and the Peabody Settlement Agreement is not executory or may be severed • under non-bankruptcy law. UMWA also argues that the Peabody Settlement .Agreement does not provide for post-closure jurisdiction. UMWA Objection, ¶ 34. UMWA argued at the hearing that the reservation of jurisdiction language in the Peabody Settlement Agreement and Amended Confirmation Order is common and should be overlooked because this matter should be considered by the *817Bankruptcy Court in Virginia where the Second Patriot Bankruptcy Cases are pending. On September 24, 2015, Objection of the UMWA 1992 Benefit Plan and the UMWA Combined Benefit Fund and Joinder to the Objection of the United Mine Workers of America to the Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010 (hereinafter “UMWA Funds’ Objection”) and Memorandum of Law in Support of the Objection of the UMWA 1992 Benefit Plan and the UMWA Combined Benefit Fund and Joinder to the UMWA Objection to the Motion to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010 (hereinafter “UMWA Funds’ Memorandum in Support of its Objection”) were filed in which the UMWA 1992 Benefit Plan and the UMWA Combined Benefit Fund (hereinafter collectively “UMWA Funds”) argue that Peabody cannot be relieved of its obligations under the Coal Act, there is no cause to reopen, the relief sought by Peabody is unavailable, and closing of the First Patri-. ot Bankruptcy Cases limits this Court’s jurisdiction.
On September 24, 2015, Debtors’ Objection to the Motion of Peabody Energy Corporation to Reopen Bankruptcy Case Pursuant to Sections 105(A) and 350(B) of the Bankruptcy Code and Fed. R. Bankr.P. 5010 (hereinafter “Debtors’ Objection”) was filed in which Debtors argue that there is no cause to reopen and this Court lack jurisdiction over non-debtor disputes. Debtors also argue that the Peabody Settlement Agreement does not provide jurisdiction after the First Patriot Bankruptcy Cases were closed. Debtors’ Objection, ¶ 15. Debtors further argued against reopening at the hearing based in large part on the fact that the Peabody Settlement Agreement will effect the rights of non-debtor parties that will effect the administration of the Second Patriot Bankruptcy Cases. Thus, Debtors believe that this matter is best left to the judge and court where the Second Patriot Bankruptcy Cases are pending. Debtors further espoused that the Virginia Bankruptcy Court can better handle the Dispute and how it will effect the current stakeholders.1 Finally Debtors argued that the reservation of jurisdiction language in the Peabody Settlement Agreement is limited to applicable law and there is none in this case; and that the reservation of jurisdiction language is not relevant and is not necessary under Section 350(b).
On September 24, 2015, Joinder of the Official Committee of Unsecured Creditors to the Objections of the United Mine Workers of America and the Debtors’ [sic] to Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Section 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010 was filed in which the Offi*818cial Committee of Unsecured Creditors in the Second Patriot Bankruptcy Cases (hereinafter “Committee”) joins in the UMWA’s Objection and Debtors’ Objection.
On October 1, 2015, Corrected Consolidated Reply in Support of Peabody Energy Corporation’s Motion to Reopen the Debtors’ Bankruptcy Case (hereinafter “Peabody’s Reply”) was filed in which Peabody argues that this Court has jurisdiction over the Dispute, that cause does exist to reopen, that this Court is the appropriate Court to adjudicate the dispute, that this Court is the only Court with jurisdiction over the Dispute and resolving this Dispute will not burden the administration of the Second Patriot Bankruptcy Cases. Peabody also argued in Peabody’s Reply and at the hearing that the Peabody Settlement Agreement cannot be assumed because Debtors are obligated for $4.8 million of drawn credit support.
JURISDICTION
This Court has jurisdiction over the parties and subject matter of this proceeding under 28 U.S.C. §§ 151, 157, and 1334 (2012) and Local Rule 81-9.01(B) of the United States District Court for the Eastern District of Missouri. This is a core proceeding under 28 U.S.C. § 157(b) (2012). Venue is proper in this District under 28 U.S.C. § 1409(a) (2012).
CONCLUSIONS OF LAW
The Court must determine whether to reopen the First Patriot Bankruptcy Cases to allow Peabody to file an adversary complaint to resolve the Dispute between Peabody and UMWA. The Court rules as follows. In light of UMWA Funds and Committee joining in UMWA’s Objection and Debtors’ Objection, the Court will focus on UMWA’s Objection and arguments and Debtors’ Objection and arguments.
The Motion to Reopen is brought pursuant to Section 350(b) and Rule 5010 of the Federal Rules of Bankruptcy Procedure. Section 350(b) states:
(b) A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debt- or, or for other cause.
11 U.S.C. § 350(b) (2012).
Rule 5010 states:
A case may be reopened on motion of the debtor or other party in interest pursuant to § 350(b) of the Code.
Fed. R. Bankr.P. 5010 (2012)
Bankruptcy courts have discretion on whether or not to reopen a case. “[I]t is within the bankruptcy court’s discretion to base its decision to reopen on the particular circumstances and equities of each particular case.” In re Apex Oil Company, Inc., 406 F.3d 538, 542 (8th Cir.2005). “A decision to reopen a case for ‘other cause’ lies within the discretion of bankruptcy court.” In re Security Services, Inc., 203 B.R. 708, 710 (Bankr. W.D.Mo.1996) citing In the Matter of Shondel, 950 F.2d 1301, 1304 (7th Cir. 1991). There is further instruction that “the bankruptcy judge has broad discretion to weigh the equitable factors in each case.” Id. at 710.
A court retains jurisdiction to enforce its own orders and this includes bankruptcy courts that retain jurisdiction to enforce their order. “It is also well established that bankruptcy courts retain jurisdiction after a case has been dismissed or closed to interpret or enforce previously entered orders.” In re Williams, 256 B.R. 885, 892 (8th Cir. BAP 2001) (citations omitted). And this jurisdiction is core. “[T]he enforcement of orders resulting from core proceedings are considered core proceedings. Id. “Resolution of the dispute requires reference back *819to prior orders of this Court rendered in core proceedings.” In re Amereco Environmental Services, Inc., 138 B.R. 590, 593 (Bankr.W.D.Mo.1992). Bankruptcy courts have continuing jurisdiction to enforce its orders. “Bankruptcy Court plainly has jurisdiction to interpret and enforce its own prior orders.” Travelers Indemnity v. Bailey, 557 U.S. 137, 151, 129 S.Ct. 2195, 2205, 174 L.Ed.2d 99, (2009). See Local Loan Co. v. Hunt, 292 U.S. 234, 239, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). “Requests for bankruptcy courts to construe their own orders must be considered to arise under title 11 if the policies underlying the Code are to be effectively implemented. Williams at 892, citing In re Franklin, 802 F.2d 324, 326 (9th Cir.1986).
UMWA argued against reopening this case at the hearing indicating that the issue involves rights of non-debtors under a contract, not a court order, that are closely intertwined with events in the Debtors’ Second Bankruptcy Case. However, this is not the case here.’ The Dispute involves the interpretation of Court Orders, the Peabody Settlement Order and the Amended Confirmation Order. A court that entered an order clearly has jurisdiction to and is best suited to interpret and enforce its own orders.
The Peabody Settlement, as well as the Amended Confirmation Order, contain jurisdictional retention language which is tantamount to forum selection, that specifies that this Court has jurisdiction even after the close of the First Patriot Bankruptcy Cases. “Forum selection clauses are prima facie valid and are enforced unless they are unjust or unreasonable or invalid for reasons such as fraud or overreaching.” Union Electric Company v. Energy Insurance Mutual Limited, 689 F.3d 968, 973 (8th Cir.2012) (cites omitted). There are no allegations' that the forum selection clause in the Peabody Settlement Agreement was procured by fraud or is overreaching or unreasonable. The Eighth Circuit goes on to instruct that “[w]here, as here, the forum selection clause is the fruit of an arm’s-length negotiation, the party challenging the clause bears an especially ‘heavy burden of proof to avoid its bargain.” Id. at 973-974 citing Servewell Plumbing, LLC v. Federal Ins. Co., 439 F.3d 786, 789 (8th Cir.2006) (quoting M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 17, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972)). Here there is no doubt that the Peabody Settlement Agreement, including the forum selection language, was the result of arm’s-length and hard fought negotiations during the First Patriot Bankruptcy Cases. Debtors and UMWA argue that the forum selection language in the Peabody Settlement Agreement is superfluous and meaningless. And this argument is made although they want other language in the Peabody Settlement Agreement, namely the language that requires Peabody to continue to fund the VEBA, to be given its full meaning. The interpretation of a court order approving a settlement agreement, that contains a forum selection clause belongs with the court that approved the settlement agreement which is also the forum court in the forum selection clause. Thus there is no basis to now invalidate that language.
Debtors and UMWA also raise the issue of ripeness. “A plaintiff does not have to ‘await consummation of threatened injury’ before bringing a declaratory judgment action.” South Dakota Mining Association, Inc. v. Lawrence County, 155 F.3d 1005, 1008 (8th Cir.1998) citing Babbitt v. United Farm Workers Nat’l Union, 442 U.S. 289, 298, 99 S.Ct. 2301, 60 L.Ed.2d 895 (1979). “A declaratory judgment action can be sustained if no injury has yet occurred.” Public Water Supply District No. 8 of Clay County, Missouri v. City of Kearney, Missouri, 401 F.3d 930, *820932 (8th Cir.2005) citing County of Mille Lacs v. Benjamin, 361 F.3d 460, 464 (8th Cir.2004). “Before a claim is ripe for adjudication, however, the plaintiff must face an injury that is ‘certainly impending.’” Id. at 932 citing Pennsylvania v. West Virginia, 262 U.S. 553, 593, 43 S.Ct. 658, 67 L.Ed. 1117 (1923); South Dakota Mining Association, Inc. v. Lawrence County, 155 F.3d 1005, 1008 (8th Cir.1998).
There can be no doubt that the Peabody Settlement Agreement will be rejected. Debtors in the Second Patriot Bankruptcy Cases have filed the Motion to Reject seeking to reject the Peabody Settlement Agreement, which has been continued to a future date, after confirmation, which is scheduled for this week. It seems highly unlikely that the Motion to Reject will be withdrawn nor that Debtors will formulate some way to assume the Peabody Settlement Agreement. Under the Peabody Settlement Agreement, Peabody is providing credit support of which $4.8 million has already been drawn. There is no suggestion that the $4.8 million draw will be repaid by Debtors or another party, therefore, assumption and assignment will not happen. Thus the remaining Dispute between Peabody and UMWA is ripe.
This Court has discretion based on the circumstances of the case to determine whether or not to reopen the case. This Court has jurisdiction to enforce its own Orders. The Dispute that is sought to be adjudicated is ripe. Thus based on the Court’s discretion, this case will be reopened for the limited purpose of allowing Peabody to file its adversary proceeding seeking interpretation of the Peabody Settlement Order on Peabody and UMWA in light of Debtors inability to continue under the terms of the Peabody Settlement Agreement. Therefore,
IT IS ORDERED THAT the Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010, Objection of the United Mine Workers of America to Motion of Peabody Energy Corporation to Reopen the Debtors’ Bankruptcy Case Pursuant to Sections 105(a) and 350(b) of the Bankruptcy Code and Fed. R. Bankr.P. 5010 is GRANTED; and this case is hereby reopened to permit Peabody to file its Adversary Complaint; and
IT IS FURTHER ORDERED THAT Peabody has (30) thirty days from the date of this Order to file its Adversary Complaint.
. The Court must note that Debtors discussed the complex nature of the Second Patriot Bankruptcy Cases, the many objections to confirmation and that Debtors need to be a part of this Dispute between UMWA and Peabody if the VEBA is not going to be funded and UMWA discussed the complex settlements, how to allocate the limited funds in the Second Patriot Bankruptcy Cases, and negotiations with 2 or 3 potential purchasers; however, it appears that with all of these negotiations, settlements and complex matters going on, Peabody has not been considered part of this. It appears as though Debtors and UMWA wish to have discussions with other parties except Peabody, and it is expected that Peabody should keep performing under the Peabody Settlement Agreement, while other interested parties are negotiating and settling with Debtors and UMWA. Thus, it appears that Peabody's only recourse was to return to this Court to determine its rights under the Peabody Settlement Agreement. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498806/ | MEMORANDUM DECISION
GARY SPRAKER, United States Bankruptcy Judge
In this adversary proceeding, the United States Trustee (“UST”) seeks denial of debtor Frederico Z. Anthonys’ discharge pursuant to 11 U.S.C. §§ 727(a)(2), (a)(4) and (a)(5).1 After trial of .this matter held on June 29, 2015, the court finds in favor of the UST, and will enter judgment deny*824ing the debtor’s discharge pursuant to 11 U.S.C. § 727(a)(4).
CASE BACKGROUND
The debtor filed a “bare bones” chapter 13 petition on May 22, 2013, with the assistance of counsel, attorney Jason Crawford.2 That case was dismissed on June 6, 2013 for the debtor’s failure to pay the filing fee. The following month, on July 18, 2013, the debtor filed a second chapter 13 petition on his own behalf, again without schedules, statements, or a chapter 13 plan. Mr. Crawford subsequently appeared in the main case as the debtor’s counsel on December 17, 2013.
1. The Debtor’s Schedules and Statements.
The debtor, acting pro se, filed his schedules and statements on September 16, 2013, while his case was pending under chapter 13.3 His Schedule A listed only an interest in a residence on Marlette Court in North Pole, Alaska, valued at $289,000.00 and encumbered by a mortgage in favor of First National Bank Alaska (“FNBA”) for $110,000.00.4 This property has since been foreclosed by FNBA.
The debtor’s Schedule B listed personal property with a total value of $5,349.00. For automobiles, the debtor listed a 1999 Malibu worth $2,100.00, located at his residence.5 On a continuation sheet, the debt- or disclosed one additional vehicle, a “Broken 80 Cutlass,” valued at $100.00, also located at his residence.6
On his Statement of Financial Affairs, the debtor responded “none” to question 10.a, which requires the disclosure of “all other property ... transferred either absolutely or for security within two years immediately preceding the commencement of this case.”7
11. The Undisclosed Assets and Debt- or’s § 341 Testimony.
The debtor’s initial meeting of creditors was held on August 16, 2013. At this meeting, the debtor stated that he had no legal counsel, nor did he have any source of income. The meeting was continued because the debtor had not yet filed his schedules and statements.
On September 27, 2013, eleven days after filing his schedules and statements, the debtor attended a continued meeting of creditors. At this meeting, the chapter 13 trustee, Larry Compton, asked him if he had listed all of his assets and creditors. The debtor responded, ‘Tes.”8 The debt- or was then examined about two parcels of real property that were not listed on his schedules. First, he was asked whether he owned a “lot next door” to his house. The debtor said he did not; the lot had been sold in 2011.9 When it was pointed out to the debtor that this sale was not reflected in the public records, he ex*825plained that he had sold it to “Mrs. Byam,” although she “probably has not recorded the land.”10 The debtor stated he had sold the parcel to her because he owed her money for some work she had done for him. However, he also indicated that she had paid him some money in the transaction, saying, “[s]he gave me.partial. But it was mostly a partial payment for the money that I owe her.”11
Six days after the debtor gave this testimony, a quitclaim deed was recorded in the Fairbanks Recording District which reflected that the debtor had transferred his interest in Lot 4, Block 3, Kingsmen Estates, First Addition (“the Kingsmen property”) to Anna Byam.12 The quitclaim deed was dated August 12, 2011, and notarized for that same day. This date falls within two years of the date the debtor filed his bankruptcy petition.
At the same creditors’ meeting held on September 27, the debtor was also asked about another parcel of real property located in North Pole, Alaska (“the Morning Star property”). A warranty deed produced at the meeting reflected that the debtor and another individual, James Schuster, became co-owners of the property in 2003. When asked if he was an owner of record for this property, the debtor attempted to qualify this term, responding that he was “maybe a co-owner.” 13 On further questioning, he conceded that he was an owner, but explained that he hadn’t listed the parcel on his schedules because he misunderstood the questions.14 He also stated that there had been no transfers with regard to this property since 2003.
The debtor was questioned further about the Morning Star property at the continued § 341 meeting held November 1, 2013. He estimated the property was worth about $20,000.00, and said he purchased it with Mr. Schuster as a business partnership.15 When asked why he hadn’t listed this property on his schedules, he responded that he wasn’t sure, but thought it might have been “because I was under the understanding the transaction took place so long ago and that I didn’t have to list it.”16 He again tried to qualify his interest in the property as a co-owner, but ultimately conceded he still had an interest in that property.
On February 10, 2014, the debtor’s ex-wife moved to convert the chapter 13 proceeding to a liquidation under chapter 7. On February 27, 2014, the court conducted a hearing on several matters in the case, including the motion to convert. The court orally granted the motion, although the order converting the case was not entered until March 5, 2014.17 On the very same day as the court heard the motion to convert, a quitclaim deed transferring the debtor’s interest in the Morning Star Property to Anna Byam was recorded in the Fairbanks Recording District.18 This quitclaim deed is also dated, and the signature notarized, for August 12, 2011, the same date reflected on the quitclaim deed for the Kingsman property. No explaná*826tion has ever been offered for why the quitclaim deeds were recorded years after the transfer, or why the deeds were recorded months apart despite having been executed on the same date.
In addition to the two undisclosed parcels of real property, the debtor had an interest in several vehicles at the time he filed his petition. He disclosed two vehicles on his Schedule B, a 1980 Cutlass and a 1999 Malibu, which, per the document, were both located at his residence on Mar-lette Court. At the November 1, 2013 § 341 meeting of creditors the trustee asked him about other specific vehicles titled in his name. In response, the debtor stated that an ’87 Cutlass belonged to his wife and was in her possession. He also stated that a ’76 Chevy was “at the lot,” that it didn’t work and that it was basically a “junk car.” He confirmed that another Olds Cutlass, a ’78 Ford, and an ’82 Pontiac were “at the lot” or “on the property,” but also characterized these as junk vehicles. He also stated that the ’82 Pontiac belonged to his wife.19 During the questioning, the trustee admonished the debtor that he should have listed assets worth $10.00, or at least “anything over $50 bucks,” on his schedules.20 The trustee also noted that the junk cars might be worth about $100.00 each from a recycler, which, when combined, could result in some “real money.”21 The debtor responded that he had thought about that.22
In spite of the discussions at the § 341 meetings about the undisclosed lots and vehicles, the debtor never amended his Schedules or Statement of Financial Affairs to correct these omissions.
III. The UST’s Complaint and Debtor’s Answer.
The UST initiated this adversary action on June 20, 2014. The UST seeks denial of discharge for the debtor’s failure to list his interest in the Kingsman and Morning Star properties, or, alternatively, his failure to disclose the prepetition transfer of those parcels. The UST also seeks to deny the debtor his discharge for his failure to schedule a 1983 Olds Cutlass, a 1987 Olds Cutlass, a 1996 GMC Sierra, a 1976 Chevy Truck, a 1980 Olds Cutlass, a 1976 Ford Truck, a 1982 Pontiac J2000, and a 1978 Honda Accord.23 The UST contends the debtor violated § 727(a)(2) by concealing his interest in these assets and by transferring the two parcels of real property with the intent to hinder, delay, or defraud creditors or the estate. The UST also contends denial of discharge is appropriate under § 727(a)(4) on the grounds that the debtor knowingly and fraudulently made false statements on his schedules and statements by failing to disclose these assets or the prepetition transfers. Finally, the UST seeks denial of discharge under § 727(a)(5) for the debtor’s failure to explain the disposition of the undisclosed vehicles.
Shortly after commencement of the adversary proceeding, the debtor sought to remove Mr. Crawford as his attorney. The court granted the motion to remove .counsel on July 15, 2014. Another attorney, Valerie Therrien, subsequently filed an answer on the debtor’s behalf in this adversary action.24 In his Answer to Complaint to Deny Discharge (“Answer”), the debtor admitted that he had an interest in *827the two parcels of real property but that he quitclaimed those parcels to Ms. Byam prepetition.25 With reference to the vehicles, the debtor responded that he has never owned a 1983 Cutlass, or a 1996 GMC Sierra. His Answer also stated that the 1987 Cutlass, although titled to him, was in his ex-wife’s possession, and further averred that the 1976 Chevy Truck, the 1980 Olds Cutlass, the 1982 Pontiac J2000, and the 1978 Honda Accord had no value and had been towed away at the request of FNBA.26 The Answer did not address the 1976 Ford Truck.
IV. The Debtor’s Testimony at Trial.
Trial of this matter was held on June 29, 2015. The debtor appeared and testified on all matters. The chapter 13/7 trustee, Mr. Compton, also testified. Ms. Byam, however, was not called as a witness, and no testimony from her was presented regarding the transfers of the Kingsman or Morning Star properties, or the subsequent recording of the two quitclaim deeds.
A. The Debtor’s Background and Educational Level.
The debtor testified that he is self employed, and works in consulting. He has completed high school and taken some college courses. He stated that, in the past, he has operated restaurants on his own.
B. The Transfers of Real Property.
The debtor testified that he transferred both the Kingsmen Estates and Morning Star parcels to Anna Byam in August 2011. He explained that he made these transfers to pay Ms. Byam for childcare/daycare services she had provided to him after his wife moved out. At the time of the transfers, he and his wife were separated. They filed for divorce in 2012. The divorce has been very contentious. The debtor stated that his children lived with him until August 15, 2012.
The debtor testified that he had a professional relationship with Ms. Byam at the time he transferred the properties to her, though he admitted that she was currently living with him.27 According to the debtor, she gave his children both care and schooling, working more than ten hours per day. The properties were quitclaimed to her in exchange for services rendered. The debtor stated that he wanted to come up with a way to repay her for her services, and that he and Ms. Byam came up with this arrangement. His explanations as to how he determined the value of her services, or the value of the properties at the time of transfer, were unclear and lacked detail. He testified that he figured a rate of $20.00 per hour for Ms. Byam’s services, which were provided over a two-year period.
Although the debtor said the transfers were made to repay Ms. Byam, he again stated that she gave him some money in exchange as part of the transaction. He characterized it as “tip money” that she had, not even $1,000.00. He believed she gave him the money because he was going through hard times and she thought she was getting the best end of the deal. Yet, he also stated that they had looked at the fair market value of the property and figured it wouldn’t cover her two years of service.
The debtor was asked how he calculated the value of the two properties. He said *828neither one was worth much. He testified that the Morning Star property was an empty, swamp lot. When asked if he recalled his testimony at the § 341 meeting to the effect that he had purchased it as a business investment, he could not remember his prior testimony. As for the Kings-man property, the debtor testified that it was “worth nothing,” and that he recalled paying just $2,000.00 for it.
The debtors’ testimony regarding the value of the two lots was contradicted by Property Summaries for the parcels introduced into evidence by the UST.28 These summaries confirmed that both parcels consisted of vacant land, but reflected that the tax assessed value was $47,558.00 for the Morning Star property and $11,044.00 for the Kingsmen property. The assessed values have not changed for either property since 2011, when the debtor transferred his interest in the two parcels to Ms. Byam. Using these assessed values, the debtor transferred real property interests worth $34,823.00 to Ms. Byam in 2011.29
When asked why he had not listed the transfers of the two parcels on his Statement of Financial Affairs, the debtor explained that the transfers occurred more than two years from the date he filed that document. He said he filled out and filed the Statement of Financial Affairs in September 2013, while the transfer occurred in August, 2011. Yet, he also testified that he did not recognize this document, or the Schedules, because they appeared to have been prepared on a computer, and he would have hand-printed the information on these documents. He also challenged the authenticity of his signature on both. His trial testimony in this respect contradicts his prior testimony at the September 27, 2013 § 341 meeting, wherein he stated that he had signed these documents, and affirmed that everything listed on them was true and correct, to the best of his knowledge.30 The court gives this earlier testimony more weight, because it was given just eleven days after the Schedules and Statement of Financial Affairs were filed.
C. The Vehicles.
The debtor’s trial testimony regarding the vehicles was inconsistent with his Answer. He again stated that he had never owned an 1983 Oldsmobile. However, he said the 1978 Honda, and the 1976 Chevy truck were his former wife’s vehicles, as was the 1987 Cutlass. He also stated that the 1987 Cutlass was at his former wife’s residence. He also “believed” that the 1976 Chevy truck was on his property and then removed, but again couldn’t provide any details. He testified that the 1982 Pontiac J2000 had been removed from his property a while back, but could not provide further specifics.
The debtor characterized the unscheduled cars as “junk vehicles.” Though he denied ownership of the vehicles at trial, he also explained that he did not list some of the vehicles in his Schedule B because he didn’t know they were still in his name. He said a couple of vehicles were buried in the ground and that they had been hauled away, either before or after he filed his petition, by FNBA. He could not be specific as to the location of these vehicles. He testified that some of them were either outside of his house or stored on a power-line easement. According to the debtor, many people left junk cars on the power-*829line easement, which he referred to as “the lot.” He explained that he simply forgot to list the vehicles because they were junk, worthless, and he didn’t see them every day. He reiterated that he did not own the vehicles because they were not in his possession.
D. The Debtor’s Testimony Regarding his Attorneys, the Trustee, and his Former Spouse.
At trial, the debtor asserted that Mr. Compton had told him not to worry about listing the vehicles in his schedules. The debtor had an opportunity to cross-examine Mr. Compton and questioned him in this area repeatedly. He asked Mr. Compton whether he recalled telling the debtor he didn’t need to schedule any asset worth less than $10.00. Mr. Compton said he did not recall such a conversation. He further testified that the vehicles should have been scheduled, regardless of their value. ■
The debtor also suggested that Mr.' Compton or attorney Jason Crawford were at fault for not amending his Schedules and Statement of Financial Affairs. He stated that Mr. Crawford had failed to do his job, and “that is the bottom line.” He also accused Mr. Compton of making mistakes in the case. He asked Mr. Compton if he recalled asking Mr. Crawford to amend the Schedules. Mr. Compton stated that he did advise Mr. Crawford that this should be done.
Finally, the debtor complained that nothing had gone right since “day one” in his divorce proceeding. It had not gone the way he had hoped. He contended the UST brought the adversary action “due to outside aid from other sources,” specifically, his former spouse, whom he claimed was vindictive and should not be permitted to participate in the bankruptcy proceeding.
DISCUSSION
Chapter 7 of the Bankruptcy Code embodies two ideals: (1) it offers a “fresh start” to an individual debtor through the discharge of most debts, and (2) it provides for the equitable distribution of a debtor’s assets among competing creditors.31 A chapter 7 discharge is governed by § 727, which directs that the court “shall” grant a debtor a discharge, with twelve exceptions. Section 727 is construed liberally in favor of the debtor and strictly against the party objecting to discharge.32 However, the fresh start offered through discharge of personal liability is not a constitutional right,33 but is instead reserved for the “honest but unfortunate debtor.”34 Those seeking denial or revocation of discharge must establish their claim under the preponderance of the evidence standard.35'
I. False Oath under § 727(a)(4)(A).
Section 727(a)(4)(A) precludes discharge to a debtor who “knowingly and *830fraudulently, in or in connection with the case ... made a false oath or account.”36 The UST contends the debtor knowingly and fraudulently made false oaths in this case by failing to schedule the Kingsmen property, the Morning Star property, and the undisclosed vehicles, as well as failing to disclose the prepetition transfer of the two parcels of real property on his Statement of Financial Affairs. To prevail on this claim, the UST must establish four elements, by a preponderance of evidence: “(1) the debtor made a false oath in connection with the case; (2) the oath related to a material fact; (3) the oath was made knowingly; and .(4) the oath was made fraudulently.”37
A. False Oath Made in Connection with the Case.
The first element is satisfied here. The debtor has made false oaths in connection with his case. At his' September 27, 2013 § 341 meeting, the debtor affirmed that he had listed all his assets and creditors. Yet, he omitted his interest in several vehicles from his Schedules, and, more significantly, failed to disclose his prepetition transfer of the two parcels of real property on his Statement of Financial Affairs. The quitclaim deeds introduced at trial establish that he transferred both parcels to Anna Byam on August 11, 2011, a date within two years of the filing of his petition. The debtor’s Answer admits the two parcels were transferred on this date, and further avers that he believed he no longer owned the parcels at the time he filed his petition. Yet, at his earlier § 341 meetings, the debtor only revealed his interest in these properties upon questioning from the trustee and others in attendance. Further, he failed to even mention that he had transferred the Morningstar Property to Ms. Byam. At the § 341 meetings, he testified that he' co-owned that property with Mr. Schuster, and attempted to qualify his interest as being something less than a true ownership interest. The quitclaim deed for the Morningstar property was not revealed until the day it became public record through its recording on February 27, 2014, the same day that oral argument was held on the motion to convert filed by the debtor’s former spouse.
Ultimately, neither the UST nor the trustee challenged the validity of the quitclaim deeds. For this reason, the court finds that the debtor did not have an interest in the two parcels he transferred to Ms. Byam on the date he filed his petition, and his failure to list an interest in these properties on his Schedule A did not constitute a false oath. However, the quitclaim deeds unquestionably establish that he transferred his interest in the parcels within two years prior to filing his petition. His failure to list these transfers on his Statement of Financial Affairs constitutes a false oath.
The debtor concedes he did not list the transfers, but argues that he was not required to, because the transfers occurred more than two years after he signed and filed the document. This explanation is not believable. Question 10.a on the Statement of Financial Affairs asks the debtor to list “all other property, other than property transferred in the ordinary course of business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case.”38 The proper time frame — two years prior to the *831commencement of the bankruptcy case — is clear. The debtor filed his bankruptcy on July 18, 2013. Therefore, he was required to disclose transfers of any property occurring after July 18, 2011. The debtor transferred the two lots to Ms. Byam on August 12, 2011. The transfers clearly fell within the two year disclosure period. Further, the debtor was not forthcoming about either transfer. He only revealed his sale of the Kingsmen property to Ms. Byam on questioning at the September 27, 2013 § 341 meeting. At that same meeting, he indicated that he still had a co-ownership interest in the Morningstar property, and neglected to mention that this property had also been transferred to Ms. Byam in 2011. Under the circumstances, the court finds that the debtor’s failure to list the transfers was intentional, rather than due to an honest oversight. His response to Question 10.a on his Statement of Financial Affairs was false.
As to the undisclosed vehicles, there is some confusion regarding exactly what vehicles the debtor owned as of his petition date. The confusion is largely created by the debtor’s own testimony, which the court found evasive and combative. For example, the debtor denied ownership of certain vehicles because they were in his wife’s possession rather than his (the 1987 Oldsmobile and 1982 Ponitac J2000), and professed that he didn’t have to list other vehicles because they had no value in his opinion.39 His denials of ownership based upon a lack of possession or value' are spurious. To the extent the debtor denies ownership of any additional, undisclosed vehicles, such argument is simply not credible, and is contradicted by his prior testimony at the § 341 meetings. More to the point, his Answer admits ownership of several, but not all, of the undisclosed vehicles identified by the UST. Based upon the debtor’s Answer, the court concludes that as of the petition date, the debtor owned the following vehicles: the 1987 Oldsmobile Cutlass, a 1976 Chevrolet Truck, a 1976 Ford,40 and a 1982 Pontiac J2000.41 None of these vehicles were listed in the debtor’s Schedule B.
The debtor claims that he was not required to list the additional vehicles because they were worthless, and Mr. Compton advised him not to list them. At trial, the debtor repeatedly argued that Mr. Compton had told him that he need not list property worth less than $10.00. Although Mr. Compton could not recall such a discussion, the excerpt of the November 1, 2013 meeting of creditors, UST Ex. 11, shows that he told the debtor, “If it’s worth $10 — or at least anything over 50 bucks, you ought to list.”42
The record does not establish specific values for any of the omitted vehicles, but such an argument misses the point. The debtor filed his schedules on September 16, 2013, after the original creditor’s meeting held August 16, 2013, and prior to the continued creditors’ meeting set for September 27, 2013. The very first discussion of omitted vehicles is found in the November 1, 2013 meeting of creditors, wherein Mr. Compton examines the debtor on specific .vehicles not listed in his Schedule B. Based upon this record, the debtor could not have relied on Mr. Compton’s comments made at this meeting in deciding. *832whether to he should have listed additional vehicles in his schedules, filed more than one month earlier.
On a much more fundamental level, the debtor was affirmatively required to list all vehicles that he owned as of the petition date regardless of value. “The recalcitrant debtor may not escape a section 727(a)(4)(A) denial of discharge by asserting that the admittedly omitted or falsely stated information concerned a worthless relationship or holding; such a defense is specious.”43 It was not for the debtor to decide whether the bankruptcy estate would administer the vehicles. His omission of the undisclosed vehicles from his Schedule B constituted a false oath as well.
B. The Oath Related to a Material Fact.
The second element requires that the debtor’s false oath relate to a material fact. A fact is material “if it • bears a relationship to the debtor’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the debtor’s property.”44 An omission or misstatement regarding an asset of little value can be material if it detrimentally affects the administration .of the estate.45 The omission or misstatement may be material even if it does not cause direct financial prejudice to creditors.46
The debtor’s false oaths regarding the transferred parcels of real property were material because they related to the existence and disposition of two of his most valuable assets, aside from his residence. As for the unscheduled vehicles, although the trustee ultimately determined that they had no value to the estate, the debt- or’s omission of these assets was also material. The fundamental purpose of § 727(a)(4)(A) is to insure that parties in interest “have accurate information [regarding the debtor’s financial affairs] without having to conduct costly investigations.”47 The debtor’s nondisclosure of the vehicles detrimentally affected the trustee, UST, and creditors in this case, who were compelled to independently investigate the debtor’s true financial condition due to the inaccuracies on his Schedules and Statement of Financial Affairs.
C. The Oath was Knowingly Made.
The third element of § 727(a)(4)(A) is that the debtor acted knowingly in making the false oath. A debtor acts knowingly where he or she acts “deliberately and consciously” when making the false oath.48 This element is established where the debtor deliberately and consciously signs the schedules and statements declaring that they are true and correct, and subsequently affirms the schedules and statements knowing that they are incomplete.49 Here, the debtor *833deliberately and consciously signed his schedules and the Statement of Financial Affairs, under penalty of perjury, declaring that they were true and correct. He subsequently reaffirmed the accuracy of those documents at his September 27, 2013 § 341 creditors’ meeting. Further, his Answer admits that he filed these documents on September 17, 2013.50
In spite of his assertions as to the accuracy of these documents, the court concludes that the debtor was fully aware of his omission of the transfers from his Statement of Financial Affairs at the time he filed it. First, the Kingsman and Morning Star properties represented the debtor’s most significant assets aside from his residence. Pragmatically, the Kings-man and Morning Star properties were more valuable than the residence because he had equity in those parcels. Second, the debtor’s shotgun and scattered denials regarding the reasons for his failure to disclose the transfers are not believable. He contends he misunderstood Question 10.a because he calculated the two year period from the time he filled out and filed the document in September 2013, suggesting that the look back period expired in September 2011. As discussed above, this explanation is unbelievable. Question 10.a is clear that the two year period is calculated from the date “immediately preceding the commencement of this ease.”51 Third, the debtor’s demeanor, evasiveness, and lack of specificity during examination at trial regarding the facts and circumstances surrounding the transfers, coupled with the timing of the post-petition recordings of the quitclaim deeds and the debt- or’s earlier failure to even reveal the transfer of the Morningstar property at his § 341 meetings, convince the court that his omission of the transfers was part of a calculated and deliberate scheme to exclude the properties from his bankruptcy.
As discussed in further detail below, the omission of the undisclosed vehicles from Schedule B presents a more difficult question. An appealing argument can be made that the debtor intentionally excluded the vehicles as part of an overall scheme to omit assets from his bankruptcy. His evasiveness and lack of credibility at trial support such a finding. However, the age, apparent poor condition, and lack of value of these vehicles, suggest otherwise. Even though ' the debtor never amended his schedules to include the omitted vehicles, the court is not convinced that he fraudulently omitted these “junk” vehicles from his Schedule B. Thus, no additional analysis is required with respect to these omitted assets.
D. The Oath was Fraudulently Made.
The fourth element of § 727(a)(4)(A) is that the debtor made the false oath fraudulently. A reckless disregard for the truth, by itself, is insufficient to establish this element.52 The UST must show that: (1) the debtor made the omissions, (2) at a time when he knew they were false, (3) and with the intention and purpose of deceiving creditors.53 As discussed above, the debtor omitted the vehicles from his Schedule B, and the transfers of the two lots in response to Question 10.a of the Statement of Financial Affairs. These omissions were material, and with respect to the real property transfers, the debtor knew the omissions were false. The remaining question is whether the *834omissions giving rise to the false oath were fraudulently made.
The UST must show that the debtor actually intended to deceive the creditors or trustee.54 A simple mistake made without such intent does not warrant denial of discharge, even where it pertains to a material misstatement.55 Fraudulent intent is typically “established by circumstantial evidence, or by inferences drawn from a course of conduct.”56 Courts generally refer to the circumstances surrounding the conduct, and well recognized “badges of fraud” to ascertain a fraudulent intent, including:
(1) a close relationship between the transferor and the transferee; (2) that the transfer was in anticipation of a pending suit; (3) that the transferor Debtor was insolvent or in poor financial condition at the time; (4) that all or substantially all of the Debtor’s property was transferred; (5) that the transfer so completely depleted the Debtor’s assets that the creditor has been hindered or delayed in recovering any part of the judgment; and (6) that the Debtor received inadequate consideration for the transfer.57
The circumstances surrounding the pre-petition quitclaim transfers themselves, the debtor’s omission of these transfers on his Statement of Financial Affairs, and the postpetition recordings of the deeds compel a finding of fraudulent intent. Numerous badges of fraud are present. The underlying transfers were made to an insider, the woman with whom the debtor is now living. While the specifics of the debtor’s finances at the time of the transfers are unknown, there are suggestions that the debtor’s business was failing, and that he was experiencing “hard times” at the time they were made.58 Further, he was separated from his wife at the time of the transfers. The debtor’s schedules reflect that the transferred properties would have been his most valuable assets, had he retained them. And, while the debtor maintains that he obtained adequate consideration for the transfers, there is no evidence to corroborate this fact. The lack of any specificity as to the amount of debt supposedly satisfied by these transfers, together with the debtor’s evasiveness on the subject, cuts sharply against the bona fides of the transaction, as does Ms. Byam’s failure to promptly record the quitclaim deeds. Moreover, the eventual timing of the recording of these deeds, confirms the debtor’s fraudulent intent. One of the deeds was recorded shortly after the debtor’s examination at the September 27, 2013 meeting of creditors, in which it was noted that the debtor still appeared to be record owner of the Kings-men property. The other deed was recorded on the same day that the court heard a motion to convert, filed by the debtor’s former spouse, and indicated its intent to grant that motion. No reason or *835explanation has ever been offered as to why Ms. Byam waited for two and a half years to record the quitclaim deeds or why they were recorded months apart. Indeed, the debtor never revealed that the Morning Star property had been transferred to Ms. Byam until after his case had been converted to chapter 7, and only after that quitclaim deed had been recorded.
The debtor’s explanations as to why he omitted these transfers are unpersuasive. Throughout the trial, He was recalcitrant, evasive, and combative. Moreover, his explanations regarding the property transfers were inherently contradictory and not credible. On the one hand, he stated that he transferred the parcels to Ms. Byam to pay her for valuable services rendered. Yet, he also said the properties were both worthless, and further said Ms. Byam paid him some consideration for their transfer. Based upon the totality of the circumstances, and given the presence of multiple badges of fraud, the court finds that the debtor fraudulently omitted the two transfers of real property to Ms. Byam from his. Statement of Financial Affairs.
Unlike the omission of the transfers of the real property, fraudulent intent cannot be found with respect to the debt- or’s failure to disclose the unlisted vehicles. Although the lack of value does not excuse him from disclosing his ownership in these vehicles, it weighs against any fraudulent intent. The trustee does not deny that the omitted vehicles were of limited value, and he has abandoned them based upon his independent conclusion that they cannot be sold for more than it would bring them to sale. Although it is not clear from the testimony at trial, the evidence strongly suggests that the vehicles are not operational. The debtor testified that they are in various locations spread across town, including in his ex-wife’s possession, on the his property, and on a utility easement. Additionally, at the November 1, 2013 meeting of creditors, the debtor testified that the registration for the 1987 Oldsmobile Cutlass had expired in 2011, the 1976 Chevy had not been registered since 2002, and the 1978 Ford was last registered in 1996.
All of the circumstances surrounding the vehicles suggest that, while they remain in the debtor’s name, they have been effectively discarded by him in any pragmatic sense. Moreover, the debtor did list two vehicles in his Schedule B; the 1999 Malibu valued at $2,100.00, and a “broken” 1980 Cutlass valued at $100.00. It is unclear why the debtor listed these vehicles, and in particular the 1980 Cutlass, but not the other vehicles. Charitably construed, it suggests that the debtor believed that the 1980 Cutlass, even in its “broken” condition, had more value than the other omitted vehicles. Disclosure of these two older vehicles suggests that the debtor was not fraudulently attempting to conceal his ownership of the other vehicles.
All four elements of § 727(a)(4)(A) have been satisfied as to the debtor’s omission of the transfers of real property to Ms. Byam. Accordingly, his discharge will be denied on this basis. However, the UST has not established the requisite fraudulent intent necessary to deny the debtor his discharge under § 727(a)(4) for the failure to list the undisclosed vehicles in his Schedule B.
II. Failure to Explain a Loss of Assets under § 727(a)(5).
The UST also seeks denial of discharge under § 727(A)(5), which precludes discharge to a debtor who “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.”59 *836To establish a claim under § 727(a)(5), the UST must show that:
(1) debtor at one time, not too remote from the bankruptcy petition date, owned identifiable assets; (2) on the date the bankruptcy petition was filed ... the debtor no longer owned the assets; and (3) the bankruptcy pleadings or statement of affairs do not reflect an adequate explanation for the disposition of assets.60
A debtor’s failure to offer a satisfactory explanation for a loss or deficiency of assets, when called on by the court, is a sufficient ground for denial of discharge under § 727(a)(5).61
The UST challenges the debtor’s failure to adequately explain the disposition of the undisclosed vehicles. However, the court has found that the challenged vehicles remained titled to the debtor. Moreover, Mr. Compton was able to locate, and evaluate, the vehicles. Based upon this record, the debtor continues to own the vehicles, and there has been no disposition of the' vehicles for which he is required to account. The record does not support a finding that the debtor failed to account for the vehicles, but rather he failed to disclose them. Denial of the debtor’s discharge under § 727(a)(5) is inappropriate.
ill. Concealment of Property of the Estate under § 727(a)(2)(B).
Under § 727(a)(2)(B), a chapter 7 discharge will be denied if the debt- or “has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed” property of the estate “with intent to hinder, delay, or defraud a creditor or an officer of the estate” after the petition filing. The UST contends the debtor concealed the two lots and the unscheduled vehicles, after he filed his petition, with the intent to hinder, delay or defraud a creditor or officer of the estate. To establish this claim, the UST must prove: “(1) a disposition of property, such as a transfer or concealment, and (2) a subjective intent on the debtor’s part to hinder, delay or defraud a creditor through the act [of] disposing of the property.”62 The subjective intent and means of proof necessary to support denial of discharge under § 727(a)(2)(B) based upon an intent to defraud mirrors the examination conducted under § 727(a)(4). However, proof of fraudulent intent is not required under § 727(a)(2)(B), and the discharge may be denied upon evidence of an actual intent to hinder or delay a creditor.63
As with claims under § 727(a)(4), the failure to list property of the estate in a debtor’s schedules may suffice to establish concealment for purposes of § 727(a)(2)(B).64 The failure to *837disclose either the two lots of real property or the several older vehicles remains the basis for the UST’s concealment claims. The failure to list the real property, however, cannot support a claim under § 727(a)(2)(B) because the debtor did not own that property as of the petition date. At trial, the UST conceded that it was not challenging the bona fides of the quit claim deeds given to Ms. Byam on August 12, 2011. Because the debtor did not own the real property as of the petition date, he was not required to list the two lots in his schedules, and they never became property of bankruptcy estate. It follows, then, that there was no concealment for purposes of § 727(a)(2)(B).
The UST’s claim for denial of the debtor’s discharge for concealment of the undisclosed vehicles necessarily fails as well, based upon the court’s prior conclusion under § 727(a)(4) that the debtor lacked fraudulent intent with respect to these assets. While the UST need only prove an intent to hinder or delay to sustain its concealment claims under § 727(a)(2)(B), the ages, condition, and lack of value of these vehicles militates against such a finding for the same reasons as set forth above. Accordingly, the court finds that denial of the debtor’s discharge under § 727(a)(2)(B) is not warranted.
CONCLUSION
For the reasons stated above, the court finds that the debtor has knowingly and fraudulently made a false oath in this case by failing to disclose the transfers of the Kingsman and Morningstar properties made within two years from his petition date. Accordingly, his discharge will be denied under § 727(a)(4)(A).
An order and judgment shall be entered consistent with this Memorandum Decision.
. Unless otherwise specified, all "§" and "Code” references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. All references to "Rule” are to the Federal Rules of Bankruptcy Procedure, unless otherwise noted. References to "ECF No.” are to the ECF number as assigned on the docket for documents filed electronically through CM/ECF in Debtors’ above-referenced bankruptcy case, and references to "AECF No.” are to the ECF number as assigned on the docket for documents filed in the instant adversary proceeding.
. In re Anthonys, Case No. F13-00274-GS. The court takes judicial notice of its docket in the original bankruptcy filing, Case No. F13-00274-GS, and the underlying main case, Case No. F13-00354-GS. Fed. R. Evid. 201.
. ECF Nos. 19, 20 (UST’s Exs. 4, 5).
. ECF No. 19 at 3 (UST's Ex. 4 at 23).
. Id. at 6 (UST’s Ex. 4 at 26).
. Id. at 8 (UST’s Ex. 4 at 28).
. ECF No. 20 at 5 (UST’s Ex. 5 at 48)(empha-sis in original).
. UST’s Ex. 10 at 4:8-19 (Transcript of Digitally Recorded 341 Meeting of Creditors — Sept. 27, 2013). The Transcript reflects that the debtor appeared at this meeting pro se. Attorney Jason Crawford, who had filed the debt- or’s prior chapter 13 petition, was also present at the meeting, but on behalf of his firm, Gazewood & Weiner, PC, rather than on the debtor’s behalf. Id. at 2.
. Id. at 6:16-21.
. Id. at 6:17-7:1.
. Id. at 7:16-19.
. UST’s Ex. 9.
. UST’s Ex. 10 at 11:2-7.
. Id. at 11:22-12:7.
. UST's Ex. 11 at 9:19-10:\2(Transcript of Digitally Recorded 341 Meeting of Creditors— Nov. 1, 2013).
. Id. at 10:13-19.
. The chapter 13 standing trustee, Mr. Compton, was also appointed the chapter 7 trustee.
. UST’s Ex. 7.
. UST's Ex. 11 at 15:7-16:24.
. Id. at 15:4-5.
. Id. at 16:14-18.
. Id.
. Complaint to Deny Discharge (“Complaint"), AECF No. 1 (UST Ex. 1) at 3-4.
. Ms. Therrien moved to withdraw from representation on March 24, 2015. The motion was granted as unopposed.
. UST’s Ex. 2 (AECF No. 17).
. FNBA held the mortgage on the debtor’s residence. The bank obtained relief from stay and has now acquired the property through foreclosure. See Order Granting Relief From Stay, entered Apr. 8, 2014 (ECF No. 101); Rescission of Proof of Claim, filed Sept. 11, 2014 (ECF No. 139).
.It is unclear from the evidence presented when Ms. Byam began living with the debtor.
. UST’s Exs. 6, 8.
. This figure includes the full assessed value for the Kingsmen property ($11,044.00), and half of the value for the Morning Star property ($23,779.00), because the debtor was a 50% co-owner of this latter parcel.
.See UST’s Ex. 10 at 4:1-10.
. Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1203 (9th Cir.2005)(citing Stellwagen v. Clum, 245 U.S. 605, 617, 38 S.Ct. 215, 62 L.Ed. 507 (1918)).
. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir.2010)(citing Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1281 (9th Cir. 1996)); see also First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1342 (9th Cir. 1986); Bowman v. Belt Valley Bank (In re Bowman), 173 B.R. 922, 925 (9th Cir. BAP 1994).
. United States v. Kras, 409 U.S. 434, 446, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973).
. 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)).
. See In re Retz, 606 F.3d at 1196 (citing In re Bernard, 96 F.3d at 1281); Searles v. Riley (In re Searles), 317 B.R. 368, 376 (9th Cir. BAP 2004)(citing Grogan, 498 U.S. at 289, 111 S.Ct. 654).
. 11 U.S.C. § 727(a)(4)(A).
. In re Retz, 606 F.3d at 1197 (quoting Roberts v. Erhard (In re Roberts), 331 B.R. 876, 882 (9th Cir. BAP 2005)).
.See UST’s Ex. 5 (Statement of Financial Affairs ), at 5 (emphasis in original).
. See Answer, Ex. 2 at 2. The debtor reiterated these opinions at trial.
. Mr. Compton inquired about a “78 Ford” in the creditors’ meeting. Based upon the pleadings in this case, it appears that the vehicle was the 1976 Ford truck.
.The court finds insufficient evidence to establish the debtor’s ownership of a 1983 Oldsmobile Cutlass, which he has consistently denied owning, as well as the 1996 GMC Sierra, or the 1978 Honda Accord.
. UST Ex. 1 at 15:4-5.
. Gugino v. Clark (In re Clark), 525 B.R. 442, 461 (Bankr.D.Idaho 2015)(quoting Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 19 84)); see also Netherton v. Baker (In re Baker), 205 B.R. 125, 133 (Bankr.N.D.Ill. 1997)(collecting cases).
. In re Retz, 606 F.3d at 1198 (quoting Khalil v. Developers Sur. & Indent. Co. (In re Khalil), 379 B.R. 163, 173 (9th Cir. BAP 2007), aff'd 578 F.3d 1167 (9th Cir.2009)).
. Fogal Legware of Switzerland, Inc. v Wills (In re Wills ), 243 B.R. 58, 63 (9th Cir. BAP 1999); see also In re Retz, 606 F.3d at 1198.
. In re Wills, 243 B.R. at 63.
. Id.
. In re Retz, 606 F.3d at 1198.
. Id. ; In re Khalil, 379 B.R. at 173; see also Gronlund v. Anderson (In re Gronlund), 2014 WL 4090433, at *8 (9th Cir. BAP Aug. 19, 2014).
. Complaint (ECF No. 1) (UST Ex. 1) at ¶ 7; Answer (ECF No. 17) (UST Ex. 2) at ¶ 1.
. Statement of Financial Affairs (ECF No. 20)(UST Ex. 2) at 5.
. In re Retz, 606 F.3d at 1199.
. Id. (citing In re Khalil, 379 B.R. at 173).
. Id.
. Merena v. Merena (In re Merena), 413 B.R. 792, 816 (Bankr.D.Mont.2009), aff'd, 2009 WL 4914650 (9th Cir. BAP Dec. 10, 2009)("But if items were omitted by mistake, the declaration will not be deemed willfully . false, and the discharge should not be denied because of it.”)
. In re Adeeb, 787 F.2d at 1343 (citing Devers v. Bank of Sheridan, Mont. (In re Devers), 759 F.2d 751, 753-54 (9th Cir. 1985)).
. In re Retz, 606 F.3d at 1200 (citing Emmett Valley Assocs. v. Woodfield (In re Woodfield), 978 F.2d 516, 518 (9th Cir.1992)).
. According to the debtor, Ms. Byam, despite being owed much more than the value of the properties transferred to her, gave him roughly $1,000.00 as part of this transaction because she knew he was undergoing hard times and thought she was getting the better part of the deal.
. 11 U.S.C. § 727(a)(5).
. In re Retz, 606 F.3d at 1205 (quoting Olympic Coast Invest. Inv. v. Wright (In re Wright), 364 B.R. 51, 79 (Bankr.D.Mont.2007)).
. In re Retz, 606 F.3d at 1205 (quoting In re Devers, 759 F.2d at 754)).
. In re Retz, 606 F.3d at 1200 (citing Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240 (9th Cir.1997)).
. In re Gronlund, 2014 WL 4090433 at *7.
. Jacoway v. Svetc (In re Svetc), 521 B.R. 892, 909 (Bankr.W.D.Ark.2014)(“Failing to list assets on bankruptcy schedules and statements is tantamount to an act of concealment falling within the time frame required by either prong of § 727(a)(2)). Even a voluntary, affirmative disclosure of property not included in the schedules "does not overcome Debt- or’s failure'to schedule it.” In re Gronlund, 2014 WL 4090433 at *6 ("Schedules are paramount for disclosure to creditors in chapter 7. Creditors rely on accurate schedules to determine whether to file a proof of claim. Revealing a valuable asset during the § 341(a) meeting is not sufficient to notify creditors because they rarely attend.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498807/ | MEMORANDUM DECISION AND ORDER FINDING BAR STUDY LOAN TO BE AN EDUCATION LOAN, DENYING DEFAULT JUDGMENT, AND DISMISSING COMPLAINT
CHRISTOPHER B. LATHAM, JUDGE, United States Bankruptcy Court
Before the court is Debtor-Plaintiff Pamela Marie Brown’s (“Brown”) motion for default judgment against Creditor-Defendant Citibank, N.A. (“Citibank”). Brown, a law school graduate, seeks a determination that her bar study loan from Citibank is not an education loan for bankruptcy purposes and so is dischargeable in the normal course. Her complaint does not allege undue hardship under § 523(a)(8).1 The court finds that Brown is not entitled to default judgment and dismisses this adversary proceeding.
I. JURISDICTION AND VENUE
The court has jurisdiction over this adversary proceeding under 28 U.S.C. *856§§ 1334(b) and 157(b)(2)(I). Venue is proper under 28 U.S.C. § 1409(a).
II. BACKGROUND
On September 19, 2014, Brown brought a voluntary Chapter 7 petition (Case No. 14-07464-CL7). Her Schedule F (Bankr. ECF No. 1, p. Í7) includes a September 5, 2008 obligation to “Citibank N.Y. State.” Brown’s schedules give no other description of the debt. And because this was a “no asset” case, no proofs of claim were filed. See Fed. É. Bankr. P. 2002(e). On October 26, 2014, the Chapter 7 Trustee issued a report of no distribution. And Brown received a discharge on December 23, 2014. The case was closed on December 29, 2014. Brown brought this adversary proceeding on December 12, 2014.
Brown asserts that the obligation to Citibank is a “bar preparation loan” she incurred in September 2008 for the purpose of sitting for the California Bar Examination. The loan covered examination costs and fees, moral character determination fees, and living expenses while Brown studied for the bar. But she does not believe the loan is subject to § 523(a)(8)’s nondischargeability provisions because it does not fall under any of that statute’s enumerated categories. Nor does she contend that paying the loan obligation would impose an undue hardship on her.
Citibank has not responded or otherwise appeared in this adversary proceeding. The court entered Citibank’s default on May 8, 2015 (ECF No. 20). Brown then brought this motion for default judgment (ECF No. 24).
The court initially heard argument on August 6, 2015. It then continued the matter with instructions that Brown provide: (1) a memorandum of point and authorities discussing whether a bar study loan is an educational loan under § 523(a)(8); (2) a copy of the subject note supported by a declaration; (3) a copy of the most recent Citibank statement showing to whom the loan was paid and when; and (4) a declaration stating whether Brown has any knowledge of whether the note was assigned to another holder or taken over by a guarantor.
The court held a further hearing on September 10, 2015. It now addresses Brown’s arguments and concludes that she is not entitled to judgment on her complaint. She fails to establish entitlement to judgment as a matter of law. Accordingly, the court dismisses this adversary proceeding without prejudice.
III. LEGAL ANALYSIS AND CONCLUSIONS
A. Section 523(a)(8) Nondischarge-ability
The Bankruptcy Code is designed to provide a “fresh start” to the discharged debtor. United States v. Sotelo, 436 U.S. 268, 280, 98 S.Ct. 1795, 56 L.Ed.2d 275 (1978). As a result, the Supreme Court has interpreted exceptions to the broad presumption of discharge narrowly. See Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). As we have observed “exceptions to discharge should be limited to dishonest' debtors seeking to abuse the bankruptcy system in order to evade the consequences of their misconduct.” Sherman v. SEC (In re Sherman), 658 F.3d 1009, 1015-16 (9th Cir.2011).
Hawkins v. Franchise Tax Bd. of Cal, 769 F.3d 662, 666 (9th Cir.2014).
Under § 523(a)(8), the following claims are excepted from discharge:
(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or *857in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual ...
11 U.S.C. § 523(a)(8).
Brown seeks to discharge her bar study loan through a finding that it is not an education loan. Ordinarily, the creditor bears the burden of proving that a particular debt falls within one of § 523(a)’s exceptions to discharge. See Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see also In re Betancourt, BAP No. CC-14-1010-KiKuDa, 2015 WL 3500322, at *5 (9th Cir. BAP June 3, 2015). But under § 523(a)(8), “the lender has the initial burden to establish the existence of the debt and that the debt is an educational loan within the statute’s parameters ... The burden then shifts to the debtor to prove all three Brunner prongs by a preponderance of the evidence.” In re Roth, 490 B.R. 908, 916-17 (9th Cir. BAP 2013); see also Benson v. Corbin (In re Corbin), 506 B.R. 287, 291 (Bankr.W.D.Wash.2014); In re Maas, 497 B.R. 863, 868-69 (Bankr. W.D.Mich.2013); 11 U.S.C. § 523(a)(8). Brown is not alleging, however, that repaying the loan would be an undue hardship. Rather, she admits the debt but contends that it is subject to her § 727 discharge since it is not among the types of obligations set forth in §§ 523(a)(8)(A)®, (a)(8)(A)(ii), or (a)(8)(B). The court considers each basis in turn.
1. § 523(a)(8)(A)(i)
Brown alleges that the subject bar study loan was not “made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.” 11 U.S.C. § 523(a)(8)(A)®. The court finds this formulaic recitation dubious. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). To start, it has reservations about the sufficiency of Brown’s evidence and her inadequate compliance with the court’s pri- or instructions. She offers a July 30, 2014 account statement, dating from two months before her bankruptcy. It indicates that, as of its date, Citibank held the loan with a principal balance of $15,000 and $4,051.60 in accrued interest. The “loan type” listed on the statement is “student loan.” The court instructed Brown at the August 6, 2015 hearing to provide evidence of whether the note was assigned to another holder or was assumed by a guarantor. In her declaration'&emdash;-as well as in open court on September 10, 2015&emdash;Brown stated that she no longer has the note and is unsure if the loan was transferred to a guarantor. But she proffers no evidence for the blanket assertion that no governmental unit or nonprofit organization was involved in funding, insuring, or guaranteeing the subject loan in any degree. Not having proven the claim, she is not entitled to judgment based on § 523(a)(8)(A)®.2
2. § 523(a)(8)(A)(ii)
Brown further asserts that her bar loan is not “an obligation to repay funds received as an educational benefit, scholarship, or stipend.” The court specifically directed additional briefing on the question of whether a bar study loan is an education loan under § 523(a)(8), but Brown’s sup*858plemental memorandum of points and authorities fails to meaningfully address the issue. And the court concludes that a bar study loan indeed falls under § 523(a)(8)(A)(ii)’s broad definition of “educational benefit.”
This appears to be an unresolved issue in the Ninth Circuit. Indeed, the Bankruptcy Appellate Panel (“BAP”) in the recent decision In re Christoff, 527 B.R. 624 (9th Cir. BAP 2015) — while analyzing the separate issue of what constitutes “funds received” under § 523(a)(8)(A)(ii) — acknowledges that there are no published Ninth Circuit Court of Appeals or BAP cases interpreting § 523(a)(8)(A)(ii) since BAPCPA’s 2005 enactment. In re Chris-toff, 527 B.R. at 632. And there is only one other published opinion in this circuit construing the provision: In re Corbin.
In Corbin, a non-debtor co-signer paid off an education loan and then obtained a default judgment against the student in state court. After the latter filed bankruptcy, the court had to consider whether the loan was nondischargeable under §§ 523(a)(8)(A)(i) and (ii). In its § 523(a)(8)(A)(ii) analysis, the court inter-' preted the term “educational benefit,” noting first that it is not defined in the Bankruptcy Code. In re Corbin, 506 B.R. at 296. Its analysis is instructive.
The Corbin court notes that “a majority of courts have held that a loan qualifies as an ‘educational benefit’ if the stated purpose for the loan is to fund educational expenses.” Id. (citing In re Maas, 497 B.R. at 869-70). Further, “courts have interpreted the phrase ‘obligation to repay funds received as an educational benefit’ so broadly ... that Section 523(a)(8)(A)® is almost subsumed by subsection (ii).” In re Corbin, 506 B.R. at 296 (citing In re Beesley, No. 12-24194-CMB, 2013 WL 5134404, at *4 (Bankr.W.D.Pa. Sept. 13, 2013)). The court goes on to note that “[Published cases addressing 523(a)(8)(A)(ii) ... merely support the proposition that subsection (ii) is interpreted very broadly.” In re Corbin, 506 B.R. at 296; see also In re Baiocchi, 389 B.R. 828, 831-32 (Bankr.E.D.Wis.2008) (§ 523(a)(8)(A)(ii) must be read as encompassing a broader range of educational benefit obligations). Additionally, “[wjhen analyzing subsection (ii), courts pay no attention to who the lender is, but focus instead entirely on whether, in the plain language of the subsection, the obligation is ‘to repay funds received as an educational benefit’ as reflected by the debtor’s agreement and intent to use the funds at the time the obligation arose.” In re Cor-bin, 506 B.R. at 296. The Corbin court concludes that “it appears that almost any obligation incurred for the purpose of paying an education-related expense is excepted from discharge under 523(a)(8)(A)(ii).” Id. Thus, the trend in the Ninth Circuit and elsewhere is to interpret § 523(a) (8) (A) (ii) broadly.
At least one other bankruptcy court, analyzing the very issues at bar, has come to the same conclusions. In In re Skipworth, No. 09-83982-JAC-7, 2010. WL 1417964 (Bankr.N.D.Ala. Apr. 1, 2010), the debtor filed an adversary proceeding against Citibank Student Loan Corporation seeking a determination that a debt owed to Citibank was dischargeable under § 523(a)(8) because the obligation was neither insured by the government nor an educational loan as defined in the Internal Revenue Code. There — as here — the debt- or received a loan from Citibank to pay for a bar examination review course. In concluding that the obligation was a student loan under § 523(a)(8), the court found that the debtor: (1) admitted the loan was incurred for bar study; (2) took out the loan while he was enrolled as a law student; (3) listed the loan on Schedule F as a “student loan”; and (4) was given the loan to assist him with his educational *859expenses, i.e., the bar review course. In re Skipworth, 2010 WL 1417964, at *2. The court also found that § 523(a)(8)(A)(ii) is to be interpreted broadly. Id. It ultimately denied the motion for default judgment and dismissed the adversary proceeding. Id. at *3.
With the exception that the Skipworth debtor took out his loan while enrolled as a law student — Brown incurred hers post-graduation — the circumstances are essentially identical to those here. Brown admits that she borrowed the money so she could sit for the California Bar Examination and support herself while preparing. She discloses the obligation on Schedule F. Though Schedule F does not describe the loan, Brown’s supplemental declaration states that she has a “student loan account with Defendant” (ECF No. 35, p. 4). And the attached Citibank statements list the “loan type” as “student loan.”3
The analysis in Skipworth is apposite and persuasive. The subject loan’s exact timing — coming, as it did, after Brown received her law degree — does not amount to a material difference. Both cases featured a bar study loan that both debtors conceded was a student loan. And by the. endeavor’s very nature, bar preparation typically occurs after schooling is done and before the examination date. There is no meaningful distinction between Brown’s case and Skipworth in that regard. That Brown signed the note after graduating does not make it any less an educational benefit. If she had not attended law school, she would not have had the need— nor likely even the opportunity — to take a bar study loan.4 In addition, a requirement for the debtor to have been a student when the debt was incurred applies only to § 523(a)(8)(B).5 There is no corresponding provision in § 523(a)(8)(A). The court gives effect to this textual difference and concludes that a debtor need not have been a student at the time of the loan for nondischargeability under either of § 523(a)(8)(A)’s two subsections.
The court is persuaded by these authorities, and concludes that § 523(a)(8)(A)(ii) should be interpreted broadly to include a bar examination loan under the definition of “educational benefit.” Brown cites no authority holding otherwise, despite the duty of candor to the court to acknowledge case law contrary to her position.
3. § .523(a)(8)(B)
In addition, Brown argues that her bar study loan is not a “qualified education loan” under § 523(a)(8)(B). “Qualified education loan,” for bankruptcy purposes, is defined in § 221(d)(1) of the Internal Revenue Code of 1986. 11 U.S.C. § 523(a)(8)(B). There, a “qualified education loan” is
any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses — (A) which are incurred on behalf of the taxpayer ... as of the time the indebtedness was incurred, (B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and (C) which are attributable to education furnished during a period during which the recipient was an eligible student.
26 U.S.C. § 221(d)(l)(A)-(C). Brown asserts that the subject loan does not meet *860this definition because she did not incur it while an eligible student. Given the Internal Revenue Code’s definition of “eligible student”, she is correct. See 26 U.S.C. § 25A(b)(3). She graduated from law school in May 2008, but did not take the Citibank loan until September 2008. The court thus finds § 523(a)(8)(B) inapplicable to this loan.
B. Brown Is Not Entitled to Default Judgment
Brown — in both her motion and supplemental papers — emphasizes that she should have default judgment because “Plaintiff has satisfied the procedural requirements for default judgment pursuant to Federal Rule of Civil Procedure 55(a).” This is not so. Federal Rule of Civil Procedure 55(b), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7055, establishes “a two-step process to obtain a default judgment in a nondischargeability proceeding: ‘(1) entry of the party’s default (normally by the clerk), and (2) entry of a default judgment.’ ” In re Yong Li, BAP Nos. CC11-1490-HTaMk, 11-15237-TD, 11-02107-TD, 2012 WL 5419068, at *2 (9th Cir. BAP Nov. 7, 2012) (quoting In re McGee, 359 B.R. 764, 770 (9th Cir. BAP 2006)). But “entry of a default does not entitle the nondefaulting party to a default judgment as a matter of right.” Id. The Ninth Circuit sets forth seven factors to consider in reviewing a motion for default judgment:
• The possibility of prejudice to the plaintiff;
• The merits of the plaintiffs substantive claim;
• The sufficiency of the complaint;
• The sum of money at stake in the action;
• The possibility of a dispute concerning material facts;
• Whether the default was due to excusable neglect; and
• The strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.
Id.; see also Senior’s Choice v. Mattingly, No. SACV-11-1622-JST (MLGx), 2012 WL 3151276, at *2 (C.D.Cal. July 31, 2012) (citing Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir.1986)).
Further, “before granting a default judgment, the court must first ascertain whether the unchallenged facts constitute a legitimate cause of action.” In re Yong Li, 2012 WL 5419068, at *2 (quoting Chanel, Inc. v. Gordashevsky, 558 F.Supp.2d 532, 536 (D.N.J.2008)). And “a court may refuse to enter a default judgment if it determines that no justifiable claim has been alleged.” In re Yong Li, 2012 WL 5419068, at *2; see also In re Kubick, 171 B.R. 658, 662 (9th Cir. BAP 1994) (“The court, prior to entry of a default judgment, has an independent duty to determine the sufficiency of a claim.... ”).
In denying Brown’s motion, the court affords significant weight to the second and third factors set forth above. She has not met her burden of proving that her loan obligation to Citibank does not fall under § 523(a)(8)’s nondischargeability requirements. Not only is she wrong on the merits of her substantive claim, her adversary complaint is insufficient as a matter of law. Brown has failed to state a claim upon which relief can be granted. Accordingly, the motion for default judgment is denied, and the adversary proceeding is dismissed without prejudice.
IV. CONCLUSION
. For the foregoing reasons, the court holds that the subject bar study loan is an education loan for § 523(a)(8) purposes, and thus not dischargeable in bankruptcy absent a showing of undue hardship. Brown’s motion for default judgment to *861the contrary is accordingly denied, and the complaint is dismissed without prejudice.
IT IS SO ORDERED.
. Unless otherwise noted, all statutory citations in this memorandum are to the Bankruptcy Code, Title 11 of the United States Code.
. See discussion at III.B., infra.
.In addition, Brown stated at oral argument on September 10, 2015 that the Citibank student loan application form she submitted was specifically one for bar study. Thus she and Citibank were presumably both aware that the loan was being taken in furtherance of Brown’s legal education.
. Notwithstanding those rare situations where applicants without formal legal education can qualify to take the California Bar Examination. See Cal. Bus. & Prof. Code § 6060(e)(2)(B)-(C).
. See discussion at III.A.3., infra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498808/ | MEMORANDUM OF DECISION
TERRY L. MYERS, CHIEF U.S. BANKRUPTCY JUDGE
On July 28, 2014, Anthony Neil Tucker (“Debtor”) filed a voluntary chapter 7 petition.1 On October 27, 2014, the United States of America on behalf of the Social Security Administration (“Plaintiff’ or, at times, “SSA”) timely filed a complaint initiating this adversary proceeding. Plaintiff seeks a determination that Debtor owes a debt that is nondischargeable under § 523(a)(2)(A).2 The' cause was tried on July 29, 2015, and the matter taken under advisement on September 10 upon completion of written closing arguments. The Court has carefully evaluated all the evidence, and the arguments of the parties. This Decision constitutes the Court’s findings and conclusions under Rule 7052.3
BACKGROUND AND FACTS A. Context
The SSA provides social security disability (“SSD”) benefits to citizens who have become disabled and unable to work.4 As. a condition for receiving this benefit, recipients must advise the SSA when they regain employment, they have changes in income, or their disability resolves. Those events have impacts on when an individual is entitled to benefits or the amount or duration of benefits. The system depends on the recipient to provide forthright and timely information. The SSA regularly provides information and materials to reinforce the recipient’s obligation to disclose the information. That the SSA does so reflects the lack of an alternative practical method by which it can obtain the detailed information as to all those receiving benefits on a current and ongoing basis. Though it is clear the SSA can receive *863information from other sources (for example, employers’ reporting of FICA wages paid to individuals), that information is not timely and does not provide a reliable means of preventing overpayment. As one court noted: “Otherwise, as happened in this case, there could be a delay between the date the benefits ‘ should have ended and the date SSA discovered that the individual returned to work.” United States v. Drummond (In re Drummond), 530 B.R. 707, 710 (Bankr.E.D.Ark.2015).
B. Debtor’s disability, benefits, and work history
Debtor injured his back in 2003. Several months later, he applied for SSD benefits. In applying, Debtor agreed to notify the SSA when he started working and when his condition improved and he could work. Ex. 100 (application). In that application, Debtor states, in part:
I AGREE TO NOTIFY THE SOCIAL SECURITY ADMINISTRATION OF ALL EVENTS AS EXPLAINED TO ME.
I AGREE TO NOTIFY THE SOCIAL SECURITY ADMINISTRATION:
—IF MY MEDICAL CONDITION IMPROVES SO THAT I WOULD BE ABLE TO WORK, EVEN THOUGH I HAVE NOT YET RETURNED TO WORK.
—IF I GO TO WORK WHETHER AS AN EMPLOYEE OR AS A SELF-EMPLOYED PERSON.
—IF I APPLY FOR OR RECEIVE A DECISION ON BENEFITS UNDER ANY WORKERS’ COMPENSATION LAW OR PLAN ... OR OTHER PUBLIC BENEFIT BASED ON DISABILITY.
THE ABOVE EVENTS MAY AFFECT MY ELIGIBILITY TO DISABILITY BENEFITS AS PROVIDED IN THE SOCIAL SECURITY ACT, AS AMENDED.
MY REPORTING OBLIGATIONS HAVE BEEN EXPLAINED TO ME. Ex. 100.
Debtor received a “notice of [SSD] award” in August 2005, Ex. 105, and the disclosure requirements were reinforced in that notice. Debtor also received a pamphlet regarding his disability benefits, and the notice of award advised Debtor that he should read it. Ex. 106 (“What You Need To Know When You Get Social Security Disability Benefits,” SSA Pub. No. 05-10153). The pamphlet, like the other materials Debtor received from the SSA, see, e.g., Ex. 107 (“Working While Disabled— How We Can Help,” SSA Pub. No. 05-10095), emphasized his “rights and responsibilities” in return for receiving the SSD benefits, and explained how working and earnings impacted the right to or amount of SSD benefits.
In discovery, Debtor provided a history .of his work following the 2004 injury. Ex. 149. Eliminating an alleged job at Over The Top Flooring from 2006 through 2008 — because Debtor admitted he lied about that job (including doing so in his deposition in this litigation) — his work history reflects the following:
*8646/2008-5/2009 Unicep Packaging $12/hour
6/19/2009-2/4/2010 S&W Capital $2,500/month
2/2010-2/2011 Country Inn $2,000/month
5/29/2011-6/19/2011 CR England $ 150/week
9/3/2011-12/21/2011 Wes Olsen Trucking $2,900/month
1/3/2012-2/10/2012 Wes Olsen Trucking $21/hour
4/30/2012-3/18/2013 Wes Olsen Trucking $21/hour
4/22/2013-12/13/2013 Wes Olsen Trucking $21/hour
5/1/2014-2/4/2015 Wes Olsen Trucking $21/hour
Thus, during the period from 2008 to 2012, Debtor was unemployed for a total of about eight months.
Notwithstanding his work history, Debt- or did not advise the SSA of changes in employment or income.
In January 2006, the SSA advised Debt- or that he was overpaid benefits in the amount of $18,447.00 because the retroactive benefits he was paid for the period February 2004 — July 2005 (which were paid upon the August 2005 notice of award) did not account for workers’ compensation payments he received covering the same period. Exs. 109, 116. This notification advised Debtor he was still entitled to ongoing benefits (even though he had been previously overpaid) and explained Debtor’s appeal rights and his right to request a waiver of repayment. Correspondence related to a waiver occurred from February 2006 (Ex. 110) through August 2006 (Ex. 112). In August 2006, Debtor submitted a “request for waiver” regarding the overpaid benefits. Ex. 113. That request was eventually granted. Ex. 115 (SSA letter waiving collection).
In June 2010 and again in July 2010, the SSA sent Debtor a work activity report form that he was to fill out and return in order for the SSA to conduct a work review. Debtor did not return the forms. In August 2010, the SSA sought information from Debtor’s possible employers, which replied with information suggesting work performed in 2008 and 2009 for Uni-cep and S&W Capital.5 In October 2010, the SSA sent a letter to Debtor informing him it believed his disability had ended in October 2008 due to the work he performed. Ex. 117.'6
*865The SSA sent another letter in December 2010 informing Debtor of the decision regarding his 2009 benefits. Ex. 120. This letter also told Debtor that, while prior benefits had been overpaid because Debtor had been working during the relevant period, he would still receive current ongoing benefits because he was not working7 at the time of the letters. It also analyzed Debtor’s “trial work period” and subsequent eligibility. The SSA again reminded Debtor of his obligations to self-report his work status. He provided no information to- the SSA in response even though, during 2010, he was working at Country Inn. Ex. 149.
In March 2011, SSA sent another request for a work activity report. Debtor completed this form and returned' it in April 2011, disclosing his work at S & W Capital and Country Inn from January 2010 through February 2011, and asserting he was not working in April. Ex. 121. Debtor started working again right after filing this report (ie., 5/29/11-6/19/11 with CR England, and 9/3/11 and after with Wes Olsen) but did not report that change.
The SSA sent letters regarding proposed decisions on Debtor’s benefits in April and July 2011 (Exs. 122, 123 re: ineligibility 6/09-1/11 and overpayment of $23,500.90). In October 2012, the SSA sent a letter questioning entitlement for additional periods including 2/11, 6/11, 10/11 and thereafter. Ex. 124. In November 2012, the SSA sent notice that no benefits were due for those periods. Ex. 125. The November letter informed Debt- or that he would be subsequently notified of the amount of overpayment and, in a December 2012 letter, Debtor was advised that the overpayment of benefits totaled $42,258.30. Ex. 126. As before, Debtor was advised of his right to appeal or request a waiver.
In February 2013, Debtor requested a waiver of the overpaid benefits. Ex. 127. The SSA denied the requested waiver and assessed Debtor the $42,258.30 in overpaid benefits. Exs. 128,129.
DISCUSSION AND DISPOSITION
As this Court summarized in Huskey v. Tolman (In re Tolman), 491 B.R. 138 (Bankr.D.Idaho 2013):
A party seeking to except a debt from discharge under § 523 must prove its case by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Generally, “exceptions to discharge are strictly construed against the objecting creditor and in favor of the debtor in order to effectuate the fundamental policy of providing debtors a fresh start.” Spokane Railway Credit Union v. Endicott (In re Endicott), 254 B.R. 471, 475 n. 5, 00.4 I.B.C.R. 199, 200 (Bankr.D.Idaho 2000). (citing Snoke v. Riso (In re Riso), 978 F.2d 1151, 1154 (9th Cir.1992)). While a central purpose of bankruptcy is to allow an honest but unfortunate debtor a fresh start, “a dishonest debtor, on the other hand, will not benefit from his wrongdoing.” Apte v. Japra (In re Apte), 96 F.3d 1319, 1322 (9th Cir.1996) (citing Grogan v. Garner, 498 U.S. at 286-87, 111 S.Ct. 654).
491 B.R. at 149. Further:
To establish a debt is nondischargeable for fraud under § 523(a)(2)(A), Plaintiff must prove five elements by a preponderance of the evidence:
(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor’s statement or conduct; *866and (5) damage to the creditor proximately caused by its reliance on the debtor’s statement or conduct.
Depue v. Cox (In re Cox), 462 B.R. 746, 756 (Bankr.D.Idaho 2011) (quoting Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir.2000)).
While often an affirmative misrepresentation is involved, it is clear that an action under § 523(a)(2)(A) can also be prosecuted on the basis of a concealment or fraudulent omission of a material fact. [As noted] in Stennis v. Davis (In re Davis), 486 B.R. 182 (Bankr.N.D.Cal. 2013), ... it is “well recognized that silence, or the concealment of a material fact, can be the basis of a false impression which creates a misrepresentation actionable under § 523(a)(2)(A).” Id. at 191 (citing In re Evans, 181 B.R. 508, 514-15 (Bankr.S.D.Cal.1995)). “A debt- or’s failure to disclose material facts constitutes a fraudulent omission under § 523(a)(2)(A) if the debtor was under a duty to disclose and possessed an intent to deceive.” Id. (quoting Haglund v. Daquila (In re Daquila), 2011 WL 3300197 (9th Cir. BAP Feb. 28, 2011)). See also Barnes v. Belice (In re Belice), 461 B.R. 564, 580 (9th Cir. BAP 2011); Mandalay Resort Grp. v. Miller (In re Miller), 310 B.R. 185, 196 (Bankr. C.D.Cal.2004) (“The concealment or omission of material facts that a party has a duty to disclose can support the nondischargeability of a debt on the grounds of actual fraud.”).
Id. at 150-51 (footnote omitted).
Debtor emphasizes that he has little formal education and did not receive a high school diploma. Even so, his testimony and demeanor before the Court reflected he could and did understand that the SSD benefits were based on his disability, and the amount of benefits and his right to receive them was conditioned on his accurate and timely reporting of actual work he obtained.8 He at times responded to the SSA inquiries, such as with the April 2011 work activity report, but not others.
Debtor also points to the detailed and sometimes hard to understand descriptions of programs the SSA offers, such as the “trial work” program. But while it is true the information in the pamphlets, letters and forms is occasionally complicated, the fundamental message was clear. Benefits are provided only to those that need them, and need is based on accurate information about the disability, whether it has been resolved, and the work that a recipient can and does perform. The brochures and letters may be less than perfect, but they repeatedly make the point that individuals must affirmatively report on their status.
Debtor argues that, based on the documents and alleged but unsubstantiated telephone calls with SSA employees, he believed he could not only work during a “trial work period” but for several subsequent years without impacting his right to benefits. The position is not credibly advanced. Such a conclusion is not supported by the information Debtor received from the SSA, even crediting Debtor’s lack of substantial formal education. His position requires the Court to read the information provided to him by the SSA generously in his favor, while simultaneously ignoring everything else provided that negated such a construction and which — importantly — repeatedly emphasized Debt- or’s duty to timely report and notify SSA of changes in his work status. His testimony reflected an ability to read and to understand those obligations.
*867Debtor also relies on the fact that he filed tax returns for the years in question, disclosing his employment and employment income for the preceding calendar year. However, the SSA materials did not simply tell Debtor he must file tax returns. The materials required Debtor to notify the SSA regarding his employment and work on an ongoing and timely basis.
In examination, Debtor conceded he understood he was obligated to inform the SSA about all his work changes and his reporting obligations were independent of whatever information the SSA might gather from other sources. Thus the arguments about trial work periods and the like go not to the failure to report such work changes — the omissions made — but instead are advanced in the hope that they might “excuse” them. They do not. Debtor obviously could have reported the work changes in a timely way, and inquired about how his benefits would be impacted thereby, whether under a trial work program or otherwise.
As noted in Tolman, a failure to disclose material facts can be a fraudulent omission where there was a duty to disclose and an intent to deceive. This principle has been applied in other § 523(a)(2)(A) eases addressing SSA disability overpayments. See, e.g., Drummond, 530 B.R. at 709; Hall, 515 B.R. at 520; United States v. Pipkin (In re Pipkin), 495 B.R. 878, 880-81 (Bankr.W.D.Ark.2013).9 Here, the duty to disclose was made clear to Debtor. And, under all the circumstances and evidence, including weighing credibility and clarity of testimony, the Court finds the intent to deceive established. There was “a pattern of falsity” and a “reckless indifference to or disregard of the truth.” Tolman, 491 B.R. at 154 (quoting NWAS Oklahoma, Inc. v. Kraemer (In re Kraemer), 2011WL 3300360 (9th Cir. BAP Apr. 21, 2011)). Debtor’s arguments that he was merely confused or “a little negligent”10 are not persuasive. The preponderating evidence is that Debtor knew he was receiving benefits while not timely and accurately reporting his employment status to the SSA and that employment status would have an impact on his benefits.11
The evidence, including the written information from the SSA and the testimony of Christopher Cohoon from the Couer d’Alene, Idaho SSA office, establishes the SSA relies on self-reporting by SSD beneficiaries regarding their employment. This is entirely rational from the point of view of the SSA. The ability to obtain information from employers directly requires knowledge of where benefit recipients are working. Obtaining it from employment data is not only cumbersome but significantly untimely. Debtor’s observa-' tion that both the SSA and the IRS are agencies of the United States is' far too facile and assumptive to be given weight.12 *868And, even if the SSA could obtain and mine data to try to determine whether a given individual was working, that does not negate the clear and unambiguous requirement placed on the individual that, as a condition to receiving disability benefits, he timely advise the SSA about the status of his disability and about ongoing changes in employment.
Plaintiff proved, by a preponderance of the evidence, the required elements of § 523(a)(2)(A). The Court finds that Debtor made fraudulent omissions and engaged in deceptive conduct, with knowledge that he was doing so. There was the requisite intent to deceive, which led to Debtor’s receipt of benefits while lacking entitlement to the same. The SSA was shown to have justifiedly relied on Debt- or’s conduct, and responded, as best it could though after the fact, to the deceptive conduct.
The final factor is proof of damages proximately caused by the fraudulent conduct. The SSA calculates the amount of overpaid benefits to be $42,285.30. Ex. 126. In requesting a “waiver” of these overpaid benefits, Debtor never contested the SSA’s calculation, nor the unreported employment discovered by the SSA. Rather, Debtor’s request for waiver was based on the arguments that (a) he “believed” he was eligible for 36 months of benefits after completing a 9 month initial period, and (b) he “assumed” that because he was paying taxes and withholdings were being reported by employers, the SSA was aware of his employment status. Ex. 127. These arguments do not impeach.or contradict the SSA’s calculations of the damages suffered. The balance of arguments made by counsel disagreeing with the calculations were not persuasively advanced.
CONCLUSION
Plaintiff has established that the $42,258.30 debt was obtained through Debtor’s fraudulent conduct and, under § 523(a)(2)(A), the same is nondischargeable. Counsel for Plaintiff shall submit a proposed form of judgment consistent with this Decision.
. Unless otherwise indicated, all statutory references are to the Bankruptcy Code, Title 11 U.S.Code §§' 101-1532, and all rule references are to the Federal Rules of Bankruptcy Procedure. This Court has jurisdiction pursuant to 28 U.S.C. § 1334, and the issue before it is a core matter on which it may enter a final decision. See 28 U.S.C. § 157(b)(2)(I).
. Plaintiff initially asserted nondischargeability under § 523(a)(2)(B) as well, but abandoned that contention in its closing brief. Adv. Doc. No. 24 at 2.
. The underlying chapter 7 case was closed in March 2015, following the chapter 7 trustee’s report of no distribution.
. Some decisions addressing § 523(a)(2)(A) actions in similar circumstances characterize these as Social Security "disability insurance benefits” or DIB. See, e.g., United States v. Hall (In re Hall), 515 B.R. 515 (Bankr. S.D.W.Va.2014).
. The SSA identified possible employers through information derived from the employers' records of earnings paid their employees. This information is thus dated rather than contemporaneous. Exs. 130, 135 (inquiries and responses re: 2009-2010).
. The SSA continued to pay benefits based on the rationale that, while substantial gainful work had been performed it had by then stopped and benefits would again be proper. See, e.g., Ex. 119. This illustrates, and indeed highlights, the lag resulting from a recipient’s failure to timely report changes in employ*865ment and earnings and, consequently, the overpayment of benefits.
. At least so far as the SSA knew given Debt- or's lack of reporting.
. The Court has also evaluated Debtor’s letters to the SSA in reaching its findings about his understanding.
. See also Bullock v. BankChampaign, N.A., - U.S. -, 133 S.Ct. 1754, 1760, 185 L.Ed.2d 922 (2013) (" ‘[f|raud’ typically requires a false statement or omission”).
. See Adv. Doc. No. 25 at 4 (Debtor’s closing brief).
. The Court notes that Debtor's credibility also suffers from the fact that he misrepresented his work for Over The Top Flooring in 2006-2008, even to the extent of including that misinformation in discovery responses he verified and provided in the present litigation.
.Debtor states: "[T]he Plaintiff is the Unit- . ed States of America. Based on it [sic] particular position it was able to know, through its relationship with the IRS, the Debtor was doing some work in late 2008-2012.” Adv. Doc. No. 25 at 5. In a related comment, he states: “If Debtor really intended to deceive Plaintiff regarding his work status, then he could have easily worked 'under the table.' Debtor always worked ‘above table,’ reported all of his income to the IRS and timely filed his tax returns.” Id. The mistake is in confusing a creditor’s arguable ability to ferret out *868fraud with the debtor’s failure to disclose material facts in the face of a duty to disclose. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498810/ | MEMORANDUM OPINION
Robert E. Nugent, United States Chief Bankruptcy Judge
The parties to this matter all agree that valid grounds exist to dismiss or convert this chapter 13 case for cause under § 1307(c). They differ on whether the Court can convert a chapter 13 case to chapter 7 after the debtor has requested dismissal under § 1307(b) and, second, whether it would better serve the interests of the creditors to dismiss this case or convert it to chapter 7. If, as a matter of law, the debtor’s motion to dismiss must be granted, whether the case should be converted is a moot point.
11 U.S.C. § 1307(b) says that the court “shall” grant the request of the debtor to dismiss his case “at any time.” But subsection (c) provides that the court “may” dismiss a chapter 13 case for cause or convert it to chapter 7 if that would be in the best interests of the creditors and estate. Mills says that the statute’s mandate to dismiss the case trumps the discretionary power to convert his case. Creditors Jason Appell, Kevin Law, and Robert Law, joined by Kanza Bank (and the trustee, at least in the beginning) assert that “Debtor’s absolute right to dismiss is qualified by an implied exception for bad faith conduct and/or abuse of the bankruptcy process.”1 Given the explicit mandatory language of § 1307(b), the limits the Supreme Court has placed on the scope of § 105(a), and the voluntary nature of chapter 13 relief, I find no “implicit exception” to the debtor’s unqualified right of dismissal. The motion to convert is moot and Ryan Mills’ case must be dismissed.2
Procedural History
Mills filed his chapter 13 case on November 20, 2014. He submitted a 36-month plan that proposed monthly payments of $1,500. After the debtor’s first meeting of creditors on December 19, the trustee filed her initial objections to the *880plan on December 22. Appell and the Laws filed theirs on January 27, 2015 along with a motion to extend their time in which to file a dischargeability complaint. In February, the Internal Revenue Service amended its proof of claim, increasing it from $11,615 to $79,883. In March, the trustee filed her supplemental objection that questioned Mills’ eligibility due to exceeding the debt limit. At trial, both the debtor’s and the trustee’s counsel stated that the debtor had agreed to dismiss his case after the supplemental objection was filed.3 But no such order was entered and then, on April 23, the trustee moved to convert the case to chapter 7. On May 5 the debtor objected to that motion and, on May 14, the debtor moved to dismiss. Ap-pell and the Laws objected to debtor’s motion and, in their response, joined in the trustee’s motion to convert. All of these matters were called for trial on August 18, after Appell and the Laws conducted only document discovery. At trial, the trustee stood mute on the motion to convert, leaving Appell and the Laws to prosecute it. Because Mills has asked to voluntarily dismiss his case, objections to the confirmation of his chapter 13 plan are moot, leaving only his motion to dismiss and Appell’s and the Laws’ motion to convert before me today.
Facts
The underlying question here is one of law: can the court deny a debtor’s motion to dismiss his chapter 13 case for bad faith conduct and/or an abuse of the bankruptcy process? But because bad faith or abuse of the process is largely a factual matter, some background is necessary.
Ryan Mills was in the construction and real estate development business before he filed his case. In 2011 he formed a company called RDM Properties LLC, d/b/a Mills Construction. In 2012, he organized M & L Development Group LLC with Mickey Lynch.4 Mills also did construction work individually.5 M & L Development’s activities between 2012 and 2014 coincided with the development of Walker’s Bar/Jetty’s Pizza on Commerce Street in Wichita. Mills remains in the construction business.
The Walker’s Bar/Jetty’s Pizza project is the centerpiece of the parties’ dispute. Ryan Mills acquired a 50% interest in The Tree Guys LLC in 2010. That entity purchased two old buildings located at 220 and 222 S. Commerce Street (the “Commerce Property”) from Michael McGill. In the fall of 2011, Mills and McGill formed Commerce Street Developers, LLC (CSD) to acquire the Commerce Property from The Tree Guys.6 CSD planned to develop the Commerce Property into Walker’s/Jetty’s by renovating the old buildings. Sometime later in 2012 or 2013, Robert “Rusty” Law, who owns Pacific Coast Pizza in northeast Wichita, introduced Mills to Mickey Lynch and Lynch joined the venture acquiring a 51% membership interest in CSD. The bar and restaurant opened in late December of 2013.
Along with his work for CSD, Mills did business as “Commerce Street Operators,” a sole proprietorship. In 2012, he solicited a $120,000 loan from Appell and the Law brothers for development of the Commerce Property. He gave them a promis*881sory note dated April 26, 2012 by which he agreed to repay the loan in 75 days by paying the three $40,000 each. In October of 2012, Mills borrowed another $140,000 from the Law brothers (but not Appell), offering to assign a 50% membership interest in CSD with Mills to keep the other 50%. He represented that the buildings were subject to valuable and transferable historical tax credits (HTCs) from both the federal government and the state of Kansas. Mills received money from the Laws, but never executed the assignments to them.7
Mills defaulted on the April note. He began to improvise. He offered Appell a “royalty” on Walker’s operating revenue in exchange for Appell’s forbearing to sue him for his portion of the April note. He convinced Appell to loan him another $60,000 in August of 2013, giving him note from Mills and CSD, the same to be payable in 30 days in the amount of $66,000.8
Mills met Lynch during this period of time. Lynch agreed to invest in the project and became a member of CSD in 2013, acquiring what may have been McGill’s 51% interest in that company for an initial $250,000 cash investment. Mills found another investor, 222 Commerce LLC, and assigned it a 25% membership from his holdings. As of October 15, 2013 Mills owned 24%, Lynch owned 51% and 222 Commerce owned 25% interest in CSD.
Walker’s and Jetty’s opened in late 2013, but due to a lack of parking and other issues, did not flourish. By March of 2014, Mills had only paid Appell $20,000 of the $60,000 he had borrowed oh the second note. Appell and the Law brothers sued Mills in state court in September, seeking judgment on the notes and claiming that Mills had fraudulently induced them to lend and/or invest in the enterprise. The bar and restaurant both closed by August.
In July of 2014, Mike McGill, who had previously owned this property, became interested in acquiring it again. Mills and CSD were still indebted to McGill on the purchase money mortgage notes that Tree Guys had granted to McGill when it acquired the property from him in 2010. McGill formed Uncondemned Properties, LLC (“UP”) in July of 2014 to reacquire the Commerce Property from CSD. He was UP’s managing member and owned 86% of it; Mills owned the other 14%.9 UP purchased the Commerce Property for $523,900 under an asset purchase agreement executed on August 28, 2014, and assumed Mills’ and CSD’s indebtedness to McGill which, according to the reinstatement documents signed by Mills, amounted to about $440,000 for which Mills remained personally liable.10 At closing, funds were to be distributed to several mechanics-’ lien claimants, to Sedgwick County for past-due ad valorem taxes, and to Garden Plain State Bank to release a prior mortgage. Mickey Lynch received $100,000, and 222 Commerce LLC $243,000 to retire their respective interests in CSD. Mills assigned 100% of CSD’s state and federal historic tax credits to Lynch. This left Mills the sole member of CSD, but CSD no longer held any assets.
Even after transferring his 51% interest in CSD, Lynch executed a deed on September 4 as a “member” of CSD, conveying the Commerce Property to UP. At closing, Lynch received 14% of UP, Mills’ interest increased to 35%, and McGill re-*882tamed 51%.11 Lynch could not say what, if any, consideration he paid for his interest in UP or how he acquired it. McGill testified that a side deal made at closing changed the members’ percentages and granted Lynch his 14% interest in UP.12 Lynch paid nothing for it.
Then, shortly after the closing on September 4, UP bought out Mills’ 35% interest in it for $42,000 cash and forgave Mill’s personal liability on the Tree Guys $440,000 debt. McGill conceded that there was no writing that evidenced the release of Mills.13 We cannot tell whether this transfer occurred before or after Appell and the Law brothers filed their state court suit against Mills on September 9, 2014.
Appell and the Law brothers say that this series of transactions should be examined by a trustee and, possibly, avoided for the benefit of Mills’ creditors, even though most of the transfers appear to involve the property of entities, not of Mills individually. They also say that Mills filed his bankruptcy case in bad faith and abused the legal process because he filed this case immediately after the state court pretrial discovery conference in their suit and because his bankruptcy pleadings reflect some inconsistencies. For example, Mills discloses that he sold his 35% interest in UP to McGill for $42,000, but does not refer to his being forgiven on the Tree Guys debt. He failed to append exhibits referenced in his statement of financial, affairs that would have detailed his pending lawsuits and business interests. At trial, though, Mills said he provided these exhibits to the trustee at the first meeting of creditors and no one contradicted that testimony. Mills’ declaration on Schedule B that he retained ownership of 49% of the federal historical tax credits is also likely inaccurate because Mills never owned the credits as an individual. The entities did. Finally, Mills admitted at his first meeting and again at trial that he listed CSD’s unsecured creditors as well as creditors of his construction entities on Schedule F, but disputed any personal liability for those debts.
After he filed, Mills collected about $4,500 of his construction accounts receivable and used those funds either in his construction business or for living expenses. In February of 2015, he organized a new limited liability company called RDM Development, LLC to conduct his construction business.14 He admitted that his tax debt greatly exceeded the amounts he scheduled, and that he could not find a way to service those debts in a plan. He also desires to negotiate an offer and compromise with the Internal Revenue Service on his tax debt which he cannot do while in bankruptcy. Mills’ tax claims now exceed $200,000, his assets amount to very little, and his unsecured creditors are unlikely to receive any distribution after all priority claims have been paid.
Analysis
Appell and the Laws (and, initially, the trustee) argue that the existence of the potential transfer actions, combined with the various inaccuracies on Mills’ schedules demonstrate his bad faith and justify *883converting the case to chapter 7.15 But if I conclude that there is no “implicit exception” to a debtor’s unconditional right to dismiss his chapter 13 case “at any time,” their motion is moot and the case must be dismissed.
Bankruptcy Code § 1307(b) states that “on request of the debtor at any time, if the case has not been converted [from chapters 7, 11, or 12], the court shall dismiss a case under [chapter 13].”16 Appell, the Laws, and the trustee argue that a bankruptcy judge may exercise § 105(a) equitable discretion to deny what appears to be mandatory relief under that subsection when creditors or other parties in interest demonstrate that the debtor has proceeded in bad faith. They claim the Supreme Court’s decision in Marrama v. Citizens Bank as the foundation for this view.17 In Marrama, the Supreme Court held that a chapter 7 debtor’s right to “mandatory” conversion to chapter 13 could be restricted or conditioned when a court concludes that a debtor has proceeded in bad faith. Five justices of the Court concluded that nothing in the text of § 706 or § 1307(c) (which supplies examples of cause to involuntarily dismiss or convert of a chapter 13 case) “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.”18 Instead, they said that courts have “broad authority” under § 105(a) to “prevent an abuse of process” by immediately denying a debt- or’s motion to convert a chapter 7 case to chapter 13 when approving it might permit the debtor to take actions prejudicial to creditors.19
Along with denying that he acted improperly, Mills says that the court lacks discretion to deny a debtor’s motion to dismiss a chapter 13 case by using § 105(a) as the Marrama court did. The Supreme Court’s recent refinement, of its holding in Marrama in Law v. Siegel supports his view.20 There the Court concluded that the bankruptcy judge’s “broad authority” did not allow for the surcharge of a debtor’s exempt homestead even though the debtor committed fraud to conceal the homestead’s value from the trustee. The Court held that nothing in § 105(a) gave a bankruptcy court power to rewrite § 522’s rules concerning exemptions or to add conditions or exceptions to them. It noted that the Marrama majority concluded that § 706(d) expressly conditions a debtor’s right to convert on his being eligible for chapter 13 relief and that a debtor’s bad faith disqualifies him from relief in chapter 13 under § 1307(c).21 Justice Scalia’s majority opinion in Law also consigns Marra-ma’s “broad authority” language to the realm of dicta—
At most, Marrama’s dictum suggests that in some circumstances a bankruptcy court may be authorized to dispense with futile procedural niceties in order to reach more expeditiously an end result required by the Code. Marrama most certainly did not endorse, even in dictum, the view that equitable considerations permit a bankruptcy court to contravene express provisions of the Code.22
*884The narrow view of Marrama’s interpretation of § 706(a) taken by the Law v. Siegel Court makes sense. That section provides that the debtor “may” convert a chapter 7 case to one in chapter 13 if the debtor has not already converted the case to chapter 7 from another chapter. Section 706(d) appends a further limitation to the privilege of voluntary conversion: a chapter 7 debtor may not convert a case to a chapter for which he is not eligible. By contrast, § 1307(b) mandates dismissal on the debtor’s request by using the words “at any time” and “shall.” It only limits the debtor’s ability to dismiss cases that have previously been converted to chapter 13 from chapters 7, 11, or 12. This court should not use § 105(a) to rewrite the mandatory provisions of § 1307(b).23
The interplay of § 1307(b) with the Rules of Bankruptcy Procedure lends support to that conclusion. Fed. R. Bankr. P. 1017(f)(2) governs a debtor’s request to dismiss under § 1307(b) and provides that "... dismissal under ... § 1307(b) shall be on motion filed and served as required by Rule 9013.” That rule provides the means for serving a “request for an order,” but doesn’t provide for other parties having an opportunity to object. Rule 1017(f)(1) governs a motion to convert under § 1307(c), providing that such a motion shall be treated as a contested matter under Rule 9014 which, in turn, requires that parties be served with notice under Rule 7004, be granted an opportunity to object, and be given a hearing. Rule 1017(f)(2) contemplates that a debtor’s § 1307(b) dismissal motion should be granted out of hand.24
There is no binding Tenth Circuit precedent on the question of whether a debtor’s § 1307(b) unconditioned right to dismiss is trumped by the court’s § 1307(c) power to convert a case in the best interests of the creditors. Other circuits are split on the issue.25 But a close reading of the statutory language and applicable rules, considered with the very different policies that animate chapters 13 and 7, convinces me that the debtor has the better argument and that his request to dismiss this case must be honored.26
*885The Second Circuit has adopted this view. In 1999, the Second Circuit Court of Appeals held that a chapter 13 debtor’s voluntary request to dismiss must be granted even when a creditor seeks conversion instead.27 The Barbieri court noted § 1307(b)’s use of the words “at any time” and “shall,” and concluded that “shall” is mandatory and leaves no discretion to a court.28 It also observed that the only exception to voluntary dismissal is found in subsection (b) itself — if the debtor previously converted to chapter 13 from another chapter, the request need not be granted.29 The Second Circuit also compared the use of “shall” in § 1307(b) to “may” in (c), the section that permits the court to convert or dismiss a chapter 13 case for cause. When “may” and “shall” are used in the same statute, “the normal inference is that each is used in its usual sense — the one act being permissive, the other mandatory.”30 The Barbieri court concluded that this reading of § 1307(b) reflected Congress’s intent to create an entirely voluntary chapter of the Code. If creditors wish to force debtors into bankruptcy, they have recourse to § 303, but they must comply with many more requirements than “simply showing cause.”31 Finally, presaging the Supreme Court’s subsequent statements in Law v. Siegel, the Barbieri court noted that § 105(a)’s equitable powers “are not a license for a court to disregard the clear language and meaning of the bankruptcy statutes and rules.”32 There being other available means to remedy abuse of the bankruptcy process, including an involuntary proceeding, sanctions, or making a criminal referral to the proper authorities, depriving the court of the power to convert in the face of a dismissal request by no means strips it of the tools it needs to sanction debtor misconduct as part of the dismissal.33 Numerous bankruptcy courts have followed Barbieri’s plain language approach to voluntary dismissals under § 1307(b), both before and after Marrama.34
*886The Fifth, Eighth, and Ninth Circuits have adopted the contrary view. Both the Fifth and Ninth Circuits have held that Barbieri’s conclusions were abrogated by Marrama. In In re Jacobsen, the case relied upon by the trustee, the Fifth Circuit held that when a debtor has acted in bad faith or abused the bankruptcy process, the case may be converted despite the debtor having made a § 1307(b) motion for dismissal.35 Deeming the absolute dismissal right an “escape hatch” for abusive debtors, the Fifth Circuit concluded that Marrama’s rejection of the “absolute right” to convert in § 706(c) applied equally to § 1307(b), and commented that there was no “analytical distinction” between the two subsections. The court also reasoned that, because a debtor who has been converted to chapter 7 need not commit her post-petition earnings to any form of repayment, she runs no risk of involuntary servitude.
In re Molitor was a pre-Marrama case in which the Eighth Circuit employed similar reasoning to convert a repeat chapter 13 debtor’s filing to chapter 7 over his protest without considering § 105(a). It emphasized that bankruptcy affords the honest but unfortunate debtor a fresh start, but does not grant wrongdoers a shield from paying their debts.36 Because the debtor had not acted in good faith, he could not be permitted to bail out of bankruptcy rather than face its consequences. In In re Rosson, the Ninth Circuit applied Marrama’s reasoning to deny the debtor’s request to dismiss in a similar situation. It stated that in the proper circumstances, the court could deny a request to dismiss on grounds of the debtor’s bad faith conduct or to ■ prevent an abuse of process under § 105(a).37 Issued in 2010, Jacobsen is the last reported Circuit authority on this issue.
Other courts have recognized Law v. Siegel’s limitations on Marrama and declined to fashion equitable relief that contravenes express provisions of the Code.38 In In re Fisher,39 the bankruptcy court concluded that denying a § 1307(b) motion to dismiss for bad faith would be, in effect, rewriting its express language:
It is the discord between a debtor’s right to dismiss under Section 1307(b), allegations of bad faith, and a creditor’s motion to convert that this Court now addresses, particularly in light of the impact of Law v. Siegel, which speaks to the Bankruptcy Court’s power to fashion equitable relief in the presence of express statutory language that instructs otherwise.
The Court’s role is not to redraft the statute, even if it perceives a need to deter and remedy a debtor’s bad-faith conduct in advance of a motion under 11 *887U.S.C. § 1307(b). Law is instructive in that regard ...
Given the guidance in Law, the right of the debtor to request a bankruptcy court to dismiss an unconverted Chapter 13 case becomes even more compelling. If this Court were to refuse to grant the Debtor’s request ... it would exceed its authority by acting in direct contravention of the express terms of Section 1307(b). This Court declines to do so.40
I concur with these well-stated comments and conclude that Barbieri and the courts that follow it correctly interpret and apply § 1307(b). Law v. Siegel precludes bankruptcy courts from crafting a bad faith exception to a chapter 13 debtor’s voluntary dismissal. Chapter 13 is a voluntary remedy only; in the absence of specific statutory direction, a debtor should be able to exit without risking being subjected to involuntary liquidation without the due process, protections afforded involuntary debtors by § 303. If a debtor commits sanctionable wrongdoing in the course of the case, the court has’ many means of addressing that other than forced liquidation premised on a shaky legal foundation. Section 1307(b) grants a chapter 13 debtor the absolute right to voluntarily dismiss his case at any time.
Conclusion and Orders
The Court GRANTS Ryan Mills’ motion to voluntarily dismiss his chapter 13 case under § 1307(b) and DENIES as MOOT the motion of the trustee, Jason Appell, Kevin Law, Robert Law, and Kanza Bank to convert under § 1307(c). The case is DISMISSED.
SO ORDERED.
SIGNED this 29th day of October, 2015.
. Dkt. 65.
. The ¡debtor Ryan Mills appeared in person and by his attorney Mark J. Lazzo. The chapter 13 trustee Laurie B, Williams appeared by her attorney Karin Amyx. The Law creditors appeared by their attorney Tom Gilman. Chris Borniger briefly appeared for creditor Kanza Bank but requested to be excused from participation in the proceedings and the Court granted that request.
. Debtor’s Ex. C.
. Ex. 27, 29. Mills organized a third entity post-petition named RDM Development, LLC. See Ex. 32. According to Mills, this new entity was his construction business post-petition.
. This is clear from some of the proofs of claim filed in the case.
. Ex. 24 shows that CSD was organized in 2011 with McGill and Mills as its initial members. According to McGill, he owned 51% of CSD and Mills owned 49%.
. Nor could he have; though the record is cloudy on this point, Mills doesn’t appear to have held more than 49% of CSD at that time.
. The extra $6,000 is euphemistically described in the instrument as "10% interest.”
. See Ex. 105, pp. 147-176 — original Operating Agreement for UP executed July 17, 2014. How or why Mills retained this interest was not éxplained at trial.
. Ex. 105, pp. 275-89, 304-06.
. An operating agreement for UP was executed by the members of UP on September 4, 2014 showing these revised interests. See Ex. 110.
. This change was allegedly negotiated and agreed upon by the parties notwithstanding an "entireties clause” in the asset purchase agreement. See Ex. 105, p. 285, ¶ 11. No written document that memorialized this oral agreement or modified the asset purchase agreement was produced at trial.
.' Mills disclosed the sale'and transfer of this interest in his Statement of Financial Affairs, Questions 2 and 10.
.Ex. 32.
. The trustee initially joined this view, but her counsel abandoned that position at trial.
. See 11 U.S.C. § 1307(b), emphasis added.
. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007).
. Id. at 374-75, 127 S.Ct. 1105.
. Id. at 375, 127 S.Ct. 1105.
. -U.S.-, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014).
. 134 S.Ct. at 1197.
. Id.
. Law v. Siegel, - U.S. -, 134 S.Ct. 1188, 1194-95, 188 L.Ed.2d 146 (2014). See also Scrivner v. Mashburn (In re Scrivner), 535 F.3d 1258, 1263 (10th Cir.2008) (Bankruptcy court’s equitable powers under § 105(a) may not be used to contravene or disregard the plain language of a statute or exercised in a manner that is inconsistent with specific provisions of the Code.); In re Alderete, 412 F.3d 1200, 1207 (10th Cir.2005): In re Hedged-Investments, 380 F.3d 1292, 1298 (10th Cir. 2004); In re Alternate Fuels, Inc., 789 F.3d 1139, 1146-49 (10th Cir.2015).
. See Alan N. Resnick and Henry J. Sommer, 8 Collier on Bankruptcy, ¶ 1307.03 at 1307-9 (16th Ed.2015) ("... because there is no right to contest the dismissal, the procedures of Bankruptcy Rule 9013, rather than Bankruptcy Rule 9014, are followed. No hearing is required.”).
. See In re Jacobsen, 609 F.3d 647 (5th Cir. 2010) (chapter 13 debtor's right to voluntarily dismiss case is not absolute and may be de- . nied on grounds of bad faith conduct and provide cause for conversion); In re Rosson, 545 F.3d 764 (9th Cir.2008) (same); In re Molitor, 76 F.3d 218 (8th Cir.1996) (same); In re Barbieri, 199 F.3d 616 (2nd Cir.1999) (chapter 13 debtor has absolute right to dismiss so long as order converting case to chapter 7 has not been entered). All of these cases were decided prior to Law v. Siegel.
.The interpretation of a bankruptcy statute is a question of law. The inquiry begins with the language of the statute itself and courts must presume that Congress says in a statute what it means and means in a statute what it says. If the language of the statute is unambiguous, the plain and ordinary meaning of the statute controls and the judicial inquiry is complete. In re McGough, 737 F.3d 1268, 1272-73 (10th Cir.2013); In re Mallo, 774 F.3d 1313, 1317, 1327 (10th Cir.2014). See also United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
. Barbieri v. RAJ Acquisition Corp. (In re Barbieri), 199 F.3d 616 (2nd Cir.1999).
. Id. at 619.
. Id.
. Id. at 620, internal citation omitted.
. Id.
. Id. at 620-21, citing Official Comm. of Equity Sec. Holders v. Mabey, 832 F.2d 299, 302 (4th Cir.1987).
. See 11 U.S.C. § 349(a); 11 U.S.C. § 109(g)(1) and (2); Fed. R. Bankr. P. 9011. See e.g., Ross v. AmeriChoice Federal Credit Union, 530 B.R. 277 (E.D.Pa.2015) (dismissal with prejudice and debtor enjoined from filing future cases without permission from bankruptcy court); In re Winder, No. 10-07070-TOM13, 2011 WL 2620992 (Bankr. N.D.Ala. July 1, 2011) (voluntary dismissal conditioned under § 109(g)(1) with 180-day refiling bar for failure to comply with confirmation order to provide tax return to trustee); In re Hasan, 287 B.R. 308 (Bankr.D.Conn. 2002) (after voluntary dismissal of case, bankruptcy court assessed attorney fees against debtor for offensive conduct during the case); In re Polly, 392 B.R. 236 (Bankr.N.D.Tex. 2008) (§ 349 permits the court to dismiss the case with prejudice to refiling and the court may reserve the matter of sanctions under Rule 9011 following dismissal).
.See Ross v. AmeriChoice Federal Credit Union, 530 B.R. 277 (E.D.Pa.2015) (debtors right to dismissal under § 1307(b) is absolute, but court has the power to impose restrictions on debtor’s refiling); Johnston v. Johnston, 536 B.R. 576 (D.Vt.2015) (following Barbieri, the controlling Second Circuit authority); In re Procel, 467 B.R. 297 (S.D.N.Y.2012) (applying Barbieri), In re Dulaney, 285 B.R. 10 (D.Colo.2002) (concluding chapter 13 debtor has absolute right to dismiss under the clear language, history and purpose of § 1307(b)); In re Thompson, No. 10-23017, 2015 WL 394361 (Bankr.E.D.Ky. Jan. 29, 2015); In re Darden, 474 B.R. 1 (Bankr.D.Mass.2012); In re Williams, 435 B.R. 552 (Bankr.N.D.Ill. 2010); In re Neiman, 257 B.R. 105 (Bankr. S.D.Fla.2001); In re Patton, 209 B.R. 98 (Bankr.E.D.Tenn.1997); In re Greenberg, 200 *886B.R. 763 (Bankr.S.D.N.Y.1996) (noting that the language of § 1307(b) is "too clear to read other than as an absolute command," but the court can impose conditions and sanctions in the dismissal order); In re Harper-Elder, 184 B.R. 403 (Bankr.D.D.C 1995) (§ 1307(b) is mandatory — "shall” really means "shall.”); In re Looney, 90 B.R. 217 (Bankr.W.D.Va.1988); In re Turiace, 41 B.R. 466 (Bankr.D.Ore.1984); In re Gillion, 36 B.R. 901 (E.D.Ark.1983). See also Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 330.1, Sec. Rev. June 16, 2004, www.Chl3online.com, for discussion and cases regarding absolute right to convert.
. 609 F.3d 647, 660 (5th Cir.2010).
. 76 F.3d 218 (8th Cir.1996).
. 545 F.3d 764 (9th Cir.2008).
. Law v. Siegel, - U.S. -, 134 S.Ct. 1188, 1194, 1197, 188 L.Ed.2d 146 (2014).
. No. 14-61076: 2015 WL 1263354 (Bankr. W.D.Va. Mar. 19, 2015). '
. 2015 WL 1263354 at *2, *6. See also Ross v. AmeriChoice Federal Credit Union, 530 B.R. 277, 287-88 (E.D.Pa. May 5, 2015) (citing Law v. Siegel and distinguishing Marrama); In re Williams, 435 B.R. 552 (Bankr.N.D.Ill. 2010) (distinguishing Marrama; cited with approval in In re Fisher). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498811/ | MEMORANDUM OPINION ON AMOUNT OF CLAIM
Michael G. Williamson, Chief United States Bankruptcy Judge
More than three years ago, a state court denied Branch Banking & Trust’s attempt to foreclose its mortgage on the Debtor’s property because the state court determined BB & T had improvidently declared a default. Now, as part of its claim in this bankruptcy case, BB & T seeks to recover interest that accrued on its loan while its foreclosure action was pending, as well as attorney’s fees and costs incurred after the *889adverse judgment but before the petition date. BB & T also claims interest that has accrued (at the contractual default rate) since it declared a second default six months ago when the Debtor failed to pay the note in full on the maturity date. The parties have filed cross-motions for summary judgment seeking a determination of the amount of BB & T’s claim as a matter of law.
The Court concludes BB & T is not entitled to accrued interest or attorney’s fees and costs as a matter of law. The state court judgment plainly provides that the loan would be reinstated nunc pro tunc to the day before the default was declared and that no “accrued principal and interest payments” would be due. And because BB & T orchestrated a default for its own benefit, it would be improper to award BB & T fees incurred in enforcing its promissory note in state court (even post-judgment). There is a question of fact, however, as to whether BB & T is entitled to post-maturity default interest because it is unclear whether BB & T prevented the Debtor from timely tendering the required balloon payment. Accordingly, the Court will grant the Debtor’s motion for summary judgment as to accrued interest and attorney’s fees and costs as a matter of law but deny the summary judgment motion as to the post-maturity interest without prejudice.
Undisputed Facts
Despite years of contentious litigation between the parties, the facts of this dispute are, for the most part, uncontested and relatively straightforward. The Debt- or operates a storage facility and flex commercial space known as Causeway Self Storage. It developed the storage facility using nearly $5.2 million in funding from Colonial Bank in 2006.1 In exchange, the Debtor gave Colonial Bank a $5.2 million note, with a five-year balloon payment, secured by a mortgage on the storage facility.2 Three years later, Colonial Bank went into receivership, and the FDIC sold substantially all of its assets — including the Debtor’s loan — to BB & T.3 In January 2010, just months after it acquired Colonial Bank’s assets, BB & T sued to foreclose its mortgage on the Debtor’s storage facility, claiming the Debtor’s loan was in default.
But Judge William Levens, the state court judge who presided over the foreclosure action, ruled against BB & T at the conclusion of a March 1-2, 2012 bench trial.4 After considering the evidence at trial, Judge Levens found that the Debtor, in fact, had a long and unblemished record of good-faith payments and that a bona fide default never occurred.5 According to Judge Levens, BB & T improvidently initiated a default to maximize collection from the FDIC under a loss-share agreement.6 Because he concluded BB & T breached its duty of good faith and fair dealing to the Debtor, Judge Levens determined BB & T’s foreclosure claim should be denied in its entirety.7
*890So on May 18, 2012, Judge Levens entered a final judgment ordering the Debt- or’s loan reinstated as of June 80, 2009, as well as extending the maturity date fourteen months (presumably to account for the time the parties were in litigation), as follows:
It is therefore ORDERED and ADJUDGED that the loan and all loan documents be reinstated nunc pro tunc to June 80, 2009 (i.e., pre-“default”). The terms of the loan and the loan documents shall remain in effect as they would have as of that date. The maturity of the loan is extended fourteen months from the effective date of this order. As there was no “default,” there are no accrued principal and interest payments due from Defendants. Rather, Defendants will pick up payments where such payments left off in June 2009 (after such principal is credited with all such amounts as detailed below).8
The final judgment required BB & T to credit the Debtor for payments the state court receiver made to BB & T and any payments the state court receiver received from the Debtor.9 Under the final judgment, no loan payments were due until the parties agreed on the new principal (after certain credits were applied) and a new payment schedule.10
BB & T appealed the state court judgment. While the appeal was pending, BB & T determined that the principal balance due on the loan as of June 30, 2009— taking into account the credits required by Judge Levens — was $4,799,763.98 and that the new monthly payment on the loan was $30,760.49.11 The Second District Court of Appeal affirmed Judge Levens on eleven of the twelve issues B.B & T raised. on appeal.12 After he was affirmed by the Second DCA, Judge Levens entered an order providing that the effective date of the final judgment was February 28, 2014, which meant the Debtor was required to begin making the $30,760.49 monthly payment beginning on that date and that the new maturity date for the loan was April 28, 2015.13
BB & T does not dispute that the Debt- or made each of the $30,760.49 monthly payments between February 28, 2014 and April'28, 2015. Nor is there any dispute that the Debtor did not pay the note in full by April 28, 2015, although the reason for nonpayment does appear to be in dispute. In any case, on April 30, 2015, two days after the extended maturity date, BB & T filed an action in federal court seeking to foreclose its mortgage on the Debtor’s property.14
The Debtor filed this chapter 11 case to stop BB & T’s foreclosure action.15 Soon after the case was filed, BB & T moved to dismiss the case as a bad-faith filing under Phoenix Piccadilly,16 BB & T also moved to confirm the automatic stay was not in effect because (1) the Debtor had not made adequate protection payments; (2) the case is a bad-faith filing; (3) BB & T was free to pursue claims against guarantors (the Debtor’s principals); and (4) this is a single-asset case, and the Debtor'is mani*891festly and permanently incapable of confirming a plan.17 The Court set the two contested matters for a final evidentiary hearing.
It quickly became apparent to the Court that this case had none of the hallmarks of a typical Phoenix Piccadilly bad-faith filing.18 To be sure, this is a two-party dispute. But the typical Phoenix Piccadilly bad-faith filing involves a debtor who loses a foreclosure case and then files for bankruptcy on the eve of foreclosure to thwart its lender from exercising its in rem remedies. And there are generally other efforts to delay the bankruptcy case. Here, by contrast, the Debtor initially prevailed in the state court foreclosure action, filed this case soon after the district court foreclosure action was filed, and has expeditiously proceeded to confirmation. The only real basis for dismissal or granting stay relief is if there is n,o hope for confirmation within a reasonable period of time.
The Debtor’s ability to confirm a plan within a reasonable time principally turns on two issues raised by BB & T’s motions: (1) the amount of BB & T’s claim; and (2) the value of the Debtor’s property. The Court took evidence on both of those issues during three days of trial.19 Both sides were fully heard on BB & T’s motions at trial and supplemented their arguments as to the amount of BB & T’s claim with cross-motions for summary judgment.20 So the Court has before it the parties’ cross-motions for summary judgment on the amount of BB & T’s claim, and the Court is permitted under Rule 52(c) to enter final judgment on an issue when a party has been fully heard.21
Conclusions of Law
Although the parties both agree that the principal amount of BB & T’s claim as of June 30, 2009 was $4,754,860.26,22 they nonetheless remain more than $2.5 million apart on the total amount of BB & T’s claim. On the one hand, the Debtor says BB & T’s claim is now $4,590,573— $164,287.26 less than it was on June 30, 2009.23 On the other hand, BB & T says its claim is now $7,194,719.63. BB & T has added three components of damages to the agreed principal that accounts for the dispute over the claim amount.
First, BB & T says it is entitled to $1,060,640.25 in accrued interest from June 30, 2009 through April 28, 2015. Second, BB & T says it is entitled to $671,780.48 in attorney’s fees and costs. Third, BB & T ' says it is entitled to $410,350.50 in default interest since April 28, 2015. The Court concludes that BB & T is not entitled to accrued interest or attorney’s fees as a matter of law.
*892
BB & T is not entitled to accrued interest.
The dispute over whether BB & T is entitled to accrued interest centers on one sentence in Judge Levens’ final judgment: “As there was no ‘default,’ there are no accrued principal and interest payments due from Defendants.”24 According to the Debtor, that language plainly precludes BB & T’s claim to interest that accrued from June 30, 2009 through the effective date of the judgment.25 BB & T, for its part, makes a grammatical argument that the plain language does not preclude a claim for accrued interest.26 To the contrary, the Court concludes the plain language of Judge Levens’ final judgment mandates that BB & T is not entitled to accrued interest from June 30, 2009 through the effective date of the final judgment.
The final judgment specifically provides that the loan is to be reinstated “nunc pro tunc” to June 30, 2009.27 “Nunc pro tunc,” of course, is Latin for “now for then.”28 The final judgment also provides that the Debtor “will pick up payments where such payments left off in June 2009.”29 A reasonable interpretation of the simple phrase “nunc pro tunc,” then, is that when the loan payments recommenced, the reinstatement would be now (i.e., the effective date of the judgment) for then (i.e., June 30, 2009). To interpret the phrase “there are no accrued principal and interest payments due” to require an accrual of interest—aside from being contrary to the language of the judgment on its face—would render the phrase “nunc pro tunc” superfluous and meaningless.
It is worth noting that this Court’s interpretation of Judge Levens’ order is consistent with BB & T’s same understanding at the time the judgment was entered. On October 8, 2012, BB & T filed a motion seeking to compel compliance with a final judgment that Judge Levens entered six months earlier. In that motion, BB & T stated that the adjusted loan balance to be amortized “omits and excuses approximately twenty-five (25) months of interest provided for under the Loan Documents from the date that the Obligors stopped paying on the Obligation until the judgment date.”30 In a second motion, one filed on December 20, 2013 in which BB & T sought to establish an effective date of the final judgment and the final amount that was due on the loan, BB & T did not claim any amounts for accrued interest after June 30, 2009.31
A colloquy between Judge Levens and BB & T’s counsel at a February 13, 2014 hearing on BB & T’s second motion is illuminating:
Court: Well at some point we have to— we have to have a new starting line. And use the old NASCAR adage, you know, we have had a wreck, they have cleaned up the track, and now it is time to restart the race. So just from a simplistic standpoint, when do you propose that we restart the race?
Counsel: Because the other interest that is listed is what is in the loan history that is admitted into evidence at trial. It is not anything that has been added posttrial which we—other than that *893one month because that is based on the language of the judgment itself only because what was admitted into evidence ended on May 29 of 2009. That is the only difference. And in the response, I pointed to the page and the exhibit number that is on. So to talk about—
Court: Well, again, I am going to shoot from the hip or from memory or whatever, but it seems to me like what I was trying to do is basically freeze things. I did not want all kinds of — I didn’t think it was fair while both sides were battling it out on appeal to continue running up additional interest.
Counsel: Correct.
Court: Basically, just put things back to status quo.
Counsel: Yes, and that is what the accounting—
Court: Restart the—
Counsel: That is what the accounting that the bank filed—
Court: Does.
Counsel: —does. I mean, it is only interest that was listed through May 2009, and then the judgment itself says through June 2009. So as the one month based on the per diem that was already in the record. And it stated in the accounting—
Court: So you are not trying to tack on—
Counsel: It is that seven—
Court: —interest during all this—
Counsel: No. There is no interest added on for the entire— from June 2009 through today, there is no interest added on in this accounting that was filed with the court.32
BB & T, however, says it is not judicially estopped by its earlier statements from taking the position here that it is entitled to accrued interest.33
While that may be the case, BB & T’s earlier statements — made around the time Judge Levens issued his final judgment and other related orders — are certainly probative as to the meaning of the phrase “there are no accrued principal and interest payments due.” It is true that BB & T has taken the position in the district court litigation and this bankruptcy case, as well as various estoppel letters sent to the Debtor, that it has a claim for accrued interest. But BB & T’s after-the-fact litigation position in the district court litigation and this case is hardly relevant to the Court’s determination of how to interpret Judge Levens’ final judgment. Accordingly, the Court concludes that BB & T is not entitled to any accrued interest.
BB & T is not entitled to attorney’s fees.
BB & T also seeks entitlement to $671,780.48 in attorney’s fees and costs. The Debtor contends BB & T is not entitled to prevailing party attorney’s fees because it plainly did not prevail in the state court foreclosure action.34 In fact, the Debtor points out that neither Judge Le-vens nor the Second District Court of Appeal has ever determined BB & T was the prevailing party.35 That argument is somewhat misplaced, however, since BB & T claims it is entitled to attorney’s fees and costs incurred after the state court final judgment under paragraph 9 of the promissory note, which provides that the Debtor is obligated to pay BB & T all costs it incurs enforcing the note.36 The Court concludes that BB & T is not enti-*894tied to attorney’s fees and costs under paragraph 9 of the note.
The First District Court of Appeal’s decision in RJ & RK, Inc. v. Spence, where the court reversed a trial court fee award under similar circumstances, is instructive.37 The plaintiff in that case, Kimberly Spence, was the personal representative of Ronald Keeton’s estate. Keeton held a mortgage on property owned by RJ & RK, Inc. Keeton also owned a company called Keeton Correctional Institutions (KCI), which leased RJ & RK’s property to operate halfway houses. Keeton and RJ & RK agreed that KCI’s monthly rent payments would be used to make RJ & RK’s mortgage payments. After Keeton died, however, Spence directed KCI to stop making the monthly rent payments, which caused RJ & RK to default on the mortgage. Then she sued to foreclose the mortgage. Because Spence had essentially orchestrated the default (by preventing KCI from making the mortgage payments), the trial court denied her right to accelerate the mortgage, but it did award her the balance due on the mortgage, as well as the attorney’s fees and costs she incurred.38
On appeal, the First District Court of Appeal reversed the fee award.39 At the outset, the court made clear the fee provision at issue did not condition an award of fees on Spence prevailing in the action but instead permitted feés incurred enforcing or collecting an obligation. And while the court initially observed that it ordinarily lacked discretion to decline enforcement of a contractual fee provision, it did recognize an exception in cases where the conduct of a mortgagee bars acceleration of a mortgage.40 According to the First District Court of Appeal, Spence (as the mortgagee) caused the mortgagor’s default, so the trial court correctly concluded she was not entitled to accelerate the mortgage, and as a consequence, Spence was not entitled to fees for enforcing the note.41
The same is true in this case. Like the trial court in Spence, Judge Levens expressly found that BB & T had orchestrated a default and denied BB & T the right to accelerate the note or foreclose its mortgage.42 Because Judge Levens found that BB & T’s inequitable conduct barred it from accelerating its note and foreclosing its mortgage, this Court concludes it would be improper to award BB & T the fees incurred enforcing its note.
There is a factual issue whether BB & T is entitled to post-maturity interest at the default rate.
BB & T claims it is entitled to $410,350.50 in post-maturity interest at the default rate because the Debtor failed to pay the note in full by the maturity date. The Court is sympathetic to the Debtor’s argument that BB & T declared a premature default.43 It does appear, as the Debtor argues, that the five-day grace period in the note applies to the final balloon payment just the same as it does any other monthly payment.44 And there is no question BB & T, which admittedly contends the grace period does not apply to the balloon payment, did not wait five days before suing to foreclose its mortgage.45 But the Debtor fails to cite any authority *895for the proposition that a premature declaration of default discharges its obligation to pay post-maturity interest where it never tendered payment within the five-day cure period.46
The Court, however, does have some concern that BB & T arguably prevented the Debtor from tendering the balloon payment. As a practical matter, the only way the Debtor (whose sole asset is the storage facility) could have tendered the final balloon payment is if it could have sold the storage facility or refinanced it. In either case, the Debtor would have needed an estoppel letter from BB & T. It is undisputed that the Debtor requested and received several estoppel letters from BB & T, and in each case, the estoppel letter overstated the amount due on the loan (either by $2.3 million or $4.7 million depending on the estoppel letter).47
Florida courts have held, in a variety of contexts, that the refusal to accept a proper tender will prevent the collection of interest because the failure to receive payment is due to the promisee’s own action: Here, there is a question of fact whether BB & T’s failure to provide an accurate estoppel letter prevented the Debtor from tendering the actual amount due on the note or if BB & T would have accepted a tender of the correct amount due if the Debtor could have raised the funds absent a proper estoppel letter.
In those cases the tender of performance will not operate as a discharge of the debt nor does the refusal to accept the money tendered operate as a discharge of the debt. However, the refusal to accept a proper tender will prevent the collection of interest or other damages because the failure to receive payment is due to the . promisee’s own action.48
The Court realizes it previously discouraged parties from putting on evidence regarding the estoppel letters. But in light of the argument about post-maturity default interest, the estoppel letters and the effect they had, if any, on the Debtor’s ability to fund the balloon payment is relevant. Accordingly, the Court will decline to rule whether post-maturity default interest is recoverable as a matter of law and consider additional evidence (and argument) on that issue at the December 30, 2015 confirmation hearing.
Conclusion
There is no dispute that the Debtor owed $4,754,860.26 as of June 30, 2009 or that the Debtor made $461,407.35 in payments from February 28, 2014 through April 28, 2015.49 Because the Court has concluded that BB & T is not entitled to accrued interest as a matter of law, $164,287.26 of those payments should be applied to reduce the outstanding principal to $4,590,573.00. BB & T is not entitled to any attorney’s fees or costs incurred from the judgment through the petition date. But there is a question of fact whether BB & T is entitled to post-maturity default interest.50 The Court will grant partial *896summary judgment on the Debtor’s motion for summary judgment on these issues and enter a separate order sustaining the Debtor’s objection to BB & T’s claim for accrued interest and attorney’s fees and costs as a matter of law but overrule the objection to the post-maturity interest without prejudice.
. Doc. No. 129-2.
. Doc. No. 129-1. The terms of the loan provided for interest only payments for the first twenty-four months. Colonial Bank was then supposed to give the Debtor written notice that it was required to begin making principal and interest payments. Id.; Doc. No. 129-2. The Debtor apparently was never given notice it was required to begin making principal and interest payments.
. Doc. No. 129-2.
. Doc. Nos. 129-2 & 129-3.
. Doc. Nos. 129-2 & 129-3.
. Doc. Nos. 129-2 & 129-3.
. Doc. No. 129-3.
. Id.
. Id.
. Id.
. Doc. No. 129-4.
. Doc. No. 129-7. The issue that BB & T prevailed on was a secondary issue and is of no consequence to the current dispute between the parties.
. Doc. No. 129-18.
. Doc. No. 129-24.
. Doc. Nos. 1 & 4.
. Doc. No. 42.
.- Doc. No. 41.
. Doc. No. 115 at 78-81.
. The trial was conducted on September 1, 2015; September 23, 2015; and October 1, 2015.
. Doc. Nos. 129 & 130.
. With one minor exception not relevant here, Federal Rule of Bankruptcy Procedure 7052 incorporates Federal Rule of Civil Procedure 52. Federal Rule of Bankruptcy Procedure, in turn, provides that Rule 7052 ap'plies to contested matters.
. Claim No. 3-1; Doc. No. 129-21. In particular, BB & T contends that the principal balance on the loan was $5,146,773.61 as of June 30, 2009. After crediting the Debtor with $391,913.35 in "Receiver Credits” as required under Judge Levens' final judgment, BB & T recalculated the principal loan balance as $4,754,860.26. Although BB & T credited those payments as of February 28, 2014 (the effective date of the final judgment), the Court’s analysis remains the same.
. Doc. No. 130.
. Doc. No. 129-3.
. Doc. No. 130 at 10-14.
. Doc. No. 129 at 14-19.
. Doc. No. 129-3.
. Black’s Law Dictionary 1097 (7th ed.1999).
. Doc. No. 129-3.
. Doc. No. 129-4 at 4.
. Doc. No. 129-14.
. Doc. No. 129-17 at p. 6, 11. 7-12; p. 14, 1. 4 - p. 15,1. 14 (emphasis added).
. Doc. No. 129 at 24-25.
. Doc. No. 130 at 11-12.
. Id. at 12.
. Doc. No. 129 at 22-23; Doc. No. 1.
. 855 So.2d 642, 644 (Fla. 1st DCA 2003).
. Id.
. Id.
. Id.
. Id.
. Doc. Nos. 129-2 & 129-3.
. Doc. No. 130 at 14-15.
. Doc. No. 129-1.
.Doc. No. 129-24.
. Doc. No. 130 at 14-15.
. Doc. No. 130 at 14; Doc. No. 130-7.
. See, e.g., Multach v. Adams, 418 So.2d 1254, 1255 (Fla. 4th DCA 1982); Fowler v. Gartner, 89 So.3d 1047, 1049 (Fla. 3d DCA 2012).
. Doc. No. 129-21.
. One other issue remains unresolved. In its proof of claim, BB & T claims $288,091.74 in ad valorem taxes and $8,996.40 in real estate taxes. Those amounts are also included in the report by BB & T’s expert. Doc. No. 129-21. The Debtor objects on the basis that BB & T has offered no evidence to support those amounts. Neither party, however, adequately briefed the issued. So the Court will overrule the Debtor’s objection without prejudice and resolve this issue at the December 30 confirmation hearing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498812/ | OPINION AND ORDER OF DISMISSAL WITH PREJUDICE
JOHN S. DALIS, United States Bankruptcy Judge
Pursuant to notice, hearing was held on the Motion to Dismiss (“Motion”) by Defendant Pension Benefit Guaranty Corpo*898ration, with response in opposition by Plaintiffs/Debtors Durango Georgia Paper Company, Durango Georgia Converting Corporation, and Durango Georgia Converting LLC, acting by and through their Liquidating Trustee, National CRS LLC. For the reasons that follow, the Motion is granted, and the Complaint for Equitable Subordination of Claim is dismissed with prejudice.
BACKGROUND
The Pension Benefit Guaranty Corporation (“PBGC”) is a corporation within the Department of Labor, 29 U.S.C. § 1302(a), that administers the federal government’s insurance program for private pension plans under the Employee Retirement Income Security Act of 1974 (“ERISA”), including pension plan terminations under 29 U.S.C. §§ 1301-1461. Here, the PBGC has two disputed claims pending in the underlying bankruptcy case: Claim No. 1576 and Claim No. 1581.
The claims are based on debts related to the defined benefit pension plan (“Pension Plan”) created by the original owner of a paper mill in St. Marys, Georgia (“Mill”) in 1965. As a result of a stock sale in December 1999, the Debtors acquired the Mill and became jointly and severally liable under 29 U.S.C. § 1307(e)(2) for the PBGC pension insurance premiums. This liability is the basis of Claim No. 1576.1
By the time the Debtors’ jointly administered bankruptcy cases were filed in 2002, the Mill had ceased operations. But the Pension Plan did not terminate until March 1, 2004.2 As of that date, the Debtors became jointly and severally liable for the total amount of unfunded benefit liabilities under 29 U.S.C. § 1362(b) (“Termination Liability”), amounting to possibly as much as $55 million (Compl. ¶ 32). This liability is the basis of Claim No. 1581.3
THE COMPLAINT
This adversary proceeding seeks equitable subordination of the PBGC’s claim for the Termination Liability under 11 U.S.C. § 510(c), asserting that the PBGC not only had every opportunity but also was requested numerous times to intervene in the Liquidating Trustee’s nearly eleven-year adversary proceeding seeking to recover the amount of the Termination Liability from the Mill’s previous owners (“Pension Defendants”).4
In that adversary proceeding, the Liquidating Trustee alleged, among other counts, that the Pension Defendants sold the Mill primarily to avoid the Termination Liability, thereby violating ERISA, 29 U.S.C. §§ 1362, 1369. Had the Liquidating Trustee prevailed on the ERISA count (“Pension-Related Claim”), any money recovered would have offset the more-than-50% dilution in distributions to all general unsecured creditors, including the PBGC, if the PBGC’s claim for the Termination Liability is allowed as a general unsecured claim. (See Compl. ¶ 66.)
But the Liquidating Trustee did not prevail. The Eleventh Circuit Court of Appeals affirmed the dismissal of the Pen*899sion-Related Claim, holding that it failed to state a claim because it was brought for the benefit of the unsecured creditors in the bankruptcy cases, not for the benefit of the PBGC. Durango-Georgia Paper Co. v. H.G. Estate LLC, 739 F.3d 1263, 1273 (11th Cir.2014).5
In its opinion, the Eleventh Circuit noted that the PBGC itself could have sued the Pension Defendants for the Termination Liability, but “declined to do so.” Id. at 1272. That opportunity is now permanently foreclosed, the six-year statute of limitations having run. Id. at 1272 n. 24.
The dismissal of the Pension-Related Claim had a collateral consequence as well: the stipulated dismissal of a second adversary proceeding the Liquidating Trustee had filed in 2009 to ensure the Pension Defendants’ ability to satisfy the anticipated judgment under ERISA.6 That second lawsuit sought to avoid the Pension Defendants’ transfer of a $200 million photography collection to the Metropolitan Museum of Art in New York, alleging that the transfer was made while the Pension-Related Claim was pending. The Eleventh Circuit’s ruling that the Liquidating Trustee had no standing to pursue the Pension-Related Claim destroyed the legal basis of the fraudulent transfer claim; hence, the stipulated dismissal.
The Liquidating Trustee now alleges that the PBGC’s refusal to either intervene or bring its own action under ERISA against the Pension Defendants was inequitable conduct that injured the remaining unsecured creditors, requiring equitable subordination of the PBGC’s claim for the Termination Liability. Alternatively, the Liquidating Trustee argues that even if the PBGC’s refusal to either intervene or bring its own action was not inequitable conduct, the resulting injury to the unsecured creditors alone is a sufficient ground for equitable subordination of the claim.
THE MOTION TO DISMISS
I. The Standard Under Rule 12(b)(6).
A complaint may be dismissed for “failure to state a claim upon which relief may be granted.” Fed. R. Civ.P. 12(b)(6).7 To survive a motion under Rule 12(b)(6), the complaint must state a claim that is facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). This standard “does not impose a probability requirement at the pleading stage, it simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of [the necessary element].” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). When the questions at issue are purely legal, “there is no inherent barrier to reaching the merits at the 12(b)(6) stage.” Marshall Cty. Health Care Auth. v. Shalala, 988 F.2d 1221, 1226 (D.C.Cir.1993).
The court “construes the complaint in the light most favorable to the plaintiff and accepts all well-pled' facts alleged in the complaint as true.” Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1260 (11th Cir. 2009). Although the court makes reasonable inferences in the plaintiffs favor, it is not required to draw the plaintiffs infer-*900enees or to accept the plaintiffs legal conclusions. Id. “[Unsupported conclusions of law or of mixed fact and law have long been recognized not to prevent a Rule 12(b)(6) dismissal.” Gonzalez v. Reno, 325 F.3d 1228, 1235 (11th Cir.2003). Ultimately, the court must draw on its judicial, experience and common sense, reading the complaint as a whole, not parsing it piece by piece. Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir.2009).
II. The Complaint Fails to State a Claim.
All the pleaded facts accepted as true, resolution of the Motion to Dismiss turns on three questions of law: first, whether the PBGC’s claim may be equitably subordinated in the absence of inequitable conduct by the PGBC; second, whether the PBGC is an “insider” for the purpose of establishing inequitable conduct,8 and third, whether it was inequitable for the PBGC not to either intervene in the Liquidating Trustee’s lawsuit9 or to bring its own lawsuit against the Pension Defendants.
The answer to each of these questions is no: The PBGC’s claim may not be equitably subordinated in the absence of inequitable conduct; the PBGC is not an insider; and the PBGC’s decision not to either intervene or to file its own action was not inequitable. The Complaint thus fails to state a claim.
But even without these fatal defects, the Complaint still would fail. What the Liquidating Trustee has not shown — and under the circumstances, cannot show — is a causal connection between the PBGC’s decision not to pursue an action against the Pension Defendants and the alleged injury to the other unsecured creditors.
A. The PBGC’s Claim May Not Be Equitably Subordinated in the Absence of Inequitable Conduct.
The bankruptcy court has the power “under principles of equitable subordination [to] subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim.” 11 U.S.C. § 510(c)(1). The phrase “under principles of equitable subordination” indicates congressional intent “at least to start with” the principles of equitable subordination as judicially developed over the decades before the Bankruptcy Code was enacted in 1978. United States v. Noland, 517 U.S. 535, 539, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996); see also Merrimac Paper Co. v. Harrison (In re Merrimac Paper Co.), 420 F.3d 53, 59 (1st Cir.2005) (“[T]he Supreme Court has made clear that in administering [§ 510(c) ], the starting point should be the compendium of judge-made principles of equitable subordination that existed prior to 1978.... ”).
Those judge-made principles include the requirement of the claimant’s inequitable *901conduct, as set out nearly forty years ago by the Fifth Circuit Court of Appeals in Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692 (5th Cir.1977). Described by the United States Supreme Court as “influential,” 517 U.S. at 538, 116 S.Ct. 1524, the Mobile Steel test continues to be applied by “the vast majority” of courts, Enron Corp. v. Springfield Assocs., LLC (In re Enron Corp.), 379 B.R. 425, 433 (S.D.N.Y.2007). Further, it is mandatory authority in the Eleventh Circuit.10
The Mobile Steel test has three prongs:
(i) The claimant must have engaged in some type of inequitable conduct.
(ii) The misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant.
(in) Equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Act.
In re Mobile Steel, 563 F.2d at 699-700 (citations omitted).
The Liquidating Trustee argues that the circumstances here justify equitable subordination of the PBGC’s claim without the misconduct required under the first prong of the Mobile Steel test. In support, the Liquidating Trustee cites In re Friedman’s, Inc., 356 B.R. 766 (Bankr.S.D.Ga. 2006) (Davis, J.), as well as five cases from other jurisdictions. (See PL’s Resp. in Opp’n 11-13, ECF No. 16.) . None of these cases support the Liquidating Trustee’s position.
The issue in all five of the cases from other jurisdictions was whether late-filed tax claims would be subordinated to timely filed unsecured claims. See IRS v. Roberts (In re Larry Merritt Co), 169 B.R. 141 (E.D.Tenn.1994); Crawford v. Green (In re Crawford), 135 B.R. 128 (D.Kan. 1991); In re Cole, 172 B.R. 287 (Bankr. W.D.Mo.1994); In re Elec. Mgmt., Inc., 133 B.R. 90 (Bankr.N.D.Ohio 1991); In re Kragness, 82 B.R. 553 (Bankr.D.Or.1988). These cases were decided under a previous version of the Bankruptcy Code that did not distinguish between timely filed and tardily filed tax claims in the chapter 7 distribution scheme. Compare In re Kragness, 82 B.R. at 556 (quoting previous version of 11 U.S.C. § 726(a)(1)) with 11 U.S.C. § 726(a)(1); see also In re Carpenter, No. 6:05-bk-03334, 2009 WL 5214960, at *4 n. 5 (Bankr.M.D.Fla. Dec. 28, 2009) (noting that previous § 726(a)(1) made no distinction between timely and late claims).
These cases are inapposite. Unlike in the matter here, the question before the court in each of these cases was the congressional intent behind a discrete statutory subsection: “Congress must have intended Section 726(a)(1) to implicitly require a timely filing of priority claims in order to be endued with first priority distribution.” In re Kragness, 82 B.R. at 557.
Only one of the cases applied § 510(c)(1) and the Mobile Steel test. See In re Cole, 172 B.R. at 291. In direct contradiction to the Liquidating Trustee’s argument that inequitable conduct is not required under §' 510(c)(1), the court in Cole specifically found inequitable conduct. See id. (“[T]he court finds the conduct is inequitable under the special circumstances of this case.... ”).
Finally, dispelling any doubt that these decisions are irrelevant here, the Eleventh Circuit Court of Appeals ruled on the same subsection under the previous Code and held that untimely tax claims would not be subordinated. See IRS v. Davis (In re Davis), 81 F.3d 134 (11th Cir.1996) (hold*902ing that untimely filing did not affect priority payment of IRS claim).
■Reliance on Friedman’s is also misplaced. There, the claim at issue was the penalty portion of a consumer fraud class action lawsuit. 356 B.R. at 777. The claimant argued that the claim could not be equitably subordinated because the class action plaintiffs had not acted inequitably. Id. at 770. Instead of applying the Mobile Steel test, Judge Davis determined that the claim should be equitably subordinated under the totality of the circumstances test. Id. at 775.
The Liquidating Trustee reads Friedman’s to say that “the requirement of inequitable conduct may not be mandatory where equity demands claim subordination.” (Pl.’s Resp. in Opp’n 12, ECF No. 16.) But Friedman’s is more narrowly drawn than the Liquidating Trustee suggests. Friedman’s recognized a single exception to Mobile Steel’s requirement of inequitable conduct: penalty/punitive claims.
Distinguishing penalty/punitive claims ’ from compensatory claims, Judge Davis considered that bankruptcy courts traditionally have not favored penalty/punitive claims, 356 B.R. at 771, and that such claims continue to be “treated as suspect,” id. at 775. He noted that in Mobile Steel and subsequent cases in the Eleventh Circuit, the claim at issue was compensatory, so it was “unclear” whether creditor misconduct was required for subordination of penalty/punitive claims. Id. at 774. Judge Davis cited with approval the Seventh Circuit’s view that “case-by-case administration of the Code’s authority for equitable subordination is the right way to deal with all punitive financial claims.” Id. at 775 (quoting In re A.G Fin. Serv. Ctr., Inc., 395 F.3d 410, 414 (7th Cir.2005)). In adopting the case-by-case approach, Judge Davis limited its application: “In the context of penalty/punitive claims, Mobile Steel’s three-prong test should not be applied inflexibly but rather as a non-exclusive list of factors that may be considered.” Id. at 776-77 (emphasis added).
Here, the challenged claim is based on “[s]tatutory liability under 29 U.S.C. §§ 1362,1368 for unfunded [pension] benefit liabilities.” (Case No. 02-21669, Claims Register, POC No. 1581.) The claim is thus compensatory, not punitive.11
I decline to extend Friedman’s to a compensatory claim. Equitable subordination is an “extraordinary remedy.” Holt v. FDIC (In re CTS Truss, Inc.), 868 F.2d 146, 148 (5th Cir.1989). Where, as here, the case “involves actual loss claims by all parties,” a finding of inequitable conduct is required for equitable subordination of the challenged claim. See First Nat’l Bank of Barnesville v. Rafoth (In re Baker & Getty Fin. Servs, Inc.), 974 F.2d 712, 719 (6th Cir.1992) (rejecting Trustee’s argument that “the new test is a standard of overall fairness to be applied on a case-by-case basis, which would allow equitable subordination even in circumstances where no ‘gross misconduct’ has occurred”).
The Liquidating Trustee is thus incorrect that the alleged injury to the unsecured creditors is alone a sufficient ground for equitable subordination of the PBGC’s claim. It must be shown that the PBGC’s conduct was inequitable.
B. The PBGC Is Not an Insider.
“Inequitable conduct has been regarded as a wrong or unfairness or, ‘at the very *903least, a masquerade of something for what it is not.’ ” Jacoway v. IRS (In re Graycarr, Inc.), 330 B.R. 741, 749 (Bankr. W.D.Ark.2005) (citing In re Lifschultz Fast Freight, 132 F.3d 339, 344 (7th Cir. 1997)).
The legal standard for inequitable conduct under the first prong of the Mobile Steel test depends on whether the claimant is an insider or a non-insider. Estes v. N & D Props., Inc. (In re N & D Props., Inc.), 799 F.2d 726, 731 (11th Cir. 1986). The standard of misconduct is lower for an insider claimant than a non-insider claimant. Equitable subordination of an insider’s claim requires conduct that is only “unfair.” Id.
The term “insider” is defined under the Bankruptcy Code. For corporate debtors, insiders include the following individuals and entities:
(i) director of the debtor;
(ii) officer of the debtor;
(iii) person in control of the debtor;
(iv) partnership in which the debtor is a general partner;
(v) general partner of the debtor; or
(vi) relative of a general partner, officer, or person in control of director, the debtor
11 U.S.C. § 101(31)(B)(i)-(vi).
Here, the Liquidating Trustee argues that if misconduct is required, the insider standard should apply, because the PBGC was a “person in control of the debtor” based on the PBGC’s control of the Pension Plan:
[The PBGC] simply displaced [the Debt- or’s] management and the [Pension] Plan administrators when they assumed the obligations of the Plan. And not only did they have the power to control the Plan, in fact they did control it. In fact, [the PBGC] overruled the decision of management to pursue these claims [for the Termination Liability]. So there’s no question that they became in control of the Plan and they supplemented the Debtor.... We want to argue and develop that by being able to take over this segment of the company, they basically essentially became in the position of one in control of that portion of the Debtor and therefore are subject to scrutiny as an insider for purposes of equitable subordination.”
(Oral Argument at 11:12:32-42, Aug. 13, 2015 (emphasis added).)
But the Pension Plan was not a “segment of the company” or a “portion of the Debtor.” The Pension Plan was a separate and distinct legal entity. See 29 U.S.C. §• 1132(d)(1) (“An employee benefit plan may sue or be sued under this sub-chapter as an entity.”); see also Wildbur v. ARCO Chem. Co., 974 F.2d 631, 645 (5th Cir.1992) (“An ERISA plan is a separate legal entity from its sponsor....”); Laurenzano v. Blue Cross & Blue Shield of Mass., Inc. Ret. Income Tr., 191 F.Supp.2d 223, 233 (D.Mass.2002) (same); Allard v. Coenen (In re Trans-Indus., Inc.), 419 B.R. 21, 29 (Bankr.E.D.Mich.2009) (ERISA plan was a separate and distinct entity from the debtor that sponsored and administered the plan); McMullen Oil Co. v. Crysen Ref, Inc. (In re McMullen Oil Co.), 251 B.R. 558, 566 (Bankr.C.D.Cal. 2000) (“[A] pension plan is'a separate legal entity, and this pension plan was not in bankruptcy.”). The PBGC’s control of the Pension Plan thus was not “control of the debtor,” and the insider standard of misconduct for equitable subordination does not apply.
C. The PBGC’s Exercise of Its Statutory Discretion Was Not Inequitable.
The proper standard under which to evaluate the PBGC’s conduct is the more stringent non-insider standard—if *904the PBGC’s conduct may be evaluated at all. Under the permissive language of 29 U.S.C. § 1303(e)(1), the PBGC has the discretion to either pursue or not pursue civil actions, as the Complaint itself avers (Compl. ¶ 72, ECF No. 1). The PBGC argues that these enforcement decisions are presumptively unreviewable by the courts. (Mot. to Dismiss 9-14, ECF No. 10 (citing Heckler v. Chaney, 470 U.S. 821, 105 S.Ct. 1649, 84 L.Ed.2d 714 (1985); Paulsen v. CNF Inc., 559 F.3d 1061 (9th Cir.2009)). I need not reach that question, however, holding instead that if the PBGC’s exercise of its statutory discretion is reviewable, the PBGC’s decision not to either intervene or to pursue its own civil action was not inequitable.
A non-insider claim will not be equitably subordinated unless the movant shows “egregious conduct such as fraud, spoliation or overreaching.” See N & D Props., Inc., 799 F.2d 726, 731 (11th Cir. 1986); see also Schubert v. Lucent Techs. Inc. (In re Winstar Commc’ns, Inc.), 554 F.3d 382, 412 (3d Cir.2009) (same); First Nat’l Bank of Barnesville v. Rafoth (In re Baker & Getty Fin. Servs., Inc.), 974 F.2d 712, 718 (requiring “gross misconduct tantamount to ‘fraud, overreaching or spoliation to the detriment of others’ ”); Riley v. Tencara, LLC (In re Wolverine, Proctor & Schwartz, LLC), 447 B.R. 1, 33 (Bankr. D.Mass.2011) (requiring “[v]ery substantial misconduct involving moral turpitude or some breach or some misrepresentation where other creditors were deceived to their damage ... or gross misconduct amounting to overreaching”).
The conduct alleged against the PBGC does not merely fall short of the non-insider standard; it is not even misconduct. The essence of the Complaint is that the PBGC decided not to either intervene in the Liquidating Trustee’s lawsuit or bring its own lawsuit in spite of knowing full well that this decision would result in a drastic decrease in the amount of assets available for distribution to the general unsecured creditor class. The Liquidating Trustee thus implies that the PBGC breached some duty it owed to the other creditors. See Official Comm. Of Unsecured Creditors v. Morgan Stanley & Co. (In re Sunbeam Corp.), 284 B.R. 355, 364 (Bankr.S.D.N.Y.2002) (“[T]o defeat a motion to dismiss, the facts must allege that the claimant committed fraud or some other illegal action, or that the claimant breached some legal duty that it owed to the debtor or its creditors.” (emphasis added)).
But as a non-insider creditor, the PBGC owed no such duty, whether to the Debtors or to the other creditors. And without other allegations of wrongdoing, it is not misconduct for a creditor to act in its own interest to the detriment of other creditors. See id. (“[A]bsent receipt of a preference or fraudulent transfer, a creditor may ordinarily improve its position in relation to other creditors.”). Accordingly, the PBGC’s exercise of its statutory discretion not to pursue an action against the Pension Defendants is not inequitable conduct under Mobile Steel.
D. There Is No Causal Connection Between the PGBC’s Decision Not to Pursue Legal Action Against the Pension Defendants and the Alleged Injury to the Unsecured Creditors.
“Without a showing of inequitable conduct, the remaining two prongs of the [Mobile Steel] test are not applicable and the [c]ourt cannot subordinate the claim.” Jacoway v. IRS (In re Graycarr, Inc.), 330 B.R. 741, 749 (Bankr.W.D.Ark.2005). Here, the PBGC’s conduct as alleged in the Complaint was not inequitable. The analysis is thus complete under the first prong.
But even if the alleged conduct were inequitable, the Complaint still would fail *905under the second prong of causality. The Liquidating Trustee states as fact that if the PBGC’s claim for the Termination Liability is allowed as a general unsecured claim, the resulting dilution of the distribution to the other unsecured creditors will be “a direct and proximate result of the PBGC’s failure to exercise its discretion to intervene in the litigation against the Pension Defendants.” (Compl. ¶ 66, ECF No. 1.) But this statement is not a fact.
The fact is that no one knows what would have happened if the PBGC had either intervened or brought its own action against the Pension Defendants. The Liquidating Trustee assumes that the PBGC would have won and collected on its judgment. That assumption is pure conjecture, relying on the hypothetical success of a hypothetical action.
This foregone conclusion of certainty in an entirely speculative chain of events has been a hallmark of the Liquidating Trustee’s pleadings from the beginning. In recommending dismissal of the Pension-Related Claim in the Second Amended Complaint against the Pension Defendants eight years ago, I wrote, “A court cannot determine liability for a claim that may or may not arise in the future and is contingent on a chain of events that have not even begun to occur.” Durango-Georgia Paper Co. v. H.G. Estate, LLC (In re Durango-Georgia Paper Co.), Ch. 11 Case No. 02-21669, Adv. No. 04-02275 (Bankr. S.D.Ga. Sept. 24, 2007) (R. & R., ECF No. 90 at 19).
As then, so now, the Liquidating Trustee is traveling under what amounts to a hope and a prayer: the hope that the PBGC would either intervene or bring its own action and the prayer that the PBGC would be successful and collect. But the pleading standard under Iqbal and Twom-bly requires more than a hope and a prayer to survive a motion to dismiss.
If a more carefully drafted complaint might be able to state a claim, the plaintiff should be given the chance to amend. Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1213 (11th Cir.2001). But if the defects in the complaint cannot be cured by amendment, the dismissal should be with prejudice. See id. Here, the defects are incurable.
ORDER
IT IS THEREFORE ORDERED that the Complaint for Equitable Subordination of Claim is DISMISSED WITH PREJUDICE.
. The amount and priority of Claim No. 1576 are in dispute. (Compl. ¶ 31.)
. The termination date was established by agreement between the PBGC and Durango Georgia Paper Company as Pension Plan administrator, by and through the Liquidating Trustee. See Pension Benefit Guaranty Corporation v. Durango Georgia Paper Company, No. 2.-05-CV-00153 (S.D.Ga. Dec. 20, 2006).
. Claim No. 1581 is a general unsecured claim, with only the amount in dispute. (Compl. ¶ 32.)
. See Durango-Georgia Paper Company v. H.G. Estate LLC (In re Durango Georgia Paper Company), Ch. 11 Case No. 02-21669, Adv. No. 04-02275 (Bankr.S.D.Ga. Feb. 4, 2015).
. One year later, the parties stipulated to dismissal of the remaining counts of the adversary proceeding. See Adv. No. 04-02275, EOF No. 163.
. See Durango Georgia Paper Company v. The Howard Gilman Foundation, Inc. (In re Durango Georgia Paper Company), Ch. 11 Case No. 02-21669, Adv. No. 09-02014 (Bankr. S.D.Ga. Feb. 4, 2015).
.Rule 12(b)(6) of the Federal Rules of Civil Procedure is made applicable in bankruptcy by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure.
. In this Circuit, whether a party is an insider is a mixed question of law and fact. Miami Police Relief & Pension Fund v. Tabas (In re The Florida Fund of Coral Gables, Lid.), 114 Fed.Appx. 72, 74 (11th Cir.2005). Here, all facts in the Complaint having been accepted as true, only the question of law remains.
. The Liquidating Trustee does not explain how the PBGC could have recovered as an intervenor since, as the Eleventh Circuit found, the Pension-Related Claim was not brought for the benefit of the PBGC. See Durango-Georgia Paper Co. v. H.G. Estate, LLC, 739 F.3d 1263, 1273 n. 25 (11th Cir. 2014).
If the PBGC could not have recovered as an intervenor, its failure to intervene could not 'possibly have been inequitable conduct. But I need not inquire into the Liquidating Trustee’s theory on the PBGC’s intervention at this juncture, because the Complaint before me also alleges that the PBGC’s failure to file its own lawsuit was inequitable (Compl. ¶ 75, ECF No. 1). Analysis of the PBGC's conduct is thus required regardless of whether the PBGC could have recovered in the Liquidating Trustee's action.
. The Eleventh Circuit has adopted as binding precedent all Fifth Circuit decisions handed down before the close of business on September 30, 1981. Bonner v. City of Prichard, 661 F.2d 1206, 1207 (11th Cir.1981).
. The PBGC initially asserted priority for the claim in part as "[t]axes or penalties owed to governmental units [under] 11 U.S.C. § 507(a)(8).” (POC No. 1581.) However, the PBGC no longer asserts the claim’s priority. {See Compl. ¶ 32, ECF No. 1.) Thus, to whatever extent the claim could have been considered a penalty/punitive claim as initially filed, there is no basis for that identity now. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498813/ | Per Curiam.
John F. Best, Jr. (the “Debtor”) appeals pro se from the bankruptcy court’s February 25, 2015 order granting the motion for judgment on the pleadings filed by Na-tionstar Mortgage LLC (“Nationstar”) on the Debtor’s complaint against Nationstar for alleged violations of the discharge injunction imposed by § 524(a).1 For the reasons set forth below, we AFFIRM.
BACKGROUND
The Debtor filed a chapter 13 petition on November 27, 2012. During the course of the bankruptcy case, the Debtor filed two chapter 13 plans in which he identified Nationstar as a mortgagee but claimed that “no assignment of mortgage exists transferring note from GMAC to Nations-tar so no debt exists.” Nationstar object*4ed to both plans, asserting that it was the holder of a note secured by a mortgage on the Debtor’s property located at. 113 Old Derry Road, Londonderry, New Hampshire, and the plan did not identify the pre-petition arrears owed to Nationstar or provide for the payment of pre-petition arrears. The bankruptcy court denied confirmation of both plans.
On February 6, 2013, the Debtor commenced an adversary proceeding against Nationstar contesting the validity of Na-tionstar’s asserted mortgage. The bankruptcy court set discovery deadlines and scheduled a final pre-trial conference for May 20, 2014. The Debtor failed to appear at the final pre-trial conference on May 20, 2014, however, and the bankruptcy court dismissed the adversary proceeding for failure to prosecute.
In the interim, on April 8,2013, Nations-tar filed a proof of claim asserting a secured claim in the amount of $315,442.72. Nationstar attached to its proof of claim: (1) a promissory note dated November 9, 2006, in the amount of $228,750.00, executed by the Debtor in favor of 1-800-East-West Mortgage Company; (2) a mortgage dated November 9, 2006, executed by the Debtor in favor of Mortgage Electronic Registration Systems, Inc., as nominee for l-800-East>-West Mortgage Company (“MERS”); (3) an allonge to the promissory note dated November 9, 2006, executed by 1-800-East-West Mortgage Company in favor of GMAC Bank; and (4) an assignment of mortgage dated December 7, 2012, executed by MERS in favor of Na-tionstar. The Debtor did not file an objection to Nationstar’s proof of claim.
On January 31, 2014, the Debtor converted the case to chapter 7. On April 29, 2014, the bankruptcy court entered an order discharging the Debtor, and, thereafter, it closed the bankruptcy case.
On July 18, 2014, the Debtor filed a motion to reopen the case, which the bankruptcy court granted on July 24, 2014.
On September 17, 2014, the Debtor again commenced an adversary proceeding against Nationstar, this time seeking damages for alleged violations of the discharge injunction imposed by § 524(a). The Debtor alleged that, after the discharge, he received certified mail from Nationstar on June 27, 2014, June 28, 2014, and June 30, 2014 “demanding money for this discharged alleged debt that never existed....”2 He also alleged that Nationstar *5contacted him by mail on July 26, 2014, July 28, 2014, and August 21, 2014,3 for a total of six “contact violations.” He .asserted that “[t]he alleged debt has been discharged” and that “Nationstar can’t now claim that they have a valid lien as a legitimate reason to start harassing and threating me....” In its answer to the complaint, Nationstar admitted it sent the post-discharge letters to the Debtor, but denied that its actions violated the discharge injunction.
On January 26, 2015, Nationstar filed an amended motion for judgment on the pleadings, asserting the post-discharge letters did not violate the discharge injunction because they included disclaimers indicating they were not attempting to collect a discharged debt from the Debtor, and because § 524(j) provides an exception for creditors holding a claim secured by the debtor’s principal residence where the creditor’s acts are in the ordinary course of business. The Debtor objected, *6arguing that Nationstar did not have a valid lien due to its .alleged failure to file a proof of claim or object to the chapter 13 plan, which listed Nationstar’s mortgage as unsecured, and, therefore, the debt was discharged as an “unsecured debt.”
The bankruptcy court held a hearing on February 24, 2015. At the hearing, the bankruptcy court considered the Debtor’s arguments that Nationstar was not a secured creditor, but pointed out that, contrary to the Debtor’s assertions, the bankruptcy discharge did not impact the presumed validity of Nationstar’s lien. The bankruptcy court explained that the bankruptcy discharge relieved the Debtor from any personal liability on the promissory note and that he had no obligation to repay the note. The discharge did not, however, convert a secured debt into an unsecured debt, nor did it render Na-tionstar’s mortgage invalid. The bankruptcy court also explained that neither Nationstar’s failure to object to the plan nor its failure to file a proof of claim made the mortgage invalid.4 The court stated: “Now, the fact that you said something in a [c]hapter 13 plan about their claim, and we’ll assume they never objected to it, never did anything on it, ... unless the plan goes to completion it’s not going to have any impact on their mortgage.” The court pointed out: “[T]he bankruptcy doesn’t have any impact on the validity of [Nationstar’s] lien.... [T]he lien looks valid on its face so it’s presumed to be valid.”
The bankruptcy court also determined that Nationstar’s actions fell within the exception to the discharge injunction set forth in § 524(j), stating:
But the one [section] that’s important in this case is ... 524(j), which says, ... “This section does not operate as an injunction against an act by a creditor that' is the holder of a secured claim.” And I understand you say they don’t have a secured claim, but if they have a mortgage that hasn’t been declared void and appears to be properly executed and appears to be properly recorded, for this purpose it’s a secured claim until some court says it isn’t.
So the discharge does not act as an injunction against that person if they have a security interest in real property that is the principal residence of the debtor. Well, this was your home so ... that part is satisfied.
Number two, the act is in the ordinary course of business between the creditor and the debtor, so trying to collect money on the mortgage that they’re owed is ordinary course of business. And it says, “Such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursing in rem relief,” which is fancy legal language for foreclosure, “to enforce the lien.” So that if they’re getting in touch with you and saying, look, if you want to talk about payment, we can talk about payment, but if you don’t we’re going to have to foreclose our mortgage, Congress has said in the statute they can do that even after a discharge is entered.
The court went on to say:
[T]he statute says that they can contact you about payment as long as — and not foreclosing their lien as long as they don’t pressure you or try to tell you, you have to pay them money. I’ve looked at *7the letters that are in this record— there’s like five or six of them — and when I look at them they all — I know you think the disclaimer is silly but the disclaimer says, “We’re not trying to collect money. If you’re in bankruptcy you don’t have to pay. We’re just trying to see if you want to pay” because if you wanted to pay them, they might accept that [in lieu of foreclosure]....
But those letters post-discharge and even a letter since you reopened the case — it’s all post-discharge — to the extent they look like that and have those caveats in them, I think come within the statutory exception to violating the discharge injunction. But for the statute it would be a violation, but the statute is there.
Based on the foregoing, the bankruptcy court granted Nationstar’s motion for judgment on the pleadings.
This appeal followed.
JURISDICTION
The Panel has jurisdiction to hear appeals from a final judgment of the bankruptcy court. 28 U.S.C. § 158(a)(1). A bankruptcy court’s determination as to a violation of the discharge injunction is a final order. See United States v. Monahan (In re Monahan), 497 B.R. 642, 646 (1st Cir. BAP 2013) (citing Canning v. Beneficial Me., Inc. (In re Canning), 462 B.R. 258, 263 (1st Cir. BAP 2011), aff'd 706 F.3d 64 (1st Cir.2013)). An order granting a motion for judgment on the pleadings pursuant to Rule 12(c) is a final order. See Lomagno v. Salomon Bros. Realty Corp. (In re Lomagno), 320 B.R. 473, 477 (1st Cir. BAP 2005) (citation omitted). Therefore, the Panel has jurisdiction to hear this appeal.
STANDARD OF REVIEW
The Panel reviews a bankruptcy court’s findings of fact for clear error and its conclusions of law de novo. See Lessard v. Wilton-Lyndeborough Coop. Sch. Dist., 592 F.3d 267, 269 (1st Cir.2010). A bankruptcy court’s entry of a judgment on the pleadings under Rule 12(c) is reviewed de novo. See Curran v. Cousins, 509 F.3d 36, 43 (1st Cir.2007) (citing Aponte-Torres v. Univ. of P.R., 445 F.3d 50, 55 (1st Cir.2006)).
DISCUSSION
I. Motion for Judgment on the Pleadings
A motion for judgment on the pleadings is governed by Rule 12(c), which is made applicable in adversary proceedings pursuant to Bankruptcy Rule 7012. Rule 12(c) provides: “After the pleadings are closed — but early enough not to delay trial — a party may move for judgment on the pleadings.” Fed.R.Civ.P. 12(c). A Rule 12(c) motion for judgment on the pleadings is treated much like a Rule 12(b)(6) motion to dismiss. Curran v. Cousins, 509 F.3d at 43. Like a motion under Rule 12(b)(6), a court will grant a defendant’s Rule 12(c) motion if the pleadings show no set of facts which could entitle the plaintiff to relief. Id.; see also Gray v. Evercore Restructuring L.L.C., 544 F.3d 320, 324 (1st Cir.2008) (“[We] will affirm a ... judgment on the pleadings if the complaint fails to state facts sufficient to establish a claim for relief that is plausible on its face.”).
While a Rule 12(b)(6) motion is “laser-focused on the legal adequacy of the complaint,”- a motion for judgment on the pleadings under Rule 12(c) examines “the undisputed factual record expanded by the defendant’s answer to determine the merits of the claims as revealed in the formal pleadings.” Pimental v. Wells Fargo Bank, N.A., C.A. No. 14-494S, 2015 WL *85243325, *4 (D.R.I. Sept. 4, 2015) (citations omitted). “ ‘In the archetypical case, the fate of such a motion will depend upon whether the pleadings, taken as a whole, reveal any potential dispute about one or more of the material facts.’ ” Pollard v. Law Office of Mandy L. Spaulding, 967 F.Supp.2d 470, 474 (D.Mass.2013), aff'd, 766 F.3d 98 (1st Cir.2014) (quoting Gulf-Coast Bank & Trust Co. v. Reder, 355 F.3d 35, 38 (1st Cir.2004)). Because a Rule 12(c) motion “calls for an assessment of the merits of the case at an embryonic stage, the court must view the facts contained in the pleadings in the light most favorable to the nonmovant and draw- all reasonable inferences” in his favor. R.G. Fin. Corp. v. Vergara-Nuñez, 446 F.3d 178, 182 (1st Cir.2006) (citations omitted). “There is no resolution of contested facts in connection with a Rule 12(c) motion: a court may enter judgment on the pleadings only if the properly considered facts conclusively establish the movant’s point,” Id. (citation omitted). Where a Rule 12(c) motion is based on an affirmative defense, “the facts establishing that defense must: (1) be definitively ascertainable from the complaint and other allowable sources of information, and (2) suffice to establish the affirmative defense with certitude.” Gray v. Evercore Restructuring L.L.C., 544 F.3d at 324 (citation and internal quotations omitted).
When considering a motion for judgment on the pleadings, the court generally may not consider matters outside of the pleadings without converting the motion to one for summary judgment.' Fed.R.Civ.P. 12(d). There are, however, well-recognized exceptiohs to this principle. The court may consider “‘documents the authenticity of which are not disputed by the parties, ... documents central to plaintiffs’ claim; [and] documents sufficiently referred to in the complaint.’” Curran v. Cousins, 509 F.3d at 44 (citation omitted). Thus, “[t]he court may supplement the facts contained in the pleadings by considering documents fairly incorporated therein and facts susceptible to judicial notice.” R.G. Fin. Corp. v. Vergara-Nuñez, 446 F.3d at 182 (citation omitted).
Consequently, when considering Nationstar’s motion for judgment on the pleadings, the bankruptcy court was entitled to look at the pleadings, any exhibits attached to the pleadings, and any documents sufficiently referenced in the pleadings. The bankruptcy court was also entitled to take judicial notice of any entries on the dockets of the main bankruptcy case and the two adversary proceedings and the claims register, not for the truth of the matters contained within those documents but to establish their existence.
II. The Discharge Injunction
Section 524 governs a debtor’s bankruptcy discharge. Section 524(a)(2) provides that a discharge “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any [discharged] debt as a personal liability of the debtor.... ” 11 U.S.C. § 524(a)(2). The discharge injunction “embodies the fresh start policy of the Bankruptcy Code, by which honest but unfortunate debtors are relieved of personal liability for their discharged debts.” Lemieux v. America’s Servicing Co. (In re Lemieux), 520 B.R. 361, 364 (Bankr.D.Mass.2014) (citing Canning v. Beneficial Me., Inc. (In re Canning), 706 F.3d 64, 69 (1st Cir.2013)). “[T]he scope of the injunction is broad, and bankruptcy courts may enforce it through [ ] § 105.... ” In re Canning, 706 F.3d at 69. “[A]ny sanctions imposed for violations [are in] the nature of civil contempt.” Id.
*9“Generally, a discharge in bankruptcy relieves a debtor from all pre-petition debt, and § 524(a) permanently enjoins creditor actions to collect discharged debts.” Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444 (1st Cir.2000) (citations omitted). “The discharge injunction is like a permanent extension of the automatic stay under [ ] § 362(a) of the Bankruptcy Code and thus, includes all types of collection activity such as [ ] letters, phone calls, threats of criminal proceedings or other adverse actions brought about with the purpose of debt repayment.” Delgado Laboy v. FirstBank P.R. (In re Delgado Laboy), A.P. No. 09-00047, 2010 WL 427780 at *5-6 (Bankr.D.P.R.2010) (citations omitted). The discharge injunction, however, does not prohibit every communication between a creditor and debtor — “only those designed ‘to collect, recover or offset any such debt as a personal liability of the debtor.’” In re Gill, 529 B.R. 31, 37 (Bankr.W.D.N.Y.2015) (citations omitted).
“A creditor violates the discharge injunction ... when it (1) has notice of the debtor’s discharge ...; (2) intends the actions which constituted the violation; and (3) acts in a way that improperly coerces or harasses the debtor.” Lumb v. Cimenian (In re Lumb), 401 B.R. 1, 6 (1st Cir. BAP 2009) (citations omitted). “Coercion is assessed under an objective standard, and the issue of whether a creditor acted in an objectively coercive manner is determined on the specific facts of each case.” Bates v. CitiMortgage, Inc. (In re Bates), 517 B.R. 395, 398 (Bankr.D.N.H.2014) (citing Pratt v. Gen. Motors Acceptance Co. (In re Pratt), 462 F.3d 14, 19 (1st Cir.2006)). “The burden of proof is on the former debtor to establish by clear and convincing evidence that [the] creditor violated the post-discharge injunction.” Manning v. CitiMortgage, Inc. (In re Manning), 505 B.R. 383, 386 (Bankr.D.N.H.2014) (citations omitted).
Despite its broad scope, the discharge injunction does not prohibit a secured creditor from enforcing a valid prepetition mortgage lien. In re Canning, 706 F.3d at 69. “Fundamentally, a discharge merely releases a debtor from personal liability on the discharged debt; when a creditor holds a mortgage lien or other interest to secure the debt, the creditor’s rights in collateral, such as foreclosure rights, survive or pass through the bankruptcy.” In re Reuss, No. DT-07-05279, 2011 WL 1522333, at *2 (Bankr.W.D.Mich. April 12, 2011). Thus, “after the automatic stay terminates as to the property, a secured creditor may take any appropriate action- to enforce a valid lien surviving the discharge, as long as the creditor does not pursue in personam relief against the debtor.” Id.
In addition, § 524(j) provides an exception to the discharge injunction for creditors who hold claims secured by the debtor’s principal residence as long as the creditor’s acts are in the ordinary course of business between the debtor and the creditor, and limited to seeking payments in lieu of in rem relief. This section provides:
Subsection (a)(2) does not operate as an injunction against an act by a creditor that is the holder of a secured claim if—
(1) such creditor retains a security interest in real property that is the principal residence of the debtor;
(2) such act is in the ordinary course of business between the creditor and the debtor; and
(3) such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.
*1011 U.S.C. § 524(j). Section 524(j) is formulated in the conjunctive, and, therefore, all three requirements must be met for the exception to apply. In re Lemieux, 520 B.R. at 368. If any of the requirements are not met, the creditor remains subject to § 524(a)(2)’s discharge injunction. Id.
III. Analysis
The fundamental question here is whether the pleadings set forth facts sufficient to establish a plausible claim that Nationstar violated the § 542(a)(2) discharge injunction, and if so, whether the pleadings set forth facts sufficient to establish that the § 524(j)(2) exception applied.
In his complaint, the Debtor identified six communications which he claimed violated the discharge injunction. The' facts surrounding the sending of the correspondence in question, their receipt by the Debtor, and their content are not in dispute. 5 Three of the communications were letters informing the Debtor of a “Dedicated Loan Specialist” who could assist him and answer questions regarding his loan status. A fourth letter informed the Debt- or that Nationstar had placed certain “unapplied funds” into a “suspense account” because the funds were insufficient to be applied as a full payment, and that the total amount required to bring the account current was $149,865.38. All four of these letters included disclaimers at the bottom stating that Nationstar was a debt collector, but if the Debtor was currently in bankruptcy or had received a discharge in bankruptcy, the communication was not an attempt to collect a debt from the Debt- or personally but was provided for informational purposes only.
The fifth letter, which indicated it was being sent as required by the terms of the mortgage, advised the Debtor of his default under the loan documents, the total amount due to cure the default, the due date for the next regular payment, and that failure to cure the default could result in acceleration of the loan and foreclosure proceedings. The first paragraph of the letter was a disclaimer stating that Na-tionstar was a debt collector, but if the Debtor was currently in bankruptcy or had received a discharge in bankruptcy, the communication was not an attempt to collect a debt from the Debtor personally but was provided for informational purposes only. The sixth letter was a mortgage statement containing account information such as the loan number, payment due date, and total amount due. It explained that the amount payable consisted of overdue payments and fees, and it also provided the loan balance and interest rate. The letter included a disclaimer at the bottom stating that the statement was sent for information purposes only and was not intended as an attempt to collect, assess, or recover a discharged debt from the Debtor.
“[C]ontact with the Debtor is not per se prohibited by the discharge injunction. Rather, demands for payment of discharged debts are prohibited.” In re Brown, 481 B.R. 351, 358 n. 10 (Bankr.W.D.Pa.2012). Moreover,
“When a secured creditor retains a lien on the debtor’s property after the discharge, courts have held that it is not per se improper for the secured creditor to contact a debtor to send payment *11coupons, determine whether payments will be made on the secured debt, or inform the debtor of a possible foreclosure or repossession, as long as it is clear the creditor is not attempting to collect the debt as a personal liability.”
In re Culpepper, 481 B.R. 650, 658 (Bankr.D.Or.2012) (citing 4 Collier on Bankruptcy ¶ 524.02[2][b]).
Other than the fact that Nationstar sent the post-discharge correspondence to the Debtor, there is nothing in the pleadings that demonstrated that Nationstar was attempting to collect the discharged debt from the Debtor personally, or that it was demanding or coercing the Debtor to make payment on the account. In fact, all of the correspondence in question contained language stating that if the Debtor was currently in bankruptcy or had received a discharge in bankruptcy, the communication was not an attempt to collect a debt from the Debtor personally but was provided for informational purposes only. Statements of an informational nature, even if they include a payoff amount, are not generally actionable if they do not demand payment. See In re Brown, 481 B.R. at 359 (general informational letters that included a payoff amount but did not demand payment were not violations of the discharge injunction) (citing cases).
Although the existence of disclaimer language will not serve to insulate an otherwise improper demand for payment, these statements made it clear that, because the Debtor had received a bankruptcy discharge, the correspondence was not an attempt to collect the debt from him personally and was provided for informational purposes only in the event he wanted to cure the default in order to prevent foreclosure. In such circumstances, bankruptcy courts have found that the discharge injunction is not violated. See, e.g., In re Bates, 517 B.R. at 399-402; Jones v. BAC Home Loans Servicing, L.P. (In re Jones), A.P. No. 09-50281, 2009 WL 5842122 (Bankr.S.D.Ind. Nov. 25, 2009); see also Pennington-Thurman v. Bank of Am. N.A. (In re Pennington-Thurman), 499 B.R. 329 (8th Cir. BAP 2013). As one bankruptcy court stated, “[e]ven a hypothetical unsophisticated consumer should understand after reading these disclaimers that the [letters were] not demands for payment.” In re Lemieux, 520 B.R. at 366 (citing In re Nordlund, 494 B.R. 507, 517 (Bankr.E.D.Cal.2011) (“[E]ven though the statements contain outstanding payment amounts, payment due dates, payment instructions, and include a payment coupon, the language in each statement indicates that they are not an attempt to collect a discharged debt.”)).
All of the post-discharge correspondence from Nationstar was limited to either, seeking payment on the note so that it would not be forced to foreclose, or for informational purposes only. They did not demand any payment and were not designed to collect or recover any debt from the Debtor. See In re Gill, 529 B.R. at 37 (Bankr.W.D.N.Y.2015). Thus, they do not establish a plausible claim that Nationstar violated the discharge injunction.
Moreover, even if one or more of the letters constituted an act to collect a debt, the facts presented in the pleadings established Nationstar’s § 524(j) defense. First, it is important to note that the Debt- or never raised any factual dispute regarding the second and third elements of § 524(j) — that the letters from Nationstar were sent in the ordinary course of business and were limited to seeking periodic payments in lieu of pursuit of in rem relief — in either his opposition to the motion for judgment on the pleadings or in this *12appeal.6 See 11 U.S.C. § 5240)(2) & (3). The only issue the Debtor has raised regarding § 524(j) relates to Nationstar’s secured status. Thus, the other two issues are waived. In re Canning, 706 F.3d at 70 n. 8 (explaining failure to brief an issue constitutes waiver).
The question then becomes whether there was a real factual dispute about whether Nationstar had a security interest in real property that is the principal residence of the Debtor. See 11 U.S.C. § 5240)(1). The Debtor does not dispute that the real property in question is his principal residence. Rather, he argues that Nationstar did not have a valid mortgage as it never filed a proof of claim or objected to his plan, and the mortgage was then discharged as an unsecured debt. He also challenges the validity of the assignment of the mortgage to Nationstar.
Despite the Debtor’s repeated assertions to the contrary, Nationstar did file objections to both of the plans proposed by the Debtor. In any event, the plans were not confirmed and, therefore, are not binding in any way. In addition, contrary to the Debtor’s assertions, Nationstar did file a proof of claim to which it attached copies of a mortgage, promissory note, allonge, and assignment of mortgage. The Debtor never filed an objection to the proof of claim. Absent an objection, Nationstar’s secured claim is presumed valid. See Fed. R. Bankr.P. 3001(f) (“A proof of claim exe■cuted and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.”). While the Debtor had filed an adversary proceeding contesting the validity of Na-tionstar’s mortgage, the bankruptcy court dismissed that adversary proceeding due to the Debtor’s failure to prosecute. A dismissal of a proceeding for failure to prosecute operates as an adjudication on the merits. See Fed.R.Civ.P. 41(b).7 Thus, despite the Debtor’s protestations to the contrary, the pleadings, as supplemented by the facts susceptible to judicial notice, do not reveal a potential dispute about this material fact; rather, they establish that Nationstar was a secured creditor with a lien on the Property.
In light of the above, we conclude that the bankruptcy court did not err in.granting Nationstar’s motion for judgment on the pleadings.
CONCLUSION
For the reasons set forth above, we AFFIRM.
. Unless expressly stated otherwise, all references to "Bankruptcy Code” or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. §§ 101, et seq. All references to "Bankruptcy Rules” are to the Federal Rules of Bankruptcy Procedure, and all references to "Rules” are to the Federal Rules of Civil Procedure.
. The Debtor did not attach copies of these communications to his complaint. In his motion to reopen, however, he identified these communications by attaching copies of the following:
Correspondence received 6/27/14: Letter dated 6/20/14 informing the Debtor of the name and contact number for a "Dedicated Loan Specialist” to answer any questions regarding his loan status. It contained the following disclaimer: "Nationstar is a debt collector. This is an attempt to collect a debt and any information obtained will be used for that purpose. However, if you are currently in bankruptcy or have received a discharge in bankruptcy, this communication is not an attempt to collect a debt from you personally to the extent that it is included in your bankruptcy or has been discharged, but is provided for informational purposes only.”
Correspondence received 6/28/14: Letter dated 6/23/14 advising the Debtor of his default under the loan documents, the amount of past-due payments, the amount to be paid in order to cure the default, and that failure to cure the default could result in foreclosure. It contained the following disclaimer: “Federal law requires us to advise you that Nationstar Mortgage LLC (“Nationstar”) is a debt collector and that this is an attempt to collect a debt. Any information obtained may be used for that purpose. However, if you are currently in bankruptcy or have received a discharge in bankruptcy, this communication is not an attempt to collect a debt from you personally to the extent that it is included in your *5bankruptcy or has been discharged, but is provided for informational purposes only.” Correspondence received 6/30/14: Letter dated 6/24/14 informing the Debtor that it had placed certain "unapplied funds” into a "suspense account” because the funds were insufficient to be applied as a full payment. It also informed him of the total amount required to bring the account current. It contained the following disclaimer: “Na-tionstar is a debt collector. This is an attempt to collect a debt and any information obtained will be used for that purpose.” The next portion of the disclaimer is illegible on the copy contained in the appendix. It then says: "If this account is active or has been discharged in a bankruptcy proceeding, be advised this communication is for informational purposes only and not an attempt to collect a debt. Please note, however, we reserve the right to exercise the legal rights only against the property securing the original obligation.”
. The Debtor did not attach copies of these communications to his complaint. Nations-tar, however, identified this correspondence in its amended motion for judgment on the pleadings as follows:
Correspondence received 7/26/14: Letter dated 7/11/14 informing the Debtor of a "Dedicated Loan Specialist” to answer any questions regarding his loan status. It contained the following disclaimer: "Nations-tar is a debt collector. This is an attempt to collect a debt and any information obtained will be used for that purpose. However, if you are currently in bankruptcy or have received a discharge in bankruptcy, this communication is not an attempt to collect a debt from you personally to the extent that it is included in your bankruptcy or has
been discharged, but is provided for informational purposes only.”
Correspondence received 7/28/14: Mortgage Loan Statement dated 7/18/14 containing account information such as the loan number, payment due date of 8/1/14, amount due of $140,957.96, and explanation of the amount due. It contained the following disclaimer: “This statement is sent for informational purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code. If this account is active or has been discharged in a bankruptcy proceeding, be advised that this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however Nationstar reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest, only against the property securing the original obligation. If you do not wish to receive this monthly information Statement in the future ... please call....”
Correspondence received 8/21/14: Letter dated 8/14/14 informing the Debtor of a "Dedicated Loan Specialist” to answer any questions regarding his loan status. It contained the following disclaimer: “Nations-tar is a debt collector. This is an attempt to collect a debt and any information obtained will be used for that purpose. However, if you are currently in a bankruptcy or have received a discharge in bankruptcy, this communication is not an attempt to collect a debt from you personally to the extent that it is included in your bankruptcy or has been discharged, but is provided for informational purposes only.”
. Throughout the proceedings, the Debtor repeatedly asserted that Nationstar failed to object to his plan or file a proof of claim. Both of these assertions were incorrect. Nations-tar filed objections to both of the plans presented by the Debtor, and it filed a secured proof of claim with loan documents attached.
. Although the Debtor did not attach any of the communications to his complaint, he referenced them in the complaint, they were essential to his claim, and their authenticity was not disputed. Therefore, the bankruptcy court could consider them when making its determination. See Curran v. Cousins, 509 F.3d at 44; R.G. Fin. Corp. v. Vergara-Nuñez, 446 F.3d at 182.
. In its answer to the complaint, Nationstar pled as an affirmative defense that it "acted in the ordinary course of business” and that its "actions are expressly permitted under the Bankruptcy Code,” although it did not reference § 524(j) specifically.
. Rule 41(b), made applicable to adversary proceedings pursuant to Bankruptcy Rule 7041, provides as follows:
If the plaintiff fails to prosecute [an action] or to comply with these rules or a court order, a defendant may move to dismiss the action or any claim against it. Unless the dismissal order states otherwise, a dismissal under this subdivision (b) ... operates as an adjudication on the merits.
Fed.R.Civ.P. 41(b). Although not specifically set forth in the rule, a court may dismiss a case sua sponte for any of the reasons set forth in Rule 41(b). See Acosta v. Reparto Saman Inc. (In re Acosta), 497 B.R. 25, 33 (Bankr.D.P.R.2013) (citing Cintron-Lorenzo v. Departamento de Asuntos del Consumidor, 312 F.3d 522, 526 (1st Cir.2002)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498815/ | MEMORANDUM
Joan N. Feeney, United States Bankruptcy Judge
I. INTRODUCTION
The matter before the Court is the Motion of East Boston Savings Bank for Relief from the Automatic Stay pursuant to 11 U.S.C. § 362(d)(1) and (d)(2) (the “Lift Stay Motion”). Specifically, East Boston Savings Bank (“EBSB”) seeks to foreclose on real property located at 173B Norfolk Avenue, Boston, Massachusetts; 30-40 Batterymarch Street, Boston, Massachusetts; 261 Marlborough Street, Unit 5, Boston, Massachusetts; and 239 Common*17wealth Avenue, Unit 10, Boston Massachusetts (collectively, the “Four Properties”). It maintains that there is cause for relief from the automatic stay under 11 U.S.C. § 362(d)(1) because BB Island Capital, LLC (“BB Island” or the “Debtor”) cannot adequately protect its interest in the Four Properties, as well as under 11 U.S.C. § 362(d)(2) because the Debtor has no equity in the Four Properties and “no reorganization is reasonably within prospect.” The Debtor opposes the Lift Stay Motion.
The Court heard the Lift Stay Motion on September 16, 2015 and on October 7, 2015 and directed the parties to file supplemental documents. Having reviewed the Lift Stay Motion and the Debtor’s Response, as well as the parties’ supplemental submissions, the Court concludes that the material facts necessary to determine whether EBSB has sustained its burden with respect to the Lift Stay Motion are not in dispute, although circumstances surrounding the stalled development of the property located at 20 Parmenter Street and 244-246 Hanover Street, Boston, Massachusetts (the “Project”) have raised, and likely will continue to raise, considerable controversies among EBSB; Whipple Construction (“Whipple”), Hanover Parmenter Union LLC (“Hanover Parmenter”), and the Debtor because the Four Properties owned by the Debtor are pledged to secure its guaranty of Hanover Parmenter’s debt to EBSB.
II. FACTS
The material facts needed to resolve the Lift Stay Motion are either admitted by the Debtor in its Response to the Lift Stay Motion or set forth in the Verified Complaint and Request for Injunctive Relief it filed against EBSB in the Suffolk Superior Court, Department of the Trial Court on July 30, 2015. The denial of injunctive relief by the Superior Court precipitated the filing of the Debtor’s Chapter 11 case on August 4, 2015.
In 2008, Twenty P. Realty Trust, 244 VFW Trust, and Joseph F. Perroncello (“Perroncello”), who holds a 99% interest in the Debtor and who was the trustee of the two trusts, borrowed $9,570,000.00 from EBSB to finance the Project, which at the time was to consist of 2 buildings located at 20 Parmenter Street and 244-246 Hanover Street and to include 18 residential units, 6-7 retail spaces, and 25 underground parking spaces. Permitting delays in connection with an underground lift for the parking areas and other issues delayed the Project, and Perroncello and the two trusts defaulted on their obligations. The loan matured in 2011 before completion of the Project.
EBSB agreed to refinance the Project, but conditioned the refinancing upon the engagement of Whipple and the conveyance of the Project to a new entity, Hanover Parmenter, whose members are Sil-vermine Development Partners, LLC (“Silvermine”) and the Debtor. Alyson Toombs Worthington (“Toombs”) is the Manager of Hanover Parmenter; Geoffrey Evancic (“Evancic”), an officer of Whipple, was until recently the manager of the Debtor.
On April 13, 2012, EBSB entered into an agreement with Hanover Parmenter for a loan in the amount of $16,423,000.00, some of the proceeds were used to pay off the existing loan. In addition, the two Perron-cello controlled trusts transferred title to the Project to Hanover Parmenter. Hanover Parmenter signed a promissory note in favor of EBSB in the amount of $16,423,000.00, which note was secured by a mortgage on the Project, i.e., the properties located at 244-246 Hanover Street and 20 Parmenter Street.
*18The Hanover Parmenter note was guaranteed by the Debtor1 and the guaranty, which is dated April IB, 2012, was secured by first mortgages on the Four Properties (the “Guaranty”). Titles to the Four Properties were transferred to the Debtor which was formed for the purpose of managing them. In order to pay off existing loans on the Four Properties, EBSB and the Debtor entered into a loan agreement whereby, on April 20, 2012, the Debtor executed a promissory note made payable to EBSB in the amount of $1,741,681.00 and granted EBSB a second mortgage on the Four Properties. On May 4, 2012, the Debtor entered into another transaction with EBSB whereby it borrowed an additional $14,472.33, executed a promissory note, and granted EBSB a third mortgage on the Four Properties. On May 1, 2015, however, EBSB filed a subordination of the first mortgage securing the Guaranty to the April 20, 2012 mortgage and the May 4, 2012 mortgage that was recorded at the Suffolk County Registry of Deeds. The effect of the subordination was to make the April 20, 2012 mortgage the first mortgage, the May 4, 2012 mortgage the second mortgage, and the mortgage securing the Guaranty the third mortgage.
The Debtor’s April 13, 2012 Guaranty of the Hanover Parmenter note was executed by Evancic as “Manager and authorized signatory,” and provides in pertinent part the following:
This Guaranty is an absolute, unconditional and continuing guaranty of the full and punctual payment and performance by the Borrower [Hanover Par-menter] of the Obligations, including any future advances made to Borrower pursuant to the Note and the other Loan Documents, and not of their collectibility only and is in no way conditioned upon any requirement that the Bank first attempt to collect any of the Obligation from the Borrower or any other party primarily'or secondarily liable with respect thereto or resort to any security or other means of obtaining payment of any of the Obligations which the Bank now has or may acquire after the date hereof, or upon any other contingency whatsoever. The obligations of the Guarantor hereunder shall remain in full force and effect until all amounts due pursuant to the Note and the other Loan Documents have been paid in full.
The liability of the Guarantor hereunder shall be unlimited in amount.
(emphasis supplied).
According to the Debtor, EBSB “ran the construction project,” but at present only the building located on Parmenter Street is partially completed and the real estate on Hanover Street is a vacant lot. In September of 2013, due to EBSB’s alleged mismanagement of the Project, Hanover Parmenter and the Debtor demanded that Whipple be terminated and that Hanover Parmenter be allowed to manage the Project, a demand EBSB rejected. Nevertheless, on December 30, 2013, the Debtor executed an “Amendment of Unlimited Guaranty of BB Island Capital LLC.” The amendment contained the parties’ alleged recognition that the loan amount was to be increased from $16,423,000.00 to $18,700,000.00. EBSB submitted the affidavit of Evancic who, while noting that a formal Consent of Members document had not been executed, represented the following:
*19The additional funding was sought by Hanover Parmenter because it had changed its plans for the Project. Mr. Perroncello was aware of the changes to the project and the increase of residential units from 18 to 28 units and he was aware that EBSB would require that BB Island execute the Amendment as part of the increased loan arrangement for the additional funds to complete the additional units.
Prior to my execution of the Amendment, Mr. Perroncello consented to having BB Island execute it and guaranty the increase in the loan amount.
Perroncello, in his affidavit, stated that “I was never made aware of or participated in any vote to amend the Guaranty ... or to modify the underlying loan.” He also stated that no vote took place and that he was not aware of, or signed, any written Consent to amend the Guaranty. In response, EBSB filed another affidavit executed by Evancic to which he attached an email chain demonstrating Perroricello’s awareness that the amount of the loan to Hanover Parmenter was to be increased, although no formal written consent was executed.
The Debtor failed to pay sums due under the April 20, 2012 and May 4, 2012 notes and, on December 8, 2014, EBSB accelerated the loans and demanded full payment. When the Debtor failed to pay, it sent the Debtor notices of its intent to foreclose and to conduct foreclosure auctions. The Debtor and EBSB dispute whether the Debtor paid $600,000 to postpone the auctions of the Four Properties for sixty days.
On July 30, 2015, the Debtor filed its Verified Complaint in the Suffolk Superior Court. Based upon its claims that EBSB controlled and mismanaged the Project, it formulated four counts as follows: Count I — Breach of Fiduciary Duty; Count II— G.L. c. 93A; Count III — Equitable Estop-pel; and Count IV — Injunctive Relief. Specifically, it alleged that EBSB should be estopped from foreclosing on the additional collateral, namely the Four Properties, because of its representations that it would complete the Project. The Superior Court heard the request for preliminary injunctive relief. Its denial of that request precipitated the filing of the Debtor’s bankruptcy petition.
In its Lift Stay Motion, EBSB states Hanover Parmenter defaulted on its obligations to EBSB by, among other things, failing to make payment as and when due, adding that the Hanover Parmenter loan matured on May 1, 2015. According to EBSB, the total amount due as of the Debtor’s filing date of the petition was $16,899,549.27, a sum in excess of the face amount set forth in the original Guaranty ($16,423,000.00 - $16,899,549.27 = $476,549.27). EBSB also contends that the Debtor is liable to it for the full amount due under the April 20, 2012 and May 4, ’ 2012 loans in the amount of $1,342,737.95 ($1,317,041.16 + $15,696.79). In its view, the Debtor is liable for a total of $18,242,287.22.
The Debtor takes issue with EBSB’s calculation of the amount due under the April 20, 2012 loan.2 Without any specificity, it challenges the default rate of interest, auctioneer’s fees and late charges. It admits that $15,696.79 is owed under the May 4, 2012 loan. With respect to the *20Hanover Parmenter loan it guaranteed, it denies owing $16,899,549.27, again challenging the default interest, late charges and legal fees.3
EBSB, based upon appraisals it obtained for the Four Properties, asserts that the Four Properties have a combined value of $3,465,000, which the Debtor admits. It also contends that the Four Properties are encumbered by tax liens totaling approximately $170,000, which the Debtor also admits and, with respect to one property, a condominium lien, which the Debt- or disputes. In addition, EBSB contends, based upon comprehensive appraisals prepared by Cushman & Wakefield, one dated December 17, 2014 for 20 Parmenter Street, and the other dated April 2, 2015 for 244 Hanover Street, that the Project *21has a total value of $14,100,000.00.' The Debtor disputes this assertion, but provided no reasoning or justification for its position. Indeed, it did not challenge a single aspect of the appraisals provided by EBSB which would undermine their validity.
The Debtor argues that EBSB is not entitled to relief from stay, asserting that “the overall collateral package to the Bank indicates that they [sic] are overseeured,” that it will provide adequate protection to EBSB, and that “[a] confirmable plan will be filed.” It did not outline the adequate protection that it would provide' EBSB, although it has been permitted to use cash collateral on an interim basis, nor did it set forth the contours, by way of an offer of proof, of a feasible Chapter 11 plan in prospect or indicate when such a plan would be filed.
The Debtor also challenges the Amendment to the Unlimited Guaranty pointing to a discrepancy in the amendment to the original Guaranty in which its date was referenced as April 13, 2013, instead of April 13, 2012. It adds, based upon Per-roncello’s affidavit, that the amendment was not authorized.
III. DISCUSSION
Section 362(d) provides in relevant 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;
(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) provides: “In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a) of this section — (1) the party requesting such relief has the burden, of proof on the issue of the debtor’s equity in property; and (2) the party opposing such relief has the burden of proof on all other issues.”
The Court finds that Hanover Par-menter owes EBSB at least $16,330,162.34 in principal and $312,943.15 in interest, for a total of $16,643,105.49 pursuant to its Guaranty and the amendment thereto, excluding default interest, late charges, legal fees, and all other fees and charges. In addition, the Debtor owes EBSB $1,139,118.77 in principal, plus $52,255.61 in interest, for a total of $1,191,374.38, under the April 20, 2012 note, excluding default interest, late charges and auction fees and other fees challenged by the Debtor. Finally, the Debtor owes EBSB $15,696.79 under the May 4, 2012 note, a sum the Debtor does not dispute. Thus, the Court finds that the Debtor owes EBSB $ 1,207,021.17 pursuant to the notes it executed on April 20, 2012 and on May 4, 2012, and at least $16,643,105.49 pursuant to its Guaranty as amended. If the sum due under the Guaranty is capped at the face amount set forth in the April 13, 2012 Guaranty, i.e, $16,423,000.00, thereby obviating a determination of the validity of the December 30, 2013 amendment,4 the *22total owed would be $17,630,071.17 ($16,-423,000.00 + $1,191,374.38 + $15,696.79), without considering outstanding real estate taxes. Juxtaposed against the debt ($17,-630,071.17) is property worth $17,465,000.00 ($14,100,000.00 for the Project, plus the undisputed value of $3,465,000 for the Four Properties). Accordingly, the Debtor has no equity in the Four Properties.
Because 'the Debtor has no equity in the Four Properties, it had the burden of demonstrating that a plan of reorganization is in prospect. It did not sustain its burden.
In United Sav. Assoc. of Texas v. Timbers of Inwood Forest Assocs., Ltd, 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988), the Supreme Court stated:
Once the movant under § 362(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.” See § 362(g). 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, as many lower courts, including the en banc court in this case, have properly said, that there must be “a reasonable possibility of a successful reorganization within a reasonable time.” In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363, 370-371 nn. 12-13 (5th Cir.1987), and cases cited therein. 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, see 11 U.S.C. §§ 1121(b), (c)(2), even within that period lack of any realistic prospect of effective reorganization will require § 362(d)(2) relief.
484 U.S. at 375-76, 108 S.Ct. 626 (footnotes omitted). In In re Souza, No. 12-13341, 2012 WL 8441318 (Bankr.E.D.Ca. Nov. 26, 2012), the bankruptcy court observed the following with respect to the standard set forth by the Supreme Court:
Since the Timbers of Inwood, decision courts have attempted to particularize this standard. The Ninth Circuit Bankruptcy Appellate Panel has embraced a four-part test first articulated in In re Holly’s, Inc., 140 B.R. 643, 700 (Bankr.W.D.Mich.1992), which describes the debtor’s burden of proof as a “moving target which is more difficult to attain as the Chapter 11 case progresses.” See, In re Sun Valley-Newspapers, Inc., 171 B.R. 71, 75 (9th Cir. BAP 1994). The Holly’s, court separated the burden of proof into four distinct stages based on when the creditor seeks relief: “The four broad categories can be stated as follows: (1) is it plausible that a successful reorganization will occur within a reasonable time?; (2) is it probable that a successful reorganization will occur within a reasonable time?; (3) is it assured that a successful reorganization will soon occur?; or (4) is it impossible that a successful reorganization will occur within a reasonable time?” Holly’s, 140 B.R. at 700 (emphasis original); see also, Sun Valley Newspapers, Inc., 171 B.R. at 75.
Holly’s, teaches us that the standard articulated in Timbers of Inwood, imposes an increasing burden of proof on the debtor regarding the viability of reorganization as a means of balancing a debt- *23or’s need to reorganize against the delay, and consequent harm, imposed on creditors by the stay. Initially the balance favors the debtor in possession. But the burden of proof rapidly shifts in favor of secured creditors, requiring a heightened showing by the debtor of its chances for reorganization. Immediately after the case is filed, a debtor in possession opposing stay relief may offer a “less strenuous!’ showing of “a reasonable possibility of successful reorganization within a reasonable time.” During this stage, the debtor sustains the burden of proof by offering sufficient evidence that a successful reorganization within a reasonable time is “plausible.” The standard is low, requiring the debtor only to present evidence that is “superficially worthy of belief’ that it is capable of producing a plan. The terms of the plan can be obscure and vague, as long as it is plausible that a successful reorganization may occur. The bankruptcy court’s mandate is to balance the reasonableness of the delay borne by the secured creditors against the debtor’s ability to formulate a plan. Immediately after the case is filed, if the debtor presents any evidence that a con-firmable plan is plausible, the balance favors the debtor and the creditors are expected to wait while the debtor attempts to craft a plan. Holly’s, 140 B.R. at 701.
In re Souza, 2012 WL 8441318 at *3 (emphasis supplied). “When the exclusivity period has not yet run, courts apply a lesser standard of proof “to benefit debtors who have a realistic chance of reorganization but who have not had sufficient time to formulate a confirmable plan.” In re Morton, No. 3:15-bk-30892, 2015 WL 4396719 at *4 (Bankr.E.D.Tenn. July 17, 2015) (quoting Am. Network Leasing, Inc. v. Apex Pharm., Inc. (In re Apex Pharm., Inc.), 203 B.R. 432, 442 (N.D.Ind.1996) (“During the early stages of a bankruptcy ease, the court ‘must work with less evidence than might be desirable and should resolve issues in favor of the reorganization where the evidence is conflicting’ to ensure that the debtor is given the ‘breathing room’ Congress intended the stay to provide.”).
Even if this Court were to adopt the lenient standard applicable to the burden of proof under 11 U.S.C. § 362(d)(2)(B) articulated by the court in Souza because the Debtor’s case was filed approximately three months ago, the Debtor merely relied upon the conclusory assertion that “[a] confirmable plan of reorganization will be filed.” That statement is insufficient to meet the burden articulated by the Supreme Court in Timbers. The Debtor owns the Four Properties and a minority interest in Hanover Parmenter. It did not even attempt to indicate how it could refinance its assets to satisfy its outstanding obligations and reorganize its financial affairs.
To the extent that the Debtor relies upon the argument that the amendment to the Guaranty was faulty, the Court concludes that a determination of the merits of the Debtor’s argument as to the lack of authority for the execution of the amendment on December 30, 2013 does not affect the April 13, 2012 Guaranty. Moreover, any assertion that the Lift Stay Motion should be denied because of the pendency of the Superior Court action is without merit in view of the decision of the United States Court of Appeals for the First Circuit in Grella v. Salem Five Cent Savs. Bank, 42 F.3d 26 (1st Cir.1994). In Grella, the United States Court of Appeals for the First Circuit stated:
The limited grounds set forth in the statutory language, read in the context of the overall scheme of § 362, and combined with the preliminary, summary *24nature of the relief from stay proceedings, have led most courts to find that such hearings do not involve a full adjudication on the merits of claims, defenses, or counterclaims, but simply a determination as to whether a creditor has a colorable claim to property of the estate.
Grella, 42 F.3d at 32. In view of the Debtor’s failure to draw even a faint outline of a plan of reorganization, coupled with the absence of equity in the Four Properties,- the Court concludes that EBSB has established a colorable claim to relief under 11 U.S.C. § 362(d)(2).
IV. CONCLUSION
In view of the foregoing, the Court shall enter an order granting EBSB’s Lift Stay Motion.
. The Note also was guaranteed by Toombs, but her guaranty is limited to $3 million and requires EBSB to pursue foreclosure of the Four Properties before it can pursue her guaranty.
. According to EBSB, as of August 4, 2015, it is owed $1,317,041.16 in connection with the *20April 20, 2012 loan to the Debtor, calculated as follows:
i. Principal $1,139/118.77
ii. Interest 52,255.61
iii. Default Interest 64,947.59
iv. Late Charges 6,316.92
v. Legal Fees 27,506.34
vi. Environmental Fees 445.00
vii. Auction Fees 11,580.00
viii. Escrow Balance 14,870.93
Total $1,317,041.16
. According to EBSB, as of August 4, 2015, it is owed $16,899,549.27 in connection with its Guaranty of the Hanover Parmenter note, calculated as follows:
i. Principal $16,330,162.34
ii. Interest 312,943.15
iii. Default Interest 215,467.42
iv. Late Charges 17,467.36
v. Legal Fees 13,759.00
vi. Appraisal Fees 9,750.00
Total $16,899,549.27
. The Court questions whether an amendment was even needed in view of the language of the Guaranty highlighted above. Specifically, the Debtor agreed to guaranty the "Obligations” which EBSB had or “may acquire after the date hereof.” In addition, the Guaranty provided that “[t]he liability of the Guar*22antor hereunder shall be unlimited in amount.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498816/ | MEMORANDUM OPINION
J. Michael Deasy, Bankruptcy Judge
I. INTRODUCTION
The Court has before it the Debtor’s objection to proof of claim no. 11 (Doc. No. 56) and her objection to a notice of post-petition mortgage fees, expenses, and charges relating to claim no. 11 (Doc. No. 58) (collectively the,. “Objections”). St. Mary’s Bank is the creditor that filed both claim no. 11 (“POC 11”) and the post-petition fee notice (the “Post-Petition Fee Notice”).1 In this opinion, the Court addresses the portion of the Objections that relates to attorney’s fees and expenses, which St. Mary’s Bank seeks to recover pursuant to a note and mortgage.
*28
II. JURISDICTION
This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334, 157(a), and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding in accordance with 28 U.S.C. ■ § 157(b)(2)(A) and (G).
III. FACTS
The background of this case is complex, involving the details of a contentious relationship between the Debtor (the “Debt- or”), her non-debtor spouse (“Mr. Taal”), aid St. Mary’s Bank (the “Bank”). The Bank is the mortgagee and note-holder of the first mortgage on the Debtor’s principal residence (the “Note,” “Mortgage,” and “Property” respectively). Mr. Taal is not obligated on the note, but did sign the mortgage and is a co-owner of the Property. Mr. Taal has filed three bankruptcy cases in this Court in the past several years, all of which were dismissed without substantial progress toward confirming a chapter 13 plan. In contrast to Mr. Taal’s conduct of his bankruptcy cases, the Debt- or obtained counsel prior to filing, has prosecuted this case in a timely manner, and has made significant progress towards ■confirming a chapter 13 plan. Aside from this brief background, the Court will not recount the details of the relationship between the parties. The Court set out the full-background of this case and the parties’ relationship in a previous opinion. See In re Taal, 520 B.R. 370 (Bankr.D.N.H.2014).
Continuing disputes between the Debtor and the Bank have delayed confirmation of a chapter 13 plan in this case. First, the Bank moved to dismiss this case as a bad faith filing and asked for in rem relief pursuant to 11 U.S.C. § 362(d)(4).2 The Court resolved that motion in favor of the Debtor. See Taal, 520 B.R. at 380. Next, the Debtor filed the Objections. The Court held a number of hearings on the Objections, which were filed in November 2014. The first was on January 16, 2015. At this hearing, the Court addressed the two main issues raised in the Objections: (1) whether the Bank had misapplied pre-petition mortgage payments; and (2) the amount of attorney’s fees and expenses included in POC 11 and in the Post-Petition Fee Notice. After the hearing, the Court sustained the Objections in part, ruling that the Bank had misapplied certain pre-petition mortgage payments and directed the Bank to correct its accounting. See January 22, 2015 Order (Doc. No. 88). The Court also ordered the Bank to provide the Debtor with copies of the invoices supporting its attorney fee and expense claim, which the Court directed the Debtor to respond to. See January 21, 2015 Order (Doc. No. 85).
After the Debtor filed a response to the Bank’s fee invoices (Doc. No. 104) and a response to the Bank’s re-accounting of pre-petition mortgage payments (Doc. No. 106), the Court held another hearing on April 3, 2015. At the hearing, the Court determined that the fee invoices that the Bank had provided to the Debtor were insufficiently detailed for the Court to make a ruling on whether the fees were allowable. The Court then ordered the Bank to submit complete copies of its fee invoices and set a new deadline for the Debtor to respond. Once the parties made their submissions, the Court took the dispute concerning the fee and expense invoices under advisement.3
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IV. DISCUSSION
The current dispute between the Debtor and Bank focuses on attorney’s fees and other expenses that the Bank incurred both pre-petition and post-petition, which the Bank asserts are recoverable under the Note and Mortgage. The Debtor has proposed a chapter 13 plan that would cure any defaults under the Note and Mortgage and maintain regular payments to the Bank during the life of the plan. See Chapter 18 Plan Dated January 30, 2014, ¶ 5 (Doc. No. 8); § 1322(b)(5).
Legal Standard Applicable to Fees and Expenses
When a chapter 13 plan proposes to cure a default under § 1322(b)(5) the amount necessary to cure the default is determined under state law. Specifically, § 1322(e) overrides the default rules pertaining to secured claims set down in § 506(b), such as a secured creditor only being entitled to attorney’s fees if the value of its collateral exceeds the value of its secured claim. Section 1322(e) provides:.
Notwithstanding subsection (b)(2) of this section and sections 506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable non-bankruptcy law.
Here, the Bank is claiming attorney’s fees and expenses in POC 11 and in the Post-Petition Fee Notice. Pursuant to § 1322(e), the Court will determine the Cure Amount of the attorney’s fees and expenses under state law and the provisions of the Note and Mortgage.
Three different parts of the Note and Mortgage govern the Bank’s ability to recover attorney’s fees and other costs from the Debtor. Paragraph 7 of the Note, entitled “Borrower’s Failure to Pay as Required,” provides in section (E):
Payment of the Note Holder’s Costs and Expenses
If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note to the extent not prohibited by' applicable law. Those expenses include, for example, reasonable attorneys’ fees.
Section 9 of the Mortgage provides:
Protection of Lender’s Interest in the Property and Rights Under this Security Instrument.
If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, (b) there is a legal proceeding that might significantly affect Lender’s interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy ...) ... then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property.... Lender’s actions can include, but are not limited to: ... (b) appearing in court; and (c) paying reasonable attorney’s fees to protect its interest in the Property and/or rights under this Security Instrument, including its secured position in a bankruptcy proceeding.... Any amounts disbursed by Lender under this *30Section 9 shall become additional debt of Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrowing requesting payment.
Finally, § 14 of the Mortgage provides:
Loan Charges.
Lender may charge Borrower fees for services performed in connection with Borrower’s default, for the purpose of protecting Lender’s interest in the Property and rights under this Security Instrument, including, but not limited to, attorneys’ fees, property inspection and valuation fees. In regard to any other fees, the absence of express authority in this Security Instrument to charge a specific fee to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that are expressly prohibited by this Security Instrument or by Applicable Law.
Under the mortgage, “Applicable Law” is defined in sub-section (H) of the definitions section (page 2 of the Mortgage) to mean “all controlling applicable federal, state and local statutes, regulations, ordinances and administrative rules and orders (that have the effect of law) as well as all applicable final, non-appealable judicial opinions.”
Under New Hampshire law, a request for attorney’s fees “must be grounded upon statutory authorization, a court rule, an agreement between the parties, or an established exception to the rule that each party is responsible for paying his or her own counsel fees.” In the Matter of Hampers & Hampers, 154 N.H. 275, 289, 911 A.2d 14 (2006) (quotation omitted). An agreement between the parties that shifts attorney’s fees is interpreted by “giving the language used by the parties its reasonable meaning.” Turner v. Shared Towers VA, LLC, 167 N.H. 196, 207, 107 A.3d 1236 (2014). Here, the Note and Mortgage plainly provide the Bank with the ability to recover attorney’s fees and other costs from the Debtor under certain circumstances. The parties agree that the Bank may recover attorney’s fees and other expenses as long as they are “reasonable or appropriate to protect [the Bank’s] interest in the Property and rights under” the Note and Mortgage. See Mortgage § 9. The parties disagree, however, as to whether specific tasks the Bank’s attorney performed fall within the definition of fees chargeable to the Debtor. The parties also disagree as to whether the Bank’s attorney expended a reasonable amount of time on specific tasks. Finally, the parties disagree about whether certain expenses related to the foreclosure process are reasonable.
In determining whether the attorney’s fees included in the Cure Amount are reasonable, the Court finds the federal lodestar approach to fees persuasive.4 *31Under this approach, the Court “mul-tipl[ies] the number of hours productively-spent by a reasonable hourly rate.” Berliner v. Pappalardo (In re Sullivan), 674 F.3d 65, 69 (1st Cir.2012) (quoting Torres-Rivera v. O’Neill-Cancel, 524 F.3d 331, 336 (1st Cir.2008)). Here, the parties are not in dispute over the hourly rate applied — $250 per hour for attorney time and $85 for paralegal time — and the Court finds that these hourly rates are reasonable and commensurate with the usual rates charged in the community for the type of work involved.
With the hourly rates determined, the Court will now focus on the number of hours productively spent. In making this assessment, the Court should subtract time expended “on unnecessary, duplicative, or overworked tasks.” Sullivan 674 F.3d at 69. This approach is flexible; “[t]he court need not follow a rigid prescription when reducing fees; it may either eliminate specific hours or reduce the overall fee award to a reasonable amount.” In re Little, 484 B.R. 506, 511 (1st Cir. BAP 2013). If a court reduces fees substantially, “then it must provide a sufficiently detailed explanation ... to establish the basis for the reduction.” In re Graham, 2013 BNH 002, 6, 2013 WL 587305 at *3 (Bankr.D.N.H. Feb. 14, 2013).
The majority of the parties’ dispute focuses on whether certain time the Bank’s attorney spent was unnecessary, duplica-tive, or overworked. The Bank provided a detailed fee report that includes attorney billing sheets and an overall summary that breaks the time down into individual categories and summarizes the work on a general level. See Doc. No. 123 (the “Fee Report”). For the sake of convenience, the Court has broken down the following analysis into categories that mirror those in the Fee Report. The Court will go through each category, summarizing the positions of the parties, and then determining the allowable amount of fees.
Fee Categories
The following attorney’s fees are included in POC 11, meaning that any reduction in these fees will affect the total amount of the Bank’s pre-petition claim.
(1) Appellate Proceedings Arising from Mr. Taal’s First Bankruptcy Case
In this category, the Bank seeks to recover for work its attorney did to analyze issues relating to, the automatic stay and Mr. Taal’s appeal of his first bankruptcy case. The Debtor objects to these fees as not being related to the Property.
Mr. Taal’s first bankruptcy case was filed on August 15, 2012.5 It was dismissed on January 25, 2013. Mr. Taal filed several motions to alter or amend the dismissal order — which were denied — and ultimately appealed the-dismissal order to the U.S. District Court for the District of New Hampshire. This Court denied a motion to stay pending appeal.
As this was Mr. Taal’s first bankruptcy filing, an automatic stay arose pursuant to § 362(a) when he filed the petition, staying any action the Bank might have taken against Mr. Taal’s interest in the Property. The automatic stay terminated when the Court dismissed the case, but Mr. Taal’s several attempts to overturn the dismissal order arguably confused the date upon which the stay ceased to exist. Here, the Court finds that the time the Bank’s attorney spent allowable under *32the Note and Mortgage, given the potential impact of the automatic stay on the exercise of the Bank’s rights under the Mortgage.
Total time allowed: 1.2 hours of attorney time and 1.6 hours of paralegal time.
(2) First Foreclosure Attempt6
Here, the Bank seeks to recover fees for services related to its first attempt to foreclose on the Property. This first attempt only proceeded to the issuing of an acceleration notice on the Note before Mr. Taal filed his second bankruptcy petition. See In re Taal, 520 B.R. at 373. The Bank’s attorney completed tasks such as reviewing the Note and Mortgage, dealing with title issues — which were complicated because Mr. Taal and the Debtor had deeded the Property to a trust without the Bank’s knowledge, see id. at 374 — and drafting and sending notices of default and an acceleration notice. In total, the Bank’s spent 16.4 hours of attorney time and 5.6 hours of paralegal time on these matters. The Debtor argues that the time spent here was excessive for a power of sale foreclosure proceeding in New Hampshire.
Overall, the Court agrees with the Debtor and finds the time spent on the foreclosure excessive. In total, the Bank’s professionals spent over 20 hours only getting to the point where they were sending the first notices of default and acceleration, in what was essentially an ordinary power of sale foreclosure. To the extent the Bank’s review of the Property’s chain of title was complicated by the Debtor and Mr. Taal’s actions, the Court finds the fees reasonable. Accordingly, the Court shall disallow 50% of the fees relating to the foreclosure work but allow all the time for work on the examination of the chain of title. See Fee Report at §§ B and C.
Time allowed for foreclosure related work: 12.8 hours of attorney time * 50% + 3.9 hours of paralegal time * 50% = 6.4 hours of attorney time + 1.95 hours of paralegal time.
Time allowed for title work: 3.6 hours of attorney time and 1.7 hours of paralegal time.
Total time allowed: 10 hours of attorney time and 3.65 hours of paralegal time.
(3) Mr. Taal’s Second Bankruptcy Case and Related Appellate Proceedings
The Bank seeks to recover attorney’s fees relating to Mr. Taal’s second bankruptcy filing. The Bank’s attorney apparently performed work on a motion to limit the stay and Mr. Taal’s attempt to avoid a judicial attachment that the Bank held on the Property. The Bank’s attorney also did work to stop Mr. Taal from extending the automatic stay. In total, this work adds up to 4 hours of attorney time. The Debtor objects to these fees, arguing that they are either supported by vague time entries or are unrelated to the Property.
The Court will disallow these fees because the services relating to the motion to limit the stay were unnecessary and because Mr. Taal’s motion to avoid lien was not related to the Bank’s rights under either the Note or Mortgage. The work relating to the motion to limit the stay was unnecessary because the automatic stay expired by operation of law, without the Bank’s intervention, and Mr. Taal did not seek to reinstate it.7 Further, the Bank *33never actually filed any motions relating to the automatic stay.
Mr. Taal’s Motion to avoid lien pursuant to § 522(f) (Doc. No. 56 in case no. 13-11253-BAH) was not an attempt to avoid the Mortgage, but an attempt to avoid a judicial attachment on the Property for a debt unrelated to the Note. Because the debt at issue was wholly unrelated to the Note or Mortgage and the attachment did not affect the validity or priority of the Mortgage, any fees or costs the Bank incurred defending the lien avoidance motion are not recoverable here.
Total time allowed: None.
(4)Second Foreclosure Attempt
Here the Bank seeks to collect attorney’s fees for the second foreclosure attempt it initiated, after the Court dismissed Mr. Taal’s second bankruptcy case. According to the Bank, its professionals spent 8.8 hours of attorney time and 2.2 hours of paralegal time updating prior work. The Debtor argues that this time is excessive, and the Court agrees. Given that the Court has allowed fees for nearly the same amount of work for the first foreclosure, work which the bank’s attorney completed just a few months earlier, taking an additional 10 hours to update that work is unreasonable. The Court also notes that this foreclosure was interrupted, at an early stage, by the filing of Mr. Taal’s third bankruptcy case, before the Bank even had an opportunity to notice the foreclosure sale. See In re Taal, 520 B.R. at 373. Accordingly, the Court shall only allow 25% of the amount requested.
Total time allowed: 8.8 * 25% -I- 2.2 * 25% = 2.2 hours of attorney time and .55 hours of paralegal time.
(5) Banking Commission Complaint 8
The Bank seeks to recover fees for Mr. Taal’s two complaints filed with the New Hampshire Banking Commission. The Debtor argues that these complaints were unrelated to the Note or Mortgage. There is nothing in the record to indicate how Mr. Taal’s complaints to the Banking Commission affected the Bank’s rights under the Note or Mortgage. Accordingly, the Court shall disallow the 8.1 hours of attorney time the Bank claims.
Total time allowed: None.
(6) Mr. Taal’s Third Bankruptcy Filing
The Bank asserts its right to collect attorney’s fees relating to Mr. Taal’s third bankruptcy, including analyzing the implications of the automatic stay. As this was Mr. Taal’s third bankruptcy filing with two prior cases dismissed during that year, the automatic stay did not come into effect upon the filing of the petition. See § 362(c)(4). The Bank filed a motion to confirm the stay was not in effect, and Mr. Taal moved to reimpose the stay, to which the Bank objected. See Doc. Nos. 33, 34, and 41 in case no. 13-12346-JMD. For this work, the Bank seeks fees for 3.9 hours of attorney time under the Note and Mortgage. The Debtor objects to this time as unrelated to the Property. The Court finds these attorney’s fees allowable. Given Mr. Taal’s multiple filings and mo*34tion .to impose the automatic stay, which could have affected the Bank’s rights under the Mortgage, the Court finds the time and effort • expended by the Bank to be recoverable and reasonable.-
Total time allowed: 3.9 hours of attorney time.
(7) Various State Court matters9
Here, the Bank argues that it is entitled to recover time spent litigating with Mr. Taal in state court. The Debtor identifies the lawsuit in question as one relating to a separate loan between the Bank and Mr. Taal, which the Bank does not dispute. The Court shall disallow these fees because they do not appear to relate to the Bank enforcing or protecting its rights under the Note and Mortgage. In total, the Bank has requested 9.6 hours of attorney time and 1.6 hours of paralegal time in this category.
Total time allowed: None.
(8) Third Foreclosure Attempt
Here the Bank seeks fees it incurred in relation to its third attempt to foreclose on the Property. The Bank seeks to recover 32.6 hours of attorney time and 13.7 hours of paralegal time for these efforts. According to the Bank, this time was spent updating its earlier work, preparing sale notices, working with the auctioneer, setting a budget, planning the day of the sale, organizing security for the sale, canceling the sale (after the Debtor filed her bankruptcy petition), and meeting with potential buyers at the canceled sale. The Debtor objects to the amount of time spent, arguing that it is nearly three times the amount that would be customarily charged for a power of sale foreclosure.
Again, the Court finds these fees to be excessive. The Court understands the difficult relationship between the Bank, the Debtor, and Mr. Taal. This relationship was strained to the point that a state court issued a restraining order. Undoubtedly, this relationship complicated the foreclosure process, and the Court finds it reasonable that the fees would be higher than normal under these circumstances. But, expending over 40 hours of combined attorney-paralegal time is excessive, and the Bank has not provided a sufficient explanation why so much time was necessary or appropriate to protect its interest in the Property. The Court has already allowed approximately 15 hours of time for the first and second foreclosure attempts. The work to update those prior efforts to be used for round three should have been straightforward. The Court will reduce the fees for the third foreclosure attempt by 50%. The Court finds that approximately 20 hours for a difficult foreclosure is reasonable, considering that a good portion of the work was to update prior title reports and letters previously drafted.
Total time allowed: 32.6 * 50% + 13.7 * 50% = 16.25 hours of attorney time and 6.85 hours of paralegal time.
(9)Injunction to. Stop Foreclosure
In this category, the Bank seeks compensation for time and effort its attorney expended halting Mr. Taal’s effort to enjoin its third foreclosure attempt in the U.S. District Court for the District of New Hampshire. Mr. Taal appealed the denial of his request for an injunction to the U.S. Court of Appeals for the First Circuit and the United States Supreme Court. The Debtor objects to these fees as unrelated to the Property. The Court finds these fees to be reasonable. In total, the Bank expended 4.7 hours of attorney time de*35fending against Mr. Taal’s efforts in this area. These efforts were related to the Bank enforcing its rights to enforce the Mortgage via foreclosure.
Total time allowed: 4.7 hours of attorney time.
(10) Initial Review of the Debtor’s Bankruptcy Petition10
The Bank argues that it is entitled to recover fees related to work its attorney did upon the Debtor’s filing of her chapter 13 petition. This work includes reviewing the petition, reviewing proofs of claims filed by other creditors, conferencing with the Bank’s representatives, and legal research regarding the bankruptcy’s impact on the foreclosure sale and issues relating to the automatic stay. In total, the Bank is seeking 39.2 hours of attorney time and 9.7 hours of paralegal time for this work. The Debtor argues again that these fees are plainly excessive, that reviewing other creditors’ claims does not relate to the Property, and that some of the issues marked as related to the initial filing in the detailed time sheets in fact relate to the Bank’s efforts later in the case.
The Court finds that while this time is compensable under the Note and Mortgage — it all appears to relate to protecting the Bank’s interest in the Property — the amount spent on an initial review of the petition, proofs of claim, and automatic stay issues is excessive under the circumstances present. The Bank’s attorney should have been familiar with the specific facts of this case given Mr. Taal’s three prior filings and the various state court matters. As far as initial review goes, the legal and factual issues involved are very similar.
The Court will allow additional time as this bankruptcy filing was Mrs. Taal’s and not Mr. Taal’s. This fact cuts both ways, however. One key difference between the bankruptcies of Mr. Taal and the Debtor is the Debtor’s representation by legal counsel. Debtor’s counsel completed and filed the petition, which inevitably made it easier for the Bank to review the petition and have confidence in its content. Additionally, the Fee Report shows that the Bank’s attorney was in communication with Debt- or’s counsel after the filing of the petition, something that also likely facilitated the Bank’s initial review. The Court does not find that the difficult relationship between the Bank and the Taals should have been a complicating factor in an initial review of the petition. At base, however, the Bank is requesting more than 40 hours of time for the initial review of a routine chapter 13 petition where the Bank, its staff, attorney, and attorney support staff were all throughly familiar with the facts involved. The amount of time spent is unreasonable. Accordingly, the Court will allow 33% of the time requested.
Total time allowed: 39.2 * 33% + 9.7 * 33% = 13 hours of attorney time and 3.2 hours of paralegal time.
(11) 2004 Exam
Here, the Bank seeks compensation for time its attorney spent preparing for a 2004 examination of the Debtor. The Bank avers this required detailed preparation and review of all the documents related to the case. The Courts finds the time the bank spent on this matter to be reasonable given the level of detail and amount of preparation required to conduct a 2004 examination, especially in light of the factually complex background in this case. The Court shall further address the *36Debtor’s objection to these fees in a later section.
Total time allowed: 10.5 hours of attorney time and 6.2 hours of paralegal time.
(12) 341 Meeting
The Bank also asks for compensation for the time its attorneys spent at the 341 meeting of creditors in this case. The Bank sent two attorneys, given its contentious relationship with the Debtor. In total Bank’s attorneys worked 5 hours on matters related to the 341 meeting, including attendance and preparation. The Court finds this amount of time reasonable, and having two attorneys attend the meeting was reasonable under the circumstances. The Court will further address the Debtor’s objection to these fees in a later section.
Total time allowed: 5 hours of attorney time.
(13) Filing Proof of Claim and Objection to Plan
The Bank is seeking reimbursement for attorney’s fees it incurred filing its proof of claim in this case and its objection to the chapter 13 plan. In total, the Bank claims a right to reimbursement for 22.8 hours of attorney time and 9.4 hours of paralegal time for these matters. The Debtor argues that some of this time should be disallowed either because POC 11 contained errors when it was initially filed or because the confirmation objection lacked merit. The Court finds this time to be allowable under the Note and Mortgage. There is no indication that the accounting errors in the proof of claim were introduced or caused by the Bank’s attorney. The Court also notes that the confirmation hearing has not yet been concluded, so the Court cannot rule that the Bank’s objection to confirmation lacks merit. Accordingly, the Court finds that the Debtor’s objections to these fees unsustainable.
Total time allowed: 22.8 hours of attorney time and 9.4 hours of paralegal time.
(14)Motion to Dismiss and for In Ren), Relief
Here, the Bank seeks compensation for the Motion to Dismiss and for In Rem Relief that it brought against the Debtor seeking to have the case dismissed. In total the Bank spent 111.3 hours of attorney time and 41.8 hours of paralegal time on this matter. The Debtor’s primary objection to these fees relies on a section of the Mortgage that the Court has not yet discussed.
Section 25 of the Mortgage11 provides for fee-shifting in favor of the Debtor, under certain conditions:
Attorneys’ Fees.
*37Pursuant to New Hampshire Revised Statutes Annotated .Section 361-C:2, in the event that Borrower shall prevail in (a) any action suit or proceeding, brought by Lender, or (b) any action brought by Borrower, reasonable attorneys’ fees shall be awarded to Borrower. Further, if Borrower shall successfully assert a partial defense or set-off, re-coupment or counterclaim to an action brought by Lender, a court may withhold from Lender the entire amount or such portion of its attorneys’ fees as the court shall consider equitable.
The Debtor successfully prevailed against the Bank’s Motion to Dismiss and for In Rem Relief. See In re Taal, 520 B.R. at 380. Based on these facts, the Debtor asserts, under § 25 of the Mortgage, that (1) the Bank should not be allowed to collect any of the fees it requests for these matters and (2) that the Bank should have to pay the Debtor’s attorney’s fees to defend the Motion to Dismiss.
The Bank’s sole argument against applying § 25 of the Mortgage in this fashion rests on a faulty legal premise. The Bank argues that 11 U.S.C. § 506(b) preempts RSA 361-C:2, citing this Court’s decision In re Center, 282 B.R. 561 (Bankr.D.N.H.2002).12 In Center, the Court held that “section 506(b) of the Bankruptcy Code preempts state law with respect to the enforceability of an attorneys’ fee provision contained in an agreement under which a creditor’s claim arises.” 282 B.R. at 568. This holding and Center in general are irrelevant to this case because the Debtor’s chapter 13 plan proposes to cure and maintain the Debtor’s obligation to the Bank under the Note and Mortgage pursuant to § 1322(b)(5). In such plans, § 1322(e) directs the Court to look to state law to determine the Cure Amount, “notwithstanding § 506(b).” See Gagne v. Countrywide Home Loans, Inc. (In re Gagne), 378 B.R. 439, 443 (Bankr.D.N.H.2007) (“ [Section] 506(b) has no applicability in the cure situation in which a debtor is merely keeping the original contract in place and bringing it up to date.”) (citing Collier On Bankruptcy ¶ 1322.18 (Alan N. Resnick & Henry J. Sommer eds. 15th ed.2015).
The Court finds that § 25 of the Mortgage and the provisions of RSA 361-C:2 are enforceable in the bankruptcy context. The language of § 25 refers to “any action suit or proceeding” brought by the Bank. Section 9 of the Mortgage uses the term “proceeding” to refer to a “proceeding in bankruptcy.” The Court sees no reason that these terms should not be afforded consistent meaning throughout the Mortgage, especially where both sections deal with attorney’s fees. Second, the plain and ordinary meaning of the terms “action,” “suit,” or “proceeding” encompasses contested matters in a bankruptcy proceeding.
This approach has been followed by courts in other states dealing with similar contracts and statutes. In In re Giusto, the bankruptcy court awarded attorney’s fees to a debtor who successfully defended against a mortgagee’s motion for relief from stay. In re Giusto, 532 B.R. 760 (Bankr.N.D.Cal.2015). The court based the fee award on the language on California’s version of RSA 361-C:2, Cal. Civ. Code § 1717 (“CCC § 1717”). After noting that CCC § 1717 allowed reciprocal attorney’s fees for “an action on a contract,” the court conducted an analysis of *38California law and determined that a stay-relief motion in a bankruptcy case would be “an action on a contract.” After making this determination, the court awarded attorney’s fees to the debtor. See also In re Johnson 460 B.R. 234, 248 (Bankr.E.D.Ark.2011) (in a contested matter awarding attorney’s fees to the debtor based on a state law fee shifting statute that applied to various types of collection actions) rev’d on other grounds by JPMorgan Chase Bank, N.A. v. Johnson, 470 B.R. 829 (E.D.Ark.2012). Given the language of the Mortgage, RSA 361-C:2, and the example in Giusto the Court will accept that the fee shifting provisions of § 25 of the Mortgage apply to the Motion to Dismiss.
With regard to the Bank’s claimed . attorney’s fees for the Motion to Dismiss and for In Rem Relief, the Court finds it equitable to disallow the Bank’s fees. Both § 25 of the Mortgage and RSA 361-C:2(II) provide the Court with discretion to disallow the Bank’s fees when the Debt- or prevails in an action brought by the Bank, such as the Motion to Dismiss. See Gaucher v. Cold Springs RV Corp., 142 N.H. 299, 700 A.2d 299 (1997) (holding that trial court had discretion under RSA 361-C:2(II) to withhold creditor’s attorney’s fees when debtor was successful in bringing affirmative defense). The Motion to Dismiss was an “action” the Bank brought against the Debtor. The Court finds it equitable to disallow the Bank’s fees, which are significant and would potentially impact the Debtor’s ability to successfully reorganize under chapter 13. In its Motion to Dismiss, the Bank asserted that this case had been filed in bad faith and should be viewed merely as an extension of Mr. Taal’s legal crusade against the Bank. The Court found the Bank’s claims to be unsupported and that the Debtor had conducted this case in good faith, making all the required payments to the Bank post-petition and attempting to comply with all the requirements imposed upon her under the Bankruptcy Code. See Taal 520 B.R. at 379. Given the language in the Mortgage, and under all the circumstances, the Court finds it inequitable under the terms of the Note, Mortgage, and applicablé state law that the Debtor would have to finance litigation against herself when she ultimately prevailed.
Under the language of § 25 of the Mortgage and RSA 361-C:2, awarding the Debtor attorney’s fees is mandatory if the Debtor prevails (“in the event that Borrower shall prevail in (a) any action suit or proceeding, brought by Lender, or (b) any action brought by Borrower, reasonable attorneys’ fees shall be awarded to Borrower”) (emphasis added). Here, it is undisputed that the Debtor prevailed on the Motion to Dismiss, and the Court must award her attorney’s fees. The Court will address the specifics of this fee award in the context of a fee application filed by Debtor’s counsel.
(15) Miscellaneous Objections
Finally, the Debtor raised several general objections to the Bank’s attorney’s fees throughout her Objections, which the Court now addresses. The first relates to the Fee Report. The Debtor argued that the arithmetic in the Fee Report was inaccurate because the Bank had not correctly summed the billable hours in its time sheets. The Debtor did not claim to have reviewed each calculation and the ones she claimed were inaccurate, were only off by a few hundred dollars. Given the extent to which the Court has already adjusted the Bank’s recoverable attorney’s fees, it does not find it necessary to conduct a detailed review of the arithmetic. The ' Court has already approved what it finds *39to be a reasonable amount of fees for the work performed.
The Debtor has also argued that various parts of the Fee Report, such as the fees generated at the 341 meeting and 2004 exam, were actually used for the purpose of filing the Motion to Dismiss and should be disallowed under § 25 of the Mortgage. The Court does not find sufficient evidence in the record to support this claim. The pleading the Bank filed to request the 2004 exam (Doc. No. 12) appears to relate to the feasibility of the Debtor’s proposed chapter 13 plan. Additionally, the Bank would have been entitled to conduct a 2004 exam and was entitled to attend and question the Debtor at the 341 meeting, even if it had not filed the Motion to Dismiss. Accordingly, the Court shall overrule this portion of the Debtor’s objection.
To the extent that the Debtor raises other objections to the Bank’s fees not explicitly addressed in this opinion, the Court either finds those objections to be de minimis in light of the substantial reduction of the Bank’s attorney fee claim or without merit and shall overrule them.
(16) Expenses
The Bank seeks expenses in addition to the attorney’s fees previously discussed. The Bank included $8,258.20 in foreclosure related expenses in amended POC 11. These expenses include newspaper publications required by state statute, appraisal fees, and fees incurred by the Bank’s auctioneer, James R. St. Jean. These fees, although on the higher end, are reasonable given all the circumstances of this case and given the Bank’s duty to conduct the sale in such a manner to achieve the best price possible. In Murphy v. Financial Development Corp., the New Hampshire Supreme Court described the duty a mortgagee owes to a mortgagor in conducting a foreclosure sale as “essentially that of a fiduciary.” 126 N.H. 536, 495 A.2d 1245 (1985). A mortgagee “must exert every reasonable effort to obtain a fair and reasonable price under the circumstances.” Id. (internal quotation omitted). Given this standard, the Court cannot say that the Bank’s efforts were unreasonable. Further, the Debtor has not provided any countervailing evidence to demonstrate that the Bank’s foreclosure expenses were unreasonable or excessive.
The Bank also seeks reimbursement for costs its attorney incurred, both pre-petition and post-petition. These • costs amount to $200.17 for the pre-petition period and $1,889.52 for the post-petition period. The Debtor has objected to these costs as insufficiently supported. After reviewing the Fee Report and time sheets attached, the Court shall sustain the Debt- or’s objection to the $1,193.70 for “Sharon R Fagan.” There is no evidence in the record indicating who this person is or what the expense relates to. The Court will allow the remainder of the expenses, which appear to be sundry filings fees and copying charges.
Total expense amount allowed: $8,258.20 + $200.17 + $1,889.52 - $1,193.70 = $9,154.19..
(17) Summary Table
The following table summarizes the preceding discussion:13
*40[[Image here]]
V. CONCLUSION
For the reasons set forth above and by separate order, the Court shall sustain in part and overrule in part the Objections. This opinion constitutes the Court’s fínd-ings of fact and conclusions of law in accor*41dance with Federal Rule of Bankruptcy Procedure 7052.
. The original Notice of Post-Petition Mortgage Fees, Expenses, and Charges Relating to Proof of Claim No. 11 was dated June 23,-2014. This notice was amended on April 2, 2015. The amendment has no effect on the fees and expenses at issue in this memorandum opinion.
. Hereinafter, all references to "§,” "section,” "Code,” and "Bankruptcy Code” are refer-enees to title 11 of the United State Code, unless otherwise indicated.
. The balance of the Objections — those issues *29relating to accounting of pre-petition mortgage payments — have been further contested in additional pleadings. See Doc. Nos. 124 and 126. The Court issued an order on June 17, 2015 (Doc. No. 132) that resolved some of the remaining disputes with regard to pre-petition, mortgage payment accounting and a related sanctions motion. The Court will resolve any remaining issues raised in the Objections by separate order.
. Although § 1322(e) directs the Court to determine the Cure Amount under state law, the parties agreed that the federal lodestar approach to determining whether attorney's fees are reasonable was persuasive, given the language of the Note and Mortgage. The Court concludes that New Hampshire law allows for this approach, where no New Hampshire statute is controlling. See Town of Barrington v. Townsend, 164 N.H. 241, 249, 55 A.3d 952 (2012) (in determining whether attorney’s fees were recoverable under New Hampshire statute, federal lodestar approach was not controlling). In general, when assessing attorney’s fee awards, the New Hampshire Supreme Court looks to the New Hampshire Rules of Professional Conduct, which includes factors that jibe with the lodestar method. See Funtown USA, Inc. v. Conway, 129 N.H. 352, 356, 529 A.2d 882 (1987) (quoting Couture v. Mammoth Groceries, Inc., 117 N.H. 294, 296, 371 A.2d 1184 (1977)).
. To the extent necessary to discuss Mr. Taal’s prior bankruptcy filings, the Court takes judicial notice of the docket in each case. Mr. Taal's first bankruptcy case was assigned case no. 12-12575-BAH.
. The Court has combined the next two sections of the Fee Report, entitled “Default on Loan and Initiation of Foreclosure Proceedings First Time” and "Confirmation of Title” as both are integrally related to the Bank’s first foreclosure attempt.
. The automatic stay expired thirty days into the case pursuant to § 362(c)(3) because this *33was Mr. Taal’s second bankruptcy case pending within the same year after a dismissed case.
. The Court has combined sections F and G of the Fee Report. The reference to the “New Hampshire Banking Commission” should undoubtedly be to the "New Hampshire Banking Department” or the "New Hampshire Banking Commissioner.” The Court has utilized the Bank’s nomenclature in this opinion to avoid any confusion.
. The Court has combined sections I and J of the Fee Report.
. The Court has combined sections M and N of the Fee report. From this point forward, the attorney time relates to the Post-Petition Fee Notice, not POC 11.
. RSA 361-C:2 mirrors § 25 of the Mortgage:
If a retail installment contract or evidence of indebtedness provides for attorney's fees to be awarded to the retail seller, lender or creditor in any action, suit or proceeding against the retail buyer, borrower or debtor involving the sale, loan or extension of credit, such contract or evidence of indebtedness shall also provide that:
I. Reasonable attorney's fees shall be awarded to the buyer, borrower or debtor if he prevails in
(a) Any action, suit or proceeding brought by the retail seller, lender or creditor; or
(b) An action brought by the buyer, borrower or debtor; and
II. If a buyer, borrower or debtor successfully asserts a partial defense or set-off, recoupment or counterclaim to an action brought by the retail seller, lender or creditor, the court may withhold from the retail seller, lender or creditor the entire amount or such portion of the attorney fees as the court considers equitable.
. At page 13, paragraph 19 of the Bank’s Response to the Objections (Doc. No. 82), the Bank refers to § 506(c). The Court assumes this was a typographical error, as Center discusses § 506(b), and § 506(c) relates to the trustee’s ability to recover costs from a secured creditor, which is inapposite to the matter at hand.
. In the columns labeled "Time Requested” and "Time Allowed” the abbreviations “A:” indicates attorney time billed and allowed at $250.00 per hour and "P:" indicates paralegal time billed and allowed at $85.00 per hour. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498817/ | MEMORANDUM DECISION
Robert E. Grossman, United States Bankruptcy Judge
Before the Court are cross motions for summary judgment in this adversary proceeding for section 1328(a)(4) non-dis-chargeability. Relying on the doctrine of collateral estoppel, the Plaintiff argues that the debt in the form of a prepetition state court judgment for sexual harassment discrimination under the New York State Human Rights Law (the “NYSHRL”), New York Executive Law § 290 et seq., and the New York City Human Rights Law (the “NYCHRL”), Administrative Code of the City of New York § 8-107 et seq., is, by the very nature of the underlying judgment, non-dischargea-ble under section 1328(a)(4). The Plaintiff argues that when presented with a state court judgment for sexual harassment discrimination, collateral estoppel should preclude the introduction of evidence on whether the underlying conduct was committed “willfully or maliciously,” as is necessary to satisfy section 1328(a)(4). In the alternative, the Plaintiff argues that the state court’s factual findings and punitive damages award are sufficient to satisfy section 1328(a)(4)’s “willful or malicious injury” standard.
The Debtor argues that (1) neither the state court’s legal findings nor the factual findings are sufficient to satisfy section 1328(a)(4)’s “willful or malicious” standard; (2) collateral estoppel should not apply because the state court judgment was entered on default, which default was caused by ineffective assistance of counsel; and, in the alternative, (3) the Plaintiff was not physically injured so as to satisfy section 1328(a)(4)’s “personal injury” requirement* *45and, even if Plaintiff was injured, the attorney’s fees portion of the state court judgment does not satisfy section 1328(a)(4)’s “personal injury” requirement.'
This Court has previously held that it will only apply collateral estoppel in non-dischargeability proceedings if the prior findings clearly and unequivocally satisfy the applicable non-dischargeability standard. The Court finds that this standard has been satisfied in this case and summary judgment in favor of the Plaintiff is appropriate. Although the Court is reluctant to apply a per se rule that a sexual harassment discrimination judgment must always be nondischargeable under section 1328(a)(4), the state court’s findings in support of the judgment in this case are sufficiently clear and unequivocal to warrant summary judgment.
For the reasons set forth in this Memorandum Decision, the judgment debt in the amount of $302,154.88 shall be excepted from discharge under section 1328(a)(4).
FACTS
The Debtor, Warren P. Deluty, D.D.S., is a dentist who employed the Plaintiff, Kristine Seubert, as an assistant for approximately nineteen months, during which time the Debtor sexually harassed her. The Debtor’s sexual harassment caused the Plaintiff to quit her job, and the Plaintiff sued the Debtor. After engaging in substantial discovery, the Debtor defaulted at trial. The state court (1) entered an order of default, which the Debt- or unsuccessfully attempted to vacate; and (2) granted the Plaintiff a damages inquest, in which the Debtor participated, at which the Plaintiff testified about the Debtor’s sexual harassment (and resulting damages), and at which the Plaintiffs parents and psychologist testified about the Plaintiffs personality changes, anxiety, depression, disorders, and emotional disturbances.
On September 30, 2013, the state court entered a 6-page “short form order” finding the Debtor liable for damages resulting from the Debtor’s sexual harassment and discrimination in violation of the NYSHRL and the NYCHRL. Among other findings, the order states:
The Court determines the [P]laintiff meets the burden of showing the [Debt- or] engaged in conduct where he sexually harassed the [P]laintiff by touching her inappropriately over her vehement objections and with the knowledge the [P]laintiff was seeking therapy because the [P]laintiff did not like being touched, and mocking her for not wanting to be touched for approximately nineteen months of her employment.
(State Court Judgment, ECF No. 13-6).
On May 14,2014, after inquest, the state court entered an amended judgment finding the Debtor liable to the Plaintiff in the amount of $302,154.88 for damages arising out of his conduct. Specifically, the Plaintiff was awarded:
(a) $1,781.00 for deprived wages, plus 9.00% prejudgment interest accruing irom January 1, 2008, up to an including the date of entry of judgment [$981.77];
(b) $1,435.00 for out-of-pocket expenses for psychological treatment, plus 9.00% prejudgment [interest] accruing from October 1, 2008, up to and including the date of entry of judgment [$692.74];
(c) $85,000 for compensation for mental anguish, emotional distress, humiliation and embarrassment, plus 9.00% prejudgment interest accruing from January 1, 2010, up to and including the date of entry of judgment [$31,322.50];
(d) $15,000 for punitive damages;
(e) $150,637.50 for reasonable attorney’s fees, plus 9.00% prejudgment interest *46accruing from May 8, 2018, up to and including the date of entry of judgment [$9,452.50];
(f) $5,151.87 for disbursements;
(g) $700 for costs ...”
(State Court Judgment, ECF No. 13-6).
DISCUSSION
Section 1328(a)(4) excepts from discharge “restitution, or damages, awarded in a civil action against the debtor as a result of willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual.” 11 U.S.C. § 1328(a)(4). The critical issue presented by these cross motions for summary judgement is whether the factual and legal issues determined by the state court to impose liability and punitive damages for sexual harassment discrimination should be given preclusive effect on the issue of section 1328(a)(4)’s “willful or malicious injury” standard such that summary judgment is appropriate.
I. Standard for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure states, in pertinent part, that 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.” In ruling upon a summary judgment motion, the Court is to determine whether a genuine issue of fact exists, not to resolve disputed issues of fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 330, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). When viewing the evidence, the Court must “assess the record in the light most favorable to the non-movant and ... draw all reasonable inferences in [the non-mov-ant’s] favor.” Delaware & Hudson Ry. Co. v. Consol. Rail Corp., 902 F.2d 174, 177 (2d Cir.1990). In a case such as this where there are cross motions for summary judgment, the Court is charged with examining each motion independently. Heublein, Inc. v. U.S., 996 F.2d 1455, 1461 (2d Cir.1993) (citing Schwabenbauer v. Board of Educ. of Olean, 667 F.2d 305, 313 (2d Cir.1981)). The Court must also draw all reasonable inferences against the party whose motion is under consideration. Id. Where, as in this case, the relevant facts are undisputed, summary judgment may be granted. This is especially true in this case where, even if the Court draws all reasonable inferences against the Plaintiff on its motion, summary judgment in favor of the Plaintiff is warranted.
II. Exception to Discharge — 11 U.S.C. § 1328(a)(4)
a. Background
Prior to the 2005 amendments to the Bankruptcy Code, the Chapter 13 “super discharge” was broad enough to permit Chapter 13 debtors to discharge debts arising from a debtor’s: “false pretenses, a false representation, or actual fraud” (11 U.S.C. § 523(a)(2)), “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” (11 U.S.C. § 523(a)(4)), and “willful and malicious injury ... to another entity or to the property of another entity” (11 U.S.C. § 523(a)(6)), as examples. In exchange for repayment of all or a part of their debt, Chapter 13 historically allowed debtors a broader discharge than that allowed by Chapter 7.
In 2005, to restrict Chapter 13’s “super discharge,” Congress expanded section 1328(a)(2)’s list of non-dischargeable debts to include, inter alia, those described in sections 523(a)(2)(a)(3), or (a)(4). Waag v. Permann (In re Waag), 418 B.R. 373, 377 (9th Cir. BAP 2009). Instead of incorporating section 523(a)(6) into Chapter 13, Congress added section 1328(a)(4), which excepts from discharge debts for “willful *47or malicious injury by the debtor that caused personal injury to an individual or the death of an individual.” Section 523(a)(6), which excepts from discharge debts for “willful and malicious injury by the debtor to another entity or to the property of another entity,” is similar to section 1328(a)(4), but- not identical. Section 1328(a)(4) applies: (1) to personal injuries or death, not to injuries to property; and (2) to “willful or malicious” injuries, rather than “willful and malicious” injuries.
b. Personal Injury
It seems clear that section 1328(a)(4)’s “personal injury to an individual or the death of an individual” language excludes debts arising from injuries to property from the scope of the statute. See, e.g., Universal Restoration Servs. v. Hartung (In re Hartung), No. 12-21920, 2014 WL 201100, at *7 (Bankr.E.D.Wis. Jan. 17, 2014) (“Because the damages in this case are to property and not to person, the plaintiffs arguments in favor of a non-disehargeable judgment based upon a willful and malicious injury are rejected.”); Adams v. Adams (In re Adams), 478 B.R. 476, 486 (Bankr.N.D.Ga.2012); Textron Fin. Corp. v. Hadley (In re Hadley), No. 09-73717, 2011 WL 3664746, at *12 (Bankr.E.D.Va. Aug. 19, 2011) (“Thus, a debt for willful and malicious injury by the debtor to the property of another entity is dischargeable....”); Green v. Salvatore (In re Salvatore), No. 10-16449, 2011 WL 2115816, at *15 (Bankr.D.N.J. May 26, 2011) (“[W]e have allegations of property damage, but not of personal injury or death. The plaintiffs request must be denied.”); In re Brown, No. A08-00235, 2008 WL 8652592, at *2 (Bankr.D.Alaska Nov. 17, 2008) (“The debtor’s conduct has not resulted in personal injury or death tq Ms. King, as required for exception to discharge under [section] 1328(a)(4).”).
It is not clear, however, whether section 1328(a)(4): (1) refers solely to personal bodily injury; (2) includes non-physical injury but not business or financial injuries; or (3) includes all injuries insofar as the injury is treated as a personal injury under non-bankruptcy law. Toste v. Smedberg (In re Toste), No. ADV 1202333, 2014 WL 3908139 (9th Cir. BAP 2014). at *3 (B.A.P. 9th Cir. Aug. 12, 2014).
The Court agrees with the thorough analysis of the court in Adams and adopts the “middle approach” to defining “personal injury” in the context to section 1328(a)(4). 478 B.R. at 487. That is, it excludes financial injury, but includes nonphysical injuries, not just bodily injury. First, Congress did not specifically limit “personal injury” to a subset of injuries to a person, such as personal injuries involving physical injury or trauma. Congress could have used the phrase “personal bodily injury” — as it did in section 522(d)(11)— but it did not. The presumption is that Congress’s choice of words was intentional. Second, construing “personal injury” to include non-physical injuries, such as emotional distress and defamation, is consistent with other constructions of “personal injury” in bankruptcy related provisions of the U.S.Code. For example, “personal injury” appears in the context of 28 U.S.C. §§ 157(b)(2)(C)) and 157(b)(5), which proscribe jurisdiction over “personal injury tort or wrongful death claims.” Id. at 476.
The Court rejects the Debtor’s argument that attorney’s fees, which do not constitute physical injury, are not to be included under section 1328(a)(4). A non-dischargeable debt includes the full amount of the liability associated with the conduct at issue, including “debt arising from” or “debt on account of’ that personal injury. See Cohen v. de la Cruz, 523 U.S. 213, 220-21, 118 S.Ct. 1212, 1217, 140 *48L.Ed.2d 341 (1998). It follows that if the conduct giving rise to a judgment against a debtor satisfies section 1328(a)(4), the plaintiffs attorney’s fees award is also non-dischargeable under section 1328(a)(4). See Gentry v. Kovler (In re Kovler), 249 B.R. 238, 262 (Bankr.S.D.N.Y.2000) (“Although decided on the basis of [s]ection 523(a)(2)(A), Cohen compels the conclusion that an award of attorney’s fees is non-dischargeable ... where those fees were incurred as a result of conduct giving rise to the non-dischargeable debt.”).
c. Willful or Malicious Injury
Because of the similarity of the statutes, courts use section 523(a)(6) case law to interpret the terms “willful” and “malicious” in section 1328(a)(4). See, e.g., Adams, 478 B.R. at 483-89. The Court will, however, note an important distinction. Using section 523(a)(6)’s “willful” and “malicious” definitions, the Plaintiff must show only that the Debtor’s actions were willful or malicious, not both.
(1) Willful
The word “willful” specifies “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). Merely showing that a debtor committed a conscious act that resulted in an injury is not sufficient. Rocco v. Goldberg (In re Goldberg), 487 B.R. 112, 127 (Bankr.E.D.N.Y.2013). The act must have been done with the intent to cause injury. Id. Reckless or negligent conduct will not satisfy section 1328(a)(4)’s “willful” standard. Geiger, 523 U.S. at 60, 118 S.Ct. 974. At a minimum, there must be a “substantial certainty” that the injury will occur. Margulies v. Hough (In re Margulies), 517 B.R. 441, 451 (S.D.N.Y.2014).
Courts within the Second Circuit have found that if a debtor’s act is intentional and injury to another is substantially certain, the debtor’s act satisfies section 1328(a)(4)’s “willful” standard. See, e.g., Stahl v. Gross (In re Gross), 288 B.R. 655, 662 (Bankr.E.D.N.Y.2003) (“An intentional wrongful act that necessarily causes injury meets the willfulness standard under Geiger.’’). While there remains a long-standing split among the Circuits on whether substantial certainty must be judged objectively or subjectively, courts within the Second Circuit judge it subjectively. Margulies, 517 B.R. at 453 (listing cases).
(2) Malicious
In the alternative to showing the injury was willful, a plaintiff may show that the injury was malicious, meaning “wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Goldberg, 487 B.R. at 112. Malice is implied when anyone of reasonable intelligence knows the act is contrary to commonly accepted duties in the ordinary relationships among people, and injurious to another. Curtis v. Ferrandina (In re Ferrandina), 533 B.R. 11, 26 (Bankr.E.D.N.Y.2015).
Having thus defined the requirements of a section 1328(a)(4) finding, the Court now analyzes whether either the Plaintiff or the Debtor is entitled to judgment as a matter of law based upon principles of collateral estoppel.
III. Collateral Estoppel
Under New York’s preclusion doctrine, collateral estoppel bars a party from relitigating in a second proceeding an issue of fact or law that was litigated and actually decided in a prior proceeding, if that party had a full and fair opportunity to litigate the issue in the prior proceeding and the decision of the issue was necessary *49to support a valid and final judgment on the merits. PenneCom B.V. v. Merrill Lynch & Co., Inc., 372 F.3d 488, 491 (2d Cir.2004). Relevant to non-disqhargeability proceedings, this Court previously emphasized:
When relying on collateral estoppel and a pre-bankruptcy judgment against the debtor as a basis for [non-disehargeability], the bankruptcy court must be able to point to clear and unequivocal factual and/or legal findings in the pre-petition judgment which would satisfy the requisite [non-dischargeability] elements ....
Indo-Med Commodities, Inc. v. Wisell (In re Wisell), 494 B.R. 23, 29 (Bankr.E.D.N.Y.2011).
Therefore, collateral estoppel application requires the Plaintiff to show the Debtor had a full and fair opportunity to litigate the Plaintiffs state court claims, and that the state court’s factual and legal findings of sexual harassment discrimination clearly and unequivocally establish a non-dis-chargeability claim under section 1328(a)(4).
a. Full and Fair Opportunity to Litigate
Because the state court judgment was entered by default, the Debtor argues he did not have a full and fair opportunity to litigate the underlying issues. The Debtor argues that “ineffective assistance of counsel, mainly that the [Debtor’s] counsel failed to appear on the trial day,” denied the Debtor a full and fair opportunity to litigate. (Debtor’s MSJ, EOF No. 15-2.) The Plaintiff argues that the Debtor not only had the opportunity to, and did, contest liability on the state court claims, but he also appeared at and participated in the inquest on damages.
Clear Second Circuit authority belies the Debtor’s argument. In Evans v. Ottimo, the Second Circuit addressed a substantially similar issue: whether a debtor in a non-dischargeability action is permitted to relitigate liability determined under a pre-petition, state court default judgment. 469 F.3d 278 (2d Cir.2006). In Evans,, the debtors were properly served with a complaint, failed to respond to that complaint, failed to appear for the inquest, and failed to seek to vacate the state court default judgment. The -Second Circuit found it appropriate to apply collateral estoppel under those facts because the debtors were afforded a full and fair opportunity to litigate the underlying issues and because the state court necessarily decided the issues.
In the instant case, the state court found the Debtor liable for violations of the NYSHRL and the NYCHRL and awarded punitive damages. The record demonstrates that the Debtor failed to appear for trial, notwithstanding that he engaged in substantial discovery, vigorously sought to vacate the judgment, and appeared at and participated in the inquest. Further, any ineffective assistance of counsel argument should have been raised in state court; the state court judgment is now final.
Guided by clear Second Circuit precedent, the Court finds that the Debtor had a full and fair opportunity to litigate the Plaintiffs allegations of sexual harassment discrimination. See Evans, 469 F.3d at 282.
b. Necessary to Support a Valid Final Judgment on the Merits
Step two of the collateral estoppel analysis requires a finding that the decision on the state court issue was necessary to support a valid and final judgment on the merits. For a question to have been actually litigated it must have been properly raised by the pleadings or otherwise placed in issue and actually determined in the prior proceeding. Evans, 469 F.3d at 282. In other words, whether the factual and - legal issues to be precluded in this *50section 1328(a)(4) case are the same as those involved in the state court case, and whether the state court findings were necessary to support the state court judgment.
To determine whether an identity of issues exists, the Court must find that (i) the elements of sexual harassment discrimination under the NYSHRL, the NYCHRL, and the punitive damages award are identical to, or subsumed in, section 1328(a)(4)’s standards; or (ii) the state court judgment is predicated on material and necessary factual findings that are sufficient to satisfy section 1328(a)(4)’s “willful or malicious” standards.
(I) State Court Judgment and Findings
In order to establish a prima facie discrimination case under the NYSHRL, the plaintiff must demonstrate (1) membership in a protected class; (2) satisfactory job performance; (3) an adverse employment action; and (4) that the adverse employment action occurred under circumstances giving rise to an inference of discrimination. Dixon v. Int’l Fed’n of Accountants, 416 Fed.Appx. 107, 109 (2d Cir.2011). Discrimination under the NYSHRL directed at a particular employee is commonly known as a “disparate treatment” claim; specifically, a plaintiff alleges that he or she has been subjected to discrimination, individually. Simmons-Grant v. Quinn Emanuel Urquhart & Sullivan, LLP, 915 F.Supp.2d 498, 505 (S.D.N.Y.2013). To prevail on a disparate treatment claim, discriminatory intent is required and the plaintiff must demonstrate deliberate discrimination. Lewis v. City of Chicago, Ill., 560 U.S. 205, 215, 130 S.Ct. 2191, 2199, 176 L.Ed.2d 967 (2010). A discrimination claim under the NYSHRL requires a plaintiff to establish willful conduct. Curtis v. Ferrandina (In re Ferrandina), 533 B.R. 11, 27 (Bankr.E.D.N.Y.2015).
In order to establish a prima facie discrimination case under the NYCHRL, a plaintiff must likewise demonstrate that the defendant engaged in willful discriminatory behavior. Id. The NYCHRL simplifies the discrimination inquiry: a plaintiff need only show that her employer treated her less well, at least in part, for a discriminatory reason. Mihalik v. Credit Agricole Cheuvreux N. Am., Inc., 715 F.3d 102, 110 (2d Cir.2013). A plaintiff still bears the burden to demonstrate that the offending conduct was motivated by discriminatory intent. Sotomayor v. City of New York, 862 F.Supp.2d 226, 258 (E.D.N.Y.2012) aff'd, 713 F.3d 163 (2d Cir.2013). A plaintiff must “link the adverse employment action to a discriminatory motivation [otherwise] her claims fail.” Id.
In order to establish a case for punitive damages, a plaintiff must show that the employer engaged in intentional discrimination with “malice” or “reckless indifference to the law.” Kolstad v. Am. Dental Ass’n, 527 U.S. 526, 529-30, 119 S.Ct. 2118, 2121, 144 L.Ed.2d 494 (1999). Here, the state court relied on Title VII to award punitive damages because sexual harassment discrimination claims under the NYSHRL, like all NYSHRL claims, are governed by the same standards as those under Title VII of the Civil Rights Act of 1964. See Pedrosa v. City of New York, No. 13 CIV. 01890, 2014 WL 99997, at *6 (S.D.N.Y. Jan. 9, 2014). To award punitive damages, the state court relied on a case in which the Supreme Court of the United States explained Congress’s intent to authorize punitive damages awards in only a subset of Title VII cases involving intentional discrimination—i.e., Title VII cases in which the employer acts with “malice or reckless indifference to the federally protected rights of the aggrieved *51individual.” Kolstad, 527 U.S. at 526, 119 S.Ct. 2118. “Malice” or “reckless indifference” pertains to the employer’s knowledge that it may be violating federal law, not its knowledge that it is engaging in discrimination. Id. at 535-36, 119 S.Ct. 2118 (“An employer must at least discriminate in the face of a perceived risk that its actions will violate federal law.” (emphasis added)). For example, an employer, who intentionally discriminates without knowledge of the federal prohibition or who intentionally discriminates with the bona fide belief that such discrimination is lawful under an occupational statutory defense, does not act with “malice” or “reckless indifference.” Id. at 536-37, 119 S.Ct. 2118. In such circumstances, ie., in the absence of “a positive element of conscious wrongdoing,” compensatory damages, not punitive damages, are available. Id. at 535, 119 S.Ct. 2118.
In the instant case, the state court found that the Plaintiff established the requisite elements of an individual disparate treatment claim — ie., sexual harassment discrimination — and of punitive damages. The Court is bound by the prior state court judgment that the Debtor subjected the Plaintiff to deliberate and intentional discriminatory treatment in violation of the NYSHRL and the NYCHRL. The Court will analyze the elements necessary to establish the NYSHRL and NYCHRL claims and the punitive damages award, and the factual and legal findings made in support of the judgment, and will compare those findings to the requirements of section 1328(a)(4).
A. Willfulness
As previously explained, the word “willful” means “a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). The Court previously stated that where an employer’s deliberate conduct is found to constitute discrimination against an individual employee, it necessarily follows that the employer’s intent was to cause injury. Goldberg, 487 B.R. at 127. Another court explained that discrimination per se constitutes intent to injure because discrimination cannot serve any other purpose. Bernal v. Benham (In re Benham), No. 07-40498, 2008 WL 397668, at *4 (Bankr.D.Mass. Feb. 11, 2008) (“Because the Defendant intended to discriminate and the discrimination itself constituted an injury to the Plaintiff, the ... judgment establishes that the Defendant’s actions were willful.”); see also Basile v. Spagnola (In re Spagnola), 473 B.R. 518, 523 (Bankr.S.D.N.Y.2012) (“This Court believes that exposure to unwelcome sexual conduct, like an advancing of one’s prurient interests to the point of harassment, is the injury that a sexual harassment victim suffers and that a judgment finding an individual intentionally caused that injury is enough to meet the prong of willfulness.”). But see Sanger v. Busch (In re Busch), 311 B.R. 657, 669 (Bankr.N.D.N.Y.2004) (“Although sexual harassment under Title VII presupposes intentional conduct in the form of unwelcome sexual conduct, it does not require that the employer intend to injure the plaintiff.”).
Although the Court believes that the state court’s legal finding of discrimination under the NYSHRL and the NYCHRL is sufficient to satisfy the “willful” standard of section 1328(a)(4), it is not necessary for the Court to rely on such a per se rule. As discussed below, the state court’s factuai findings are sufficient.
In this case the state court determined that the Debtor “engaged in conduct where he sexually harassed the [P]laintiff by touching her inappropriately over her vehement objections and with the knowl*52edge the [P]laintiff was seeking therapy because the [Pjlaintiff did not like being touched, and mocking her for not wanting to be touched for approximately nineteen months of her employment.” (State Court Judgment, EOF No. 13-6). These findings support the judgment for intentional discrimination. There is no indication in the state court findings that the Debtor’s actions were anything but intentional, and in the Court’s view those intentional acts caused willful personal injury to the Plaintiff. .
While the discrimination finding based on the Debtor’s willful conduct may have been enough to establish willful injury to the Plaintiff, in this case, the finding of discrimination was coupled with a punitive damages award. At a minimum, to impose punitive damages a defendant’s intentional discrimination must be done with malice or reckless indifference to violating federal law. In support of the-punitive damages award, the state court found not only that the Debtor acted in the face of a perceived risk that his actions would violate the law, but that the Debtor willfully and “with knowledge” violated the law. The state court found: a “willful violation by [Debt- or’s] conduct done with knowledge he violated the law of the City of New York.” (State Court Judgment, ECF No. 13-6). Thus, the state court’s findings in support of punitive damages rise above the minimum “reckless indifference” standard, and bring this case more squarely within the requirements of section 1328(a)(4)’s “willful” standard.
The Court finds that by virtue of willfully (and with knowledge) violating a sexual harassment discrimination law, the Debtor intentionally discriminated and willfully caused injury to the Plaintiff. Surely, one cannot willfully (and with knowledge) violate a law without intentionally committing the law’s prohibited act. The Debtor’s conduct was deliberate and intentional and rises above Geiger’s reckless-negligence standard. See McDonough v. Smith (In re Smith), 270 B.R. 544, 550 (Bankr.D.Mass.2001) (rejecting a debtor’s reliance on Geiger—i.e., that he was a “jealous lover who behaved recklessly causing unwanted injury to the Plaintiff’—to find that the debtor’s conduct was deliberate and intentional). The state court’s factual findings of the Debtor’s “willful violation” and continued touching “with knowledge the [P]laintiff was seeking therapy” are sufficient to show that the Debtor acted with substantial certainty that injury to the Plaintiff would result. Viewed in the light most favorable to the Debtor, these findings manifest the Debtor’s intentional discrimination and willful injury to the Plaintiff.
Although a finding of willful personal injury to the Plaintiff alone would satisfy section 1328(a)(4)’s standard, the Court will also analyze the malice standard of the statute.
B. Malice
While courts have found that discriminatory conduct satisfies section 1328(a)(4)’s “malicious” standard, particularly in cases involving sexual harassment, see, e.g., Jones v. Svreck (In re Jones), 300 B.R. 133, 140 (1st Cir. BAP 2003), and Spagnola, 473 B.R. at 524, the Court has acknowledged that most anti-discrimination statutes, such as the NYSHRL and the NYCHRL, do not require direct proof of malice. Goldberg, 487 B.R. at 128. There being no requisite or express finding of “malice” (or its equivalent) to hold the Debtor liable for sexual harassment discrimination under the NYSHRL and the NYCHRL, the Court cannot find that the legal elements necessary to support a judgment of sexual harassment discrimination under the NYSHRL and the NYCHRL are identical to the malice standard of section 1328(a)(4).
*53To some courts, a punitive damages award, alone, suffices for a malice finding. See, e.g., Bernal v. Benham (In re Benham), No. 07-40498, 2008 WL 397668, at *4 (Bankr.D.Mass. Feb. 11, 2008) (“Because the standards for malice and punitive damage awards are similar, a punitive damage award suffices for a malice finding.”); McDonough v. Smith (In re Smith), 270 B.R. 544, 550 (Bankr.D.Mass.2001) (explaining that a punitive damage award for sexual harassment discrimination demonstrates that the defendant’s conduct caused willful and malicious injury to the plaintiff by creating an intimidating and offensive work environment). However, as discussed above, a prerequisite for a punitive damages award is a finding that the Debtor acted with either “malice” or “reckless indifference.” Because punitive damages awards are available in the absence of malice, i.e., in cases where the employer acted with “reckless indifference,” the Court finds that a punitive damages award does not per se satisfy section 1328(a)(4)’s “malicious” standard.
However, the state court’s malice findings are clear: “the [Debtor] engaged in conduct where he sexually harassed the [P]laintiff by touching her inappropriately over her vehement objections with the knowledge the [P]laintiff was seeking therapy because the [P]laintiff did not like being touched, and mocking her for not wanting to be touched for approximately nineteen months of her employment.” (State Court Judgment, ECF No. 13-6). This is similar to Jones, in which a court, in finding malice, specifically noted that the debtor continued with his harassment, despite the fact the plaintiff asked the debtor to stop touching her and expressed her discomfort. 300 B.R. at 140. As the Court explained in Goldberg, it defies rationality and logic to suggest (1) that the Debtor’s commission of overt acts that constitute intentional discrimination was objectively benign, and (2) that an overt act constituting sexual' harassment discrimination aimed at an individual could occur absent a malicious intent to harm. 487 B.R. at 129.
Based on the factual findings of the state court, the Court finds that the Debt- or’s personal injury to .the Plaintiff also satisfies the malicious standard of section 1328(a)(4). The Debtor’s acts towards the Plaintiff, as found by the state court, clearly were “wrongful and without just cause or excuse.” The findings of the state court also provide the basis for which this Court to find implied malice as anyone of “reasonable intelligence” would know that the Debtor’s actions towards the Plaintiff were “contrary to commonly accepted duties in the ordinary relationships among people, and injurious” to the Plaintiff. In re Ferrandina, 533 B.R. 11, 26 (Bankr.E.D.N.Y.2015). The Court’s findings are consistent with those of courts giving preclusive effect to discrimination judgments in non-dischargeability proceedings if the judgment is supported by findings that clearly and unequivocally establish non-discharge-ability.
Accordingly, the Court finds that the Debtor’s conduct and the resulting injury was willful or malicious, as is necessary to satisfy section 1328(a)(4).
CONCLUSION
For the foregoing reasons, the Court grants summary judgment in favor of the Plaintiff and denies the Debtor’s cross motion. The full amount of the judgment debt — $302,154.88—shall be excepted from discharge under section 1328(a)(4). A judgment consistent with this Memorandum Decision will issue forthwith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498818/ | DECISION
CARLA CRAIG, Chief United States Bankruptcy Judge
This adversary proceeding was commenced by Gregory Messer, Esq., trustee for the estate of Nigel Collins (the “Trustee”), against Raquel Collins (“Collins”)
and School Data Corp. (“School Data” and collectively with Collins, “Defendants”). The Trustee seeks a judgment against Defendants on the basis of an alleged fraudulent scheme whereby Nigel Collins (the “Debtor”) caused the assets of his closely-held company, Learning Directions LLC (“Learning Directions”) to be transferred to a new corporation nominally controlled by Collins, his wife. According to the Trustee, the new corporation, School Data, conducted the same business as Learning Directions, and the alleged transfers occurred at a time when Learning Directions and the Debtor had outstanding debts that ultimately resulted in a state court judgment against them.
Before the Court is Defendants’ motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7012(b). For the reasons stated below, Defendants’ motion is granted in part and denied in part.
JURISDICTION
This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1996, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A),(E),(H) and (O).
BACKGROUND
All the facts herein are taken from the Trustee’s pleadings, except where noted, and are assumed to be true for purposes of this decision. On August 13, 2001, the Debtor formed a New York Limited Liability Company under the name Learning Directions, LLC. (Compl. ¶¶ 15-16, EOF *57Doc. No. 1.)1 The Debtor was the majority owner and president of Learning Directions. (Compl. ¶¶ 18, 25, ECF Doc. No. 1.) Learning Directions operated out of a business office located in the building where the Debtor and Collins reside. (Compl. ¶¶ 20-21, ECF Doc. No. 1.) Learning Directions paid rent for the use of the space. (Compl. ¶22 ECF, Doc. No. 1.) Learning Directions’ business was to provide services, software, and analysis to schools in and around New York City. (Compl. ¶¶ 23-24, ECF Doc. No. 1.) Learning Directions dealt primarily with the New York City Department of Education (the “DOE”) and had a vendor license to market products to schools in New York City. (Compl. ¶ 24, ECF Doc. No. 1.)
In the course of his work at Learning Directions, the Debtor obtained confidential, proprietary information and trade secrets owned by Learning Directions consisting of
knowledge of important points of contacts at specific schools in charge of outsourcing and approving contracts with outside vendors for goods and services to schools, contact information about individuals within the New York City Department of Education who have authority regarding approving contracting for services and/or products for schools with outside vendors, contact information and inside information as to how the process at the New York City Department of Education functions/operates with regard to outside vendors obtaining approval for contracts to supply goods and services to the New York City Department of Education and its schools, points of contact and information regarding the names and identities of outside consulting groups and individuals who can facilitate a vendor obtaining contracts with the New York City Department of Education and its schools, the actual and potential software and testing needs of public and nonpublic schools in the greater New York City area, and profitable lines of business regarding the goods and services needed [at] such schools and the New York City Department of Education, among other things.
(Compl. ¶¶ 26-27, ECF Doc. No. 1.) The Debtor and Learning Directions also created software related to the business. (Compl. ¶ 28, ECF Doc. No. 1.) The Debt- or and Learning directions obtained this proprietary information and software by expending time and effort, and the information is not readily accessible by the public. (Compl. ¶29, ECF Doc. No. 1.) The Debtor, as the president and majority member of Learning Directions, had a legal and equitable interest in the assets and profits of Learning Directions. (Compl. ¶ 31, ECF Doc. No. 1.)
In August, 2008, the Debtor entered into a loan agreement with Sovereign Bank on behalf of Learning Directions for a $95,000 line of credit. (Compl. ¶ 33, ECF Doc. No. 1.) The Debtor also executed a personal guaranty of the loan. (Compl. ¶ 38, ECF Doc. No. 1.) Learning Directions subsequently defaulted on the loan, and was notified of the default by NTL Capital LLC, assignee of Sovereign Bank. (Compl. ¶ 41-42, ECF Doc. No. 1.) NTL Capital LLC filed suit against Learning Directions and the Debtor and obtained a judgment against them in the amount $113,895.00 in May of 2012. (Compl. ¶¶ 44-46, ECF Doc. No. 1.)
In October, 2009, School Data was founded. (Compl. ¶ 48, ECF Doc. No. 1.) *58Collins, the Debtor’s wife, is the sole shareholder of School Data. (Compl. ¶ 50, ECF Doc. No. 1.) Prior to the founding of School Data, Collins worked as an attorney for a non-profit entity. (Compl. ¶ 51, ECF Doc. No. 1.) School Data maintained its place of business at the same address as Learning Directions, which is located in the building where the Debtor and Collins reside. (Compl. ¶ 53, ECF Doc. No. 1.) Starting in 2010, the Debtor ceased using Learning Directions for contracts with the DOE and New York City schools and began using School Data instead. (Compl. ¶¶ 59-60, ECF Doc. No. 1.) The Debtor became an employee of School Data at that time. (Compl. ¶52, ECF Doc. No. 1.)
As Learning Directions ceased doing business and School Data began to enter into contracts to provide goods and services to the DOE and New York City schools, Learning Directions transferred property to School Data. (Compl. ¶¶ 54, 58, ECF Doc. No. 1.) This property included
proprietary confidential business information and trade secrets of Learning Directions regarding proprietary information about how a vendor obtains contracts for goods or services with the New York City Department of Education and New York City schools, what types of goods or services are needed by the New York City Department of Education and its schools, how to get a contract approved to provide those entities with goods and services, as well as computers, software, office equipment and customer goodwill.
(Compl. ¶ 55, ECF Doc. No. 1.) School Data paid no consideration to Learning Directions in exchange for these transfers. (Compl. ¶ 54, ECF Doc. No. 1.)
The Trustee filed the Complaint on September 24, 2014. Defendants filed their Motion to Dismiss on January 20, 2015. The Trustee filed Opposition to the Motion to Dismiss on February 12, 2015. Defendants filed their Reply to the Trustee’s Opposition on February 17, 2015. A hearing was held on the Motion to Dismiss on May 12, 2015 and the matter was taken under advisement.
DISCUSSION
Standard For A Motion To Dismiss Under Fed. R. Bankr. P.
7012(b)
Rule 8(a)(2),2 incorporated by reference in Bankruptcy Rule 7008,3 requires a pleading to contain “a short and plain statement of the claim showing that the pleader is entitled to relief[.]” Fed. R. Civ. P. 8(a)(2); see Fed. R. Bankr. P. 7008. Rule 12(b)(6), incorporated by reference in Bankruptcy Rule 7012, provides that a complaint may be dismissed “for failure to state a claim upon which relief can be granted[.]” Fed. R. Civ. P. 12(b)(6); see Fed. R. Bankr. P. 7012(b). The purpose of Rule 12(b)(6) “ ‘is to test, in a streamlined fashion, the formal sufficiency of the plaintiffs statement of a claim for relief without resolving a contest regarding its substantive merits.’ ” Halebian v. Berv, 644 F.3d 122, 130 (2d Cir.2011) (quoting Global Network Commc’ns, Inc. v. City of New York, 458 F.3d 150, 155 (2d Cir.2006)).
“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, *59570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). In making this determination, a court must liberally construe the complaint, accept the factual allegations as true, and draw all reasonable inferences in favor of the plaintiff. See Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir.), cert. denied, 554 U.S. 930, 128 S.Ct. 2964, 171 L.Ed.2d 906 (2008). However, courts “are not bound to accept as true a legal conclusion couched as a factual allegation.” Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986); see Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (“Threadbare recitals of the elements of a cause of action, supported by mere conclu-sory statements, do not suffice.”). “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 (quoting Twombly, 550 U.S. at 556, 127 S.Ct. 1955). “Determining whether a complaint states a plausible claim for relief ’ is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679, 129 S.Ct. 1937. In other words, plausibility “ ‘depends on a host of considerations: the full factual picture presented by the complaint, the particular cause of action and its elements, and the existence of alternative explanations so obvious that they render plaintiffs inferences unreasonable.’ ” Fink v. Time Warner Cable, 714 F.3d 739, 741 (2d Cir.2013) (quoting L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 430 (2d Cir.2011)).
Two of the Trustee’s claims allege fraud and must be pled according to Rule 9(b). Rule 9(b), incorporated by reference in Bankruptcy Rule 7009, requires a pleading, when alleging fraud, to “state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b); see Fed. Bankr. R. 7009. Fraudulent intent may be alleged generally, but the plaintiff is required to plead sufficient facts to support a strong inference of fraudulent intent. Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994). In bankruptcy, “courts take a liberal approach in construing allegations of actual fraud pled by a trustee, because the trustee is a third party outsider to the transaction and must plead fraud based upon second hand knowledge.” Gredd v. Bear, Stearns Security Corp. (In re Manhattan Inv. Fund Ltd.), 310 B.R. 500, 505 (Bankr.S.D.N.Y.2002). In such situations, “courts often look at the totality of the circumstances as well as the badges of fraud surrounding the transfers.” Id.
The Adequacy of the Complaint
In reviewing the well-pleaded facts to determine whether a complaint states a claim for relief,, common sense and judicial experience must be employed to evaluate the complaint in context. Iqbal, 556 U.S. at 679, 129 S.Ct. 1937. This exercise involves more than reviewing each allegation and claim line by line. To decide whether a claim is sufficiently pled under Rule 8, it is appropriate to consider the complaint as a whole in order to assess whéther the plaintiff has stated a claim for relief that crosses the line from possible to plausible.
Here, the Trustee has alleged plausible claims. The alleged facts, taken as true, present a scenario in which the Debt- or, in an effort to avoid creditors, closed down Learning Directions and opened a new company, School Data, in his wife’s name. School Data conducted essentially the same business in the same location with the same customers and employees as Learning Directions. (Compl. ¶¶ 56, 59-60, ECF Doc. No. 1.)
The nature of the business is also an important part of the context in which the *60Complaint must be evaluated. The Complaint alleges that Learning Directions and School Data were service businesses that relied on proprietary information, developed by the Debtor for Learning Directions, consisting of
knowledge of important points of contacts at specific schools in charge of outsourcing and approving contracts with outside vendors for goods and services to schools, contact information about individuals within the New York City Department of Education who have authority regarding approving contracting for services and/or products for schools with outside vendors, contact information and inside information as to how the process at the New York City Department of Education functions/operates with regard to outside vendors obtaining approval for contracts to supply goods and services to the New York City Department of Education and its schools, points of contact and information regarding the names and identities of outside consulting groups and individuals who can facilitate a vendor obtaining contracts with the New York City Department of Education and its schools, the actual and potential software and testing needs of public and nonpublic schools in the greater New York City area, and profitable lines of business regarding the goods and services needed [at] such schools and the New York City Department of Education, among other things.
(Compl. ¶ 27, ECF Doc. No. 1.) The Complaint ' alleges that School Data used the proprietary information, contacts, trade secrets and goodwill developed for Learning Directions to apply for DOE contracts under a new name. (Compl. If 60, ECF. Doc. No. 1.) The Debtor became an employee of School Data, continued the business under that name, and used the same computers and the same information in the same space as Learning Directions. (Compl. ¶¶ 52, 56, 60-61, ECF Doc. No. 1.) In short, the business of Learning Directions continued under School Data’s name and under the Debtor’s control. (Compl. ¶¶ 60, 114-15, ECF Doc. No. 1.)
It is also significant that School Data was owned by the Debtor’s wife. It is well-established that “[t]he transfer of property by the debtor to his spouse while insolvent, while retaining the use and enjoyment of the property, is a classic badge of fraud.” Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1583 (2d Cir.1983).
These allegations more than adequately state plausible claims for relief. Defendants’ challenges to the adequacy of the Complaint principally consist of denials of key factual allegations. These factual arguments are insufficient to support a motion to dismiss. See, e.g., Todd v. Exxon Corp., 275 F.3d 191, 203 (2d Cir.2001) (holding that fact-specific questions cannot be resolved on a motion to dismiss); O’Hearn v. Bodyonics, Ltd., 22 F.Supp.2d 7, 10 (E.D.N.Y.1998) (holding that the court does not weigh evidence at the motion to dismiss stage).
Each of Defendants’ arguments will be addressed in turn below.
A. Conveyance of Property (All Claims)
Defendants note that all the causes of action asserted in the Complaint are based on alleged transfers of property by Learning Directions to School Data. (Mot. to Dismiss at 3 n.4, ECF Doc. No. 14-1.)4 Causes of action one through six are based *61on allegations of constructive or actual fraudulent transfers. The remaining six causes of action also rely in part on allegations that property was transferred from Learning Directions to School Data.
In their Motion and Reply, Defendants argue that nothing of value was transferred from Learning Directions to School Data. (Mot. to Dismiss at 3, ECF Doc. No. 14-1.) They claim that any alleged information or knowledge developed by Learning Directions and used by School Data was neither proprietary nor a trade secret and is publicly available on the DOE’s website.5 (Mot. to Dismiss at 5-6, ECF Doe. No. 14-1.) They also argue that the Trustee has failed to adequately allege the existence of any software that is claimed to have been transferred from Learning Directions to School Data. (Reply at 3-4, ECF Doc. No. 19.) Defendants further argue that the Trustee failed to allege that anything of value changed hands with respect to the lease for office space used by Learning Directions and then by School Data. (Mot. to Dismiss at 6, ECF Doc. No. 14-1.)
1. Intangible Property
The Trustee alleges that valuable intangible property was transferred from Learning Directions to School Data without compensation, including proprietary information and trade secrets. (Compl. ¶ 54, ECF Doc. No. 1.) The alleged proprietary information and trade secrets consist generally of knowledge about who to contact and how to go about obtaining contracts for services and supplies with schools in the New York City area. (Compl. 1155, ECF Doc. No. 1.) The Trustee specifically alleges that Learning Directions acquired
knowledge of important points of contacts at specific schools in charge of outsourcing and approving contracts with outside vendors for goods and services to schools, contact information about individuals within the New York City Department of Education who have authority regarding approving contracting for services and/or products for schools with outside vendors, contact information and inside information as to how the process at the New York City Department of Education functions/operates with regard to outside vendors obtaining approval for contracts to supply goods and services to the New York City Department of Education and its schools, points of contact and information regarding the names and identities of outside consulting groups and individuals who can facilitate a vendor obtaining contracts with the New York City Department of Education and its schools, the actual and potential software and testing needs of public and nonpublic schools in the greater New York City area, and profitable lines of business regarding the goods and services needed [at] such schools and the New York City Department of Education, among other things.
(Compl. ¶ 27, ECF Doc. No. 1.) The Trustee alleges that this information was proprietary and was not readily available or easily discernible to the public and other vendors. (Compl. ¶29, ECF No. 1.) The intangible property allegedly transferred to School Data also included software and customer goodwill. (Compl. ¶55, ECF Doc. No. 1.)
Intangible property such as proprietary information, trade secrets, and *62goodwill may be the subject of a fraudulent transfer claim. See, e.g., Defiance Button Mach. Co. v. C & C Metal Products Corp., 759 F.2d 1053, 1063 (2d Cir.1985) (holding that confidential customer list developed through substantial effort was a trade secret); Levitt Corp. v. Levitt, 593 F.2d 463, 468 (2d Cir.1979) (“Goodwill is a valuable property right derived from a business’s reputation for quality and service.”) Here, the Trustee has alleged the existence of proprietary information, trade secrets, and goodwill and the transfer of that property to School Data.
Defendants respond by pointing to a document available on the DOE website entitled “Procurement Policy and Procedures” (the “DOE Procedures”).6 The purpose of the DOE Procedures is, among other things, to “ensure appropriate public access to contracting information.” (DOE Procedures at 1.) The DOE Procedures provide guidelines on both the procurement process employed by New York schools and the methods by which contractors are selected. (DOE Procedures at 14-81.)
Defendants argue that the availability of the DOE Procedures demonstrates that no proprietary information was transferred to School Data. The Trustee, however, has alleged Learning Directions transferred information not available to the general public to School Data, and that Learning Directions acquired information about the DOE’s contracting processes that is not publically available or generally known to potential competitors, including information concerning specific points of contacts at specific schools, and within the DOE, with authority to approve contracts with outside vendors; inside information as to how the DOE functions with respect to outside vendor contracts; the names and identities of consulting groups and individuals who can facilitate the process; the software and testing needs of schools in the New York City area; and profitable lines of business for outside vendors with schools and the DOE. (Compl. ¶¶ 27, 54-55, ECF Doc. No. 1.) Whatever the DOE Procedures may contain, it is plausible that an experienced vendor such as Learning Directions could develop information not set forth in the DOE Procedures as alleged in the Complaint.
Geltzer v. Bloom (In re M. Silverman Laces, Inc.), 404 B.R. 345 (Bankr.S.D.N.Y.2009), relied upon by Defendants, does not support dismissal of the Complaint. There, the court made a determination about the value of an allegedly proprietary customer list after a trial, in which it received testimony from five witnesses over a period of three days. Id. at 349. Whether the proprietary information at issue in that case had any value was ultimately a factual question that turned on the evidence presented. The same is true here. Whether Learning Directions developed valuable proprietary information that it transferred to School Data is a question of fact that cannot be decided at this stage in the case.
Crenshaw v. McKinley, 116 F.2d 877 (2d Cir.1941), cited by Defendants, is also distinguishable. In that case, a trustee filed a fraudulent transfer action against the debtor’s wife because the debtor had started a new company in her name doing the same business. Id. at 878-79. The court found that the trustee had failed to state a claim because the debtor did not transfer any property. Id. at 880. The crucial difference between Crenshaw and the in*63stant case is that the property alleged to have been transferred in Crenshaw was the debtor’s “credit,” defined as his reputation in the industry. Id. The court held that this was not a form of property that could be the subject of a fraudulent transfer claim. Id. Here, the Trustee’s claims are not based upon a transfer of the Debt- or’s reputation in the industry; the Complaint alleges that Learning Directions’ proprietary information, software, and goodwill were transferred to School Data, which enabled it to continue Learning Directions’ business. This more than enough to satisfy the requirement that the complaint allege plausible claims based upon the transfer of such property.
As to the software, the Trustee alleges that the Debtor and Learning Directions “acquired and/or created” software used for “student testing and analysis of tests.” (Compl. at ¶ 28, ECF Doc. No. 1.) Defendants respond by arguing that no software was transferred between Learning Directions and School Data, and that any software sold by Learning Directions was not owned by Learning Directions.7
This too is a factual argument. Defendants’ contentions about who the software belongs to, whether it was proprietary, and whether it has value hinge on the facts. Accepting the factual allegations in the Complaint as true, the Trustee has adequately pled that proprietary software existed and was transferred to School Data.
2. Tangible Property
In addition to the intangible property discussed above, the Trustee also alleges that the tangible property of Learning Directions, including computers and office equipment, was transferred to School Data. Defendants did not challenge this allegation, and the Trustee has met his burden to plead the transfers of this tangible property.
3. The Lease
The Trustee also alleges that School Data obtained a lease for the same office space used by Learning Directions without paying compensation to Learning Directions. (Compl. ¶¶ 56-57, ECF Doc. No. 1.) This allegation, however, is a con-clusory statement without any factual support. The Trustee does not allege that the lease was below market or that Learning Directions paid for School Data’s use of the space, and has not met his burden to adequately plead a transfer of property with respect to the lease of premises for Learning Directions and School Data. Therefore, Defendants’ motion is granted with respect to every claim to the extent such claim alleges a transfer of the lease.
B. Misappropriation of Trade Secrets (Claim Eleven)
To state a claim for misappropriation of trade secrets, the plaintiff must allege that “(1) it possessed a trade secret, and (2) defendant is using that trade secret in breach of an agreement, confidence, or duty, or as a result of discovery by improper means.” Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir.1990) (internal quotations omitted). New York courts consider the following factors when determining whether a trade secret exists:
(1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the business to guard the secrecy of the information; (4) the value of the infor*64mation to the business and its competitors; (5) the amount of effort or money expended by the business in developing the information; (6) the éase or difficulty with which the information could be properly acquired or duplicated by others
Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 895, 604 N.Y.S.2d 912, 624 N.E.2d 1007, 1013 (1993) (quoting Restatement of Torts § 757 comment b) (internal brackets omitted).
In Friedman v. Wahrsager, 848 F.Supp.2d 278 (E.D.N.Y.2012), the plaintiff alleged that defendants had transferred a customer list in violation of a duty of confidence. Id. at 301. The defendants argued in their motion to dismiss that the items in question were not trade secrets. Id. The court noted that whether a customer list constitutes a trade secret depends on the confidential nature of the list and whether the information in it is not otherwise readily ascertainable. Id. at 302 (quoting Defiance Button Machine, 759 F.2d at 1063). The court determined that the ultimate inquiry was a question of fact, and that the plaintiff had sufficiently pled the claim. Id.
Here, the Trustee has alleged the existence of trade secrets belonging to Learning Directions consisting of proprietary information “about how a vendor obtains contracts for goods or services with the [DOE] and New York City Schools, what types of goods or services are needed by the [DOE] and its schools, [and] how to get a contract approved to provide those entities with goods and services.... ” (Compl. ¶ 55, ECF Doc. No. 1.) He also alleged that this information was improperly obtained by Defendants. (Compl. ¶ 130, ECF Doc. No. 1.) Defendants argue that the alleged proprietary information and trade secrets are readily ascertainable on the DOE’s website. (Mot. to Dismiss at 5-6, ECF Doc. No. 14-1.) As explained above, this factual argument is insufficient to support a motion to dismiss.
To state a claim for misappropriation, the Trustee must also plead that Defendants used the misappropriated trade secret. Defendants contend that the Trustee has failed to do so because he has not alleged specific instances where Defendants used the alleged trade secrets. (Mot. to Dismiss at 11, ECF Doc. No. 14-1.) Defendants rely on Jung v. Chorus Music Studio, Inc., No. 13-cv-1494, 2014 U.S. Dist. LEXIS 128103, 2014 WL 4493795 (S.D.N.Y. Sept. 11, 2014), where the court ruled that a proposed claim of misappropriation of trade secrets was futile because the claimants (1) did not detail the ways the trade secrets were used, (2) did not identify any customers contacted, and (3) did not identify any other business ventures. Jung, 2014 U.S. Dist. LEXIS 128103, at *23, 2014 WL 4493795, at *8. Here, however, the Trustee has alleged that. Defendants used the .alleged trade secrets to secure contracts with the DOE and did so using newly-created School Data. The specifics of the proprietary information and trade secrets involved, and the instances when they weré used, is the type of information particularly within the control of Defendants that the Trustee may plead on the basis of information and belief. Therefore, Defendants’ motion is denied with respect to claim eleven of the Complaint.
C. Actual Fraudulent Conveyance Under New York Debtor and Creditor Law § 276 and 11 U.S.C. § 518(a)(1)(A) (Claims Two and Six)
The Complaint seeks relief under DCL § 276, which is made applicable to this case through § 544(b) of the Code and provides that a conveyance may be set aside when it is made with “actual intent *65... to hinder, delay, or defraud” creditors. N.Y. Debt. & Cred. Law § 276. Section 548(a)(1)(A) of the Code likewise provides that a trustee may avoid a transfer of an interest of the debtor in property if the transfer was made with “actual intent to hinder, delay, or defraud” creditors. 11 U.S.C. § 548(a)(1)(A). Claims under these statutes must be pled according to Rule 9(b). Atlanta Shipping Corp. v. Chem. Bank, 818 F.2d 240, 251 (2d Cir.1987) (holding that claims under DCL § 276 must be pled according to Rule 9(b)); Manhattan Investment, 310 B.R. at 505 (holding that claims under 11 U.S.C. § 548(a)(1)(A) must be pled according to Rule 9(b)). The principal difference between DCL § 276 and § 548(a)(1)(A) of the Code is how far back the Trustee can go to avoid a transfer: under DCL § 276, the statute of limitations is six years; under § 548(a)(1)(A), only transfers occurring within two years before the filing date may be avoided. Miller v. Polow, 14 A.D.3d 368, 787 N.Y.S.2d 319, 320 (2005); 11 U.S.C. § 548(a)(1).
1. The Particularity Requirement
To satisfy Rule 9(b)’s particularity requirement, the plaintiff generally must allege “(1) the property subject to the transfer, (2) the timing and, if applicable, frequency of the transfer and (3) the consideration paid with respect thereto.” Pereira v. Grecogas Ltd. (In re Saba Enterprises, Inc.), 421 B.R. 626, 640 (Bankr.S.D.N.Y.2009); see also Alnwick v. European Micro Holdings, Inc., 281 F.Supp.2d 629, 646 (E.D.N.Y.2003). Courts often apply a more relaxed standard to the particularity requirement when a trustee in bankruptcy alleges actual fraud. Saba Enterprises, 421 B.R. at 640; Manhattan Investment, 310 B.R. at 505. This “relaxed standard does not eliminate the particularity requirement, [but] the degree of particularity required should be determined in light” of the circumstances of the case. Devaney v. Chester, 813 F.2d 566, 569 (2d Cir.1987). The particularity requirements serve to put the defendant on sufficient notice of the alleged fraudulent conduct to be able to answer and defend the allegations. Saba Enterprises, 421 B.R. at 641. The intent element may be alleged generally so long as the facts alleged are sufficient to support a strong, inference of fraudulent intent. Shields, 25 F.3d at 1128.
Under Rule 9(b), as applied to a trustee in bankruptcy, the Trustee has met his pleading obligations. First, the Trustee identified the particular property allegedly transferred sufficiently to put the defendants on notice. The Complaint specifically describes interests in property allegedly belonging to the Debtor that were the ■subject of fraudulent transfers, including proprietary information regarding contracting with the DOE, computers, software, office equipment, and the business goodwill. Second, the Trustee adequately alleged timing by pleading that the transfers occurred during the period in 2010 when Learning Directions stopped doing business and School Data began doing business. This is sufficient to put Defendants on notice of the timing of the alleged transfers, particularly in this case where the Complaint alleges the Debtor worked for both companies, the companies used the same office space, and the office space was located in the house where both the Debtor and Collins reside. Third, the Trustee has adequately alleged that the transfers were made for no consideration and Defendants have not contested this point.
The Trustee has not, however, adequately alleged that any of the transfers took place within the two-year look back period under § 548(a)(1)(A) of the Code. *66The Trustee’s allegations in this regard consist of a bare recitation that, upon information and belief, some of the alleged transfers occurred during the two-year period prior to the filing date. This does not meet the requirements of Rule 9(b) even under the relaxed standard applied to a bankruptcy trustee. See Alnwick, 281 F.Supp.2d at 646 (holding that vague reference to a year does not meet Rule 9(b)’s particularity requirement). The allegations are not sufficient to put Defendants on notice as to which alleged transfers may be subject to avoidance under DCL § 276 and which may be subject to avoidance under § 548 of the Code. Therefore, Defendants’ motion is granted with respect to count six of the Complaint.
2. Fraudulent Intent
As intent is rarely susceptible to direct proof, courts rely on the badges of fraud8 to provide circumstantial evidence of intent. Kaiser, 722 F.2d at 1582. Additionally, both “[t]he transfer of property by the debtor to his spouse while insolvent, while retaining the use and enjoyment of the property” and “[t]he shifting of assets by the debtor to a corporation wholly controlled by him” are strong indicators of fraudulent intent. Id. at 1583.
The Trustee has pled sufficient badges of fraud to adequately allege the Debtor’s fraudulent intent. The Complaint alleges that Defendants paid no consideration for the alleged transfers. (Compl. ¶ 54, ECF Doc. No. 1.) It also alleges that the Debtor transferred the property to another entity under the nominal control of his wife, who had no experience running this type of business, while he actually controlled the business and received benefits from it. (Compl. ¶¶ 47-52, 114-15, ECF Doc. No. 1.) Therefore, Defendants’ motion is denied with respect to count two of the Complaint.
D. Trustee’s Remaining Claims
Defendants have challenged claims one, three, four, five, seven through ten, and twelve solely on the basis of the argument, discussed in section A above, that no transfer of property from Learning Directions to School Data occurred or is adequately alleged. As discussed above, the Trustee adequately alleged the existence of transfers of property in the Complaint. Therefore, Defendants’ motion is denied with respect to these claims.
CONCLUSION
For the reasons stated above, Defendants’ motion to dismiss is granted with respect to all claims to the extent they allege the transfer of a lease between Learning Directions and School Data, granted with respect to claim six, and denied with respect to all other claims. The Trustee is granted leave to replead.
. Citations to “ECF Doc. No.” are to papers filed on the docket in this adversary proceeding, No. 14-1132, identified by document number, unless otherwise indicated.
. References to a "Rule” or "Rules” are to the Federal Rules of Civil Procedure.
. References to a "Bankruptcy Rule” or "Bankruptcy Rules” are to the Federal Rules of Bankruptcy Procedure.
, Defendants’ Motion to Dismiss (ECF Doc, No. 14-1) and Reply (ECF Doc. No. 19) do not contain paragraph or page numbers. The cited page numbers refer to the numerical page count in the document as it was filed on the docket.
. The Court takes judicial notice of the information contained in the DOE website (http:// schools.nyc.gov/Offices/dcp/Departmentof EducationProcurementPolicyandProcedures. pdf) as a public record. See Brooklyn Heights Ass’n, Inc. v. Nat’l Park Serv., 777 F.Supp.2d 424, 432 n. 6 (E.D.N.Y.2011).
. New York City Dep't of Educ., Procurement Policy and Procedures (2012), available at http://schools.nyc.gov/Offices/dcp/Department ofEducationProcurementPolicyand Procedures.pdf.
. Defendants point to deposition transcripts to support these contentions. That material, which is outside the pleadings, was not considered in deciding this motion.
. Traditional badges of fraud include: “(1) the lack or inadequacy of consideration; (2) the family, friendship or close associate relationship between the parties; (3) the retention of possession, benefit or use of the property in question; (4) the financial condition of the party sought to be charged both before and after the transaction in question; (5) the existence or cumulative effect of a pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors; and (6) the general chronology of the events and transactions under inquiry.” Kaiser, 722 F.2d at 1582-83. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498820/ | MEMORANDUM OPINION GRANTING RECOGNITION OF FOREIGN MAIN PROCEEDING
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
An issue in chapter 15 cases is whether a foreign debtor must have a place of business or property in the United States to be eligible to file a chapter 15 petition. In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir.2013), the Second Circuit held that section 109(a) of the Bankruptcy Code applies to chapter 15 cases and requires that a foreign debtor must reside, have a domicile or place of business, or property in the United States to be eligible to file a chapter 15 petition. The Barnet decision continues to be a frequent subject of discussion and criticism at international insolvency conferences and in *82scholarly writing. See generally Daniel M Glosband and Jay Lawrence Westbrook, Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?, 24 Int’l Insolv. Rev. 28 (2015) (available at' Wiley Online Library (wileyonlineli-brary.com)). No other federal circuit appears to have addressed the “property in the United States” issue in chapter 15 cases so far.
Barnet is binding on this Court. Foreign debtors who wish to file chapter 15 cases in New York often have no place of business in the United States; therefore, the focus shifts to whether the foreign debtor has property in New York that will establish eligibility and venue in this district.1
Section 109(a) of the Bankruptcy Code does not specify how much property must be present or when or for how long property has had a situs in New York. Earlier cases have identified bank accounts, attorney retainers deposited in New York, or causes of action owned by the foreign debtor with a situs in New York, as satisfying the “property in the United States” eligibility requirement. See In re Octaviar Admin. Pty Ltd, 511 B.R. 361, 369-74 (Bankr.S.D.N.Y.2014).
The foreign debtor in this case, Berau Capital Resources Pte Ltd (“Ber-au”), does not have a place of business in the United States. Berau filed an insolvency proceeding in Singapore, where the company has its headquarters. The foreign representative originally focused solely on the attorney retainer held by the foreign representative’s New York counsel as the basis for eligibility. The Court is satisfied that the retainer provides a sufficient basis for eligibility in this case. Octaviar, 511 B.R. at 372-74. However, it is apparent that another substantial (and frequently recurring) basis for chapter 15 eligibility exists here.
Berau is an obligor on over $450 million of U.S. dollar denominated debt; New York law expressly governs the debt indenture, which also includes a New York choice of forum clause. Under the indenture, Berau appointed an authorized agent for service of process in New York, and numerous acts must be performed in New York City.2 The debt was in default when the foreign representative filed the chapter 15 case.
Dollar denominated debt, subject to New York governing law and New York forum selection are quite common in international finance. They are highly desirable attrib*83utes for global trade and investment, providing certainty, predictability and respected courts in the event of disputes. It would be ironic if a foreign debtor’s creditors could sue to enforce the debt in New York, but in the event of a foreign insolvency proceeding, the foreign representative could not file and obtain protection under chapter 15 from a New York bankruptcy court.3 The Court concludes that no such conundrum exists because the indenture is property of Berau in the United States, thereby satisfying the section 109(a) eligibility requirement.
Contracts create property rights for the parties to the contract. A debtor’s contract rights are intangible property of the debtor.4 U.S. Bank N.A v. Am. Airlines, Inc., 485 B.R. 279, 295 (Bankr.S.D.N.Y.2013), aff'd, 730 F.3d 88 (2d Cir.2013); see also Wallach v. Nowak (In re Sherlock Homes of W.N.Y., Inc.), 246 B.R. 19, 23-24 (Bankr.W.D.N.Y.2000) (stating that listing contracts between the debt- or/broker dealer and prospective sellers bestowed contractual rights upon the parties and the contract rights were assets of the debtor); Slater v. Town of Albion (In re Albion Disposal, Inc.), 217 B.R. 394, 407-08 (W.D.N.Y.1997) (noting that “it is well-established ... that a debtor’s contractual rights — including rights arising under post-petition contracts— are included in the property of the estate”). State law governs property rights in bankruptcy eases. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Section 1502(8) of the Bankruptcy Code expressly provides that the location of intangible property rights is to be determined under applicable nonbankruptcy law. See In re Fairfield Sentry Ltd., 484 B.R. 615, 623 (Bankr.S.D.N.Y.2013), aff'd sub nom. Krys v. Farnum Place LLC (In re Fairfield Sentry, Ltd.), 484 B.R. 615 (S.D.N.Y.2013), vacated, 768 F.3d 239 (2d Cir.2014).
It has long been recognized under New York law that intangible property rights, such those arising from contracts, may have more than one situs. As Chief Judge Cardozo wrote in Severnoe Sec. Corp. v. London & Lancashire Ins. Co., 255 N.Y. 120, 174 N.E. 299, 300 (1931), “[t]he situs of intangibles is in truth a legal fiction, but there are times when justice or convenience requires that a legal situs be ascribed to them. The locality selected is for some purposes, the domicile of the creditor; for others, the domicile or place of business of the debtor, the place, that is to say, where the obligation was created or was meant to be discharged; for others, any place where the debtor can be found.” Chief Judge Cardozo’s framing of the issue has stood the test of time. See Bankers Trust Co. v. Equitable Life Assur. Soc., 19 N.Y.2d 552, 281 N.Y.S.2d 57, 227 N.E.2d 863, 86566 (1967) (“In addition, as Judge Cardozo observed, determination of situs for one purpose has no necessary bearing on.its determination for another purpose ... which, of course, follows if determination of situs is to be made upon the basis *84of considerations of ‘justice and convenience in particular conditions’.”); Octaviar, 511 B.R. at 371. In the case of the Berau indenture, as already indicated, the notes issued under the indenture are to be discharged in New York City. The attributes of the indenture would be' sufficient to establish the situs of the property in New York, but in addition, the New York Legislature had adopted several laws clearly making New York a situs of the property.
The New York Legislature makes contracts of substantial size with New York governing law and choice of forum provisions — most certainly applicable to this debt indenture — enforceable in this State. Three statutory provisions are relevant here, two in the General Obligations Law and one in the Civil Practice Law and Rules (“CPLR”).
N.Y. General Obligations Law § 5-1401 (Choice of Law) provides, with exceptions not relevant here, that the parties to any contract arising out of a transaction covering not less than $250,000 “may agree that the law of this state shall govern their rights and duties in whole . or in part, whether or not such contract ... bears a reasonable relation to this state.” N.Y. General Obligation Law § 5-1402 (Choice of Forum) provides, again with exceptions not relevant here, that any person may maintain an action in a New York court against a foreign corporation that relates to a contract made in whole or in part pursuant to section 5-1401 and that arises out of a transaction involving not less than $1 million. CPLR 327(b) provides that a court may not stay or dismiss an action on grounds of inconvenient forum where the action relates to a contract to which sections 5-1401 and 5-1402 apply.
These three sections reflect a legislative policy to permit contract counterparties to establish a contract situs in this state by designating New York governing law and a New York forum for contracts involving transactions of the requisite amounts. The Berau indenture' easily satisfies these requirements. This is sufficient to fix the situs of the contracts in New York, whether the contract has a situs elsewhere for other purposes. The Court concludes that the presence of the New York choice of law and forum selection clauses in the Berau indenture satisfies the section 109(a) “property in the United States” eligibility requirement.5 Of course, the other requirements for recognition must also be satisfied, but none of those requirements were in dispute here.
CONCLUSION
No objections to recognition were filed and all requirements for recognition were satisfied. On October 16, 2015, the Court entered an order recognizing Berau’s Singapore proceeding as a foreign main proceeding. (ECF Doc. # 32.) This Opinion addresses only whether the debt indenture satisfies the section 109(a) requirement of “property in the United States,” an issue likely to recur in other cases. As explained above, the Court concludes that the foreign debtor has property in the United States, satisfying the eligibility requirement in section 109(a). Venue in the Southern District of New York was likewise established.
IT IS SO ORDERED.
. The venue statute for chapter 15 cases, 28 U.S.C. § 1410, permits a chapter 15 case to be filed in a district in which the debtor has its principal place of business or principal assets; and absent a place of business or assets, in a district in which there is an action or proceeding pending against the debtor in a federal or state court. Id. § 1410(1)—(2). If neither of those requirements is satisfied, the chapter 15 case may be filed in a district “in which venue will be consistent with the interests of justice and the 'convenience of the parties, having regard to the relief sought by the foreign representative." Id. § 1410(3).
. The Indenture outlines acts that can only be done at the Bank of New York Mellon in New York City, including: (a) to have the Trustee authenticate and deliver notes issued by the Foreign Debtor to the Foreign Debtor or upon the order of the Foreign Debtor (Indenture § 2.01, ECF Doc. # 24, Ex. B); (b) to have the Trustee maintain a registry of noteholders and to authenticate and deliver notes or new notes to transferees of notes (§ 2.05); (c) to redeem the notes (§§ 3.01, 3.02); (d) to discharge the notes and defease certain covenants (§ 8.01); (e) to recover cash or securities posted in connection with such defeasance (§ 8.04); (f) to make certain amendments to the Indenture without note-holder consents (§§ 9.01, 9.02); and (g) to require the Trustee to release collateral (§ 12.02).
. Barnet concluded that the venue provision in 28 U.S.C. § 1410 does not relieve the foreign debtor of the requirement of property in the United States to satisfy the section 109(a) eligibility requirement. Barnet, 737 F.3d at 250.
. Upon an order recognizing a proceeding as a foreign main proceeding, section 1520 makes sections 361 and 362 applicable with respect to the debtor and property of the debtor within the jurisdiction of the United States. The statute refers to "property of the debtor” to distinguish it from the "property of the estate” that is created under section 541(a). In a chapter 15 case, there is no "estate”; nevertheless, section 1520(a) imposes an automatic stay on any action with respect to the debtor's property located in the United States. See In re Pro-Fit Holdings Ltd., 391 B.R. 850, 864 n. 48 (Bankr.C.D.Cal.2008).
. Other types of contracts — such as patent, trademark or intellectual property licensing agreements — entered into by a foreign debtor that include New York choice of law and forum selection clauses may satisfy the requirements of N.Y. General Obligation Law §§ 5-1401 and 5-1402. The Court does not decide whether such contracts satisfy the section 109(a) "property in the United States” eligibility requirement. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498822/ | MEMORANDUM OPINION1
Christopher S. Sontchi, United States Bankruptcy Court
Energy Future Intermediate Holding Company LLC (“EFIH”) and EFIH Fi*99nance Inc. (together with EFIH, the “EFIH Debtors”) two of the above-captioned debtors and debtors in possession (the “Debtors”) have filed the EFIH Debtors’ Partial Objection to Proof of Claim No. 6347 Filed by the Indenture Trustee for the EFIH Unsecured Notes (the “PIK Claim Objection”).2 The PIK Claim Objection objects to Claim No. 6347 (the “PIK Claim”) filed by UMB Bank, N.A. (“UMB” or “Indenture Trustee”), as indenture trustee for the unsecured 11.25%/12.25% Senior Toggle Notes Due 2018 (the “PIK Notes” and such holders the “PIK Noteholders”), which seeks a minimum of approximately $1.57 billion in principal “plus interest, fees and other amounts arising in connection with the [PIK] Indenture.”3 Among other things, the PIK Claim seeks an amount related to “premiums, Applicable Premium, pre-payment penalties, make-whole premiums, [and/or] call premiums”4 (collectively, referred to herein as “make-whole premiums” or “premiums”), which is the subject of this Memorandum Opinion.
Through the PIK Claim Objection, the EFIH Debtors object to the portion of the PIK Claim that seeks: (i) payment of the “Applicable Premium” under section 3.07(a) or the Optional Redemption Price under section 3.07(d) of the PIK Indenture; and (ii) post-petition interest at the rate specified in the PIK Indenture. The Court will address the post-petition interest issues in a separate decision. This Memorandum Opinion solely relates to the premiums.
The issue before the Court is whether the language in the PIK Indenture (in bold below) gives rise to a claim for a premium upon automatic acceleration after an event of default.
[I]n the case of an Event of Default arising under clause (6) or (7) of Section 6.01(a) hereof, all principal of and premium, if any, interest (including Additional Interest, if any) and any other monetary obligations on the outstanding Notes shall be due and payable immediately without further action or notice.
The Court recently addressed virtually identical language in relation to the First Lien Notes and found no payment was owed.
When the EFIH Debtors filed for bankruptcy, the Notes automatically accelerated and became due and payable immediately. Under New York law, a borrower’s repayment after acceleration is not considered voluntary. This is because acceleration moves the maturity date from the original maturity date to the acceleration date and that date becomes the new maturity date. Prepayment can only occur prior to the maturi*100ty date, and acceleration, by definition, advances the maturity date of the debt so that payment thereafter is not prepayment but instead is payment made after maturity. Once the maturity date is accelerated to the present, it is no longer possible to prepay the debt before maturity. Acceleration therefore does not trigger the Trustee’s right to prepayment consideration under the Optional Redemption provision. Thus, the Trustee’s claim that the EFIH Debtors’ repayment was an optional redemption must fail.5
The inclusion of the “premium, if any” and “other monetary obligations” language in the PIK Indenture, which was not present in the First Lien Indenture, does not change the analysis. Thus, the Court will sustain the portion of PIK Claim Objection relating to make-whole premiums.
BACKGROUND
A. Prior Litigation Regarding the PIK Notes
The EFIH Debtors initiated an adversary proceeding seeking declaratory judgment relating to the issues raised in the PIK Claim Objection. Thereafter, an Ad Hoe Committee of PIK Noteholders moved to dismiss the complaint as unripe. On June 15, 2015, the Court issued an opinion and entered an order dismissing the adversary proceeding as unripe and stating that “nothing in this Opinion limits the EFIH Debtors’ ability to object to the PIK Claim or to seek to liquidate such claim.”6 The EFIH Debtors subsequently filed the PIK Claim Objection.
B. PIK Indenture
On December 2, 2012, the EFIH Debtors, as issuers, and the PIK Trustee entered into an indenture (the “PIK Indenture”, as amended and supplemented) pursuant to which EFIH issued $1,144,770,000 aggregate principal amount PIK Notes. EFIH subsequently issued an additional (i) $159,082,000 aggregate principal amount of PIK Notes under a First Supplemental Indenture dated as of December 19, 2012, (ii) $63,930,000 aggregate principal amount of PIK Notes under a Second Supplemental Indenture dated as of January 29, 2013, and (iii) $24,713,000 aggregate principal amount of PIK Notes under a Third Supplemental Indenture dated as of January 30, 2013.
Pursuant to section 12.08 of the PIK Indenture, the PIK Indenture and the PIK Notes are governed by, and construed in accordance with the laws of the State of New York.7
The PIK Notes provide for the payment of an “Applicable Premium” upon optional redemption before December 1, 2014. Section 3.07(a) of the PIK Indenture titled “Optional Redemption” states:
[P]rior to December 1, 2014, the Issuer may redeem, in whole or in part, the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest (including Additional Interest, if any) to, the date of the redemption (the “Redemption Date”), subject to the right *101of the Holders of the Notes of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date.
Section 1.1 of the PIK Indenture defines “Applicable Premium” as:
“Applicable Premium” means, with respect to any Note on any Redemption Date, the greater of:
1.0% of the principal amount of such Note; and
(2) the excess, if any, of (a) the present value at such Redemption Date of (i) the redemption price of such Note at December 1, 2014 (such redemption price as set forth in the table appearing under Section 3.07(d) hereof), plus (ii) all required interest payments (calculated based on the Cash Interest rate payable on the Notes) due on such Note through December 1, 2014 (excluding accrued and unpaid interest, if any, to the redemption Date), computed using a discount rate equal to the Treasury Rate as of such Redemption Date plus 50 basis points; over (b) the principal amount of such Note.
The PIK Notes also provide that after December 1, 2014, EFIH may voluntarily “redeem” the notes at certain “redemption prices” (“Optional Redemption Price”). Thus if the PIK Notes are redeemed after December 31, 2014 but before maturity, the EFIH Debtors would repay the principal plus an additional pre-payment/make-whole payment.
EFIH has not repaid the PIK Notes. However, the proposed plan before the Court provides that each holder of general unsecured claims against the EFIH Debtors, which includes the PIK Noteholders, will receive “up to the Allowed amount of its Claim, payment in full in Cash or other treatment rendering such Claim unimpaired.”
Section 6.01(a) of the PIK Indenture defines “Event of Default” and includes at subsections (6) and (7) certain definitions of an Event of Default that relate to insolvency and bankruptcy, including the filing of a bankruptcy petition (which the Debtors voluntarily filed on April 29, 2014). Section 6.02 of the PIK Indenture defines “Acceleration” and, as noted above, specifies (emphasis added):
[I]n the case of an Event of Default arising under clause (6) or (7) of Section 6.01(a) hereof, all principal of and premium, if any, interest (including Additional Interest, if any) and any other monetary obligations on the outstanding Notes shall be due and payable immediately without further action or notice.
The PIK Trustee highlights that these bolded phrases are not in the First Lien Indenture. Thus, the PIK Trustee asserts that this Court’s prior holding is not applicable to the PIK Noteholders’ claim for make-whole premiums and the PIK Claim seeks payment of the Applicable Premium and/or the Optional Redemption Price after acceleration.
ANALYSIS
A. Claims Objection and Burden of Proof
Section 502(b) of the Bankruptcy Code states that the Court shall allow a claim, except to the extent “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 unma-tured .... ”
The burden of proof rests on different parties at different stages of the claim objection process:
Initially, the claimant must allege facts sufficient to support the claim. If the averments in his filed claim meet this *102standard of sufficiency, it is “prima fade ” valid. In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant’s initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the objector must produce evidence equal in force to the pri-ma facie case. In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim’s legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence. The burden of persuasion is always on the claimant.8
As the EFIH Debtors have rebutted the prima fade validity of the PIK Claim, the PIK Trustee must now prove the validity of the PIK Claim by a preponderance of the evidence.
B. Parties’ Argument
i. The EFIH Debtors
The PIK Claim seeks payment of “premiums, the Applicable Premium, prepayment penalties, make-whole premiums, [and] call premiums.”9 This language seeks the Applicable Premium due upon an optional redemption before December 1, 2014, under section 3.07(a) of the PIK Indenture, and/or seeks the Optional Redemption Price based on an optional redemption after December 1, 2014, under section 3.07(c) of the PIK Indenture.10
The EFIH Debtors assert that they do not owe an Applicable Premium because an Applicable Premium is only owed if the PIK Notes are optionally redeemed before December 1, 2014. As December 1, 2014, has passed and the PIK Notes have not been repaid in any way, the EFIH Debtors assert that the Applicable Premium cannot be owed. The EFIH Debtors also argue that separate and apart from the expiration of the December 1, 2014 deadline, neither the Applicable Premium nor the Optional Redemption Price is owed because the repayment of the PIK Notes will not be an optional redemption.
The PIK Indenture provides that an “Event of Default” occurs when EFIH “commenc[es] proceedings to be adjudicated bankruptcy or insolvent.”11 The EFIH Debtors filed for chapter 11 protection on April 29, 2014, triggering this Event of Default. The EFIH Debtors assert that, under the plain language of the Indenture, the bankruptcy-induced Event of Default automatically accelerated the PIK Notes’ maturity date to the Petition Date. The PIK Indenture provides, “in the case of an Event of Default arising” out of EFIH’s bankruptcy filing, “all principal of and premium, if any, interest (including Additional Interest, if any) and any other monetary obligations on the outstanding Notes shall be due and payable immediately without further action or notice.”12
The EFIH Debtors argue that in order to optionally redeem the debt, they must *103provide the PIK Noteholders with “at least 30 days but not more than 60 days” notice 13 (The EFIH Debtors have not delivered an optional redemption notice to the PIK Trustee). The EFIH Debtors compare this to the automatic acceleration which does not contemplate notice: upon EFIH’s bankruptcy filing, “the. outstanding Notes shall be due and payable immediately without further action or notice.”14 The EFIH Debtors argue that the language differences between the First Lien Indenture and the PIK Indenture do not give rise to a valid claim for an Applicable Premium or an Optional Redemption Price after acceleration.
ii. The PIK Trustee
The PIK Trustee argues that the deliberate insertion of “and premium, if any” immediately following “principal” and before “interest” indicated that such language is not surplusage, but a reference to an adjustment to the principal amount. The PIK Trustee continues that “premium, if any” read together with “any other monetary obligations” must refer to something more specific and could only logically refer to the premiums set forth in section 3.07 of the PIK Indenture. The PIK Trustee also asserts that by using the phrase “premium, if any” rather than the narrower term of “Applicable Premium,” the PIK Indenture captures the multiple premiums that could be owed, depending on the time of repayment. Further, the PIK Trustee asserts that “premium, if any” refers to all of the premiums in the PIK Indenture. The PIK Trustee continues that the “if any” qualifier contemplates all situations, such as filing for bankruptcy because of the looming maturity date and repayment after the maturity date. The PIK Trustee also asserts that the phrases “premium, if any,” as well as, “other monetary obligations” are “catch all” provisions that refer to the applicability of the call premium except when payments are made after the maturity date. Finally, the PIK Trustee attempts to introduce parole evidence that demonstrates (in the PIK Trustee’s opinion) that the PIK Indenture (including the differences from the First Lien Indenture) was specifically bargained for to provide different legal entitlements upon acceleration from the First Lien Indenture.
C. Contract Interpretation Under New York Law
In construing a contract under New York law, the Court should look to the language of the contract because “when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms.”15 “Where the contract is clear and unambiguous on its face, the intent of the parties must be gleaned from within the four comers of the instrument, and not from extrinsic evidence.”16 Thus, if unambiguous, the contract must be enforced according to its plain terms.17
A contract is ambiguous if the terms have more than one meaning “when viewed objectively by a reasonably intelligent person who has examined the context *104of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.” 18 In instances when the contract is susceptible to more than one meaning the Court may look to parol evidence.19
“It is also fundamental that every word of the agreement should, to the extent possible, be given a meaning, or, in other words, one of the most basic interpretive canons is that a contract should be construed so that effect is given to all of its provisions and no part will be inoperative or superfluous or of no significance.”20
The PIK Indenture is unambiguous; therefore, the Court will not consider extrinsic evidence.
D. Make-Whole and Prepayment Premiums
As a general rule regarding make-whole or prepayment premiums, “a lender is not entitled to prepayment consideration after a default unless the parties’ agreement expressly requires it. This is because prepayment provisions generally address the consideration to be paid when the borrower voluntarily prepays the debt, but after a default the borrower’s repayment is neither voluntary nor in the nature of a prepayment.”21 However, parties may agree that “even after default and acceleration, or where the borrower’s prepayment is otherwise involuntary, an amount that is equivalent to prepayment consideration may nevertheless be due.”22 However, the parties’ agreement must be express and the terms of their agreement must defíne the parameters of the borrower’s obligation to make a make-whole or prepayment premium in the event of default and/or acceleration.23 If the language is explicit, *105As the Second Circuit has explained, a prepayment premium is enforceable “where (1) actual damages may be difficult to determine and (2) the sum stipulated is not ‘plainly disproportionate’ to the possible loss.”25
*104[c]ourts review prepayment consideration terms that are triggered by default and acceleration under the standards applicable to liquidated damages. That is, courts consider whether the amount due is an unenforceable penalty.24
*105E. Neither an Applicable Premium Nor an Optional Redemption Price is Due Under the Terms of the PIK Indenture.
Pursuant to the terms of the PIK Indenture, the Court must determine whether an Applicable Premium or an Optional Redemption Price is due. As noted above, the Applicable Premium is only due upon optional redemption before December 1, 2014. As the PIK Notes were not redeemed prior to December 1, 2014, the PIK Notes are not entitled to an Applicable Premium.
The PIK Indenture provides for an Optional Redemption Price (also referred to herein as a “prepayment premium” or a “make-whole premium”) if the PIK Notes are redeemed after December 1, 2014, but prior to the maturity date.26 As the PIK Notes were automatically accelerated as a result of the EFIH Debtors’ bankruptcy filings, repayment of the PIK Notes will not be an optional redemption. As this Court stated in relation to the First Lien Notes, which is also applicable herein:
When the EFIH Debtors filed for bankruptcy, the Notes automatically accelerated and became due and payable immediately. Under New York law, a borrower’s repayment after acceleration is not considered voluntary. This is because acceleration moves the maturity date from the original maturity date to the acceleration date and that date becomes the new maturity date. Prepayment can only occur prior to the maturity date, and acceleration, by definition, advances the maturity date of the debt so that payment thereafter is not prepayment but instead is payment made after maturity. Once the maturity date is accelerated to the present, it is no longer possible to prepay the debt before maturity. Acceleration therefore does not trigger the Trustee’s right to prepayment consideration under the Optional Redemption provision. Thus, the Trustee’s claim that the EFIH Debtors’ repayment was an optional redemption must fail.27
There is nothing in the PIK Indenture that would lead the Court to a different conclusion. If the EFIH Debtors repay the PIK Notes, such repayment would not be “optional” as the PIK Notes were accelerated under the terms of section 6.02 of the PIK Indenture. According to the terms of the PIK Indenture, neither the Applicable Premium nor the Optional Redemption Premium is due. Thus, even if the Court found that the language “if any” (as discussed infra) refers back to sections 3.07(a) and 3.07(d) of the PIK Indenture, there would be no premium due pursuant to the terms of the PIK Indenture.28
F. PIK Indenture Language: “Premium, If Any”
As stated above, neither the Applicable Premium nor the Optional Redemption *106Price have been triggered under the terms of the PIK Indenture. However, the PIK Trustee asserts that language in the acceleration provision provides for payment of a make-whole premium (in addition to principal, interest, etc.) upon automatic acceleration. The PIK Trustee asserts that the acceleration clause language in the PIK Indenture differs from the First Lien Indenture — and these additional 9 words create the obligation to pay the make-whole upon acceleration. As compared to the acceleration clause in the First Lien Indenture, the PIK Indenture states, in part (differing language is bolded):
[I]n the case of an Event of Default arising under clause (6) or (7) of Section 6.01(a) hereof, all principal of and premium, if any, interest (including Additional Interest, if any) and any other monetary obligations on the outstanding Notes shall be due and payable immediately without further action or notice.29
Thus, the Court must determine whether these additional 9 words create the obligation to pay a make-whole premium after acceleration.
The Bankruptcy Court for the Southern District of New York examined virtually identical language in Momentive.30 The language in the Momentive’s indenture was as follows: “ ‘If an Event of Default specified in Section 6.01(f) or (g) with respect to MPM [which includes the debtors’ bankruptcy] occurs, the principal of, premium, if any, and interest on all the Notes shall ipso facto become and be immediately due and payable without any declaration or other act on- the part of the Trustee or any Holders.’ ”31 In Momentive, Judge Drain held:
[I]t is “well-settled law,” that, unless the parties have clearly and specifically provided for payment of a make-whole (in this case the Applicable Premium), notwithstanding the acceleration or advancement of the original maturity date of the notes, a make-whole will not be owed. Such language is lacking in the relevant sections of the first and 1.5 lien indentures and notes; therefore, they do not create a claim for Applicable Premium following the automatic acceleration of the debt pursuant to Section 6.02 of the indentures.32
Thus, the Momentive court held that the “premium, if any” to be paid upon prepayment was not specific enough to meet the specificity requirement of New York law in order for the make-whole or prepayment claim to be payable post-acceleration.33 Judge Drain continued to state that even if the “if any” language referred back to the actual provisions of the indenture that provides for a specific premium, those premium provisions do not sufficiently provide for payment after acceleration under New York law.34
The Momentive court stated that there are only two ways to receive a make-whole upon acceleration under New York law: (i) explicit recognition that the make-whole would be payable notwithstanding the acceleration, or (ii) a provision that requires the borrower to pay a make-whole whenever debt is repaid prior to the original maturity.35 As discussed infra, the relevant language in this case is identical to that in Momentive and does not explicitly *107provide for payment of the premiums notwithstanding acceleration nor does it provide for payment of the make-whole any time prior to the original due date.
The District Court for the Southern District of New York affirmed the bankruptcy court’s holding in Momentive holding that the language “premium, if any” was not sufficient to create an “unambiguous right to a make-whole payment.”36 This Court fully endorses and adopts the holding in the Momentive cases.
The PIK Trustee attempts to distinguish Momentive because Judge Drain likened “if any” to other belt-and-suspenders catch-all provisions in other New York cases, where the role of “catch-all” in the PIK Indenture is played by the “and any other monetary obligations” provision— thus, according to the PIK Trustee, the phrase “premium, if any” in this case refers to the applicability of the call premium for payments made after the maturity date. This distinction fails for several reasons: (i) the PIK Indenture is not specific or explicit about the payment of any pre-' mium upon automatic acceleration;37 and (ii) “if any” means that the premium may not be due at all.
The PIK Trustee also advances the argument that “premium, if any” must be “specific” because the Indenture would not contain two “catch all” provisions. However, legal documents such as the PIK Indenture often contain redundant language and “mere redundancy of words is not so unusual as to justify the court in giving an interpretation to the contract which its words do not import.”38
In another example similar to Momentive, in In re Solutia Inc., the bankruptcy court found the language of “premium, if any” insufficient and lacking in “explicitness that would be expected in a typical post-acceleration yield-maintenance clause.”39 Similarly, in In re AMR Corp., the bankruptcy court held that it “reads ‘if any’ to mean that payment of the Make— Whole Amount is not automatic and there are some circumstances under which a Make—Whole Amount will not be payable.” 40
These cases should be compared to Northwestern Mutual and United Merchants, wherein the courts held that the contractual language was explicit. In Northwestern Mutual Life Ins. Co. v. Uniondale Realty Associates, the court reviewed the following language in the loan agreement (referred to below as the “Note”):
“Borrower shall have the right, upon thirty (30) days advance written notice, beginning December 15, 2003 of paying this note in full with a prepayment fee. This fee represents consideration to Lender for loss of yield and reinvestment costs. The fee shall be the greater of Yield Maintenance or 2% of the outstanding principal balance of this note on the date of prepayment. In the event of a prepayment of this note following (i) the occurrence of an Event of *108Default ... followed by the acceleration of the whole indebtedness evidenced by this note ... such prepayment will constitute an evasion of the prepayment terms ... and be deemed to be a voluntary prepayment ... and such payment will, therefore, ... include the prepayment fee required under the prepayment in' full privilege recited above r> 41
The Northwestern Mutual court held: “When a clear and unambiguous clause which calls for payment of the prepayment premium or a sum equal thereto, at any time after default and acceleration is included in the loan agreement, such clause is analyzed as liquidated damages and is generally enforceable.”42 The Northwestern Mutual court found that the critical language in the subject clause is “in the event of prepayment” and “evasion.”43 The Northwestern Mutual court held:
the subject, clause eliminates the need to prove that prepayment after acceleration is an intentional avoidance of the premium, as prepayment after acceleration is “deemed” voluntary and an avoidance. The clause does not, however, contain language indicating prepayment application in foreclosure, redemption or any other payment. If the word “prepayment” in the subject clause was intended to include “redemption” in the context of foreclosure, it would be expressly included, as was done in the aforementioned examples.44
Thus, the court ultimately found that the prepayment premium was only relevant after an attempt at prepayment after a default and acceleration but prior.to commencement of a foreclosure action; thus in Northwestern Mutual, as it was a foreclosure action, the prepayment premium was not recoverable.45 Thus, even though- the language in Northwestern Mutual was more specific than the PIK Indenture language, the Northwestern Mutual court ultimately held that the language lack specificity in a foreclosure context and, therefore, did not allow the premium.
Similarly, in In re United Merchants and Manufacturers, Inc., the default provision in the note at issue stated:
then, at the option of the holder of any Note, exercised by written notice to (UM & M), the principal of such Note shall forthwith become due and payable, together with the interest accrued thereon, and, to the extent permitted by law, an amount equal to the pre-payment charge that would be payable if (UM & M) were pre-paying such Note at the time pursuant to P 8.2 hereof.46
The Second Circuit held that this liquidated damages provision in the agreement was valid under New York law as it was a loan agreement between sophisticated parties for a large sum of money and the amount stipulated was “not plainly disproportionate to the possible loss.” 47 Again, however, as distinguished from this case, the contractual language was specific regarding the amount of the pre-payment charge and specifically referring to the *109calculation thereof in the note. Here, the PIK Indenture states “premium, if any” without any additional language referring to the amount of such premium or what type of premium being sought.
The PIK Indenture does not provide specifically for a payment of a premium upon acceleration, nor does it refer back to specific sections of the Indenture. As such, and for the reasons set forth in Momentive, the Court finds that the PIK Indenture’s acceleration clause is unambiguous, insufficient and lacking in explicitness regarding whether a make-whole premium is due upon an event of default. Thus, after acceleration, the PIK Trustee does not have a valid claim for either an Applicable Premium nor an Optional Redemption Price.
CONCLUSION
Thus, as stated above, the Court will sustain the Partial Objection and disallow the portion of the PIK Claim seeking an amount for “premiums, Applicable Premium, prepayment penalties, make-whole premiums, [and/or] call premiums.”48 An order will be entered.
. This Memorandum Opinion constitutes the Court’s findings of fact and conclusions of law *99pursuant to Fed. R. Bank. P. 7052, which is applicable to this matter by virtue of Fed. R. Bankr.P. 9014. The Court has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 11 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The Court has the judicial power to enter a final order.
. D.I. 4964.
. The PIK Claim was filed in the amount of $1,647,374,288.21 plus interest, fees, expenses and other amounts “arising in connection with the [PIK] Indenture (see addendum).” PIK Claim (attached as Exh. 1 to the PIK Claim Objection). Based on the record in these proceedings it is the Court's understanding that there is approximately $1.57 billion in principal, $81 million in pre-petition accrued interest and $109,000 in pre-petition accrued fees and expenses owed under the PIK Notes.
.PIK Claim, Addendum to the Proof of Claim of UMB Bank, N.A., as Indenture Trustee for the U.25%/12.25% Senior Toggle Notes Due 2018 ("PIK Claim Addendum”), ¶ 4.
. Delaware Trust Co. v. Energy Future Intermediate Holding Company LLC (In re Energy Future Holdings Corp.), 527 B.R. 178, 195 (Bankr.D.Del.2015) (citations and quotations marks omitted). Capitalized terms not defined herein shall have the meaning ascribed to them in the Court's opinion.
. Energy Future Intermediate Holding Co. LLC v. UMB Bank, N.A. (In re Energy Future Holdings Corp.), 531 B.R. 499, 515 (Bankr.D.Del.2015).
. PIK Indenture § 12.08.
. In re Allegheny Int' l, Inc., 954 F.2d 167, 173-74 (3d Cir.1992) (citations omitted).
. PIK Claim Addendum 114.
. The PIK Indenture provides for other types of premiums; however, these premiums are not at issue for the purposes of this Memorandum Opinion. See, e.g., PIK Indenture §§ 2.06(h)(i)(vi), 4.10(b)(4)(f), 5.02, 12.01, and 12.02.
. PIK Indenture § 6.01(a)(6)(i).
. PIK Indenture § 6.02 (emphasis added).
. PIK Indenture § 3.03.
. PIK Indenture § 6.02.
. D’Addario & Co. v. Embassy Indus., Inc., 20 N.Y.3d 113, 957 N.Y.S.2d 275, 980 N.E.2d 940, 943 (2012) (citations and internal quotation marked omitted).
. British Int’l Ins. Co. Ltd. v. Seguros La Republica, S.A., 342 F.3d 78, 82 (2d Cir.2003) (citations, modifications and internal quotation marks omitted).
. In re MPM Silicones, LLC, No. 14-22503-RDD, 2014 WL 4436335, at *3 (Bankr.S.D.N.Y. Sept. 9, 2014) aff’d, 531 B.R. 321 (S.D.N.Y.2015) (hereinafter, “Momentive ”).
. British Int'l Ins. Co., 342 F.3d at 82 (citations and internal quotation marks omitted); Evans v. Famous Music Corp., 1 N.Y.3d 452, 775 N.Y.S.2d 757, 807 N.E.2d 869, 872 (2004).
. Momentive at *3.
. Id.
. In re S. Side House, LLC, 451 B.R. 248, 268 (Bankr.E.D.N.Y.2011) aff'd sub nom. U.S. Bank Nat. Ass’n v. S. Side House, LLC, No. 11-CV-4135 ARR, 2012 WL 273119 (E.D.N.Y. Jan. 30, 2012) (citations omitted). See also Energy Future Holdings Corp., 527 B.R. at 192 ("Under New York law, an indenture must contain express language requiring payment of a prepayment premium upon acceleration; otherwise, it is not owed.”); and MSCI 2007-IQ16 Retail 9654, LLC v. Dragul, No. 1:14-CV-287, 2015 WL 1468435, at *3 (S.D.Ohio Mar. 30, 2015) ("Upon default and the acceleration of the loan, the maturity date advances and any subsequent payment is no longer considered a voluntary prepayment. The lender forfeits the collection of a prepayment premium in such a scenario unless the parties' agreement contains a ‘clear and unambiguous’ clause requiring payment of the prepayment premium upon default and acceleration. This general rule created the problem that a borrower might actually intentionally default to acquire the right to prepay without penally, so lenders began including provisions in loan documents to ensure the prepayment penalty would be enforceable after default.”) (citations omitted)).
. S. Side House, 451 B.R. at 269 (citations omitted).
. Id. at 270.
. Id. (holding mortgage lender’s claim for a post-default, post-acceleration prepayment premium, pursuant to "escape” clause in mortgage documents that prohibited debtor from evading prepayment fee by tendering full amount of debt post-foreclosure, had to be disallowed; because the debtor, in propos*105ing to pay mortgage debt over time in plan of reorganization, was not tendering full amount of debt, and was not attempting to prepay this accelerated debt.).
. United Merchants and Mfrs., Inc. v. Equitable Life Assurance Society of the U.S. (In re United Merchants & Mfrs., Inc.), 674 F.2d 134, 142 (2d Cir.1982).
. PIK Indenture § 3.07(d).
. Energy Future Holdings Corp., 527 B.R. at 195 (citations and quotations marks omitted).
. See Momentive at *15.
. PIK Indenture § 6.02 (emphasis added).
. 2014 WL 4436335, supra.
. Id. at *13.
. Id. at *14 (citations omitted).
. Id. at *15.
. Id.
. Id.
. U.S Bank N.A. v. Wilmington Savings Fund Society (In re MPM Silicones, LLC), 531 B.R. 321, 336 (S.D.N.Y.2015).
. As set forth in note 10, supra, there are many different premiums discussed in the PIK Indenture.
. Casler v. Connecticut Mut. Life Ins. Co., 22 N.Y. 427, 432 (1860).
. In re Solutia Inc., 379 B.R. 473, 488 (Bankr.S.D.N.Y.2007).
. U.S. Bank Trust N.A. v. American Airlines, Inc. (In re AMR Corp.), 485 B.R. 279, 303 (Bankr.S.D.N.Y.2013) aff’d, 730 F.3d 88 (2d Cir.2013) cert. denied sub nom.U.S. Bank Trust Nat. Ass’n v. AMR Corp., — U.S. —, 134 S.Ct. 1888, 188 L.Ed.2d 913 (2014).
. Nw. Mut. Life Ins. Co. v. Uniondale Realty Associates, 11 Misc.3d 980, 816 N.Y.S.2d 831, 833-34 (Sup.Ct.2006) (quoting the Note at issue in the case; emphasis supplied in Note).
. Id. at 836 (citations omitted).
. Id. at 839.
. Id. (emphasis added).
. Id. at 839-40.
. United Merchants and Mfrs, 674 F.2d at 140 (emphasis added; footnote and citations omitted).
. Id. at 143 (internal quotation marked omitted).
. PIK Claim Addendum ¶ 4. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498823/ | MEMORANDUM OPINION1
Christopher S. Sontchi, United States Bankruptcy Court
UMB Bank, N.A. (“UMB”) is the Indenture Trustee for the unsecured 11.25%/12.25% Senior Toggle Notes Due 2018 (the “PIK Notes” and such holders the “PIK Noteholders”). Pursuant to an indenture dated December 5, 2012 (the “PIK Indenture”), Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (the “EFIH Debtors” and, collectively with its affiliated debtors, the “Debtors”) issued approximately $1.4 billion in aggregate principal amount of PIK Notes. The PIK Indenture provides for, among other things, the payment of post-petition interest on overdue principal at the contract rate. Pursuant to the PIK Indenture, UMB timely filed Proof of Claim No. 6347 with an accompanying addendum on behalf of the PIK Noteholders (the “PIK Claim”). The PIK Claim seeks a minimum of approximately $1.57 billion in principal “plus interest, fees and other amounts arising in connection with the [PIK] Indenture .. ,”2 The addendum to the PIK Claim states:
This Master Proof of Claim makes claim to all amounts — whether liquidated or unliquidated — due under or relating to the [PIK Notes] or arising under the [PIK] Indenture on behalf of the Claimant and the [PIK] Noteholders, including, but not limited to, principal, premiums, the Applicable Premium, prepayment penalties, make-whole premiums, call premiums, interest, fees, costs, and expenses outstanding as of, and arising from and after, April 29, 2014. (emphasis added)
On July 9, 2015, the Debtors filed the EFIH Debtors’ Partial Objection to Proof of Claim No. 6347 Filed by the Indenture Trustee for the EFIH Unsecured Notes (the “Partial Objection”) in which the Debtors objected to the portion of UMB’s claim seeking post-petition interest and payment of a make-whole claim. This memorandum opinion addresses that por*111tion of the Partial Objection relating to post-petition interest. The Court will render a separate decision related to the make-whole claim.-
In the Partial Objection, the Debtors argue that, under section 502(b)(2) of the Bankruptcy Code, UMB’s claim for post-petition interest must be disallowed as “unmatured interest.” At most, the Debtors argue, UMB’s claim for post-petition interest is limited under section 726(a)(5), made applicable by section 1129(a)(7)(A)(ii), to “payment of interest at the legal rate,” which the Debtors claim is the Federal judgment rate. UMB argues that it is entitled to post-petition interest at its contract rate as part the PIK Claim.
The Debtors are correct that UMB’s allowed claim cannot include post-petition interest, i.e., “unmatured interest,” because to hold otherwise would violate the plain meaning of section 502(b)(2). Furthermore, sections 726(a)(5) and 1129(a)(7)(A)(ii) do not alter the allowed amount of UMB’s claim. UMB’s allowed unsecured claim is limited to the amount of principal and accrued fees and interest due under the unsecured notes “as of the date of the filing of the petition” and does not include any post-petition interest, regardless of whether such interest would be calculated at the contract rate, the Federal judgment rate or otherwise. See In re W.R. Grace & Co., 475 B.R. 34, 159 (D.Del.2012) (Section 502(b)(2) “prohibits the allowance of unmatured interest as part of an allowed unsecured claim. It is well-established that when a debtor files for bankruptcy, the accrual of interest on its loans is suspended, and any subsequent claims brought by unsecured creditors for the amount of this “unmatured interest” is prohibited under § 502(b) of the Bankruptcy Code.”).
The parties’ arguments, however, -miss the mark. To say that UMB’s allowed claim excludes post-petition interest is the beginning of the analysis not the end. As one court has noted, there is a distinction between the payment of interest on an allowed claim as opposed to as an allowed claim. Ultimately, the Debtors must confirm a plan of reorganization. The provisions governing confirmation will determine what the holders of claims must receive in order for the plan to be confirmed. In some instances the holders of unsecured claims such as the PIK Notes at issue here will be entitled to just the allowed amount of the claim excluding post-petition interest while in other instances the holders will be entitled to the allowed amount of the claim plus additional consideration, which may include post-petition interest. The receipt of post-petition interest, thus, does not arise as part of the allowed amount of the claim but, rather, as a requirement of confirmation. That is a critical distinction. Section 502 defines the amount of the claim while section 1129 and its other related provisions govern confirmation of a plan. They are different sections of the Code with very different purposes. The claim itself does not change. What may change is what the holder of a claim is entitled to receive under a confirmed plan.
To illustrate this distinction, let’s explore how this plays out.
Section 1123(a)(1) of the Code requires that a plan designate classes of claims. Under section 1123(a)(2) and (3) a plan must specify any class of claims that is impaired under the plan and the treatment of any impaired class of claims, respectively. . Section 1123(b)(1) provides that a plan may impair or leave unimpaired any class of claims. Section 1124 provides that a “class of claims ... is impaired under a plan unless, with respect to each claim ... of such class the treatment satisfies either subsection (1) or (2). Section 1124(1) pro*112vides that a class of claims is unimpaired if a plan “leaves unaltered the legal, equitable, and contractual rights to which such claim ... entitles the holder of such claim” while section 1124(2) provides that a class of claims is unimpaired if the plan provides for the holder of such claim to receive what is generally referred to as reinstatement of the claim.
Section 1126 contains a number of provisions governing acceptance or rejection of a plan. More specifically, section 1126(a) provides that the holder of a claim may accept or reject a plan. Section 1126(c) provides that “a class of claims has accepted a plan if such plan has been accepted by creditors ... that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors ... that have accepted or rejected such plan.” Section 1126(f) provides that “a class that is not impaired under a plan, and each holder of a claim ... of such class, are conclusively presumed to have accepted the plan.” And, section 1126(g) provides that “a class is deemed not to have accepted a plan if such plan provides that the claims ... of such class do not entitle the holders of such claims ... to receive or retain any property under the plan on account of such claims.”
Section 1129 governs confirmation of a plan. It creates a number of requirements for confirmation, including sections 1129(a)(7), (a)(8), (a)(10) and (b). Section 1129(a)(7) provides that in order for a plan to be confirmed, with respect to each impaired class, each holder of a claim that has not accepted the plan “will receive or retain under the plan on account of such claim ,.. property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date.” This is known as the “best interest of creditors” test.
Section 1129(a)(8) requires that in order for a plan to be confirmed with respect to each class of claims such class has either accepted the plan or is not impaired under the plan.
Section 1129(b)(1) provides that a plan may be confirmed even if each impaired class has not accepted the plan “if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims that is impaired under, and has not accepted, the plan.” This is, of course, known as cramdown. With respect to unsecured creditors, section 1129(b)(2)(B) provides that a plan is fair and equitable with respect to a class if “(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property”
Finally, section 1129(a)(10) provides that if a class of claims is impaired under the plan, it can only be confirmed if “at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.”
Thus, there a limited number of scenarios under which a plan can be confirmed and the consideration paid to the holder of an allowed unsecured claim in a class will vary from scenario to scenario.
A plan can provide that a class of claims is impaired or unimpaired. Looking first to impaired classes, a plan that impairs a class of unsecured claims can be confirmed a number of ways.
*113An impaired class can vote to accept a plan. Creditors are free to agree to virtually any treatment of claims in a class by voting, as a class, to accept a plan. This would include a plan that pays holders of unsecured claims in the class any unpaid principal and accrued fees and interest owed as of the petition date but excluding post-petition interest.
But there is a caveat. Under the best interests of creditors test, the holder of an impaired claim that votes to reject a plan (even if the class votes to accept the plan) must “receive or retain under the plan on account of such claim ... property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date.” Section 726 of the Code governs the distribution of property of the estate to the holders of claims in Chapter 7 cases. Under section 726, property is distributed in a waterfall until the estate is depleted. If holders of claims under the 'first priority are paid in full then the holders of claims under the second priority receive a distribution, etc. If the holders of claims under a priority are not paid in full, holders of claims under lower priorities do not receive a distribution. Under section 726(a)(2), the second priority of distribution is for “payment of any allowed unsecured claim.” Under section 726(a)(5), the fifth priority of distribution includes “payment of interest at the legal rate from the date of the filing of the petition” on any allowed unsecured claim paid under the second priority.
This is significant for two reasons. First, section 726(a)(2) governs payment of allowed unsecured claims and 726(a)(5) provides for the payment of post-petition interest on allowed unsecured claims. The distinction in section 726(a)(2) and (a)(5) between the allowed amount of the claim and post-petition interest on the allowed claim, respectively, supports the plain meaning interpretation of section 502(b)(2), i.e., an allowed unsecured claim cannot include post-petition interest. Otherwise, the distinction between payment under the 2nd and 5th priorities of the allowed claim and interest on the allowed claim, respectively, would be meaningless. Second, and nonetheless, in order to satisfy section 1129(a)(7), which is necessary to confirm a plan where the holder of a claim in an impaired class has voted to reject the plan, the holder of an allowed claim in the class must receive payment of its allowed claim plus post-petition interest at the legal rate, if and only if, the holder of that claim would receive payment under the 5th priority of distribution under section 726(a) in a hypothetical Chapter 7 liquidation of the debtor’s estate. The inquiry is not into the value of the property of the estate and the distributions under the plan before the court but, rather, what would occur in the hypothetical scenario of a Chapter 7 liquidation of the debtor. The point is that nothing in sections 1129(a)(7) nor 726(a) alters the allowed amount of the unsecured claim, which excludes unmatured, i.e., post-petition, interest. Neither do these sections either singularly or in tandem serve to create a universal limitation on the payment of post-petition interest on unsecured debt. Rather, they merely provide that in a certain scenario, in order for a plan to be confirmed, the holders of claims in a class must receive payment in full of the allowed amount of the claim, i.e., unpaid principal and accrued fees and interest due at the petition date, plus the additional consideration of post-petition interest on the claim at the legal rate — however defined.
So, what is the legal rate of interest? This Court adopts that portion of Judge Walrath’s ruling in In re Washington Mutual, Inc., 461 B.R. 200 (Bankr.D.Del.2011) in which she held that the legal rate of *114interest under sections 726(a) and 1129(a)(7) is the Federal judgment rate.
Now that all issues have been presented to the Court, the Court concludes that the better view is that the federal judgment rate is the appropriate rate to be applied under section 726(a)(5), rather than the contract rate. The Court’s conclusion is supported by many factors. First, section 726(a)(5) states that interest on unsecured claims shall be paid at “the legal rate” as opposed to “a” legal rate or the contract rate. As the LTW Holders note, where Congress intended that the contract rate of interest apply, it so stated.
Second, the payment of post-judgment interest is procedural by nature and dictated by federal law rather than state law, further supporting use of the federal judgment rate.
Third, the use of the federal judgment rate promotes two important bankruptcy goals: “fairness among creditors and administrative efficiency.”
Id. at 242-43 (citations omitted). See also In re Dow Corning Corp. (“Dow I”), 237 B.R. 380, 412 (Bankr.E.D.Mich.1999) (“the Court concludes that, within the context of § 726(a)(5), ‘interest at the legal rate’ means the federal judgment rate.”).
An impaired class can also vote to reject a plan. As a preliminary matter, section 1129(a)(7) also applies if a class votes to reject a plan. So, in order for the plan to be confirmed, the holder of an allowed claim in the class must receive payment of its allowed claim plus post-petition interest at the Federal judgement rate, if and only if, the holder of that claim would receive payment under the 5th priority of distribution under section 726(a) in a hypothetical Chapter 7 liquidation of the debtor’s estate
Regardless of the application of the best interest of creditors test, under section 1129(a)(8), all impaired classes must vote to accept the plan for it to be confirmed. Notwithstanding that provision, under section 1129(b)(1), a plan may be crammed down on a rejecting impaired class and confirmed “if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims that is impaired under, and has not accepted, the plan.” As stated earlier, with respect to unsecured creditors, section 1129(b)(2)(B) provides that a plan is fair and equitable with respect to a class if “(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.” Importantly, section 1129(b)(2)(B) is written in the disjunctive and satisfaction of either prong is sufficient to cram down the plan on the rejecting class.
Assume that a plan provides that holders of claims in the unsecured class receive payment on the effective date in cash in the amount of any unpaid principal and accrued fees and interest owed as of the petition date but excluding post-petition interest and that no claims or interests junior to the unsecured class receive any distribution. The plan can be crammed down on the rejecting unsecured ’class under section 1129(b)(2)(B)(ii) because “the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property”
Now assume that a plan provides that holders of claims in the unsecured class receive payment on the effective date in cash in the amount of any unpaid principal *115and accrued fees and interest owed as of the petition date but excluding post-petition interest and that one or more classes of claims or interests junior to the unsecured class receives a distribution. The plan cannot be crammed down on the rejecting unsecured class under section 1129(b)(2)(B)(ii) because the holder of a junior claim or interest is receiving a'distribution under the plan on account of such junior claim or interest.
That leaves section 1129(b)(2)(B)(i). Under the plain meaning of the statute, the plan can be crammed down on the rejecting class even though junior claims or interests are receiving a distribution because each holder of an unsecured claim is receiving on account of such claim cash, as of the effective date of the plan, equal to the allowed amount of such claim, i.e., unpaid principal and accrued fees and interest owed as of the petition date, excluding unmatured, i.e., post-petition interest.
But there is a complication. Section 1129(b)(2) actually provides that “[f]or purposes of this subsection, the condition that a plan be fair and equitable with respect to a class includes” the requirements of subsections (b)(2)(A) through (C). UMB argues that the use of the words “includes” means that for a plan to be fair and equitable with respect to unsecured claims, the plan must satisfy either clause (i) or clause (ii) of section 1129(b)(2)(B), plus any other unenumerated requirements that may be applicable. UMB goes on to argue that in the context of solvent debtor reorganizations, i.e., when equity holders are receiving a distribution, payment to unsecured creditors of post-petition interest at the contract rate is one of the additional requirements that must be satisfied for a plan to be fair and equitable. In support of this proposition UMB cites to pre-Code and post-Code case law.
The Court disagrees with UMB’s argument. The use of the word “includes” in section 1129(b)(2) does not create a requirement that unsecured claims must receive post-petition interest at the contract rate in order to cramdown a plan on a class of unsecured creditors that are receiving payment in full of their allowed claims under section 502(b) when a junior class is receiving a distribution.
First, as a textual matter, the word “includes” applies to all three types of claims and interests in section 1129(b)(2) — secured claims, unsecured claims and interests. As such, one would expect the unen-umerated requirements under the fair and equitable test to apply to all three categories óf claims and interest. But UMB does not argue that post-petition interest is required as an unenumerated requirement in all three cases. Nor could it. 1129(b)(2)(A) provides for the payment of allowed secured claims, which specifically includes post-petition interest at the contract rate; and post-petition interest is something that would never be applicable to interests under section 1129(b)(2)(C). What then are the unenumerated requirements for secured claims and interests? If the use of the word “includes” is important for unsecured creditors it must also be important for secured creditors and interests. But UMB does ■ not specify what significance it holds for those other categories.
Second, UMB’s reliance on pre-Code case law, which it argues has not been abrogated by adoption of the Bankruptcy Code, is inapposite. UMB relies on the Supreme Court’s holding in Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982 (1941), stating that the court held that a plan of reorganization runs afoul of the absolute priority rule if equity holders receive value before bondholders are paid their full con*116tract rate of interest. What UMB conveniently fails to note, however, is that the bondholders in Consolidated Rock were secured creditors. The treatment of unsecured claims was not before the court because under the plan “the claims of general creditors will be paid in full or assumed by the new company.” Id. at 515, 61 S.Ct. 675 n. 9.
Moreover, the holding of that case was codified in sections 506(b) and 1129(b)(2)(A), which in combination provide that in order for a plan to be fair and equitable to a class of secured creditors when a junior class is receiving a distribution the secured class must receive post-petition interest at the contract rate. Thus, UMB’s argument that the holding in Consolidated Rock was not abrogated by passage of the Bankruptcy Code is incorrect. Importantly, however, the holding in Consolidated Rock was not incorporated in section 1129(b)(2)(B) governing the treatment of unsecured creditors. At most, Consolidated Rock stands for the proposition articulated by the Supreme Court in Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 165, 67 S.Ct. 237, 91 L.Ed. 162 (1946) that it is “manifest that the touchstone of each decision on allowance of interest in bankruptcy, receivership and reorganization has been a balance of equities between creditor and creditor or between creditors and the debtors.” But see In re Manchester Gas Storage, Inc., 309 B.R. 354, 385 (Bankr.N.D.Okla.2004) (“The Court is not comfortable with the notion that the Vanson case gives permission to present-day bankruptcy courts bound by the bankruptcy Code to override section 502(b) of the Code by invoking equity ... The concept that post-petition interest is a matter of the bankruptcy court’s equitable jurisdiction has been superseded by statute.”).
The only other pre-Code cases identified by UMB are In re Realty Associates Securities Corp., 163 F.2d 387 (2d Cir.1947) and Empire Trust Co. v. Equitable Office Building Corp., 167 F.2d 346 (2d Cir.1948), which are cited for the proposition that contract rate is the proper rate for calculation of post-petition interest. But whether to use contract rate is not the issue. The issue is whether any post-petition interest must be paid to unsecured creditors under the absolute priority rule and neither of those cases stand for that proposition.
Third, UMB’s reliance on post-Code case law is not persuasive. In making this argument UMB relies on the Dow Corning line of cases out of the Sixth Circuit, specifically In re Dow Corning Corp. (“Dow III”), 244 B.R. 678 (Bankr.E.D.Mich.1999); and In re Dow Corning Corp. (“Dow III”), 456 F.3d 668 (6th Cir.2006). But those cases do not stand for the proposition that payment to unsecured creditors of post-petition interest at the contract rate when a junior class is receiving a distribution is required for a plan to be fair and equitable. The court in Dow II went through an exhaustive and scholarly recitation of the origins of section 502(b)(2), 726(a) and 1129(b) of the Bankruptcy Code. The court concluded that post-petition interest is not part of an allowed claim under section 502(b) and that the legal rate under section 726(a) is the Federal judgment rate but does not serve as a cap on post-petition interest that applies throughout the Code. In addition, the court concluded that in applying the fair and equitable test under section 1129(b)(2) it has the discretion to exercise its equitable power to require, among other things, the payment of post-petition interest.' Specifically, the court held that “[t]he wide parameters associated with the fairness inquiry, in conjunction with the discretion which we are generally accorded in matters concerning post-petition interest, lead us to conclude that a *117plan which would pay the dissenting class [post-petition] interest at the minimum rate pursuant to sections 1129(a)(7)(ii)/ 726(a)(5) is not necessarily ‘fair and equitable’ for purposes of section 1129(b).” Dow II at 695, (emphasis added). The court then went on to determine, based on the evidence, whether the plan before it was, in fact, “fair and equitable.” The court found that, in its case, the plan proponents offered no persuasive evidence in support of paying less than the contract interest and that to do otherwise would not be fair and equitable. Nonetheless, the unsecured creditors were not fully vindicated as the court declined to award default interest due under the contract.
For the next five years the parties litigated the validity of the claims that would be paid under the plan. The bankruptcy court ultimately determined on summary judgment that it could not award default interest because there was no evidence that it would be fair and equitable to do so and because the debtor had not been in default on the date of the bankruptcy filing. The unsecured creditors appealed and the district court affirmed the bankruptcy court’s ruling on default interest. The 6th Circuit reversed. The court noted that where debtors are insolvent, bankruptcy courts have concluded that whether to award default interest under 1129(b) is determined on a case-by-case basis based on the facts and equities .of each specific case. The court went on to note, however, that, “in solvent debtor cases, rather than considering equitable principles, courts have generally confided themselves to determining and enforcing whatever pre-pe-tition rights a given creditor has against the debtor.” Dow III, 456 F.3d at 679. The court went on to state that “[w]hen a debtor is solvent, the presumption is that a bankruptcy court’s role is merely to enforce the contractual rights of the parties, and the role that equitable principles play in the allocation of competing interest is significantly reduced.” Id. Note that the court stated that the role of equitable principles is reduced — not eliminated. Thus, the 6th Circuit held that, in solvent debtor cases, there is a presumption that the default interest rate should be awarded. Nonetheless, the court held that the record before it was not sufficiently developed for it to determine whether the general rule calling for the payment of default interest in solvent debtor cases, when considered with other equitable factors, made the award of default interest in the case appropriate. Thus, the court remanded the case to bankruptcy court for proceedings consistent with its decision “including the consideration of any equitable factors affecting the interest rate.” Id. at 680.
The import of the use of the word “includes” in section 1129(b)(2) is less than clear. What is clear, however, is that UMB is overreaching in arguing that the term somehow requires that, when a junior class is receiving a distribution, unsecured claims must receive post-petition interest at the contract rate in order to cramdown a plan on a class of unsecured creditors that are receiving payment in full of their allowed claims under section 502(b). At most, it allows a court to weigh equitable considerations in deciding whether to award post-petition interest. Whether to invoke that equitable power here would require an evidentiary record that is not before the Court. But it is not necessarily the case that equitable considerations require the payment of post-petition interest to unsecured creditors any time equity holders are receiving a distribution. For example, in a case such as this, the ultimate equity holders of the enterprise are not receiving a distribution. Rather, the equity is held by another debtor entity in an integrated capital structure. To require the payment of post-petition interest *118in a case such as this would reduce the consideration available to pay other creditors of the enterprise not the ultimate equity holders. It is not clear to the Court that it would be equitable in this situation to require the payment of post-petition interest. Indeed, the court in Dow II specifically noted that inherent in the court’s discretion in applying its equitable powers is the ability not to require the payment of post-petition interest, especially when “such payments may mean a pro tanto reduction in the payment of principal owed to lower-priority creditors.” Dow II, 244 B.R. at 691.
In any event, this Court holds that the plain meaning of section 1129(b)(2) does not require payment to unsecured creditors of post-petition interest when a junior class is. receiving a distribution for a plan to be fair and equitable. Rather, the Court has the discretion to exercise its equitable power to require, among other things, the payment of post-petition interest. 'The rate of interest may be the contract rate or such other rate as the Court deems appropriate.3 Exercise of the Court’s discretion to award interest will vary on a case by case basis and must be based on an evidentiary record. There is no hard and fast rule and the Court has the full authority to decline to exercise its discretion at all and leave the fair and equitable requirement to the elements specified in the statute, which provide for the payment of allowed claims that exclude the payment of unmatured, i.e., post-petition interest.
So where does that leave unsecured creditors where its class has voted to reject a plan that does not- provide for the payment of postpetition interest? Are they confined to a world where they will always be subject to cramdown and never receive' post-petition interest? No. At the very least, section 1129(a)(7) might require that they receive post-petition interest at the Federal judgment rate. In addition, the court might exercise its equitable power under the fair and equitable requirement of 1129(b)(2) to award post-petition interest at an appropriate rate, which might be at that provided in the contract. But the unsecured creditors also have the protection of section 1129(a)(10), which provides that if a class of claims is impaired under the plan, it can only be confirmed if “at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.” Note that 1129(a)(10) requires acceptance by one class of claims — interests, i.e., equity, are excluded. Thus, a plan that fails to pay unsecured creditors post-petition interest at the contract rate will be uncon-firmable unless a class of impaired creditors votes to accept the plan. In most cases where unsecured claims are being paid the full amount of their allowed claims plus post-petition interest at the Federal judgment rate and equity holders are receiving a distribution the only impaired class will be the unsecured creditors and they will control their own destiny — their rejection of the plan that does not pay them at the contract rate will render the plan unconfirmable. Only in the rare case where another class of impaired claims exists, such as a secured class, that has voted to accept the plan will the class of unsecured creditors be at risk of receiving, at most, post-petition interest at the Fed*119eral judgment rate. So how does a debtor confirm a plan where, as here, it lacks the support of any of its creditors and avoid the problem of section 1129(a)(10)? By unimpairing its creditors. That leads to the question of whether a class of unsecured creditors must receive post-petition interest at the contract rate in order to be unimpaired.
As just, noted, a plan can provide that a class of claims is not impaired under the plan, which under section 1124(1) would mean that the plan “leaves unaltered the legal, equitable, and contractual rights to which such claim ... entitles the holder of such claim.” A plan can also leave a class of creditors unimpaired by reinstating the claims under section 1124(2) but that is not relevant here. The proposed plan in this case purports to leave the PIK Notehold-ers unimpaired under section 1124(1). More specifically, the plan provides that each holder of general unsecured claims against the EFIH Debtors, which includes the PIK Noteholders, will receive “up to the Allowed amount of its Claim, payment in full in Cash or other treatment rendering such Claim unimpaired.” The plan further provides that Allowed Claims will include accrued principal, fees and interest due as of the petition date plus “accrued postpetition interest at the Federal Judgment Rate.” UMB argues that in addition to the payment of the principal, fees and interest due as of the petition date the PIK Noteholders’ treatment under the plan must include the payment in cash of post-petition interest at the contract rate (rather than the Federal judgment rate) that has accrued as of the effective date of the plan in order for its class to be unimpaired.
The Third Circuit described impairment in In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 202-203 (3d Cir.2003) (“PPI II”).
“Impairment” is a term of art crafted by Congress to determine a creditor’s standing in the confirmation phase of bankruptcy plans. Each creditor has a set of legal, equitable, and contractual rights that may or may not be affected by bankruptcy. If the debtor’s Chapter 11 reorganization plan does not leave the creditor’s rights entirely “unaltered,” the creditor’s claim will be labeled as impaired under section 1124(1) of the Bankruptcy Code. If the creditor’s claim is impaired, the Code provides the creditor with a vote that, depending on the value of the creditor’s claim, may be sufficient to defeat confirmation of the bankruptcy plan.
The Bankruptcy Code creates a presumption of impairment “so as to enable a creditor to vote on acceptance of the plan.” Under section 1124(1), the presumption of impairment is overcome only if the plan “leaves unaltered the [creditor’s] legal, equitable, and contractual rights.” The burden is placed on the debtor to demonstrate the plan leaves the creditor’s rights unaltered.
Under section 502(b), the PIK Claim does not include post-petition interest. The question is whether a plan that does not provide for the payment of post-petition interest at the contract rate “leaves unaltered, the legal, equitable, and contractual rights to which such claim ... entitles the holder of such claim.” As UMB argues in its sur-reply, “[i]f the Plan does not leave ‘unaltered the ... contractual rights,’ then the PIK Noteholders are impaired. Because anything short of the contract rate would alter their contractual rights, a fortiori the PIK Noteholders must receive postpetition interest at the contract rate in order to be treated as unimpaired under the Plan.” D.I. 6303, Exh. A at 3 (emphasis in original). But it is not that simple.
*120Prior to 1994, section 1124 provided that “a class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan ... (3) provides that, on the effective date of the plan, the holder of such claim or interest receives, on account of such claim or interest, cash equal to (A) with respect to a claim, the allowed amount of such claim.” Because under section 502(b)(2) allowed unsecured claims do not include post-petition interest, under the plain meaning of section 1124(3)(A), a debtor could render an unsecured class unimpaired by paying the allowed claim in full without post-petition interest even if the debtor was solvent and providing a distribution to a junior class. Indeed, the New Jersey bankruptcy court so held in In re New Valley Corp., 168 B.R. 73 (Bankr.D.N.J.1994). As described by Judge Walsh, “the result in New Valley stood in contrast with a line of cases holding that where a debtor is solvent, unsecured creditors must be paid in full, including postpetition interest, pursuant to the ‘fair and equitable’ test of section 1129(b)(2) when the debtor is cramming down that creditor’s claim. Thus, solvent debtors could avoid paying ‘unimpaired’ unsecured creditors postpetition interest by paying them in full in cash, yet the same solvent debtor would be required to pay postpetition interest to an ‘impaired’ dissenting class of unsecured creditors.” In re PPI Enterprises (U.S.), Inc., 228 B.R. 339, 351 (Bankr.D.Del.1998) (“PPI I”). While this Court disagrees that there is a requirement to pay post-petition interest in a solvent debtor case, there was certainly the potential for an inconsistent result.
Congress agreed and, in 1994, removed section 1124(3) from the Bankruptcy Code. The legislative history makes clear Congress’s intent.
[t]he principal change in this section ... relates to the award of postpetition interest. In a recent Bankruptcy Court decision in New Valley, unsecured creditors were denied the right to receive postpetition interest on their allowed claims even though the debtor was liquidation and reorganization solvent. The New Valley decision applied section 1124(3) of the Bankruptcy Code literally by asserting, in a decision granting a declaratory judgment, that a class that is paid the allowed amount of its claims in cash on the effective date of a plan is unimpaired under section 1124(3), therefore is not entitled to vote, and is not entitled to receive postpetition interest. The Court left open whether the good faith plan proposal requirement of section 1129(a)(3) would require the payment of or provision for postpetition interest. In order to preclude this unfair result in the future, the Committee finds it appropriate to delete section 1124(3) from the Bankruptcy Code.
H.R.Rep. No. 835, § 214 (1994), reprinted in 1994 U.S.C.C.A.N. 3340.
Judge Walsh summarized the effect of the deletion of section 1124(3) and the interplay with section 1124(1) as follows:
Section 1124(3) created nonimpairment status by a cash payment equal to the allowed amount of the claim but without postpetition interest. Such treatment could not qualify for nonimpairment under § 1124(1) because the- failure to pay postpetition interest does not leave unaltered the contractual or legal rights of the claim. If, in a nonbankruptcy context, the creditor would be entitled to interest on its claim to the date of payment, then in a bankruptcy context the claim is altered absent the interest payment. Section 1124(3) may be viewed as an exception to the test set forth in § 1124(1). Congress, of course, deleted the section for the reason discussed *121above. Now the holder of a claim can only be deemed unimpaired if the cash payment is both equal to the claim and includes postpetition interest.
PPI I, 228 B.R. at 352-53 (emphasis added).
The Third Circuit specifically endorsed this view. PPI II, 324 F.3d at 207.
But that is not the end of the analysis. The Court must address the issue of statutory impairment versus plan impairment.
The issue in PPI was whether a landlord’s lease rejection claim was impaired by the statutory cap on the claim under section 502(b)(6) of the Code. The plan in PPI purported to treat the landlord as unimpaired by paying him the entire amount of his section 502(b)(6) capped rent claim, plus pre- and post-petition interest. The landlord argued that the failure to pay him the full amount of his claim under state law for breach of his lease as opposed to the allowed amount of his claim capped under section 502(b)(6) altered “the legal, equitable, and contractual rights to which such claim ... entitles the holder of such claim” and, thus, his claim was impaired. Judge Walsh, however, disagreed, finding that the landlord was confusing “two distinct concepts: (i) plan impairment, under which the debtor alters the ’legal, equitable, and contractual rights to which [their] claim entitles the holder of such claim,’ and (ii) statutory impairment, under which the operation of a provision of the Code alters the amount that the creditor is entitled to under nonbankruptcy law.” PPI I, 228 B.R. at 353. Judge Walsh went on to state:
By its very language, § 1124(1) embodies this distinction. It requires the plan to leave unaltered those rights to which the creditor’s “claim or interest entitles the holder of such claim or interest.” § 1124(1) (emphasis added). Note that the quoted provision does not say “entitles the holder under nonbankruptcy law”; it includes bankruptcy law and in this case § 502(b)(6) determines that entitlement. Thus, it is not PPI’s Plan which proposes to alter [the landlord’s] rent claim; PPI’s Plan provides for payment in full of the capped rent claim plus interest. Instead, it is the operation of the Code itself that has altered the $4.7 million amount owed by PPI [under state law]. That $4.7 million is not a right of payment to which [the landlord] is entitled to as a result of his bankruptcy claim.
Id. (emphasis in original).
As the plan was to pay the landlord exactly what he was entitled to receive, subject to the cap on the claim under section 502(b)(6), Judge Walsh found that the plan did not alter the landlord’s rights and his claim was not impaired.
The Third Circuit affirmed Judge Walsh’s ruling. Adopting the analysis of In re American Solar King Corp., 90 B.R. 808 (Bankr.W.D.Tex.1988), upon which Judge Walsh also relied, the court held:
The relevant impairment language requires bankruptcy plans to leave unaltered those rights to which the creditor’s “claim or interest entitles the holder of such claim or interest.” This language in section 1124(1) does not address a creditor’s claim “under nonbankruptcy law.” The use of a present-tense verb suggests a creditor’s rights must be ascertained with regard to applicable statutes, including the section 502(b)(6) cap. In other words, a creditor’s claim outside of bankruptcy is not the relevant barometer for impairment; we must examine whether the plan itself is a source of limitation on a creditor’s legal, equitable, or contractual rights.
PPI II, 324 F.3d at 204.
The court then went on to conclude:
*122In sum, [PPI’s plan] intends to pay [the landlord] his “legal entitlement” and provide him with “full and complete satisfaction” of his claim on the date the Plan becomes effective. [The landlord] is only “entitled” to his rights under the Bankruptcy Code, including the section 502(b)(6) cap. [The landlord] might have received considerably more if he had recovered on his leasehold claims before [PPI] filed for bankruptcy. But once [PPI] filed for Chapter 11 protection, that hypothetical recovery became irrelevant. [The landlord] is only entitled to his “legal, equitable, and contractual rights,” as they now exist. Because the Bankruptcy Code, not the Plan, is the only source of limitation on those rights here, [the landlord’s] claim is not impaired under section 1124(1).
Id. at 205.4
But if the limit on rejection damages under section 502(b)(6) is statutory impairment not plan impairment then what about the exclusion of unmatured, i.e., post-petition, interest on unsecured claims under section 502(b)(2)? The same analysis should apply. See W.R. Grace, 475 B.R. at 161 (“It is unlikely that the Third Circuit meant to sift the statutory grains of sand here so finely — if it found no impairment on the basis of application of subsection (b)(6) to a creditor’s claim, then it stands to reason that there likewise would be no impairment from the application of subsection (b)(2).”). Indeed, one can easily replace the reference to section 502(b)(6) in the Third Circuit’s conclusory paragraph.
In sum, [the Debtors’ plan] intends to pay [the PIK Noteholders their] “legal entitlement” and provide [them] with “full and complete satisfaction” of [their] claim on the date the Plan becomes effective. [The PIK Noteholders are] only “entitled” to [their] rights under the Bankruptcy Code, including the [the exclusion of unmatured interest under section 502(b)(2) ]. [The PIK Noteholders] might have received considerably more if [they] had recovered on [their] claims [under the PIK Notes] before [the Debtors] filed for bankruptcy. But once [the Debtors] filed for Chapter 11 protection, that hypothetical recovery became irrelevant. [The PIK Noteholders are] only entitled to [their] “legal, equitable, and contractual rights,” as they now exist. Because the Bankruptcy Code, not the Plan, is the only source of limitation on those rights here, [the PIK Noteholders’ claim is] not impaired under section 1124(1).
A finding that the exclusion of post-petition interest at the contract rate on the PIK Noteholders’ claims under the plan in this case is a result of the statute, i.e., section. 502(b)(2), and not the plan and, thus, the plan does not impair their claim is the logical and, indeed, unavoidable extension of the holding in both PPI cases that the limit on rejection damages under section 502(b)(6) is statutory impairment not plan impairment. Such a ruling, how*123ever, appears to create an irreconcilable conflict with the findings in both PPI cases that the holder of an unsecured claim against a solvent debtor can only be deemed unimpaired if the cash payment is both equal to the claim and includes post-petition interest. See PPI I, 228 B.R. at 353; and PPI II, 324 F.3d at 207. Indeed, Judge Walsh specifically found that the plan in PPI did not impair the landlord’s claim because he was to receive pre- and post-petition interest. PPI I, 228 B.R. at 851.
The conflict is resolved by returning to the text of section 1124(1), which provides that a class is unimpaired if the plan does not alter “the legal, equitable, and contractual rights to which such claim ... entitles the holder of such claim.” (emphasis added) Section 502(b)(2), like 502(b)(6), has altered by statute the terms of the parties’ contract. The contractual right to post-petition interest has been trumped by the Bankruptcy Code. Nor is there a legal right to post-petition interest because no other provision of the Bankruptcy Code providing for payment of such interest, such as section 1129(a)(7), is applicable. But what of the claimant’s equitable rights?
Although Consolidated Rock and Van-ston are not directly applicable, allowing for the award of post-petition interest on an allowed claim to unimpaired unsecured creditors in a solvent debtor case as a matter of equity is consistent with the spirit and principles behind the Supreme Court’s decisions.5 It also resolves a conflict between the holdings in the PPI cases and the legislative history behind Congress’s deletion of section 1124(3) in which Congress clearly expressed its disagreement with the decision in New Valley that a debtor could render an unsecured class unimpaired by paying the allowed claim in full without post-petition interest even if the debtor was solvent and providing a distribution to a junior class. To strictly apply the reasoning of the PPI cases as to statutory impairment to the facts of this case would result in exactly the same result that led Congress to delete section 1124(3) from the Bankruptcy Code.
Such a strict holding would also create a conflict between the treatment of impaired and unimpaired creditors in solvent reorganization cases such that unimpaired creditors might receive inferior treatment than that accorded impaired creditors. Recall that, under the fair and equitable requirement of section 1129(b)(2), the court has the equitable power to award post-petition interest to impaired unsecured creditors when a junior class is receiving a distribution. Granting unimpaired creditors the equitable right to seek post-petition interest puts them on the same footing as impaired creditors under the fair and equitable test.
Nonetheless, impaired creditors are potentially in a better position than unimpaired creditors in at least one instance. Separate from the application of equitable principles, impaired creditors have the protection of section 1129(a)(7) that might require such impaired creditors to receive post-petition interest at the Federal judgment rate. But neither sections 1129(b) nor 1129(a)(7) apply to unimpaired creditors.6
In the end, the only way to reconcile the Third Circuit’s decision in PPI II is to hold *124that the plan in this case need not provide for the payment in cash on the effective date of post-petition interest at the contract rate in order for the PIK Notehold-ers to be unimpaired. Indeed, the plan need not provide for any payment of interest at all, even at the Federal judgement rate, as what would be the basis for the payment of post-petition interest other than the contract? But the plan must allow for the PIK Noteholders to be awarded post-petition interest at an appropriate rate under equitable principles. In effect, the Court holds that the fair and equitable test as applied to unsecured creditors in solvent debtor cases, see p. 17, supra, must also be met in solvent debtor cases for such creditors to be unimpaired. As with the fair and equitable test, the rate of interest may be the contract rate or such other rate as the Court deems appropriate.7 Whether such interest would be awarded and at what rate in this case cannot be determined at this time, but the Court has already noted that it is less than clear that an award of post-petition interest under the facts of this case would be equitable.
Thus, the Court will sustain the Debtors’ Partial Objection to UMB’s claim. The PIK Claim is limited to the principal and accrued fees and interest due as of the petition date and excludes unmatured, i.e., post-petition interest. The Court further finds that the legal rate of interest under section 726(a) is the Federal judgment rate but the applicability of section 726(a) is limited to its incorporation in section 1129(a)(7) and does not create a general rule establishing the appropriate rate of post-petition interest. Moreover, the plain meaning of section 1129(b)(2) does not require payment to unsecured creditors of post-petition interest when a junior class is receiving a distribution for a plan to be fair and equitable. Rather, the Court has the discretion to exercise its equitable power to require, among other things, the payment of post-petition interest, which may be at the contract rate or such other rate as the Court deems appropriate. Finally, the plan in this ease need not provide for the payment in cash on the effective date of postpetition interest at the contract rate for the PIK Noteholders to be unimpaired. Indeed, the plan need not provide for any payment of interest, even at the Federal judgement rate. But in order for the PIK Noteholders to be unimpaired the plan must provide that the Court may award post-petition interest at an appropriate rate if it determines to do so under its equitable power.
An order will be issued.
. This Memorandum Opinion constitutes the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bank. P. 7052, which is applicable to this matter by virtue of Fed. R. Bankr.P. 9014. The Court has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 11 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The Court has the judicial power to enter a final order.
. The PIK Claim was filed in the amount of $1,647,374,288.21 plus interest, fees, expenses and other amounts "arising in connection with the [PIK] Indenture (see addendum).” PIK Claim (attached as Exh. 1 to the PIK Claim Objection. Based on the record in these proceedings it is the Court’s understanding that there is approximately $1.57 billion in principal, $81 million in pre-petition accrued interest and $109,000 in pre-petition accrued fees and expenses owed under the PIK Notes.
. The Court disagrees with the 6th Circuit's adoption of a presumption that interest should be awarded at a specific rate whether it be the contractual default rate or otherwise. Dow III, 456 F.3d at 679. The Court sees no reason to create a presumption one way or the other. Nor does the Court believe that its role in weighing equitable principles to determine an appropriate rate of interest is reduced in solvent debtor cases.
. One could argue that section 1124(l)’s reference to “claim,” which is defined in section 101(5) as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, un-matured, disputed, undisputed, legal, equitable, secured, or unsecured,” is broader than “allowed claim” under section 502(b) and, thus, any limitation on allowance is irrelevant for purposes of determining whether a claim is impaired under section 1124(1). Indeed, this was the landlord’s argument in PPI. Judge Walsh, however, specifically rejected that argument in PPI I, 228 B.R. at 353, which the Third Circuit endorsed in PPI II, 324 F.3d at 204. See also In re Smith, 123 B.R. 863, 867 (Bankr.C.D.Cal.1991) ("[A] plan may limit payment of claims to .‘the extent allowed,’ without impairing them; for until claims are allowed, or deemed allowed, the holders thereof are not entitled to distribution from the bankruptcy estate.”).
. See Vanston, 329 U.S. at 165, 67 S.Ct. 237 (it is "manifest that the touchstone of each decision on allowance of interest in bankruptcy, receivership and reorganization has been a balance of equities between creditor and creditor or between creditors and the debtors.”).
. While the plan need not pay the PIK Note-holders any post-petition interest for the class to be unimpaired that is not to say it can't. *124The discussion here has focused on the minimum required. There is nothing to keep a plan from paying such interest at any rate, including at the Federal judgment rate. Indeed, this plan so provides. As such, it moots any argument that as unimpaired creditors the PIK Noteholders are being deprived of the benefit they would receive under section 1129(a)(7) as impaired creditors. Were section 1129(a)(7) applicable, the PIK Noteholders would be entitled under that section to receive, at most, post-petition interest at the Federal judgment rate, which is what they are receiving under the plan.
. See W.R. Grace, 475 B.R. at 164 (“Therefore, [PPI II ] at most stands for the proposition that a claim must receive some form of post-petition interest in a solvent debtor case to qualify as unimpaired ... [it] does not stand for the proposition that unsecured creditors must receive post-petition interest at the contractual default rate in order to render their claims unimpaired. Rather, [PPI II] can at most be applied here to require the [unsecured creditors] to receive some form of post-petition interest, regardless of whether or not that interest is at the contractual rate of interest.”) (emphasis in original). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498824/ | OPINION
Robert N. Opel, II, Bankruptcy Judge
The PlaintiffBank alleges that a mortgage it held was erroneously satisfied by a former holder of the mortgage. It requests that the satisfaction be set aside and the mortgage reinstated. The Plaintiff/Bank now seeks summary judgment. I conclude that there is an outstanding material issue of fact as to whether the Plaintiff was the holder of the mortgage at the time of the satisfaction. Therefore, the Motion for Summary Judgment is denied.
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).
II. Facts and Procedural History
Thomas F. Pregent (“Debtor”) filed a voluntary Chapter 13 petition on May 19, 2014. An original Chapter 13 Plan was filed on August 14, 2014; a First Amended Chapter 13 Plan was filed on January 24, 2015. At the time of this writing, there is no' confirmed Chapter 13 plan in the underlying bankruptcy case.
This Adversary Proceeding was commenced by a Complaint filed by Mid Penn Bank (“Mid Penn”). The Complaint names six Defendants, but the only contest is between Mid Penn and the Defendant, Wells Fargo Bank, N.A., as servicer for U.S. Bank, National Association, as Trustee (“Wells Fargo”). The Complaint essentially alleges that on June 22, 2005, Mid Penn purchased a note and mortgage in the face amount of $130,000.00 which the Debtor and his non-filing spouse had previously executed and delivered to the original lender, now known as Centric Bank (“Centric”). It is alleged that, when filed, the $130,000.00 mortgage created a first lien on real property known as 285 Rom-berger Road, Washington Township, Dauphin County, Pennsylvania (the “Mid Penn Mortgage”).
The gravamen of the Complaint is that on February 26, 2014, Centric mistakenly satisfied the Mid Penn Mortgage by filing a satisfaction piece with the Dauphin County Recorder of Deeds. Complaint to Determine Validity, Priority or Extent of Lien, ECF No. 1, p. 6-7 ¶ 26.
*127Mid Penn has obtained either stipulated relief or default judgments as to all Defendants other than Wells Fargo. On January 27, 2015, Mid Penn filed a Motion for Judgment on the Pleadings. Thereafter, Wells Fargo filed a Motion for Leave to Amend Answer, EOF No. 39. The Motion for Leave to Amend Answer was granted and the Motion for Judgment on the Pleadings was deemed moot by virtue of the Amended Answer filed by Wells Fargo.
On August 13, 2015, Mid Penn filed its Motion for Summary Judgment, EOF No. 60. In response, Wells Fargo filed its Answer to the Motion for Summary Judgment, EOF No. 67. The parties have submitted their respective briefs, and statements of material fact, in support of and in opposition to the Motion for Summary Judgment and the matter is now ripe for decision.
III. Discussion
A. Standard to Decide a Motion for Summary Judgment Under F.R.B.P. 7056
Federal Rule of Bankruptcy Procedure 7056 makes Federal Rule of Civil Procedure 56 applicable to bankruptcy adversary proceedings. Pursuant to Rule 56, the court shall grant summary judgment to the moving party, “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). Thus, the movant has the burden to show the absence of genuine issues of material facts. In re Madera, 363 B.R. 718, 724 (Bankr.E.D.Pa.2007); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). At the summary judgment stage, the court must view the facts in the light most favorable to the non-moving party and draw all inferences in favor of that party. In re Shull, 493 B.R. 453, 455 (Bankr.M.D.Pa.2013) (internal citations omitted). The evidence of the non-movant is to be believed and all justifiable inferences are to be drawn in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986) (internal citations omitted). Further, when considering a summary judgment motion, the judge’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, 106 S.Ct. at 2511; Santini v. Fuentes, 795 F.3d 410, 416 (3d Cir.2015).
The Third Circuit has noted:
[I]n considering a motion for summary judgment, a district court may not make credibility determinations or engage in any weighing of the evidence; instead, the non-moving party’s evidence is to be believed, and all justifiable inferences are to be drawn in his favor.
Montone v. City of Jersey City, 709 F.3d 181, 191 (3d Cir.2013) (internal citations omitted); In re Rose, 397 B.R. 740, 742 (Bankr.M.D.Pa.2008).
B. Consideration of State Law
As noted above, Wells Fargo principally opposes summary judgment by denying that Mid Penn was the holder of the Mid Penn Mortgage when it was satisfied of record.
Property interests are created and defined by state law. Absent a significant federal interest which requires a different result, there is no reason why such interests should be analyzed differently because one of the parties is involved in a bankruptcy proceeding. Thus, state law may be applied to determine ownership interests in bankruptcy matters. In re Stroup, 521 B.R. 84, 87 (Bankr.M.D.Pa.2014). Further:
*128The justifications for application of state law are not limited to ownership interests; they apply with equal force to security interests .,.
Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979).
My colleague, Judge Thomas, has found that Pennsylvania law should be reviewed to determine property interests concerning a parcel of real estate located in Pennsylvania. In re Smith, 449 B.R. 221, 222 (Bankr.M.D.Pa.2011).
I will therefore consider, under Pennsylvania law, whether Mid Penn has established it was the holder of the Mid Penn Mortgage when it was satisfied.
C. Requirements to be the Holder of a Mortgage
The pleadings establish that the Mid Penn Mortgage was recorded on October 1, 2004. Thereafter, on or about October 15, 2004, the Debtor obtained another loan and executed and delivered to Wells Fargo a note in the face amount of $490,000.00 (the “Wells Fargo Mortgage”). The Wells Fargo Mortgage encumbers the same property as the Mid Penn Mortgage. Complaint to Determine Validity, Priority or Extent of Lien, EOF No. 1, p. 5, ¶¶ 16-17; Amended Answer and Affirmative Defenses to Complaint to Determine Validity, Priority or Extent of Lien, ECF No. 54, p. 4, ¶¶ 16-17. Essentially, Mid Penn alleges that Centric erroneously satisfied the Mid Penn Mortgage and it requests that the satisfaction be set aside and the Mid Penn Mortgage be reinstated.
In support of the Motion for Summary Judgment, Mid Penn filed its Statement of Material Facts to which it contends there is no genuine issue to be tried. In part, the Statement maintains that Mid Penn purchased the Mid Penn Mortgage, and the note which it secured, in June 2005. Plaintiffs Statement of Material Facts, ECF No. 61, p. 5, ¶ 16. Wells Fargo s response to Mid Penn’s Statement of Material Facts includes:
16. Denied. It is specifically denied that Mid Penn purchased the Var-tan [Mid Penn] Note and Vartan [Mid Penn] Mortgage from Vartan [Centric] in June 2005 and strict proof thereof is demanded at trial. It is further denied that Vartan [Centric]’ delivered the original Vartan [Mid Penn] Note and Var-tan [Mid Penn] Mortgage to Mid Penn in exchange for payment and strict proof thereof is demanded at trial....
Defendant, Wells Fargo Bank, N.A.’s, Response to Mid Penn’s Statement of Material Facts, ECF No. 68, p. 2, ¶ 16.
Pennsylvania has traditionally been referred to as a title theory state for mortgage purposes. The Pennsylvania Supreme Court has indicated:
Thus, for purposes of determining whether mortgage assignments, mortgage satisfactions and mortgage releases are property transfers, we begin with the premise that a mortgage conveys the property subject to the mortgage to the mortgagee until the obligations under the mortgage are fulfilled.
Pines v. Farrell, 577 Pa. 564, 848 A.2d 94, 100 (2004).
Surely, the most obvious way for a lender like Mid Penn to show that it is the holder of a mortgage securing a loan, which it did not originate, would be to provide a certified copy of a recorded assignment of the mortgage from the originating lender, or prior holder. Appeal of Pepper, 77 Pa. 373, 377 (1875). Mid Penn has not provided such proof.
[5-7] However, Pennsylvania law recognizes that one may be the holder of a *129note and mortgage without a written recorded assignment. Under the Pennsylvania Uniform Commercial Code, the note securing a mortgage is a negotiable instrument. A note endorsed in blank is a “bearer note” payable to the holder, regardless of who previously held the note. In a mortgage foreclosure action, the Pennsylvania Superior Court has held, that where the plaintiff bank held the original note, it held the mortgage as well. Bank of America, N.A. v. Gibson, 102 A.3d 462, 466 (Pa.Super.2014); also see JP Morgan Chase Bank, N.A. v. Murray, 63 A.3d 1258, 1266 (Pa.Super.2013) (summary judgment for plaintiff in mortgage foreclosure action reversed because of genuine issue of material fact as to whether the plaintiff had possession of the original note).
Other federal court, decisions also suggest that recordation of an assignment of mortgage is not the only way to prove one is the holder of a mortgage. The Third Circuit Court of Appeals has held that there is no obligation under Pennsylvania law to record all land conveyances. Montgomery County, PA v. MERSCORP Inc., 795 F.3d 372, 378 (3d Cir.2015); also see U.S. Bank, Nat. Ass’n v. Zimmer, 2015 WL 412389, *2 (M.D.Pa., Jan. 30, 2015) (under the Pennsylvania Uniform Commercial Code, the note securing a mortgage is a negotiable instrument. When endorsed in blank, the note becomes payable to the bearer and may be negotiated by transfer of possession alone).
IV. Conclusion
I must view the facts in the light most favorable to the non-moving party, Wells Fargo. Wells Fargo has denied that Mid Penn was the holder of the Mid Penn Mortgage, and the note which it secured, when the mortgage was satisfied.
Clearly, to have standing to complain, Mid Penn would need to have been the actual holder at the time of satisfaction. Mid Penn has not produced a recorded assignment of the mortgage. Neither has it offered testimony, subject to the rigors of cross examination, showing that it is the holder of the original signed note which is secured by the Mid Penn Mortgage. At trial, it may offer the original note for inspection by Wells Fargo and the Court.
I conclude that there is an outstanding disputed material issue of fact which precludes the entry of summary judgment. An order consistent with this Opinion will follow. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498825/ | OPINION
ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE
I. INTRODUCTION
In this chapter 13 case, Debtor Angela • P. Freeman (“the Debtor”) seeks both
(1)the disallowance of a proof of claim as unenforceable due to the expiration of the applicable statute of limitations; and
(2) sanctions against the claimant under Fed. R. Bankr. P. 9011 for the filing of the proof of claim.
The Debtor frames her request for sanctions as an attempt to protect the bankruptcy claims allowance process from the conduct of a creditor who
fiíe[d] a “stale” Proof of Claim ... with .knowledge that the claim is unenforceable; not in the belief that the claim is valid, but in the hope that it will not be noticed, or that the Debtor will have no incentive to object.
(Debtor’s Mem. at 7) (unpaginated). The Debtor asserts that such-creditor conduct harms other creditors who hold and timely file valid proofs of claim by diluting their distribution from the bankruptcy estate. (Id. at 6).
For the reasons set forth below, I will disallow the proof of claim at issue because it is unenforceable under applicable non-bankruptcy law. However, I will deny the Debtor’s request for sanctions because sufficient grounds do not exist in this case to impose sanctions on the claimant under Rule 9011 for filing a “stale proof of claim.”1
II. PROCEDURAL HISTORY
The Debtor filed a chapter 13 bankruptcy case on December 5, 2014. On February 23, 2015, Palisades Collections, LLC (“Palisades”) filed a proof of claim (“the POC”), asserting a general unsecured claim in the amount of $316.23. The claim is based on a bill from Verizon Pennsylvania, Inc. (“Verizon”) for unpaid telephone services. The POC identified Palisades as the creditor, but stated that notices should be sent to Vativ Recovery Solutions, LLC (“Vativ”). The POC was . signed under penalty of perjury by Stephen Braun, who identified himself as Vativ’s Assistant VP of Operations/Director of Litigation.
The POC was supported by copies of:
(1) a bill from Verizon dated April 28, 2004;
(2) a Bill of Sale of certain receivables from Verizon to Palisades Acquisition IX, LLC (“Palisades Acquisition”); and
(3) an assignment from Palisades Acquisition to Palisades of “certain receivables Palisades Acquisition purchased from Verizon.”
On August 4, 2015, the Debtor filed what she styled as a “Motion for Sanctions Pursuant to FRCP 11 and FRBP 9011” (“the Motion”) (Doc. # 49).2 In the Motion, the *133Debtor pointed out that the POC states neither the date of Verizon’s last service nor the date of the last payment. However, based on the attached Verizon bill from April 2004 — more than ten (10) years before the Debtor commenced her bankruptcy case — the Debtor asserted that the applicable statute of limitations, 42 Pa.C.S. § 5525(a), has expired and that the claim “is completely without the claimed value, uncollectable [sic] at law, and without reasonable basis in law or fact.” (Motion ¶10).
Only the Debtor’s counsel appeared at the hearing on the Motion on September 1, 2015. At the conclusion of the hearing, I took the matter under advisement. The Debtor filed a memorandum of law in support of her position on September 15, 2015 and the matter is ready for decision.
III. DEBTOR’S STANDING TO OBJECT TO THE POC
The Debtor seeks disallowance of the Proof of Claim and monetary sanctions for prosecuting a successful objection to the Proof of Claim. Disallowance of the claim is requested under 11 U.S.C. § 502(b)(1).
The Debtor also requests that sanctions be imposed for the asserted violation of Fed. R. Bankr. P. 9011(b). In making this request, the Debtor asserts that:
• the filing the POC was for the improper purpose of securing payment on an invalid claim, see Fed. R. Bankr. P. 9011(b)(1) and
• the claimant’s failed to make a reasonable inquiry into the validity of the POC, see Fed. R. Bankr. P. 9011(b)(2).
(Motion ¶¶ 13-14). In connection with the request for sanctions the Debtor posits that Palisades and Vativ filed an invalid claim based upon the expectation that the Debtor lacks a sufficient incentive to object to the claim and would not do so,3 and that, similarly, the chapter 13 trustee was. unlikely to object to the claim.4
*134The Debtor’s statement, that the claimant would surmise that she lacks an incentive to object to an invalid proof of claim appears accurate. In this case, the Debt- or’s First Amended Plan, which was confirmed by order entered on August 19, 2015, provided for the payment of a fixed, base amount in plan payments and a pro-rata distribution to unsecured creditors after the distribution to more senior classes has been completed. (See Doc. #’s 40, 57). Thus, the allowance or disallowance of the POC cannot have any effect on the Debtor’s payment obligations under the confirmed plan. Nor has the Debtor suggested that any of the allowed claims are nondischargeable. (If there were nondis-chargeable claims, the Debtor would have a financial incentive to seek disallowance of invalid claims so as to increase the distribution to the holders of the nondischargeable claims and decrease the balance due on the nondischargeable debt after the completion of the case).
The Debtor’s candid observation that she lacks an incentive to object to the POC leads to a threshold question whether the Debtor even has standing to object to the POC, a question that the court is obliged to consider sua sponte. See, e.g., In re Gronczewski, 444 B.R. 526, 582 n. 4 (Bankr.E.D.Pa.2011) (citing cases).
“The linchpin of standing, in the constitutional sense, is that the party seeking relief demonstrate exposure to some actual or threatened injury.” In re Gronczewski 444 B.R. 526, 533 (Bankr.E.D.Pa. 2011) (quoting and citing cases) (quotations omitted). The Bankruptcy Code also addresses standing. Section 502(a) of the Bankruptcy Code provides that a proof of claim is deemed allowed “unless a party in interest ... objects.” 11 U.S.C. § 502(a). The Code does not define a “party in interest.” To give meaning to the term, many courts have concluded that, in the bankruptcy context, a party must have a “pecuniary interest” in the outcome of the dispute. See, e.g., In re Kaiser, 525 B.R. 697, 705 (Bankr.N.D.Ill.2014); In re Bozman, 403 B.R. 494, 496 (Bankr.S.D.Ohio 2006); In re Manshul Constr. Corp., 223 B.R. 428 (Bankr.S.D.N.Y.1998).
Here, to the extent the Debtor emphasizes that the filing and allowance of invalid claims does not have much impact on her, but rather harms creditors holding legitimate, allowed claims by diluting their distribution under her chapter 13 plan, she does not appear to be raising issues in which she has a pecuniary interest; she appears to be asserting the rights of third parties, not her own. A litigant’s assertion of the rights of third parties is at odds with generally accepted principles of standing. See, e.g., Twp. of Piscataway v. Duke Energy, 488 F.3d 203, 209 (3d Cir.2007) (as a matter of prudential standing, a “plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties”); see also Powers v. Ohio, 499 U.S. 400, 410-11, 111 S.Ct. 1364, 113 L.Ed.2d 411 (1991).
*135Despite the concerns expressed above, I am satisfied that the Debtor has the requisite personal interest in the allowance or disallowance of the POC to provide her with standing to object to the claim.
Many confirmed chapter 13 plans are not completed, resulting in dismissal of the case under 11 U.S.C. § 1307(c)(4) and (6). See Ed Flynn, Chapter 13 Case Outcomes by State, 33-AUG Am. Bankr.Inst. J. 40, 76 (August 2014). Upon dismissal, a debtor remains liable on prepetition claims. In light of the real risk that a plan will not be completed, leaving, the debtor liable on the prepetition claims, the debtor has a legitimate interest in seeing that only valid claims (to which he or she has no defense) are paid by plan distributions. In addition, if the chapter 13 trustee makes a distribution on a time-barred claim, the debtor has a legitimate concern that the trustee’s payment pursuant to the debtor’s plan may be asserted as an “acknowledgment” of the debt, resulting in the re-commencement of the limitations period.5 See U.S. v. Quinones, 36 B.R. 77, 79 (D.P.R.1983). But see In re Seltzer, 529 B.R. 385, 389-90 (Bankr.M.D.Ga.2015). Consequently, I conclude that the Debtor in this case has a sufficient stake in the outcome of the dispute to confer standing to object to this POC.6
IV. DISALLOWANCE OF THE POC
A. Procedural Irregularities
In seeking disallowance of the POC by filing the Motion, the Debtor did not invoke the proper procedure. Fed. R. Bankr. P. 3007 provides for disallowance of claims to be requested by objection, not motion.
There is a significant difference between a contested matter arising from a claims objection and one arising by motion. Motion practice typically imposes a response requirement, see, e.g., L.B.R. 9014-3(1) (Bankr.E.D.Pa.) (“an answer to a motion shall be filed and served ... no later than 14 days after the date on .which the movant serves the motion”),7 with the potential for the grant of relief by default if no timely response is filed.' Claims objection practice includes neither a response requirement nor a default procedure for failing to respond.8
*136The Debtor also erred by titling her motion as a motion for sanctions without indicating in the title that she was seeking disallowance of the POC. Nevertheless, these procedural irregularities do not preclude consideration of the merits of the Debtor’s objection to the POC.
In both the body of the Motion and the accompanying proposed order, the Debtor made it crystal clear that she was objecting to the POC and was requesting its disallowance. Further, this matter proceeded in a manner entirely consistent with claims objection procedure, not motion procedure. The Debtor effected service of the motion. A hearing on the merits was held; the relief requested by the Debtor was not granted by default. Thus, functionally speaking, the only difference between the Motion and a typical claims objection was the Debtor’s mislabeling of the objection as a motion and the incorrect representation in the Notice of Motion that a response was required.9 In these circumstances, denial of the Debtor’s request for relief on that basis would exalt form over substance, an outcome that is not compelled by the rules of court. See Fed. R. Bankr. P. 1001 (the bankruptcy rules of court “shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding”).
B. Merits of the Claim Objection
With respect to the merits, the Debtor requests disallowance of the Proof of Claim, asserting that the claim is unenforceable under applicable nonbankruptcy law due to the expiration of the statute of limitations. See 11 U.S.C. § 502(b)(1) (claim should not be allowed if “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”).
I will sustain the Debtor’s objection to the POC.
The applicable statute of limitation in Pennsylvania is four (4) years. 42 Pa.C.S. § 5525(a)(3), (8).10 The only evidence in the record is a bill for services provided to the Debtor that was issued more than ten (10) years béfore the bankruptcy case was filed. It is reasonable to infer that the Debtor made no payments after the issuance of the bill and that the account has *137been in default for more than ten (10) years.
This evidence is sufficient to satisfy the Debtor’s burden of production. See n.8 supra. The claimant having failed to appear at the hearing to offer any further evidence on the issue, I find that the Debt- or has established that the statute of limitations expired on this claim prior to the filing of the bankruptcy case and therefore, the claim should be disallowed as unenforceable under applicable nonbankruptcy law. See In re Keeler, 440 B.R. 354, 360 (Bankr.E.D.Pa.2009); In re Michael Angelo Corry Inn, Inc., 297 B.R. 435, 438-39 (Bankr.W.D.Pa.2003).
IY. DENIAL OF THE DEBTOR’S REQUEST FOR SANCTIONS
In addition to disallowance of the POC, the Debtor requests sanctions for the filing of the POC under Fed. R. Bankr. P. 9011. Unquestionably, Rule 9011 applies to proofs of claim. See, e.g., In re Hannon, 421 B.R. 728, 731 (Bankr.M.D.Pa.2009); In re Abramson, 313 B.R. 195, 198 (Bankr.W.D.Pa.2004). However, as explained below, the Debtor has not established that the filing of the POC in this case violated the standards of conduct in Rule 9011. Therefore, I will deny the request for sanctions.
A. Rule 9011, Generally
1.
Fed. R. Bankr. P. 9011, like its counterpart in the civil rules, Fed. R. Civ. P. 11, is designed to deter abusive practices and otherwise streamline litigation. See, e.g., In re Schaefer Salt Recovery, Inc., 542 F.3d 90, 97 (3d Cir.2008). The centerpiece of the Rule is subsection (b), which sets forth the standard of conduct to which attorneys and parties acting pro se must adhere.
Fed. R. Bankr. P. 9011(b) provides:
By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,—
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have eviden-tiary 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.
If a court determines that a violation of Rule 9011(b) has occurred, the court may impose an appropriate sanction upon the attorneys, law firms, or parties that have violated the rule or are responsible for the violation. Fed. R. Bankr.P. 9011(c).11 The *138sanction may be non-monetary or monetary in nature and, if monetary, may include an order to pay a penalty into the court or the movant’s reasonable attorney’s fees. Id. Sanctions may be imposed upon request of a party, see Fed. R. Bankr.P. 9011(c)(1)(A),12 or upon the court’s own motion, see Fed. R. Bankr. P. 9011(c)(1)(B).
2.
In this matter, the two (2) pertinent subsections of Rule 9011 are (b)(1) and (b)(2).
Rule 9011(b)(1) refers to the presentation of matters “for an improper purpose,” giving as examples, “to harass or to cause unnecessary delay or needless increase in the cost of litigation.” The examples are not exclusive. Sanctions may be imposed “for any improper purpose.” 2-11 James Wm. Moore, Moore’s Federal Practice § 11.11[8][a], at 11-33 (Matthew Bender 3d ed. 2015) (“Moore’s”). For example, bringing a matter before the court for “a purpose other than ... to vindicate substantive or procedural rights or to put claims of a right to a proper test” is encompassed by Rule 9011(b)(1). In re Jazz Photo Corp., 312 B.R. 524, 539-40 (Bankr.D.N.J.2004) (quotation and citation omitted); see also Chu v. Griffith, 771 F.2d 79, 81 (4th Cir.1985) (lawsuit filed to compel a judge to recuse himself in a different case).
As counterintuitive as it might seem initially, the determination of '“improper purpose” also is based on an objective standard. See, e.g., Lieb v. Topstone Indus., Inc., 788 F.2d 151, 157 (3d Cir.1986). Essentially, this means that the propriety of the purpose is measured objectively and the offending party or attorney cannot escape liability because he or she subjectively did not intend to cause harm (e.g., harass the opposing party, delay the proceedings or impose unnecessary litigation costs or any other improper purpose).
Rule 9011(b)(2) attacks litigation abuse from a different direction. It imposes the requirement that an attorney or pro se party conduct a “reasonable inquiry” prior to presenting a claim or defense to the court and have a reasonable basis to assert that the claim or defense is “warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.”
The evaluation whether a claim or defense is warranted or supported by a nonfrivolous argument also is measured by an objective standard. E.g., Martin v. Brown, 63 F.3d 1252, 1264 (3d Cir.1995) (citation omitted). Specifically, in evaluating whether Rule 9011(b)(2) has been satisfied or violated, the court must employ *139“an objective standard of reasonableness under the circumstances.” Martin, 63 F.3d at 1264 (quotations and citations omitted); see also Wright & Miller § 1335 & n.9. No showing of bad faith is necessary. See, e.g., Shine v. Bayonne Bd. of Educ., 2015 WL 5559842, at *3 (3d Cir. Sept. 22, 2015) (unpublished); Martin, 63 F.3d at 1264. The subjective state of mind of the offending attorney or party has no bearing. Rule 9011’s objective standard eliminates any “empty-head pure-heart” justification for claims or arguments that lack a reasonable basis in fact and law. See, e.g., Clement v. Pub. Serv. Elec. & Gas Co., 198 F.R.D. 634, 637 (D.N.J.2001). At the risk of oversimplification, as one court put it, pro se parties and attorneys “are expected to take reasonable preparatory steps before filing pleadings or other papers.” Trustees of the Nat. Elevator Indus. Pension, Health Ben., Educ., Elevator Indus. Work Pres. Funds, Elevator Constructors Annuity & 401(K) Ret. Plan v. Access Lift & Serv. Co., Inc., 2015 WL 1456040, at *2 (E.D.Pa. Mar. 30, 2015).13
B. Relevant Case Law: Filing Stale Proofs of Claim
1.
The Debtor has not specified the particular subsection of Rule 9011(b) on which she bases her request for sanctions. However, there is precedent in her favor under both subsections (b)(1) and (b)(2).
The leading reported decision favorable to the Debtor is Matter of Sekema, 523 B.R. 651 (Bankr.N.D.Ind.2015), in which the court based its ruling on Rule 9011(b)(2).
In Sekema, the debtor successfully objected to a creditor’s proof of claim as stale. The creditor did not contest the claims objection. After disallowing the claim, the court sua sponte issued a show cause hearing to consider sanctions under Rule 9011(b)(2). The creditor neither responded to the show cause hearing order or appeared at the scheduled hearing.
After holding that Rule 9011(b)(2) applies to proofs of claim and encompasses consideration of obvious affirmative defenses, the Sekema court reasoned that it was obliged to
undertake an objective inquiry into the obviousness of the debtors’ statute of limitations defenses to the claims filed by Resurgent/LVNV and Jefferson Capital and whether those claimants undertook a reasonable investigation into that issue before filing the claims.
Sekema, 523 B.R. at 654.
The court next determined that the statute of limitations defense was “blindingly obvious” in that a “third-grader could do the math” to determine that the charge-off date on the account more than ten (10) years prior was beyond the applicable six (6) year statute of limitations. Id.
Finally, in light of the claimant’s failure to appear at either the claims objection or the sanction hearing, the court inferred that “there is nothing that could allow the court [to] conclude that either claimant undertook any investigation into the obvious statute of limitations defense to the claims they each filed, much less a reasonable one” and concluded that the filing of the proof of claim violated Rule 9011(b)(2). Id. at 654.
*140Sekema is grounded in the legal proposition that Rule 9011(b) compels a party to engage in a “reasonable inquiry” to evaluate the merits of “any obvious affirmative defenses” that may exist to the claim. There are many reported cases stating this principle in other contexts.14
Sekema is on all fours with the case sub judice, the only (nonmaterial) difference being that the court invoked Rule 9011 sua sponte in Sekema, while in this case, the Debtor filed the motion for Rule 9011 sanctions.
While the Sekema court holding is based on Rule 9011(b)(2), in In re Feggins, 535 B.R. 862, 867-69 (Bankr.M.D.Ala.2015), the court, in dictum, suggested that the filing of a proof of claim for a time-barred claim violates both Rule 9011(b)(1):
A facially time-barred proof of claim is not well-founded. It follows that a creditor's only possible purpose in filing a facially time-barred proof of claim is to take advantage of the automatic claims allowance process of § 502(a) and hope that the debtor and the bankruptcy court do not notice the defect. Such conduct is an abuse of the claims allowance process and an affront to the integrity of the bankruptcy court.
The Bankruptcy Code and Rules provide remedy for such conduct.... Bankruptcy Rule 9011 authorizes the bankruptcy court to impose sanctions on creditors who file proofs of claim for any improper purpose or who make claims or legal contentions that are not .warranted by existing law.
535 B.R. at 868-69 (internal quotations omitted)
There also are reported decisions that have stated, in dicta, in the course of denying claims brought under the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692p (“FDCPA”), that the filing of proof of claim for an obviously time-barred claim violates Rule 9011. See Torres v. Asset Acceptance, LLC, 96 F.Supp.3d 541, 547-48, 2015 WL 1529297 at *6 (E.D.Pa. Apr. 7, 2015), appeal pending, No. 15-2132 (3d Cir.); In re Chaussee, 399 B.R. 225, 240 (9th Cir. BAP 2008). Interestingly, in the course of upholding FDCPA claims for the filing of stale proofs of claim, there also are reported decisions that have stated, in dicta, that such filings violate Rule 9011. See Feggins, 535 B.R. at 867-69; In re Avalos, 531 B.R. 748, 757 (Bankr.N.D..Ill.2015).
To some extent, the holdings and dicta in the cases cited above are driven by a concern that the bankruptcy courts are facing a “deluge” of proofs of claim for time barred claims, filed by “[cjonsumer debt buyers ... armed with hundreds of delinquent accounts purchased from creditors,” Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1256 (11th Cir.2014), cert. denied, — U.S. —, 135 S.Ct. 1844, 191 L.Ed.2d 724 (2015). One court has depicted the filing and allowance of these claims as an abuse of the claims allowance process:
Bankruptcy is not a free-for-all that invites creditors to gorge themselves on the debtor’s assets without regard to the merit or enforceability of their claims. Rather, bankruptcy is intended to offer an insolvent debtor a fresh start while equitably dividing the debtor’s assets among creditors who' hold meritorious and enforceable claims. See 11 U.S.C. *141§ 502(b)(1). A creditor’s lot in bankruptcy is famine, not feast, because the debtor’s insolvency usually means that there will not be enough assets to make all of the creditors whole. A creditor who obtains payment via an undeserving proof of claim exacerbates this problem and undermines one of bankruptcy’s key purposes by parasitically diluting the already meager shares of deserving creditors still further.
Feggins, 535 B.R. at 869.
2.
There is legal authority contrary to the Debtor’s position, including a decision from this district, In re Keeler.
In Keeler, the debtor filed an adversary proceeding against a creditor for filing a claim that it “knew or should have known” was time-barred under § 105(a), the FDCPA, the Pennsylvania Unfair Trade and Consumer Protection Law, 73 P.S. § 201-1 et seq., and 28 U.S.C. § 1927. Keeler, 440 B.R. at 357. Although Rule 9011 was not at issue, in granting the defendant-creditor’s motion to dismiss the adversary complaint, the Keeler court unequivocally held the creditor committed no impropriety in filing a stale proof of claim. The court offered a number of rationales for its decision.
First, the Keeler court reasoned that the existence of a “claim” as defined by 11 U.S.C. § 101(5) is a distinct concept from its “allowance” (ie., the entitlement to share in the distribution from the estate). Based on this distinction, as well as the broad definition of “claim,” which encompasses rights to payment that may are not currently enforceable,15 the court concluded that the Code gave the creditor holding a claim barred by the statute of limitations the right to file a proof of claim. See 440 B.R. at 362-63.16
Second, the Keeler court considered the treatment of the issue under the Bankruptcy Act. Concluding that the filing of time-barred proofs of claim was permitted under the prior Act, see In re Weidenfeld, 277 F. 59, 61-62 (2d Cir.1921),17 and taking *142into account the expansion of the definition of the term “claim” when the present Code was enacted in 1978, the court perceived no Congressional intent to overrule prior practice. Keeler, 440 B.R. at 364 (citing Dewsnup v. Timm, 502 U.S. 410, 419, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (“[T]his Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history.”)).
Third, the Keeler court found support for its conclusion in bankruptcy court decisions from other jurisdictions holding that the claims allowance process contemplates that stale proofs of claim may be filed subject to objection based on the expiration of the statute of limitations. See In re Andrews, 394 B.R. 384, 387 (Bankr.E.D.N.C.2008); In re Simpson, 2008 WL 4216317, at *2 (Bankr.N.D.Ala. Aug. 29, 2008); In re Varona, 388 B.R. 705, 723-24 (Bankr.E.D.Va.2008). In this line of cases, the courts emphasize that the expiration of the statute of limitations does not extinguish a claim, but merely imposes a procedural barrier to the claimant’s right to seek redress through the court. Indeed, sometimes that procedural barrier may be lifted, such as through the “acknowledgment” of the debt. See generally In re Irwin, 509 B.R. 808, 820 (Bankr.E.D.Pa.2014) (discussing the acknowledgment doctrine under Pennsylvania law). Further, in many jurisdictions, the statute of limitations defense is an affirmative one that is waived if not raised by the defendant. In Keeler, the court cited Pennsylvania case law for both of these propositions and con-eluded that in Pennsylvania, “[a] debt barred by the statute of limitations is not extinguished; rather, it is subject to an affirmative defense that can be waived.” 440 B.R. at 365.
Given the nature of the legal consequences attending the expiration of a statute of limitations under applicable non-bankruptcy law, the Keeler court perceived no impropriety in the filing of a stale proof of claim in a bankruptcy case. Id. at 366; accord Hess, 404 B.R. at 752 (“Unless and until local or national rules changes are made, it is incumbent on debtors, their counsel, and the Chapter 13 Trustee, carefully to scrutinize proofs of claims to identify and object, if appropriate, to stale claims.”). Thus, while Keeler did not specifically address Rule 9011, it stands for the proposition that it is permissible for a creditor to seek allowance of a stale proof of claim and place the burden on the debt- or or trustee to object to the claim.
Recently, in In re Jenkins, 538 B.R. 129, 135 (Bankr.N.D.Ala.2015), a bankruptcy court in Alabama invoked much the same reasoning as in Keeler and concluded that “the filing of a claim on a debt that is stale under state law — where the proof of claim is otherwise in all material respects compliant — is not egregious and offensive conduct that Rule 9011 was intended to address. The Jenkins court also expressed concern that such a holding will lead courts down the proverbial “slippery slope,” with undesirable consequences:
If ... Sekema and Feggins are correct, why would not any claim that is later disallowed under § 502(b) for any reason be frivolous and groundless so that it is not one that may have been filed under § 501? It seems circular to say *143that because the claim was disallowed, it was never allowed, and because it was never allowed, it was not a claim that the creditor may file a proof of claim for under § 501, although it could never have been disallowed had the claim not been filed. If the frivolous and groundless categorization is reserved for claims that are subject to a statute of limitations defense, does this court then have a duty under [United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 277 n. 14, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) ] to examine every claim, not just those filed by debt collectors, even where no objection to the claim is filed, and disallow as frivolous and groundless any that appear on their face to be subject to a statute of limitations defense?
Jenkins, 538 B.R. at 136 (quotation marks and footnote omitted).
C. Analysis
In order to resolve the present matter, I need not choose between the Sekema/Feggins and Keeler/Jenkins lines of cases. Even if I were to agree that Rule 9011 imposes a duty on a claimant to investigate and develop a response to overcome an “obvious” affirmative defense before filing a proof of claim, sanctions are not appropriate in this case and will not be appropriate under Rule 9011(b)(2) unless and until the division of authority discussed above is settled definitively by the Supreme Court.
1.
Initially, I perceive no basis to impose sanctions under Rule 9011(b)(1).
I respectfully disagree with the suggestion in Feggins that filing a stale proof of constitutes the filing of a document for an .“improper purpose” as that term is used Fed. R. Bankr. P. 9011. Such a proof of claim fits none of the examples of improper purpose stated in the rule (harassment, causing unnecessary delay or increasing the cost of litigation). Nor does the filing of a stale proof of claim appear to satisfy the more general type of improper purpose (ie., a purpose other than to vindicate the rights put at issue by the filing of the document, see n.14 & accompanying text, supra). Quite the opposite. A stale proof of claim is filed to obtain the precise relief afforded to a properly filed, valid proof of claim: the allowance of the claim. Whether the proof claim is so unfounded on the merits that the filing may warrant sanctions should be evaluated under Rule 9011(b)(2), not 9011(b)(1).18
2.
Second, as far Rule 9011(b)(2) is concerned, in light of the uncertain state of the law, the imposition of sanctions for filing a stale proof of claim is inappropriate.
As a starting point, “the test for Rule 9011 sanctions is a stringent one.” In re 15375 Mem’l Corp., 430 B.R. 142, 150 (Bankr.D.Del.2010). Rule 9011 sanctions are imposed only in exceptional circumstances where the claim is “patently un-meritorious or frivolous,” Dura Sys., Inc. v. Rothbury Investments, Ltd., 886 F.2d 551, 556 (3d Cir.1989), ie., where it is “clear that a claim has absolutely no chance of success.” Oliveri v. Thompson, 803 F.2d 1265, 1275 (2d Cir.1986); accord *144Zuniga v. Riverview Residential Partners, II, L.P., 2011 WL 240162, at *3 (E.D.Pa. Jan. 25, 2011). Rule 9011 is not intended to chill an attorney’s creativity in pursuing legal theories. Rothbury Investments, 886 F.2d at 556. Sanctions should not be imposed based on hindsight bias, but rather, the conduct should be evaluated based on what was reasonable at the time of the filing. See id.; 15875 Mem’l Corp., 430 B.R. at 150. All doubts should be resolved in favor of the signer of the filed document. See Ohio Cas. Grp. v. McClinton, 1991 WL 125467, at *3 (E.D.Pa. June 27, 1991).
Here, the reported cases, all oí which are supported by thoughtful opinions, are divided on the propriety of filing a stale proof of claim. The case law includes a decision in this district that supports the claimant’s position, with no binding Third Circuit or Supreme Court precedent to the contrary.
In these circumstances, the conclusion is inescapable. There is no basis under Rule 9011(b)(2) to sanction this claimant for filing a stale proof of claim. It is not possible to conclude that the filing satisfies the Rule 9011(b)(2) requirement that it was not “warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law.” Sanctions should not be imposed for putting forward a claim or argument if circuit case law is unsettled, but there is support in this circuit or other circuits for the position taken. See Matthews v. Freedman, 128 F.R.D. 194, 200 (E.D.Pa.1989) (citing Edward D. Cavanagh, Developing Standards Under Amended Rule 11 of the Federal Rules of Civil Procedure, 14 Hofstra L.Rev. 499, 543-44 (1986)), aff'd, 919 F.2d 135 (3d Cir.1990); see also Andrews, 394 B.R. at 388 (sanctions are not appropriate if party reasonably relies on existing case law, even if the court disagrees with those decisions); see generally Zuniga, 2011 WL 240162, at *3 (party’s removal of case from state court held not frivolous or sanctionable in light of a “vacuum” of legal authority on its propriety).
Indeed, given the split in the case law, it is difficult to see how sanctions under Rule 9011(b)(2) can be imposed on claimants filing stale proofs of claim, even if, in the future, a substantial number of courts (including, perhaps, several courts of appeal) adopt the Sekema/Feggins position that it is improper to file proofs of claim without investigating and developing plausible responses to obvious affirmative defenses to a proof of claim. See generally Georgene M. Vatro, Rule 11 Sanctions: Case Law Perspectives and Preventive Measures § 6.05[a][1][A] at 340 (3d ed.2004) (discussing decisions in which arguments relying on precedent from outside the circuit that are inconsistent with circuit precedent may be made consistent with Rule 11). Unless and until the Supreme Court resolves the issue, a rational argument exists for the practice of filing stale proofs claims and compelling debtors and trustees to object to their allowance.19
*145V. CONCLUSION
The parties that decry the practice of filing stale claims as an abuse of the bankruptcy claims allowance system may be correct. Certainly, some courts agree. The bankruptcy court’s inability to sanction parties that file stale proofs of claim under Fed. R. Bankr. P. 9011 may frustrate the parties compelled to undertake the obligation of objecting to stale claims and the courts in which such claims are filed. However, given the present state of the law, there is a respectable argument that claimants are entitled to file stale claims because the statute of limitations is a waivable, affirmative defense. As a result, Rule 9011 is not the proper vehicle to remedy the perceived problem.
The limitations built into Rule 9011 are purposeful. Rule 9011 is intended to address abuses in the litigation'process. The Rule is not intended to be a broad remedy for correcting other, diverse types of mischief that offend policies embodied in a particular statute — here, the Bankruptcy Code policy of an equitable distribution of limited assets to creditors holding valid claims against the bankruptcy estate. If the practice of filing stale proofs of claim is improper and should be stopped, some means other than Rule 9011 must be employed by those with the authority to make that judgment — at least until the U.S. Supreme Court provides definitive guidance on the issue.20
For the reasons set forth above, the Debtor’s Motion will be granted in part and denied in part. Palisades’ proof of claim will be disallowed. But the Debtor’s request for sanctions will be denied.
ORDER
AND NOW, upon consideration of the Debtor’s Motion for Sanctions (Doc. # 49) (“the Motion”), and after notice and hearing, and for the reasons set forth in the accompanying Memorandum; it is hereby ORDERED that:
1. The Motion is GRANTED IN PART and DENIED IN PART.
2. Claim No. 3, filed by Palisades Collections, LLC is DISALLOWED.
3. In all other respects, the Motion is DENIED.
. In this Opinion, I will use the Debtor’s term — "stale proof of claim” — -to refer to an otherwise properly filed proof of claim that appears, on its face to be unenforceable under applicable nonbankruptcy law due to the expiration, prior to the commencement of the bankruptcy case, of the statute of limitations.
. This contested matter is governed by Fed. R. Bankr. P. 9011, not Fed. R. Civ. P. 11. However, Rule 11 and Rule 9011 are almost identical. Reported decisions under under Rule 11 serve as reliable precedent for Rule 9011. See In re Theokary, 468 B.R. 729, 746 (Bankr.E.D.Pa.2012) (citing cases), aff'd sub nom. *133592 Fed.Appx. 102 (3d Cir.2015). Consequently, I will refer to the rules interchangeably in this Opinion.
. In her Memorandum, the Debtor states:
[N]either a Debtor, nor Debtor’s counsel, has an obligation to merely object to a proof of claim unless there is some positive result for the Debtor_ [I]t rarely benefits a Debtor to object to unsecured claims. The non-common case in a Chapter 13 where the Debtor is in a “100% Plan” or other Plan which necessitates paying most or all of the filed claims may be the only time where it would benefit the Debtor to merely object to such claims. Since someone has to pay for this work, it would be irresponsible for counsel to expect the Debtor to have to pay for work which does not benefit the Debtor.
(Debtor’s Mem. at 5-6) (unpaginated) (emphasis added).
. In her Memorandum, the Debtor states:
Neither the Chapter 13 Trustees nor the U.S. Trustee have shown any inclination to object to such worthless claims. So, absent some enforcement mechanism, the current situation virtually guarantees a feeding frenzy of less scrupulous debt-buyers, attempting to cash in on claims after paying only a few percent of the face value.
(Debtor's Mem. at 5-6) (unpaginated).
The Debtor’s observation — that the chapter 13 trustee is reluctant to engage in claims litigation — is accurate in this district. But perhaps that begs the real question: Should the chapter 13 trustee file objections to a claims in cases involving plans with a pro rata distribution where the face of one or more proofs of claim indicate that the claim appears time-barred? See generally 11 U.S.C. § 1302(b)(1) (requiring the trustee to perform certain duties under 11 U.S.C. § 704, including § 704(a)(5): "if a purpose would be served, examin[ing] proofs of claim and objecting to allowance of any claim that is improper”); In re Hess, 404 B.R. 747, 752 (Bankr.S.D.N.Y.2009) (“the Chapter 13 Trustee plays a crucial role and has an important responsibility in assuring that only proper claims are allowed and paid from the debtor’s estate”).
*134In stating these questions, I am aware that the chapter 13 trustee usually lacks immediate access to the information necessary to evaluate the merits of filed claims, perhaps malting his hesitancy to engage in claims litigation understandable. This hesitancy may be tempered by the potential ease with which the trustee’s may investigate a matter by obtaining the necessary information from the debtor. See § 521(a)(3) (requiring debtor to cooperate with trustee as necessary to enable trustee to fulfill his duties under § 704); Fed. R. Bankr. P. 4002(a)(4) (same). More importantly, as the present case illustrates, proofs of claim often show on their face that a plausible, if not compelling, ground for objection exists based on the apparent expiration of the statute of limitations. Perhaps, at a minimum, the chapter 13 trustee should be filing that type of claims objection.
. Under Pennsylvania law, the acknowledgment of a debt, through a promise to repay the debt or an actual payment causes the statute of limitations to recommence. See, e.g., United States v. Hemmons, 774 F.Supp. 346, 351 (E.D.Pa.1991); Makozy v. Makozy, 874 A.2d 1160, 1170 (Pa.Super.Ct.2005).
. Other courts have agreed that a chapter 13 debtor has standing to object to proofs of claim, employing different rationales. See In re Sims, 278 B.R. 457, 483-84 (Bankr.E.D.Tenn.2002); In re Roberts, 20 B.R. 914, 917 (Bankr.E.D.N.Y.1982).
. The national bankruptcy rule on motion practice, Fed. R. Bankr. P. 9014(b), states that a written response to a motion shall be served within the time determined under Rule 9006(d). Rule 9006(d) provides that a written response shall be served not later than one (1) day before the hearing on the motion (unless the court permits otherwise). Thus, Rule 9006(d) sets an absolute deadline (unless the court orders otherwise) for filing a response, but does not preclude the promulgation of a local rule setting an earlier response deadline.
. There is no response requirement in Fed. R. Bankr. P. 3007. Further, Rule 3001(f) provides that a proof of claim filed in accordance with the rules of court not only serves the function of a pleading, but it also constitutes evidence that makes out' a prima facie case supporting the validity and amount of the claim. See In re O’Brien, 440 B.R. 654, 658 n. 3 (Bankr.E.D.Pa.2010) (“It is settled ... [that] the allegations of the proofs of claim are to be taken as true” (quoting In re Castle Braid Co., 145 F. 224, 228 (S.D.N.Y.1906)). Thus, if a proof of claim is properly filed and makes out a prima facie case, it is not possible to "default” a claimant who does not respond *136to an objection to the claim. Rather, before such the objection can be sustained, the court must hold a hearing at which the objector offers evidence that rebuts an element of the claim. Once such evidence has been offered, the objector's burden of production has been met and the ultimate burden of proof rests with the claimant. See, e.g., In re Wells, 463 B.R. 320, 326 (Bankr.E.D.Pa.2011) (citing In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3d Cir.1992)).
. Insofar as the Notice of Motion stated a response to the claims objection was required, it was wrong. It was not wrong in advising that a response to the request for sanctions was required.
. 42 Pa.C.S. § 5525(a) provides:
(a) General rule.&emdash;Except as provided for in subsection (b), the following actions and proceedings must be commenced within four years:
(3) An action upon an express contract not founded upon an instrument in writing.
(7) An action upon a negotiable or nonnegotiable bond, note or other similar instru- . ment in writing. Where such an instrument is payable upon demand, the time within which an action on it must be commenced shall be computed from the later of either demand or any payment of principal of or interest on the instrument.
(8) An action upon a contract, obligation or liability founded upon a writing not specified in paragraph (7), under seal or otherwise, except an action subject to another limitation specified in this subchapter.
. The Debtor requests sanctions against both Palisades (the claimant) and Vativ (the agent that filed the POC on Palisade’s behalf). It is not entirely clear which party may be subject to sanctions or whether both may be. As the claimant, Palisades is a "party,” but no Pali*138sades representative signed the “offending” document (i.e., the POC) with the court. Va-tiv's representative signed the POC, but did so as Palisades agent. Query whether Vativ was a “party” for purposes of Rule 9011(c)? In light of my denial of the request for sanctions, I need not resolve which entity or entities may be subject to sanctions in this contested matter.
. Rule 9011 includes a safe harbor provision:
[A] motion for sanctions may not be filed with or presented to the court unless, within 21 days after service of the motion ... the challenged paper ... is not withdrawn or appropriately corrected....
Fed. R. Bankr. P. 9011(c)(1)(A).
If the moving party does not comply this twenty-one (.21) day safe harbor notice requirement, the motion must be denied. Schaefer, 542 F.3d at 99; see also C. Wright & A. Miller, 5A Fed. Prac. & Proc. Civ. § 1337.2 (3d ed. West 2012) (“Wright & Miller'').
In this case, the Debtor complied with the notice requirement.
. An interesting question is whether Rule 11 is violated by a document filed for an improper purpose under (b)(1) when the document also is sufficiently "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law" under subdivision (b)(2). Moore’s discusses the division of authority on the issue. Moore’s § 11.11[8][d], I need not address the question in this case.
. See, e.g., F.D.I.C. v. Calhoun, 34 F.3d 1291, 1299 (5th Cir.1994); Tura v. SherwinWilliams Co., 933 F.2d 1010 (Table), 1991 WL 88346, at *3 (6th Cir.1991) (per curiam) (unpublished); In re Lawrence, 494 B.R. 525, 532-33 (Bankr.E.D.Cal.2013); Matter of Leeds Bldg. Products, Inc., 181 B.R. 1006, 1010 (Bankr.N.D.Ga.1995).
. As the Keeler court explained:
For example, Pennsylvania law provides that a cause of action exists only when a party has the present right to bring suit. Therefore, a lawsuit brought before a cause of action has accrued is premature and subject to dismissal. For example, there can be no judgment against a promissor in an action brought on a promissory note before it is due.
However, although Pennsylvania would not permit a civil action to commence on an unmatured claim, Congress has authorized an entity holding an unmatured claim or contingent claim to file a proof of claim. See 11 U.S.C. § 101(5)(A).
440 B.R. at 363 (case citations omitted).
. Recognizing that this footnote is dictum, and without opining whether Keeler may have been correctly decided on other grounds, I observe that I fail to understand how the initial rationale articulated by the court — i.e., distinction between a "claim” under 11 U.S.C. § 101(5) and "allowed claim” under § 502(a) — supports the proposition that a claimant may file a time-barred proof of claim. Indeed, I think the distinction cuts the other way because it illustrates that allowance requires an affirmative act by the claimant through the filing of a document with the court.' Accordingly, it strikes me as indisputable that the act of filing a document to obtain some benefit or right conferred through the judicial process is subject to Rule 9011. The more pertinent (but closer) question, as to which I have located no binding authority in this Circuit, is whether (or the degree to which) Rule 9011 imposes a duty on a claimant to investigate responses it may have to a meritorious affirmative defense that appears "obvious” on the face of the document filed by the claimant. It is not obvious how this Rule 9011 principle can be squared with the general proposition that affirmative defenses can be waived.
.In Weidenfeld, the Second Circuit stated:
The defense of the statute of limitations is a bar to a claim, and, when it is interposed, it *142must be pleaded and proved. In the absence of such a defense, presented by objection, it was permissible [for the claimant] to file and prove [the] claim.
277 F. at 61-62.
. I am not suggesting that the lack of merit is never relevant under Rule 9011(b)(1). The patent lack of merit may be a circumstance contributing to the conclusion that a filing was for an improper purpose, especially when the types of improper purpose expressly described in the rule are at issue (i.e., harassment, delay, needlessly increasing the expense of litigation).
. While I do not decide the issue, I note that even if I ignored the legal authority that supports the filing of stale proofs of claim, there is some doubt whether sanctions could be imposed on the present record.
The record consists of nothing more than a proof of claim that, on its face, appears to be based on a claim that is unenforceable under applicable nonbankruptcy law due to the expiration of the statute of limitations. There is nothing in the record regarding the pre-filing "inquiry" of the claimant that would allow the court to determine that it was not "reasonable under the circumstances” under Rule 9011(b)(2).
I recognize that at least part of the reason that the record is silent on the issue of the claimant’s pre-filing inquiry is that the claimant did not respond to the Motion. I also recognize that Selcema was in the same proce*145dural posture and the court there inferred from the silence in the record that no reasonable inquiry occurred. There is some support for the Sekema court’s approach. See Digeo, Inc. v. Audible, Inc., 505 F.3d 1362, 1368 (Fed.Cir.2007) ("Once a litigant moves based upon non-frivolous allegations for a Rule 11 sanction, the burden of proof shifts to the non-movant to show it made a reasonable pre-suit inquiry into its claim”). Particularly in light of the interest in minimizing the scope of Rule 11 litigation, the shifting burden may be appropriate. However, if the burden does not shift, then the Motion here would fall short. A reasonable case can be made for the proposition that the burdens in Rule 11 litigation should remain, at all times, on the party seeking the imposition of sanctions and that adequate discovery tools exist to permit the moving party to develop an adequate record. This is another issue that I do not reach today.
. One possibility is an amendment of the rules of court, as suggested in In re Andrews, 394 B.R. at 388, e.g., an amendment to Fed. R. Bankr. P. 3001 to require that a claimant make an affirmative representation in the proof of claim that no statute of limitations defense is applicable. Another "solution” would be the application of the FDCPA, to the filing of proofs of claim, an issue that has divided the courts and is presently pending before the Third Circuit. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498828/ | *177
MEMORANDUM OPINION
GREGORY L. TADDONIO, UNITED STATES BANKRUPTCY JUDGE
In November 2006, Bill and Ruth Anderson advanced over $7 million to Commonwealth Renewable Energy, Inc., a venture created by Bill Anderson and his colleagues, Steven Savor and Stephen Fro-bouck, to develop an ethanol production facility in Western Pennsylvania. After the project failed to materialize, the 'Andersons1 pursued an action in mortgage foreclosure to recover the amounts due under a judgment note, prompting Commonwealth to file this bankruptcy case. The Andersons now seek relief from the automatic stay.
This Court must decide whether the advance constitutes a loan or.an equity contribution. Because the parties originally intended the transaction to be a loan and the Court finds no credible evidence that Bill Anderson agreed to modify the obligation prior to his death, the Court concludes that the Andersons hold a secured claim against the bankruptcy estate. In the absence'of any grounds to equitably subordinate the claim and without sufficient proof that the Property (as defined below) is necessary for an effective reorganization, the Andersons are granted relief from the automatic stay.
I.
Anderson, Savor, and Frobouck were business associates with a long history of doing business together. In the early 1990s, Anderson and Savor formed the Anderson Group of Companies, Inc. (“AGC”) to serve as a holding company for the various business enterprises in which they might invest. Frobouck became a shareholder in 1998 and, by that timé, Anderson, Savor, and Frobouck each held a 1/3 interest in AGC.. Under the AGC business model, Anderson, Frobouck, and Savor made capital contributions to AGC which, in turn, were invested by the company in various business opportunities. Through this investment vehicle, Frobouck and Savor claim their intent, together with Anderson, was to share the financial burdens and risk equally.
In August 2006, Anderson, Savor, and Frobouck embarked upon a new enterprise to develop an ethanol treatment facility on a, 133.662-acre industrial site located in New Stanton, Pennsylvania (the “Property”). The site was owned by the Pennsylvania Industrial Development Authority (“PIDA”) , and formerly housed the Sony American Video Glass manufacturing facility.
Commonwealth was formed to acquire Sony’s leasehold interest in the Property, together with an option to purchase the Property from PIDA. In a departure from their prior transactions, AGC was not used to acquire the equity interests in Commonwealth. Instead, Anderson, Frobouck, and Savor each controlled 1/3 of the voting' shares. Frobouck’s and Savor’s shares are held in their individual names, while the remaining third is owned by Anderson Energy Investments, LP (“AEI”), an entity controlled by Anderson. Prior to Anderson’s death, Anderson, Frobouck, and Savor were the directors of Commonwealth. After Anderson’s passing, Fro-bouck and Savor remained the sole directors.
*178Commonwealth’s initial interest in the Property was acquired for $17 million. Part of the purchase price was financed through Commonwealth’s assumption of certain loan obligations owed to PIDA and the Pennsylvania Infrastructure Investment Authority. Commonwealth also entered into an Indenture of Lease dated November 21, 2006 with PIDA. To cover the remaining balance of the purchase price and closing costs, Commonwealth obtained an advance of $7,022,423.37 from the Andersons.
Commonwealth executed a Judgment Note in the amount of $20 million (the “Anderson Note”) to .evidence its obligations to the Andersons for the cash advance. Although the amount advanced by the Andersons was substantially less than the face amount of the note, the parties wanted flexibility in the event additional advances were made in the future.2 The Anderson Note required Commonwealth to make monthly “interest-only” payments during a six-month term. The obligations under the Anderson Note matured on May 21, 2007, at which time all principal and accrued interest was due and payable to the Andersons.
To secure the obligations under the Anderson Note, Commonwealth executed an Open-End Leasehold Mortgage and Security Agreement dated November 20, 2006 (the “Mortgage”), which granted the Andersons a mortgage lien upon its leasehold interest in the Property. In the event that Commonwealth acquired fee simple title to the Property, the liens and security interests granted under the Mortgage would automatically attach to the fee interest. The Mortgage was duly recorded in the public records. Both the Anderson Note and Mortgage were signed by Frobouck (as president) and Savor (as secretary) on behalf of Commonwealth.
Each month, Kathy Anderson invoiced Commonwealth for the interest payments due under the Anderson Note. Commonwealth paid the six monthly interest payments according to the terms of the note, although the last payment (billed on June 6), was not made until August 6, 2007. It is undisputed that no further interest payments were made after August 6, 2007, and there was never a payment made on the principal.
After the Maturity Date, Kathy Anderson continued to send the invoices to Commonwealth each month through February 2010. Upon receipt of the invoices, Commonwealth recorded the interest accruals. Erin Henninger, Commonwealth’s office manager, testified that she was responsible for maintaining Commonwealth’s books and records and would enter the interest accruals from the Anderson Note into Commonwealth’s books long after the maturity date had passed.3 She also continued to list the obligations under the Anderson Note as a debt liability on Commonwealth’s balance sheet through 2012.4
Anderson, Frobouck, and Savor utilized two lines of credit from PNC Bank in connection with their projects. An initial $5 million line of credit was used for busi*179ness which predated the Commonwealth transaction. When Commonwealth’s cash requirements exceeded the remaining availability under the $5 million line, Anderson, Frobouck and Savor obtained an additional $10 million line of credit from PNC. Ruth Anderson was not a borrower on either one of the PNC credit lines, but she pledged certain securities jointly owned by her and Bill Anderson as collateral for the $10 million line of credit.
In its early stages, the ethanol treatment facility project was highly promising. Savor negotiated a five-year out-take agreement with BP Products North America, Inc. (“BP”) by which BP would purchase all of the project’s output of ethanol, including a pass through of the main input costs of natural gas and corn. Projected profits were estimated at as much as $0.22 per gallon for 127 million annual gallons produced.5
To achieve these projections, Anderson, Frobouck, and Savor recognized that development of the ethanol treatment project would require considerable outside investment. Once the Property rights were secured, Commonwealth engaged prominent Wall Street legal counsel to explore the bond financing market, and enlisted a well-known investment bank to solicit investors and handle investment inquiries. Through these efforts, the parties hoped to raise in excess of $40 million to convert the Property into a fully-functional facility.6
Despite its promise, Commonwealth was ravaged by the credit crunch in May 2007 which effectively dried up credit sources and eliminated any interest in the project by third-party investors. This development caused Anderson, Frobouck, and Savor to revisit the business plan by considering a much smaller project than originally conceived.
During this time, Anderson met weekly with his financial advisor Mohammad A. Samad and Frobouck for lunch at Franco’s Restaurant. At one particular meeting in June 2007, Frobouck and Savor claim that Anderson agreed to cancel the Anderson Note and consider the indebtedness to be part of Anderson’s equity investment in Commonwealth. The discussion appears to have been prompted by Frobouck’s suggestion that the Mortgage be modified to add Frobouck and Savor as mortgagees. There is nothing in the record to support that Anderson ever agreed in writing to cancel the Anderson Note or add Fro-bouck and Savor as mortgagees to the Mortgage.
Anderson died on October 16, 2008. Two months later, Ruth. and Kathy Anderson filed a Complaint in Confession of Judgment against Commonwealth in the U.S. District Court for the Western District of Pennsylvania, arguing that the Anderson Note was in default and seeking payment of $7,881,969.67 plus late charges, interest, and attorney’s fees. Judgment was entered on December 17, 2008. The district court subsequently voided the judgment on April 19, 2010 because it lacked subject matter jurisdiction (lack of diversity).
CRE eventually paid off the PIDA loan and acquired title to the Property in 2010. Upon the transfer of ownership, the liens and security interests granted under the Mortgage automatically attached to the fee interest and became the first-priority liens against the Property.
On April 10, 2010, Commonwealth (by Frobouck and Savor) leased a ten-acre portion of the Property to RES, a compa*180ny in which Frobouck and Savor held controlling membership interests (Savor 27 percent, Frobouck 22-24' percent).7 The term of the RES lease is fifty years, and RES holds an option to purchase its parcel for $6 million. Ruth Anderson alleges that she did not give consent to the RES lease.
From 2008 to 2010, the parties continued discussions regarding ways to resolve ■their disputes. When those discussions failed, Ruth and Kathy Anderson filed a complaint in mortgage foreclosure on October 26, 2010. The state court was about to hear argument on the Andersons’ motion for summary judgment when this bankruptcy case was commenced on July 3, 2014.8
The bar date to file claims has passed and only four claims were filed against Commonwealth. Ruth Anderson filed a claim for a secured debt in the amount of $13,637,249.01, together with interest, attorneys’ fees, and costs (the “Anderson Claim”). The Anderson Claim is premised upon the amounts owed under the Anderson Note and Mortgage. Savor and Frobouck each filed unsecured claims for approximately $11 million for funds advanced to Commonwealth. The only other proof of claim was submitted by the Hempfield - Township Tax Collector for $115,538.43 in prepetition taxes.
Commonwealth does not intend to reorganize as an ongoing concern. On October 29, 2014, it filed a liquidating plan of reorganization that provides for the sale of the Property, its primary asset.9 Although the Property has been marketed by a real estate broker for over a year, Commonwealth has yet to seek Court approval of any purchase offers. For the purpose of this Opinion, the parties agree that the Property has a value of less than $7 million which has not diminished since the bankruptcy case began.
Ruth and Kathy Anderson filed their Motion for Relief from Stay or, in the Alternative, for Adequate Protection on August 26, 2014.10 Their motion alleged that cause for relief exists under § 362(d)(1) because, among other things, Commonwealth is in default of its obligations under the Anderson Note and Mortgage and is unable to provide adequate protection. They farther allege that Commonwealth has no equity in the Property and it is not necessary for an effective reorganization, and thus there are no grounds for relief under § 362(d)(2)..
Commonwealth, Frobouck, and Savor opposed the motion, prompting the Court *181to conduct a two-day evidentiary hearing. The Court heard testimony from Savor, Frobouck, Henninger, and Samad. After the close of testimony, the Court requested post-trial briefing on certain issues. Following submission of the post-trial briefs, the Court took the matters under submission.
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(G). Venue is proper under 28 U.S.C. § 1409. This matter is now ripe for adjudication.
II.
Before considering the motion for relief from stay, the Court must first examine the challenge to Ruth and Kathy Anderson’s status as secured creditors. Commonwealth, Frobouck, and Savor advance three arguments which implicate the treatment of the Anderson Claim.11 It is first alleged that, notwithstanding their appearance as debt instruments, the Anderson Note and Mortgage represent capital contributions and should be rechar-acterized as such by the Court. Frobouck and Savor also contend that the Anderson Note and Mortgage were expressly modified to render the $7 million advance as an equity investment in Commonwealth. As a final alternative, Commonwealth, Fro-bouck, and Savor seek the equitable subordination of the Anderson Claim. The Court will address each of these arguments in turn.
A.
Recharacterization of the Anderson Claim
The Court’s initial inquiry strikes at whether the Andersons’ $7 million advance was a “loan” or a “capital contribution” to Commonwealth. On their face, the Mortgage and Anderson Note bear all of the hallmarks of a debt instrument and security agreement. Commonwealth, Frobouck, and Savor request that we look beyond the documents and ascertain the parties’ intentions through evidence of their past conduct. Based on a series of prior transactions, they claim a long-standing business practice was established in which Anderson, Frobouck, and Savor agreed to share the investment burden and risk on an equal one-third basis in every business deal. They allege that the same result was intended with respect to all funds advanced to Commonwealth.
Bankruptcy courts possess equitable authority to recharacterize a claim from debt to equity as a means of ensuring that form does not triumph over substance. See Cohen v. KB Mezzanine Fund II (In re SubMicron Sys. Corp.), 432 F.3d 448, 457 (3d Cir.2006) (“Submicron ”). The determination of whether a debt actually exists is a question of fact that must be evaluated on a case-by-case basis as “[n]o mechanistic scorecard suffices.” Id. at 455-56. The Third Circuit explains that “the determinative inquiry in classifying advances as debt or equity is the intent of the parties as it existed at the time of the transaction.” Id. at 457. Intent may be “inferred from what the parties say in their contracts, from what they do through their actions, and from the economic reality of the surrounding circumstances.” Id. at 456.
To assist the court in its determination of the intent of the parties at the time they created the Anderson Note and Mortgage, the Court looks to the “pertinent factors” used by five United States Courts of Appeals. The factors “are *182aimed at determining the intent of the parties at the time they entered into the loan transaction.” Vieira v. AGM II, LLC (In re Worldwide Wholesale Lumber, Inc.), 372 B.R. 796, 811 (Bankr.D.S.C.2007). These factors include: (i) the names given to the instruments, if any, evidencing the indebtedness; (ii) the presence or absence of a fixed maturity date and schedule of payments; (iii) the presence or absence of a fixed rate of interest and interest payments; (iv) the source of repayments; (v) the adequacy or inadequacy of capitalization; (vi) the identity of interest between the creditor and the stockholder; (vii) the security, if any, for the advances; (viii) the corporation’s ability to obtain financing from outside lending institutions; (ix) the extent to which the advances were subordinated to the claims of outside creditors; (x) the extent to which the advances were used to acquire capital assets; and (xi) the presence or absence of a sinking fund to provide repayments. See Bayer Corp. v. Mascotech, Inc. (In re Autostyle Plastics, Inc.), 269 F.3d 726, 750-53 (6th Cir.2001) (‘Autostyle ”) (adopting the eleven-factor test set forth in an earlier, tax-related case, Roth Steel Tube Co. v. Comm’r, 800 F.2d 625, 630-32 (6th Cir.1986)).12
After due consideration of each of these factors, the Court concludes that the Anderson cash advance was intended to be a loan at the time it was made. The analysis begins with the Anderson Note and Mortgage, which are unquestionably instruments of indebtedness. Titled as a “Judgment Note,” the Anderson Note contains all of the salient terms necessary to establish a lending relationship between Commonwealth and the Andersons. It identifies the amount of the loan, sets a fixed rate of interest,13 and creates an obligation for Commonwealth to repay the balance. By its own terms, the Anderson Note matured within six months of execution and requires monthly interest payments through the maturity date.14 Although the absence of a fixed interest rate and regular payments is indicative of an equity infusion, the presence of both factors evidences a debt obligation. Indmar Prods. Co. v. Comm’r, 444 F.3d 771, 779 (6th Cir.2006) (citing Roth, 800 F.2d at 630); see also 7 Mertens Law op Fed. Income Tax’n § 26:28 (“A fixed interest rate is indicative-of a deductible interest payment.”).
The complexity of the documents substantiates their classification as debt instruments. These were not generic or “form” documents. Rather, the Anderson Note and Mortgage were carefully drafted *183by Commonwealth’s legal counsel to address the unique aspects of the transaction. Notably, the Mortgage navigated the intricacies of Commonwealth’s relationship with PIDA and provided a mechanism for the Andersons’ liens to attach to the fee title in the event Commonwealth exercised its right to purchase the Property. While the absence of a written instrument may be compelling evidence of a capital contribution,15 the existence of a highly-specialized promissory note and mortgage suggests the parties intended to create a secured debt.
Frobouck and Savor argue that the mere existence of an executed Anderson Note does not prove indebtedness, relying on Fid. Bond & Mortg. Co. v. Brand (In re Fid. Bond & Mortg. Co.) 340 B.R. 266, 803 (Bankr.E.D.Pa.2006). They also claim that the presence of a fixed maturity date does not evidence a debt instrument, based on the holding in Friedman’s Liquidating Trust v. Goldman Sachs Credit Partners, LP (In re Friedman’s Inc.), 452 B.R. 512, 520 (Bankr.D.Del.2012). The Court finds both cases to be inapplicable. In Brand and Friedman’s, the court was confronted with documents that did not require principal payments for several years. Finding it unreasonable to provide for a lengthy loan term without at least some principal pay down, the Friedman’s court concluded that the parties intended an equity contribution. Id. Similarly, the Brand court determined that, despite the existence of -written promissory notes, the amount in controversy was not a debt because, over the course of a five-year term, there was no payment of principal and this was inconsistent with the “economic reality” of the parties. Id.
The Anderson Note, in contrast, provides an abbreviated loan term and defers principal payments for only six months. The transaction had a short fuse because the parties envisioned this to be a temporary solution until a permanent credit facility could be obtained.16 Indeed, Commonwealth’s counsel, the drafter of the instruments, described the Anderson Loan and Mortgage as a “bridge loan” in an email to Savor and Samad.17 Commonwealth already obtained a commitment from BP that was projected to generate a steady income stream, and it was actively soliciting outside investment for the purpose of, among other things, repaying the $7 million advance. Unlike the parties in Brand and Friedman’s, the Andersons had a reasonable expectation of full repayment within a year,18 and the documents accurately reflect a short-term financing arrangement.
To enhance the likelihood of repayment, Commonwealth armed the Andersons with remedies to compel performance. As security for its obligations under the Anderson Note, Commonwealth pledged a lien against its interest in the Property and provided a litany of protections which are generally unavailable to equity hold*184ers.19 The Anderson Note also contains a confession of judgment clause which provides an immediate mechanism for enforcement.20 When a creditor secures a transaction with a lien, courts typically conclude that a loan was intended. Autostyle, 269 F.3d at 751. Moreover, the existence of these features is probative of the parties’ intent to be bound by the precise terms of the instruments as written.
Frobouck and Savor contend that no security could be provided when, in reality, the Property was valueless. This is a most puzzling argument in light of the factual record. At the time the Mortgage was recorded, the Property was anything but “valueless.” The parties envisioned tremendous potential for the facility, and a prominent investment bank, Houlihan Lo-key, projected a valuation as high as $435 million.21 Anderson estimated his own share to have a potential value in excess of $100 million, presumably based upon these projections.22 The Andersons also received the benefit of a $20 million title insurance policy issued by Chicago Title Insurance Company.23 The parties certainly would not have taken precautions to protect the Mortgage, including payment of a $36,000 insurance premium, if the liens were merely illusory.24 Although the Mortgage initially attached to Commonwealth’s leasehold interest and remained subordinate to the liens held by PIDA, these actions reflect that, at a minimum, Anderson believed his debt was fully secured.
The Court is unconvinced that, at the time it was made, the Andersons’ $7 million advance was subject to any longstanding agreement between Anderson, Frobouck, and Savor to share investment risks and rewards equally. While the parties may have agreed to a one-third split in their previous transactions, this deal took on a distinctly different flavor. The parties dispensed with using AGC as the investment vehicle and, instead, made all of their advances directly to Commonwealth. Unlike' the prior transactions, Ruth Anderson was directly involved as a named party in the instruments and a security agreement was executed in connection with the cash advance.
After reviewing the documentation prepared at the time of the advance, the Court is struck by the overwhelming number of items that support the existence of a loan, and the lack of contemporaneous documents indicative of a capital contribution. In 2006, Commonwealth’s balance sheet reflected a $7,022,428.37 loan from Bill Anderson as one of the company’s “current liabilities.”25 Conversely, the register of capital contributions maintained by Commonwealth failed to show the $7 million advance as an equity contribution.26
As the transaction unfolded, the parties had no qualms describing the advance as a loan in their dealings with third parties. In November 2006,. PIDA provided its *185written consent to the placement of a leasehold mortgage on the Property for the benefit of the Andersons.27 The consent was given based upon PIDA’s express understanding that the mortgage would “secure a loan” made by the Andersons “for various purposes related to the acquisition and modification of the project property ...”28
Commonwealth’s tax returns also identified the $7 million advance as a loan. From 2006 to 2012, the advance was classified as a “loan from shareholder” or “other liabilities” on the Commonwealth income tax returns. By 2012, the Commonwealth tax return showed $337,006 in accrued interest due on the Anderson Note and Mortgage.29 Each return was prepared from information supplied by Commonwealth’s employees to its accountants and was signed by Frobouck in his capacity as president.30
Anderson, Frobouck, and Savor were savvy businessmen who recognized the distinction between debt and equity in their dealings with Commonwealth. An examination of the Andersons’ advances bears this out. While the Andersons’ initial $7 million was documented as a loan, other advances were treated differently. By contrast, Anderson’s subsequent infusion of $3.4 million to partially satisfy the PNC line of credit was deemed an equity investment in Commonwealth. Anderson did not add the $3.4 million to the indebtedness owed under the Anderson Note, nor did he claim it was secured by the mortgage. The Court finds this to be compelling evidence that the loan documentation was no accident, but rather, the product of deliberate choices made by the parties with full knowledge of their consequences.
The testimony of Frobouck and Savor is the only material evidence suggesting the advance was an equity contribution at the time it was made. The Court finds this evidence unpersuasive considering the way Frobouck and Savor vascillate on the characterization of their own advances over the years. In 2009, both attempted to convert their admitted capital contributions into' a debt secured by a mortgage lien.31 After they subsequently disavowed this effort,32 Frobouck and Savor each filed unsecured proofs of claim in this bankruptcy case, reserving the right to categorize their separate $11 million contributions as loans to the extent necessary.33 The wavering is not limited to their own contributions, either. In contrast to its current position, Commonwealth previously asserted (in a statement verified by Frobouck) that Anderson agreed to convert his secured claim into a capital contribution in June 2007.34 This serves as an acknowledgement that the advance was originally cast as a loan. At the June 2007 meeting at Franco’s, Frobouck also admitted he wanted the Mortgage to remain in place as a prophylatic measure to discourage subordinate claims, • including mechanics liens, from being filed- against the Property.35 From this record, it appears that Fro-bouck and Savor do not .view “debt” and “equity” as static characterizations, but rather, interchangeable labels that can be altered as needed to suit their needs. For *186this reason, the Court finds their testimony unreliable.
Although our court of appeals warns against excessive reliance on mechanistic scorecards, it observed that the presence of one group of factors could make it “easy” for a court to deny recharacterization of debt as equity. Upon finding a document titled as a “note” which calls for payments of a sum certain at fixed intervals with market-rate interest and secured by a pledge of collateral, the Third Circuit suggests the determination is clear-cut and the inquiry can end there. See Submicron, 432 F.3d at 456. As discussed above, those features are present here. The Anderson Note required payments at fixed intervals at a market rate of interest which were partially performed and for which security was provided. Upon consideration of these factors alone, the Court can confidently conclude that the Anderson Note and Mortgage were intended to be debt instruments at their inception and that no grounds exist to recharacterize the transaction. While the evidence suggests that Anderson, Frobouck, and Savor sought to make equivalent advances to the company (and in fact they kept track of the amounts), the question before the Court is not how much each party funded, but rather, the terms by which the advance was made. The Court cannot easily cast aside the corporate form and transactional details used in the. Commonwealth deal that was markedly different from those that preceded it. Based on its analysis of the eleven factors, credibility determinations of witness testimony and documentary evidence, and the economic reality of the parties, the Court concludes that the funds advanced by Anderson and secured by the Anderson Note and Mortgage represent a debt obligation of Commonwealth ■and do not qualify as a capital contribution.
III.
Alleged Modification of the Anderson Debt Obligations
Having determined that the Anderson Note and Mortgage were intended to be a debt obligation of Commonwealth at the time of execution of the documents, the Court now turns to whether the parties later agreed to convert the debt into an equity contribution. It is undisputed that economic conditions deteriorated after 2006, leaving Commonwealth in a position where it could no longer develop an ethanol production facility with BP. Facing this new reality, Frobouck and Savor allege that Anderson agreed to reposition the company to pursue other opportunities. An apparent stumbling block to the strategy was the Anderson Note and Mortgage. In June 2007, Frobouck met with Anderson and Samad.36
Frobouck testified that Anderson asked if the Anderson Note and Mortgage should be modified. According to Frobouck, he told Anderson to leave the instruments in place to protect their investments:
... Bill Anderson actually asked me the question, should we remove the mortgage and I said no. We’ll leave the mortgage there, you know, basically, to save the certain purpose that it’s been there since the very beginning, you know, to secure the equity that he and Bill, that he and Steve and I had in the project[.]
Tr. 9:2-6 (April 28, 2015).
The Court considers the evidentiary implications of this discussion in two ways: first, both Anderson and Frobouck considered the Anderson Note and Mortgage as *187a binding, secured debt obligation that was already in place. Second, they left the mortgage intact to serve as a barrier to the enforcement of junior debt. Although Frobouck suggests the mortgage protected the investment of all three shareholders (a contention which is not substantiated by written documentation in the record), his testimony confirms that a decision was made to retain the Anderson Note and Mortgage for the purpose of preserving their character as a debt obligation.
There is no further evidence in the record that Anderson, Frobouck, and Savor ever met and formally decided to modify, satisfy, or release the Anderson Note and Mortgage. It is also significant that the parties never bothered to document any such arrangement in the sixteen months which elapsed between the Franco’s meeting and Bill Anderson’s death. Frobouck and Savor are sophisticated businessmen who were trained as attorneys and were familiar with the documentation necessary to memorialize these arrangements. They also had outside legal counsel and accountants at their disposal. If there was an understanding with the Andersons to dramatically shift $7 million from the liability ledger to equity, the Court expects at least one written agreement would exist to substantiate it.
The Court also finds no support for a modification from the parties’ actions following the June 2007 meeting. Savor and Frobouck argue that Bill Anderson ceased collecting interest payments after the meeting and did not foreclose on the Mortgage once the obligations matured. They contend that a failure to foreclose upon a mortgage is evidence that the transaction was an investment, not a debt. United States v. State St. Bank & Trust Co., 520 B.R. 29, 76 (Bankr.D.Del.2014) (citing Aquino v. Black (In re Atlantic Rancher, Inc.). 279 B.R. 411 (Bankr.D.Mass.2002). While the allegation that Bill Anderson ceased to collect payments after maturity is correct, it is also misleading. Kathy Anderson continued to send invoices to Commonwealth for the monthly interest accrual through February 2010.37 Although the invoices were unpaid, there is nothing in the record to indicate that she was told to discontinue this practice.
Henninger, who maintained the books and records for Commonwealth on a daily basis, was not informed of any modification. Although she was told to stop issuing payments to the Andersons, she was not instructed to stop accruing interest. Instead, Henninger dutifully recorded the interest expense in Commonwealth’s corporate records consistent with the invoices she received from Kathy Anderson. In the months and years following the June 2007 meeting, she continued to show the Anderson Note and Mortgage as a loan on Commonwealth’s financial statements and reported this information to Commonwealth’s accountants for the preparation of the corporate income tax returns. If the parties agreed (after June 2007) that the funds advanced by Anderson were equity rather than debt, there would have been no need to record the interest accruals on Commonwealth’s financials.38 The evidence establishes that Henninger had reg*188ular conversations with Frobouck and Savor, and the two reviewed her books and records.39 She therefore had reason to know of any changes in the Commonwealth’s debt structure. If the person most knowledgeable about Commonwealth’s financial records was unaware that the Anderson loan had been modified, the Court certainly cannot reach this conclusion.
Even if the Court would consider that Bill Anderson orally agreed to alter or extinguish the Mortgage, the modification is barred by the Parol Evidence Rule and Pennsylvania’s Statute of Frauds, 33 Pa. Stat. § 1. Both the Anderson Note and Mortgage contained restrictions strictly prohibiting oral modification of the documents.40 Moreover, Pennsylvania case law holds that any agreement to modify a mortgage or refrain from enforcing its terms is subject to the statute of frauds and must be in writing. Strausser v. PRAMCO, 944 A.2d 761, 765 (Pa.Super.Ct.2008); see U.S. Bank N.A. v. JGKM Assocs., LLC, 2015 WL 1474448, at *5 (E.D.Pa. March 13, 2015) (accepting PRAMCO as applicable law in Pennsylvania and that any modification of mortgage falls under the statute of frauds and must be in writing); Hansford v. Bank of Am,., 2008 WL 4078460, at 13-14, 2008 U.S. Dist. LEXIS 65502, at *36 (E.D.Pa. August 22, 2008) (same); Atl. Fin. Fed. v. Orianna Historic Assocs., 406 Pa.Super. 316, 594 A.2d 356, 358 (Ct.1991); Eastgate Enters., Inc. v. Bank & Trust Co. of Old York Road, 236 Pa.Super. 503, 345 A.2d 279 (Ct.1975); see also Phoenix Four Grantor Trust # 1 v. 642 N. Broad St. Assocs., No. 00-597, 2000 WL 876728, at *5 (E.D.Pa. June 29, 2000) (“[B]ecause the mortgages constitute interests in land, under ... Pennsylvania law, the statute of frauds requires any modification of those mortgages to be in writing.” (citing Linsker v. Sav. of Am., 710 F.Supp. 598, 600 (E.D.Pa.1989)). Here, the Court finds no evidence of a signed agreement that varies the terms of the Anderson Note and Mortgage. It also concludes that Commonwealth, Frobouck, and Savor failed to establish that any of the exceptions to the Statute of Frauds apply.
Commonwealth, Frobouck, and Savor challenge the proposition that mortgages fall within the Statute of Frauds. They rely upon decisions from the Nineteenth Century (and a 1931 case following those rulings) that suggest a mortgage represents only security for the payment of money. Bulger v. Wilderman, 101 Pa.Super. 168, 171, 1930 WL 3790 (1931), citing Wilson v. Shoenberger’s Ex’rs, 31 Pa. 295, 1858 WL 7895 (1858) and McIntyre v. Velte, 153 Pa. 350, 25 A. 739 (1893). None of those cases specifically discuss the application of the Statute of Frauds to mortgages, and it is axiomatic that when formulating modern law, federal and state courts of Pennsylvania take these early cases into *189account. The Court therefore finds the more recent rulings of PRAMCO, East-gate, and Orianna instructive as to the current state of Pennsylvania law which requires mortgage modifications to be evidenced in writing.
In addition to the lack of any written evidence, there is no proof that Ruth Anderson ever consented to a modification of Anderson Note and Mortgage. Commonwealth admits that Ruth did not sign an agreement to convert the Anderson Note and Mortgage into a capital contribution, and that she failed to exhibit any conduct that would lead to this conclusion.41 Frobouck, Savor, and Henninger testified that they never dealt with Ruth on any business matters, and as far as Frobouck knew, no one else from Commonwealth consulted her either.42 While a contract may be altered after its formation, all parties must mutually agree to the new terms and consideration must be exchanged. See Great N. Ins. Co. v. ADT Sec. Servs., 517 F.Supp.2d 723, 736 (W.D.Pa.2007); J.W.S. Delavau v. E. Am. Tramp. & Warehousing, Inc., 810 A.2d 672, 681 (Pa.Super.Ct.2002) (citing Corson v. Corson’s Inc., 290 Pa.Super. 528, 434 A.2d 1269 (1981)). As a holder and co-owner of the Anderson Note and Mortgage, Ruth Anderson’s approval was a prerequisite for any modification of the documents. See Wilcox v. Regester, 417 Pa. 475, 207 A.2d 817 (1965); Corson, 434 A.2d at 1271. Absent Ruth’s consent, the contention that both Andersons agreed to convert their loan into an equity contribution falls flat.
Frobouck and Savor suggest that Bill Anderson routinely made decisions for his wife Ruth. Even if this were true, there is no credible evidence in the record that Bill possessed the authority to unilaterally modify Ruth’s rights under the documents. The Court is reluctant to ignore Ruth’s independent ownership rights without a writing, and the absence of an executed consent, assignment, or power of attorney is-compelling. As noted above, this transaction deviated from the path previously followed by the parties where advances were made to AGC which, in turn, invested in the various subsidiary businesses. Because the record fails to show that Ruth had any involvement in AGC, the Court concludes that Commonwealth was designed to be a decidedly different transaction and, therefore, Ruth’s authorization was required before any modification could occur.
Finally, the Court does not consider the analysis and testimony of Samad as probative of an agreement to modify the instruments. Frobouck and Savor place great reliance on Samad’s “investment analysis,” a spreadsheet they claim to be proof of Bill Anderson’s intent to share the cash burdens and risk equally with his colleagues.43 While the analysis suggests an effort was undertaken to balance the amounts advanced to Commonwealth, Samad prepared it upon his own initiative and not at the request or direction of any party. It therefore sheds no light into the mindset of the principals, nor is it conclusive of any intent to re-cast the Mortgage as equity. To the contrary, the analysis distinguishes between funds advanced “via mortgage”' from those made as direct investments or through payments on the line of credit. Samad’s testimony further confirmed that, at least initially, the Anderson Note and Mortgage were deemed to be a legitimate, enforceable debt of Commonwealth.
*190To overcome the Statute of Frauds requires clear and convincing evidence with “full, complete, satisfactory, and indubitable proof’ of the terms of the contract. Kurland v. Stolker, 516 Pa. 587, 533 A.2d 1370, 1373 (1987). Commonwealth, Frobouck, and Savor have fallen far below the minimum evidentiary and probative standards necessary to satisfy the Statute of Frauds and tire Parol Evidence Rule in this case. Faced with clear evidence of a secured loan from the Andersons, the Court is swayed by the absence of any contrary documentation substantiating an agreement to release or modify the Mortgage. Although the testimony of Frobouck and Savor was offered to fill this void, the Court does not find these witnesses credible because their statements are inconsistent with Commonwealth’s financial records which continuously recorded the $7 million advance as a liability. Considering that Frobouck and Savor had both supervisory authority over the preparation of the financial statements and a major financial incentive for advocating their current position, the Court places more weight upon the contemporaneous financial records than the statements of two self-interested shareholders whose testimony can no longer be refuted by Bill Anderson. Accordingly, the Court concludes that the Anderson Note and Mortgage remain valid and enforceable debt instruments and may be asserted as a claim against Commonwealth in this bankruptcy.
IY.
Equitable Subordination
Equitable subordination is a remedy provided in § 510(c), which states:
(c) Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may&emdash;
(1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or
(2) order that any lien securing such a subordinated claim be transferred to the estate.
Equitable subordination is “a ‘remedial rather than penal’ doctrine designed ‘to undo or to offset any inequality in the claim position of a creditor that will produce injustice or unfairness to other creditors in terms of the bankruptcy results.” Schubert v. Lucent Tech., Inc. (In re Winstar Commc’ns, Inc.), 554 F.3d 382, 411 (3d Cir.2009) (quoting Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims, 323 F.3d 228, 233-34 (3d Cir.2003)).
Section 510(c) permits a bankruptcy court to subordinate an allowed claim, on equitable grounds, to the claims of other creditors of a debtor’s estate. “In the exercise of its equitable jurisdiction the bankruptcy court has the power to sift the circumstances surrounding any claim to see that injustice or unfairness is not done in administration of the bankruptcy estate.” In re Mid-American Waste Sys., Inc., 284 B.R. 53, 68 (Bankr.D.Del.2002) (quoting Burden v. United States, 917 F.2d 115, 117 (3d Cir.1990) in turn, quoting Pepper v. Litton, 308 U.S. 295, 307-08, 60 S.Ct. 238, 84 L.Ed. 281 (1939)).
The party seeking to subordinate a claim has the initial burden of coming forward with matei’ial evidence to overcome the prima facie validity accorded to proofs of claim. Mid-American Waste, 284 B.R. at 69. Then, the burden shifts to the claimant to demonstrate the fairness of its conduct. Id. The burden on the claim*191ant is not only to prove the good faith of the parties to the transaction, but also to show the inherent fairness from the point of view of the debtor corporation and those with interests therein. Id.
In Winstar, the Third Circuit adopted a three-factor test that must be satisfied before determining if equitable subordination of a claim is appropriate: (1) the claimant must have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in an injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must be consistent with the provisions of the Bankruptcy Code. Winstar, 554 F.3d at 411. The Winstar three-part test is consistent with U.S. Supreme Court teachings. U.S. v. Noland, 517 U.S. 535, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996) (describing existing case law as consistent with the three-part test originally identified in In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir.1977)).
Frobouck and Savor have presented an extraordinarily confusing argument concerning allegedly inequitable conduct by Bill, Ruth, and Kathy Anderson. Under their legal theory, Bill used his interest in Commonwealth to over-leverage his investments and obtain excessive credit from S & T Bank and PNC Bank. Once the economic recession hit, Bill could no longer make the required payments to the banks. After his death, the banks put pressure on Ruth and Kathy Anderson to foreclose on the Anderson Note and Mortgage. Rather than pursue this remedy immediately, they claim that Ruth and Kathy Anderson waited in the bushes until Savor and Frobouck paid off the PIDA lien and then pounced with a foreclosure action after the Mortgage became the senior lien on the Property.
The Court fails to understand how any of this constitutes inequitable conduct as understood in the context of § 510(c) or Winstar. Anderson’s financial decisions harmed himself, his family, and possibly the banks, but not Commonwealth or its creditors. That Ruth and Kathy Anderson might have baited Savor and Frobouck into paying off the PIDA lien is not supported by evidence in the record. In December 2008, two months after Bill passed away, Ruth and Kathy confessed judgment against Commonwealth, indicating their intent to enforce the terms of the documents as written. It was therefore apparent at least two years before the PIDA loan was satisfied (in October 2010) that Ruth and Kathy exhibited hostile intent with respect to Commonwealth, and a mortgage foreclosure action was foreseeable. And it stretches credulity to suggest that two attorneys who are highly-successful entrepreneurs would be unaware that paying off the PIDA loan would elevate the Andersons’ mortgage lien to first-priority status during a time when the Andersons were encountering financial difficulties.
The purpose of equitable subordination is “to undo or to offset any inequality in the claim position of a creditor that will produce injustice . or unfairness to other creditors in terms of the bankruptcy results.” Citicorp Venture Capital, Ltd., 323 F.3d at 233. It is often wielded against insiders of the debtor to prevent harm to those who could not protect themselves, either due to deception or an unfamiliarity with a firm’s capital structure, from overreaching by those with intimate knowledge of everything.
Where equitable subordination is sought against a non-insider creditor, the plaintiff bears a heavy burden. Bank of N.Y. v. Epic Resorts (In re Epic Capital Corp.), 307 B.R. 767, 772 (D.Del.2004). It must allege an “egregious level of misconduct” to satisfy the first prong of the Winstar test. Century Glove, Inc. v. Ise-*192lin (In re Century Glove, Inc.), 151 B.R. 327, 333 (Bankr.D.Del.1993). It must also establish the claim with particularity. Bank of N.Y. v. Epic Resorts-Palm Springs Marquis Villas (In re Epic Capital Corp.), 290 B.R. 514, 524 (Bankr.D.Del.2003).
Since Ruth and Kathy are not insiders, Frobouck and Savor fail to establish the first and most important of the Winstar factors, that Ruth and Kathy engaged in inequitable conduct. Fraud, spoliation, breach of fiduciary duty, and the creditor’s use of the debtor as a mere instrumentality are examples of egregious conduct justifying equitable subordination, but none of those factors are present here. See Waslow v. MNC Commercial Corp. (In re Paolella), 161 B.R. 107, 118 (E.D.Pa.1993); In re Aluminum Mills Corp., 132 B.R. 869, 896 (Bankr.N.D.Ill.1991). Frobouck and Savor did not demonstrate with particularity how any actions undertaken by Ruth, Kathy, or even Bill Anderson rose to the level of egregious misconduct.
As evident by its name, the concept of “equitable subordination” requires that principles of equity are to be considered in any application of this remedy. Since Fro-bouck and Savor are creditors who would stand to benefit from any imposition of an equitable subordination remedy against the Andersons, it is entirely appropriate for the Court to evaluate how their own conduct may have contributed to the circumstances for which they now find themselves. In re Papercraft Corp., 211 B.R. 813, 827 (W.D.Pa.1997) (remedy of equitable subordination of creditor’s claim should be reconciled with principles of equity).
One principle of equity is that it will not aid a party which is not vigilant. Banco Urquijo, S.A. v. Signet Bank, 861. F.Supp. 1220, 1251 (M.D.Pa.1994) (finding bank failed to require monthly financial statements although entitled to do so); Roeder v. Lockwood (In re Lockwood Auto Group, Inc.), 450 B.R. 557, 558 (Bankr.W.D.Pa.2011). Frobouck and Savor were anything but diligent. According to their testimony, the parties acknowledged Commonwealth’s precarious financial position when they met at Franco’s in June 2007. After the discussion turned to the Mortgage, it is claimed that Anderson agreed to treat the $7,022,423.37 advance as a capital contribution. To the extent this was the understanding, Frobouck and Savor had every incentive to ensure that it was properly documented. As officers and directors of Commonwealth, they also possessed the tools and the resources to make it happen. Frobouck and Savor were not unwitting participants in these transactions, but trained lawyers who were experienced in constructing venture capital investments capable of generating hundreds of millions of dollars. Their failure to prepare a written modification in this instance indicates that the Andersons never agreed to such terms.
In short, Savor and Frobouck failed in their initial burden to overcome the prima facie validity of the Anderson claim. They then failed the first two Winstar elements in not demonstrating how Bill, Ruth, and Kathy acted inequitably and caused injury to Commonwealth or its creditors. In consideration of these factors, the Court denies the request to equitably subordinate the claim of Ruth Anderson and the Anderson estate.
Y.
Relief from the Automatic Stay
The Court now turns to the question of whether Ruth and Kathy Anderson are entitled to relief from the automatic stay to proceed with their foreclosure action in the state court. Section 362(d)(2) provides that relief must be granted with respect to *193a stay against property if “(A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization.”
As the proponents of the motion, Ruth and Kathy have the burden of proof on the issue of Commonwealth’s equity in the Property. The test in the Third Circuit for determining whether a debtor has any equity in property for purposes of § 362(d)(2)(A) focuses on comparing the total amount of all liens against the property and the current value of the property subject to the lien(s). Nantucket Investors II v. California Fed. Bank (In re Indian Palms Assocs., Ltd), 61 F.3d 197, 206 (3d Cir.1995). The term “equity” as it appears in § 362(d)(2)(A) is defined as the amount by which the value of a given property exceeds the total amount of the lien(s) or charges against it. In re Indian Palms Assocs., Ltd., 61 F.3d at 208. If this value is equal to or less than the amount of the liens, there is no equity.
Ruth and Kathy have carried their burden of proof under § 362(d)(2)(A). There is no doubt that Commonwealth has no equity in the Property. The value of the Anderson Claim is at least $7,022,428.37. By contrast, the parties stipulate that the Property has a value of less than $7 million,44 and it is likely the actual value is substantially less. Commonwealth authorized its real estate broker to list the Property for sale at $6,850,000, but after sixteen months on the market, it remains unsold. In his testimony, the broker expressed a belief that the Property will ultimately sell for between $3.5 million and $4 million. Comparing the acknowledged lien totals against the current and anticipated value of the Property shows that Commonwealth has no equity in the Property.
Commonwealth has the burden of proving that the Property is necessary for an effective reorganization. See 11 U.S.C. § 362(d); In re Diversified Energy Venture, 311 B.R. 712, 717 (Bankr.W.D.Pa.2004). As explained by the United States Supreme Court, property is necessary to an effective reorganization when it is “essential for an effective reorganization that is in prospect.” United Sav. Ass’n of Tex. v. Timbers of Inwood Forest, 484 U.S. 365, 375-77, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (emphasis in original). Accordingly, there must be “a reasonable possibility of a successful reorganization within a reasonable time.” Id.
On this count, Commonwealth has not carried its burden of proof. Commonwealth has proposed a liquidating plan of reorganization. Such plans are acceptable for § 362(d)(2)(B) purposes. In re Conroe Forge & Mfg. Corp., 82 B.R. 781, 785 (Bankr.W.D.Pa.1988) (“In a liquidating Chapter 11 where Debtor has ceased operations and collateral value is not decreasing, ordinarily all property will be necessary for an effective reorganization”). However, Commonwealth cannot take comfort from the Conroe Forge decision because it has provided no evidence that the centerpiece of that liquidation, the sale of the Property, could realistically occur within a reasonable time period.
Courts have described the burden of proof necessary to establish a reasonable possibility of an effective liquidation as a sliding scale, where the debtor has great freedom in the early stages of bankruptcy and the burden enlarges as the bankruptcy case progresses. In re Madco Prods., 2009 Bankr.LEXIS 5724, at *13 (Bankr.W.D. Tenn. June 16, 2009); In re Holly’s, 140 B.R. 643, 701 (Bankr. *194W.D.Mich.1992). When relief from stay is requested near the expiration of the exclusivity period, “the moving target burden of proof requires a greater showing than 'plausibility.’ ” In re Holly’s, 140 B.R. at 701. Here, Commonwealth has not demonstrated that a successful reorganization within a reasonable period of time is “probable.” Commonwealth has been marketing the Property for almost two years without success. Although the Property has been- listed at $6.8 million and the court-appointed broker expressed a willingness to entertain offers in the $8.5 to $4 million range, Commonwealth has-not brought forth any potential buyers willing to acquire the Property at any price.
Where there is only one asset of the debtor, the asset has no equity, and the debtor is not conducting any business, “there is no basis to conclude that property lacking equity has any value to the estate in a liquidating plan.” In re 6200 Ridge, Inc., 69 B.R. 837, 844 (Bankr.E.D.Pa.1987). It is possible under some circumstances that a property without equity may still be productive, when it can be sold in a package with other assets. Empire Enters., Inc. v. Koopmans (In re Koopmans), 22 B.R. 395, 407 (Bankr.D.Utah 1982) (discussing, for example, liquidating plans where the property was needed to house inventory or other assets, or where the property could be combined with other assets to make a more profitable asset, such as assembling contiguous parcels of real estate). But in this case, there are no other assets and the Property has no equity. At this advanced stage of the bankruptcy, Commonwealth has not shown that it could realistically implement a liquidating plan within a reasonable time period.
Further, there are numerous impediments to an effective sale of the Property which prompts the Court to conclude that, .even if a suitable buyer were found, approval is anything but inevitable. Ruth and Kathy Anderson have already indicated that they will oppose the proposed assumption of the RES lease in the plan. They challenge the validity of the lease due to various alleged improprieties and self-dealings by Frobouck and Savor which occurred when the lease was granted. Included among these allegations is the assertion that Ruth and Kathy Anderson did not consent to the RES lease, even though the mortgagees’ consent is required by the Mortgage.45 While this motion does not present the proper context to examine the circumstances surrounding the execution of the RES lease, enough legitimate questions have been raised to suggest that if Commonwealth insists on the lease assumption as part of the sale, it is not substantially certain that the sale will be approved. Based on the lack of any interest in the Property, Commonwealth’s insistence that any sale include the assumption of the RES lease, numerous complications with that lease, and the near-certainty of protracted hearings on plan confirmation, the Court is forced to conclude that Commonwealth has not carried its burden of proof that there is a reasonable possibility of a successful reorganization/liquidation within a reasonable time.
In reaching this determination, the Court is influenced by the absence of any creditors who are unaffiliated with Anderson, Frobouck, or Savor. Indeed, the only independent creditor is the real *195estate tax collector who can expect to be paid regardless of whether a sale or foreclosure occurs because its lien is superior to the lien granted by the Mortgage. All of the remaining claims are either held by Frobouck, Savor, the Andersons, or an entity they own or control. The Court also finds it unlikely that any surplus funds will remain from the sale to pay any parties other than the Andersons and the real estate taxing authorities. As determined above, Ruth Anderson and the estate of Bill Anderson hold a secured claim of at least $7,022,428.37,46 and they possess the ability to credit bid for the Property. Considering that the Property valuations range from $3.5 million to $6.8 million, the Andersons can expect to receive virtually all of the proceeds from a sale. Under these circumstances, the Court concludes that it is improbable that Commonwealth can confirm a plan within a reasonable period of time that will provide a benefit to anyone other than the Andersons. For these reasons, the Andersons should not bear any further delays and shall be granted relief from the stay.
The motion for relief from stay under § 362(d)(2) is GRANTED. Because the Court grants relief under this provision, it does not reach the merits of the motion for relief from stay under § 362(d)(1).
An appropriate Order will issue.
ORDER GRANTING MOTION FOR RELIEF FROM THE AUTOMATIC STAY PURSUANT TO 11 U.S.C. § 362(d)(2)
This matter is before the Court on the Motion for Relief from Stay or, in the Alternative, for Adequate Protection filed by creditors Ruth F. Anderson and Kathy L. Anderson, as executor of the estate of William E. Anderson. Ruth Anderson and Kathy Anderson seek relief to, inter alia, continue an action in mortgage foreclosure against the Debtor’s real property in the Court of Common Pleas of Westmoreland County, Pennsylvania. The Court conducted an evidentiary hearing on the motion on April 27 and 28, 2015. For the reasons stated in the Memorandum Opinion of this date, it is hereby
ORDERED, ADJUDGED, and DECREED that:
1. The Motion for Relief from the Automatic Stay or, in the Alternative, for Adequate Protection is GRANTED. Pursuant to 11 U.S.C. § 362(d)(2), Ruth and Kathy Anderson are granted relief from the automatic stay to continue their action in mortgage foreclosure.
. Bill and Ruth were husband and wife until his passing in 2008. As a matter of convenience, the Court uses the term "Andersons” to refer to Ruth and either Bill Anderson or his estate (as represented by their daughter, Kathy Anderson, in her capacity as executor of the Estate of William E. Anderson). The singular term "Anderson” shall mean Bill Anderson alone.
. Transcript ("Tr.”) at 39:17-40:4 (Apr. 27, 2015).
. Henninger testified that she worked as Commonwealth’s office manager until it discontinued office operations in 2008. She then began work as an office manager for Reserved Environmental Services, LLC ("RES”), an entity controlled by Frobouck and Savor and discussed more fully below. Despite her new position, Henninger continued to maintain Commonwealth’s books and records while employed by RES. Henninger was occasionally listed as assistant secretary of Commonwealth and was formally listed as corporate secretary of RES.
.Exs. AA and C.
. Ex. 11.
. Ex. 11.
. Tr. 20:20-22 (April 28, 2015).
. In addition to the foreclosure action, the parties were engaged in litigation on several fronts. On July 24, 2012, AEI filed a derivative suit in the Court of Common Pleas of Allegheny County, Pennsylvania, alleging that, inter alia, Savor and Frobouck had misused their positions at Commonwealth to the financial detriment of the company and its shareholders. Frobouck and Savor then filed a declaratory judgment action on October 19, 2012, seeking a court determination of the relationships among Frobouck, Savor, Ruth and Kathy Anderson, and AEI, in connection with Commonwealth. The actions were consolidated on July 10, 2014. All actions have since been stayed by the bankruptcy. Fro-bouck, Savor, and- Commonwealth removed the consolidated actions to this Court on September 29, 2014, at adversary proceeding 14-2199-GLT. Any further consideration of the adversary proceeding has been stayed pending the disposition of the Anderson’s request for stay relief.
. See Dkt. Nos. 79, 80.
. Ruth and Kathy Anderson also brought a motion to dismiss the bankruptcy case or, in the alternative, seeking the appointment of a chapter 11 trustee at the same time as the motion seeking stay relief. Dkt. 43. The Court will consider this motion after disposing of the stay relief motion.
. As of this date, no party has filed a formal objection to the Anderson Claim.
.The courts of appeals for the Fourth, Fifth, Tenth and Eleventh Circuits have adopted most of these eleven factors as well as additional ones in their own recharacterization analyses. Ellinger v. United States, 470 F.3d 1325, 1333 (11th Cir.2006); Fairchild Dornier GmbH v. Official Comm. of Unsecured Creditors, 453 F.3d 225, 233 (4th Cir.2006); Sender v. Bronze Group, Ltd. (In re Hedged-Investments Assocs.), 380 F.3d 1292, 1298 (10th Cir.2004); Estate of Mixon v. United States, 464 F.2d 394, 402 (5th Cir.1972); In re Sub-Micron, 432 F.3d at 456. Bankruptcy courts within the Third Circuit have utilized some or all of the eleven factors to determine whether recharacterization is appropriate under a given set of circumstances. See, e.g., Patel v. Shubh Hotels, LLC (In re Shubh Hotels Pittsburgh, LLC), 476 B.R. 181, 187-88 (Bankr.W.D.Pa.2012); Autobacs Strauss v. Autobacs Seven Co. (In re Autobacs Strauss), 473 B.R. 525 (Bankr.D.Del.2012); Neilson v. Agnew (In re Harris Agency, LLC), 465 B.R. 410, 421 (Bankr.E.D.Pa.2011); Official Comm. of Unsecured Creditors v. Highland Capital Mgmt., L.P. (In re Moll Indus., Inc.), 454 B.R. 574, 581 (Bankr.D.Del.2011).
. Ex. I, Anderson Note at ¶ 1 (providing a fixed interest rate of 8% per annum.)
. See Ex. I, Anderson Note at ¶ 2.
. See Autostyle, 269 F.3d at 750.
. Tr. 214:1-6 (Apr. 27, 2015).
. Ex. VV.
. In reaching this conclusion, the Court finds that it was rational to expect the repayment to be funded from third-party financing or investment. When, at the time a cash advance is made, a prudent investor has a reasonable expectation of repayment from an obligor’s cash flow or outside financing, the economic reality suggests a valid debt has been created. State St. Bank & Trust Co., 520 B.R. at 77. Conversely, advances which can only be paid from profits or liquidation proceeds are considered equity investments since they are “at the risk of the venture.” Scriptomatic, Inc. v. U.S., 397 F.Supp. 753, 764 (E.D.Pa.1975).
. See Ex. I, Mortgage at ¶ 16(b).
. Ex. I, Note at ¶ 10.
. Ex. 105.
. Ex. 40.
. Ex. UU.
. Ex. TT. The Court also observes that as late . as 2008, the parties were cautious about any business decision that might affect the validity of the mortgage. Counsel for Commonwealth cautioned Samad that there may be negative consequences to the securitization of the mortgage if the parties changed Commonwealth from a C Corporation to an LLC. Ex. FF.
. Ex. X
. Ex. Y.
. See Ex. SS.
. Id.
. Ex. W at CRE 04246.
. Exs. Q-W.
. Exs. GG and II.
. Ex. KK.
. See Claims 2 and 3.
. See Ex. B at ¶ 52.
. Tr. 9:1-9 (April 28, 2015).
. Despite representations in Frobouck and Savor's pretrial brief that Savor was present at the meeting, testimony elicited at the hearing establishes that he was not.
. Although Frobouck and Savor have claimed the invoices stopped coming in October 2008, the record contains copies of invoices from November 2006 through February 2010. Exs. O, C.
. The Court also notes that Commonwealth's final interest payment was made in August 2007, two months after the Franco’s meeting at which Anderson allegedly agreed to convert his debt into equity. Again, had the parties agreed in June 2007 to convert, there would have been no need to pay any further interest payments.
. Tr. at 108: 3-4; 129:1-5 (Apr. 27, 2015). The Court also notes that the balance sheets and monthly operating reports produced by Commonwealth during these bankruptcy proceedings lists the amounts owed under the Anderson Note as liabilities rather than equity contributions.
. Anderson-Note at ¶ 6 ("Lender shall not be deemed, by' any act of omission or commission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by Lender, and then only to the extent specifically set forth in writing.”); and Anderson Mortgage at 25(j): ("This Mortgage is intended as a document under seal and may only be amended, modified, supplemented, or waived by a writing signed by Mortgagor [CRE] and Mortgagee [Anderson, Mrs. Anderson], No course of dealing, course of performance or trade usage, and no parol evidence of any nature shall be used to modify, amend, supplement or waive any of the terms of this Mortgage.”).
. See Commonwealth’s Responses to Request for Admission.
. Tr. at 30:14-31; 52:15-16; 136:18-23.
. See Ex. 50.
. See Stipulation [Dkt. No. 190] at ¶ 9.
. See Ex. I, Mortgage at ¶ 10 (Commonwealth may not lease any part of the Property for purposes other than ethanol production without mortgagee's written consent); ¶ 7 (mortgagee's written consent required for construction or destruction of improvements on any part of the Property).
. It is unnecessary for the Court to determine the precise amount of the Anderson Claim at this stage since the value of the Property does not exceed the outstanding principal amount owed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498829/ | OPINION AND ORDER
Catharine R. Aron, United States Bankruptcy Judge
THIS MATTER came on for hearing on April 27, 2015, in Durham, North Carolina, upon the cross-motions for summary judgment filed by Sara Conti, Chapter 7 Trustee for Clean Bum Fuels, LLC (“Clean Burn”) and Perdue BioEnergy, LLC (“Perdue”). At the hearing, Vicki Parrott and JP Cournoyer appeared on behalf of Clean Burn, and Gregory Crampton, Steven Newton, Carey Deeley, and Andrew Currie appeared on behalf of Perdue.
Clean Burn filed a preference action seeking to avoid $14,958,293.07 in payments made to Perdue. Presently, Clean Burn seeks summary judgment on the pri-ma facie elements of a preference under 11 U.S.C. § 547(b) and on Perdue’s affirmative defenses under 11 U.S.C. §§ 546(e) and (g).- Concurrently, Perdue seeks summary judgment on its affirmative defenses found in 11 U.S.C. §§ 546(e), (g), and 11 U.S.C. § 547(c).1
After reviewing the record and considering the arguments from counsel, this Court finds that the Trustee is entitled to summary judgment as to the prima facie elements of her preference claim. Notwithstanding this finding, Perdue may invoke the limitation on the Trustee’s avoidance power under § 546(e), and there is a factual dispute as to which transactions qualify under this defense. For those transactions that do not qualify for the § 546(e) safe harbor, Perdue may also invoke its § 547(c) defenses. However, due to this Court’s previous opinion and certain factual issues, summary judgment is not appropriate as to the § 547(c) defenses.
JURISDICTION
This Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a) and Local Rule 83.11 of the District Court for the Middle District of North Carolina. This is a core proceeding under 28 U.S.C. § 157(b)(2) which this Court may hear and determine. To the extent that this Court’s constitutional authority to enter a final judgment in this matter is questioned under Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), both parties have consented to this Court’s adjudication. See Wellness Int’l Network, Ltd. v. Sharif, — U.S. —, 135 S.Ct. 1932, 1944, 191 L.Ed.2d 911 (2015) (allowing parties to “waive the right to Article III adjudication of Stern claims”).2
*200
BACKGROUND
Clean Burn operated an ethanol facility in Raeford, North Carolina, to convert corn into ethanol and a by-product known as dried distillers grain with solubles. Clean Bum entered into a series of related contracts with Perdue for the purpose of procuring corn. These contracts included a Feedstock Supply Agreement, a Co-Product Purchase and Marketing Agreement, a Lease Agreement, and a Master Agreement.
The Feedstock Supply Agreement controlled the procurement and purchase of corn and other related services between Clean Bum and Perdue. Under the Feedstock Supply Agreement, Clean Burn agreed to purchase corn exclusively from Perdue. In exchange, Perdue agreed to provide a number of different services. One such service concerned the origination, or procurement, of corn. Perdue agreed to supply all of Clean Bum’s requirements of corn with a special provision that Perdue source twenty percent of all corn from local farmers. In addition to supplying the corn, Perdue agreed to manage the logistics of transporting the corn to Clean Burn’s facility by either rail or truck and to employ an on-site logistics coordinator.
Clean Burn’s facility included two storage bins connected to a processing plant. All deliveries of corn were deposited into the storage bins, which were owned by Clean Burn but leased to Perdue for $1.00 per year. When it needed corn, Clean Burn would draw it out from the storage bins using a conveyor belt. As corn traveled on the conveyor belt it would pass over an instrument called a weighbelt. The weighbelt measured Clean Burn’s daily corn usage. This data was transmitted to Perdue, and Perdue used the data from the weighbelt to determine the total price of the corn sold.
The pricing mechanism for the corn was complex. According to the Feedstock Supply Agreement, the total price of corn was comprised of a basis price — calculated based on the transportation method used, the storage capacity of the transportation, and a fixed origination fee — and a futures price — an amount tied to the price of corn trading on a particular month on the Chicago Board of Trade. Over the course of their relationship the parties entered into seven basis contracts, which governed the basis price for future transactions within a set period of time. After entering into a basis contract, the parties would enter into weekly agreements that would establish the quantity and futures price of the corn on either the Thursday or Friday before the corn was to be pulled out of the bins for the following week’s usage. Once the futures price was set, the full contract price between Clean Bum and Perdue was established, allowing Clean Burn to draw corn out of the storage bins and across the weighbelt. In other words, the parties anticipated that the full price and quantity of the corn would be determined before the corn passed over the weighbelt.
Clean Burn’s payment terms varied over the parties’ relationship. Under the Feedstock Supply Agreement, Clean Bum was required to pay fifteen percent of the invoice price on the same day the invoice was sent, with the balance due on Friday of the same week. The parties, however, altered this schedule several times. In *201January 2011, the parties changed the payment schedule to require a twenty percent payment on the Friday following receipt of the invoice, with the remaining eighty percent to be paid on the following- Friday. All of the payments made pursuant to this last payment schedule were within the ninety day period before Clean Bum filed for Chapter 11 (the “Preference Period”). In the Preference Period, Clean Bum made sixteen payments to Perdue' for a total amount of $14,958,293.07.
Eventually, the high cost of corn coupled with the low market value of ethanol resulted in an insufficient cash flow for Clean Burn to continue its business operations. On February 28, 2011, Clean Burn stopped removing grain from the storage bins. Shortly thereafter, Perdue’s onsite employee locked the weighbelt, preventing further corn withdrawals. By the time Clean Burn filed for Chapter 11 on April 3, 2011, 553,000 bushels of corn with an approximate value of $4,675,000.00 remained in the storage bins. Clean Bum filed an adversary proceeding (the “Corn Litigation”) to determine the ownership of the remaining corn, avoid a potential ownership interest retained by Perdue in the corn under 11 U.S.C. §§ 544(a) and 549, and recover the value of the corn under 11 U.S.C. § 550. Both parties moved for partial summary judgment; this Court granted Clean Burn’s motion. Clean Burn Fuels, LLC v. Perdue BioEnergy, LLC et al. (In re Clean Burn Fuels, LLC), 492 B.R. 445 (Bankr.M.D.N.C.2013).
In the Com Litigation this Court determined that the corn held in the storage bins when Clean Burn filed for Chapter 11 was property of the bankruptcy estate. 3 Relying on N.C. Gen.Stat. § 25-2-401, this Court determined that Perdue delivered the corn, at the latest, when it arrived at Clean Burn’s facility. Id. at 462. The determination of when delivery occurred was a pivotal component in this Court’s ultimate holding that Perdue failed to perfect its security interest, thereby allowing the Trustee to avoid Perdue’s security interest under § 544(a). Id. at 464. Perdue filed a notice of appeal, and the matter is currently under advisement before the District Court for the Middle District of North Carolina.
STANDARD OF REVIEW
Federal Rule of Civil Procedure 56, made applicable to adversary proceedings through Federal Rule of Bankruptcy Procedure 7056, states that “the court shall grant summary judgment if the movant shows that'there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). In deciding a motion for summary judgment, “the judge’s function is not [herself] to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine dispute is one in which “the evidence would allow a reasonable jury to return a verdict for the nonmoving party.” News and Observer Publ’g Co. v. Raleigh-Durham Airport Auth, 597 F.3d 570, 576 (4th Cir.2010). “In particular, the relevant inquiry is ‘whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.’ ” Garofolo v. Donald B. Heslep Assocs., Inc., 405 F.3d 194, 199 (4th Cir.2005) (quoting Jenkins v. Anderson, 447 U.S. 231, 251-52, 100 S.Ct. 2124, 65 L.Ed.2d 86 (1980)).
DISCUSSION
I. Law of the Case
Before discussing the merits of the motions before the Court, a preliminary issue *202must be resolved as to the impact of this Court’s previous ruling in the Corn Litigation. Perdue' maintains that this Court’s determination of when delivery occurred should not control the Court’s analysis in the present action. Clean Bum disagrees, arguing that this Court’s earlier decision is binding. Under the principle of law of the case, this Court agrees with Clean Bum.
Law of the case stands for the principle “that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.” Walker v. Kelly, 589 F.3d 127, 137 (4th Cir.2009) (quoting United States v. Aramony, 166 F.3d 655, 661 (4th Cir.1999)). This doctrine promotes the policies of judicial economy and finality. Id. As such, it reflects “a prudent judicial response to the public policy favoring an end to litigation.” Sejman v. Warner-Lambert Co., 845 F.2d 66, 68 (4th Cir.1988). Law of the case is not only adopted in appellate proceedings, but also in bankruptcy matters as well. See, e.g., New Bern Riverfront Dev., LLC v. Weaver Cooke Constr., LLC (In re New Bern Riverfront Dev., LLC), 516 B.R. 316, 321 (Bankr.E.D.N.C.2014) (applying law of the case within the same adversary proceeding). The pendency of an appeal does not impact the law of the case doctrine. Burtch v. Masiz (In re Vaso Active Pharm., Inc.), 500 B.R. 384, 399 (Bankr.D.Del.2013) (applying law of the case “notwithstanding the appeal currently pending in District Court.”).4
This Court’s previous determination that delivery occurred pursuant to N.C. Gen.Stat. § 25-2-401 is law of the case in the current adversary proceeding. Perdue made the same argument to this Court during the Corn Litigation that the Feedstock Supply Agreement, not North Carolina law, should dictate when delivery of the corn occurred. After careful consideration, this Court entered a final order applying North Carolina law, finding that the delivery of corn occurred, at the very latest, when it reached Clean Burn’s facility. There is no compelling reason to adopt a different definition of delivery in the Corn Litigation from the current matter. Therefore, this Court’s previous ruling on delivery will continue to govern in the present case.
II. Prima Facie Case
In order to satisfy a prima facie case for a preference action, Clean Bum must prove six elements: 1) the existence of a transfer of an interest of the debtor in property; 2) the transfer was made to or for the benefit of a creditor; 3) the transfer was made for or on account of an antecedent debt owed by the debtor before the transfer was made; 4) the transfer was made while the debtor was insolvent; 5) the transfer was made within ninety days before the date of the filing of the petition; and 6) the transfer enables the creditor to receive more than it would receive in a hypothetical Chapter 7 distribution. 11 U.S.C. § 547(b). Clean Bum carries the burden on all six elements. 11 U.S.C. § 547(g).
Perdue has already admitted to several of the elements of Clean Burn’s preferential transfer claim. In its Amended Answer, Perdue admitted that it was a creditor of Clean Bum and that Clean Bum transferred its property to Perdue during the Preference Period, satisfying the first, *203second, and fifth elements. In the Corn Litigation, Perdue stipulated that Clean Bum was insolvent during the ninety days prior to its Chapter 11 petition, satisfying the fourth element. Final Pre-Trial Order, Clean Burn Fuels, LLC v. Perdue BioEnery, Ch. 7 Case No. 11-80562, Adv. No. 11-09046, Doc. No. 186. Perdue therefore disputes only the third and sixth elements.
These two remaining elements are easily satisfied. The Fourth Circuit has adopted a “common sense approach” to determine if a transfer was made for antecedent debt: “whether the creditor would be able to assert a claim against the estate, absent repayment.” Smith v. Creative Fin. Mgmt., Inc. (In re Virginia—Carolina Fin. Corp.), 954 F.2d 193, 197 (4th Cir.1992). Had Clean Bum not made the transfers during the Preference Period, Perdue would have been able to assert a claim against Clean Burn’s estate for repayment. Moreover, Perdue received more than it would have received in a hypothetical Chapter 7. See Buchwald Cap. Advisors LLC v. Metl-Span I., Ltd (In re Pameco Corp.), 356 B.R. 327, 337 (Bankr.S.D.N.Y.2006) (“[T]here is no dispute that the anticipated recovery of unsecured creditors under the Plan will be less than 100 cents on the dollar, Defendant clearly recovered from the Debtor more than it would have in a hypothetical Chapter 7 liquidation ... ”). While it is unclear what the dividend to creditors will be, it will likely be less than one hundred percent. Therefore, the Court finds that Clean Burn satisfied its prima facie case for a preference action under § 547(b).
III. Section 546(e) defense
A trustee’s power to avoid preferential transfers is not without restraint. Section 546(e) limits a trustee’s avoidance power by stating that “the trustee may not avoid a transfer that is a ... settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a ... forward contract merchant ... in connection with ... a forward contract, that is made before the commencement of the case, except under section 548(a)(2)(A) of this title.” 11 U.S.C. § 546(e). In order to qualify for this exception to the trustee’s avoidance power, a transferee must prove three things: 1) the existence of a forward contract; 2) the settlement payments were made pursuant to the forward contract; and 3) the settlement payments were made by, to, or for the benefit of a forward contract merchant. Id.
A. Forward contract
1. Differing Definitions of a Forward Contract
According to Perdue, a forward contract is explicitly defined in the Bankruptcy Code. Section 101(25)(A) lists three requirements: 1) the contract is for the purchase of a commodity; 2) the contract is not a commodity contract as defined in 11 U.S.C. § 761; and 3) the contract has a maturity date of more than two days after the contract was entered into. 11 U.S.C. § 101(25)(A). According to Perdue, the statutory elements, and only these elements, form the definition of a forward contract.
Clean Bum relies on case law to expound upon the definition of a forward contract. In Hutson v. E.I. du Pont de Nemours and Co., Inc. (In re Nat’l Gas Distribs., LLC), 556 F.3d 247 (4th Cir.2009), the Fourth Circuit held that under § 546(g), a commodity forward agreement is not required to be traded on an exchange and may include the physical delivery of the commodity. Id. at 259. The Fourth Circuit arrived at this holding by unpacking the term “commodity forward *204agreement,” which the Bankruptcy Code fails to define. The Fourth Circuit began by comparing the terms “agreement” and “contract,” to find that “[t]he term ‘agreement’ ... is really an expression of greater breadth of meaning and less technicality [than ‘contract’]. Every contract is an agreement; but not every agreement is a contract.” Id. at 255 (quoting Black’s Law Dictionary 74 (8th ed.2004)). The Court then used the definition of a forward contract in § 101(25)(A) to define a commodity forward agreement, noting that all forward contracts must, at a minimum, have the elements of a forward agreement. Nat’l Gas Distribs., 556 F.3d at 256-57. In remanding the case back to the bankruptcy court, the Fourth Circuit outlined four non-exhaustive elements required for all commodity forward agreements: 1) substantially all expected costs of performance are attributable to the underlying commodity; 2) the contract has a maturity date of more than two days after the contract was entered into; 3) the price, quantity, and time elements must be fixed at the time of contracting; and 4) the contract has a relationship to the financial markets. Id. at 259-60. Due to the Fourth Circuit’s discussion of § 101(25)(A), Clean Burn claims that the four elements are essential in defining a forward contract.
Perdue strenuously argues against Clean Burn’s use of National Gas Distributors. Perdue correctly notes that National Gas Distributors interpreted a separate and distinct statutory provision, 11 U.S.C. § 546(g), which concerns the avoidance of swap agreements. Perdue also claims that the Fourth Circuit’s limited holding&emdash;that “the Bankruptcy Code does not require that a ‘forward contract’ be traded on an exchange or in a market,” and that “Congress did not preclude physical delivery in connection with a ‘commodity forward agreement’ ”—restrains any application to § 546(e). Nat’l Gas Distribs., 556 F.3d at 256, 258. Further, Perdue urges this Court to consider a Fifth Circuit case that refused to apply the four elements laid out in National Gas Distributors, because “the context of the court’s discussion is intentionally open-ended ... and evocative rather than prescriptive.” Lightfoot v. MXEnergy Elec., Inc. (Matter of MBS Mgmt. Servs., Inc.), 690 F.3d 352, 356 (5th Cir.2012).
Despite Perdue’s arguments, this Court must apply National Gas Distributors. Although it is correct that the Fourth Circuit’s holding explicitly applied to § 546(g), it is also true that National Gas Distributors relied heavily on the definition of a forward contract in § 101(25)(A) as the foundation for its decision. By extrapolating the definitional components of a forward contract to set out the requirements of a commodity forward agreement, the Fourth Circuit necessarily spoke to the requirements of a forward contract. Further, the Fourth Circuit created elements, particularly the second and third elements, that were derived predominantly from its analysis of § 101(25)(A)’s definition of a forward contract. The second element, which requires the price to be fixed at the time of contracting with a maturity date of more than two days after contracting, was created with an explicit reference to § 101(25)(A). Nat’l Gas Distribs., 556 F.3d at 260. The third element, which requires the quantity and time components to be fixed at the time of contracting, was derived from two cases interpreting forward contracts5 and a dictionary *205definition of a forward contract.6 Id. Dismissing National Gas Distributors as merely a § 546(g) case adopts a strained reading of the Fourth Circuit’s opinion not in keeping with its reasoning. Further, this Court cannot accept the Fifth Circuit’s reading in MBS Management Services in which that court understood the Fourth Circuit’s four non-exhaustive elements as “evocative rather than prescriptive.” 690 F.3d at 356. The issue with this interpretation is that the Fourth Circuit did in fact prescribe the bankruptcy court to consider these very elements on remand.7 Recharacterizing these four elements as merely evocative overlooks the procedural posture of National Gas Distributors and is unwarrantedly dismissive. Of course, this Court cannot forsake the statutory definition of a forward contract in favor of applying National Gas Distributors. Therefore, the proper analysis of § 546(e) requires an analysis of § 101(25)(A) as informed by National Gas Distributors.
2. Commodities and Commodity Contracts
Perdue satisfied the first two statutory elements for a forward contract. Section 101(25)(A) defines a forward contract both negatively and positively. In the negative sense, a forward contract cannot be a commodity contract as defined under 11 U.S.C. § 761, which includes a “contract for the purchase or sale of a commodity for future delivery on, or subject to the rules of, a contract market or board of trade.” 11 U.S.C. § 761(4)(A). Positively speaking, a forward contract must be “for the purchase, sale, or transfer of a commodity, as defined in section 761(8) of this title.” 11 U.S.C. § 101(25)(A). Section 761(8), in turn, cites to the Commodity Exchange Act’s definition of a commodity, which includes corn. See 7 U.S.C. § la(9). Perdue correctly argues, and Clean Burn agrees, that the contracts at issue were not commodity contracts as defined in § 761 and that the contracts were for the sale of corn.
Clean Burn resists a neat application of § 101(25)(A) by arguing that meaningful portions of the contract are not attributable to the corn. Clean Bum urges the Court to utilize the Fourth Circuit’s requirement for commodity forward agreements, that “substantially all of the expected costs of performance must be attributable to the expected costs of the underlying commodity.” Nat'l Gas Distribs., 556 F.3d at 259. Under this line of reasoning, Clean Burn argues that meaningful portions of the Feedstock Supply Agreement, such as the logistics and origination provisions, are not commodities.
Clean Burn’s argument is not persuasive. After announcing its rule, the *206Fourth Circuit • contrasted forward commodity agreements, “in which the benefits or detriments depend on future fluctuations in commodity prices,” with supply contracts, “in which costs attributable to other factors, such as packaging, marketing; transportation, service, and similar matters contribute to a greater portion of the costs.” Id. at 259. In other words, if the benefits or detriments of the contracts entered into were dependent on the fluctuations in the commodity market rather than on the non-commodity portions, then those contracts were substantially for the sale of a commodity. During the Preference Period, the basis price, which reflected the cost for logistics and origination, ranged from $0,855 to $1,000, while the futures price, which reflected the cost of the corn, ranged from $5,665 to $7,100. In comparing the two prices during the Preference Period, it is clear that the contract prices were predominantly attributable to the corn such that the benefits or detriments of each contract depended on future fluctuations of corn prices. Regardless of how meaningful the logistics and origination components were to Clean Burn, the contracts entered into during the Preference Period were substantially for the sale of corn. Therefore, the contracts at issue meet the first two elements for a forward contract as defined by § 101(25)(A).
3. Maturity Date
The final requirement for a forward contract is that the contract at issue must have a maturity date more than two days after the contract was entered into. 11 U.S.C. § 101(25)(A). The Bankruptcy Code does not define “maturity date,” and in its absence courts have adopted a variety of competing definitions. Some courts understand a contract’s maturity date as the date of delivery. See, e.g., In re Olympic Nat'l Gas, 294 F.3d at 741 (substituting delivery date for maturity date); In re Borden Chems. & Plastics Operating Ltd. P’ship, 336 B.R. at 219 (tying maturity date to the contractual delivery date). Other courts take a more nuanced approach, defining maturity date as “the future date at which the commodity must be bought or sold ... that is the date on which the buyer’s obligation to pay matures.” McKittrick v. Gavilon, LLC (In re Cascade Grain Prods., LLC), 465 B.R. 570, 575 (Bankr.D.Or.2011). Confusingly, National Gas Distributors draws from both camps, stating simultaneously that a forward contract “must require a payment for the commodity at a price fixed at the time of contracting for delivery more than two days after the date the contract is entered into” and that “a maturity date in the future means that the benefit or detriment from the contract depends on future fluctuations in the market price of the commodity.” 556 F.3d at 260. Clean Bum urges the Court to adopt a definition of maturity date that is tied to the delivery date, while Perdue advocates for the more flexible definition.
While a contract’s delivery date could sometimes serve as an adequate proxy for its maturity date, simply equating one with the other can lead to a perplexing result and is at odds with the statutory definition of a forward contract. To use the present case as an example, this Court previously determined that the corn was delivered, at the latest, when it arrived at Clean Burris facility. After the corn was delivered to Clean Bum, it sat in storage bins that Clean Bum leased to Perdue until the parties agreed on a futures price, which finalized their contract. The issue with Clean Burris definition is that any contract with Perdue would necessarily have a maturity date before the contract was finalized. Put another way, to adopt Clean Burris definition would require accepting the premise that a contract can mature before *207either party could create it. Clean Burn argues that the inability of a contract to mature before it exists actually supports its contention that the contracts with Per-due were not forward contracts. This argument, however, is at odds with § 101(25)(A) because the statutory definition of a forward contract presumes that a contract’s maturity date will follow the contract 'itself: “the term ‘forward contract’ means — a contract ... with a maturity date more than two days after the date the contract is entered into ...” 11 U.S.C. § 101(25)(A). Any definition of “maturity date” must allow for the contract to be entered into first. Because Clean Burn’s interpretation does not follow this sequence, its definition of “maturity date” is not viable.
In contrast, Perdue’s more flexible definition of “maturity date” does not lead to such perplexing results and is in keeping with the § 101(25)(A). Indeed, the legislative history of § 5456(e) lends support for Perdue’s argument. While § 101(25)(A) does not provide a definition for “maturity date,” Congress provided some guidance:
The primary purpose of a forward contract is to hedge against possible fluctuations in the price of a commodity. This purpose is financial and risk-shifting in nature, as opposed to the primary purpose of an ordinary commodity contract, which is to arrange for the purchase and sale of the commodity.
H.R. Rep. 101-84, at 4 (1990).
Thus, Congress differentiated between two types of contracts: forward contracts and contracts for the purchase and sale of a commodity. By protecting forward contracts from preference actions, “Congress sought to prevent market instability when a commodities or securities firm became insolvent.” U.S. Bank Nat’l Ass’n v. Plains Mktg. Can. LP (In re Renew Energy, LLC), 463 B.R. 475, 479 (Bankr.W.D.Wis.2011). To separate these two kinds of contracts, Congress wrote § 101(25)(A) such that contracts that mature more than two days after being entered into would be distinguished from contracts for the immediate sale of commodities. The more-than-two-days temporal requirement captures those contracts which serve to hedge against fluctuations of commodity prices and reflects their risk-shifting nature.
In light of the purpose behind protecting forward contracts, the statutory language at issue, and the practical ramifications of contrary interpretations, the better interpretation of § 101(25)(A)’s maturity date is the date “that the benefit or detriment from the contract depends on future fluctuations in the market price of the commodity.” Nat’l Gas Distribs., 556 F.3d at 260. Such a flexible result was anticipated by Congress in describing forward contracts: “If the price of a commodity ... rises or falls on some future date, the buyer or seller can minimize the risk involved through the use of forward contracts to offset the fluctuation in price from the date of the agreement to the actual date of transfer or delivery.” H.R. Rep. 101-84, at 4 (1990). Whether the maturity date is determined on a case-by-case basis to be the date of delivery, see Knauer v. Superior Livestock Auction, Inc. (In re E. Livestock Co.), Ch. 11 Case No. 10-93904-BHL-11, Adv. No. 11-59088, 2012 WL 4210347, at *4 (Bankr.S.D.Ind. Apr. 5, 2012) (“This Court agrees that the maturity date is the date on which delivery is made, insofar as that date completes the sellers’ obligations under the forward contract and triggers the buyers’ obligation to settle the account”), or the date on which payment is required, Renew Energy, 463 B.R. at 480 (“a common sense (and usage) definition of ‘maturity date’ is the date that all other obligations under thé contract *208have been performed, and nothing else need be done except tender payment”), the focus should be on when the benefits or detriments of the contract are realized. Such a definition best captures Congress’s intent in protecting forward contracts from preference actions and best accords with the broad protections afforded in the Bankruptcy Code.
Under this definition of maturity date, it is unclear whether a factual dispute exists as to the maturity dates of the contracts. After the parties had agreed on a basis price they would execute a document entitled Confirmation of Pricing And/Or Contract Amendment (“Pricing Confirmation Document”). See Trustee’s Br. in Support of Mot. for Summ. J., Ex. L (Doc. No. 47). Each Pricing Confirmation Document included the basis price, the futures price, the date the parties agreed to the contract, and an estimated quantity of corn to be withdrawn. Following the contract finalization and weekly corn usage, Perdue would submit an invoice entitled Sales Settlement Sheet. See Trustee’s Br. in Support of Summ. J., Ex. Q (Doc. No. 47). Each Sales Settlement Sheet included the total price the parties had agreed, the usage dates, and the amount of corn that had been withdrawn from the storage bins during the usage period. Perdue submitted approximately eleven Sales Settlement Sheets to Clean Bum during the Preference Period.
After comparing the Pricing Confirmation Documents with the Sales Settlement Sheets, it appears that the parties entered into some contracts that matured in more than two days, and entered into other contracts that matured in two days or less. One example of a contract that meets this definition is reproduced below:
[[Image here]]
In this example, by comparing the Pricing Confirmation Document 237 amendment 4, the parties finalized their contract on December 23, 2010, and the parties began to realize the benefits or detriments of their contract when Clean Burn began withdrawing the corn on December 27, 2010. In contrast, an example of a contract that does not meet this definition is reproduced below:
[[Image here]]
In this example, the parties finalized their contract on February 7, 2011, and Clean Burn began withdrawing corn on the same day.8
*209Inasmuch as there are instances in which contracts both matured in more than two days and those that did not, and because neither party sufficiently briefed this issue, it is the parties’ responsibility to provide the Court with those Sales Settlement Sheets that meet the definition of a forward contract.
B. Settlement payment
With respect to those transactions that do meet the definition of a forward contract, the second requirement to prevent avoidance under § 546(e) is that the transfers were settlement payments. The Bankruptcy Code defines settlement payments as including preliminary, partial, interim, final, and net settlement payments “or any other similar payment commonly used in the forward contract trade.” 11 U.S.C. §§ 101(51A), 741(8). Despite being “a definition in name only ... a commodity ‘settlement payment’ must, at the least, be some kind of payment on a commodity forward contract.” Buchwald v. Williams Energy Mktg. & Trading, Co. (In re Magnesium Corp. of Am.), 460 B.R. 360, 368 (Bankr.S.D.N.Y.2011); see also 5 Collier on Bankruptcy ¶ 546.06[2][b] (Alan N. Resnick and Henry J. Sommers eds., 16th ed.2015) (“the term ‘settlement payment’ should be interpreted very broadly.”). All of the transfers made during the Preference Period were payments made to settle Clean Burn’s obligations under the contracts. Therefore, to the extent that contacts entered into during the Preference Period were forward contracts, the second requirement under § 546(e) is met.
C. Forward Contract Merchant
The final requirement for establishing protection under the safe harbor of § 546(e) is to prove that the transfers were made by a forward contract merchant. The Bankruptcy Code defines a forward contract merchant as “an entity the business of which consists in whole or in part of entering into forward contracts or with merchants in a commodity (as defined in section 761).” 11 U.S.C. § 101(26). In an effort to give meaning to every word in the statutory definition, one court persuasively defined a forward contract merchant as “a person that, in order to profit, engages in the forward contract trade as a merchant or with merchants,” with “merchant” defined as “one that is not acting as either an end-user or a producer.” Mirant Ams. Energy Mktg., L.P. v. Kern Oil & Ref. Co. (In re Mirant Corp.), 310 B.R. 548, 567-68 (Bankr.N.D.Tex.2004).
There can be no doubt that Per-due was a merchant. Perdue procured corn from independent sources in order to sell it to Clean Burn, who acted as the end-user of the corn. In an effort to bolster its forward contract merchant bona fides, Perdue claims that it entered into forward contracts with two other companies. Clean Burn stressed during oral argument that the Court needed to examine Perdue Bioenergy’s business, and not that of its parent corporation, Perdue Agribusiness, to determine specifically whether Perdue Bioenergy engaged in the trade of corn for a profit. Regardless of whether Perdue Bioenergy conducted multiple corn-trading transactions with other entities, there is no dispute that it traded in corn with Clean Bum to make a profit.' The statutory definition broadly defines a *210forward contract merchant as an entity whose business “in whole or in part” consists of entering into forward contracts. 11 U.S.C. § 101(26). Therefore, to the extent that Perdue entered into forward contracts with Clean Burn, it is a forward contract merchant under § 101(26).9 Thus, those contracts which did have maturity dates greater than two days after the date of contracting qualify for exclusion from avoidance under § 546(e).
IV. Section 547(c) defenses
For those contracts which do not qualify for the § 546(e) defense, Perdue also raised new value defenses under §§ 547(c)(1) and (4), and an ordinary course of business defense under § 547(c)(2). Section 547(c)(1) prevents a trustee from avoiding a preferential transfer “to the extent that such transfer was&emdash; (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange.” 11 U.S.C. § 547(c)(1). Similarly, § 547(c)(4) prevents the trustee from avoiding preferential transfers “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—(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.” 11 U.S.C. § 547(c)(4). Perdue relies on its own definition of delivery, in which Perdue delivered corn to Clean Bum when it passed over the weigh-belt, as the basis for both defenses. Because this Court already determined that the corn was delivered, at the latest, when it arrived at Clean Burn’s facility, the payments made during the Preference Period were not made contemporaneously with the delivery of the corn. Therefore, Per-due’s Motion for Summary Judgment as to its §§ 547(c)(1) and (4) defenses must be denied.
Perdue’s ordinary course of business defense under §. 547(c)(2) raises factual issues that this Court cannot decide at this time. Section 547(c)(2) prevents the trustee from avoiding preferential transfers to the extent that the transfers were “made in the ordinary course of business or financial affairs of the debtor and the transferee” or, alternatively, were “made according to ordinary business terms.” 11 U.S.C. § 547(c)(2). Perdue acknowledges that the subjective prong of § 547(c)(2) is a “peculiarly factual analysis,” that requires this Court to consider “(1) the length of time the parties were engaged in the transaction in issue; (2) whether the amount or form of tender differed from past practices; (3) whether the debtor or creditor engaged in any unusual collection or payment activities; and (4) whether the creditor took advantage of the debtor’s deteriorating financial condition.” Conti v. Sampson-Bladen Oil Co. (In re Clean Burn Fuels, LLC), Ch. 7 Case No. 11-80562-7D, Adv. No. 12-9081, 2014 WL 2987330, at *5 (Bankr.M.D.N.C. July 1, 2014) (citations omitted). Both *211Perdue and Clean Bum dispute whether a baseline of dealing can be established and whether the payments made during the Preference Period differed from their past practices. Furthermore, the parties raise factual disputes concerning the objective prong of § 547(c)(2) by disagreeing over the proper industry to consider and what terms are common in that industry. Therefore, Perdue’s § 547(c)(2) defense is not ripe for summary judgment.
Conclusion
In light of the foregoing, the Trustee has established the prima facie elements of a preference under § 547(b). Therefore, the Trustee’s Motion for Summary Judgment as to § 547(b) is GRANTED.
With respect to Perdue’s Motion for Summary Judgment as to its § 546(e) defense, the Trustee has identified two contracts for which the maturity date is two days or less after the date of contacting. The Trustee is ordered to present the Court with a list within thirty days of any additional contracts for which it contends the maturity date is two days or less than the date of contracting. If the Trustee does not provide this list, the Court will enter an order granting summary judgment as to all other contracts and denying summary judgment as to the two contracts previously identified.
With respect to Perdue’s § 547(c)(1) and (4) defenses, this Court finds its previous ruling in the Corn Litigation precludes granting Perdue summary judgment. Perdue’s Motion for Summary Judgment is therefore DENIED.
With respect to Perdue’s § 547(c)(2) defense, this Court finds that there are material issues of fact such that summary judgment is not appropriate. Therefore, Perdue’s Motion for Summary Judgment as to its § 547(c)(2) defense is DENIED.
IT IS SO ORDERED.
. Perdue’s § 546(g) defense incorporates the same argument as its § 546(e) defense, inter alia, that the payments made by Clean Bum to Perdue were pursuant to forward contracts. Thus, Perdue's § 546(g) defense will be considered along with its § 546(e) defense.
. In its Amended Answer, Perdue did not consent to this Court’s entry of a final judgment. See Perdue's Amended Answer, ¶ [Doc. No. 17], However, Perdue later requested this Court to enter final judgment in its Motion for Summary Judgment. The Supreme Court, in allowing parties to impliedly consent to bankruptcy courts’ jurisdiction, noted that such a rule promotes the “pragmatic virtue[]” of “checking gamesmanship.’’ Wellness, 135 S.Ct. at 1948; see also Haley v. Barlays Bank Del. (In re Carter), 506 B.R. 83, 88 (Bankr.D.Ariz.2014) ("If a Stern objection were not deemed waived by the party making *200it 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.”). To prevent the gamesmanship described in Haley, this Court will interpret Perdue’s Motion for Summary Judgment as its consent to this Court’s entry of a final judgment.
. The opinion from the Com Litigation was entered by the Hon. Thomas W. Waldrep, Jr.
. While this Court entered a consent order granting Perdue’s motion to stay both the May 16, 2013 Memorandum Opinion and the June 28, 2013 Final Judgment, conclusions of law made therein still stand for the purposes of law of the case, unless and until the District Court vacates them.
. The Fourth Circuit cited Williams v. Morgan Stanley Capital Grp. Inc. (In re Olympic Nat. Gas), 294 F.3d 737, 739 (5th Cir.2002) (finding a contract fit the statutory definition of a *205forward contract where the price, quantity, and time elements were fixed at contract) and BCP Liquidating LLC v. Bridgeline Gas Mktg., LLC (In re Borden Chems. & Plastics Operating Ltd. P’Ship), 336 B.R. 214, 221 (Bankr.D.Del.2006) (determining that forward contracts have fixed quantities and prices).
. The Fourth Circuit cited the Merriam-Webster's Dictionary of Law’s definition of a forward contract as "a privately negotiated investment contract in which a buyer commits to purchase something (as a quantity of a commodity, security, or currency) at a predetermined price on a set future date.”
. In re Nat’l Gas Distribs., 556 F.3d at 259:
"In determining whether the contracts in this case are 'commodity forward agreements,’ the bankruptcy court will not, unfortunately, have the benefit of developed case law, nor even the benefit of clear market-place definitions .... Although we do not attempt to provide a definition ourselves, we can point to certain nonexclusive elements that the statutory language appears to require.”
. The Trustee also contends that the price associated with Sales Settlement Sheet number 313673 was determined in accordance with Pricing Confirmation Document 277 amendment 2. Both Sales Settlement Sheet 316807 and 313673 use the same price, $7.5725, and are associated with the same basis contract number, 277. No other amendment to basis contract number 277 lists this price other than amendment 2. There*209fore, assuming that Pricing Confirmation Document 277 amendment 2 fixed the price for Sales Settlement Sheet 313673, this transaction had a maturity date of two days or less. According to Sales Settlement Sheet 313673, corn was used from February 4 through February 6, 2011, but the Pricing Confirmation Document 277 amendment 2 lists a contract date of February 7.
. The Court is mindful that the Mirant court rejected the simplistic definition of a forward contract merchant as "a person that enters into forward contracts,” because it would "violate the judicial corollary to Occam's Razor: that each word in a statute has significance and must be given meaning in construing the statute.” In re Mirant Corp., 310 B.R. at 567. While this Court agrees that the definition of a forward contract merchant must mean something more than a party that enters into a forward contract, the statutory definition is purposefully broad. The limiting language in § 101(26) narrows its expansive reach to merchants engaged in business. Perdue fits the definition of a merchant and its activity conforms to the term "business.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498830/ | ORDER
HELEN E. BURRIS, US Bankruptcy Judge, District of South Carolina
THIS MATTER came before the Court to consider confirmation of the proposed plan filed by Debtors Ryan Michael Bycu-ra and Sherri Ann Bycura, and for a hearing on the Bycuras’ Objection to the Claim of Founders Federal Credit Union (“Founders”), Founders’ Objection to the Homestead Exemption, and Founders’ Motion for Relief from the Automatic Stay. The Court enters the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a)(1), made applicable to these contested matters pursuant to Fed. R. Bankr. P. 7052 and 9014.
Findings of Fact
1. In 2004, the Bycuras purchased a house and land located at 2900 Neely Store Road, Rock Hill, York County, South Carolina for $150,000. This purchase was financed by a loan from Founders secured by the property. At the time of purchase, the property included 14 acres and a house.
2. In 2005 and 2006, Founders refinanced the loan for the Bycuras, granting a mortgage on the 14 acres. Each time, the Bycuras received a cash distribution.
3. Beginning in 2006, Mr. Bycura worked for Founders for approximately four years as a teller and a loan processor, and became very familiar with personal and auto loans. He did not work in the mortgage loan department.
4. From the date of purchase to the date of the hearing, the Bycura family, which currently includes three children, has lived in the house located on a portion of the 14 acres. The residence, built around 1955, is approximately 900 square feet with two bedrooms and one bathroom and was renovated by the Bycuras.
5. The Bycuras decided to build a larger house on the 14 acres and intended to move there upon completion. When Mr. Bycura sought permits to begin construction, he understood from York County officials that the 14 acres would need to be divided.
6. A plat titled “Property Surveyed for Ryan M. Bycura and Sherri A. Bycura,” dated July 10, 2006, indicates a 1.081 acre *214tract (the “1 acre”) carved out of the 14 acres.1
7. Although the Bycuras’ current residence is located on the remaining property (“13 acres”), its driveway and well are on the 1 acre. Mr. Bycura testified that he intended for the well to provide water for the current residence located on the 13 acres and the house to be built on the 1 acre.
8. Mr. Bycura testified that he notified Founders of his intentions and Founders’ employees informed him that in order to build the house, he would need to have an appraisal conducted and refinance the loan, with the 1 acre excluded because the value of the 13 acres would be sufficient to secure the loan.
9. Ken Kessaris conducted an appraisal of the 13 acres dated January 29, 2008, and provided a copy to Founders. The appraisal states that the “[e]xisting tract is 14 acres. 1 acre is to be cut off leaving 13 acres to be appraised in this report (See plat).” The appraisal further states “[f]or purposes of this appraisal 1 acre and home is to be appraised separately from the remaining 12 acres. The 12 acres will be given a value and added back to home and 1 acre.” According to this methodology, the appraiser valued the 13 acres at $258,-000.2
10. Attorney Tracey H. Reynolds was given instruction for the closing of a $255,000 loan from Founders to the Bycu-ras. The Closing Instructions sent to the attorney, completed by one of Founders’ loan processors and dated February 21, 2008, state that the legal description of the property securing the loan is “Parcel #772000005 Deed BK6305 pg 115 14 acres.”
11. On March 3, 2008, Ms. Reynolds emailed Denise Shepherd and Debra Bailey, Founders’ mortgage processors, referencing the Bycuras’ refinance, to clarify the property description. Ms. Reynolds stated “[p]lease note as I discussed with Debra, Bycura is the 14 acres minus the 1.081 parcel. Let me know if this is not correct.” Ms. Bailey responded by e-mail regarding other matters, but the record does not indicate that either she or Ms. Shepherd ever stated that this description was incorrect and did not reference the property description in any regard.
12. On or about March 5, 2008, the Bycuras executed an Adjustable Rate Note in the amount of $255,000 payable to the order of Founders. The note was a renewal and refinance of the existing indebtedness. The note states that it is secured by “2900 Neely Store Road, Rock Hill, SC 29730,” identifying the property by address only.
13. The Bycuras also executed a mortgage granting Founders a lien on real property located at “2900 Neely Store Road” and more particularly described therein as follows:
All that certain piece, parcel or lot of land with all improvements thereon, lying being and situate in County of York, State of South Carolina, and being shown and designated as Tract 1, John Simpson Estate, containing 14.00 acres, more or less, on plat entitled “Record Plat — 17.46 acres, Tracts 1 and 2 of the John Simpson Estate” prepared by Sti-keleather & Associates, LLC, dated May 10, 2004, and recorded in the Office of *215the Clerk of Court for York County, South Carolina in Plat Book 141, Page 514, and having such metes and bounds, courses and distances as reference to said plat will more fully appear.
Less and except 1.081 acre as shown on plat entitled “Property Surveyed for Ryan M. Bycura and Sherri A. Bycura” prepared [sic] By Fisher-Sherer Inc. dated July 10, 2006, and recorded in the Office of the Clerk of [sic] Court for York County, South Carolina in Plat Book D302, Page 6.
[DERIVATION: This being the identical property conveyed to Ryan M. Bycu-ra and Sherri A. Bycura by deed of William Robinson Simpson, III, dated May 20, 2004, and recorded June 3, 2004, in the office of the Clerk of Court for York County, South Carolina in Record Book 6305, Page 115.
(emphasis added).
14. The recorded plat for the 1 acre excluded from the March 5, 2008 mortgage was not actually recorded until March 14, 2008, in Plat Book D302, Page 6. The record contains no explanation for the reference in the mortgage to a recorded book and page number that did not exist until nine days later.
15. The mortgage was recorded on March 24, 2008, in the Office of the Clerk of Court for York County in Mortgage Book 09888, Page 121.
16. Mr. Bycura testified that he understood the 1 acre was to be excluded from the March 2008 mortgage as the documents indicate.
17. The HUD Settlement Statement from the March 5, 2008 refinance indicates that the Bycuras received a cash disbursement of $15,581.05 from the proceeds of the loan.
18. John Seabolt, Assistant Vice President of Recovery Services at Founders, testified. Mr. Seabolt did not have any personal involvement with the 2008 refinance and stated that he based his testi-. mony upon a review of records and documents created by Founders in the normal course of business, including conversation logs, notes, and documents contained in Founders’ file for the Bycuras. Mr. Sea-bolt testified that the lender understood the cash disbursement of $15,581.05 was to be applied by the Bycuras to the new house construction. Mr. Seabolt testified that it was Founders’ understanding that the Bycuras used cash disbursements from the prior refinances for the same reason.
19. At some point in time, which is not clear from the record, the Bycuras began construction of a new house on the 1 acre, while continuing to live in the residence located on the 13 acres.
20. Founders introduced a current tax valuation for the' 1 acre and improvements, which indicates that the 1 acre maintained the street address of 2900 Neely Store Road and was assigned TMS 772-00-00-037, and the 13 acres was given the street address 2916 Neely Store Road and maintained the TMS 772-00-00-005. It is not clear from the record when the additional street address and tax map sequence number were assigned.
21. The York County Tax Assessor taxes the 13 acres at the 4% rate used for primary residences and the 1 acre at the 6% rate used for investment properties and non-primary residences.
22. Before the new house was completed, the Bycuras fell behind on their monthly payments to Founders.
23. On June 21, 2013, Founders filed an action against the Bycuras in the York *216County Circuit Court.3 In addition to a judgment on the note and foreclosure of the mortgage on the 13 acres, Founders asserted additional causes of action seeking reformation of the mortgage, a declaratory judgment that the mortgage is a valid and enforceable mortgage hen against the 1 acre as well, and relief due to unjust enrichment/equitable lien.
24. The state court complaint alleges that the legal description in the mortgage erroneously excludes the 1 acre and the exclusion is contrary to the parties’ intent. The Bycuras filed an answer disputing these claims.
25. During the state court action, Founders was granted partial summary judgment with respect to the indebtedness due pursuant to the note, which resulted in entry of a judgment on November 20, 2014, in the amount of $260,502.09. Upon recording, the judgment lien encumbered the 1 acre. That judgment lien did not include any amount for attorneys’ fees and reserved such issues for future determination.
26. On June 30, 2015, the Bycuras filed a voluntary petition for relief under Chapter 13. At the time the case was filed, the state court action was stayed, including any issues regarding the 1 acre.
27. The Bycuras’ schedules list the 1 acre as an hnencumbered property that is used as part of their residence along with the 13 acres. The schedules indicate that Founders has a mortgage hen on the 13 acres, but fail to include any mention of a judgment lien.
28. Mr. Bycura testified that he was not aware of the judgment hen until shortly before the hearing on these matters.
29. The Bycuras claim a homestead exemption in the amount of $100,000 applied to the 14 acres as a whole.
30. Construction of the new house is now approximately 75% complete. The house is 3,570 square feet with four bedrooms. The plumbing has been roughed-in, but is not completed, and the HVAC system was recently completed to maintain the status of the building permit.
31. Currently, the unfinished house is used for storage. Photographs show a grill in the backyard and children’s toys on the back porch. The aerial view below, which outlines the 1 acre, indicates that the unfinished house is located approximately fifty feet away from the house on the 13 acres.4
*217[[Image here]]
82. The Bycuras’ Chapter 13 plan proposes payments to cure the arrearage on Founders’ note and mortgage. The plan does not address the judgment lien.
33. The Bycuras’ schedules and the testimony indicate that their monthly income is insufficient to fund the plan as currently proposed.
34. The Bycuras have not made the three post-petition mortgage payments due directly to Founders as of the date of the hearing and, therefore, have failed to comply with the requirements of their proposed plan. Mr. Bycura testified that when he attempted to make the first of these payments at the drive-thru window of a Founders branch, he was informed he needed to speak with the loan department. Mr. Bycura has not attempted to make the subsequent two payments and does not currently have the funds to do so.
35.On August 5, 2015, Founders filed a proof of claim in the amount of $300,477.31, asserting a mortgage on and security interest in the entire 14 acres.
*21836. An arrearage statement attached to Founders’ claim asserts that the Bycuras are $75,906.26 in arrears on the note. This amount is itemized as follows:
• $7,040.60 for 5 missed payments of $1,408.12 each;
• $35,602.84 for 28 missed payments of $1,271.53 each;
• $1,550.00 for 31 late charges of $50.00 each; and
• $31,712.82 for legal fees and foreclosure fees and costs (collectively, the “attorneys’ fees and costs”).
Excluding the attorneys’ fees and costs, the arrearage amount is $44,193.44.
37. Section 7 of the note, titled “Borrower’s Failure to Pay As Required” provides:
If [Founders] has required [the Bycu-ras] to pay immediately in full as described above, [Founders] will have the right to be paid back by [the Bycuras] for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law. Those expenses include, for example, reasonable attorneys’ fees.
38. Section 9 of the mortgage, titled “Protection of Lender’s Interest in the Property and Rights Under this Security Instrument” provides that if:
there is a legal proceeding that might significantly affect [Founders’] interest in the Property and/or rights under this Security Instrument ... then [Founders] may do and pay for whatever is reasonable or appropriate to protect [Founders’] interest in the Property and rights under this Security Instrument. ... [Founders’] actions can include, but are not limited to ... appearing in court; and ... paying reasonable attorneys’ fees to protect its interest in the Property and/or rights under this Security Instrument....
39. The mortgage also provides that any amounts disbursed by Founders under Section 9 shall become additional debt of the Bycuras secured by the mortgage.
40. Whitney Floyd, Bankruptcy Coordinator for Founders, testified that the majority of the attorneys’ fees and costs are related to the state court action. She stated that in her experience, Founders usually incurs $5,000 to $6,000 in legal fees and costs for routine, uncontested foreclosure actions.
41. Founders did not provide any detail of the attorneys’ fees and costs actually incurred or paid during the state court action or in this bankruptcy case.
Jurisdiction
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (G), (K), and (L) and this Court may enter a final order.
Discussion and Conclusions of Law
I. Objection to the Homestead Exemption
The Bycuras claim a homestead exemption under S.C. Code Ann. § 15-41-30(A)(1) in the 14 acres as a whole. The Chapter 13 Trustee did not object. Founders objected, arguing that this exemption is impermissible because the By-curas reside only in the residence on the 13 acres and the house located on the 1 acre is uninhabitable.
Section 522(b) provides that debtors can choose to exempt from property of the bankruptcy estate that property which is exempt under the applicable state or federal law. South Carolina has opted out of the federal exemptions. 11 U.S.C. § 522(b)(2). Under South Carolina law, a debtor may “exempt from attachment, levy, and sale under any mesne or final *219process issued by a court or bankruptcy proceeding ... [t]he debtor’s aggregate interest, not to exceed fifty thousand dollars in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence-” S.C. Code Ann. § 15-41-30(A)(1). The statute does not define “residence.” However, South Carolina case law has established that “[a] residence is defined as, ‘[p]lace where one actually lives or has his home; a person’s dwelling place or place of habitation; an abode; house where one’s home is; a dwelling house.’ ” In re Jones, 397 B.R. 765, 770-71 (Bankr.D.S.C.2008) (quoting Black’s Law Dictionary 1309 (7th ed.1999)).
“The rationale for Homestead exemptions is well established: to protect from creditors a certain portion of the debtor’s property, and to prevent citizens from becoming dependent on the State for support.” Holden v. Cribb, 349 S.C. 132, 140, 561 S.E.2d 634, 639 (Ct.App.2002) (citing Scholtec v. Estate of Reeves, 327 S.C. 551, 560, 490 S.E.2d 603, 607 (Ct.App.1997)). In support of this purpose, courts are to construe the homestead exemption liberally in favor of debtors. In re Nguyen, 211 F.3d 105, 110 (4th Cir.2000) (“Generally, statutes creating debtors’ exemptions must be construed liberally in favor of the debtor and the exemption.”); In re Shaffer, 78 B.R. 783, 784 (Bankr.D.S.C.1987) (finding that “exemptions are to be construed liberally in favor of the debtor” (internal citations omitted)).
Pursuant to Fed. R. Bankr. P. 4003(c), “the objecting party has the burden of proving that the exemptions are not properly claimed.”
In Jones, this Court found that the debtors were allowed to apply the homestead exemption under S.C. Code Ann. § 15 — 41— 30(A)(1) to two parcels of property — one containing the debtors’ home and the other containing the driveway. 397 B.R. at 771. The Court found that the objecting party did not meet his burden of proof and the only evidence was the debtor’s testimony, which indicated that the debtors used the driveway on the contiguous property to access their home. Id. Similarly, in In re Weldon, this Court found that the debtors were entitled to claim a homestead exemption on two parcels even though the house in which the debtors resided was located on only one parcel. C/A No. No. 11-05407-jw, slip op. (Bankr.D.S.C. Dec. 7, 2011). The adjacent parcel contained the driveway the debtors used to access their home, part of their pool, and a building used by the debtors for storage. Id. The Court concluded that both parcels were used as the debtors’ residence for purposes of S.C. Code Ann. § 15-41-30(A)(1). Id.
This case is similar to Jones and Weldon. There is no question that the Bycuras occupied the residence on the 13 acres from the time of purchase until the hearing date. The well for that residence is located on the adjacent 1 acre as is a portion of their driveway. The property was originally one 14 acre parcel that, as a whole, served as the Bycuras’ residence and they have continued to use it in the same manner since the 1 acre plat was recorded. Although it includes an unfinished, uninhabited house, that does not negate the fact that the 1 acre is necessary to the enjoyment and use of the Bycuras’ home by providing water and access. The property is also used as storage and the porch and yard are used for family recreation. The 1 acre and the 13 acres are used by the Bycuras together in a manner that is consistent with the meaning of a “residence” under S.C. Code Ann. § 15-41-30(A)(1). Construing the exemption liberally, the Court finds that Founders has not met its burden under Fed. R. *220Bankr. P. 4003(c) and the objection to exemption is overruled. The Bycuras may claim an exemption in both the 13 acre and the 1 acre parcels.
II. Objection to Proof of Claim
Founders filed a claim in the amount of $300,477.31, which includes mortgage ar-rearages of $75,906.26. The arrearage amount consists of delinquent monthly payments, unpaid late fees, and $31,712.82 in attorneys’ fees and costs. Founders asserts that its claim is secured by a mortgage lien on the entire 14 acres. The Bycuras contest the attorneys’ fees and costs and the extent of the mortgage lien claimed by Founders.
The filing of a proof of claim is prima, facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). “Once an objection is raised, the objector bears the burden of going forward to produce evidence sufficient to negate the prima facie validity of the filed claim.” In re Lewis, 363 B.R. 477, 481 (Bankr.D.S.C.2007) (citing In re Allegheny Intern., Inc., 954 F.2d 167, 173 (3d Cir.1992)). “If the objector produces evidence sufficient to negate the validity of the claim, the ultimate burden of persuasion remains on the claimant to demonstrate by a preponderance of evidence that the claim deserves to share in the distribution of the Debtor’s assets.” Id.
a. Attorneys’ Fees and Costs
Founders’ claim provided no detail of the significant claim for attorneys’ fees and costs. A review of the state court complaint clearly indicates that the dispute between the parties was broader than a foreclosure or collection action. Analysis of the attorneys’ fee provisions in the note and mortgage reveals that they are not limitless in scope. Therefore, the Bycuras’ have sufficiently negated any prima facie validity of reasonableness and appropriateness of the amount of attorneys’ fees and costs claimed and the burden shifts to Founders.
Despite the Bycuras’ challenge to the claim and proper notice of the objection and hearing, Founders failed to provide any itemization or detail concerning the attorneys’ fees and costs incurred in this case. Founders only offered estimates of usual amounts in simpler cases. The Court is unable to determine the nature and extent of the legal services rendered in this case. As a result, Founders has not established that its attorneys’ fees and costs of $31,712.82 are reasonable or within the scope of the language found in the note or mortgage. Accordingly, this portion of the Bycuras’ objection is sustained and the $31,712.82 for attorneys’ fees and costs is disallowed.
b. Security Interest
Founders claims a mortgage on the entire 14 acres. The specific property description in the mortgage clearly excepts the 1 acre. There is no evidence that the Bycuras gave or intended to pledge the 1 acre as security for the note. There is also no evidence that the Bycuras misled Founders in any way, that there was a mutual mistake or error or unjust enrichment, or that Founders took any action to correct or alter the mortgage from the time it was executed in 2008 until 2013 after the Bycuras had defaulted. The By-curas have produced ample evidence to rebut the prima facie claim of a mortgage lien on the 1 acre, and Founders has not presented sufficient evidence or any legal theory in response to support its claim. Therefore, the Bycuras’ objection is sustained to the extent it claims that the mortgage includes or should be altered to include the 1 acre.
*221III. Plan Confirmation
The Chapter 13 Trustee argues the Bycuras’ proposed plan is not feasible and cannot be confirmed pursuant to 11 U.S.C. § 1325(a)(6). Founders also objects to the feasibility of the plan and the provisions regarding payment of its claim. The proposed plan does not address the judgment lien. A review of the testimony, the budget filed by the Bycuras, and the proposed plan clearly indicate that the Bycuras cannot afford to maintain current payments on the mortgage, cure the arrearage— even in the absence of the claimed attorneys’ fees and costs — and comply with the plan. Therefore, the Bycuras have failed to meet their burden of proof and confirmation of the plan is denied.
IY. Relief From Stay
It is undisputed that Founders has a valid mortgage lien on the 13 acres and the Bycuras are in arrears on their pre- and post-petition mortgage payments. Additionally, the Bycuras have insufficient income to make the regularly scheduled payments and cure the arrearage, even after deducting the claimed attorneys’ fees and costs. At the hearing, no feasible plan to retain this property was evident, and the Bycuras’ counsel advised that, out of necessity, they likely will amend their plan to surrender the 13 acres. On these facts, sufficient cause exists to lift the automatic stay pursuant to 11 U.S.C. § 362(d)(1) and (2) to allow Founders to proceed with its state law collection rights regarding this property.
Founders does not, however, have a mortgage lien on the 1 acre and the Bycu-ras claim an exemption in that property. Founders does have a judgment lien on the 1 acre. The Bycuras have not initiated any action to attempt to value or avoid the judgment lien and at the hearing, the parties reserved the issue of the value of the property.5 Founders has not shown sufficient cause for relief at this time regarding the 1 acre and it remains protected by the automatic stay of 11 U.S.C. § 362(a).
IT IS, THEREFORE, ORDERED THAT:
1. Founders’ Objection to the Homestead Exemption is overruled and the By-curas may claim an exemption in the 13 acre and the 1 acre properties.
2. The Bycuras’ Objection to Founders’ Claim is sustained. Founders’ proof of claim is allowed in the amount of $268,764.49 (the claim amount less the attorneys’ fees and costs), secured by: (1) a mortgage lien on the 13 acres; and (2) a judgment lien that attaches to the Bycu-ras’ real property, including the 1 acre. The mortgage arrearage claim is limited to $44,193.44, removing the attorneys’ fees and costs.
3. Confirmation of the proposed plan is denied. If the Bycuras are to maintain a Chapter 13 case, they must file a revised plan within seven (7) days from entry of this Order.
4. Founders’ Motion for Relief from Stay is granted in part and denied in part. Founders is granted relief from stay to proceed with its state law collection rights regarding the 13 acres. Any further relief requested in Founders’ motion is denied.
IT IS SO ORDERED.
. The plat, recorded later, indicates it was "approved for recording” by the Clerk of Court of York County on July 28, 2006.
. The appraiser concluded that the 12 acres of land had a value of $168,000 and the acre where the residence is located had a value of $90,000, for a total value of $258,000.
. Founders Fed. Credit Union v. Bycura, 2013-CP-46-01923.
. Creditor’s Ex. C.
. Evidence in this record indicates that the value may exceed the amount of the Bycuras’ homestead exemption. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498831/ | MEMORANDUM OPINION
DOUGLAS D. DODD, UNITED STATES BANKRUPTCY JUDGE
Tower Credit, Inc. (“Tower”) contends that its claim against debtors Gregory and Amy Lathers is not dischargeable under 11 U.S.C. § 523(a)(2)(A) and (B). The evidence established that the obligation is nondischargeable. ■
Facts
The Tower Loan Applications
Gregory and Amy Lathers borrowed money from Tower in early 2013 to buy a 2002 GMC Yukon.1 Both debtors signed the face of the two-page application and a companion document declaring both the accuracy and completeness of their loan application, and specifically that it listed all liabilities for federal and state taxes.2 Still *224another document comprising different financial and personal information bore Amy Lathers’s signature below language warning that failure to disclose all information “truly and completely -will constitute fraud,”3 Both debtors signed a document entitled “Budget” that listed their net monthly income and expenses as well as their net disposable income.4 The loan process culminated with the defendants signing a promissory note for $6,366.47.5
A little more than a year later the Lathers again approached Tower to borrow $350.00 for moving expenses.6 The debtors signed another loan application and another document reciting that the information on the application was correct and included all their debts.7 Amy Lathers separately confirmed her income from hairdressing and from food stamps.8 The debtors also signed two other documents confirming their financial and personal information below the fraud warning quoted in the preceding paragraph.9 The debtors signed and in places initialed a three-page document detailing their monthly income and expenses and a calculation of their net income available to pay the new Tower debt.10 The Lathers then signed a promissory note for $1,177.06 for the new loan.11
On November 22,2014, the Lathers filed a joint chapter 7 petition.’
The Debtors’ Alleged Misstatements
Amy Lathers’s Income
Documents submitted with the debtors’ 2013 loan application recited that Amy Lathers earned $1,200 a month styling hair while the 2014 application documents stated that she earned $1,500 each month.12 Both statements proved to be untrue. At the meeting of creditors Mrs. Lathers admitted that she earned only $1,021 from cosmetology in 2013, the sum disclosed on her 2013 federal income tax return.13 She also testified that the following year was little better; she earned just $2,005 styling hair between January and October 24, 2014.14 Thus Amy Lathers’s earnings from hair styling were less than $100 monthly in 2013 and only about $200 monthly for the first ten months of 2014. *225She testified at trial that she has not had a full-time monthly income since giving birth in late 2012.15
Gregory Lathers’s Business Losses
The debtors’ 2013 loan application stated that Gregory Lathers was a carpenter at Maximum Construction earning $3,000 monthly.16 The application listed no other employment or business operation for Mr. Lathers, and the debtors’ budget accompanying their application for the 2013 loan listed no “regular payments fi’om the operation of a business.”17 Both statements proved to be untrue. The tax return transcript for the tax period ending December 31, 2013 reflects that Gregory Lathers claimed a business, loss of $12,776.00 for the year.18 Mr. Lathers admitted in sworn testimony at the meeting of creditors that he had a carpentry business in 2013 and that it lost $12,000.19
The Debtors’ Tax Liabilities
The debtors’ declarations to Tower about their taxes also proved to be false. Their November 24, 2014 bankruptcy schedules included a $2,056.00 debt to the Internal Revenue Service incurred in 2012 and $500.00 owed to the Louisiana Department of Revenue from 2011.20 Yet their applications to Tower for the 2013 and 2014 loans reflected no debts for state or federal taxes, even though documents accompanying the loan applications specifically sought confirmation that the debtors had listed all their debts, including debts for federal and state taxes.21 Further, question 7 on the 2013 loan application addendum that Amy Lathers signed, and question 6 on the 2014 loan application addenda both debtors signed, directly asked if the borrower or his spouse had any delinquent tax obligations. Both the 2013 and 2014 budgets list taxes as separate expense line items.
In sum, the documents are so clear that the Lathers cannot credibly argue that they did not know Tower sought information about their tax liabilities before deciding to lend them money and were mistaken in answering that they had no tax liability.
Tower’s Loan Process
Stephen Binning, Tower’s president, testified at trial concerning the two loans. Binning stated that until the debtors filed bankruptcy he had no knowledge of Mrs. Lathers’s overstated income, Mr. Lathers’s carpentry business or its losses, or the tax debts. After examining the debtors’ schedules aiid questioning them at the meeting of creditors, Tower sued to have the debts declared nondischargeable.
*226Binning testified that Tower would not have made either loan had the debtors included any of the information they’d omitted from their bankruptcy filings. He explained that had Tower known of Mr. Lathers’s carpentry business, it would have demanded that the debtors give Tower financial information for the business as well as a more detailed financial statement than the debtors already had provided. Binning testified that the $1,000 monthly business loss should have been listed as an “other” expense on the debtors’ budget; and that had it been disclosed at the time of the 2013 application, Tower would not have loaned the money because the debtors would not have had sufficient income to make the loan payment.22 Binning also testified that Tower would not have made the 2014 loan had it known that Amy Lathers’s monthly income was so much less than she’d represented in the application because the debtors would have lacked the income to repay the loan.
Binning also testified that Tower would not have made the loan had it known of the defendants’ tax debts. He explained that the State of Louisiana or the Internal Revenue Service could garnish the debtors’ incomes to pay the obligations, leaving the Lathers without enough income to pay the Tower debts. The risk of a seizure of the debtors’ earnings to satisfy tax debt at any time would have made the loans too risky, Binning testified.
In summary, Binning testified that Tower would not have made either the 2013 or the 2014 loans had the Lathers truthfully represented Amy Lathers’s income, the carpentry business and its losses and the Lathers’ tax debt.
Analysis
Bankruptcy Code § 523(a)(2)(A) is Not a Basis for Tower’s Norir-Dischargeability Claim
Tower first alleges that the defendants’ actions render their debt to Tower nondischargeable under 11 U.S.C. § 523(a)(2)(A), which excepts from discharge debts:
“for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by&emdash;
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s ... financial condition....”
However, because the debtors’ allegedly false representations were contained in their written loan application, 11 U.S.C. § 523(a)(2)(B), not section 523(a)(2)(A), governs the dischargeability of their debt to Tower. Section 523(a)(2)(B) applies to false written statements concerning a debtor’s financial condition. 4 COLLIER ON BANKRUPTCY ¶ 523.08, pp. 523-43 (16th ed. 2015) (“False financial statements are dealt with separately in section 523(a)(2)(B) and the exclusion from paragraph (A) makes clear that the false financial statement exception falls within a category separate from the false representation or actual fraud exception and is subject to special conditions to be met before the exception becomes effective. Paragraphs (A) and (B) of section 523(a)(2) are mutually exclusive”). Accordingly, only Bankruptcy Code section *227523(a)(2)(B) is applicable to this dispute.23
Tower Proved that the Debt is Nondischargeable Under 11 U.S.C. § 528(a)(2)(B)
Bankruptcy Code section 523(a)(2)(B) makes nondischargeable a debt “for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by&emdash;
(B) use of a statement in writing&emdash;
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such ... credit reasonably relied; and
(iv) that the debtor ■ caused to be made or published with intent to deceive.”
A written statement is materially false for purposes of applying section 523(a)(2)(B) if it “‘paints a substantially untruthful picture of a financial condition by misrepresenting information of the type which would normally affect the decision to grant credit.’ ” Matter of Norris, 70 F.3d 27, 30 (5th Cir.1995), quoting In re Jordan, 927 F.2d 221, 224 (5th Cir.1991) (emphasis added).
Tower proved that the debtors’ loan application contained materially false statements about their financial condition. Amy Lathers admitted under oath both at the creditors meeting and at trial that she did not earn $1,200 monthly in 2013, or $1,500 a month in 2014, as the 2013 and 2014 loan applications she signed and verified stated. Gregory Lathers also conceded under oath at the meeting of creditors that his carpentry business lost more than $12,000 in 2013, facts he did not disclose on either loan application or in the documents supporting them. The debtors also failed to list on the 2013 or 2014 loan documents their federal or state tax debts, despite scheduling a 2012 federal tax liability and a 2011 state tax liability in their bankruptcy case. All of these misrepresentations gave Tower an untruthful picture of the debtors’ financial condition. ,
The debtors dispute Tower’s claim that it relied on their applications to make the loans. Amy Lathers testified that before making the loans, Tower had solicited their business in letters stating that the Lathers were pre-approved for loans: indeed, she testified that the debtors called Tower about the 2013 loan to purchase the Yukon specifically in response to a loan solicitation letter.
The debtors did not offer any written evidence of the loan solicitations, Mrs. Lathers explaining that she no longer had the letters. Nor did she recall whether the letter made the loan offer subject to credit approval. Mrs. Lathers admitted not telling Tower that she and her husband owed taxes, insisting that they were not asked for that information. She also explained that she did not understand the questions on the applications concerning owing taxes, yet on cross-examination acknowledged that her signed loan application verifications mentioned tax debts among those she was required to list. The debtors’ argument is not persuasive.
First, the Lathers admitted signing verifications of the accuracy and completeness of the loan applications. “ ‘When it is not disputed that a loan application was *228signed by the [d]ebtor, then the contents of the application should, in general, be attributed to the [d]ebtor and entitled at least to great weight, and perhaps decisive effect.’ ” In re Williams, 431 B.R. 150, 155 (Bankr.M.D.La.2010), quoting In re Kabel, 184 B.R. 422, 425 (Bankr.W.D.N.Y.1992). Second, the Lathers provided no corroborating evidence of Tower’s loan offer supporting their assertion. Consequently, the Lathers adopted the false information and in so doing misrepresented their finances.
In addition, the evidence established that the Lathers intended to deceive Tower through the financial statements they gave to support both loans. “Intent to deceive may be inferred from the totality of the circumstances.” Byrd v. Bank of Mississippi 207 B.R. 131, 138 (S.D.Miss.1997), citing In re Jordan, 927 F.2d 221, 226 (5th Cir.1991) (overruled on other grounds, In re Coston, 991 F.2d 257, 260 (5th Cir.1993)). “[A] creditor can establish intent to deceive by proving reckless indifference to, or reckless disregard of, the accuracy of the information in the financial statement of the debtor when the totality of the circumstances supports such an inference.” In re Cohn, 54 F.3d 1108, 1119 (3d Cir.1995). The debtors readily admit ted at the meeting of creditors that their loan applications misrepresented Amy Lathers’s income and Gregory Lathers’s operation of a business at a loss. Their explanations of these false statements are not credible.
Moreover, Mrs. Lathers readily admitted on cross-examination that she had not read the papers she signed when the debtors applied for the loans. A borrower’s lack of care when signing, loan documents evidences a reckless disregard for the correctness of the information in the application, and thus establishes intent to deceive for purposes of applying section 523(a)(2). In re Williams, 431 B.R. 150, 155 (Bankr.M.D.La.2010); In re Butski 184 B.R. 193, 195 (Bankr.W.D.N.Y.1993), citing In re Coughlin, 27 B.R. 632, 636 (1st Cir. BAP 1983).
Finally, Tower proved that it reasonably relied on the debtors’ misrepresentations. In contrast to section 523(a)(2)(A), a declaration of nondischarge-ability under section 523(a)(2)(B) requires proof that the creditor reasonably relied on the debtor’s false statements:
The reasonableness of a creditor’s reliance ... should be judged in light of the totality of the circumstances. The bankruptcy court may consider, among other things: whether there had been previous business dealings with the debtor that gave rise to a relationship of trust; whether there were any “red flags” that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and whether even minimal investigation would have revealed the inaccuracy of the debtor’s representations.
Matter of Coston, 991 F.2d 257, 261 (5th Cir.1993).
Binning testified that Tower relied on the debtors’ representations about their finances contained in the loan application documents and also stated that Tower would not have made either loan had it known of Mrs. Lathers’s meager income, Mr. Lathers’s carpentry business and its losses or the debtors’ tax debts. Specifically, Binning stated that Mr. Lathers’s $1,000 monthly business loss in 2013 and Mrs. Lathers’s meager monthly hairstyling income would have left the debtors without sufficient income to make the payments on the 2013 loan. Nor, as Binning testified, would the debtors have had enough income for Tower to make the 2014 loan had they *229honestly disclosed Amy Lathers’s 2014 monthly income.
Finally, no party offered any evidence suggesting that a “red flag” existed warranting Tower’s further investigation of the information on the debtors’ 2018 or 2014 credit applications, especially in light of the parties’ prior relationship. Accordingly, Tower reasonably relied on information the debtors gave it in February 2013 and March 2014.
CONCLUSION
Plaintiff Tower Credit, Inc. proved that Gregory and Amy Lathers’s debt to it is nondischargeable under 11 U.S.C. § 523(a)(2)(B).
. February 8, 2013 loan application, signed on February 11, 2013 (Exhibit Tower 1).
. February 11, 2013 loan application verification page (Exhibits Tower 2 for Gregory Lath*224ers and 3 for Amy Lathers). Among the defendants' debts was a 2012 loan from Tower.
. February 11, 2013 loan application addendum (Exhibit Tower 4).
. February 11, 2013 budget (Exhibit Tower 5).
. February 1, 2013 promissory note (Exhibit Tower 6).
. March 3, 2014 loan application (Exhibit Tower 7).
. March 3, 2014 loan application verification page (Exhibits Tower 9 for Gregory Lathers and 10 for Amy Lathers).
. March 3, 2014 income verification (Exhibit Tower 8).
. March 3, 2014 loan application addendum (Exhibits Tower 11 for Amy Lathers and 12 for Gregory Lathers).
. March 3, 2014 budget (Exhibit Tower 13).
. March 3, 2014 promissory note (Exhibit Tower 14). The total amount financed included the $350.00 paid to the Lathers and payments to other creditors including $500 to Tower.
. Exhibits Tower 1, 7 and 8.
. Transcript of February 23, 2015 meeting of creditors, p. 31, ll. 7-25; p. 32, ll. 1-10 (Exhibit Tower 17) and 2013 U.S. Individual Income Tax Return for Amy Lathers, p.1, line 21 (Exhibit Tower 16).
. Transcript of meeting of creditors, p. 33, ll. 1-12 (Exhibit Tower 17) and payment advices filed in debtors’ bankruptcy case number 14-11505 (P-6, pp. 5-9).
.The Lathers appeared for trial at 9:48 although the trial was scheduled to begin at 9:00. This resulted in their not being present for much of the direct testimony of Tower’s witness, Stephen Binning. Amy Lathers maintained that they '-‘were told" the trial would begin at 10:00, but offered no evidence of this. The case record reflects that the order continuing the trial from August 3, 2015 at 9:00 a.m. to August 10, 2015 at 9:00 a.m. was served on the debtors at the address on record (Order Continuing Trial, P-12). The Lathers had not filed a notice of address change in the records of either their bankruptcy case or this adversary proceeding. In any case the Lathers have pointed to no prejudice resulting from their absence for part of the trial; nor did the record indicate that the debtors’ tardiness prejudiced their defense in any way.
. Exhibit Tower 1.
. Exhibit Tower 5.
. Exhibit Tower 18, p. 2.
. Transcript of creditor meeting, p. 30,11. 5-25; p. 31, ll. 1-5. No evidence from the creditor meeting transcript or elsewhere in the record established that Gregory Lathers operated the carpentry business in 2014.
. Debtors’ Schedule E (Exhibit Tower 15).
. Exhibits Tower 1-5, 7, 9-13.
. However, on further examination by the court Mr. Binning explained that even if the business loss was merely depreciation, it could have affected the debtors’ cash flow. He explained that Tower considers the effect of a business loss on case by case basis. Binning could not with certainty state whether Tower would have made the loans had the business loss been disclosed because the Lathers gave Tower no information about Mr. Lathers’s business when it made the loan.
. Prior opinions admonished Tower, not an infrequent litigant here, that Bankruptcy Code section 523(a)(2)(A) was not a valid basis for excepting from discharge debts arising out of a debtor’s use of a false written statement regarding his financial condition. See In re Touchet, 394 B.R. 418 (Bankr.M.D.La. 2008), In re Brooks, 392 B.R. 642 (Bankr.M.D.La.2008). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498832/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW IN SUPPORT OF ORDER CONFIRMING PLAN OF ADJUSTMENT
Harlin DeWayne Hale, United States Bankruptcy Judge
On October 21, 2015, the Court conducted the Confirmation Hearing on the *231Amended Plan of Adjustment (Doc. # 283, the “Plan”)1 filed by Hardeman County Hospital District d/b/a Hardeman County Memorial Hospital (the “Debtor” or the “Hospital”). The court-approved Plan Summary was appropriately transmitted to Creditors, and the Court finds that due and proper notice has been given of the Confirmation Hearing and the deadlines and procedures for voting and for filing objections to the Plan. The objection (Doc. #291) filed by TMJMF Holdings, L.P. (“TMJMF”), the objection (Doc. #299) filed by InterEXPO Ltd. (“InterEXPO”), and any other objections or responses to Confirmation of the Plan that (a) have not been withdrawn, waived, or settled prior to the entry of the Order Confirming Plan or (b) are not cured by the relief granted herein, are overruled on the merits, and all withdrawn objections or responses each are hereby deemed withdrawn with prejudice. Upon the record of the Confirmation Hearing, the Court makes these Findings of Fact and Conclusions of Law (the “Findings and Conclusions”):
The Debtor
1. Hardeman County Hospital District, which does business under the name Hardeman County Memorial Hospital, is the county hospital serving Quanah, Texas and Hardeman County.
2. The Hospital is designated as a critical-access licensed 24-bed general acute-care facility and is also designated as a Trauma Level 4 facility. Its services include acute medical care, out-patient services, rehabilitation services, swing-bed program, clinic services, and intensive outpatient mental health services for senior adults. The Hospital is the primary and acute care center for Quanah, Hardeman County, and portions of the surrounding counties. The Hospital presently has partnered with the town of Crowell in neighboring Foard. County to be its medical provider for its rural health clinic.
3. Hardeman County Hospital District is a taxing district, and thus is a political subdivision, of the State of Texas. It was created by an act of the Texas Legislature in 1979. Its enabling statute has been codified by the Legislature and is found in the Special District Local Laws Code at Chapter 1038. Tex. Spec. Dist. Local Laws Code § 1038.001 et seq. The District operates solely with the taxes it raises by levy on properties located within its boundaries and the revenues of its medical and healthcare services and operations. The enabling legislation provides that “[t]he legislature may not make a direct appropriation for the construction, maintenance, or improvement of a district facility.” Id. § 1038.006. Accordingly, “the district has full responsibility for: (1) operating all hospital facilities; and (2) providing medical and hospital care for the district’s needy inhabitants.” Id. § 1038.101.
4. The communities of Quanah, Harde-man County, and Foard County depend on the Hospital in multiple ways. As noted, it maintains an emergency room 24 hours a day, seven days a week. This emergency-room availability is critically important to the employers of the communities, such as the gypsum wallboard manufacturing plant that employs 130 people, the school district that is the largest employer in the county, as well as all residents of all ages of the communities served by the Hospital as well as visitors and those needing medical services while traveling through, such as car crash victims. The economic, social, and community-building and -bonding ef*232fects of the Hospital cannot be calculated in mere dollars and cents.
5. The dollars and cents are of course important. The Hospital must match its expenditures to its revenues and operate within its means. The Hospital was in serious financial distress by the end of 2012 and. insolvent in early 2013. As a result, its Board of Directors voted on March .21, 2013 to file a petition under Chapter 9, the municipal bankruptcy provisions of the federal Bankruptcy Code, as the best available means of restructuring and revivifying itself in order to successfully continue its mission to provide healthcare services to its communities including needy inhabitants into the future. The Court entered the Order for Relief (Doc. # 24) on March 27, 2013.
6. The Plan, which is dated, as originally filed by the Debtor, August 14, 2015 (Doc. # 269), and as amended, September 4, 2015 (Doc. #280),2 is intended to pay secured claims in full, to provide a fair distribution to Unsecured Creditors, to assume and continue more than 200 executo-ry contracts and leases that are beneficial to the Debtor, to maintain its facilities and its corps of dedicated employees and healthcare providers, and to accomplish its statutory mission within the communities it serves. The Second Amended Disclosure Statement for the Plan of Adjustment (Doc. # 288) and the evidence presented at the Confirmation Hearing have detailed the steps and work that have gone into rehabilitating the Hospital during the post-petition era. Confirmation of the Plan will be the final step in the rehabilitation and adjustment of debts of the Hospital and its repositioning to continue its mission well out into the future.
jurisdiction and Venue
7.This Court has jurisdiction over this Chapter 9 case and this matter under 28 U.S.C. § 1334(a) & (b), and venue is proper under 28 U.S.C. §§ 1408 and 1409. Confirmation of the Plan is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (L), and (O), and this Court has authority to enter a final order determining whether the Plan complies with the Bankruptcy Code and should be confirmed.3
*2338. Because it is a political subdivision of the State of Texas that has been specifically authorized by the Texas Legislature to seek relief under Chapter 9,4 the Debtor is a proper municipal debtor under Bankruptcy Code § 109. Further, the Debtor is the proper proponent of the Plan under Bankruptcy Code § 941. A debtor in a Chapter 9 Case has the exclusive right to propose a plan of adjustment. See Collier on Bankruptoy ¶ 941.02 (16th ed.) (hereinafter “Collier”) (citing Ashton v. Cameron Cty. Water Improvement Dist. No. 1, 298 U.S. 513, 56 S.Ct. 892, 80 L.Ed. 1309 (1936) and U.S. v. Bekins, 304 U.S. 27, 58 S.Ct. 811, 82 L.Ed. 1137 (1938), both construing the Tenth Amendment to the United States Constitution as requiring that a municipal debtor be left in complete control of its political and governmental affairs).
Brief History of Chapter 9
9. Chapter 9 was added to the national bankruptcy law during the Great Depression. Prior to adoption of the Bankruptcy Code, it was generally called “Chapter IX.” From its earliest days, it has afforded restructuring relief to political subdivisions of states that specifically authorize their political subdivisions to file petitions to commence cases in bankruptcy courts. The purpose of Chapter 9 is beneficent for both debtors and creditors. Collier speaks of “the broad remedial purpose of chapter 9,” Collier ¶ 900.02[2][b], and noted commentators who have focused on Chapter 9 have observed:
[I]t is not always possible to pay, and it is in the interest of all (creditors as well as debtors) to reach an accommodation when this eventuality occurs. This may require coercion of unwilling parties, since individual creditors may find it in their interest to resist a solution even when it is in the interest of the creditors as a whole. This is the “collective action” problem ... [Bankruptcy [is] the solution to the collective action problem ....
Michael W. McConnell & Randal C. Picker, When Cities Go Broke: A Conceptual Introduction to Municipal Bankruptcy, 60 U. Chi. L. Rev. 425, 426 (1993) (emphasis added).
10. The Debtor has limned the history of Chapter 9 in its Confirmation Hearing-Brief (Doc. # 302), demonstrating that its early history has deep Texas roots. The Debtor’s case and its Plan fit well within that tradition.
*234Standards for Confirmation Under Bankruptcy Code § 943
11. A Chapter 9 plan proponent has the burden to prove the requirements for confirmation of a plan by preponderance of the evidence. In re City of Detroit, 524 B.R. 147, 202 (Bankr.E.D.Mich.2014); In re Barnwell Cnty. Hosp., 471 B.R. 849, 855-56 (Bankr.D.S.C.2012); In re Pierce Cnty. Hous. Auth., 414 B.R. 702, 715 (Bankr.W.D.Wash.2009); In re Mount Carbon Metro. Dist., 242 B.R. 18, 31 (Bankr.D.Colo.1999).
12. The Debtor has carried its burden of proof for Confirmation. The evidentia-ry record of the Confirmation Hearing and the provisions of the Plan support this Court’s findings of fact and conclusions of law.
13. Bankruptcy Code § 943(b)(1). In accordance with Bankruptcy Code § 943(b)(1), the Plan complies with the provisions of the Bankruptcy Code made applicable to Chapter 9 cases by Bankruptcy Code §§ 103(f) and 901. Specifically:
(a) Bankruptcy Code § 1122. Article IV of the Plan classifies each Claim against the Debtor into a Class containing only substantially similar Claims as mandated by § 1122(a) of the Bankruptcy Code. “The application of § 1122iin chapter 9 cases should be essentially the same as in chapter 11' cases.” Collier 11901.04[35]. See also Supreme Forest Woodmen Circle v. City of Belton, 100 F.2d 655, 657 (5th Cir.1938) (non-negotiable warrants may be placed in the same class of a Chapter IX plan as negotiable bonds). The legal rights under applicable law of each Holder of Claims within each Class under the Plan are substantially similar in nature and character to the legal rights of all other Holders of Claims within each Class.
“Under the Bankruptcy Code, classes must contain ‘substantially similar’ claims, but similar claims can be separated into different classes for ‘good business reasons.’ ” Bank of N.Y. Trust Co., NA v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 251 (5th Cir.2009); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1281 (5th Cir.1991). Further, “ ‘[substantially similar claims must be classified together unless some reason, other than gerrymandering, exists for separating them.’ ” In re The Heritage Org., L.L.C., 375 B.R. 230, 298 (Bankr.N.D.Tex.2007).
The Plan does not separately classify any Claims for the purpose of gerrymandering favorable votes with respect to the Plan. The four classes of secured claims, Classes 1 through 4, are based on the separate collateral, or in the instance of Class 4, the unique setoff right, of each of the creditors placed in each of such Classes. The separation of General Unsecured Creditors into two classes, Class 5 for General Unsecured Claims and Class 6 for Convenience Claims, which is statutorily authorized by Bankruptcy Code § 1122(b) for administrative convenience, is proper in all respects. See In re City of Detroit, 524 B.R. at 202 (approving convenience class of unsecured claims of $25,000 or less for administrative convenience).
(b) Bankruptcy Code § 1123(a)(l)-(5). In accordance with Bankruptcy Code § 1123(a)(1), Article IV of the Plan properly classifies all Claims that require classification, and the classifications in the Plan comply with Bankruptcy Code § 1122, as described above. Bankruptcy Code § 1123(a)(2) is inapplicable because there are no unimpaired classes under the Plan. Pursuant to Bankruptcy Code *235§ 1123(a)(3), Article IV of the Plan properly identifies and describes the treatment of .each Class of Claims that is “impaired” under the Plan within the meaning of Bankruptcy Code § 1124. See Western Real Estate Equities, L.L.C., v. Village at Camp Bowie I, L.P. (In re Village at Camp Bowie I, L.P.), 710 F.3d 239, 247-48 (5th Cir.2013).
As required by Bankruptcy Code § 1123(a)(4), the Plan provides the same treatment for each Claim of a particular Class (and here no Holder of such a Claim has agreed to less favorable treatment). Bankruptcy Code § 1123(a)(5) requires that a plan provide adequate means for its implementation, and the Plan does so in its provisions specified in Article VI of the Plan entitled “Means for Implementation of this Plan,” Article VII of the Plan entitled “Plan Administration,” and Article VIII of the Plan entitled “Provisions Governing Distributions.”
(c)Bankruptcy Code § 1123(b). Bankruptcy Code § 1123(b) sets forth permissible provisions that may be contained in a plan. In accordance with Bankruptcy Code § 1123(b)(1), Article IV of the Plan impairs each Class of Claims. Under Bankruptcy Code § 1123(b)(2), Article XI of the Plan provides for the assumption or rejection of the executory contracts and unexpired leases of the Debtor that-.have not been previously assumed or rejected during the Case pursuant to Bankruptcy Code § 365. Per Bankruptcy Code § 1123(b)(3), the Plan provides for the settlement, adjustment, or retention of Claims belonging to the Debtor. In compliance with Bankruptcy Code § 1123(b)(5), the Plan modifies, as specified therein, the rights of Holders of Secured Claims and of Holders of General Unsecured Claims. In accordance with Bankruptcy Code § 1123(b)(6), the Plan includes additional appropriate provisions that are not inconsistent with the Bankruptcy Code, including certain discharge, injunction, exculpation, and settlement and release provisions described elsewhere in these findings and conclusions.
(d) Bankruptcy Code § 1123(d). As authorized by Bankruptcy Code § 1123(d), the Plan proposes to cure defaults under assumed Executory Contracts and Unexpired Leases. The cure amounts attributable to any such defaults have been determined by the Debtor and set forth on Exhibit A to the Plan and are in accordance with the underlying agreements and applicable nonbankruptcy law.
(e) Bankruptcy Code § 1128. Bankruptcy Code § 1128 requires the Court to hold a hearing confirm a plan, which the Court did on October 21, 2015, after appropriate notice and opportunity for objections by Creditors and other parties in interest in compliance with the Bankruptcy Code and Bankruptcy Rules.
(f) Bankruptcy Code § 1129(a)(2). The Debtor has complied with all applicable provisions of the Bankruptcy Code with respect to the Plan and the solicitation of acceptances or rejections thereof. In particular, the Plan and the Debtor’s solicitation of acceptances or rejection of that Plan complies with the requirements of Bankruptcy Code §§ 1125 and 1126(a)-(c) and (e)-(g) (made applicable in Chapter 9 cases by Bankruptcy Code § 901) as follows:
(i) Bankruptcy Code § 1125(b). As detailed in the Certificate of Service (Doc. #293) the Debtor complied with Bankruptcy Code § 1125(b) by transmitting to holders of Allowed Claims entitled to vote a copy of the court-approved Disclosure Statement and Plan Summary, and other Court-approved notices.
(ii) Bankruptcy Code § 1125(c). In compliance with Bankruptcy Code *236§ 1125(c), the Debtor transmitted the same Disclosure Statement to all Holders of Claims within each Class under the Plan.
(iii) Bankruptcy Code § 1125(e). In accordance with Bankruptcy Code § 1125(e), the Debtor has solicited acceptance or rejection of the Plan in good faith and in compliance with the applicable provisions of the Bankruptcy Code.
(iv) Bankruptcy Code § 1126(a). The Holders of allowed Claims were given the opportunity to vote to accept or reject the Plan using ballots and voting procedures previously approved by this Court as required by Bankruptcy Code § 1126(a),
(vii) Bankruptcy Code § 1126(f). Bankruptcy Code § 1126(f) is inapplicable as all Classes of Claims are impaired under the Plan.
(viii) Bankruptcy Code § 1126(g). Bankruptcy Code § 1126(g) is inapplicable because all Classes of Claims are to receive or retain some kind of property under the Plan on account of such Claims.
(g) Bankruptcy Code § 1129(a)(8). Bankruptcy Code § 1129(a)(3) imposes on a plan' proponent a duty to propose its plan in good faith and not by any means forbidden by law. TMJMF has objected to the Debtor’s good faith in proposing its Plan. However, in the Confirmation Hearing, the Debtor presented ample evidence of good faith and the avoidance of any means forbidden by law. “Generally, ‘[where] [a] plan is proposed with the legitimate and honest purpose to reorganize and has a reasonable hope of success, the good faith requirement of § 1129(a)(3) is satisfied.’ ” In re Village at Camp Bowie I, L.P., 710 F.3d 239, 247 (5th Cir.2013) (quoting In re T-H New Orleans P’ship, 116 F.3d 790, 802 (5th Cir.1997)).
(v) Bankruptcy Code § 1126(b). Bankruptcy Code § 1126(b) is inapplicable to the Plan.
(vi) Bankruptcy Code § 1126(c). The Debtor, whose counsel was tasked to receive the acceptances or rejections of the Plan, has timely and properly filed and served a ballot certification that identifies the amount and number of allowed claims of each class accepting or rejecting the Plan and the amount of allowed interests of each class accepting or rejecting the Plan. The following Classes of Claims voted, by requisite majorities of at least two-thirds in amount and more than one-half in number of those Ballots cast, to accept the Plan:
Class 1-FNB Secured Claim Yes'1 Vote = 100%; $817,315.47 = 100%
Class 2 -TRB Secured Claim Yes-' 1 Vote = 100%; $240,000.00 = 100%
Class 3 -CSB Secured Claim Yes: 1 Vote = 100%; $6,403.41= 100%
Class 4 - Cardinal Health Yes: Secured Claim 1 Vote = 100%; $1,752.33 = 100%
Class 5 -General Unsecured Yes: 19 Votes = 76%; $287,254.88 = 46%
Claims No: 6 Votes = 24%; $338,425.48 = 54%
Class 6 - Allowed Yes-' Convenience Claims 12 Votes = 100%; $34,945.06 = 100%
*237In the present case, the Plan has not been proposed by any means forbidden by law, and the Plan has been proposed by the Debtor in good faith, with honesty, sincerity, good intentions, and the reasonable expectations that an adjustment of the Debtor’s debts and an operational restructuring of the Debtor can and should be effectuated in accordance with the purpose of Chapter 9. Moreover, the Plan is feasible. The Plan and the treatment of Claims, and the process by which the Debtor has sought Confirmation, are fundamentally fair to the Debtor’s Creditors.
The Plan is intended to achieve two primary objectives: first, the continued operation of Hardeman County Memorial Hospital and its related rural health clinics in order to provide medical care to the residents of Hardeman County, including its needy inhabitants, which is its statutory mission under Article IX, Section 9 of the Texas Constitution, § 286.073 of the Texas Health & Safety Code, and § 1038.101 of the Special DistRict Local Laws Code, and, second, the satisfaction of Creditor Claims in accordance with the provisions of a Plan from available funds while preserving other funds needed,for Hospital and clinic operations and for necessary improvements and maintenance of the Hospital and clinic facilities now and into the future. Both of these goals meet the objective and purpose of Chapter 9 of the Bankruptcy Code, which is to permit a financially distressed public entity to adjust its debts in light of the fact that it is an operating municipality, which, by its nature, is not subject to liquidation. See CollieR ¶900.01[1]. As one bankruptcy case explained, the legislative purpose underlying Chapter 9 “is to allow an insolvent municipality to restructure its debts in order to continue to provide public services.” In re Mount Carbon Metro. Dist., 242 B.R. 18, 41 (Bankr.D.Colo.1999).
Further evidence of the Debtor’s good faith in proposing the Plan to adjust its debts is the Debtor’s performance and activities during this Case. The Debtor has complied with all requirements of the Bankruptcy Code, the Bankruptcy Rules, and the Local Bankruptcy Rules. The U.S. Trustee appointed a Patient Ombudsman under Bankruptcy Code § 333, Marian Jean Small, and she has inspected the Hospital and its patient care regularly during the Case and has filed her reports with the Court reflecting that the Debtor has done a good job of patient care. The Debtor has submitted willingly to governmental audits and obtained its own audit of the financial statements for 2013. The Debtor’s Board of Directors has continued to hold public meetings each month during the Case. The Debtor has conducted itself honestly and openly at all times.
The Debtor’s good faith is further shown in reaching negotiated settlements with many of its Creditors during the Case, including with the litigation claimants TMJMF and InterEXPO, and the fact that the Plan is supported by the all of the Debtor’s secured Creditors, including its primary and secondary lenders, with whom the Debtor has worked closely throughout the Case and negotiated the Plan treatments, as well as by a large proportion of its General Unsecured Creditors.
In finding that the Plan has been proposed in good faith and not by any means forbidden by law, the Court has considered the totality of the circumstances of this Chapter 9 Case as well as the testimony at the Confirmation Hearing. As in the City of Detroit Chapter 9 case, this Court finds that the Plan has been proposed in good faith because it “was filed to achieve a result consistent with the objectives and purposes of chapter 9 — to adjust the [Hospital District's debts so that it *238can reinvest in itself, address its operational problems, recover its ability to provide adequate municipal services, and maintain long-term solvency.” In re City of Detroit, 524 B.R. 147, 251 (Bankr.E.D.Mich.2014).
At the Confirmation Hearing, TMJMF Holdings, LP (“TMJMF”), an objector to the Plan and holder of the largest Class 5 General Unsecured Claim, complained that the Debtor did not pursue all claims against all possible parties; however, the Debtor believes its major claims to have been against the objecting parties, including TMJMF, and those claims have been settled during this Case. Furthermore, at the Confirmation Hearing, the Chairman of the Board of the Debtor testified credibly that the Board received professional advice not to pursue additional claims. Moreover, the Debtor’s financials suggest that the Debtor lacks funds to pursue extensive post-confirmation litigation and any such funds expended would be at the expense of operations of the Hospital. The fact that Debtor’s counsel has provided the bulk of its work in this Case on a pro bono basis further supports the conclusion that the Debtor lacks funds to pursue litigation. The objectors’ allegations of lack of good faith under Bankruptcy Code § 1129(a)(3) are not well taken.
(h)Bankruptcy Code § 1129(a)(6). In accordance with both Bankruptcy Code §§ 1129(a)(6) and 943(b)(6), Article VI of the Plan provides that, as a condition to effectiveness of the Plan, the Debtor shall have obtained any regulatory or electoral approvals necessary under applicable non-bankruptcy law in order to carry out any provision of the Plan, or such Plan provision is expressly conditioned upon such approval being obtained. The evidence presented is that no such approvals are necessary.
(i) Bankruptcy Code § 1129(a)(8). Based on the results of balloting as set forth above, Bankruptcy Code § 1129(a)(8) is not satisfied because one of the six classes of impaired classes has rejected the Plan, namely, Class 5, General Unsecured Creditors.
(j) Bankruptcy Code § 1129(a)(10). The Plan has been accepted by multiple Impaired Classes of Claims that are entitled to vote on the Plan, without including any acceptance of the Plan by any insider, as indicated in section 13(g)(6) of these findings and conclusions.
(k) Bankruptcy Code § 1129(b)(1) & (b)(2)(A) & (B). ■ Class 5, General Unsecured Creditors, has voted to reject the Plan due to the requirement that two-thirds in amount voting to accept the Plan not being met. However, while Bankruptcy Code § 1129(a)(8) is not satisfied, the Plan may be crammed under § 1129(b) if the Plan does not unfairly discriminate with respect to each Class of Impaired Claims that has not accepted the Plan and if the Plan is fair and equitable with respect to each such Class.
A determination of whether a plan unfairly discriminates involves consideration of differential treatment as between similarly situated classes and whether the treatment, though different, is fair under the given facts. See In re Simmons, 288 B.R. 737, 748 (Bankr.N.D.Tex.2003) (stating that it is “necessarily inherent in the term ‘unfair discrimination’ that there may be ‘fair’ discrimination in the treatment of classes of creditors”). As the Fifth Circuit has held: “A bankruptcy court can permit discrimination when the facts of the case justify it.” Brinkley v. Chase Manhattan Mortg. & Realty Trust (In re LeBlanc), 622 F.2d 872, 879 (5th Cir.1980). See generally, Bruce Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 Am. Bankr.L.J. 227 *239(1998). Here the Plan does not unfairly discriminate with respect to Class 5, which is impaired under, and has not accepted, the Plan. See In re Adkins, 2015 WL 2898412, at *1 (Bankr.W.D.La. May 18, 2015) (unfair discrimination test applies only as between treatment of unsecured claimants). Indeed, here there is no unfair discrimination against Class 5 because the only other class containing General Unsecured Claims, Class 6, is statutorily entitled to receive a better percentage treatment than Class 5 due to the administrative convenience of placing small claims into their own class. Bankr.Code § 1122(b) (made applicable via § 901(a)).
The Plan is also fair and equitable, within the contemplation of Bankruptcy Code § 1129(b)(2)(A) and (B) with respect to Class 5, which is the only the impaired rejecting Class of Claims. In a Chapter 9 case, the fair and equitable requirement has been interpreted to mean that Holders of Claims must receive all they can reasonably expect under the circumstances of the Case. See Collier ¶ 943.03[1][f][i][B]. Additionally, in determining those reasonable expectations, the district must be allowed to retain adequate revenues to continue operations because a Chapter 9 debtor “cannot be dismantled or liquidated as in ordinary bankruptcy’ and “the fan* and equitable rule does not prevent a municipal debtor from continuing to operate, even if creditors are not paid in full.” Id. In a California municipal hospital case, the bankruptcy court held that, because there are no equity holders in a Chapter 9 case, “ ‘the absolute priority rule’ embodied by § 1129(b)(2)(B) does not prevent the debt- or here from continuing to operate the hospital.” In re Corcoran Hosp. Dist., 233 B.R. 449, 458 (Bankr.E.D.Cal.1999).
In Chapter 9, creditors cannot expect that, in making payments to Creditors under a plan, the Debtor’s cash at any point in the future will go toward the additional payment of Claims because, as Collier makes clear, the Debtor must be allowed to retain sufficient funds with which to operate, make necessary improvements, and maintain its facilities. Collier ¶ 943.03[7][a]. Indeed:
[t]he primary purpose of debt restructure for a municipality is not future profit, but rather continued provision of public services. The insolvency test measures whether a municipality can pay for the services it provides. Since insolvency is the foundation of Chapter 9 eligibility, it would make little sense to confirm a reorganization plan which does not remedy the problem. Stated differently&emdash;there is no purpose in confirming a Chapter 9 plan if the municipality will be unable to provide future governmental services.
In re Mount Carbon Metro. Dist., 242 B.R. 18, 34 (Bankr.D.Colo.1999) (emphasis added).
Municipalities are ineligible for. court-supervised liquidation under Chapter 7 so Creditors of the Hospital would have only state law rights in the event this Case is dismissed.. One California bankruptcy court has noted: “In the chapter 9 context, the alternative is dismissal of the case, permitting every creditor to fend for itself in the race to obtain the mandamus remedy and to collect the proceeds.” County of Orange v. Merrill Lynch & Co. (In re County of Orange), 191 B.R. 1005, 1020 (Bankr.C.D.Cal.1996); Collier ¶ 943.03[7][a] (16th ed.).
Here, the Plan reasonably compensates and provides the best recovery for Creditors in the circumstances and the maximum that the Debtor is able to pay while maintaining its mission of continuing to provide health care services to Hardeman County and its needy inhabitants. The Debtor’s Business Plan and the testimo*240nies of Dave Clark, its Chief Executive Officer, Tracy Betts, its Chief Financial Officer, and Brent Fuller,- its accountant and consultant, háve established that the projected cash balances at future points in time are uncertain and subject to variance, especially in the current healthcare environment in which the Affordable Care Act has injected sweeping changes, and such funds are likely to be needed to pay costs of providing medical services to the residents, including needy inhabitants, of the Debtor’s district, the salaries of the medical staff and employees, and the costs of maintenance of the physical plant and the equipment. In fact, as stated in the testimony of Brent Fuller at the Confirmation Hearing, the Debtor operates with a significantly smaller amount of cash on hand and a far leaner staff than do its peers. Specifically, the Debtor operates with approximately half of the cash on hand compared to its peer hospitals. In addition, the Debtor has capital needs, specifically to replace and upgrade numerous pieces of equipment, which are itemized on'Exhibit B to the Disclosure Statement. In light of those circumstances, the amounts of Cash proposed to be paid to satisfy Secured Claims of Creditors in Classes 1 through 4 and in the two Classes of General Unsecured Claims, Classes 5 and 6, is justified and appropriate under the facts of this Case. The Court will not second-guess the political discretion and governmental decision-making of the Debtor’s governing board in the determination of these amounts.
Accordingly, the circumstances of the Debtor’s Chapter 9 Case support Confirmation of the Plan as fair and equitable over the will of dissenting Class 5 Creditors. No viable alternative to the Plan exists that would resolve the Debtor’s insolvency and provide a greater recovery to the objecting and the rejecting Creditors in Class 5. In reaching this conclusion, the Court has relied on the credible testimony of all five witnesses at the Confirmation Hearing: Dave Clark, Interim CEO; Tracy Betts, CFO; Brent Fuller, the Debtor’s outside CPA; Ronald Ingram, the Hardeman County Judge; and Wiley Tabor, the Chairman of the Hardeman County Hospital District Board of Directors.
(1) Bankruptcy Code § 1142(b). Pursuant to Bankruptcy Code § 1142(b), Articles VI and VII of the Plan provide for the Debtor and any other necessary Persons to execute or deliver, or join in any instrument required to perform any act, including the satisfaction of any lien, that is necessary for the consummation of the Plan.
14. Bankruptcy Code § 943(b)(2). As required by Bankruptcy Code § 948(b)(2), the Plan complies with the relevant provisions of Chapter 9 of the Bankruptcy Code, as follows:
(a) Bankruptcy Code § 941. In accordance with Bankruptcy Code § 941, the Debtor properly filed the Plan to adjust its debts. See Collier ¶ 941.02.
(b) Bankruptcy Code § 942. Section 942 is not applicable.
(c) Bankruptcy Code § 944. In accordance with Bankruptcy Code § 944(a), the provisions of the Plan shall bind the Debt- or and any Creditor, (i) whether or not such Creditor’s claim was filed or deemed filed under Bankruptcy Code § 501, (ii) whether or not such Claim is allowed under Bankruptcy Code § 502, or (iii) whether or not such Creditor has accepted the Plan. Under Bankruptcy Code § 944(b), the Debtor shall be discharged from all of its debts as of the time when (x) the Plan is confirmed, (y) the Debtor has deposited the consideration to be distributed under the Plan to Classes 5 and 6 with the Disbursing Agent, and (z) the Order Con*241firming Plan is entered, which shall constitute a determination by this Court that such provisions made to pay or secure payment of such obligation are valid.
(d) Bankruptcy Code § 945. Under Bankruptcy Code § 945, the Plan properly provides that this Court retains jurisdiction over the Case after Confirmation in order to ensure the successful implementation of the Plan.
15. Bankruptcy Code § 943(b)(3). Bankruptcy Code § 943(b)(3) requires that all amounts to be paid by the Debtor for services and expenses of professionals in the Case or incident to the Plan have been disclosed by those professionals to the Court. Such amounts have been properly disclosed in the Disclosure Statement, and the Court hereby finds that such amounts are reasonable. Any unpaid Professional Fees owed by the Debtor may be paid on or as soon as is reasonably practicable following the date of entry of the Order Confirming Plan, or at such other time as may be agreed upon in writing by such professionals and the Debtor. In the ordinary course of business, the Debtor may pay for professional services rendered and expenses incurred after the Effective Date.
16. Bankruptcy Code § 943(b)(4). In compliance with Bankruptcy Code § 943(b)(4), the Debtor is not prohibited by law from taking any action necessary to carry out the Plan.
17. Bankruptcy Code § 943(b)(5). As required by Bankruptcy Code § 943(b)(5), except to the extent, if any, that a Holder has agreed to different treatment of its Claim, the Plan provides that each Holder of an Administrative Claim under Bankruptcy Code § 507(a)(2) will receive Cash on account of such Claim equal to the allowed amount of such Claim on the Effective Date, or as soon as reasonably practicable thereafter; or if the Administrative Claim has not been allowed as of the Effective Date, within ten (10) Business Days after the date such Claim has been Allowed by Final Order of this Court.
18. Bankruptcy Code § 943(b)(6). In accordance with Bankruptcy Code § 943(b)(6), the Plan provides as a condition to its effectiveness that the Debtor shall have obtained any regulatory or electoral approval necessary under applicable nonbankruptcy law in order to carry out any provision of the Plan, or such Plan provision is expressly conditioned upon such approval being obtained. The evidence presented at the Confirmation Hearing indicates that no such approval is necessary.
19. Bankruptcy Code § 943(b)(7). It is this Court’s judgment that the Plan is in the best interests of Creditors and is feasible.
20. The Plan is in the best interests of Creditors because it provides Creditors, as a whole, with a better alternative than dismissal of the Chapter 9 Case and indeed provides all that Creditors can reasonably expect under the circumstances. In Chapter 9, Creditors cannot expect that, in making payments to Creditors under a plan, all of the Debtor’s excess cash will go toward the payment of Claims because the Debtor must be allowed to retain sufficient funds with which to operate, make necessary improvements, and maintain its facilities. Collier ¶ 943.03[7][a]. Indeed: “[T]here is no purpose in confirming a Chapter 9 plan if the municipality will be unable to provide future government services.” In re Mount Carbon Metro. Dist., 242 B.R. at 34.
21. Municipalities are not eligible for court-supervised liquidation under Chapter 7 of the Bankruptcy Code, and, accordingly, Creditors have only state law rights in the event a Chapter 9 plan of adjustment is not confirmed. A bankruptcy court in *242California found: “In the [C]hapter 9 context, the alternative is dismissal of the case, permitting every creditor to fend for itself in the race to obtain the mandamus remedy and to collect the' proceeds.” County of Orange v. Merrill Lynch & Co., Inc. (In re Cnty. of Orange), 191 B.R. 1005, 1020 (Bankr.C.D.Cal.1996). In the event of dismissal of this Case, such chaos would ensue, and the Debtor would face substantial unpaid debts and millions of dollars in asserted liabilities that have been otherwise settled in the many settlements that have taken place during the Case or satisfied in full by the Plan. Moreover, “of particular importance to the Court is that the Plan preserves the availability of healthcare services to citizens and patients” in Hardeman County. In re Barnwell Cnty. Hosp., 471 B.R. at 869. Yet another case observed that a Chapter 9 plan is in the best interests of creditors because the alternative of dismissal would allow those creditors that would be able most promptly to obtain judgments on their claims to benefit at the expense of others and also because the plan preserved the availability of healthcare services to local citizens. In re Bamberg Cnty. Mem’l Hosp., No. 11-03877, 2012 WL 1890259, at *8 (Bankr.D.S.C. May 23, 2012). Finally, an opinion in a closely analogous Chapter 9 case considered in its § 943(b)(7) analysis that “the hospital is very important to the community” and is an “essential element” to community survival. In re Corcoran Hosp. Dist., 233 B.R. at 454. Were the Case to be dismissed, the Debtor’s ability to effectively continue to serve its mission of providing health care services to the citizens of Hardeman County, including its needy inhabitants, would be seriously threatened at a minimum.
22. The Debtor’s three-year Business Plan, which is attached to the Disclosure Statement as Exhibit C, sets forth the Debtor’s best estimates of all funds expected to be or become available to the Debtor from proceeds of its medical services and Hospital operations and revenues of its property taxation. The Debtor has formulated its Plan and determined the amount of those distributions to Creditors under the Plan based upon those estimates. Although TMJMF and InterEXPO asserted that the Debtor should raise its tax rate to obtain more money with which to pay General Unsecured Creditors, the credible evidence at the Confirmation Hearing is that the Debtor is not in a position to raise taxes because of property values and economic conditions; and the taxpayers of the county are already paying the maximum the taxpayers will permit. The exhibits and the testimony at the Confirmation Hearing bear this out. The Board has maintained a steady amount of tax revenues since 2010 and during the Case. The Board of Directors of the Debtor has properly exercised its governmental discretion and decision-making with respect to the tax rate.
23. Other bankruptcy courts have not required Chapter 9 debtors to raise taxes in connection with confirmation of a Chapter 9 plan. For instance, in the face of a creditors’ committee arguing that a Chapter 9 hospital district debtor must be required to raise taxes in order to pay off its debts under its plan of adjustment, the bankruptcy court in Corcoran Hosp. Dist., 233 B.R. at 453 & 459, did not require the hospital district in that case to increase taxes; it would have been a “futile exercise” in light of the hospital district’s demographics and economic issues. Specifically, the court explained that it “found that the debtor Hospital District could not raise taxes sufficient to pay more to Class 5.” Id. at 461. Likewise, the Court in this Case should not require the Debtor to increase taxes where the valuation of taxable properties has substantially *243declined in the past year and taxpayer sentiment is strongly opposed to increasing the amount of the Hospital’s tax revenue.
24. Similarly, in the City of Detroit Chapter 9 case, the bankruptcy court considered arguments of “some creditors that the City could pay them more by raising taxes.” In re City of Detroit, 524 B.R. at 213. But, the court there explained that “[t]he Supreme Court has described the right to compel a municipality to raise taxes to satisfy judgments against it as an ‘empty right to litigate,’ particularly in times of economic crisis.’” Id. at 214 (quoting Faitoute Iron & Steel, 316 U.S. 502, 510, 62 S.Ct. 1129, 86 L.Ed. 1629 (1942)). In Detroit, as in this Case, “[t]he evidence establishes that raising tax rates is not a viable option for the [municipality], legally or practically” where there was testimony from the mayor that neither the people of the city nor the state legislature would vote to increase taxes and where the emergency manager for the city testified that the city is at “tax saturation and that raising taxes would likely add to the population decline.” Id. at 216. The court further explained that “creditors as a whole” must be benefitted by the plan, not just a single creditor who could win the “proverbial race to the courthouse” if the case were to be dismissed (noting that liquidation is not an option in Chapter 9). Id. at 216-17. Further bolstering its conclusion, the Detroit court explained:
There is no more money available for creditors in the City’s already tight budget projections. Every dollar is accounted for in providing necessary services, in implementing the necessary RRIs [reinvestment and restructuring initiatives], and in meeting plan obligations. All of those cash uses are essential to the City’s future. In this plan, the floor of the best interest test and the ceiling of the feasibility test have, for all practical purposes, converged.
Id. at 219. Moreover, the court continued:
Consistent with (or perhaps required by) [the Tenth A]mendment], § 903 provides that chapter 9 “does not limit or impair the power of a State to control, by legislation or otherwise, a municipality ... in the exercise of the political or governmental powers of such municipality.” 11 U.S.C. § 903. Whether for clarity or emphasis, § 904 underscores that restriction on this Court’s authority by providing, “Notwithstanding any power of the court, ... the court may not ... interfere with” a chapter 9 debtor’s property, revenue, or use thereof, or with any of its “political or governmental powers.” 11 U.S.C. § 904.
Id. at 250. Indeed, “it is for the City, not this Court, to supervise the execution of [its] recovery.” Id. at 251. The State of Texas has filed a statement of support for Confirmation of the Plan, noting its compliance, with § 904.
25. The Business Plan additionally supports the conclusion that the Plan is feasible within the contemplation of Bankruptcy Code § 943(b)(7). In order to meet the feasibility requirement in Chapter 9, the Debtor must be able to have a reasonable prospect of successfully implementing the Plan while continuing to provide government services. See Mount Carbon Metro. Dist., 242 B.R. at 35; Prime Healthcare Mgmt., Inc. v. Valley Health Sys. (In re Valley Health Sys.), 429 B.R. 692, 711 (Bankr.C.D.Cal.2010) (Chapter 9 plan is feasible where it “offers a reasonable prospect of success and is workable”). On the Effective Date, it is more likely than not that the Debtor will be able to make the payments contemplated by the Plan and, at the same time, sustainably continue to provide medical care services to Hardeman County. The *244payments contemplated by the Plan have been carefully considered by the Debtor and its advisors, and Court finds that the making of such payments is feasible,. Furthermore, the Court finds that the conditions to the Effective Date set forth in § 6.04 of the Plan are reasonably likely to be satisfied. Thus, the Debtor has demonstrated a reasonable prospect that it will be able to successfully implement the Plan. Under all the circumstances presented in the record of this Case and the evidence presented at the Confirmation Hearing, this Court finds that the Plan is in the best interest of Creditors and is feasible.
Approval of Settlements and Compromises
26. The Supreme Court has long recommended settlements in bankruptcy cases: “Compromises are a normal part of the process of reorganization.” Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968). The TMT decision came up from the Fifth Circuit, which has ever since had the leading published jurisprudence in the nation on the topic of approval of settlements in bankruptcy cases, and which very recently reconfirmed the evaluative standards:
A bankruptcy court may approve a compromise or settlement ... pursuant to Rule 9019, but it should do so “only when the settlement is fair and equitable and in the best interest of the estate.” In determining whether a settlement is fair and equitable, we apply the three-part test set out in Jackson Brewing with a focus on comparing “the terms of the compromise with the likely rewards of litigation.” A bankruptcy court must evaluate: (1) the probability of success in litigating the claim subject to settlement, with due consideration for the uncertainty in fact and law; (2) the complexity and likely duration of litigation and any attendant expense, inconvenience, and delay; and (3) all other factors bearing on the wisdom of the compromise. These “other” factors&emdash;the so-called Foster Mortgage factors&emdash;include: (i) “the best interests of the creditors, “with proper deference to their reasonable views’”; and (ii) “‘the extent to which the settlement is truly the product of arms-length bargaining, and not of fraud or collusion.’ ”
Off. Comm. of Unsec. Creds. v. Moeller (In re Age Refining, Inc.), 801 F.3d 530, 538-39 (5th Cir.2015); In re Jackson Brewing Co., 624 F.2d 599, 602 (5th Cir.1980); Conn. Gen. Life Ins. Co. v. United Cos. Fin. Corp. (In re Foster Mortg. Co.), 68 F.3d 914, 917 (5th Cir.1995).
27. The following settlements and compromises embodied in the Plan satisfy the fair and equitable requirement and are approved in all respects as good faith, fair, reasonable, and equitable compromises and settlements of the disputes and contract issues with the following parties,' and such settlements and compromises are in the best interests of the Debtor, its Creditors, and its inhabitants:
(a) Settlement with Hardeman County on EMS Contract. The Debtor compromises and settles the mutual claims of Hardeman County and the Debtor with respect to the executoiy contract concerning emergency medical services. The Debtor will enter into a new contract with the Hardeman County pertaining to ambulance and emergency service within the county, the payments to the Debtor therefor, and the resolution of the prepetition claim of the County. In connection with the execution of the contract, the County of Hardeman withdraws its Proof of Claim No. 56 in the amount of $7,829,25.
*245(b) Settlement with Otis Elevator on Elevator Contract. The Debtor compromises and settles the mutual claims of Otis Elevator (“Otis”) and the Debtor with respect to the prepetition executory contract titled Examination and Lubrication Service Agreement (the “Old Contract”). The Debtor owes Otis $316.89 for prepetition services rendered under the Old Contract and $1,512.94 for postpetition services rendered under the Old Contract. The Debtor intended to reject the Old Contract under Bankruptcy Code § 365, but instead the parties have agreed to waive prepetition amounts owed by the Debtor and to accept a one-time reduced payment of $1,011.06 for postpetition services rendered under the Old Contract; and the Debtor and Otis shall enter into a new contract relating to maintenance and service of the Hospital’s elevator and to release one another from all claims relating thereto.
28. The Order Confirming Plan shall constitute approval of each of the settlements and compromises under Bankruptcy Rule 9019 and the Fifth Circuit standards. The Debtor is authorized to take any and all actions necessary or appropriate to perform under or implement the terms of each.
Approval of Exculpation, Release, Discharge, and Injunctive Provisions
29. The discharge provision set forth in § 11.01, the injunctive provisions set forth in § 11.02, and the settlement and release of claims provision set forth in § 11.05 of the Plan are consistent with the provisions of Chapter 9 of the Bankruptcy Code, are approved, and shall be effective on the Effective Date of the Plan.
30. As announced on the record at the Confirmation Hearing, this Court directed the redrafting of the exculpation provision in § 11.04 of the Plan to comply with Bank of N.Y. Trust Co., N.A. v. Official Unsecured Creditors’ Comm. (In Pac. Lumber Co.), 584 F.3d 229 (5th Cir.2009) (“Palco”). The revised exculpation provision, which shall replace § 11.04 of the Plan, is as follows and is also included in the Order Confirming Plan:
From and after the Effective Date, to the fullest extent permitted under applicable law, and except as éxpressly set forth herein, the Debtor shall not have or incur any liability, whatsoever, to any Person for any act or omission in connection with, relating to, or arising out of the Debtor’s restructuring efforts or the chapter 9 Case; however, the foregoing otherwise broad exculpation shall not affect the liability of the Debtor that otherwise would result from any act or omission to the extent that such act or omission is determined in a Final Order to have constituted gross negligence or willful misconduct. The Debtor shall be entitled to rely upon the advice of counsel and financial advisors -with respect to its duties and responsibilities under, or in connection with, the Case, the administration thereof, and this Plan.
The revised § 11.04 contains no release of third parties from any liability for any acts or omissions related to the Case, and, accordingly, it is consistent with Palco.
31. As provided in the Plan, the automatic stay of Bankruptcy Code §§ 362(a) and 922(a) and any injunction or other stay arising under or entered during the Case under Bankruptcy Code § 105 or otherwise that is in existence on the Confirmation Date shall remain in full force and effect until the later of the date of the closing of the Case or any date indicated in the Order providing for such injunction or stay.
Order Confirming Plan to Be Binding on All Parties
32. Subject to § 6.04 of the Plan, in accordance with § 944(a) of the Bankrupt*246cy Code, and notwithstanding any otherwise applicable law, upon the occurrence of the Effective Date, the terms of the Plan, these findings and conclusions, and the Order Confirming Plan shall be binding upon, and inure to the benefit of: (a) the Debtor; (b) any and all Holders of Claims' (irrespective whether (i) any such Claim is impaired under the Plan; (ii) proof of any such Claim has been filed or deemed filed under § 501 of the Bankruptcy Code; (iii) any such Claim is allowed under § 502 of the Bankruptcy Code; or (iv) the Holders of such Claims accepted, rejected, or are deemed to have accepted or rejected the Plan); (c) any Person giving, acquiring, or receiving property under the Plan; (d) any and all non-Debtor parties to Executory Contracts or Unexpired Leases of the Debtor; (e) any party to any Settlement or Compromise; (f) the respective heirs, executors, administrators, trustees, affiliates, officers, directors, agents, representatives, attorneys, beneficiaries, guardians, successors, or assigns, if any, of any of the such parties. All settlements, compromises, releases, waivers, discharges, exculpations, and injunctions set forth in the Plan shall be operative, effective, and binding on all Persons who may have standing to assert any settled, released, discharged, exculpated, or enjoined causes of action, and no other Person or entity shall possess such standing to assert such causes of action after the Effective Date. The compromises and settlements embodied in the Plan, along with the treatment of any associated Allowed Claims, shall not be subject to any collateral attack or other challenge by any Person in any court or other forum.
Retention of Property and Release of Liens
33.Except as otherwise expressly provided in the Plan, all property and interests in property of the Debtor shall be retained by the Debtor on the Effective Date, free and clear of all Claims, liens, encumbrances, charges, and interests. From and after the Effective Date, the Debtor may conduct its affairs and use, acquire, and dispose of any assets or property without supervision by or approval of this Court and free of any and all restrictions of the Bankruptcy Code or Bankruptcy Rules, other than any restrictions expressly imposed by the Plan or the Order Confirming Plan. Except as otherwise provided in the Plan, any Person having a lien, Claim, or other interest-against the Debtor’s assets shall be conclusively deemed to have consented to the- re-vesting of such assets in the Debtor upon the Effective Date free and clear of such hen, Claim, or other interest by failing to object to the Confirmation of the Plan.
Executory Contracts and Unexpired Leases
34. The executory contract and unexpired lease provisions of Article X of the Plan are approved.
35. The executory contracts and unexpired leases identified on the Plan’s Exhibit A constitute the Assumed Contracts that are assumed by the Debtor. All such contracts and leases not assumed are rejected as of the Effective Date. The Plan serves as a motion for an order approving the assumption of the Assumed Contracts by the Debtor on the Effective Date. Except to the extent (a) the Debtor has previously assumed or rejected an executory contract or unexpired lease, (b) prior to the Effective Date, this Court entered an Order granting assumption of an executory contract or unexpired lease, (c) at the Confirmation Hearing, this Court approved the assumption of an executory contract or •unexpired lease, or (d) an executory contract or unexpired lease is set forth on Exhibit A to the Plan, all other of the Debtor’s executory contracts and unexpired leases shall be rejected on the Effec*247tive Date under Bankruptcy Code §§ 365, 901, and 1123.
36. The assumption by the Debtor of the Assumed Contracts, and the proposed cure amounts relating to each Assumed Contract, which are specified in Exhibit A of the Plan, are hereby approved as of the Effective Date. Any Objections to any of the assumptions or to any proposed cure amounts are hereby overruled. Any Claims for Cure Amounts relating to the assumption of an Assumed Contract and ordered to be paid by this Court shall be paid by the Debtor on, or as soon as reasonably practicable after, the Effective Date. Such Claims for Cure Amounts shall be satisfied in full and shall be deemed in final satisfaction of all defaults, including arrearages, under the Assumed Contracts as of the Effective Date. As of the Effective Date, the Debtor shall be relieved and discharged from any liability arising on or before the Effective Date under the Assumed Contracts other than the obligation to satisfy Claims for Cure Amounts and to perform such agreements henceforth.
37. Non-Debtor counterparties to ex-ecutory contracts and unexpired leases that are deemed rejected on the Effective Date have until the Rejection Damages Bar Date, which shall be the first Business Day that is at least thirty (30) Business Days after the Effective Date, to file Claims with this Court asserting any Claims for rejection damages; however, if a prior Final Order if this Court approved the rejection of an executory contract or unexpired lease during the Case, any bar date set forth in such order shall be applicable and shall control as to such previously-rejected executory contract or unexpired lease. Any Claims for rejection damages that are not filed by the applicable Rejection Damages Bar Date are forever barred and discharged without any further order of this Court being required.
38. Although the Debtor is party to executory contract(s) with CSS Health Technologies, a Tennessee corporation, its successors or assigns (“CSS”), described as or titled “Purchase and License Agreement (with Schedule A),” “Company Software Support Agreement,” and “Hardware Support Agreement,” or howsoever the contractual relationship of the Debtor and CSS may be documented, such contracts) are neither assumed or rejected by the Debtor in this Case; rather, such contracts) shall ride through the Case and shall be unaffected by the provisions of the Plan as set forth in § 10.03 of the Plan. See Stumpf v. McGee (In re O’Connor), 258 F.3d 392, 404-05 (5th Cir.2001); Century Indem. Co. v. Nat’l Gypsum Co. Settlement Trust (In re Nat’l Gypsum Co.), 208 F.3d 498, 504 n. 4 (5th Cir.2000); In re Greystone III Joint Venture, 995 F.2d at 1281; Texaco Inc. v. Bd. of Comm’rs (In re Texaco Inc.), 254 B.R. 536, 556-58 (Bankr.S.D.N.Y.2000). The Debtor believes that CSS has not performed or may not perform its obligations under such contracts) while the Debtor has made payments to CSS totaling approximately $436,032.38 plus approximately $280,000.00 from July 2013 through August 31, 2015 in monthly support fees, and the Debtor has performed its obligations. Ride through of the executory contracts) with CSS is, therefore, justified and appropriate as proposed by the Debtor.
Plan Distributions
39. On and after the Effective Date, Distributions on account of Allowed Claims under the Plan, and the resolution and treatment of Disputed Claims, shall be effectuated pursuant to Articles IV, VII, VIII, and IX of the Plan.
Claims Bar Dates and Related Matters
40. Unless otherwise provided in the Plan or in an Order of this Court, or agreed to expressly and in writing by the *248Debtor, any Claim that is not timely filed shall not be treated as an Allowed Claim for all purposes (including voting and distribution) under the Plan, whether or not an objection to such Claim has been filed, and such Claims shall be forever barred and discharged upon the occurrence of the Effective Date.
41. The Bar Date for Creditors to file Proofs of Claims in this Case was July 19, 2013 for non-governmental entities and September 17, 2013 for governmental entities. Any Proofs of Claim that are Filed after the applicable Bar Date, including amendments to existing Proofs of Claim, and any applications for the allowance of any Administrative Claims that are Filed after the Administrative Claims Bar Date, are forever barred and discharged unless consented to by the Debtor in writing or expressly authorized by Order of this Court.
42. The 503(b)(9) Bar Date was July 18, 2014 at 5:00 p.m. Each Holder of an Administrative Claim asserted under Bankruptcy Code § 503(b)(9) must have filed any asserted 503(b)(9) Claims in accordance with the 503(b)(9) Procedures by the 503(b)(9) Bar Date. Any 503(b)(9) Claims not filed in accordance with the 503(b)(9) Procedures by the 503(b)(9) Bar Date are forever barred and discharged. Unless the Holder of an Allowed § 503(b)(9) Claim has agreed to different treatment, the Debtor shall pay to such Holder the Allowed amount of such § 503(b)(9) Claim, without interest, on the Effective Date, or as soon as reasonably practicable thereafter.
43. Except as otherwise provided in the Plan, the Holder of an Allowed Administrative Claim, in full satisfaction and discharge of, and in exchange for such Claim, shall, to the extent not already paid during the pendency of the Case, (a) be paid by the Disbursing Agent the full amount of such Allowed Administrative Claim, without interest, on or before the later of (i) the Effective Date of the Plan or (h) ten (10) Business Days after the date such Claim is Allowed by Final Order or (b) receive such other less favorable treatment as may be agreed upon in writing by such Holder and the Debtor. Notwithstanding the foregoing, any Administrative Claim based upon liability incurred by the Debt- or in the ordinary course of business during the Case may be paid by the Debtor under its authority preserved by Bankruptcy Code §§ 903 and 904 in the ordinary course of business, in accordance "with the terms and conditions of any agreement related thereto or upon such other terms as may be agreed upon between the Holder of such Claim and the Debtor, without application by or on behalf of such parties to this Court, and without notice and a hearing, unless specifically required by this Court.
44. Each Holder of an Administrative Claim (other than any Administrative Claims paid in the ordinary course of business pursuant to § 2.01 of the Plan, § 503(b)(9) Claims, Claims for Cure Amounts, Professional Fees, or any FNB Postpetition Credit Facility Claim) shall File with this Court, and serve upon all parties required to receive notice, a motion explaining the factual and legal bases for and requesting allowance of such Administrative Claim on or before the Administrative Claims Bar Date. The failure to timely File such a motion on or before the Administrative Claims Bar Date, which is the first Business Day that is at least sixty (60) calendar days after the Effective Date, will result in such Administrative Claim being forever barred and discharged without any further order of this Court being required. The Debtor or other party in interest may File an objection to such motion for allowance of any Administrative *249Claims within sixty (60) calendar days after the expiration of the Administrative Claims Bar Date, unless such time period for filing any such objection is extended by this Court. Any such Administrative Claim shall only be an Allowed Administrative Claim upon entry of, and to the extent granted by, a Final Order by this Court finding that such asserted Administrative Claim is an Allowed Claim.
46.As set forth in the subsection of these findings and conclusions entitled Ex-ecutory Contracts and Unexpired Leases, and as defined in the Plan, the Rejection Damages Bar Date is the first Business Day that is at least thirty (30) Business Days after the Effective Date, unless an earlier date otherwise has been specified in a Final Order of this Court relating to the rejection of an executory contract or unexpired lease during the Case.
Plan Implementation
46. Pursuant to and for purposes of Bankruptcy Code § 904, the Debtor has consented to entry of these findings and conclusions and the Order Confirming Plan on the terms and conditions set forth in the Plan and to entry of any further orders as necessary or required to implement the provisions of the Plan or any and all related transactions.
47. As of the Effective Date, the Debt- or shall retain and have all the rights, powers, and duties necessary to carry out its responsibilities under the Plan and as may be otherwise provided in these findings and conclusions or the Order Confirming Plan.
48. On and after the Effective Date, the Debtor, as Disbursing Agent, shall carry out the administration of the Plan, including the disbursement of Distributions to be paid to Holders of Claims under the Plan. The Order Confirming Plan shall serve as the appointment by this Court of the Debtor as Disbursing Agent in compliance with the requirement of the appointment of a “disbursing agent” in accordance with Bankruptcy Code § 944(b)(2) and as set forth in § 7.02 of the Plan.
49. On and after the Effective Date, the Debtor shall have the right to retain the services of and pay the fees and expenses of attorneys, accountants, and other professionals that, in their sole discretion, are reasonable and necessary to assist them in the performance of then-duties with respect to the Plan. The reasonable fees and expenses of such professionals may be paid as they are invoiced in the ordinary course of business of the Debtor and shall not be subject to further approval of this Court. .
50. All post-confirmation costs, expenses, and obligations incurred by the Debtor in administering the Plan, in any manner connected, incidental, or relating to such administration, or in effecting Distributions from the Debtor thereunder (including the reimbursement of reasonable expenses) shall be a charge against the property of, and owed by, the Debtor. Such expenses shall be paid in the ordinary course of business of the Debtor as they are incurred without the need for further approval of this Court. .
Binding Effect of Prior Orders
51. Effective as of the Confirmation Date, but subject to the occurrence of the Effective Date and the terms of the Plan, these findings and conclusions, and the Order Confirming Plan, all prior orders entered in the Case, all documents and agreements executed by the Debtor as authorized and directed thereunder, and all motions or requests for relief by the Debt- or pending before this Court as of the Effective Date, shall be binding upon and shall inure to the benefit of the Debtor and any other parties expressly subject thereto.
*250Patient Care Ombudsman
52. Upon the Effective Date of the Plan, the Patient Care Ombudsman, who was appointed by this Court on April 23, 2013 pursuant to Bankruptcy Code § 333, shall be released and fully discharged of her duties in this Case.
In the Event of Reversal
53. If any or all "of the provisions of these findings and conclusions or the Order Confirming Plan were to be stayed, reversed, modified, or vacated by subsequent order of this Court or any other federal appellate court with appropriate jurisdiction, such stay, reversal, modification, or vacatur shall not affect the validity of the acts or obligations incurred or undertaken under or in connection with the Plan prior to the Debtor’s receipt of written notice of such order. Notwithstanding any such stay, reversal, modification, or vacatur of these findings and conclusions or the Order Confirming Plan or any of these findings and conclusions, any such act or obligation incurred or undertaken pursuant to, and in reliance on, these findings and conclusions or the Order Confirming Plan prior to the effective date of such stay, reversal, modification, or vaca-tur shall be governed in all respects by the provisions of- these findings and conclusions, the Order Confirming Plan, and the Plan and all related documents or any amendments or modifications thereto.
Notices of Order Confirming Plan and of Effective Date
■ 54. In accordance with Bankruptcy Rule 3020(c)(2), the Debtor shall mail or cause to be mailed notice of the entry of the Order Confirming Plan, promptly after its entry, to all Creditors and parties in interest in the Case.
55.On or before five (5) Business Days after the occurrence of the Effective Date, the Debtor shall mail or cause to be mailed to all Creditors and parties in interest in this Case a Notice of Effective Date that informs such Persons of (a) entry of the Order Confirming Plan; (b) the occurrence of the Effective Date; (c) the assumption and rejection of executory contracts and unexpired leases of the Debtor as well as the deadline and procedures for the filing of Claims arising from any such rejection; (d) the deadline and procedures for filing of Administrative Claims; and (e) any other such matters the Debtor deems appropriate.
No Diminution of State Power
56. No term of the Plan shall be construed: (1) to limit or diminish the power of the State of Texas to control, by legislation or otherwise, (a) the Debtor in the exercise of political or governmental powers or (b) the Debtor’s provision of healthcare-related services or any other activities or matters subject to the regulatory agencies of the state; or (2) as a waiver by the State of Texas of its rights as a sovereign state and the rights reserved for it in the Tenth Amendment of the Constitution.
Retention of Jurisdiction
57. Under Bankruptcy Code §§ 105(a) and 945, and notwithstanding entry of the Order Confirming Plan and occurrence of the Effective Date, this Court shall retain exclusive jurisdiction over all matters arising out of and related to the Case or the Plan to the fullest extent permitted by law, as is necessary for the successful implementation of the Plan, including, among other things, jurisdiction as set forth in Article XII of the Plan.
Conclusion
The Court reserves the right to make further findings and conclusions. Any finding of fact that constitutes a conclusion of law shall be so construed and vice versa.
*251An Order Confirming Plan will be separately entered.
. Capitalized terms used but not otherwise defined herein have the meanings ascribed in the Plan.
. For administrative reasons, an identical version of the Plan was also docketed by the Court at Doc. #283.
. The Supreme Court’s decision in Stern v. Marshall, 564 U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), pet. for reh’g'denied — U.S. —, 132 S.Ct. 56, 180 L.Ed.2d 924 (2011), which limited the constitutional authority of bankruptcy courts to enter final orders, does not prevent this Court from entering a final order confirming the Plan. See Wellness Int’l Network, Ltd. v. Sharif, — U.S. —, 135 S.Ct. 1932, 1946-47, 191 L.Ed.2d 911 (2015) (the limitation in Stem on the entry of final orders by bankruptcy courts is "narrow”). This Bankruptcy Court has authority, notwithstanding Stern, to adjudicate on a final basis whether the Plan should be confirmed under Bankruptcy Code § 943(b), which incorporates many of the requirements of Bankruptcy Code § 1129. "State law has no equivalent to this statute[, and,] therefore, the facts in this case are distinguishable from those in Stern, which involved only state law.” In re Carlew, 469 B.R. 666, 672 (Bankr.S.D.Tex.2012); see also In re Thalmann, 469 B.R. 677, 680-81 (Bankr.S.D.Tex.2012); In re Whitley, 2011 WL 5855242, at *4 (Bankr.S.D.Tex. Nov. 21, 2011). Indeed, Stem “did not purport to limit bankruptcy courts’ authority to adjudicate other ‘core proceedings,’ such as confirmation of a plan under § 157(b)(2)(L).” In re Land Res., LLC, 505 B.R. 571, 581 n. 7 (M.D.Fla.2014). See also In re Lower Bucks Hosp., 471 B.R. 419, 448, n. 45 (Bankr.E.D.Pa.2012) ("If a bankruptcy court lacks subject matter jurisdiction over plan confirmation, it is hard to conceive of any matter that would fall within bankruptcy subject matter jurisdiction.”). As one Texas Bankruptcy Court stated in the chapter 13 context, "there is absolutely no state law involved in confirmation of a[ ] plan, or modification of such a plan”; thus, “Stern is entirely inapplicable^] and this Court has the constitutional authority to sign a final order....” *233In re Hill, 2011 WL 6936357, at *7 (Bankr.S.D.Tex. Dec. 30, 2011). Because the narrow strictures imposed upon bankruptcy courts by Stem do not apply to confirmation of a plan, this Court has the constitutional authority to enter a final order confirming the Plan this Case.
. Texas statutory law provides:
Tex. Local Gov't Code § 140.001. Relief Under Federal Bankruptcy Laws for Municipality, Taxing District, or Other Political Subdivision
(a)A municipality, taxing district, or other political subdivision that is subject to this section may proceed under all federal bankruptcy laws intended to relieve municipal indebtedness.
(b) A municipality is subject to this section if it has the power to incur indebtedness through the action of its governing body. A taxing district or other political subdivision
is subject to this section if it has the power to incur indebtedness either through the action of its governing body or through that of the county or municipality in which it is located.
(c) The officials and governing body of the municipality, taxing district, or other political subdivision may adopt all proceedings and take any action necessary or convenient to fully avail the entity of the federal bankruptcy laws. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498833/ | MEMORANDUM OPINION
DENYING CONFIRMATION OF DEBTORS’ JOINTLY ADMINISTERED AMENDED PLAN OF REORGANIZATION
[Resolving Doc. #73]
Eduardo V. Rodriguez, United States Bankruptcy Judge
I. INTRODUCTION
The Court held a hearing on August 17, 2015 on the Jointly Administered Amended Plan of Reorganization filed by Star Ambulance Service, LLC & Rodolfo E. Martinez» Jr. & Silvia Martinez, Debtors, having previously entered an order approving the Amended Disclosure Statement, [ECF No. 50], for a Small Business Case pursuant 'to 11 U.S.C. §§ 101(51C) and (51D). [ECF Nos. 40, 44, 46, 50, 51, 61, 63, 71 and 73]. For the reasons stated below, this Court finds that the confirmation of the Debtors’ Jointly Administered Amended Plan of Reorganization should be DENIED.
A. Findings & Conclusions
The findings and conclusions set forth herein and in the record of the Confirmation Hearing constitute this Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052, made applicable to this proceeding pursuant to Fed. R. Bankr. P. 9014. To the extent any of the following findings of fact constitute conclusions of law, they are adopted as such. To the extent any of the following conclusions of law consti*254tute findings of fact, they are adopted as such.
B. Jurisdiction, Venue, and Constitutional Authority
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(b)(2) and 1334(b). This particular hearing arises under 28 U.S.C. § 157(b)(2)(L). 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.”). This Court also has an independent duty to evaluate whether it has the constitutional authority to sign a final order regarding the confirmation hearing. Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). The Supreme Court held that a statute authorizing bankruptcy judges to issue final judgments violated Article III to the extent that it authorized such final judgments on certain matters. Stern, 131 S.Ct. at 2616. The Court found that the particular bankruptcy ruling in dispute did not stem from bankruptcy itself, nor would it necessarily be resolved in the claims allowance process, and it only rested in a state law counterclaim by the estate. Id. at 2618. The Court reasoned that bankruptcy judges are not protected by the lifetime tenure attribute of Article III judges, but they were performing Article III judgments by judging on “all matters of fact and law” with finality. Id. at 2618-19. Hence, the Court held that Article III imposes some restrictions against a bankruptcy judge’s power to rule with finality. The Court found that a solely state law based counterclaim, while statutorily within the bankruptcy judge’s purview, escaped a bankruptcy court’s constitutional power. Id. at 2620. This Court reads Stern to authorize final judgments only where the issue is rooted in a right created by federal bankruptcy or the resolution of which relies on the claims allowance process. In other words, this Court may issue final judgments and orders where the issue “arises in” or “arises under” bankruptcy, but not where the issue is merely “related to” bankruptcy. See 28 U.S.C. § 157. However, even where the case does create a “Stern problem,” Article III will be satisfied where the parties to the case knowingly and voluntarily consent to the bankruptcy court’s power to issue final judgments. Wellness Int’l Network v. Sharif, — U.S. —, 135 S.Ct. 1932, 1938-39, 191 L.Ed.2d 911 (2015).
The matter at bar arises from the confirmation of Debtors’ Combined & Jointly Administered Plan of Reorganization, which is a matter that can only arise in bankruptcy. See In re Prescription Home Health Care, 316 F.3d 542, 547 (5th Cir.2002) (“Under 28 U.S.C. § 157(b)(2)(E)1, jurisdiction is granted bankruptcy courts to confirm Chapter 11 reorganization plans ...”). Thus, this Court finds that it has the constitutional authority to grant or deny confirmation of the Jointly Administered Plan of Reorganization.
II. PROCEDURAL HISTORY AND FINDINGS OF FACT
A. Star Ambulance Service, LLC’s Bankruptcy Filing
1. Pursuant to Debtors’ Amended Plan of Reorganization, the bankruptcy was precipitated by an I.R.S. levy and seizure *255of assets. The I.R.S. debt stemmed from a now defunct business operated by Rodolfo E. Martinez, Jr. and Rodolfo Martinez, III (father & son respectfully) called Star EMS which itself previously filed two chapter 11 bankruptcy cases, to wit: (1) Case No. 12-70427 filed on July 26, 2012 and dismissed for failure to abide by an agreed cash collateral order between the Debtor and the I.R.S.; and (2) Case No. 13-70072 filed on February 8, 2013 and dismissed on July 1, 2013. Star Ambulance Service, LLC began operating in 2013 and immediately fell behind with its I.R.S. obligations due to its poor cash position. In 2014 the I.R.S. began issuing levies on the Star Ambulance and Martinez bank accounts.
2. On January 22, 2015 Star Ambulance Service, LLC, a Texas Limited Liability Company, (“Star Ambulance”) filed its voluntary petition under Title 11, Chapter 11 under the United States Bankruptcy Code and checked the designation of Small Business Case pursuant to the provisions of 11 U.S.C. § 1121(e) commencing Case No.15-70041-M-11. [ECF No. 1], Silvia Martinez and Rodolfo Martinez III are the sole members of Star Ambulance. Id.
3. On January 22, 2015, Star Ambulance filed its First Amended Petition. [ECF No. 2]
4. On February 23, 2015, Star Ambulance filed its Second Amended Petition. [ECF No. 25]
B. Rodolfo E. Martinez, Jr. and Silvia Estella Martinez’s Bankruptcy Filings
1. On January 22, 2015, Rodolfo E. Martinez, Jr. & Silvia Estella Martinez (husband and wife respectively, collectively “Martinez”) filed their voluntary petition under Title 11, Chapter 13 of the United States Bankruptcy Code commencing Case No. 15-70042-M-13. [ECF No. 1]
2. On January 22, 2015, Martinez filed their Chapter 13 Plan. [ECF No. 2]
3. On January 29, 2015 Martinez filed their First Amended Chapter 13 Plan. [ECF No. 14]
4. On February 27, 2015, Martinez filed a Motion to Convert their case from Chapter 13 to 11. [ECF No. 19]
5. On March 23, 2015 this Court entered an order converting the Martinez case to a proceeding under Title 11, Chapter 11 of the United States Bankruptcy Code. [ECF No. 23]
6. On March 24, 2015, Martinez filed their First Amended Petition, wherein they elected to NOT check the designation of Small Business Case pursuant to the provisions of 11 U.S.C. § 1121(e). [ECF No. 24]
7. On March 24, 2015 Martinez also filed their First Amended Schedules. [ECF No. 25]
8. On March 26, 2015, Martinez filed their Second Amended Petition, this time electing to check the designation of Small Business Case pursuant to the provisions of 11 U.S.C. § 1121(e). [ECF No. 33]
C. Star Ambulance Service, LLC & Rodolfo E. Martinez Jr. and Silvia Estella Martinez’s Jointly Administered Combined Disclosure & Plan of Reorganization
1. On May 13, 2015, Star Ambulance & Martinez (“Debtors”) filed a Motion for Expedited Consideration to have the respective Chapter 11 cases Jointly Administered. [15-70041; ECF No. 35]
2. On May 18, 2015, this Court entered an order granting the Debtors’ Motion for Expedited Consideration to Jointly Administer the respective Chapter 11 cases. [ECF No. 38]
*2563. On May 27, 2015, Debtors filed their Jointly Administered Combined Disclosure Statement and Plan of Reorganization (“Plan”). [ECF No. 40]
4. Debtors subsequently amended their Plan on June 9, 2015. [ECF No. 44]
5. This Court entered an order approving the Jointly Administered Disclosure Statement on June 17, 2015 and set a hearing on the confirmation of the Plan for July 22, 2015. The hearing was continued to August 17, 2015. [ECF No. 50]
6. Debtors latest amended Plan of Reorganization, that is the subject of the August 17, 2015 hearing, was filed on August 17, 2015. [ECF No 73]
7. Significantly, since the filing of the Disclosure Statement and Plan of Reorganization, [ECF No. 40], and as of the date of the hearing on the Confirmation of the Plan, eighty-three (83) calendar days have elapsed.
III. EVIDENCE
At the hearing before this Court on August 18, 2015, the Debtors put forth the following evidence in support of the confirmation of their plan:
1. Affidavit on Confirmation of Amended Plan dated August 17, 2015 by Rodolfo E. Martinez, Jr., dated August 18, 2015.
2. Affidavit on Confirmation of Amended Plan dated August 17, 2015 by Silvia Martinez, dated August 18,2015.
3. Affidavit on Confirmation of Amended Plan dated August 17, 2015 by Silvia Martinez in her capacity as the President of Star Ambulance, LLC, dated August 18, 2015.
For each of the foregoing Affidavits presented by the Debtors, the affidavits merely read as recitations of 11 U.S.C. § 1129(a) without providing any further evidence to substantiate the statements sworn to by the affiants.
4. Ballot Summary with Attached Ballots, dated August 18, 2015.
The Ballot Summary provided the acceptance votes by Hidalgo County, an impaired secured creditor; Admin Recovery, an unimpaired secured creditor; Discover Bank, an impaired unsecured creditor; Billing Partners, an impaired unsecured creditor; and Mobile Relays, an impaired secured creditor. However, the Ballot Summary neglects to include the rejection by Knight Capital Funding II, LLC, [ECF No. 60], filed on July 21, 2015. Furthermore, there was no evidence presented as to whether or not the ballots submitted for each class was sufficient to accept the plan pursuant to 11 U.S.C. § 1126(c).
5. Testimony by Delina Martinez, Administration for Star Ambulance Service, LLC, who testified to the following:
a. Star Ambulance has been acquiring new contracts, which should help improve cash flow for their operations.
b. Star Ambulance’s improved cash flow since January 2015 has permitted them to become profitable, and that the level of profitability should increase going forward.
c. Winter months are typically more profitable for Star Ambulance, as there is an increase in the use of their services.
d. Star Ambulance currently operates six (6) ambulances, two (2) of which are owned by Star Ambulance. The remaining four (4) ambulances are being used pursuant to a verbal lease with Star EMS, which is owned by Rodolfo Martinez, Sr. Star Ambulance has been making the payments for those units on behalf of Star EMS.
e. Star Ambulance expects to recognize a minimum of fifty (50) percent of their accounts receivables, and the reduction is due to insurance company payments *257being less than payment in full. They are working to secure payment on the receivables, as many are 90 to 120 days old and many insurance companies do not pay on 60 day terms,
f. Star Ambulance experienced higher than average expenses during the month of July 2015, due to needed repairs on their ambulance units.. Ms. Martinez testified that there was not an expectation of the expenses to be reoccurring.
6. Clarifications on the Plan provided by Star Ambulance’s Counsel.
a. The Combined Plan contains no evidence of feasibility or projections of future cash flow under the plan.
b. The Liquidation Analysis is representative of the belief that the Debtors’ debts are greater than their assets, contrary to what is presented in their Schedules.
c. The Ballot Summary is intended to provide information about the Creditors that voted on the Plan, and Debtors are assuming that all non-voters have accepted the Plan.
d. Star Ambulances’ members intend to retain ownership of the entity post-bankruptcy, but this was not documented in the Disclosure or the Plan.
IV. Conclusions op Law
A. Effect of 11 U.S.C. § 1129(e) Time Limit
Debtors filed their respective Chapter 11 cases and elected the “small business” provisions of 11 U.S.C. § 101(51C). Congress intended the updated provisions of the Bankruptcy Code to reduce the time and expense required for small businesses to find relief while requiring that such businesses move at an expedited pace to the confirmation of their reorganization plans. In re Barnes, 308 B.R. 77, 79 (Bankr.D.Colo.2004)2. In small business cases, § 1129(e) provides that “[i]n a small business case, the court shall confirm a plan that complies with the applicable provisions of this title and that is filed in accordance with section 1121(e) not later than 45 days after the plan is filed unless the time for confirmation is extended in accordance with section 1121(e)(3).” 11 U.S.C. § 1129(e).
§ 1121(e) provides that:
(e) In a small business case—
(1) only the debtor may file a plan until after 180 days after the date of the order for relief, unless that period is—
(A) extended as provided by this subsection, after notice and a hearing; or
(B) the court, for cause, orders otherwise;
(2) the plan and a disclosure statement (if any) shall be filed not later than 300 days after the date of the order for relief; and
*258(3) the time periods specified in paragraphs (1) and (2), and the time fixed in section 1129(e) within which the plan shall be confirmed, may be extended only if—
(A) the debtor, after providing notice to parties in interest (including the United States trustee), demonstrates by a preponderance of the evidence that it is more likely than not that the court will confirm a plan within a reasonable period of time;
(B) a new deadline is imposed at the time the'extension is granted; and
(C) the order extending time is signed before the existing deadline has expired.
Id. § 1121(e).
Thus, the plain language of the statute provides a scheme whereby small business cases should move expeditiously from filing to confirmation, a timeframe lasting no longer than 300 days for a plan to be filed and confirmation to occur within 45 days of the small business debtor’s filing of the plan. The statute places a burden upon small business debtors to act prudently, to file their plans in a relatively expedient fashion, and to ensure confirmation hearings occur on their plans within the prescribed 45-day timeframe.' Failing to do so violates the directives of §§ 1121(e)(l-2) and 1129(e), absent a timely request for an extension of time that meets the requirements provided under § 1121(e)(3).
There is limited case law addressing when the 45-day timeframe begins: on the date of the original filing or the date of the amended filing. However, several cases are instructive on how the § 1129(e) requirement interacts with plans filed by the debtor. In In re Florida Coastal Airlines, Inc., the bankruptcy court reviewed a debtor’s amended plan to determine if it related back to the date of the original filing. See In re Florida Coastal Airlines, Inc., 361 B.R. 286 (Bankr.S.D.Fla.2007). The court held that the filing did in fact relate back. Id. The court reached this conclusion by analogizing the filing of an amended plan to the filing of an amended complaint in an adversary proceeding. Id. Fed. R. Bankr.P. 7015 states that an amended complaint relates back to an original pleading in certain situations.3 See In re Florida Coastal Airlines, Inc., 361 B.R. 286 (Bankr.S.D.Fla.2007). The Court held the amended plan filed by the debtor after the 300-day deadline had expired related back to the filing of the original plan — and was thus timely — because it was “fundamentally a cleaned up version of its original plan.” Importantly, the question before the Court in Florida Coastal Airlines involved the determination of issues under § 1121(e)(2), whereas the question before this Court focuses on the application of §. 1129(e) to determine if the proscribed 45-day deadline for confirmation should be measured from the original plan or the amended plan(s). Thus, Florida Coastal Airlines, while instructive on matters re*259garding the ordering and timing of plans submitted by debtors and other parties in interest, is not directly applicable in the matter before the court.
Our sister bankruptcy court addressed a materially similar issue to the issue before this Court in In re Save Our Springs (S.O.S.) Alliance, Inc., 388 B.R. 202 (Bankr.W.D.Tex.2008), aff'd, 2009 WL 8637183 (W.D.Tex. Sept. 29, 2009), aff'd, 632 F.3d 168 (5th Cir.2011). The Court reviewed, among other issues, whether the 45-day deadline for the confirmation of a small debtor’s plan under § 1129(e) is measured from the original filing of the plan or the filing of any subsequent amended plans. The Court held that the 45-day deadline, as required by § 1129(e), ran from the filing of the original plan by the Debtor and, importantly, the deadline was not restarted upon the filing of an amended plan. In re Save Our Springs (S.O.S.) Alliance, Inc., 388 B.R. at 224-25. There are several other cases that have similarly treated the 45-day deadline as a bar to confirmation of the plan. See In re Simbaki, Ltd., 522 B.R. 917, 923-24 (Bankr.S.D.Tex.2014) (holding that “it is correct that a plan must be confirmed by the court 45 days after filing”); In re Maxx Towing, Inc., 2011 WL 3267937, at *4 (Bankr.E.D.Mich. July 27, 2011); In re J & J Fritz Media, Ltd., 2010 WL 4882601, at *3 (Bankr.W.D.Tex. Nov. 24, 2010) (providing that “[a] small business case must be confirmed within 45 days after the filing of a plan”); In re J.D. Manufacturing, Inc., 2008 WL 4533690, at *3 (Bankr.S.D.Tex. Oct. 2, 2008)4. Cf. In re AMAP Sales & Collision, Inc., 403 B.R. 244, 250 (2009)5. Here, the Debtors failed to seek leave of court to extend the 45 day limit and/or seek confirmation of its Jointly Administered Plan within the prescribed time limit as set forth in 11 U.S.C. § 1129(e), and as such, the Jointly Administered Plan, [ECF No. 40], filed on May 27, 2015, as amended, cannot be confirmed by this Court.
Even if the Court were to disregard the 45 day confirmation limitation, the Plan as filed is patently not confirma-ble for the following reasons:
B. Debtors’ Jointly Administered Combined Amended Disclosure Statement & Plan of Reorganization [Case 15-70041-ECF No. 63]
As the proponent of the Plan, the Debtor must establish by a preponderance of the evidence that each of the confirmation requirements set forth in Bankruptcy Code § 1129 has been met. See Heartland Fed. Sav. & Loan Ass’n v. Briscoe Enters. (In re Briscoe Enters.), 994 F.2d 1160, 1165 (5th Cir.1993). The Court considers each of these requirements in turn.
1. Bankruptcy Rule 3016(a).
The Plan is dated and identifies the Debtors as the Plan proponents, thereby satisfying Bankruptcy Rule 3016(a).
*2602. Plan Compliance with Bankruptcy Code (11 U.S.C. § 1129(a)(1)).
Bankruptcy Code § 1129(a)(1) requires that “[t]he plan compl[y] with the applicable provisions of this title.” 11 U.S.C. § 1129(a)(1). Courts interpret this language to mean that a plan must meet the requirements of Bankruptcy Code Sections 1122 and 1123. See, e.g., In re Save Our Springs, 632 F.3d at 174; In re Enviro Solutions of New York, LLC, 2010 WL 3373937, at *2-3 (Bankr.S.D.N.Y. July 22, 2010). For the reasons stated on the record and in this Opinion, the Plan fails to comply with the applicable provisions of the Bankruptcy Code, thereby failing to satisfy § 1129(a)(1) of the Bankruptcy Code.
(a). Proper Classification (11 U.S.C. §§ 1122, 1123(a)(1)).
Section 1122 addresses the classification of claims or interests. In particular, Bankruptcy Code § 1122(a) provides that “a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other class or interest of such class.” 11 U.S.C. § 1122(a). Section 1122(a) is satisfied when the debtor does not “classify similar claims differently in order to gerrymander an affirmative vote on a reorganization plan.” Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1279 (5th Cir.1991), cert. denied, Greystone III Joint Venture v. Phoenix Mut. Life Ins. Co., 506 U.S. 821, 113 S.Ct. 72, 121 L.Ed.2d 37 (1992). Although the Debtor has not established by a preponderance of the evidence that the Plan satisfies § 1122(a) by separately classifying similar classes of claims, this Court does not view the classification flaw as fatal to Confirmation.
Section 1123(a)(1) addresses the contents of a plan and requires that a plan designate classes of claims and interests. 11 U.S.C. § 1123(a)(1). Here, section 5 of the Plan improperly classifies the claims and interests. Administrative claims and priority tax claims do not require designation under § 1123(a)(1). In re Eagle Bus Bfg., Inc., 134 B.R. 584, 596 (1991). Thus, the Debtor not has established by a preponderance of the evidence that the Plan satisfies the requirements of § 1123(a)(1).
(b). Specified Treatment of Impaired and Unimpaired Classes (11 U.S.C. § 1123(a)(2-3)).
Sections 1123(a)(2) and (a)(3) require that a plan specify which classes are unimpaired and which classes are impaired under the plan. 11 U.S.C. § 1123(a)(2-3). Here, section 5 of the Plan clearly provides that several of the creditors listed in Class 2-M are unimpaired and Classes 1-S, 2-S, 3-S, 1-M, & 3-M and some of the creditors listed in Class 2-M are impaired under the Plan. Additionally, the Plan specifies the treatment of each claim including interest rates and other terms. Therefore, the Debtor has established by a preponderance of the evidence that Sections 1123(a)(2) and (3) are satisfied.
(c). No Discrimination (11 U.S.C. 1123(a)(4).
Section 1123(a)(4) requires that a plan “provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest.” 11 U.S.C. § 1123(a)(4). As set forth in section 5 of the Plan, some of the claims in similar classes receive disparate treatment in terms of interest rate, terms of payout, or both. Thus, in accordance with § 1123(a)(4), the Plan does not provide the same treatment for each claim or interest of a particular class. As a result, the Debtor has not established by a prepon*261derance of the evidence that the requirements of § 1123(a)(4) are met.
(d). Implementation of the Plan (11 U.S.C. 1123(a)(5)).
Section 1123(a)(5) requires that a plan provide adequate means of implementation of the plan. In re Eagle Bus Mfg., Inc., 134 B.R. at 596. Here, Articles 3 & 4 of the Plan fails to set forth any substantive provisions to facilitate the implementation of the Plan. The Plan states that Debtors will reorganize their finances by “generating additional revenues” and “reducing expenditures,” but provides no details as to how these goals will be accomplished. At the hearing on August 18, 2015, the Debtors offered minimal testimony to shed additional light on how they will improve the profitability, but to discuss how profitability has historically improved during the winter months and that their cash flow position is getting stronger is by no means adequate. Accordingly, the Debtor has failed to establish by a preponderance of the evidence that the Plan satisfies § 1123(a)(5).
(e). Nortr-Voting Equity Securities (11 U.S.C. 1128(a)(6)).
Section 1123(a)(6) “requires a plan to provide for the inclusion in the charter of the debtor, if the debtor is a corporation ... a provision prohibiting the issuance of non-voting equity securities.” In re PC Liquidation Corp., 2006 WL 4567044, at *-, 2006 Bankr.LEXIS 4638, *16 (Bankr.E.D.N.Y. Nov. 13, 2006); see also In re Eagle Bus Mfg., Inc., 134 B.R. at 596. Consistent with § 1123(a)(6), the Plan is silent and does not address this issue. As a result, the Debtor has not established by a preponderance of the evidence that the requirements of § 1123(a)(6) are met or not applicable.
(f). Designation of Managers, Directors and Officers of the Debtors (11 U.S.C. 1123(a)(7)).
Section 1123(a)(7) requires that a plan “contain only provisions that are consistent with the interests of creditors and equity security holders and with public policy with respect to the manner of selection of any officer, director, or trustee under the plan....” 11 U.S.C. § 1123(a)(7). The Plan is silent as to whom the operation, management, and control of the reorganized Debtor will be assigned to. The Debtors offered little testimony at the hearing on August 18, 2015 to enlighten this Court as to their expectations for management of the reorganized entity, beyond stating that the Silvia Martinez and Rodolfo Martinez III intend to retain ownership of the company. Accordingly, the Debtors have not established by a preponderance of the evidence that the' Plan satisfies the requirements of § 1123(a)(7).
(g). Impairment Unimpairment of Any Class of Claims or Interests (11 U.S.C. 1123(b)(1)).
The classes of claims contained in the Plan adequately describe which classes are impaired or unimpaired, thus satisfying the requirements of § 1123(b)(1).
(h). Assumption and Rejection of Ex-ecutory Contracts (11 U.S.C. 1123(b)(2)).
Article 9 of the Plan provides for the rejection of the executory contracts and unexpired leases of the Debtors as of the Effective Date in accordance with 11 U.S.C. § 1123(b)(2). However, the Court was troubled by the fact that such assumption or rejection of contracts by the Debtors was not specific enough to meet the requirements of § 1123(b)(2). The Debtors offered little testimony as to the actual ownership and disposition of the ambulances. Moreover, the lack of clarity left the Court wondering whether the actual *262underlying leases would be assumed by the Debtors.
(i). Settlement of Claims and Causes of Action (11 U.S.C. § 1123(b)(3)). The Plan does not mention nor does it provide for the settlement of claims or causes of action, thereby violating § 1123(b)(3).
(j). Modification of Rights (11 U.S.C. § 1123(b)(5)).
The Plan (1) leaves unaffected the rights of some holders of Claims in Classes 2-M, and (2) affects the rights of holders of Claims in all other Classes. Nevertheless, the Debtors have demonstrated by a preponderance of the evidence that the Plan complies with § 1123(b)(5).
(k). Cure of Defaults (11 U.S.C. § 1123(d)).
The Plan does not provide for the curing of any defaults. Accordingly, the Plan complies with § 1123(d) of the Bankruptcy Code.
3. The Proponent of the Plan Complies with the Applicable Provisions of this Title (11 U.S.C. § 1129(a)(2)
Bankruptcy Code § 1129(a)(2) requires that “[t]he proponent of the plan comply with the applicable provisions of this title.” 11 U.S.C. § 1129(a)(2). Courts interpret this language to require that the plan proponent comply with the disclosure and solicitation requirements set forth in Bankruptcy Code §§ 1125 and 1126. See, e.g., In re Eagle Bus Mfg., Inc., 134 B.R. at 598-99. The Debtors, as proponents of the Plan, have substantially complied with the Bankruptcy Code and Rules provisions regarding disclosure, notice, and solicitation with respect to the Plan, the Disclosure Statement, and other matters in connection with this Chapter 11 case. As noted above, the Court entered an Order approving the Disclosure Statement on June 17, 2015. Thus, the Debtors have established by a preponderance of the evidence that the requirements of § 1129(a)(2) ax-e met.
4. The Plan has been Proposed in Good Faith and not by any means Forbidden by Law (11 U.S.C. § 1129(a)(3)
Bankruptcy Code § 1129(a)(3) requires that “[t]he plan has been proposed in good faith, and not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). The 5th Circuit has interpreted good faith to be determined “in light of the totality of the circumstances surrounding establishment of [the] plan.” In re Village at Camp Bowie I, L.P., 710 F.3d 239, 247 (5th Cir.2013). A plan is pi'oposed in good faith only “[w]here [a] plan is proposed with the legitimate and honest purpose to reorganize and has a reasonable hope of success.” Id.; see also In re Eagle Bus Mfg., Inc., 134 B.R. at 599. In addressing the good faith requirement, the Second Circuit noted, “[t]he good faith test means that the plan was proposed with honesty and good intentions and with a basis for expecting that a reorganization can be effected.” Kane v. Johns-Manville Corp., 843 F.2d 636, 649 (2d Cir.1988). As several courts have observed, the good faith requirement should be viewed in light of the totality of the circumstances surrounding the plan, and “the requirement of Section 1129(a)(3) ‘speaks more to the process of plan development than to the content of the plan.’” In re Chemtura Corp., 439 B.R. 561, 608 (Bankr.S.D.N.Y.2010). Section 1129(a)(3) makes clear that “a plan proponent [has] a duty to propose its plan ‘in good faith and not by any means forbidden by law.’ ” In re Village at Camp Bowie, 710 F.3d at 247. Similarly, the good faith requirement addresses the “conduct manifested in obtaining the confirmation votes of a plan of reorganization and *263not necessarily on the substantive nature of the plan.” In re Sovereign Grp., 88 B.R. 325, 328 (Bankr.D.Colo.1988). It does not require the bankruptcy judge to determine whether the ends achieved in the plan contravene non-bankruptcy law. See In re Ocean Shores Cmty. Club, Inc., 1991 WL 184827, at *2 (9th Cir.1991) (observing that “Bankruptcy Code section 1129(a)(3) bars confirmation of plans proposed in violation of law, not those that contain terms that may contravene law”). Other sections of the Bankruptcy Code permit a court to review the legality of plan provisions. See In re Food City, 110 B.R. 808, 812 n. 10 (Bankr.W.D.Tex.1990) (noting that “[t]his is not to say that a potentially illegal provision is not a relevant consideration in the confirmation process. For example, the legal consequences which might flow from the implementation of a substantive provision which is prohibited by law could affect the plan’s feasibility under § 1129(a)(11 ).”).
Here, the record shows that the Debtors proposed the Plan with “a basis for expecting that a reorganization can be effected.” Kane v. Johns-Manville, 843 F.2d at 649. The Debtors have testified that their cash flow projections should be improved and are anticipating that they will recognize approximately $17,000 net each month, which will allow them to make the scheduled payments under the Plan. Moreover, a survey of the monthly operating reports filed by the Debtor substantiates the testimony provided in showing a continually improving financial position for the entity during the course of the bankruptcy, excepting the higher expenses in July 2015. Furthermore, the Debtors have recently made necessary repairs to their ambulance units that will allow them to further enjoy a period of relief from repair expenses on those units. Although the Debtors have failed to provide any substantial evidence to this Court that in fact this Plan is feasible, this Court believes that the Debtors have proposed this Plan in good faith. There is nothing in the record to demonstrate otherwise. However, as the Court pointed out to counsel, certain provisions of the Plan do violate 11 U.S.C. § 1129(8)(C). For these reasons, and based on the entire record, the Debtors have established by a preponderance of the evidence that although the Debtors have proposed the Plan in good faith, certain provisions of the Plan fail to meet the provisions of § 1129(a)(3).
5. Any Payment made or to be made by the Proponent has been Approved by, or is Subject to the Approval of, the Court as Reasonable. (11 U.S.C. § U29(a)a)
Bankruptcy Code § 1129(a)(4) provides:
“Any payment made or to be made by the proponent,' by the debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of,' the court as reasonable.”
11 U.S.C. § 1129(a)(4). Here, the Plan is silent as to the payment of administrative expenses. Accordingly, the Debtors have not established by a preponderance of the evidence that the Plan satisfies the requirements of § 1129(a)(4).
6. The Proponent of the Plan has Disclosed the Identity and Affiliations of Individuals (11 U.S.C. § 1129(a)(5)
Under Bankruptcy Code § 1129(a)(5), a debtor must:
“[DJisclose the identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, *264officer, or voting trustee of the debtor, an affiliate of the debtor participating in a joint plan with the debtor or a successor to the debtor under the plan, and to show that the appointment to, or continuance in, such office of such individual is consistent with the interests of creditors and equity security holders and with public policy.”
Section 1129(a)(5) also requires the disclosure of the identity of any insider that will be employed by the reorganized debtor, and the nature of any compensation for such insider. In re Eagle Bus Mfg., Inc., 134 B.R. at 599-600. Here, the Plan is silent as to this provision. As a result, the Debtors have not established by a preponderance of the evidence that the Plan complies with § 1129(a)(5).
7. Regulatory Approval of • Rate Changes (11 U.S.C. § 1129(a)(6)
Bankruptcy Code § 1129(a)(6) requires that “[a]ny governmental regulatory commission with jurisdiction, after confirmation of the plan, over the rates of the debtor has approved any rate change provided for in the plan, or such rate change is expressly conditioned on such approval.” 11 U.S.C. § 1129(a)(6). Upon confirmation of the Plan, the Debtor’s business will not involve rates subject to the approval of any governmental regulatory commission. Accordingly, § 1129(a)(6) does not apply to this case.
8. Impaired Classes (11 U.S.C. § 1129(a)(7))
Bankruptcy Code § 1129(a)(7) requires each holder of a claim or interest of such class
(1) has accepted the plan; or
(2) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date....
Bankruptcy Code § 1129(a)(7) is commonly referred to as the “best interests test,” because it ensures that reorganization is in the best interest of individual claimholders who have not voted in favor of the plan. In re Cypresswood Land Partners, I, 409 B.R. 396, 428 (Bankr.S.D.Tex.2009). It requires that all holders of claims and interests in impaired classes must either vote to accept the plan or receive at least as much as they would receive in a Chapter 7 liquidation. The Liquidation Analysis provided by the Debtors wholly fails to support a finding that this is the case. At the hearing on August 18, 2015, the Debtors offered testimony to discuss the Liquidation Analysis and only provided the explanation that the analysis was based on a presumption that the Debtors’ debts outweighed their assets, contrary to the sum of the Schedules filed with this Court. As a result, the Debtors have not established by a preponderance of the evidence that the Plan complies with § 1129(a)(7).
Even assuming the Debtors had satisfied the best interests test — which they have not — the Court must review the remaining requirements of § 1129(a) before discussing the cramdown requirements of § 1129(b).
9.Plan Acceptance by All Classes (11 U.S.C. § 1129(a)(8))
Bankruptcy Code § 1129(a)(8) provides that “[w]ith respect to each class of claims or interests (A) such class has accepted the plan; or (B) such class is not impaired under the plan.” 11 U.S.C. § 1129(a)(8). The Certification of Ballots failed to demonstrate how the Plan complied with § 1129(a)(8).
*26510. Disparate Claim Treatment (11 U.S.C. § 1129(a)(9))
Bankruptcy Code § 1129(a)(9) provides for the mandatory treatment of certain priority claims. As to administrative claims, the statute states:
“Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that ... with respect to a claim of a kind specified in section 507(a)(2) [administrative expense claims] ... on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim.”
11 U.S.C. § 1129(a)(9)(A). Here, section 6 of the Plan fails to provide that the administrative claims will be paid in full on: the Effective Date, upon court approval, or upon such other terms agreed upon by the parties. Accordingly, the Debtor has not established by a preponderance of the evidence that the Plan meets the requirements of Bankruptcy Code § 1129(a)(9)(A).
Section 1129(a)(9)(B) addresses the treatment of other priority non-tax claims. The statute provides that
“each holder of a priority non-tax claim will receive: (i) if such class has accepted the plan, deferred cash payments of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) if such class has not accepted the plan, cash on the effective date of the plan equal to the amount allowed of such claim[.]”
11 U.S.C. § 1129(a)(9)(B). The Plan does not contain any such claims. Thus, the Debtor has established by a preponderance of the evidence that the Plan satisfies the requirements of § 1129(a)(9)(B).
Finally, the Bankruptcy Code provides for similar treatment for unsecured and secured priority tax claims. For unsecured priority tax claims, the Bankruptcy Code requires:
“[T]he holder of such claim will receive ... regular installment payments in cash — (i) of a total value, as of the effective date of the plan, equal to the allowed amount of such claim; (ii) over a period ending not later than 5 years after the date of the order for relief ... and (iii) in a manner not less favorable than the most favored nonpriority unsecured claim provided for by the plan....”
11 U.S.C. § 1129(a)(9)(C).
Here, section 12 of the Plan states that holders of allowed priority tax claims shall be paid in 60 monthly installments which shall begin thirty (30) days from the confirmation date, but the Plan is silent as to whether the payments are in accordance with this statute and accordingly, the Debtor has not established by a preponderance of. the evidence that the Plan meets the requirements set forth in § 1129(a)(9)(C).
As to secured priority tax claims, Bankruptcy Code § 1129(a)(9)(D) states that claimholders will receive cash payments “in the same manner and over the same period” as required for unsecured "priority tax claims. 11 U.S.C. § 1129(a)(9)(D). Here, section 12 of the Plan states that holders of allowed secured and priority tax claims of the I.R.S. shall receive 120 monthly installments commencing thirty (30) days from the date of confirmation. Additionally, section 5 of the Plan indicates that the Secured Claim of the Texas Workforce Commission shall receive 55 monthly installments, but is silent as to when such payments are to commence and end. Since the Plan fails to provide that the priority tax claim holders will have their claims satisfied in full on the effective date, or “in the same manner and over the same period” as required for unsecured priority *266tax claims, the Debtor has not established by a preponderance of the evidence that the Plan meets the requirements set forth in §§ 1129(a)(9)(C) and (D).
11. Acceptance by Impaired Class(es) (11 U.S.C. § 1129(a)(10))
Bankruptcy Code § 1129(a)(10) requires that “at least one class of claims that is impaired under the plan has accepted the plan ... without including any acceptance of the plan by any insider.” 11 U.S.C. § 1129(a)(10). According to the Certification of Ballots and despite one rejection, each class carried. Accordingly, the Debt- or has established by a preponderance of the evidence that the Plan satisfies the requirements of § 1129(a)(10).
12. Plan Feasibility Requirement (11 U.S.C. § 1129(a)(ll))
Bankruptcy Code § 1129(a)(11) is commonly referred to as the “feasibility” requirement. The Bankruptcy Code requires that confirmation may proceed only if “[cjonfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor ... unless such liquidation or reorganization is proposed in the plan.” 11 U.S.C. § 1129(a)(11). The Second Circuit has interpreted the feasibility standard to mean “whether the plan offers a reasonable assurance of success. Success need not be guaranteed.” Kane v. Johns-Manville, 843 F.2d at 649; see also Matter of T-H New Orleans Ltd. P’ship, 116 F.3d 790, 801-2 (5th Cir.1997); In re Adelphia Bus. Solutions, Inc., 341 B.R. 415, 421-22 (Bankr.S.D.N.Y.2003) (finding that “[i]n making determinations as to feasibility, ... a bankruptcy court does not need to know to a certainty, or even a substantial probability, that the plan will succeed. All' it needs to know is that the plan has a reasonable likelihood of success”). Bankruptcy courts consider factors including “the earning power of the business, its capital structure, the economic conditions of the business, the continuation of present management, and the efficiency of management in control of the business after confirmation” when assessing whether a plan is feasible. In re D & G Invs. of West Fla., Inc., 342 B.R. 882, 886 (Bankr.M.D.Fla.2006).
In determining if a plan is feasible, the “inquiry is peculiarly fact intensive and requires a case by case analysis, using as a backdrop the relatively low parameters articulated in the statute.” In re Eddington Thread Mfg. Co., 181 B.R. 826, 833 (Bankr.E.D.Pa.1995). “A ‘relatively low threshold of proof will satisfy the feasibility requirement.” Mercury Capital Corp. v. Milford Conn. Assoc., L.P., 354 B.R. 1, 9 (D.Conn.2006) (quoting Computer Task Grp., Inc. v. Brotby (In re Brotby), 303 B.R. 177, 191 (9th Cir. BAP 2003)). And as the Second Circuit recently observed, “[i]n most situations, the time immediately following bankruptcy will call for fairly specific proof of the company’s ability to meet its obligations.... As one moves further away from the time of confirmation, ... the proof will necessarily become less and less specific.” Dish Network Corp. v. DBSD N. Am. Inc. (In re DBSD N. Am. Inc.), 634 F.3d 79, 107 (2d Cir.2011).
In the context of § 1129(a)(11) and feasibility, the question to be addressed is not whether the Plan offers adequate treatment of the secured claim. Rather, it is whether the Plan, as proposed, has a reasonable prospect of success. Viewed another way, § 1129(a)(11) requires a debtor to show that it can accomplish what it proposes to do, in the time period allowed, on the terms set forth in the plan. And a finding that a plan is *267feasible does not mean that it satisfies the other requirements of confirmation, including the requirement to treat the claims of dissenting creditors fairly and equitably. Nor does it mean the risk that the reorganization may fail should not be taken into account in other ways, including in determining a cramdown interest rate.
The proposed plan wholly fails to demonstrate financial feasibility. The Debtors'(1) did not provide any financial projections demonstrating its ability to fund the plan for the proposed period of time; (2) faded to disclose the adequacy of the Debtors’ capital structure; (3) failed to show the earning power of the Debtors’ business; (4) failed to show the ability of the Debtors’ management and the probability of the continuation of the same management and (5) any other related matter determinative of the prospects of a sufficiently successful operation to enable performance of the provisions of the plan. In re M & S Assocs. Ltd, 138 B.R. 845, 849 (Bankr.W.D.Tex.1992). For these reasons, and based on the entire record, the Debtors have not established by a preponderance of the evidence that the Plan is feasible and that the requirements of § 1129(a)(11) are satisfied.
13.Payment of Plan Fees (11 U.S.C. § 1129(a)(12))
Bankruptcy Code § 1129(a)(12) requires that “[a]ll fees payable under section 1930 of title 28, as determined by the court at the hearing on confirmation of the plan, have been paid or the plan provides for the payment of all such fees on the effective date of the plan.” 11 U.S.C. § 1129(a)(12). Here, the Plan states that “all fees payable under 28 U.S.C. § 1930 that have not been paid, shall be paid on or before the Effective Date.” [Case 15-70041, ECF No. 71, p. 13 15]. Accordingly, the Debtor has established by a preponderance of the evidence that the Plan meets the requirements of § 1129(a)(12).
14. Payment of Retiree Benefits (11 U.S.C. § im(a)(lS))
Bankruptcy Code § 1129(a)(13) requires that a plan provide for “the continuation of payment of all retiree benefits, at the level established pursuant to § 1114 of the Bankruptcy Code at any time prior to confirmation of the plan, for the duration of the period the debtor has obligated itself to provide such benefits.” PC Liquidation, 2006 WL 4567044, at *—, 2006 Bankr.LEXIS 4638, at *27. Therefore, to comply with § 1129(a)(13), a plan must allow for the continued payment of retirement benefits either at “the level originally provided by the debtor ... or at the modified level established pursuant to the requirements of section 1114 of the Bankruptcy Code by court order, or by agreement between the debtor in possession or trustee and the authorized representative of the persons entitled to receive retiree benefits.” 7 Collier on Bankruptcy ¶ 1129.02[13], p. 1129-56 (16th ed.2010). Here, the Plan is silent as to whether the Debtor has retirement benefit agreements with past or current employees or even if at all. As a result, Debtors have not complied with § 1129(a)(13).
15. Payment of Domestic Support Obligation (11 U.S.C. § 1129 (a) (U))
Bankruptcy Code § 1129(a)(14) states “[i]f the debtor is required by a judicial or administrative order, or by statute, to pay a domestic support obligation, the debtor has paid all amounts payable under such order or such statute for such obligation that first become payable after the date of the filing of the petition.” Here, the individual Debtors have not certified in their Certification In Support of Confirmation of Reorganization of the Plan that they are or *268are not required by a judicial or administrative order, or by statute, to pay a domestic support obligation, or whether they have paid all amounts payable under such order or such statute for such obligation that first become payable after the date of the filing of the petition. Accordingly, the Debtors have not established by a preponderance of the evidence that the Plan meets the requirements of § 1129(a)(14).
16.Objection by Holders of Unsecured Claims of Individual Debtors (11 U.S.C. § 1129(a)(15))
In a case in which the debtor is an individual and in which the holder of an allowed unsecured claim objects to the confirmation of the plan—
(A) the value, as of the effective date of the plan, of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the value of the property to be distributed under the plan is not less than the projected disposable income of the debtor (as defined in section 1325 (b)(2)) to be received during the 5-year period beginning on the date that the first payment is due under the plan, or during the period for which the plan provides payments, whichever is longer.
11 U.S.C. § 1129(15)(A-B). Here, there have been no objections to confirmation of the Jointly Administered Plan. Nevertheless, the Court has an independent duty to ensure that the Debtors have complied with § 1129(a)(15). As stated earlier, the Debtors failed to document in their Jointly Administered Plan a proper liquidation analysis of their assets. Accordingly, the Debtors have not established by a preponderance of the evidence that the Plan meets the requirements of § 1129(a)(l 5).
17. Transfers of Property (11 U.S.C. § 1129(a)(16))
Bankruptcy Code § 1129(a)(16) requires that “[a]ll transfers of property under the plan shall be made in accordance with any applicable provisions of nonbankruptcy law that govern the transfer of property by a corporation or trust that is not a moneyed, business, or commercial corporation or trust.” Debtor is not a corporation or trust that is not a moneyed, business or commercial corporation or trust. Therefore, § 1129(a)(16) is not applicable.
18. Cramdown Provisions (11 U.S.C. § 1129(b))
Section 1129(b) permits a plan proponent to “cramdown” a plan over a dissenting class if the plan does not “discriminate unfairly” and provides “fair and equitable” treatment to the dissenting classes that are impaired under the plan. In re Eagle Bus Mfg., Inc., 134 B.R. at 601. Before a plan proponent may cramdown a plan, it must establish that, other than paragraph (8), all of the other requirements of § 1129(a) are met. Id. As discussed in the foregoing sections of this opinion, the Debtors have substantially failed to comply with § 1129(a). Therefore, Bankruptcy Code § 1129(b) is unavailable, since those provisions have not been met by the Debtors.
19. Avoidance of Tax Liability (11 U.S.C. § 1129(d))
Finally, Bankruptcy Code § 1129(d) requires that “[t]he primary purpose of the Plan is not avoidance of taxes or avoidance of the requirements of Section 5 of the Securities Act of 1933, and there has been no objection filed by any governmental unit asserting such avoidance.” In re Eagle Bus Mfg., Inc., 134 B.R. at 602; see also PC Liquidation, 2006 WL 4567044, at *—, 2006 Bankr.LEXIS 4638, at *28. *269There has been no request under this Section or objection to the Plan by any governmental unit on these grounds. Accordingly, § 1129(d) does not apply to this case.
Therefore, for the reasons stated on the record, the Court holds that the 45-day timeline under § 1129(e) began upon Star Ambulance’s filing of their original plan on May 27, 2015, but did not start again upon the Debtors filing of an amended plan. Furthermore, even if the Plan had been filed and a timely motion for confirmation had been made, the Debtors have not met their burden of proving the elements of § 1129 of the Bankruptcy Code by a preponderance of the evidence. The plain language of § 1121(e) provides an exclusivity period for the Debtor to file a plan, but does not mandate that dismissal or conversion be required should the Debtor fail to do so within the 180-day timeframe. The requirements of § 1129(e) places a burden upon the court, but does not place one on the Debtor. See In re Crossroads Ford, Inc., 453 B.R. 764, 768 (Bankr.D.Neb.2011). Moreover, the disparity in burdens between § 1129(e) and § 1121(e) is instructive in resolving a situation, such as the one that Star Ambulance finds itself in, and this Court should not impose, nor does it, a dismiss or convert choice under § 1112(b)(4)(J) as a result of a non-con-firmable plan, as this Court has not issued an order mandating plan confirmation nor has the time allotted in § 1121(e)(2). The Order entered contemporaneously with this Opinion only requires the Debtors to adhere to the timeframes of §§ 1121 and 1129, a burden that was already imposed on the Debtors by the United States Bankruptcy Code.
AS THE COURT FINDS THAT THE NECESSARY ELEMENTS UNDER 11 U.S.C. §§ 1121 & 1129(a) HAVE NOT BEEN MET, THE DEBTORS’ JOINTLY ADMINISTERED PLAN AS PROPOSED, AND AMENDED, PURSUANT TO THE STAR AMBULANCE AND MARTINEZ COMBINED PLAN OF REORGANIZATION AND DISCLOSURE STATEMENT, SHALL BE AND HEREBY IS NOT CONFIRMED.
CONCLUSION
The Debtors prosecuted their Chapter 11 Bankruptcy with relative diligence since their initial filing in January 2015 and have continued to do so since moving for joint administration. The original plan and disclosure statement was filed on May 27, 2015 and the plan has been amended multiple times since. The Debtors, however, have not filed any motions seeking to extend the time to confirm their original or amended plans. As such, the 45-day drop dead date for confirmation of the Plan before this Court, as required by § 1129(e) has come and gone, and therefore the Plan before this Court is no longer eligible for confirmation. In re Save Our Springs (S.O.S.) Alliance, Inc., 632 F.3d 168, 174 (5th Cir.2011) (“stating that “[t]he bankruptcy court can approve a reorganization plan only if it conforms to the requirements of the Bankruptcy Code. 11 U.S.C. § 1129(a)(1)”) (emphasis added). Perhaps more importantly, the Plan, as filed and amended, does not met the requirements of 11 U.S.C. § 1129(a) or (b) and is not confirmable.
An Order consistent with this Memorandum Opinion will be entered on the docket simultaneously herewith.
. 28 U.S.C. § 157(b)(2)(L) states that ‘‘[c]ore proceedings include, but are not limited to confirmation of plans."
. "The Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, amended several aspects of Chapter 11 to apply in cases where a debtor is a “small business.” These amendments were created "to expedite the process by which small businesses may reorganize under chapter 11." Floor Statements on the Bankruptcy Reform Act of 1994, 140 Cong. Rec. H10752, H10768 (daily ed. October 4, 1994) (analysis of Act’s provisions appended to remarks of Rep. Brooks) (1994 WL 545773). Upon making the election, a debtor can take advantage of a more abbreviated confirmation process, including more liberal provisions for disclosure and solicitation. See H.R. Rep. 103-834, 103rd Cong., 2nd Sess. 30 (October 4, 1994), U.S.Code Cong. & Admin. News 1994, p. 3323; 140 Cong. Rec. H10768 (October 4, 1994). To reap the benefits of this expedited process, a debtor must meet certain abbreviated time deadlines. Included in these deadlines is the time restriction for filing a plan contained in 11 U.S.C. § 1121(e) ...” (footnotes omitted).
. "An amendment to a pleading relates back to the date of the original pleasing when: (A) the law that provides the applicable statute of limitations allows relation back; (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; or (C) the amendment changes the party or the naming of the party against whom a claim is asserted, is Rule 15(c)(1)(B) is satisfied and if, within the period provided by Rule 4(m) for serving the summons and complaint, the party to be brought in by amendment: (i) received such notice of the action that it will not be prejudiced in defending on the merits; and (ii) knew or should known that that the action would have been brought against it, but for a mistake concerning the proper party’s identity-”
. The Court stated that "Bankruptcy Code § 1121(e)(3) provides that the 45 days can be extended only if the court issues an order prior to the running of that deadline. A prerequisite to the issuance of an order granting extension is a request by the debtor that is noticed to parties in interest. The debtor must also prove at a hearing ‘... that it is more likely than not that the court will confirm a plan within a reasonable period of time.’ Debtor did not request an extension of the 45 day limit and the Court did not issue an order extending the ... deadline.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498834/ | MEMORANDUM OPINION DENYING DEBTORS’ MOTION TO RECONSIDER THIS COURT’S ORDER DISMISSING CASE WITH PREJUDICE
Eduardo V. Rodriguez, United States Bankruptcy Judge
Debtors urge this Court to reconsider its • order for the voluntary dismissal of Debtors’ Individual Chapter 11 case, where the order rendered prejudice against the Debtors from refiling under Title 11 for 180 days pursuant to 11 U.S.C. § 109(g). Specifically, Debtors contend that their voluntary dismissal here does not fall under the purview of § 109(g) and subsection (2), which together require a 180-day bar on refiling where the voluntary dismissal follows a filing of a request for relief from the automatic stay. Debtors argue that their request for dismissal had no causal connection to the fact that a creditor here had filed a motion for relief from the automatic stay, and thus the application of § 109(g) is improper. This Court shall now reconsider its Order dismissing Debtors’ case with prejudice. - To the extent that any of the following findings of fact constitute conclusions of law, they are adopted as such. ■ To the extent that any of the following conclusions of law constitute findings of fact, they are adopted as such.
Factual Background
1. Debtors Jesus and Alicia Guerrero filed for Chapter 13 bankruptcy protection on March 2, 2015. [ECF No. 1].
2. ■ On April 24, 2015, during the pen-dency of the Chapter 13 case, Lone Star National Bank filed a Motion for Relief from Stay under 11 U.S.C. § 362. [ECF No. 25].
3. On May 20, 2015 and June 2, 2015, respectively, this Court entered an order, [ECF No. 31], and amended order, [ECF *272No. 39], on the Motion for Relief from Stay. The essential effect of this Court’s amended order was to impose conditions on the Debtors, failing which, the 'Stay would automatically terminate.
4. On May 22, 2015, the Chapter 13 Trustee filed an Amended Motion To Dismiss the Chapter 13 case, primarily because the Debtors exceeded the Chapter 13 debt limits pursuant to 11 U.S.C. § 109(e). [ECF No. 33].
5. On June 11, 2015, the Debtors filed their response to the Trustee’s Amended Motion to Dismiss, denying the Trustee’s allegations. [ECF No. 41].
6. On July 2, 2015, Lone Star National ' Bank filed its Notice of Termination of Stay as To Specific Property. [ECF No. 45].
7. On June 18', 2015, the Court heard arguments on the Trustee’s Amended Motion to Dismiss, which the Court took under advisement while resetting the dismissal hearing to July 23, 2015. [ECF No. 43].
8. On July 23, 2015, this Court ordered Debtors to cpnvert their case to Chapter 11 by July 24, 2015, or the case would be dismissed. [ECF No. 47].
9. On July 24, 2015, Debtors filed their Motion to Convert their case from Chapter 13 to Individual Chapter 11, [ECF No. 48], which this- Court granted. [ECF No. 49],
10. On July 27, 2015, Lone Star National Bank filed its second Notice of Termination of Stay. [ECF No. 53]. -
11. On August 4, 2015, Debtors filed an Emergency Motion to Dismiss their Chapter 11 case, [ECF No.-59], which was set for a hearing on August 10, 2015. [ECF No. 63].
12. On August 10, 2015, this Court conducted an evidentiary hearing wherein it cautioned Debtors’ counsel that, since the voluntary motion to dismiss was filed following the filing of a motion for relief from the automatic stay, the court would grant the dismissal with prejudice. Debtors offered no testimony at the hearing, and Debtors’ counsel did not object to the dismissal with prejudice. This Court granted Debtors’ voluntary request for dismissal, entering an order dismissing the Individual Chapter 11 case with prejudice against refiling as a debtor under Title 11 for 180 days, pursuant to 11 U.S.C. § 109(g). [ECF No. 69].
13. On August 12, 2015, Debtors filed a Motion to Reconsider the August 10, 2015 dismissal order, contending that Debtors’ case , does not fall under the requirements of a correct, in Debtors’ view, reading of 11 U.S.C. § 109(g). [ECF No. 70]. That Motion was amended on August 13, 2015. [ECF No. 72].
14. On August 28, 2015, the Court conducted an evidentiary hearing on Debtors’ First Amended Expedited Motion To Reconsider Dismissing Individual Chapter 11 Case Following The Filing of A Request For Relief From The Automatic Stay (“the Motion”). Although the Debtors were contending, inter alia, that the requested dismissal was not “the result of the stay relief motion,” [ECF No. 72, p. 8, ¶ 11], Debtors offered no evidence or testimony at this hearing. The Court was left to consider only the documents filed of record and legal arguments of counsel.
I. Analysis
This Court will now re-evaluate the basis for its entry of dismissal with prejudice in Debtors’ Individual Chapter 11 case.
A. Authority
This is a core proceeding for the purpose of 28 U.S.C. § 157 and a case that “arises under” title 11 for the purpose of 28 U.S.C. § 1334, because the construction *273of 11 U.S.C. § 109(g), its application to this case, and the content of this Court’s original order all concern the final disposition of a bankruptcy proceeding and rights solely arising out of bankruptcy law. See In re Lopez, 2015 WL 1207012 (Bankr.S.D.Tex. Mar. 12, 2015); see also In re Poplar Run Five Ltd. Partn., 192 B.R. 848, 855 (Bankr.E.D.Va.1995). Additionally, this Court is empowered to reconsider and modify its orders pursuant to its own equitable powers, and more specifically pursuant to Fed. R. Bankr. P. 9024. Thus, this Court is empowered to reconsider its final order and issue final judgments on the matter.
B. Legal Analysis
Debtors’ potential relief of a dismissal with prejudice rests upon how 11 U.S.C. § 109(g)(2) must be construed. 11 U.S.C. § 109(g) states:
Notwithstanding any other provision of this section, no individual or family farmer may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if—
(1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or
(2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.
11 U.S.C. § 109(g). This Court reads several elements and sub-elements from § 109(g)(2), each of which contain their own analytical framework. The first element requires that the debtor must request and obtain the voluntary dismissal of the case.1 § 109(g)(2). The second element is “following,” wherein the request and obtaining of dismissal from the first element- must follow the third element. Id. The third and final element requires that there be a “filing of a request for relief from the automatic stay.” Id. Here, the Debtors do not dispute that they have voluntarily sought dismissal of their Chapter 11 case, resulting in this Court ordering that the case be dismissed. Therefore, this Court is left to only consider the construction of the final two elements of § 109(g)(2). For the reasons set forth below, this Court finds that a proper reading of the statute clearly rendérs Debtors ineligible to refile for 180 days.
1. What does “following” mean"?
Debtors’ objection to the entry of dismissal with prejudice primarily stems from their reliance on a particular reading of the word “following” in § 109(g)(2). In essence, Debtors claim that “following” should not be construed to create a chronological relationship between element one (“request and obtain the voluntary dismissal of the case”) and element three (“filing of a request for relief from the automatic stay.”). [ECF No. 72, p. 4], Rather, Debtors believe that “following” demands a subjective inquiry into the causal relationship between the filing for relief from stay and the debtors’ voluntary motion for dismissal. Id. The Debtors urge that a subjective test be read into § 109(g)(2), but the Fifth Circuit has not dispositively adopted an interpretive approach on this issue. Matter of Ulmer, 19 F.3d 234 (5th Cir.1994); In re Hackett, 233 *274F.3d 574 (5th Cir.2000) (per curiam). Debtors specifically argue that “following” means a causal “because of’ rather than a chronological “after,” and thereby generates a causation test. [ECF No. 72, p. 4], However, not every court has addressed a § 109(g) eligibility issue from this angle. Matter of Milton, 82 B.R. 637, 639 (Bankr.S.D.Ga.1988) (discussing the split in authority between courts as to whether a “good faith” standard should be written into the statutory language of § 109(g)(2)); see also In re Richardson, 217 B.R. 479 (Bankr.M.D.La.1998) (surveying four judicial approaches to eligibility in § 109(g)(2)). Generally speaking, this Court views three approaches that courts implement on the “following” issue:
• “[Fallowing” clearly means “after.”
• “[F]ollowing” really means “because of.”
• Regardless of the operative meaning of the words, the statute has a good faith exception.
This Court will begin its analysis by examining these approaches in more detail, and then it will proceed to explain its own reading. It must be noted that most cases interpreting § 109(g) are postured as challenges to the dismissal of a debtor’s “second case” refiling, where the debtor argues that the facts of its “first case” do not fall under the ineligibility terms of the statute operating upon the “second case.” The Motion before this Court requires the same treatment, as this Court’s entry of dismissal with prejudice forbids a “second case” for 180-days, based on what this Court finds is a proper interpretation of § 109(g) applied to these circumstances.
The Chronological Approach:
“Following” as “After”
Statutory construction may afford itself to many analytical tools and devices, but it must begin with an examination of the text, because courts must presume “that a legislature says in a statute what it means and means in a statute what it says there.” Conn. Nat'l Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). Moreover, courts “properly assume, absent sufficient indication to the contrary, that Congress intends the words in its enactments to carry ‘their ordinary, contemporary, common meaning.’ ” Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380, 388, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). Additionally, when the words of the statute are unambiguous, the judicial inquiry ends. Germain, 503 U.S. at 254, 112 S.Ct. 1146. To determine the ambiguity of statutory language, a court looks to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole. Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997). Resort to an examination of legislative history is appropriate only to resolve statutory ambiguity, and in the final analysis, such examination must not produce a result demonstratively at odds with the purpose of the legislation. In re Sorrell, 359 B.R. 167, 173 (Bankr.S.D.Ohio 2007) (citing Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992); Pennsylvania Dept. of Pub. Welfare v. Davenport, 495 U.S. 552, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990); Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986)). Under the guidance of the Supreme Court, a court begins by determining whether the statute in question is ambiguous. If a statute unambiguously expresses one meaning, the analysis ends with a faithful application of that meaning, but if the statute appears ambiguous, then a court must avail itself of additional evidence to render its conclusion.
*275The Sixth Circuit Bankruptcy Appellate Panel exhibited an approach to § 109(g)(2) as unambiguous in In re Andersson, 209 B.R. 76 (6th Cir. BAP 1997). There, the Appellate Panel presided over an appeal from a bankruptcy court’s dismissal of the debtor’s second petition, pursuant to § 109(g)(2). In that case, a creditor had filed a motion for relief from the automatic stay, but no order was ever entered with respect to the motion for relief, and the debtor thereafter requested and obtained voluntary dismissal. Id. at 77. In affirming the lower court’s decision, the Andersson Panel found that the terms of § 109(g)(2) were unambiguous and, by implication, adopted the chronological reading of “following.” Id. at 78. Notably, the Panel referred to its analysis as determining whether the statute has a mandatory or a discretionary application, which presents a line of thought echoed by other courts.2 Id. Of course, courts can still conclude that “follow” means “after” where they have determined that the statute is ambiguous. In re Richardson exemplifies this approach. 217 B.R. 479, 486-87 (Bankr.M.D.La.1998). There, the court concluded that the meaning of § 109(g)(2) is ambiguous, but the balance of evidence rested in favor of reading “following” as “after.” Id.
The Causation Approach: “Following” as “Because of’
A court may conclude, through statutory analysis, that the meaning of the word “following” is “because of,” thereby making the statute operate a causal relationship test between the voluntary dismissal and the creditor’s filing of a motion for relief from the stay. In re Payton best illustrates this approach. 481 B.R. 460 (Bankr.N.D.Ill.2012). In that case, the court presided over a second bankruptcy case filed within 180 days from the dismissal of the first bankruptcy case. Id. In the first case, a creditor filed a motion for relief from the automatic stay in order to repossess a car securing its claim. Id. at 462. The motion was granted, the car was surrendered, the debtor’s plan was confirmed, and, three years after confirmation, the debtor requested and obtained a voluntary dismissal of her case. Id. The court noted that the general, everyday usage of “following,” where it establishes a relationship between two items, can form three possible meanings. Id. at 463-464. These possible meanings include a “time sequence,” “compliance,” and “causation” relationship. Id. at 464. By way of simple examples, the court illustrated these possibilities with (chronological) “following their first class, the children went to their lockers,” versus (compliance) “following the rules of etiquette, they congratulated one another,” versus (causation) “[fjollowing an embarrassing security breach earlier this month, business-oriented social networking site Linkedln has been hit with a $5 million law-suit....” Id. The court then found that the American Heritage Dictionary, in its Second College Edition of 1982, supported all three inquired meanings. Payton, 481 B.R. at 465. The court be*276lieved that the variety of normal usages and established definitions demonstrated that there was no single obvious meaning of the word “following” when used as a modifying component in a sentence. Id. With the causation and chronological meanings standing on equal footing, the court proceeded to analyze context to resolve the ambiguity in favor of the most reasonable meaning of the word. Id. The court reasoned that where “following” establishes a relationship between two discrete actions or events, it is most likely to set up a causation relationship, and then the court observed that § 109(g)(2) contains two discrete actions: the voluntary dismissal following the filing of the lift stay motion. Id. at 466. The court continued its analysis by noting Congress’s purpose in enacting the provision, which was to prevent abusive repetitive filings by debtors who “voluntarily [dismiss] one case in which stay relief was sought and then fil[e] another case — obtaining] repetitive automatic stays to prevent a creditor from taking action against the debtor’s property.” Id. The court simply thought it would not be sensible to read the statute in a way that would be overbroad with respect to the intent of Congress; the chronological application could apply in cases where the debtor had no motive to abuse, or, at the very least, the creditor seeking the protection was at no risk of frustration. Id. Hence, the court felt that the most reasonable reading of “following” was the causal definition. Payton, 481 B.R. at 466. Thereafter, the court swiftly concluded that the facts of the case demonstrated that the debtor had not sought voluntary dismissal because a creditor had filed a motion for relief from the automatic stay three years prior, especially given that the property in question was already surrendered and the creditor fully satisfied. Id. at 467. Thus, the court concluded that the debtor had not been rendered ineligible by § 109(g) under its adopted causation approach. Id.; see, e.g., In re Copman, 161 B.R. 821, 824 (Bankr.E.D.Mo.1993); In re Durham, 461 B.R. 139, 142 (Bankr.D.Mass.2011).
The Good Faith or Exception Approach
A number of courts have embraced the idea that, in spite of how the language operates, there are some situations in which courts should offer relief by refusing to apply the statute by its terms. The Ninth Circuit Bankruptcy Panel has declined to follow a “mandatory application of section 109(g)(2).” In re Luna, 122 B.R. 575, 577 (9th Cir. BAP 1991). The Luna Panel reasoned that a mechanical application of the statute in that case would reward the creditor for acting in bad faith and punish the debtor for acting in good faith. Id. at 577. Accordingly, the Panel concluded that it must adopt a discretionary approach, because “legislative enactments should never be construed as establishing statutory schemes that are illogical, unjust, or capricious.” Id. (citing Bechtel Constr., Inc. v. United Bhd. of Carpenters & Joiners of America, 812 F.2d 1220, 1225 (9th Cir.1987)). Other courts have held that the statute should be applied in congruence with Congress’s intent, rather than Congress’s words. In re Santana, 110 B.R. 819 (Bankr.W.D.Mich.1990); Matter of Patton, 49 B.R. 587 (Bankr.M.D.Ga.1985). Some courts may interpret these lines of cases as an exercise in deciding whether § 109(g)(2) has a “good faith” exception. See In re Hackett, 1999 WL 294797 (E.D.La. May 10, 1999), aff'd 233 F.3d 574 (5th Cir.2000) (per curiam); Matter of Ulmer, 19 F.3d at 236; Matter of Milton, 82 B.R. 637 (Bankr.S.D.Ga.1988)
Analyzing Non-Governing Discussions From Our Own Jurisdictions
The Fifth Circuit has entertained how it might possibly interpret § 109(g)(2), but it *277issued no dispositive holding on the matter. Matter of Ulmer, 19 F.3d at 236-37. There, the Fifth Circuit reviewed a lower court’s issuance of sanctions under an abuse of discretion standard, where the debtor’s attorney had been sanctioned for filing a second bankruptcy case in contravention to § 109(g) and subsection (2). Id. at 235. In analyzing the appropriateness of sanctions, the issue was whether § 109(g)(2) had a good faith exception, such that the attorney’s filing for the debt- or’s second bankruptcy protection was not really violative of the statute, which would render sanctions inappropriate. Id. at 237. The Fifth Circuit concluded that, regardless of whether the statute really contained a good faith exception, the bankruptcy court’s factual findings showed that the debtor would not qualify under an exception where the record reflected no indication that the second bankruptcy petition was aimed at anything other than delaying the creditor’s rights. Id. The Fifth Circuit’s discussion of whether the good faith approach exists in the statute is uninstruc-tive here. The Fifth Circuit indicated no favor to either interpretive method and declined to choose one, because that choice was not dispositive either way. Id. Importantly, since the Fifth Circuit’s review over the sanctions issued by the bankruptcy court relies on whether the position a lawyer adopts is “unreasonable from the point of view both of existing law and of its possible extension, modification, or reversal,” then it would not have mattered if the lawyer prevailed. Id. at 235. This is because the Fifth Circuit could have concluded that reading a good faith exception in § 109(g)(2) was reasonable, thus excusing the lawyer from sanctions while not actually endorsing that reading as the state of the law. Debtors before this Court also rely on another dictum from the Ulmer court, in which the Fifth Circuit asserted in a footnote that there was support in the language and purpose of § 109(g)(2) for a reading that the statute does not apply where the motion for relief from the stay is no longer “pending” before a court, because a court can reasonably conclude that the request for voluntary dismissal did not follow the former motion. Ulmer, 19 F.3d at 236, n. 9. Again, the Fifth Circuit declined to choose a reading over how this pending theory would affect an interpretation of any of the elements of § 109(g)(2), because the Fifth Circuit believed that the motion for relief from the automatic stay was obviously still pending before the bankruptcy court at the time the voluntary dismissal was requested and rendered. Id. at 236. After Ulmer, the Fifth Circuit, sitting per curiam over In re Hackett, had another occasion to discuss the possible meaning of § 109(g)(2), but again declined to issue a dispositive holding on this issue. In re Haekett, 233 F.3d at 574. In In re Hackett, the Fifth Circuit presided over an appeal from a district court’s affirmation of a bankruptcy court’s dismissal of a debt- or’s bankruptcy case, pursuant to the terms of § 109(g)(2). Id. During the debt- or’s bankruptcy case, a creditor filed a motion for relief from stay, the resolution of which was delayed. Id. Faced with an attempt by the Trustee to dismiss his case for failure to abide by Chapter 13 deadlines, the debtor voluntarily dismissed his case on the very day set for the creditor’s hearing for relief from stay. Id. The debt- or then refiled under Chapter 11, and the Trustee successfully had the debtor’s second case dismissed. Id. On appeal, the debtor argued that he was entitled to a good faith exception under the statute, because he dismissed his Chapter 13 case with the intent to refile for Chapter 11 under advice of his counsel. Id. The Fifth Circuit considered debtor’s argument that there exists a good faith exception, but it concluded: “[w]hatever may be the answer to that question, it is clear that Hackett *278would not qualify for such an exception however it might be configured.” In re Hackett, 233 F.3d at 574. In ruling that the debtor would not qualify for any exception if the statute were interpreted to create one, the Fifth Circuit issued no ruling on what the statute actually means. Id.
This Court’s Approach
The analysis must begin with the text: “[T]he debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.” § 109(g)(2). This Court agrees with the court in In re Pay-ton that the word “following” finds itself amenable to several definitions and that § 109(g)(2), as it is read, is ambiguous as to the meaning of “following.” See In re Payton, 481 B.R. at 463-65; see also In re Richardson, 217 B.R. at 484. Section 109(g)(2) was added to the Code by § 301 of Public Law 98-353, also known as the Bankruptcy Amendments and Federal Judgeship Act of 1984. Pub.L. No. 98-353, § 301, 98 Stat. 333, 352 (1984); see also Richardson, 217 B.R. at 488, n.15. At the time, the provision was entei*ed into the Code as § 109(f)(2), but it has since been moved to § 109(g)(2). Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub.L. No. 99-554, § 253, 100 Stat. 3088, 3105 (1986). Since this Court must analyze the meaning of the statute as it was promulgated to the public at the time of passage, a dictionary that was available to the public at the time of the law’s passage will be necessary to the analysis. The 1982 American Heritage Dictionary provides an excellent starting point and defines “follow” as:
“1. To come or go after: Follow the usher”
“5. To be the result of: A fight followed the argument.”
“7. To come after in order, time, or position: Night follows day.”
American Heritage Dictionary 520 (2d College ed.1982). The dictionary definitions of “follow” clearly support an understanding of “following” as either chronological or causal. However, unlike the Payton Court, this Court does not find that the two readings stand on equal footing, to be resolved by an inquiry into legislative intent. Section 109(g)(2) establishes three events that, in reality, always take place in a timed manner: a filing, a request for dismissal, and the obtaining of the dismissal. These three events are established into a relationship through the word “following.” Two of the events, the request and obtaining, have an obvious one-way chronological connection that is irrespective of the filing for relief; courts grant dismissals after requests for dismissal. In turn, the request and the obtaining have a relationship with the filing for relief. A chronological reading of “following,” establishing a relationship between all three events, is more natural where two of those events already have a natural and salient one-way, chronological relationship.
This Court’s reading is further confirmed by the structure of § 109(g) as a whole. The 180-day ineligibility provision of § 109(g) activates where the “first bankruptcy case” meets either subsection (1) or subsection (2)’s requirements. In § 109(g)(1), the requirement is met where “the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case.” Where Congress knows how to say something, courts will presume that Congress would say it for the same effect elsewhere, and Congress’s choice not to is instructive. City of Chicago v. Environmental Defense Fund, 511 U.S. 328, 338, 114 S.Ct. 1588, 128 L.Ed.2d 302 (1994) (citing Keene Corp. *279v. United States, 508 U.S. 200, 208, 113 S.Ct. 2035, 124 L.Ed.2d 118 (1993) (“it is generally presumed that Congress acts intentionally and purposely when it includes particular language in one section of a statute but omits it in another” (internal quotation marks omitted)). Here, if Congress was interested in applying its policy by means of a subjective intent test in “following” under § 109(g)(2), it could have chosen a clearer way of expressing its establishment of a subjective test. Reading a subjective causation test into “following” in § 109(g)(2) is especially troubling, where it stands in such stark contrast against its sister subsection, § 109(g)(1), which is wholly concerned with matters of debtor wrongdoing and motive, flourished by language such as “willful failure.” Compare § 109(g)(1) with § 109(g)(2). These two provisions were enacted together at the same time under the Bankruptcy Amendments and Federal Judgeship Act of 1984. Pub L. No. 98-353, § 103, 98 Stat. 333, 352 (1984). This Court will presume that Congress would not draft an obvious intent test using the word “willful” while leaving the courts to divine an intent test out of the word “following” in the very next subsection enacted on the same day. Id. Furthermore, Congress has built an intent inquiry into § 109(g)(2) itself, by virtue of requiring that the dismissal be “voluntary,” which shows that Congress purposely drafted a clear intent element in § 109(g)(2), while leaving “following” unclear as to whether it established an intent test. Therefore, it is counterintuitive to impute a motive test into “following,” which does not naturally lend itself to such an analysis, where the same subsection (2) avails itself of an intent test for “voluntary” and its sister subsection (1) calls for an intent test in “willful.” This Court is not comfortable in injecting an error-prone, subjective, and complex factual test into one word, absent stronger support for such a reading.
The elemental structure of § 109(g)(2) further demonstrates that incorporating a causation reading,into “following” would render the - statute’s terms incoherent. The reason for this stems from the bifurcation of element one, “the debtor requested and obtained the voluntary dismissal of the case,” into two sub-elements: (1) request, and (2) obtained. § 109(g)(2). Importantly, the “following” element inures to request and obtain separately. If a debtor were to request dismissal first, and then a creditor flies for relief from the stay, and then the court grants the dismissal, § 109(g)(2) would not apply, because only one sub-element, “obtain”, “follows.” In re Hicks, 138 B.R. at 505. The debtor’s request for dismissal is within the debtor’s dominion and control. However, it is only through a court’s action that dismissal is approved, ordered, and thus “obtained.” 11 U.S.C. § 1307; 11 U.S.C. § 1112; 11 U.S.C. § 707. Since a debtor requests the dismissal (where it is voluntary), reading “following” as a causal relationship makes logical sense, because the debtor controls the request, and thus that request can be “caused” by a filing for relief from stay. However, the obtaining of dismissal must also “follow” the filing for relief from stay. A causal reading of “following” would make no logical sense in this context, because it would literally mean that the filing of a request for relief “caused” the court to grant dismissal. Courts generally do not grant dismissal “as a result of’ a creditor’s filing of a motion for relief from stay after a debtor motions to dismiss “as a result of’ a creditor’s filing for relief from stay. Rather, a court grants dismissal because a party moves for dismissal. The causal reading would also severely limit the number of cases that § 109(g)(2) would cover, because its requirements would only be satis*280fied where both the debtor’s and court’s actions were motivated by the filing of a motion for relief from stay. The incoherent reading produced by a causal meaning of “following” could only be reconciled by a dual reading, wherein “following” means “because of’ with respect to the debtor’s action and “following” means “after” with respect to the court’s action. It is far more reasonable to read “following” as chronological, where both the voluntary request and the grant of that request by the court must take place after the filing of the motion for relief from stay.
This Court’s understanding of Congress’s intent is not availing to Debtors’ argument. The court in In re Riekena found that “[i]t is widely acknowledged that Congress enacted section 109(g)(2) for the purpose of curbing abusive repetitive filings by debtors attempting to nullify a stay relief order entered in a prior case by obtaining a new automatic stay upon refiling.” 456 B.R. 365, 368 (Bankr.C.D.Ill.2011). This Court embraces the Riekena court’s understanding of Congress’s intent. It does not follow that the statute must have a causation test built into “following,” just because a causation understanding could more tightly serve the policy interests behind the language. Id. at 369 (“Congress intended the broad brush rule”). The court in In re Payton resolved the ambiguity of “following” towards a causation reading. 481 B.R. at 467. Part of the Payton court’s reasoning was that a chronological reading of § 109(g)(2) would not advance the statute’s purpose in certain situations. Id. at 466. The court offered several examples: (1) if the motion to lift stay had been withdrawn or denied as groundless, (2) if years have passed between- the filing of the lift stay motion and the debtor’s voluntary dismissal, (3) or the creditor who filed the motion already obtained the property subject to the stay by the time the debtor voluntarily obtained dismissal. Id. While recognizing the occasional harshness of a chronological application, this Court declines to reach the same conclusion. First and foremost, this Court believes that “following” in the context of the language alone most obviously reads in a chronological manner, and so a showing of a few odd outcomes is not enough read an unnatural definition into the statute; the judiciary is not the vanguard of underlying Congressional policy where the language definitively shows the way. See Germain, 503 U.S. at 254, 112 S.Ct. 1146. Second, this conclusion is further comforted by the fact that Congress’s policy is merely served in an over-inclusive manner under § • 109(g)(2), rather than in a manner plainly contrary to the underlying policy of curbing abusive refilings. Congress is free to choose overbroad methods to serve its policies. Third, the consequences of a chronological reading, as offered by the Payton court, are not what this Court would call absurd. 481 B.R. at 466. If the motion to lift the stay has been withdrawn, it is possible for courts to impute the motion as having never been filed under § 109(g)(2). Therefore, there might be no filing for the voluntary dismissal to “follow” under § 109(g)(2). If years have passed between the motion to lift stay and the voluntary dismissal, it might seem as though an application of § 109(g)(2) is entirely unrelated to the purpose of combating debtor abuse. However, Debtor abuse can be inadvertent. By the terms of § 109(g), when a creditor seeks relief from the automatic stay, the debtor is put on notice that its right to refile and enjoy the protections of the automatic stay will be impaired for 180 days if the debtor undertakes to voluntarily obtain dismissal. The objective chronological test prevents a debtor from accidentally, but in good faith and honesty, frustrating a creditor’s rights. For example, a creditor might file *281a motion to lift the stay and enter an agreement with the debtor calling for a conditioning of the automatic stay, subject to debtor’s performance on specified terms. Years into bankruptcy and years since the motion to lift stay had been filed, the debtor could seek a voluntary dismissal in good faith and with intentions to continue performing pursuant to an agreement with the creditor. However, if that debt- or’s life changes for the worse, the debtor could seek, again in full honesty and good faith, the protections of bankruptcy. This hypothetical debtor may have had a cooperative spirit with the creditor, but the harm is the same, because the protection of the automatic stay under 11 U.S.C. § 362 automatically applies from the moment the debtor petitions for bankruptcy protection. Since the purpose of § 109(g)(2) is to combat the mischiefs wrought by the automatic nature of § 362’s stay, it is not necessary to read an intentionality component into § 109(g)(2), because a chronological reading can combat both intentional and unintentional frustrations of creditors’ rights. See Ulmer, 19 F.3d at 235 (“Congress enacted section 109(g)(2) to prevent debtors from frustrating creditors’ efforts to recover funds'owed them”). The Payton court proposes one final scenario of evil by describing when a creditor lifted the stay, obtained the property, and had no further interest in the case by the time the debtor obtained voluntary dismissal. 481 B.R. at 466. This Court would be more concerned by this outcome if § 109(g)(2) were solely aimed at personally protecting the rights of the creditor who had filed the motion. However, the spirit of § 109(g)(2) is broader, as it is structurally built to protect the integrity of the bankruptcy process and all creditors from intentional or unintentional abuses. In fact, a “because of’ reading of “following” could produce odd situations of its own. Under a causation test, which does not require the cause to be before the effect where the execution of events is concerned, a debtor can be accused of moving for voluntary dismissal in anticipation of a creditor filing a motion for relief from the automatic stay; a creditor would simply need to claim that the request for dismissal was caused by the anticipated filing that it eventually lodged before dismissal was granted. This would frustrate judicial economy objectives, as numerous objections could ensue based on perceived abuses by debtors. This Court declines to encourage such an outcome. The spirit of the statute is in congruence with a chronological reading of “following” in § 109(g)(2).
A review of other bankruptcy code provisions fortifies the argument that Congress would have chosen another word had it meant to establish a subjective causation test or a good faith exception. Section 362 contains several good faith exceptions. Under § 362(d)(4), a creditor may seek relief from the automatic stay if it affirmatively establishes that the bankruptcy petition “was part of a scheme to delay, hinder, or defraud creditors,” which evinces a test that is almost wholly reliant on showing a subjective state of mind. Similarly, under § 362(c)(3), the automatic stay can be terminated where the debtor refiles for bankruptcy within a prescribed time frame, a situation very similar to the refiling bar in § 109(g). However, § 362(c)(3) explicitly allows for a good faith exception to continue the operation of the stay, while § 109(g) offers no such good faith language to preserve the debtor’s eligibility for refiling. Compare § 362(c)(3) with § 109(g). When Congress amended § 362(c) with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 using “good faith” exception language, it had the opportunity to amend the 1984 language of § 109(g)(2) to more clear*282ly establish a subjective test, yet it chose not to. Pub.L. No. 109-8, § 302, 119 Stat. 23, 75; see also Ned H. Waxman, Judicial Follies: Ignoring the Plain Meaning of Bankruptcy Code § 109(g)(2), 48 Ariz.L.Rev. 149, 167-68 (2006). This Court will assume that Congress is satisfied with the way in which the majority of courts apply a chronological standard to § 109(g)(2). This Court joins the majority view that has embraced a chronological reading of “following” in § 109(g)(2). Andersson, 209 B.R. at 77 (impliedly embracing the chronological test by a “mandatory’ application); In re Steele, 319 B.R. 518, 520 (E.D.Mich.2005) (“Once a motion for relief from stay has been filed, if a debtor chooses to voluntarily dismiss his case, he cannot file another case for 180 days following the dismissal.”); In re Dickerson, 209 B.R. 703, 706 (W.D.Tenn.1997) (rejecting a causal reading and finding the statute mandatory); Kuo v. Walton, 167 B.R. 677, 679 (M.D.Fla.1994) (impliedly embracing the chronological test by finding the statute mandatory); In re Munkwitz, 235 B.R. 766, 768 (E.D.Pa.1999) (finding that “following” means “coming after” or “next order in time”); Richardson, 217 B.R. at 486 (finding that “following” means “after”); In re Jarboe, 177 B.R. 242, 246 (Bankr.D.Md.1995) (impliedly embracing the chronological test in applying the plain language of the statute to bar debtor’s refiling); In re Redwood, 2011 WL 2456785 *1 (Bankr.D.R.I. June 16, 2011) (impliedly assuming that “following” means “after”); Riekena, 456 B.R. at 369 (concluding that Congress intended the broad brush rule embodied in a chronological reading); In re Stuart, 297 B.R. 665, 668 (Bankr.S.D.Ga.2003) (finding that the statute affords no inquiry into debtor’s intent); In re Denson, 56 B.R. 543, 545 (Bankr.N.D.Ala.1986) (embracing the chronological reading of “following”); Hicks, 138 B.R. at 505 (taking as given that the framework is chronological and proceeding to grant relief on the basis that only the court’s grant of dismissal, not the request, had followed the filing of relief).
Perhaps if this Court were faced with a supremely unfair outcome, it could turn to the doctrine of absurd consequences on a case-by-case basis as applied. See Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982) (cited by United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (“The plain meaning of legislation should be conclusive, except in the rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.” (internal quotation marks omitted)). Suffice it to say that this Court declines to rewrite § 109(g) under the facts of this case. Debtors have voluntarily sought and obtained dismissal just several months after a creditor, showing no evidence of wrongdoing, filed a motion for relief from the automatic stay. Debtors are not forever barred from refiling for bankruptcy. These are not the kinds of facts that move courts to offer relief from the plain terms of a statute.
Turning to whether § 109(g)(2) contains a good faith exception, this Court finds no evidence that Congress meant for an implicit exception to exist beyond its language. Evidence that § 109(g)(2) serves a general policy interest of curbing abusive filing in an overbroad manner is not enough to convince this Court that Congress invited the judiciary to override the plain meaning and operation of the language of this provision, especially just so that its applicability to debtors may become slightly more tailored towards its spirit. As this Court explained, the outcomes attendant to an overbroad § 109(g)(2) are not drastically at odds with its spirit as to warrant the reading re*283quested by Debtors. This Court also explained that Congress has explicitly included a “good faith” exception in § 362(c)(3), while § 109(g)(2) contains no such exception. Section 109(g)(2) is well served by its language, and Congress spoke of good faith in § 362(c)(3) without speaking of good faith in § 109(g)(2). ' This Court declines the invitation to read a good faith exception into § 109(g)(2).
Under the principles adopted by this Court, the case becomes very simple. A creditor filed a motion for relief from the automatic stay. Thereafter, Debtors voluntarily moved for dismissal of their case, which this Court granted. Section 109(g)(2) most certainly applies to the facts of this case, and thus the entry of dismissal with prejudice pursuant to § 109(g) was proper. However, Debtors suggest one additional method of relief that is analytically distinct from the principles of understanding “following” or applying a good faith exception.
2. Understanding “the filing of’
Debtors rest much of their argument on the fact that the creditor’s motion for relief from stay was no longer before or “pending” before this Court. [ECF No. 72 P. 5-6], This Court reads this assertion as evidence of Debtors’ claim that the creditor’s motion for relief from stay did not cause Debtors to voluntarily dismiss their case. Since “following” has a chronological meaning, the causation question is irrelevant. However, the issue of whether a motion for relief from the automatic stay is still pending before the court at the time of voluntary dismissal may have some significance for the purpose of § 109(g)(2). The argument, as explored in dictum by the Fifth Circuit in Ulmer, is as follows: if the motion for relief from the automatic stay has been disposed of, then there is simply nothing for the voluntary dismissal to follow. Matter of Ulmer, 19 F.3d at 236, n. 9. Courts that have adopted the strongest method of relief via this argument have been referred to as the “pending” courts. In re Richardson, 217 B.R. at 485. A reading of § 109(g)(2) according to the “pending” logic is quite troubling. If a court grants a motion for relief from the automatic stay, the motion would technically no longer be pending before the court. However, if this meant that § 109(g)(2) could not apply, the debtor would be free to voluntarily dismiss its case and refile with impunity, thus frustrating the creditor’s rights and the public policy purposes of § 109(g). Id. This Court does not believe that the pending approach could possibly provide the correct reading of § 109(g)(2). The plain language of § 109(g)(2) provides that the voluntary dismissal has a connective, “following” relationship with “the filing of a request for relief from the automatic stay.” § 109(g)(2) (emphasis added). The voluntary dismissal “follows” a “filing” not a “motion still pending.” Id. There is no language about whether the motion is granted. Where the motion for relief from the automatic stay is withdrawn by the creditor or denied by a court, then perhaps the court can deem the motion to have never been filed. See In re Hackett, 1999 WL 294797 at *4. If there is no filing, then a voluntary dismissal cannot follow it. However, this Court has no occasion to dispositively rule on that question, because the facts of this case assuredly would not entitle Debtors to relief under a “pending” approach. There was a motion for relief from stay filed in this case. That motion led to an agreed order, whereby the automatic stay would automatically lift if Debtors failed to meet the agreed conditions. In effect, it is as though the motion for relief from stay was granted upon Debtor’s failure to meet the *284conditions. Debtors thereafter voluntarily-requested and obtained dismissal of then-case. Therefore, it is an appropriate application of § 109(g) to grant the dismissal with prejudice, as the requirements of the section were met.
II. Conclusion
For the reasons stated above, this Court finds that a chronological reading of the statute is correct, and Debtors’ case meets its requirements. Therefore, an entry of dismissal with prejudice, pursuant to 11 U.S.C. § 109(g), is proper. The Debtor’s Motion to Reconsider, as amended, is DENIED.
A separate Order consistent with this Opinion shall be issued simultaneously herewith.
. Though not at issue here, “request” and "obtain” produce separate inquiries, which may complicate an otherwise simple analysis with motion timing issues. See In re Hicks, 138 B.R. 505 (Bankr.D.Md.1992) (the request and the grant of dismissal must each come after filing of the motion to lift stay).
. This Court takes issue with characterizing the question in this way, since the difference between giving an "after” versus a "because of” construction to “following” is really a matter of embracing a mechanical or discretionary application from the meaning of a word. Perhaps more importantly, a court's recitation of the "mandatory versus discretionary standard” argument tends to confuse readers, who seek clear guidance from the courts, into believing that the court is espousing a good faith exception that operates over the language of the statute, rather than construing the operative meanings of terms within the statute. While the analysis for a good faith exception could collapse into the "because of” test most of the time, that is no license to conflate two analytically distinct methods of relief. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498836/ | MEMORANDUM OPINION
Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE
This Memorandum Opinion concerns similar adversary proceedings filed by and Diamond Offshore Company (Adv. Pro. 12-03425) and TM Energy Holdings (Adv. Pro. 12-03429). Rodney Tow, Chapter 7 Trustee, has filed Amended Counterclaims for the avoidance and recovery of transfers made by ATP to TM and Diamond pursuant to 11 U.S.C. §§ 547 and 549 related to the conveyance of purported overriding royalty interests.
TM and Diamond, the putative ORRI Holders, have each filed motions to dismiss each of Tow’s claims under various theories.
Bennu has filed a motion to enforce the Final Sale Order and prevent the Trustee from pursuing § 549 claims sold to Bennu. Bennu is correct. Accordingly, Tow’s remaining § 549 claims are dismissed with prejudice.
Tow’s remaining § 547 claims survive both TM and Diamond’s motions to dismiss.
Background
On August 17, 2012, ATP filed a voluntary petition for relief under Chapter 11. On August 23, 2012, the Court issued a Conveyance Order authorizing (1) Payment of Funds attributable to Overriding Royalty Interests in the Ordinary Course of Business and (2) Payment of Funds Attributable to Net Profits Interests Subject to Further Order of the Court Requiring Disgorgement Thereof ... (Case No. 12-36187, ECF No. 191). Pursuant to the Conveyance Order, the Court approved ATP’s transfer of production proceeds to holders of overriding royalty interests and net profits interests, provided that holders of such interests executed an agreement to disgorge such funds upon subsequent order of the Court (i.e. “Disgorgement Agreement”).
On October 17, 2013, the Court approved ATP’s sale motions (Case No. 12-36187, ECF Nos. 1169,1252, and 1492) and entered the Final Order (A) Approving the Sale of Certain of the Debtor’s Assets Free and Clear of Claims and Liens and (B) Approving the Assumption and Assignment of Contracts and Leases (Case No. 12-36187, ECF No. 2706) (the “Final Sale Order”) approving the Asset Purchase *296Agreement (the “APA”) (Case No. 12-36187, ECF No. 2706-1) pursuant to which Bennu acquired the Purchased Assets (as defined in the Final Sale Order) via a credit bid of liens previously held by Credit Suisse AG, Cayman Islands Branch, as administrative agent for the DIP Lenders.
The Purchased Assets included ATP’s interest in the Telemark leases (Atwater Valley Block 63, Mississippi Canyon 941 and 942).
Pursuant to the Final Sale Order, Bennu acquired the Purchased Assets burdened by certain ORRIs and Net Profit Interests (as defined in the Final Sale Order), including those that are the subject of the underlying adversary proceedings. See Final Sale Order at ¶ 29.
On June 26, 2014, ATP’s bankruptcy ease was converted to a case under chapter 7 of the Bankruptcy Code. Rodney Tow was appointed as Trustee.
Adversary Proceedings
The ORRI holders have each , filed a complaint seeking a declaratory judgment that its ORRI is its own real property and not property of the estate. As counterclaims, ATP asserted claims for declaratory judgment that are the mirror image of the claims asserted in the ORRI holders’ complaints: (i) that each ORRI constitutes a disguised financing arrangement and, therefore, constitutes property of the Debtor’s estate and (ii) that each ORRI and related agreements constitute executo-ry contracts. ATP also asserted claims for disgorgement.
On May 20, 2014, Bennu was substituted for ATP in these three adversary proceedings with respect to all claims that relate to the Purchased Assets. (Case No. 12-36187, ECF No. 172).
On November 13, 2014, Bennu filed its Motion to Determine Ownership of Claims (Case No. 12-03443, ECF No. 212) pursuant to which it sought a ruling from the Court that Bennu owned the counterclaims originally asserted by ATP in each adversary proceeding and, therefore, that such counterclaims could not be asserted by the Trustee. The Trustee opposed the Ownership Motion.
January 28, 2015 Ownership Order
On January 28, 2015, the Court issued its Order on the Ownership Motion. (ECF No. 236). The Court ruled that Bennu has the exclusive right against TM and Diamond “to seek to re-characterize the alleged [TM or Diamond] Overriding Royalty interest as something other than a vested ownership right granted to [TM or Diamond] in the hydrocarbons to be produced.” (Case No. 12-03443, ECF No. 236).
Additionally, the Court held: “Rodney Tow, Trustee, has the exclusive right to seek to avoid payments made to [ORRI Holder] by the Estate or the Debtor, whether such avoidance is sought under § 544, § 547, § 548 or § 549 of the Bankruptcy Code, subject to paragraph 3(c) of this Order.”
Paragraph 3 of the Order states:
In the prosecution of the Trustee’s avoidance claims:
a. The Trustee may seek to prove that the payments made on account of the alleged Overriding Royalty Interest were made on account of a lien or contract that did. not create a vested ownership right held by [ORRI Holder] in the hydrocarbons to be produced.
b. [ORRI Holder] may seek to prove that the payments made on account of the alleged Overriding Royalty Interest were made on account of a vested ownership right held by [ORRI Holder] in the hydrocarbons to be produced.
*297c. The Trustee may not pursue § 549 claims that were purchased by Ben-nu.
d. The Court does not presently decide what factual disputes may be precluded by this Order.
(Id.).
In accordance with the Court’s Order, Rodney Tow filed his Amended Complaint against each ORRI Holder on February 24, 2015. (12-03425, ECF No. 270); (Case No. 12-03429, ECF No. 293); (Case No. 12-03443, ECF No.238).
In each Amended Complaint, Tow removed the original claims for declaratory judgment seeking recharacterization and asserted claims for the avoidance and recovery of transfers made to each ORRI holder by ATP pursuant to §§ 547 and 549.
TM and Diamond have each filed motions to dismiss Tow’s Amended Complaint. Bennu has filed a motion to enforce the Final Sale Order and prevent the Trustee from pursuing § 549 claims sold to Bennu.
Rule 12(b)(6) Standard
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 929 (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).
May 22, 2015 Hearing
In the ORRI holders’ motions to dismiss, they argue, inter alia, that Tow’s counterclaims (under §§ 547 and 549) must be dismissed for lack of standing and jurisdiction because such claims are wholly dependent on the success of a threshold recharacterization cause of action, which Tow does not own and cannot assert. (Case No. 12-03443, ECF No. 249 at 2). At the May 22, 2015 hearing, the Court took the ORRI Holders’ motions to dismiss under advisement.
With respect to Bennu’s motion to enforce the sale order, the Court held that the § 549 claims seeking money paid for hydrocarbons from a Telemark or Clipper well were sold to Bennu. Accordingly, the Court dismissed these § 549 claims1. (See Case No. 12-03425, ECF No. 284 at 51-52) *298(“Fm going to find that the claims under 549 and the claims under the Disgorgement Order were either transferred wholly to Bennu to the extent 'that there is any ambiguity in the Order or alternatively, if there is no ambiguity in the Order ... that the exclusive right to prosecute those claims was transferred to Bennu. And accordingly, Fm going to grant the various motions to dismiss the Trustee’s standing to bring those particular claims.”).
Section 549 Claims Related to Gomez
Based on the Court’s May 22, 2015 oral ruling, the only issue remaining from Ben-nu’s motion to enforce the sale order is whether the § 549 claims for the payments on the Gomez well are the property of Bennu or property of the estate.
Accordingly, the Court requested briefing firom Bennu, Diamond, and the Trustee on whether the § 549 claims for money paid for hydrocarbons from Gomez wells are an excluded asset under the Asset Purchase Agreement and Final Sale Order.2 Specifically, the Court was concerned with how to resolve potentially inconsistent provisions in the APA and Final Sale Order.
On further review, the Court finds that it need not resolve the alleged inconsistency between the APA and Final Sale Order because (i) the Final Sale Order establishes that Bennu purchased all § 549 claims; and (ii) if and to the extent that the APA is inconsistent with the Final Sale Order, the Final Sale Order governs. Accordingly, the Court finds that Bennu purchased all of ATP’s § 549 claims.
Two separate paragraphs of the Final Sale Order include all of ATP’s § 549 claims as a Purchased Asset.
Paragraph 11(f) of the Final Sale Order excludes from the Purchased Assets “any preference or avoidance action proceeds pursuant to Section 550 of the Bankruptcy Code (other than those avoidance action proceeds derived from Section 549 of the Bankruptcy Code, which are included in the Purchased Assets).” (Case No. 12-36187, ECF No. 2706 at 20) (emphasis added).
To further clarify, paragraph 29 of the Final Order Approving the Sale of the Debtor’s Assets provides:
The Purchased Assets include all of the Debtor’s claims, rights and causes of action against the holders of overriding royalty interests, production payments, net profits interests, carried interests or similar interests (the “ORRI/NPI Holders”) with respect to any of the Purchased Assets, excluding any claims under Chapter 5 of the Bankruptcy Code, other than claims pursuant to Section 549 of the Bankruptcy Code (for the avoidance of doubt, any claim of the Debtor arising under Section 549 of the Bankruptcy Code shall constitute a Purchased Asset).
(ECF No. 2706 at 26) (emphasis added).
Tow interprets this paragraph to mean that only the § 549 claims with respect to the Purchased Assets (which do not include Gomez) were transferred to Bennu. He argues that “[t]he parenthetical in paragraph 29 makes it clear that the preceding sentence meant that Bennu was purchasing any Section 549 claims that ATP had for the Purchased Assets” and that “Gomez was excluded from “Purchased Asset” at the very beginning of paragraph 29.” (ECF No. 290 at 5). In *299other words, he argues that since Bennu did not purchase the Gomez leases, then it follows that Bennu did not purchase the § 549 claims associated with Gomez. Tow’s interpretation ignores the plain language of the Final Sale Order.
The parenthetical in the last sentence states that any claim of the Debtor3 arising under § 549 constitutes a “Purchased Asset.” When read with the earlier part of the sentence — which states that “[t]he Purchased Assets include all of the Debt- or’s claims ... with respect to any of the Purchased Assets,” all of the Debtor’s § 549 claims become expressly included as a Purchased Asset.
The phrase “for the avoidance of doubt” is included immediately prior to stating that “any claim of the Debtor arising under Section 549 of the Bankruptcy Code shall constitute a Purchased Asset.” The “for the avoidance of doubt” language makes it abundantly clear that the preceding phrases in the sentence should not affect the statement that “any claim of the Debtor arising under Section 549 of the Bankruptcy Code shall constitute a Purchased Asset.” (ECF No. 2706 at 26) (emphasis added).
This is consistent with the earlier provision in the Final Sale Order — paragraph 11(f) — which also states that “avoidance action proceeds derived from Section 549 of the Bankruptcy Code ... are included in the Purchased Assets.”
Accordingly, the Final Sale Order unambiguously provides that Bennu purchased all of ATP’s § 549 claims.
Paragraph 68 of the Final Sale Order states that “[t]o the extent that this Sale Order is inconsistent with the Purchase Agreement or any prior order or pleading with respect to the Motion in this Chapter 11 case, the terms of this Sale Order shall govern.” (Case No. 12-36187, ECF No. 2706 at 44).
Accordingly, even if the APA is inconsistent with the Final Sale Order, the Final Sale Order governs.
Based on the above findings, the Court need not consider (i) any intent-based arguments, (ii) whether the ORRI holders’ “crossover” argument resolves the alleged inconsistency between paragraph 29 of the Final Sale Order and section 2.02 of the Asset Purchase Agreement (“APA”); (iii) whether the Trustee is estopped from asserting § 549 claims as a result of his previous positions and admissions; or (iv) whether Bennu’s ownership of the rechar-acterization claims precludes the Trustee’s pursuit of § 549 claims.
Tow’s § 549 claims are dismissed with prejudice.
Tow’s Preference Claims
The ORRI holders assert that Tow’s § 547 claims should be dismissed (i) under rule 12(b)(1) because the Trustee lacks standing and (ii) under rule 12(b)(6) because the Trustee cannot plead the elements necessary to maintain a cause of action under § 547.4
*300Both of these bases — rule 12(b)(6) and 12(b)(1) — stem from the argument that Tow’s 547- claims fail (or he lacks standing to assert them) because he is unable to obtain a finding of law that recharacterizes the underlying instruments from true ORRIs to debt instruments under Louisiana law.
This argument relies on two premises, both of which must be true to sustain the dismissal motion: (i) Tow does not own the right to seek recharacterization of the underlying instruments under Louisiana law because the recharacterization claims were conveyed to Bennu; and (ii) Tow must seek — and the Court must make — a finding that recharacterizes the instruments under Louisiana law in order for Tow to prevail on each of his § 547 claims.
For the reasons discussed below, the Court rejects the second premise.
Recharacterization Claims
The term “recharacterization claim” refers to Bennu’s right to seek recharacteri-zation of the parties’ label of the transactions — overriding royalty interests — as disguised debt instruments under Louisiana law.
The parties dispute whether Tow can prevail on a § 547 claim that requires re-characterization as a result of the conveyance of the “recharacterization claims” to Bennu.
A few things appear to be undisputed under the sale documents and Ownership Order: (i) Tow cannot prevail on an action seeking declaratory judgment that an ORRI is a disguised financing transaction under Louisiana law; Bennu owns the exclusive right to prosecute those claims; and (ii) the ATP bankruptcy estate retained the right to prosecute § 547 claims that do not require recharacterization.
Tow’s prosecution of the preference actions on behalf of the estate is expressly reserved in the Asset Purchase Agreement, the Final Sale Order, and the Court’s Ownership Order. The APA defines the NPI/ORRI claims (i.e. the “re-characterization claims”) transferred to Bennu as “all claims ... relating to or challenging the validity of overriding royalty interests, net profits interests or similar burdens on the Assets.,” (ECF No. 2706-1 at 17). However, section 2.03(g) of the APA specifically excludes preference actions from being conveyed to Bennu. (See ECF No. 2706 at 26) (stating that the Excluded Assets include “[a]ll preference and avoidance action proceeds pursuant to Section 550 of the Bankruptcy Code (other than those avoidance action proceeds from Section 549 of the Bankruptcy) ... ”).
In the Final Sale Ox-der, paragraph 11(f) excludes from the Purchased Assets “any preference or avoidance action proceeds pursuant to Section 550 of the Bankx-uptcy Code (other than those avoidance action proceeds derived from Section 549 of'the Bankruptcy Code ...).” (Case No. 12-36187, ECF No. 2706 at 20). Paragraph 29 again excludes preference actions: “The Purchased Assets include .... excluding any claims under Chapter 5 of the Bankruptcy Code, other than claims pursuant to Section 549 of the Bankruptcy Code ...” (Id. at 26).
Consistent with the sale documents, paragraph 1 of the Court’s Ownership Order states: “Bennu Oil & Gas, LLC has the exclusive light against [TM and Diamond] to seek to recharacterize the alleged Overriding Royalty interest held by [TM and Diamond] as something other than a vested ownership right granted to [TM and Diamond] in the hydrocarbons to be *301produced.” (Case No. 12-03425, ECF No. 264).
The Order establishes that Tow has the exclusive right to seek to avoid payments — including the § 547 preference claims — made to each ORRI holder other than the § 549 claims purchased by Ben-nu: “Rodney Tow, Trustee, has the exclusive right to seek avoidance payments made to [TM and Diamond] avoidance is sought under § 544, § 547, § 548 or § 549 5 of the of the Bankruptcy Code, subject to paragraph 3(c) of this Order.”
The Order concludes by stating that “[t]he Court does not presently decide what factual disputes may be precluded by this Order.”
Accordingly, the Court must now decide whether the sale documents and this Order preclude the Trustee from asserting his § 547 claims.
Elements of a Preferential Transfer under § 547
To state a prima facie claim under § 547, Tow must allege that each payment made by ATP to each ORRI holder pursuant to the underlying instruments constituted:
[A] transfer of an interest of the debtor in property ... (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the Debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made ... on or within 90 days before the date of the filing of the petition ... (5) that enables such creditor to receive more than such creditor would receive if. (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b).
With respect to the first three elements, the ORRI holders assert that “[t]he Trustee cannot establish the foregoing elements without first establishing that [TM or Diamond’s] ORRI/NPI Interests are properly classified as debts rather than real property interests, which in turn requires recharacterization of the interests themselves.” (Case No. 12-03429, EOF No. 306 at 11). The Court disagrees.
The parties quibble over whether re-characterization requires a finding of law, or as Tow asserts, that recharacterization is merely a factual issue incidental to each § 547 claim. However, because the Court finds that recharacterization may be unnecessary to sustain any of Tow’s § 547 claims, the Court need not resolve this dispute.
As set forth below, the Court could (theoretically, since the pleadings do not conclusively demonstrate that traceable ORRI funds were used to make the ORRI payments) find that an ORRI payment made by ATP to each ORRI holder constitutes a “transfer of the debtor’s interest in-property” made “on account of an antecedent debt” under § 547 the Bankruptcy Code, without deciding whether the underlying instruments constitute an overriding royalty interest or disguised debt instrument under Louisiana law.
Federal Law Governs the Definition of an ‘Antecedent Debt’ for § 547
Whether a transfer was made “for or on account of an antecedent debt” is a matter of federal law. See Matter of Southmark Corp., 88 F.3d 311, 316 (5th Cir.1996) (applying Bankruptcy Code’s *302definition of “debt” for purposes of § 547(b)); see also In re MarkAir, Inc., 240 B.R. 581, 608 (Bankr.D.Alaska 1999) (“While state law is often important in determining rights and duties under the Bankruptcy Code, the Code sometimes trumps state law, including with respect to the definition of ‘antecedent debt.’ ”).
The Fifth Circuit has adopted a broad definition of the term “antecedent debt” for purposes of § 547(b). “Debt” is defined in § 101(12) of the Bankruptcy Code, which states “debt means liability on a claim.” “Claim” is itself defined in § 101(5)(A) 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.” It is well settled that “claim” and “debt” are synonymous, such that whenever a “claim” arises, a “debt” necessarily arises as well; the only distinction between the two terms is the party to which it applies. Matter of Southmark Corp., 88 F.3d 311, 317 (5th Cir.1996) (citing Penn. Dept. of Public Welfare v. Davenport, 495 U.S. 552, 558, 110 S.Ct. 2126, 2130, 109 L.Ed.2d 588 (1990) (“This definition reveals Congress’ intent that the meanings of ‘debt’ and ‘claim’ be coextensive.”).
The definition of “debt” can therefore be restated as “a liability for payment, whether or not such liability is reduced to judgment, liquidated, unliqui-dated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” See, e.g., In re Enron Corp., 357 B.R. 32, 47 (Bankr.S.D.N.Y.2006).
A debt need not .arise from a loan for purposes of § 547(b). See McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir.2000) (explaining that “[a] debt is not something you obtain; it is something you incur as a consequence of having obtained money or something else of value from another person ... ”). “[A] transfer of the debtor’s property to or for the benefit of virtually every kind of creditor may be avoided as a preference if the other requirements of section 547(b) are met.” 5 Collier on Bankruptcy ¶ 547.03[3] (Alan N. Resnick & Henry Sommer eds., 16th ed.2014).
Indeed, courts have applied this broad definition to find a creditor-debtor relationship under § 547(b) under a wide range of circumstances. See, e.g., In re Upstairs Gallery, Inc., 167 B.R. 915 (9th Cir. BAP 1994) (holding that a debtor’s payment of a termination fee to lessor pursuant to the parties’ agreement to terminate the lease within ninety days of lessee’s bankruptcy petition constituted a transfer of the debtor’s property on account of an antecedent debt, reasoning that the “debt” arose on the date that the parties entered into the lease and was “antecedent” within the meaning of § 547(b)(2)); see also In re Prior, 176 B.R. 485, 495-96 (Bankr.S.D.Ill.1995) (finding that a district court’s order directing payment of the debtor’s interest in future oil proceeds to a judgment creditor constituted a preferential transfer subject to avoidance by the trustee under § 547(b)).
Even in cases where an investor is defrauded by a “Ponzi scheme”6 debtor, courts hold that a debtor’s repayment of funds to an earlier investor during the preference period constitutes a transfer of .the debtor’s interest in property made on account of an antecedent debt. See, e.g, *303Cohen v. Barge (In re Cohen), 875 F.2d 508 (5th Cir.1989) (holding that an investor who was defrauded by the debtor, who had no intention of purchasing promised investments on investor’s behalf, was a creditor for preference purposes).
The Court will- assume, without deciding, that each ORRI agreement created a real property interest under Louisiana law, owned by the ORRI holders. If ATP were to have breached its duty under the applicable agreements to forward the property to the ORRI holders, that breach would have caused ATP to incur a debt to the ORRI holders. If ATP were to have diverted the property for its own use — and then replenished the property via payment to the ORRI holders — ATP’s replenishment would have been payment of the incurred debt.
If the diversion and replenishment occurred (a fact that cannot be discerned from the pleadings) each of these debts were “antecedent” when ATP made each alleged preferential transfer because ATP became liable to each ORRI holder at an earlier date.
Determining whether these transactions constitute “debt instruments”, under Louisiana law would trigger an entirely different analysis. However, Tow need not prove that each alleged ORRI constitutes a debt under Louisiana law7 in order to satisfy the “antecedent debt” requirement for a § 547 preference claim. Nor does Tow have to establish that the underlying transactions do not constitute true ORRIs under Louisiana law.
The sole issue is whether — when the payments were made to the ORRI holders — the payments -were made from the ORRI holder’s own property or from ATP’s property.
Even if the Court were to determine that the underlying instruments were entirely consistent with a real property interest and inconsistent with a debt instrument under Louisiana law8 this would not preclude the Court from finding that the relevant transactions constituted a payment of a “debt” under the Bankruptcy Code. This would run afoul with the fundamental principle of bankruptcy preference law9. As the Supreme Court observed:
Equality of distribution among creditors is a central policy of the Bankruptcy Code. According to that policy, creditors of equal priority should receive pro rata shares of the debtor’s property. Section 547(b) furthers this policy by permitting a trustee in bankruptcy to avoid certain *304preferential payments made before the debtor files for bankruptcy. This mechanism prevents the debtor from favoring one creditor over others by transferring property shortly before filing for bankruptcy.
Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) (citations omitted).
Accordingly, because preference actions implicate an important federal interest, the Bankruptcy Code’s broad definition of “debt” trumps any state law characterization of the instrument. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) (“Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”).
Transfer of an Interest of the Debtor in Property
The Court need not recharacterize the underlying instruments in order to find that the alleged preferential transfers were “of an interest of the debtor in property.” 11 U.S.C. § 547(b). The Bankruptcy Code does not define the term “interest of the debtor in property.” The Supreme Court, however, has interpreted the term to mean “that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.” Begier v. I.R.S., 496 U.S. 53, 58, 110 S.Ct. 2258, 2263, 110 L.Ed.2d 46 (1990). For guidance, the Supreme Court considered the term “interest of the debtor in property” under § 547(b) to be synonymous with the term “property of the estate” under § 541. Courts generally look to state law to determine whether property is an asset of the debtor. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979).
The property at issue in each of Tow’s § 547 claims is the funds that ATP transferred to each ORRI holder pursuant to the underlying ORRI instruments during the preference period. This determination does not involve consideration of whether the underlying instruments — which were executed years prior to the bankruptcy filing — created true real property interests under Louisiana law.
The fundamental inquiry is whether the cash transfer diminished or depleted ATP’s estate. Whether the transfer diminished the estate turns on whether the debtor owned the transferred funds. See Matter of Southmark Corp., 49 F.3d 1111 (5th Cir.1995) (holding that payment to employee from debtor’s checking account, which contained commingled funds as part of a cash management system, constituted a preferential transfer because debtor “held complete legal title, all indicia of ownership, and unfettered discretion to pay creditors of its own choosing, including its own creditors.”); In re Chase & Sanborn Corp. (Nordberg v. Sanchez), 813 F.2d 1177, 1181 (11th Cir.1987) (“[A]ny funds under the control of the debtor, regardless of the source, are properly deemed to be the debtor’s property, and transfers that diminish that property are subject to avoidance.”); see also Love v. First Interstate Bank of Montana, 155 B.R. 225, 230 (Bankr.D.Mont.1993) (“The dispositive question is whether the Debtor had direct control of the funds”).
Indeed, courts have even held that transfers of property or funds that the debtor has stolen, misappropriated, converted or fraudulently obtained may constitute transfers of the debtor’s property. See, e.g., Burgoyne v. McKillip, 182 F. 452, 453 (8th Cir.1910) (“In case of embezzlement or misappropriation of funds, the *305person defrauded may at his option assert a demand as upon implied contract to repay, and such a demand is provable in bankruptcy ... The holder of the demand cannot, as an ordinary creditor, take and hold transfers of property from the insolvent defaulter free from the provisions of the bankruptcy act respecting preferences.”).
There are at least two recognized exceptions to the general rule that a debtor has an interest in property so long as the debtor had control over the funds: (i) the earmarking doctrine and (ii) the trust doctrine.10
Under the earmarking doctrine, funds provided to a debtor for the purpose of paying a specific indebtedness may not be recoverable as a preference from the creditor to which they are paid, because the property transferred in such a situation was never property of the debtor and therefore did not disadvantage other creditors.11 This exception is inapplicable.
A trustee cannot recover funds for the benefit of the estate once it has been determined that the transferred funds were trust assets, as those assets do not become property of the debtor’s estate. In re E.D.B. Constr. Corp., No. 11-76129-REG, 2013 WL 6183849, at *3 (Bankr.E.D.N.Y. Nov. 26, 2013). When a debtor holds property in trust under applicable non-bankruptcy law, the equitable interest in that property belongs to the trust beneficiary, not the debtor. The equitable interest does not become Estate property. 11 U.S.C. § 541(d).
In addition to statutory trusts, claimants have attempted to use the constructive trust doctrine to defend avoidance actions.12
Tracing Requirement
In preference actions where the defendant alleges that the property transferred constitutes trust property, the defendant must be able to trace the proceeds of the trust property into the funds that the defendant received. In re Mississippi Valley Livestock, Inc., 745 F.3d 299, 307 (7th Cir.2014) (“There can be no constructive trust without tracing a claimant’s interest to specific property.”); In re Philip Servs. Corp., 359 B.R. 616, 626 (Bankr.S.D.Tex.2006) (“As a general rule, any party seeking to impress a trust upon funds for purposes of exemption from a bankrupt estate must identify the- trust fund in its original or substituted form.”) (quoting First Fed. of Michigan v. Barrow, 878 F.2d 912, 915 (6th Cir.1989)); See also In re E.D.B. Constr. Corp., No. 11-76129-REG, 2013 WL 6183849, at *4 (Bankr.E.D.N.Y. Nov. 26, 2013) (“the funds in a commingled account may be used to pay unsecured creditors unless a trust beneficiary can trace a superior right to those *306funds. Therefore, the funds in a commingled account that could have been used to pay other creditors presumptively constitute[ ] property of the estate.”).
The tracing requirement also applies to cases where the debtor transfers property that the debtor does not own, but has legal control of based on consignment, bailment, or agency relationships. See In re Rine & Rine Auctioneers, Inc., 74 F.3d 854, 860 (8th Cir.1996) (“In a true consignment arrangement, bailment, or agency, recovery by the bailor, principal, or consignor rests upon identification. When the property involved, or its proceeds, has been intermingled with other goods or funds of the debtor’s, the owner must definitely trace that which he claims as contained in the assets of the estate.”) (internal citations omitted).
In Beiger, the Supreme Court carved out a narrow exception to the tracing requirement. Begier v. I.RS., 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). As an airline, the debtor was required to collect excise taxes from its customers for payment to the IRS. § 4291. Pursuant to § 7501, the amount of the excise taxes is “held to be a special fund in trust for the United States,” and are often called “trust-fund taxes.”
During the 90 day period before filing for bankruptcy, the airline had paid the IRS for the taxes it owed — some payments were made out of a separate trust account and other payments were made out of the debtor’s general accounts. The trustee filed an adversary action against the IRS to recover the entire amount that the airline had paid for trust-fund taxes during that 90-day • preference period. The Supreme Court reversed the bankruptcy court’s decision allowing the trustee to avoid payments that the debtor made out of its general accounts.
In determining that tracing was unnecessary in this particular context, the Supreme Court differentiated between a trust created under common law and a statutory trust created under the Internal Revenue Code:
Under common-law principles, a trust is created in property; a trust therefore does not come into existence until the settlor identifies an ascertainable interest in property to be the trust res. A § 7501 trust is radically different from the common-law paradigm, however ... Unlike a common-law trust, in which the settlor sets aside particular property as the trust res, § 7501 creates a trust in an abstract “amount”-a dollar figure not tied to any particular assets-rather than in the actual dollars' withheld. Common-law tracing rules, designed for a system in which particular property is identified as the trust res, are thus unhelpful in this special context.
Begier v. I.R.S., 496 U.S. 53, 62, 110 S.Ct. 2258, 2265, 110 L.Ed.2d 46 (1990) (internal citations omitted).
Accordingly, the Supreme Court reached its decision based on (i) its interpretation that § 7501 does not mandate segregation as a prerequisite to the creation of the trust; and (ii) in the absence of any suggestion in the Bankruptcy Code about what tracing rules to apply, the Supreme Court examined the legislative history.
In analyzing legislative intent, the Supreme Court noted that Congress intended to overturn the Supreme Court’s ruling in Randall, where it prohibited the IRS from recovering withheld taxes ahead of the bankruptcy proceeding’s administrative expenses where the debtor failed to place withheld taxes into a separate account. United States v. Randall, 401 U.S. 513, 91 S.Ct. 991, 28 L.Ed.2d 273 (1971). The Supreme Court noted that a House Report *307to the 1978 Restructuring of the Bankruptcy Code states:
A payment of withholding taxes constitutes a payment of money held in trust under Internal Revenue Code § 7501(a), and thus will not be a preference because the beneficiary of the trust, the taxing authority, is in a separate class with respect to those taxes, if they have been properly held for payment, as- they will have been if the debtor is able to make the payments.
Begier v. I.R.S., 496 U.S. 53, 66, 110 S.Ct. 2258, 2267, 110 L.Ed.2d 46 (1990) (quoting H.R.Rep. No. 95-595).13
The Supreme Court adopted a literal reading of this passage, finding that the trustee “could not avoid any voluntary prepetition payment of trust-fund taxes, regardless of the source of the funds.” (Id. at 66, 110 S.Ct. 2258).
In this case, no exception to the ordinary common-law tracing requirement applies. The ORRI holders have not alleged that an ORRI agreement creates a special type of trust that would make ORRI payments immune from common-law tracing principles.
Each ORRI holder’s motion to dismiss fails to address several crucial facts. Each motion fails to assert whether ATP was contractually required to maintain a separate trust account and whether separate trust funds were used to make the alleged preferential transfers. Certain ORRI agreements expressly permit a payment window between when ATP receives proceeds from production and when it is required to pay the ORRI holder’s share of the proceeds. (See Case No. 12-03425, ECF No. 281 at 17) (providing that ATP shall pay Diamond “within thirty (30) days next following the close of each calendar month.”).
Although the facts are insufficiently pled, the Court notes that the record in the case before it lends credence to the possibility that the payments might have been in satisfaction of a debt. On August 24, 2012, Albert Reese — then ATP’s Chief Financial Officer — testified that ATP was not current on its net profit interests and ORRI payments, stating that it owed approximately $23.4 million from production proceeds received prepetition. (Case No. 12-36187, ECF No. 186 at 96). He testified that these funds were diverted to pay other expenses that were necessary to continue operations. (Id. at 97). At the conclusion of the hearing, Charles Kelly— counsel for ATP — indicated that only certain ORRI agreements contained an escrow requirement, while other ORRIs were merely subject to payment windows. (Id. at 372-373).
The outcome of Tow’s § 547 claims may depend upon fact issues surrounding the mechanics of how ATP made each alleged preferential transfer. For example, ATP could have incurred a debt if ATP used Diamond’s share of the proceeds to pay for other expenses by (i) borrowing funds from a separate Diamond trust account; (ii) failing to place Diamond’s share of the proceeds in an escrow account as required under the contract; or (iii) failing to comply with the payment schedule with traceable funds. If any of these events occurred, *308and ATP subsequently paid Diamond from ATP’s own funds during the 90 day preference period, the payment would constitute a transfer of an interest in the debtor’s property.
Tow’s § 547- Claim against Diamond
Tow alleges that in May of 2009, ATP and Diamond entered into a “Farmout Agreement” and “Conveyance of Overriding Royalty Interest” by which ATP granted Diamond an ORRI in the Leases entitling Diamond to receive a limited “net profits interest” attributable to any Hydrocarbons produced and saved from the Leased Lands. (Case No. 12-03425, ECF No. 270 at 3-5). In exchange for the ORRI, the parties agreed to convert approximately $116,400,000 in accrued accounts payable for past drilling services performed by Diamond into the initial contribution toward the ORRI account, and agreed that thereafter such amount would be increased by invoices for drilling services provided by Diamond in the future. Tow has sufficiently alleged facts to establish the “antecedent debt” requirement for purposes of § 547 of the Bankruptcy Code.
Tow alleges that two preferential transfers — $9,701,526.00 on June 20, 2012 and $7,894,844.00 on July 3, 2012 — were made by ATP to Diamond pursuant to the alleged ORRI transaction. (Id. at 10). Fact issues remain as to whether these payments constitute “transferís] of an interest of the debtor in property...” § 547(b).
Accordingly, Diamond’s motion to dismiss Tow’s § 547 claims is denied.
Tow’s § 547 Claim against TM
Tow alleges that in January of 2010, ATP entered into a “Purchase and Sale Agreement” with GMZ Energy, TM Energy and other parties, under which ATP agreed to sell and GMZ Energy agreed to purchase a term ORRI for $27,533,333.33, and TM Energy agreed to purchase a perpetual ORRI for $466,666.67. (Case No. 12-03429, ECF No. 293 at 3). ATP also entered into a “Farmout Agreement” with TM Energy in January of 2010, in which ATP granted TM an ORRI in exchange for $25,000,000.00 in cash. (Id. at 5). The parties subsequently made several amendments to the terms of their agreements. Tow has sufficiently alleged facts to establish the “antecedent debt” requirement under § 547.
Tow alleges that a preferential transfer in the. amount of $1,031,847.00 was made to TM on May 31, 2012. (Case No. 12-03429, ECF No. 293 at 10). Fact issues remain as to whether these payments constitute “transferís] of an interest of the debtor in property ...” § 547(b).
Accordingly, TM’s motion to dismiss Tow’s § 547 claim is denied.
Conclusion
The Court will enter Orders consistent with this Memorandum Opinion.
. The Court ruled that the alternative argument for dismissing the Trustee’s § 549 claims — i.e. that Bennu’s ownership of the recharacterization claims precludes the Trustee’s pursuit of § 549 claims — was therefore moot.
. Because TM’s ORRI only relates to the Tele-mark and Clipper properties (none relate to Gomez), the Court dismissed Tow’s §§ 541(a) and 549 claims against TM with prejudice. (Case No. 12-03429, ECF No. 315). Tow’s § 547 claims against TM were taken under advisement.
. At the May 22 hearing, the Court rejected Tow's theory that the estate retained the right to prosecute all § 549 claims because the sale documents and the Disgorgement Order treat "Debtor” and "Debtor’s estate” differently so that only assets defined with reference to the "Debtor” were sold under the Final Sale Order.
. Additionally, TM argues that Tow’s § 547 claims should be dismissed because the Trustee amended his counterclaim without seeking leave of this Court in violation of Rules 24(a)(2), 15, and 13 (made applicable under the Bankruptcy Rules). (Case No. 12-03429, ECF No. 306 at 21). Tow responded to these alleged procedural deficiencies by expressly seeking leave to file the amended counterclaim from the Court. Because TM has failed to show any prejudice caused by the delay, *300TM's procedural grounds for dismissal are denied.
. As discussed above, paragraph 3(c) states "[t]he Trustee may not pursue § 549 claims that were purchased by Bennu.”
. A "Ponzi scheme” is any sort of fraudulent arrangement that uses later acquired funds or products to pay off previous investors.
. Under Louisiana law, the definition of a “debt” appears to be far narrower than the Bankruptcy Code's definition. A loan of money is a contract by which one person pays money to another, and the party receiving the funds "is bound to repay the same numerical amount... regardless of fluctuation in the value of the currency.” LA. CIV. CODE ANN. ART. 2907. The definition of a loan provides for the unconditional obligation to repay the money loaned.
. It is also worth noting that this Court has recognized that some or all of the ATP transactions may be wholly consistent with the definitions of both a debt instrument and a Term ORRI under Louisiana law. (Case No. 12-03443, ECF No. 145 at 13).
. Additionally, the parties' stated intent to convey “real property interests” under the relevant documents is not relevant in determining whether these were preferential transfers under § 547(b). See Corporate Food Mgmt., Inc. v. Suffolk Cmty. Coll. (In re Corporate Food Mgmt., Inc.), 223 B.R. 635, 641 (Bankr.E.D.N.Y.1998) (quoting Cullen Center Bank & Trust v. Hensley (In re Criswell), 102 F.3d 1411, 1414 (5th Cir.1997)) ("Because a ‘preference is an infraction of the rule of equal distribution among all creditors,’... neither the intent nor motive of the parties is relevant in consideration of an alleged preference under § 547(b).”).
. If the funds are traceable, the Court may later be called upon, to decide whether the funds were held in a trust that would except the funds from Estate property.
. See Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1356 (5th Cir.1986) (“In cases where a third person makes a loan to a debtor specifically to enable him to satisfy the claim of a designated creditor, the proceeds never become part of the debtor's assets, and therefore no preference is created. The rule is the same regardless of whether the proceeds of the loan are transferred directly by the lender to the creditor or are paid to the debtor with the understanding that they will be paid to the creditor in satisfaction of his claim, so long as such proceeds are clearly 'earmarked.'") (quoting 4 Collier on Bankruptcy ¶ 547.25 at 547 — (101—102) (15th ed. 1986).
. Some courts have rejected the applicability of the constructive trust doctrine in bankruptcy preference litigation. See, e.g., In re Omegas Group, Inc., 16 F.3d 1443, 1451 (6th Cir.1994).
. Additionally, the Supreme Court noted that a Senate bill attacked Randall directly, providing in § 541 that trust-fund taxes withheld or collected prior to the filing of the bankruptcy petition were not "property of the estate.” See S. Rep. No. 95-1106, at 33 ("These amounts will not be property of the estate regardless o£ whether such amounts have been segregated from other assets of the debt- or by way of a special account, fund, or otherwise, or are deemed to be a special fund in trust pursuant to provisions of applicable tax law”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498837/ | MEMORANDUM OPINION REGARDING DEBTOR’S EMERGENCY MOTION TO IMPOSE THE AUTOMATIC STAY
[.Resolving ECF No. 10]
Eduardo V. Rodriguez, United States Bankruptcy Judge
I. Introduction
In the instant motion, the Court is asked to determine whether to grant Reynaldo Acosta’s (the “Debtor ”) Emergency Motion To Impose the Automatic Stay pursuant to 11 U.S.C. § 362(c)(4)’s required rebuttal of the presumption that a bankruptcy filing is not in good faith where the debtor had two or more cases pending within the prior year.
II. Findings Of Fact
To the extent that any Finding of Fact constitutes a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law constitutes a Finding of Fact, it is adopted as such.
A. The Debtor’s First Bankruptcy Case
1. On May 10, 2013, Debtor filed his initial petition for bankruptcy relief under chapter 13 of Title 11 of the United States Code (the “Bankruptcy Code” or “Code”)),1 initiating case number 13-70233-M-13 and thereby invoking the automatic stay pursuant to 11 U.S.C. § 362. *311[ECF No. 1]. Debtor filed his chapter 13 plan on the same date. [ECF No. 2]. The Plan called for monthly payments in the amount of $10,000.00 to the chapter 13 trustee with a 47% dividend to the general unsecured class of creditors.
2. On May 24, 2013, Debtor filed his Motion To Extend The Automatic Stay. [ECF No. 11]. Debtor had filed a prior case at 11-70784-M-13 on November 30, 2011, which was dismissed on April 23, 2015.
3. Debtor listed his occupation as owner/operator of RDB Transport, with income of approximately $12,376.15 per month. [ECF No. 92],
4. On June 27, 2013, the court granted Debtor’s Motion and entered an order extending the automatic stay. [ECF No. 30].
5. On October 17, 2013, the chapter 13 trustee filed her Motion To Dismiss. [ECF No. 46].
6. On January 23, 2014, the court gave Debtor fourteen days to cure the deficiencies stated in the trustee’s Motion To Dismiss, or else the case would be dismissed. [ECF No. 61].
7. On May 16, 2014, the trustee filed her Second Motion To Dismiss in which the trustee alleged that the Debtor, inter alia, had failed to file a feasible plan. [ECF No. 67].
8. On January 22, 2015, the plan was ultimately confirmed by the court. [ECF No. 99].
9. On March 27, 2015, Hidalgo County filed a Motion To Dismiss for failure to pay post-petition ad valorem taxes. [ECF No. 104].
10. On April 20, 2015, the court entered its order dismissing bankruptcy case 13-70233-M-13. [ECF No. 105].
B. The Debtor’s Second Bankruptcy Case
11. On May 7, 2015, Debtor filed another chapter 13 petition, initiating case number 15-70242-M-13 and thereby again invoking the automatic stay. [ECF No. 1].
12. On May 15, 2015, Debtor filed his motion to extend the automatic stay. [ECF No. 14].
13. Debtor again listed his occupation as owner/operator of RDB Transport, this time earning approximately $13,085.09 per month. [ECF No. 36],
14. On May 22, 2015, PACCAR Financial Corp. (“PFC”) filed its Objection to Debtor’s Motion, alleging, inter alia, lack of adequate protection. [ECF No. 15].
15. On June 3, 2015, this Court signed an Agreed Order Extending The Automatic Stay regarding PFC’s objection. [ECF No. 23].
16. On June 4, 2015, this Court entered its order extending the automatic stay as to all creditors. [ECF No. 25].
17. On June 23, 2015, the case was automatically dismissed by this Court for deficiencies. [ECF No. 34].
18. On July 6, 2015, Debtor filed a Motion To Reconsider Dismissal, [ECF No. 39], which was denied by this Court on August 19,2015. [ECF No. 46].
C. The Debtor’s Third Bankruptcy Case (the pending chapter 13 case)
19. On October 5, 2015, Debtor filed the instant chapter .13 petition, case number 15-70503-M-13, thereby again invoking the automatic stay pursuant to 11 U.S.C. § 362. [ECF No. 1].
20. On October 5, 2015, Debtor filed his plan of reorganization (herein “Plan ”). [ECF No. 2]. The Plan calls for monthly payments in the amount of $6,800.00 to the chapter 13 trustee with a 100% dividend to *312the general unsecured class of creditors. Id.
21. Debtor again lists his occupation as an “Owner/Operator” of RDB Transport, this time e'arning approximately $9,085.09 in net monthly income. [ECF No. 1— Schedule I].
22. On October 13, 2015, Debtor filed an Emergency Motion To Impose The Automatic Stay (the “Motion”). [ECF No. 10].
23. On October 14, 2015, PFC filed its Objection to Debtor’s Motion (the “Objection”). [ECF No. 13].
24. On October 27, 2015, PFC and the Debtor filed an Agreed Order on Debtor’s Motion (the “Agreed Order”). [ECF No. 23]. The Agreed Order stipulated-, inter alia, that Debtor will make payments in accordance with the Plan and maintain full insurance coverage on the truck tractors that serve as collateral for PFC’s secured claim. Id. at 2-3.
D. The Hearing on October 28, 2015
25. On October 28, 2015, this Court conducted an evidentiary hearing (the “Hearing”) on the instant motion and PFC’s Objection. At the hearing, Debtor’s Counsel was present to argue the instant motion. Additionally, Debtor was present and testified as to the following:
a. Following the dismissal of Debtor’s Second Bankruptcy, case number 15-70242, Debtor used the funds distributed by the chapter 13 trustee to make a payment to creditor(s). PFC was initially offered a payment against the outstanding debts, but PFC refused to accept the payment. See also [ECF No. 10 ¶ 4]. Ultimately, Debtor made a payment to a different creditor, Mack Financial Services, instead of PFC. Mack Financial Services had secured claims on a 2006 KW Tractor (# 140335) and a 2005 Kenworth Tractor (#110881). [Case No. 15-70242, ECF No. 1 at 16]. The result was that Mack Financial Services released its liens as to the two truck tractors and Debtor thereby eliminated a significant debt, which enabled Debtor to propose the Plan with much lower payments,
b. Debtor testified on the various vehicles that are listed on Schedule B, Item 25, [ECF No. 1]:
i. The 2007 Mustang is currently still in Debtor’s possession, but is being used by one of Debtor’s children. When questioned by the Court, however, Debtor testified that there was no outstanding debt or payments being made on the vehicle, despite the fact that Schedule D listed a debt in the amount of $13,064.16 and the chapter 13 plan proposed that the Debtor was to continue making payments in accordance with the prepetition contract on a supposed non-existing debt.
ii. The 2007 Chevy Avalanche was surrendered to a local dealer and is no longer in Debtor’s possession, despite it being listed in Schedules B, C, and D, and despite the fact that the Chevy Avalanche was listed in the Plan as a secured debt in the amount of $13,064.16 and to be paid in accordance with the pre-petition contract.
iii. The 2008 Chevy Silverado, listed in Schedules B, C, D and the chapter 13 plan as a secured debt in the amount of $14,539.54 to be paid in accordance with the pre-petition contract was, in fact, traded in to a dealer to purchase *313a 2014 Dodge Ram, which is titled in the name of Debtor’s spouse, but not present on Debt- or’s Schedule B, C, or D. There is currently approximately $16,000 in debt owed on the vehicle and an approximately $370 per month payment. This monthly payment, however, is not listed in the chapter 13 plan or Schedule J.
iv. As for the 2011 Lincoln MKX, there remains a lien in the approximate amount of $13,000, and it is scheduled to be repaid by the Debtor in the amount- of $800 per month. However, this payment is not listed on Schedule J.
c.Debtor also testified as to the business-related vehicles found on Schedule B, Item 29, [ECF No. I]:
i. PFC currently has a secured claim on two of the four 2006 Kenworth Model T600 truck tractors listed in Schedule B, Item 29 and three Kenworth Model T2000 truck tractors. Debtor testified that a truck tractor had been surrendered to PFC at some point, but did not specify when that occurred or which truck tractor it was.
ii. As previously mentioned, two of the truck tractors previously subr jeet to a claim by Mack Financial Services are no longer subject to that claim.
in. Debtor estimates that his business is currently operating five of the seven truck tractors listed in Schedule B, Item 29. The other two truck tractors are being used for parts and are otherwise nonoperational.
iv. Debtor inconsistently testified that the truck tractors in his fleet were both non-compliant and compliant with the provisions of the Clean Air Act of 1963, 42 U.S.C. § 7401 et seq.
d. Debtor also testified as to the purpose behind filing the instant case. Debtor alleged that PFC has been aggressively pursuing Debtor in regards to PFC’s outstanding claims and allegedly reported the two truck tractors as stolen.
e. Debtor also offered significant but inaccurate and conflicting testimony on the budget and revenues from his business operation:
i. First and foremost, Debtor admitted that the budget for RBD Transport, Debtor’s business, [ECF No. 1 at 31], was based on net revenues, not the gross income required.
ii. Debtor had significant difficulty, due to the prior admission, in establishing a clear picture of the monthly gross income and expenses for RBD Transport.
in. Debtor’s budget is missing key expenses such as diesel fuel, taxes on trucks, and understates other expenses, such as oil changes, car payments, and truck tractor tire repair/replacements.
iv. Additionally, the budget was void of any payments on vehicles, estimated quarterly 1040 taxes of approximately $250 per month, Heavy Highway Vehicle Use Tax, ad valorem taxes on the homestead, and underestimated business related expenses.
f. In discussing the provisions of the Plan, Debtor’s Counsel acknowledged multiple problems with the Plan, such as the foregoing, that require modification. These include provisions in the Plan for pre-petition ad valorem taxes for the years 2013, 2014, and 2015, removal of ve-*314hides that are either no longer in Debtor’s possession, have been paid in full, and/or replacement vehicles that were not listed on the Schedules. In a disturbing disregard of 11 U.S.C. § 521, the chapter 13 plan essentially appears as though it had just been copied and refíled from the older cases without a thorough review of the claims, budget, or plan,
g. After Debtor described the timing of payment issues with the prior case, Debtor’s Counsel offered to file a motion for the Debtor to make payments via ACH or EFT. The proposal was a little too late, as such a motion should have been initiated at the commencement of the case rather than as an afterthought at a hearing.
26. At the conclusion of the Hearing, this Court took the Motion under advisement in order to further examine, pursuant to the requirements of § 362(c)(4), the provisions of the Plan and the schedules filed by the Debtor.
III. Legal Standard
Section 362 provides that a stay, which is applicable to all entities, is automatically applied whenever a debtor files a petition for bankruptcy, whether voluntary or involuntary. 11 U.S.C. § 362(a) (the “Automatic Stay”). The stay prohibits a variety of actions against the debtor or the debtor’s property. § 362(a)(l)-(8). ’ However, the stay is subject to certain restrictions when the debtor(s) have had one or more cases pending within a year prior to filing the current petition. Id. at (c)(3)(a) & (4)(A). When a debtor has two or more cases pending within a year prior to filing the current petition, the Automatic Stay is not in effect. Id. at (c)(4)(A)®. Section 362(c)(4)(A) states that
(i) if a single or joint case is filed by or against a debtor who is an individual under this title, and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707(b), the stay under subsection (a) shall not go into effect upon the filing of the later case; and (ii) on request of a party in interest, the court shall promptly enter an order confirming that no stay is in effect;
§ 362(c)(4)(A)(i)-(ii). However, a debtor may request that a court impose the Automatic Stay within the first 30 days of filing a case, but the court may only grant such relief and impose the Automatic Stay on “any or all creditors (subject to such conditions or limitations as the court may impose), after notice and a hearing, only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed.” § 362(c)(4)(B); see also In re Little Creek Development Co., 779 F.2d 1068, 1072-73 (5th Cir.1986) (discussing the standard for good faith in the Bankruptcy Code and stating that “[djetermining whether the debtor’s filing for relief is in good faith depends largely upon the bankruptcy court’s on-the-spot evaluation of the debtor’s financial condition, motives, and the local financial realities”). Such relief, however, is only effective starting on the day in which the order from the court is entered. § 362(c)(4)(C). Section 362(c)(4)(D) creates a presumption that such a case is not filed in good faith under certain conditions. A court, when considering a debtor’s request for the imposition of the Automatic Stay, must evaluate the debtor’s attempt to rebut this presumption under the clear and convincing evidentiary standard. § 362(c)(4)(D). The presumption is created, as to all creditors, when the debtor has been shown to have met any of the following:
*315“(I) 2 or more previous cases under this title in which the individual was a debtor were pending within the 1-year period;
(II) a previous case under this title in which the individual was a debtor was dismissed within the time period stated in this paragraph after the debtor failed to file or amend the petition or other documents as required by this title or the court without substantial excuse (but mere inadvertence or negligence shall not be substantial excuse unless the dismissal was caused by the negligence of the debtor’s attorney), failed to provide adequate protection as ordered by the court, or failed to perform the terms of a plan confirmed by the court; or
(III) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous case under this title, or any other reason to conclude that the later case will not be concluded, if a ease under chapter 7, with a discharge,' and if a case under chapter 11 or 13, with a confirmed plan that will be fully performed”
§ 362(c)(4)(D)(i)(I)-(III). For creditors that have sought relief from the Automatic Stay in a previous case for the same debt- or, the same presumption is maintained when, “as of the date of dismissal of such case, such action was still pending or had been resolved by terminating, conditioning, or limiting the stay as to such action of such creditor.” § 362(c)(4)(D)(ii).
The imposition of the Automatic Stay is not a matter that is extensively found in case law. However, there are several cases in the Southern District of Texas that are instructive in analyzing the clear and convincing standard announced by the Fifth Circuit in Shafer v. Army & Air Force Exch. Serv., which requires that the:
“weight of proof which produces in the mind of the trier of fact a firm belief or conviction as to the.truth of the allegations sought to be established, evidence so clear, direct and weighty and convincing as to enable the fact finder to come to a clear conviction, without hesitancy, of the truth of the precise facts of the case.”
376 F.3d 386, 396 (5th Cir.2004) (citing to In re Medrano, 956 F.2d 101, 102 (5th Cir.1992)) (internal quotations omitted). In In re Charles, the court set forth a list of factors to be used in determining whether a debtor can, or alternatively has, established that the pending case has been filed in good faith by clear and convincing evidence. 334 B.R. 207, 219-23 (Bankr.S.D.Tex.2005). These so-called Charles factors have been adopted in other sister courts in the Southern District of Texas as recently as July 2015, when the court used the factors in In re Wright, 533 B.R. 222, 233-34 (Bankr.S.D.Tex.2015). The factors to be considered are as follows:
1) Does the creditor against whom the extension of the stay is sought agree to the stay extension?
2) Is it likely that the debtor will obtain a discharge in the pending case?
3) What is the nature of the debt held by the creditor?
4) What is the nature of the collateral held by the creditor?
5) Has the debtor made any purchases on the eve of bankruptcy?
6) What has been the debtor’s conduct in the pending case?
7) What are the reasons why the debtor wants to extend the automatic stay?; and
8) Are there any unique facts or circumstances particular to the pending case?
*316Id. at 234. The factors, which were intended to assess a debtor’s § 362(c)(3) good faith rebuttal by the clear and convincing standard are equally instructive as to a § 362(c)(4) rebuttal, and this Court adopts the Charles factors for assessing a good faith filing for both §§ 362(c)(3) & (4). 334 B.R. at 219-23; In re Wright, 533 B.R. at 233-34.
IV. Conclusions Of Law
A. Jurisdiction & Venue
This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides that “the district courts shall have original and exclusive jurisdiction of all cases under title 11.” § 1334(a). This is a core matter for the purpose of 11 U.S.C. § 157, which provides that bankruptcy judges may issue final orders or judgments where the matter is determined to be core. § 157(b)(1). Section 157 enumerates a non-exclusive list of core matters, which includes “matters concerning the administration of the estate.” § 157(b)(2)(A). The decision to grant or deny the imposition of the automatic stay therein is squarely one that involves the administration of an estate. Therefore, jurisdiction is proper by the statutory provisions governing bankruptcy courts.
This Court may only hear a case in which venue is proper. Venue with respect to cases under title 11 is governed by 28 U.S.C. § 1408, which designates that venue may hold wherever “in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity ...” In his petition, Debtor alleges that he resides in San Juan, Texas. Therefore, venue is proper.
B. Constitutional Authority To Enter A Final Order
This Court also has an independent duty to evaluate whether it has the constitutional authority to sign a final order. Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In Stern v. Marshall, the Supreme Court considered the constitutional limitations that Article III imposes upon § 157’s grant of final order and judgment powers to non-Article III courts. Id. The Supreme Court held that § 157 violated Article III to the extent that it authorized final judgments on certain matters. Id. at 2616. The Court found that the particular bankruptcy ruling in dispute did not stem from bankruptcy itself, nor would it necessarily be resolved in the claims allowance process, and it only rested in a state law counterclaim by the estate. Id. at 2618. The Court reasoned that bankruptcy judges are not protected by the lifetime tenure attribute of Article III judges, but they were performing Article III judgments by judging on “all matters of fact and law” with' finality. Id. at 2618-19. Hence, the Court held that Article III imposes some restrictions against a bankruptcy judge’s power to rule with finality. The Court found that a solely state law based counterclaim, while statutorily within the bankruptcy judge’s purview, escaped a bankruptcy court’s constitutional power. Id. at 2620. This Court reads Stern to authorize final judgments only where the issue is rooted in a right created by federal bankruptcy or the resolution of which relies on the claims allowance process. In other words, this Court may issue final judgments and orders where the issue “arises in” or “arises under” bankruptcy, but not where the issue is merely “related to” bankruptcy. See 28 U.S.C. § 157. However, even where the case does create a “Stern problem,” Article III will be satisfied where the parties to the case knowingly and voluntarily consent to the bankruptcy court’s power to issue final judgments. *317Wellness Int’l Network v. Sharif, — U.S. —, 135 S.Ct. 1932, 1938-39, 191 L.Ed.2d 911 (2015).
The matter at bar requires this Court to decide whether the automatic stay pursuant to 11 U.S.C. § 362 (c)(4) should be imposed, [ECF No. 10], which solely concerns federal bankruptcy law. Therefore, this Court holds constitutional authority to enter a final order and judgment with respect to the matter at bar.
C. A Review of the 8 Factors to Determine Whether to Grant or Deny the Debtor’s Motion
1. Threshold Factors&emdash;Creditor Response and Potential for Discharge
In Charles, the court reasoned that the first two factors amounted to a threshold test for good faith by the debtor(s). In re Charles, 334 B.R. at 220-21; see also In re Wright, 533 B.R. at 234. If this Court cannot find that either of the threshold factors are met, then the inquiry must continue to the latter factors. In re Collins, 335 B.R. 646, 653 (Bankr.S.D.Tex.2005).
The first factor looks at the response from a creditor to the debtor’s motion to impose the Automatic Stay. In re Charles, 334 B.R. at 219-23; In re Wright, 533 B.R. at 233-34. Here, the Motion filed by the Debtor seeks to impose the Automatic Stay as to all creditors, but enumerates a list of specific creditors for the stay to be imposed upon. [ECF No. 10 at 1-2]. Of those creditors, only PFC has objected to the Debtor’s Motion. [ECF No. 13]. This Court can only infer that the remaining creditors have no objection to the stay being imposed upon them, due to their failure to file an objection prior to the deadline. [ECF No. 10 & 11]. On the eve of the Hearing, PFC and the Debtor filed an Agreed Order with the Court, [ECF No. 23], that therefore manifests agreement with the Debtor’s Motion, Subject to the qualifications of the Agreed Order. Finding of Fact No. 24. However, the remaining creditors are deemed to have agreed to the motion, so no further analysis beyond the second factor need be done. § 362(c)(4)(B); In re Collins, 335 B.R. at 653 (“A finding that the creditor against whom the extension of the stay is sought agrees to a stay extension ends the inquiry”); Cf. In re Charles, 334 B.R. at 220. Accordingly, as to PFC, this Court notes that it has objected to the plan, even though PFC subsequently filed the Agreed Order, and this Court will continue the analysis for PFC claims to ensure that there is good faith on behalf of the Debtor. Finding of Fact No. 23 & 24.
The second factor is an objective test, in the sense that it objectively analyzes the debtor’s situation to determine whether the pending bankruptcy case is likely to succeed or to fail. In re Charles, 334 B.R. at 219-23; In re Wright, 533 B.R. at 233-34. In order to receive a discharge in a chapter 13, the debtor must confirm a plan and perform under that plan. 11 U.S.C. § 1328. Here, Debtor’s pending bankruptcy appears to be in better condition, initially, than Debtor’s second bankruptcy, which ended in automatic dismissal under § 521(i), and Debtor’s first bankruptcy, which was dismissed for failure to pay the post-petition ad valorem taxes addressed for in the plan. Findings of Fact No. 9, 10, 17 & 18. Debtor has filed the necessary forms, as required by § 521(i), in a timely manner. [ECF No. 1, 4, 5, and 23]; see also [ECF No. 10 ¶ 5], However, after careful review of the documents on file and the testimony provided by Debtor at the Hearing makes it apparent that the plan and schedules filed by Debtor are wildly inaccurate. Finding of Fact No. *31825(a)-(g). Furthermore, it appears that Debtor’s Counsel, in preparing the schedules, did little more than copy the schedules from the Second Bankruptcy case without inquiry and with barely competent updates. Id.; Compare [Case No. 15-70503, ECF No. 1] with [Case No. 15-70242, ECF No. 1]; see also Fed. R. Bankr. P. 9011(b) (discussing that representations made to the court are to be done only after “an inquiry reasonable under the circumstances”). Moreover, the Plan proposed by the Debtor suffers, in part, from the same type of gross inaccuracies attributable to the missing assets and liabilities in the schedules. Finding of Fact No. 25(a)-(g). The Plan, while not yet confirmed by this Court nor likely confirmable, calls for 100% dividend to unsecured creditors over the course of a five year period. [ECF No. 2 at 10]. The Plan is based on payments sourced from approximately seventy-five percent of Debtor’s income, which is certainly a hefty percentage of discretionary income to be committed to the payments; however, a large portion of the budget is based on misguided and inaccurate information that is certainly not reliable. Id. at 9. This alone raises feasibility issues. In its preliminary inquiry into confirmability, this Court cannot conclude that the Plan meets the requirements under 11 U.S.C. § 1325 as to be likely confirmable, due to the substantial problems with the Plan and Debtor’s Schedules. In re Charles, 334 B.R. at 220-21. This Court has serious concerns regarding Debtor’s failure to provide for insurance and taxes in the budget, failure to propose a feasible plan, failure to provide for electronic payments to the chapter 13 trustee, and failure to provision emergency savings in the Plan, especially given the volatile nature of Debtor’s business. [ECF No. 1 at 32-34 & 2 at 7-8]; see also Findings of Fact No. 25(e)(iii) and 25(f)-(h). Under these circumstances, Debtor’s Plan, once modified, could possibly result in a bankruptcy discharge should the Debtor complete all payments scheduled in the Plan. However, the current Plan is patently not confirmable, and therefore a discharge will not occur. § 1328; ECF No. 2 at 9; Findings of Fact No. 25(b)-(h). Accordingly, Debtor has not met the threshold for establishing good faith in filing the instant case, for failure to show that the prospective outcome of the Plan will allow Debtor to obtain a discharge, given the overall picture of Debt- or’s business operations as explained at the Hearing.
As the threshold determinations do not weigh towards a finding of good faith in the filing of the instant bankruptcy, this Court must continue with the inquiry to determine whether the Motion is filed in good faith to PFC, as the other creditors are deemed to have agreed to the motion.
2. Subjective Analysis — Factors Specific to the Pending Bankruptcy for PFC
The subjective analysis takes into account the remaining six Charles factors. In re Charles, 334 B.R. at 221-23. This Court will analyze these factors to determine if there is good faith in the filing of the pending case “as to the creditors to be stayed.”
The first factor considers the nature of the debt held by the creditor for whom the debtor seeks to impose the stay. Id. The court in Charles described the first factor as evaluating the purpose for which the debt was acquired, potential questionable conduct by the debtor, and if there was any malfeasance on behalf of the debtor. Here, PFC holds a secured claim on two Kenworth truck tractors in the amount of $36,720.67. [ECF No. 1 at 20]. However, there is an unsecured claim of $5,225.49, since the value of the two truck tractors, *319which is collectively $31,495.18, is less than the secured claim. Id. Debtor’s business involves operating a trucking company, and thus, in order to have a successful business, the Debtor must have access to tractors. As in Charles, this Court is hard pressed to conclude that the nature of the debt is anything other than what was necessary to operate the business that the Debtor operates. In re Charles, 334 B.R. at 221. Therefore, this factor weighs towards a finding that the filing of the pending case was done in good faith.
The second factor is the nature of the collateral held by the creditor, which weighs much the same as the first factor, given its apposite analysis to the first factor. As discussed above, PFC holds collateral in the two Kenworth truck tractors used in the course of the Debtor’s business. [ECF No. 1 at 20]. The Debtor has a total of seven truck tractors, of which only five are operational, and so the potential loss of the two PFC tractors would significantly hamper the Debtor’s ability to perform under the plan. Finding of Fact No. 25(c)(iii). The necessity of these two truck tractors weighs towards a finding of good faith just as did the finding of the acquisition of the related debt under factor one.
The third factor is whether the debtor made any purchases on the eve of bankruptcy, such that they might appear to have been made in bad faith. The law on these types of purchases is well settled and vitiates any appearance of good faith on behalf of Debtor. In re Charles, 334 B.R. at 222; see also In re Vianese, 192 B.R. 61, 72 (Bankr.N.D.N.Y.1996); In re Barnes, 158 B.R. 105, 108-09 (Bankr.W.D.Tenn.1993). The irregularities with Debtor’s personal vehicles, as testified in the hearing, compared to what is provided in the schedules is extremely troubling to this Court, but it does not appear that any of the transactions were made on the eve of bankruptcy. Finding of Fact No. 25(b)(i)-(iv). However, Debtor did testify that he utilized the unused funds, post-dismissal of the Second Bankruptcy, to make a payment to a creditor, which effectively completed a purchase of the two truck tractors. Finding of Fact No. 25(a). Here, there appears to be no direct evidence of any purchases on the eve of bankruptcy such that this Court could find that the filing of the pending case was not made in good faith.
The fourth factor considers the debtor’s behavior in the pending bankruptcy case. In re Wright, 533 B.R. at 234. In Charles, the court described this inquiry as an examination “to see if the present case is filed in a bona fide effort to obtain a discharge.” In re Charles, 334 B.R. at 222. The Charles court further explained that the inquiry looks at important actions such as debtor attendance at trustee meetings, as required, the filing of schedules and statements, and the performance of other duties as required by the Code. Id. Here, the Debtor has filed his schedules and statements in a timely manner. [ECF No. 1, 4, 5 and 23]; see also [ECF No. 10 ¶ 5]. The Trustee has scheduled a Meeting of Creditors, pursuant to 11 U.S.C. § 341(a), on November 19, 2015, which will occur after the Hearing. However, the testimony presented at the Hearing provides substantial concern about the quality and veracity of the Debtor’s Plan, petition, and Schedules. Finding of Fact No. 25(a)-(h). While these omissions and inaccuracies do not rise to the finding of not in good faith, they are a continuance of questionable behavior by Debtor and Debtor’s counsel in the filing of the pending case and related Motion. Accordingly, this factor weighs towards a finding that the filing of the pending case was not made in good faith.
*320The fifth factor takes into account the debtor’s purpose in seeking to have the Automatic Stay imposed. In re Wright, 533 B.R. at 234; see also In re Charles, 334 B.R. at 222. Debtor’s stated purpose in seeking to have the Automatic Stay imposed as to all creditors, not just PFC, is to effectuate,the bankruptcy process so that he can make his payments and complete the plan. [ECF No. 10 ¶ 7]. This Court finds Debtor’s purpose to persuasively represent Debtor’s ultimate goal for using the chapter 13 bankruptcy process, in the successful completion of the plan and to avoid continuing issues with PFC with respect to its claim. Finding of Fact No. 24, 25(a), 25(c)(i), and 25(d). Therefore, this factor weighs in favor of a finding of good faith in the filing of fhe instant case.
The sixth Charles factor is to analyze any facts or circumstances that are particularly unique to the pending case. In re Charles, 334 B.R. at 223. Here, Debtor’s second bankruptcy, case no. 15-70242, was dismissed, but the court indicated that reinstatement was possible if Debtor met the requirements of the Trustee. [ECF No. 10 ¶ 3]. To further complicate matters, this Court’s predecessor retired the day after Debtor met those requirements. Id. However, Debtor did not raise the issue of compliance with the order from the July 23, 2015 hearing with this Court after the retirement of this Court’s predecessor, which resulted in this Court denying Debt- or’s Motion to Reconsider Dismissal approximately three weeks later. Finding of Fact No. 18. Thus, while the foregoing are facts from the prior case, they nonetheless are uniquely determinative as to the filing of the instant case. This Court finds that there are no facts or circumstances unique to the instant case that weighs towards a finding that the pending case was filed not in good faith.
The foregoing six Charles factors, in whole, weigh towards a finding that the pending case was filed in good faith. In re Charles, 334 B.R. at 219-23; see also In re Wright, 533 B.R. at 222-38. However, as discussed in In re Wright, a finding of good faith pursuant to § 362(c)(4)(B) does not require that this Court impose the Automatic Stay on any or all creditors. In re Wright, 533 B.R. at 239-40; see also In re Charles, 334 B.R. at 223. This Court, in accordance with our sister courts, agrees with this approach and therefore adds the following analysis to further make a determination as to the filing of the pending case being made in good faith.
3. Additional Factors to be Considered Beyond the Charles Factors
In addition to the, foregoing Charles factors, this Court will take into consideration three additional factors. The first additional factor is based on the debtor’s employment, irrespective of W-2 status, in whether the debtor has a wage order in place or has signed up for electronic payments with the Trustee to facilitate' a successful plan. The second additional factor is based on § 362(c)(4)(D)(i)(III) and analyzing any substantial changes between a Debtor’s prior bankruptcy cases and the pending case. The third additional factor, pursuant to § 362(c)(4)(D)(ii), is to determine whether any of the creditors that the debtor seeks to impose the Automatic Stay upon had in the prior bankruptcy case a pending motion for relief from stay in which the result would be a termination, conditioning, or limiting of the stay. § 362(c)(4)(D)(ii).2
*321The first of the additional factors that this Court will analyze is whether the Debtor has entered or otherwise appears to be contemplating the use of a Wage Order or EFT or ACH Payments to facilitate payments being made in a timely manner. The Southern District of Texas Bankruptcy Local Rules require that the Debtor file the appropriate form of order contemporaneously with the plan or in the alternative, as justified by extraordinary circumstances, file a motion with the court for an exception to the requirement. BLR 1007 — 1(d)(1)—(3). Here, the Debtor has vaguely mentioned in the Plan that the payments would be made in compliance with BLR 1007-1, but has failed to file the appropriate motion for EFT or ACH'pay-ments, a Wage Order, or a motion for an exception. [ECF No. 2 at 1]. At the hearing, the issue of electronic payments did arise, and Debtor’s counsel offered to take steps to arrange for Debtor to make payments electronically. Finding of Fact" No. 25(i). Accordingly, absent excusable negligence that was not apparent at the Hearing, this Court cannot conclude that the Debtor has demonstrated good faith where it failed to comply with Local Rule 1007-1, despite the suggestion of steps to rectify the failure.
The second additional factor, pursuant to the Code, is a determination as to any “substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous case.” § 362(c)(4)(D)(i)(III). Here, the Debtor made significant progress in the second bankruptcy, case number 15-70242, towards reducing his debt by making payments of $10,000 prior to the dismissal of the case. [ECF No. 10 at ¶ 3 & 5], Additionally, the Debtor paid off one of his creditors in the interim between the Second Bankruptcy case and the pending case, thus eliminating a potential additional secured claim. Finding of Fact No. 25(a). The prior progress made by the Debtor coupled with the provisions of the Plan seem to meet the type of substantial change in circumstances contemplated in § 362(c) (4) (D) (i) (II I); Finding of Fact No. 25(a). However, due to the presence of -significant missing provisions in the Plan providing for the payment of post-petition ad valorem taxes, post-petition 1040 taxes, insurance coverage, payments on four vehicles missing in the budget and not accounted for in the Plan, and in light of its wholly inaccurate budget, this Court is hard pressed to conclude that there are substantial changes in the financial or personal affairs of the Debtor such that this Court may conclude that the filing of the instant case is substantially different from the first case. In fact, it appeared to this Court that the Plan in the prior case was merely copied and pasted into the case that is presently pending before this court. Finding of Fact No. 25(a)-(f). Therefore, due to the need by Debtor to make significant amendments and modifications to the Plan and Schedules in order for this Court to conclude that the circumstances warrant a substantial change, this Court cannot find that the pending case was filed in good faith.
The third and final additional factor that this Court will consider is whether there were any pending motions for relief from stay at the time of the dismissal of the prior case. § 362(c)(4)(D)(ii). A survey of the docket for Case No. 15-70242 demonstrates that there were no Motions for Relief from the Stay filed in the case, and there were therefore none pending at the *322time of dismissal. This Court finds that as to this third additional factor, the Debtor has filed the pending case in good faith.
Given the foregoing three additional factors that this Court has taken into consideration in addition to the Charles factors, this Court concludes that the pending case was not filed in good faith due to the substantial deficiencies already outlined in this opinion. [ECF No. 2 at 1, 10 at ¶ 3 & 5].
V. Conclusion
Debtor filed his Motion to Impose the Automatic Stay, which requires that this Court consider Debtor’s conduct both in his instant and prior cases and conduct a preliminary consideration of the Debtor’s filings in the instant case. § 362(c)(4)(B). This Court adopted the factors used by our sister courts in In re Charles, In re Collins, and In re Wright to help determine whether the Debtor filed the pending case in good faith by “clear and convincing evidence.”3 See In re Charles, 334 B.R. at 219-223; see also In re Wright, 533 B.R. at 234; In re Collins, 335 B.R. at 652. The first two threshold factors did not weigh in favor of a finding that the Debtor had filed the pending case in good faith. Supra Part IV.C.1. The subjective analysis under the Charles factors weighed towards finding that the Debtor had filed the pending case in good faith. Supra Part IV.C.2. This Court found that an additional three factors should be used to further determine if the filing had been made in good faith, and in such inquiry, found that the Debtor’s Plan and Schedules had some major anomalies. Supra Part IV.C.3. The analysis under these additional three factors concluded with a finding that the pending case had been filed not in good faith, where significant deficiencies in the Plan and omissions in the various Schedules prevented Debtor from demonstrating that substantial changes could affect Debt- or’s ability to successfully complete the payments scheduled in the Plan or" any amended Plan. Accordingly, Debtor’s Motion to Impose the Automatic Stay is DENIED.
An Order consistent with this Memorandum Opinion will be entered on the docket simultaneously herewith for both the Debt- or’s Motion and the Agreed Order.
. Any reference to “Code" or “Bankruptcy Code" is a reference to the United States Bankruptcy Code, 11 U.S.C., or any section (i.e.§) thereof refers to the corresponding section in 11 U.S.C.
. Subparagraph (ii) provides that a case is presumptively filed not in good faith "as to any creditor that commenced an action under subsection (d) in a previous case in which the *321individual was a debtor if, as of the date of dismissal of such case, such action was still pending or had been resolved by terminating, conditioning, or limiting the stay as to such action of such creditor.”
. Clear and convincing evidence was defined by the Fifth Circuit in Shafer, 376 F.3d at 396. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498839/ | MEMORANDUM
Alan C. Stout, United States Bankruptcy Judge
This adversary proceeding comes before the Court on the Motion for Summary *333Judgment1 (the “Motion”) filed by Plaintiff CMCO Mortgage, LLC d/b/a Home Lending Source (“HLS”)- The Debtor, Aaron K. Hill (“Hill”), opposes the motion. The Court has considered the Motion, the responses of Hill, the supporting documents submitted by each party, and the comments of counsel given at the hearing held on the Motion, as well as the entire record presented to the Court in this matter. For the following reasons, the Court will grant HLS’ Motion for Summary Judgment.
JURISDICTION
Determinations of dischargeability are core proceedings under 28 U.S.C. § 157(b)(2)(I). The Court has jurisdiction over core proceedings under 28 U.S.C. §§ 1334 and 157(a).
FACTUAL AND PROCEDURAL BACKGROUND
The following facts are not in dispute. HLS was a mortgage company, where Hill worked as an employee. HLS terminated Hill on February 17, 2012, after HLS learned that Hill was taking actions HLS believed were adverse to its interests. In February 2012, HLS filed an action in Jefferson Circuit Court against Hill, and seventeen (17) other defendants. HLS amended its complaint in March 2012. HLS alleged that beginning in 2011, Hill began discussions with Peoples Bank, a direct competitor of HLS. Between November 2011 and February 2012, Hill allegedly engaged in unauthorized and extensive negotiations with Peoples Bank to open an internet division that would directly compete with HLS and while utilizing HLS employees. HLS alleged that in the course of his discussions with Peoples Bank, Hill disclosed HLS’ confidential and proprietary information to Peoples Bank. Furthermore, HLS alleged that Hill sent HLS’ trade secrets to Peoples Bank without HLS’ consent.
HLS alleged numerous claims against Hill, including: 1) Breach of Contract; 2) Breach of Fiduciary Duty; 3) Interference with Actual or Prospective Business Advantage; 4) Unfair Competition, Usurpation of Corporate Business Opportunities; 5) Trade Secret Misappropriation; 6) Conversion; and 7) Unjust Enrichment.
Peoples Bank paid for Hill’s representation, and retained an attorney to represent Hill and the other individual defendants who had been HLS employees. Hill filed an answer, and asserted counterclaims against HLS. In July, 2013, a mediation was held and the claims with the other defendants were settled. The claims against Hill were not settled. After the mediation, Hill’s attorney was apparently told by Peoples Bank that it would no longer pay for the representation of Hill. Nevertheless, that attorney continued to represent Hill gratis for a short period of time, but eventually the attorney withdrew on October 2, 2013, leaving Hill unrepresented.
Hill continued pro se in the state court litigation. On February 11, 2014, the state court entered an order setting the case for a pretrial conference on August 19, 2014 and for a trial to be held on September 22, 2014. After Hill failed to appear at the pretrial conference, on August 20, 2014, the state court entered a default judgment against Hill, as well as a judgment in favor *334of HLS on all claims asserted by Hill (the “Default Judgment”)- The Default Judgment was entered in response to HLS’ motions for sanctions due to Hill’s “repeated and intentional failures to comply with the Court’s Second Jury Trial Order dated February 11, 2014, and his failure to appear at the final pretrial conference.” Exh. C & D to the Complaint.
On September 22, 2014, the state court held a trial to determine HLS’ damages on its complaint. HLS appeared and presented evidence as to its damages, and on October 3, 2014, the state court entered Findings of Fact and Judgment for Plaintiff CMCO Mortgage, LLC, D/B/A Home Lending Source against Hill in the amount of $3,417,477.00, with interest at twelve percent (12%) compounded annually (the “Damages Judgment”). According to the Damages Judgment, Hill was aware of the trial date, but failed to attend or otherwise participate in the trial.
The state court made several relevant findings in the Damages Judgment. At ¶ 6, the state court found that Hill engaged in unauthorized discussion to open an internet division that would be competitive to HLS, using HLS employees. The court found Hill disclosed HLS’ confidential and proprietary information to Peoples Bank. Moreover, Hill emailed the HLS information from his HLS email account to a personal email account before sending the information to Peoples Bank to avoid detection by HLS.
At ¶ 7, the court found Hill sent HLS’ trade secrets to Peoples Bank. These trade secrets had an economic value.
At ¶ 12 of the Damages Judgment, the state court found that Hill’s actions were “willful, intentional, in bad faith, egregious, and done with malice.” The court further determined that Hill’s “actions caused a willful and malicious injury to HLS” and constitute “fraud and defalcation while acting in a fiduciary capacity given his intentional misrepresentations made to conceal his wrongful actions from HLS, and his failure to meet his fiduciary obligations to HLS.” The court also found that “Hill intended the consequences of his actions, namely the destruction of HLS’ internet division. Hill’s actions were done in reckless disregard of HLS’ economic interests and expectancies.”
Although Hill filed a motion to reconsider, the state court denied the motion and neither the Default Judgment nor the Damages Judgment were appealed, vacated, or otherwise modified.
On September 29, 2014, Hill filed a petition for bankruptcy relief-under Chapter 7 of the Bankruptcy Code. On October 29, 2014, HLS filed its timely Proof of Claim for $3,417,477.00. Upon motion by HLS, pursuant to 11 U.S.C. § 362(d), this Court entered an order on June 8, 2015, annulling the automatic stay as it applied to the Damages Judgment issued by the state court on September 22' 2014 and entered on October 3, 2014.
On January 5, 2015, HLS filed this adversary proceeding against Hill, seeking a determination that the debts owed by Hill to HLS are non-dischargeable pursuant to 11 U.S.C. § 523 and seeking to deny Hill’s discharge pursuant to § 727(a). HLS sought to except the debt from discharge pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6). HLS sought to deny Hill’s discharge pursuant to 11 U.S.C. § 727(a)(4)(A).
Hill answered the complaint denying the material allegations.
On July 21, 2015, HLS filed the Motion currently before the Court. HLS filed its summary judgment motion only on its claim for non-dischargeability under § 523(a)(6), alleging there are no material *335facts in dispute that Hill’s conduct was “willful and malicious.”
As will be discussed more fully below, Hill opposed the Motion, arguing a variety of theories.
SUMMARY JUDGMENT STANDARD
Federal Rule of Civil Procedure 56(c), made applicable to bankruptcy proceedings by Bankruptcy Rule 7056, provides that a court shall render summary judgment:
if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
The party moving the Court for summary judgment bears the burden of showing that “there is no genuine issue as to any material fact and that [the moving party] is entitled to judgment as a matter of law.” Jones v. Union County, 296 F.3d 417, 423 (6th Cir.2002). See generally Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party meets that burden, the nonmoving party “must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial.” Hall v. Tollett, 128 F.3d 418, 422 (6th Cir.1997) (emphasis added). In determining the existence or nonexistence of a material fact, a court will view the evidence in a light most favorable to the nonmoving party. Tennessee Dep’t of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir.1996). Absent such evidence from the nonmoving party in a motion for summary judgment, the Court need not comb the entire record to determine if any of the available evidence could be construed in such a light. See In re Morris, 260 F.3d 654, 665 (6th Cir.2001) (holding that the “trial court no longer has the duty to search the entire record to establish that it is bereft of a genuine issue of material fact”).
DISCUSSION
HLS seeks to have the debt owed to it by Hill declared nondischargeable in Hill’s Chapter 7 bankruptcy proceeding. HLS’ Motion for Summary Judgment contends that Hill’s actions constitutes willful and malicious injury under 11 U.S.C. § 523(a)(6).
HLS argues that under the doctrine of collateral estoppel, the judgment of the state court should be given preclusive effect to establish that Hill’s conduct constituted a “willful and malicious injury” within the meaning of § 523(a)(6), such that his debt to HLS is nondischargeable.
It is without question that the doctrine of collateral estoppel applies in bankruptcy proceedings. See Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (A bankruptcy court may properly give collateral estoppel effect to those elements of the claim that are identical to the elements required for discharge and which were actually litigated and determined in the prior action); In re Brown, 489 Fed.Appx. 890 (6th Cir.2012). Under the standards of full faith and credit enunciated in 28 U.S.C. § 1738, “a federal court must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered.” Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75, 81, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984). When assessing whether a state court judgment should be given preclusive effect in a non-dischargeability action, a bankruptcy court may review the entire record in the state court case to determine the grounds for, or *336the meaning of, the state court’s judgment or order. Miller v. Grimsley (In re Grimsley), 449 B.R. 602, 615 (Bankr.S.D.Ohio 2011).
When applying collateral estoppel principles to a nondischargeability proceeding, a bankruptcy court is directed to apply the law of the forum where the original proceeding took place. Wolstein v. Docteroff (In re Docteroff), 133 F.3d 210, 214 (3rd Cir.1997). Normally, this entails applying the law of collateral es-toppel from the state in which the underlying judgment was rendered. The Sixth Circuit has held that the application of collateral estoppel in a nondischargeability action is contingent upon whether the applicable state law would give collateral es-toppel effect to the prior judgment. Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315 (6th Cir.1997). See also In re Francis, 226 B.R. 385, 388 (6th Cir. BAP 1998) (state court judgments may be given preclusive effect in nondischarge-ability actions if the law of that state would apply collateral estoppel to the judgments). Thus, this Court must look to Kentucky law to determine if collateral estoppel applies in this case.
In order for collateral estoppel to apply under Kentucky law, a party must establish four elements. First, (1) “the issue in the second case must be the same as the issue in the first case.” In addition, the issue must have been (2) actually litigated, (3) actually decided, and (4) necessary to the court’s judgment. Coomer v. CSX Tmnsp., Inc., 319 S.W.3d 366, 374 (Ky.2010); Buis v. Elliott, 142 S.W.3d 137, 140 (Ky.2004).
The Court will first address the identity of issues element. HLS argues that the identity of issues requirement is met because the debt resulted from the prior state court litigation against Hill. The debt is based upon several separate causes of action, including interference with actual or prospective business advantage; unfair competition, usurpation of corporate business opportunities; trade secret misappropriation; and conversion. If proven, each of these counts would support a claim for willful and malicious injury under § 523(a)(6).
This Court agrees. Hill’s actions were indisputably adjudged by the Jefferson Circuit Court to have been “willful, intentional, in bad faith, egregious, and done with malice.” Said actions led to injury to HLS in an amount equal to the Damages Judgment.
Under § 523(a)(6), a debt is nondis-chargeable if it is “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). HLS, as the party seeking application of the exception, bears the burden of proving its elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Under 11 U.S.C. § 523(a)(6), in order to find “willful and malicious injury,” a bankruptcy court must find the debtor “(1) intended to cause injury to the Creditor or to the Creditor’s property, or (2) engaged in an intentional act from which [the debt- or] believed injury would be substantially certain to result.” In re Sweeney, 264 B.R. 866, 871 (Bankr.W.D.Ky.2001) (citing Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir.1999)); see also Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (holding that, with respect to the intent requirement under § 523(a)(6), “[t]he section’s word ‘willful’ modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely *337a deliberate or intentional act that leads to injury.”).
This case is very similar to the case in Spring Works, Inc. v. Sarff (In re Sarff), 242 B.R. 620, 625 (6th Cir. BAP 2000). In that case, Gregory Sarff (“Sarff’) was a former sales person for Spring Works, Inc. (“Spring Works”), a bedspring manufacturer. While still employed by Spring Works, Sarff began providing services to a competitor of Spring Works, National Spring (“National”). Specifically, while employed by Spring Works, Sarff loaned money to National to purchase office equipment, purchased a phone system for National, and referred a Spring Works customer to National. Id. at 625-26. The BAP found that such conduct met the standards for non-dischargeability pursuant to 523(a)(6) and held:
There is no question that Sarff, both individually and in concert with the other defendants in the state court action, willfully and maliciously caused injury to [Spring Works] by misappropriating trade secrets and interfering with business relations. The bankruptcy court noted that the state court’s award of punitive damages further indicated that the state court found that Sarff acted with malice.
Those actions indicate an intention to cause Spring Works economic injury by taking customers from Spring Works. Accordingly, the compensatory damage award in the judgment is nondischargeable under § 523(a)(6). The part of the bankruptcy court’s order finding the compensatory damages for breach of the duty dischargeable is reversed.
[t]his is not the case of an ‘honest but unfortunate’ debtor. Sarff intentionally injured Spring Works by competing with it while he had a duty of loyalty to the company. He stole from Spring Works to aid a competitor and he repeatedly violated an injunction prohibiting him from competing against Spring Works. The bankruptcy court correctly held that it was bound to apply the state court findings to determine whether the judgment was nondischargeable under § 523(a)(6).
Id. at 627-629 (citations omitted).
Here, as set forth below, there is no dispute of material fact that Hill’s debts were caused by a “willful and malicious injury” to the property of HLS, as defined by relevant case law. Like in the Sarff case, there was a specific finding' that Hill’s actions were “willful, intentional, in bad faith, egregious, and done with malice.” The state court further determined that Hill’s “actions caused a willful and malicious injury to HLS.” Further, the court held that “Hill intended the consequences of his actions, namely the destruction of HLS’ internet division.” Under even the most conservative reading, these findings comport with the requirements of § 523(a)(6). As such, this Court finds that the identity of issues element has been met.
Next, the Court turns to the second element, that the issue was actually litigated. The Court will first state that, unlike some states, Kentucky gives preclusive effect to default judgments. See Davis v. Tuggle’s Admr., 297 Ky. 376, 178 S.W.2d 979 (1944); In re Morris, 229 B.R. 683, 685 (Bankr.E.D.Ky.1999). See also In re Bursack, 65 F.3d 51, 54 (6th Cir.1995) (noting that under Tennessee law, a default judgment satisfies Tennessee’s “actually litigated” requirement). Further, in In re Calvert (Bay Area Factors, a Division of Dimmitt & Owens Financial, Inc. v. Calvert), 105 F.3d 315, 318 (6th Cir.1997), the Sixth Circuit Court of Appeals applied Cal*338ifornia law, which, like Kentucky, also gives preclusive effect to default judgments. The Circuit Court held that a party who permits a default judgment to be entered confesses the truth of all material allegations in the complaint, so that a default judgment is as conclusive upon the issues tended by the complaint as if rendered after an answer is filed and a trial held on the allegations. Thus, under Kentucky law, even though this was a default judgment, it still satisfies the “actually litigated” element for collateral estoppel to apply.
Even if Kentucky did not give preclusive effect to default judgments, under the facts of this case, collateral estop-pel would still preclude Hill from re-litigating these issues. Generally speaking, federal law holds that the doctrine of collateral estoppel is not applicable to those prior judgments entered by default because the issues to be precluded were not “actually litigated” in the prior, proceeding. Frank v. Daley (In re Daley), 776 F.2d 834, 838 (9th Cir.1985) (citation omitted), cert. denied, 476 U.S. 1159, 106 S.Ct. 2279, 90 L.Ed.2d 721 (1986).
There are exceptions to this general rule, however, when the underlying judgment does not conform to the typical default judgment situation; that is, a default judgment entered for some reason other. than the defendant’s failure to appear or otherwise answer a complaint. For example, the “actually litigated” requirement of the collateral estoppel test has been applied to default judgments where a party substantially participates in the-underlying action, but then later, after much expense and time, decides to abandon his defense. FDIC v. Daily (In re Daily), 47 F.3d 365, 368-69 (9th Cir.1995) (a debtor who actively, but obstructively participates in litigation may be bound by default judgment entered therefrom). A default judgment has been given preclusive effect when it is rendered as a discovery sanction. Wolstein v. Docteroff (In re Docteroff), 133 F.3d 210, 215 (3d Cir.1997). A party “who deliberately prevents resolution of a lawsuit, should be deemed to have actually litigated an issue for purposes of collateral estoppel application.” Id. “To hold otherwise would encourage behavior similar to [the debtor’s] and give litigants who abuse the processes and dignity of the court an undeserved second bite at the apple.” Id. Other cases have reached the same result: Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319, 1324-25 (11th Cir.1995) (collateral estoppel applied where debtor, despite substantial participation in the underlying action, refused without any justification to produce documents and appear at a deposition).
Here, HLS’ state-court complaint raised the issues of willful and malicious conduct by Hill The issues were actually litigated to the extent that Hill retained an attorney, filed an answer, asserted counterclaims, and participated in discovery. In fact, until Hill’s attorney withdrew, Hill vigorously litigated the case. His strategic decision to abandon his defense late in the proceeding does not undo his earlier active participation in the litigation. In re Bursack, 65 F.3d 51, 54 (6th Cir.1995). According to the Damages Judgment, the basis for the default judgment was that Hill repeatedly, and intentionally, refused to comply with a trial order and failed to appear at the final pretrial conference. Thus, it appears that Hill deliberately or otherwise intentionally set about to delay or interfere with the trial in the state court litigation. As such, the facts of this case rise to the level of the conduct present in Docteroff and the other cases which have applied the collateral estoppel doctrine to a prior default judgment entered as a sanction.
*339Next, the third element necessary for the application of collateral estoppel is that the issue was actually decided. This element is easily met as demonstrated by the Default Judgment. Clearly, the state court found Hill liable for his conduct, and entered the Damages Judgment as a result.
Finally, the issue was necessary to the state court’s judgment. A decision on Hill’s conduct was necessary in order to find him liable under the counts asserted by HLS in the state court action. The Findings of Fact entered in connection with the Damages Judgment show that the state court specifically considered Hill’s actions in reaching its damages award. Therefore, when all things are considered, the Court finds that applying the collateral estoppel doctrine to those averments contained in HLS’ verified amended complaint from the state court case is appropriate under the particular facts of this case.
The Court will conclude by addressing some of the points raised by Hill in his Response to the Motion for Summary Judgment. Hill argues that he did not have adequate notice of either proceeding that culminated in default. Hill argues that to trigger the full faith and credit statutory directive of 28 U.S.C., § 1738, “state proceedings need do no more than satisfy the minimum procedural requirements of the Fourteenth Amendment’s Due Process Clause.” Kremer v. Chem. Constr. Corp., 456 U.S. 461, 481, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982). “[No] single model of procedural fairness, let alone a particular form of procedure, is dictated by the Due Process Clause ... [Rather the] very nature of due process negates any concept of inflexible procedures universally applicable to every imaginable situation.” Id. at 483, 102 S.Ct. 1883 (internal quotation marks and citations omitted).
Hill argues that he did not have a full and fair opportunity to litigate the issues in the state court action because he did not receive notiee of the pretrial or damages hearing. He argues that after his counsel withdrew, notices were sent to an address that was not his. Hill contends that the notices were sent to an address in Kansas, rather than to his address in Louisville, Kentucky, where he resided. Hill looks to In Re Sweeney, 276 B.R. 186 (6th Cir. BAP 2002) as support for his position that this court should, at a minimum, convene a hearing to examine the issue of notice. Sweeney, however, is distinguishable from this case in two material respects. First, the debtor in Sweeney asserted that he “was completely ignorant of the [state court] litigation” until after the default judgment was entered. Id. at 90. In contrast, Hill in this case fully acknowledges that he had actual notice of the state court action prior to the Default Judgment being entered. Indeed, Hill vigorously defended the action for a large portion of the case. Hill’s notice of the existence of the state court action supports a finding that he was afforded an opportunity to litigate these issues.
While Hill’s pro se status and his misunderstanding of the consequences of his failure to appear at the pretrial hearing may have established grounds to set aside the Default Judgment for excusable neglect2, this case again differs from Sweeney in that the state court has already made a determination that Hill received notice of *340the hearing. Specifically, the state court found that the “trial date was set by the Court’s Second Civil Jury Trial Order, and Hill was aware of the trial date, and that he should appear for the trial or adverse consequences would occur.” This finding was supported by the Second Civil Jury Trial Order which was mailed to Hill, at his Louisville address. Here, the state court held that Hill received notice. Accordingly, this Court finds that the state court’s determination that notice was proper is also entitled to full faith and credit under 28 U.S.C. § 1738. In re Henkel, 490 B.R. 759, 776-77 (Bankr.S.D.Ohio 2013) (where service was litigated in state court, the debtor was precluded from re-litigating that issue in the bankruptcy non-dischargeability context). Correspondingly, because due process was provided in the state court action, Hill had a full and fair opportunity to litigate these issues in the state court action. See In re Foster, 280 B.R. 193, 207 (Bankr.S.D.Ohio 2002) (concluding that the debtor had an adequate opportunity to litigate the issue of fraud where the debtor sought reconsideration of the state tribunal’s order and had the opportunity to seek further review of the order); Lexus Real Estate Group, Inc. v. Bullitt County Bank, 300 Fed.Appx. 351, 357 (6th Cir.2008) (affirming the district court’s determination that it was bound under 28 U.S.C. § 1738 by the state court’s ruling regarding personal jurisdiction over the defendant where the issue of personal jurisdiction was affirmed by the state court of appeals); Griego v. Padilla (In re Griego), 64 F.3d 580, 585 (10th Cir.1995) (holding that the issue of whether a party had a full and fair opportunity to litigate a claim could not be re-litigated where the state trial and appellate courts had considered and rejected this issue).
Hill also makes the argument that in the state court proceedings, the issues were not “actually litigated.” Hill argues that because of the requirement of actual litigation, collateral estoppel should not apply to default judgments awarded in a non-bankruptcy forum. Hill cites In re Treadwell, 459 B.R. 394, 405 (Bankr.W.D.Mo.2011) and In re Myers, 52 B.R. 901 (Bankr.E.D.Va.1985) in support of his argument.
This Court believes Hill’s reliance on those cases is misplaced as both those cases applied non-Kentucky law. As stated above, this Court must apply the law of the forum where the prior judgment was entered. This judgment was entered in Kentucky, and Kentucky law gives preclu-sive effect to default judgments. See Davis v. Tuggle’s Admr., 297 Ky. 376, 178 S.W.2d 979 (1944); In re Morris, 229 B.R. 683, 685 (Bankr.E.D.Ky.1999). Second, at least with respect to the Treadwell case, the reason collateral estoppel did not apply was not that the complaining creditor was relying upon a default judgment, but more that in the state court action, the creditor failed to plead the requisite elements to support a finding of non-dischargeability under § 523 of the Bankruptcy Code. Treadwell at 406-407. As stated above, HLS’ state court complaint did plead the necessary requisites to support a § 523(a)(6) determination.
Moreover, as discussed above, this is not a true default situation. The Court has cited numerous cases wherein default judgments have been given preclusive effect, when the default was entered for something other than a failure to answer or otherwise respond. FDIC v. Daily (In re Daily), 47 F.3d 365, 368-69 (9th Cir.1995); Wolstein v. Docteroff (In re Docteroff), 133 F.3d 210, 215 (3d Cir.1997); Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319, 1324-25 (11th Cir.1995); Corydon Palmer Dental Soc’y v. Johnson, Johnson & Assocs., Inc., 1988 WL 21334, at *1 (Ohio Court.App.1988) (the court gave preclusive effect to a de*341fault judgment, but only where the defendant had answered the complaint, then defaulted).
The Court also notes that the state court made specific findings of fact in the Damages Judgment with regard to Hill’s conduct. HLS presented evidence at a trial from which the findings of fact were derived. This was not a simple one-line default judgment, but rather a comprehensive judgment complete with detailed findings of fact. Even in states where there is some question regarding the preclusive effect of default judgments, this default judgment would suffice.
In Hinze v. Robinson (In re Robinson), 242 B.R. 380 (Bankr.N.D.Ohio 1999), the bankruptcy court first noted that under Ohio law, a default judgment obviates'the plaintiffs burden to prove the elements of the claim alleged. Nevertheless, the court found that it was reasonable to assume that normally issues are not actually litigated for purposes of the collateral estop-pel doctrine when a state court grants a motion for default judgment. To reconcile these principles, the court held that for default judgments to be given preclusive effect, the state court must decide the merits of the case and the best evidence would be findings of fact and conclusions of law by the court entering the default judgment. Id. at 387-388. See also In re Sweeney, 276 B.R. 186, 193-94 (6th Cir. BAP 2002) (adopting the Robinson test for Ohio cases and finding that for preclusive effect to be given default judgments, the default court must state what findings and conclusions, if any, it has reached in arriving at the judgment); In re Cunningham, 2014 WL 1379136, at 9 (Bankr.N.D.Ohio 2014) (judgment entry was not sufficiently detailed to support the application of the collateral estoppel doctrine in the subsequent proceeding). Here, the state court found Hill liable to HLS on the counts alleged in the amended complaint, and issued detailed findings of fact in support of that determination. Thus, even under the more restrictive Ohio law, this default judgment would be given preclusive effect.
Hill also argues that this matter should at a minimum have a hearing, citing Spilman v. Harley, 656 F.2d 224, 228 (6th Cir.1981). In Spilman, the Circuit Court stated that before applying the doctrine of collateral estoppel, “the bankruptcy court should look at the entire record of the state court proceeding, not just the judgment (internal cites omitted), or hold a hearing if necessary.” In Spilman, the Circuit Court held that where important issues are not actually litigated in the prior proceeding, as is the case with a default judgment, then collateral estoppel does not bar re-litigation in the bankruptcy court. The Court notes that the viability of Spilman is seriously questioned. In In re Calvert, 105 F.3d 315, 319 (6th Cir.1997), a later panel of the Sixth Circuit questioned the legitimacy of Spilman in light of a later Supreme Court decision, Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1332, 84 L.Ed.2d 274 (1985), and specifically held collateral estoppel could be used in default judgment situations.
Hill also takes issue with the fact that the Damages Judgment was drafted by HLS. Hill argues that because HLS drafted the Damages Judgment, it should somehow not be afforded the same weight as a judgment drafted by the state court. Hill did not cite to any case law that would support this argument, and this Court was unable to locate a reported decision where a judgment should be afforded less weight because it was drafted by a party rather than the court. Having said that, the Court would note that upon review of the Damages Judgment, the state court judge made several alterations to the document *342prepared by HLS. These alterations indicate that the state court did not simply “rubber stamp” the document prepared by HLS, but considered the contents of the document and ruled according to the evidence that was presented at the trial.
For all of the above reasons, the Court finds HLS’ Motion for Summary Judgment is supported by the record, and establishes that HLS is entitled to summary judgment as a matter of law. Accordingly, HLS’ Motion for Summary Judgment will be granted. A separate judgment will be entered in accordance with this order.
Additionally, the Court will set a status hearing on this matter by separate order to determine what, if any, action needs to be taken with respect to the remainder of the allegations raised in this case not addressed by this summary judgment motion.
JUDGMENT
Pursuant to the Court’s Memorandum entered this same date and incorporated herein by reference, and the Court being otherwise sufficiently advised,
IT IS ORDERED that the October 3, 2014 Findings of Fact and Judgment for Plaintiff CMCO Mortgage, LLC, D/B/A Home Lending Source entered in Jefferson Circuit Court is non-dischargeable pursuant to 11 U.S.C. § 523(a)(6).
There being no just cause for delay, this is a final and appealable judgment.
. The actual document (Doc. No. 34) is styled as a Motion for Judgment on the Pleadings, but the body of the motion as well as the supporting Memorandum references summary judgment as the relief being sought. The Court will treat the matter as a summary judgment motion, and believes the incorrect nomenclature relates back to a previous pleading (Doc. No. 8) that was denied by Order dated June 3, 2015.
. The Court will take this opportunity to point out in the Motion to Set Aside default Judgment filed by Hill in the state court action, he did not allege a lack of notice as grounds for setting aside the judgment. Rather, he argued that the judgment should be set aside because he had been advised by an attorney not to attend the trial due to the bankruptcy case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498842/ | MEMORANDUM OPINION ON DEBTOR’S THIRD OMNIBUS OBJECTION TO CLAIMS
Jack B. Schmetterer, United States Bankruptcy Judge
Debtor has filed Objections and Notice of Objections consisting of the Third Omnibus Objection to Claims asserting lack of liability. Notice was given to claimants and their representatives of a date by which responses to the Objections had to be filed. None of the claimants filed any response.
The following claims are involved:
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*358For reasons stated below, the Objections will be overruled by separate order.
BACKGROUND
Debtor filed a petition for relief under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101, et al., on March 31, 2014 (the “Petition Date”). Debtor previously ran manufacturing operations in connection with the automobile and other industries. However, Debtor ceased all manufacturing activity in 2006, divested itself of its last operating subsidiary in 2012, and no longer generates revenue (directly or indirectly) from manufacturing or other operations. Debtor has no full-time employees, and its ordinary course of business currently consists of satisfying legacy and other liabilities from cash on hand and insurance.
On October 24, 2014, the court entered an order (Dkt.626) establishing March 31, 2015 as the general deadline for filing proof of claims (the “General Bar Date”) applicable to creditors required to file proof of claim as specified therein. The deadline for parties to object to claims filed by the General Bar Date was also set therein, and subsequently extended to July 31,2015. (Dkt.900.)
Debtor filed its Third Omnibus Objection to Claims on July 29, 2015. Debtor argues that no liability exists in connection with the claims objected to for one of two reasons: (1) liability for workers’ compensation claims has been assumed by Debt- or’s parent company; or (2) the proof of claim fails to establish legal or factual basis for personal injury liability.
Workers’ Compensation Liability Claims (Claims 26, 27 & 206)
Claims 26 and 27 of the Ohio Bureau of Workers’ Compensation seek relief in connection with Debtor’s workers’ compensation obligations. Claim 26 seeks $655,511.14 for costs associated with workers’ compensation claims paid (payments are detailed in an attachment). The second claim by the Ohio Bureau of Workers’ Compensation, Claim 27, seeks $46,798.30, for taxes in connection with workers’ compensation premiums due and detailed in an attachment to the proof of claim.
Claim 206 of George Kinloch seeks $1,000,000 for a work injury. The court was informed by Debtor’s counsel in a filing that, “This claim contains additional attachments that were removed due to sensitive information.” No further explanation or any analysis of the omitted “attachments” was supplied by Debtor. Therefore, the court was not given the complete claim.
With respect to these three claims, the Third Omnibus Objection to Claims argues that Debtor is not liable for these claims because Debtor’s workers’ compensation obligations were assumed by Debtor’s parent corporation pursuant to a prepetition agreement between the two.
Debtor’s Third Omnibus Objection to Claims gave claimants an opportunity to file any response by a specified deadline. Claimants were informed that if no response was filed, Debtor may seek entry of a proposed order sustaining the Objections without further notice. None of these claimants filed any response or any amendment to their proof of claim.
Personal Injury and Product Liability Claims (Claims 2268 & 2267)
Claim 2268 of Bridgestone Americas Tire Operations LLC (“Bridgestone”) is related to Claim 2269 of David Green; both claims allege liability in connection with an accident involving a product that was manufactured by Debtor. The claim of Bridgestone alleges $1,000,000 in damages for injury allegedly arising from personal injury and product liability from “an accident involving a multi-piece wheel assembly product that was manufactured in *359part by the Debtor,” that the injuries occurred pre-bankruptcy and that this claim is “based upon assertions made by Claimants counsel.” The claim of David Green is for $10,000,000 allegedly arising from product liability and personal injury related to “explosive failure of a multi-piece which assertedly a component of which was manufactured by Debtor.”
Debtor’s objection to these two claims asserts that neither of these “include any meaningful information or law to support such claims on a prima facie basis,” and that Debtor “is unaware of any fact or law that support such claims in any way.” It also asserts that Debtor’s books and records do not show that Debtor is liable to these claimants.
The Notice of Objection informed claimants that to contest Debtor’s Objection to Claims, each claimant was to file a written response by a certain date, but neither of these claimants filed any response to the Objections.
DISCUSSION
I. Jurisdiction
Subject matter jurisdiction lies under 28 U.S.C. § 1334. The district court may refer a proceeding to a bankruptcy judge under 28 U.S.C. § 157, and this matter is referred here by District Court Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue lies under 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B) and (O). It seeks to determine the allowance or disal-lowance of claims against the estate.. Therefore, it “stems from the bankruptcy itself,” and may constitutionally be decided by a bankruptcy judge. Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011).
II. Objections To Allowance of Claims
Debtor’s objection to allowance of claims sought in the Third Omnibus Objection to Claims is governed by 11 U.S.C. § 502. Under § 502(a), claims held by creditors who file timely proof of claim are generally “deemed allowed, unless a party in interest ... objects.” 11 U.S.C. § 502(a); see also 11 U.S.C. § 501(a) (providing that proof of claim may be filed by a creditor, and, in some cases, by other entities on such creditor’s behalf). If a claim is objected to under § 502, the bankruptcy court is instructed to determine the amount of the claim as of date of the bankruptcy petition, and must allow the claim with respect to that amount, except to the extent that one of nine enumerated grounds for disallowance exist. See 11 U.S.C. § 502(b)(1)-(9)1; Travelers Cas. & Sur. Co. of America v. Pac. Gas & Elec. Co., 549 U.S. 443, 452, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) (recognizing the general presumption that “claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.” (citing 11 U.S.C. § 502(b))).
In this case, Debtor has objected to allowance of the claims at issue arguing that Debtor has no liability for these claims. Under § 502(b), a claim that is objected to may be disallowed to the extent that “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for reason other than because such claim is contingent or unmatured....” 11 U.S.C. § 502(b)(1). The Supreme Court has stated that § 502(b)(1) “is most naturally understood to provide that, with lim*360ited exceptions, any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy.” Travelers, 549 U.S. at 450, 127 S.Ct. 1199.
Debtor’s Third Omnibus Objection to Claims seeks to challenge the validity of five individual claims as unénforceable against Debtor entirely, rather than dispute the amounts alleged to be owed in connection with liability asserted in the proof of claim.' To prevail in disallowing these claims at this stage, Debtor’s objection must be sufficient to rebut the presumption that a properly executed proof of claim constitutes prima facie evidence of the validity and the amount of the claim. Fed. R. Bankr. P. 3001(f).
If the Objections were to prevail, these creditors would not be able to assert claims against estate assets consisting of cash and insurance policies, and they could never recover anything since all cash and insurance assets will be dealt with by a new financial plan.
A. Workers’ Compensation Liability Claims (Claims 26, 27, 206)
The Third Omnibus Objection to Claims does not contest the merits of claims asserting liability in connection with injuries suffered by individuals previously employed by Debtor and giving rise to liability alleged by claimants. Instead, Debtor argues that any liability of the Debtor alleged in Claims 26, 27 and 206 has been assumed by Debtor’s parent company, ThyssenKrupp North America, Inc. (“TKNA”), pursuant to a prepetition agreement between Debtor and TKNA (the “Prepetition Agreement”). The Pre-petition Agreement referenced by Debtor includes terms whereby TKNA agrees to assume Debtor’s workers’ compensation obligations (see Dkt. 11, Ex. 2, at ¶ 8). However, claimants were not parties to the Prepetition Agreement between Debtor and its parent, TKNA.
Debtor has not alleged or provided any evidence that' the obligations alleged as due under the claims objected to have been satisfied by TKNA, The Prepetition Agreement referenced provided that TKNA agreed to assume Debtor’s obligations, but Debtor’s obligations to third parties are not extinguished by TKNA’s agreement to assume these liabilities unless and until obligations of Debtor to third parties are satisfied by TKNA. Accordingly, Debtor has failed to establish that Claims 26, 27 and 206 are unenforceable against the Debtor.
Debtor argues that “even if TKNA has not satisfied such claims,” the court should “enter an order: (1) disallowing the claims, solely for purposes of voting on a chapter 11 plan; and (2) preserving the Debtor’s right to object to Claims 26, 27, and 206 at a later date on the grounds that such claims have been satisfied by TKNA and are consequently subject to disallowance under § 502(b)(1) of the Bankruptcy Cpde.” Third Omnibus Objection to Claims, at 4. No applicable authority is cited for the form of alternative relief sought. Nor is the court aware of any provision in the Bankruptcy Code or applicable rules authorizing the type of relief sought by Debtor.
As discussed above, under § 502 of the Bankruptcy Code, claims for which proof has been filed are generally allowed unless an objection is raised; if an objection is made, the court shall determine the amount of the claim as of the date of the petition, and allow the claim for that amount, except to the extent that specified exceptions are applicable. See 11 U.S.C. § 502(a), (b). While a claim may be allowed, in part, and disallowed, in part, based on the court’s determination that the amount of the allowable claim is limited by grounds set forth in § 502(b), the allowance or disallowance of a claim solely for purposes of preventing their voting on a *361chapter 11 plan is not contemplated by § 502.
Allowance or disallowance of claims pursuant to § 502 is also not otherwise conditioned by provisions applicable to cases under chapter 11 of the Bankruptcy Code. Instead, § 1126 provides that holders of claims “allowed under section 502 of this title may accept or reject a plan.” 11 U.S.C. § 1126(a). Therefore, the court finds no basis for disallowing claims solely for purposes of voting on a chapter 11 plan.
Debtor also requests entry of an order preserving Debtor’s right to object to Claims 26, 27, and 206 at a future date if the liabilities claimed are satisfied by TKNA. However, to the extent that this or other grounds for disallowance become applicable in the future, Debtor may seek applicable relief under § 502 at that time. Debtor may be able to request that this court reconsider allowance or disallowance of a claim for cause, see 11 U.S.C. § 502(j), or other relief which may be applicable under the Bankruptcy Code or applicable rules.2
Accordingly, Debtor’s Third Omnibus Objection to Claims will be overruled with respect to Claims 26,27 and 206.
B. Personal Injury and Product Liability Claims (Claims 2268 & 2267)
Debtor also objects to Claims 2268 and 2267 asserting no liability in connection with the alleged basis provided by these two claims. Debtor seeks disallowance of these two claims and argues that they fail to provide enough information or a legal basis to justify a claim against Debtor. Debtor also argues that its books and records fail to show that Debtor is liable to the claimants.
While Claims 2268 and 2269 fail to include certain information, including dates and information regarding the type of product which was manufactured by Debt- or, the claims may not be disallowed solely on the basis that they fail to attach this or other information.
Under Bankruptcy Rule 3001, claimants need not attach any documents evidencing of the value or validity of their claims. See generally Fed. R. Bankr.P. 3001 (governing filing of proof of claim). Unless otherwise specified therein, a proof of claim is only required to “conform substantially to the appropriate Official Form.” Fed. R. Bankr. P. 3001(a). Supporting documents are only required by this rule where a claim is based on a writing, see Fed. R. Bankr. P. 3001(c), or where necessary to show that a secured claim or interest is perfected under applicable law, see Fed. R. Bankr.P. 3001(d). This is not applicable here.3
Proof of Claims 2268 and 2269 generally conform with Official Form 10, *362the national proof of claim form. Since no additional requirements are applicable, proof of claims was filed in accordance with Bankruptcy Rule 3001, see Fed. B. Bankr. P. 3001(a); each proof of claim, therefore, constitutes “prima facie evidence of the validity and amount of the claim,” Fed. R. Bankr. P. 3001(e). Debtor has failed to present any evidence to dispute the prima facie validity of these claims. Debtor’s assertion that claimants are not included in its books and records is not determinative or sufficient to dispute the evidentiaiy value of claimants’ respective proof of claim or challenge the amount of damages alleged by claimants.
Even assuming that proof of the claims fails to comply with the requirements set forth in Bankruptcy Rule 3001, claimants generally would not be barred from supplementing their claims by amendment, or at an evidentiary hearing to determine the value of their claims if such a hearing was held. See 11 U.S.C. § 502(b); see In re Guidry, 321 B.R. 712, 716 (Bankr.N.D.Ill.2005).
While the basis provided for these two claims is general, the court cannot conclude that it is unsupported by facts providing a basis for a claim. Together, the claims estimate amounts due for each individual claim, and reference a basis for imposing liability on Debtor as manufacturer of parts alleged to have been involved in the accident that gave rise to personal injury claims. No facts or law have been alleged by Debtor to dispute these factual allegations or establish that they fail support liability under applicable law.
Moreover, while Debtor asserts that the information supplied is insufficient, proof filed for these claims includes contact information for the attorneys who filed proof of claim on claimants’ behalf. Nothing in Debtor’s Third Omnibus Objection to Claims suggests that Debtor has attempted and failed to obtain information necessary to ascertain the validity of Claims 2268 and 2269 or in any way justify summary disallowance of these claims at this stage.4
Debtor’s objection to these two claims also fails to raise any factual dispute with respect to the factual allegations asserted by claimants, or to include any defense that would conclusively bar these claims. If a factual dispute arose, an evi-dentiary hearing would be required to determine the amount of the claims subject to allowance. See 11 U.S.C. § 502(b). If Debtor disputes the evidentiary presumption of validity of a proof of claim, the burden of establishing the basis of the claim by preponderance of the evidence would shift back to the claimant. See Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15, 20-22 n. 2, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) (holding that the ultimate burden of proof in establishing claim after validity is disputed by objecting party depends on applicable nonbankruptcy law governing the substantive basis of the claim). However, Debtor has not established a basis for disallowing these claims at this stage, or come forward with evidence raising a factual dispute necessitating an evidentiary hearing to determine the amount of allowable claims. Nor has Debtor sought discovery as to any aspect of the claims or injuries.
Finally, while the allowance or disallowance of claims against the estate is generally a core proceeding which this *363court may hear and determine, no party has briefed, nor can the court determine at this stage, whether a proceeding to determine the validity of Claims 2268 and 2269 falls within the statutory exception to this court’s core jurisdiction as “liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution_” See 28 U.S.C. § 157(b)(2)(B). Debtor has argued that Claims 2268 and 2269 should be disallowed entirely as “unenforceable against the debtor and property of the debtor, under any agreement or applicable law for reason other than because such claim is contingent or unmatured_” 11 U.S.C. § 502(b)(1). Disallowance on this basis would necessarily constitute a determination that these claims are substantively invalid and cannot seek distribution from the estate. Debtor has not shown that this determination is warranted at this stage.
CONCLUSION
For the foregoing reasons, Debtor’s Third Omnibus Objection to Claims will be entirely overruled by separate order.
To the extent that personal injury claims are deemed contingent or unliquidated, estimation may be possible for purposes of allowance, see 11 U.S.C. § 502(c). No determination is made by the court with respect to the propriety or availability of this or other applicable remedies at this stage. However, should this court lack authority to estimate the personal injury claims at issue, the claims may be estimated or tried in district court. See 28 U.S.C. §§ 157(b)(2)(B), (b)(5).
. Additional grounds for disallowance set forth in § 502(d) and (e) do not apply to the types of claim at issue in this case.
. No findings are made by this court with respect to Debtor’s ability to seek relief at a later time. Reconsideration for cause under § 502(j) is referenced to note that the type of relief requested by Debtor is governed by § 502.
. Even where Bankruptcy Rule 3001 requires documentation to support a claim, the remedy for failure to do so is not disallowance; rather, all that the rule provides is that a claim filed in accordance with this rule constitutes prima facie evidence that the claim is valid. Matter of Stoecker, 5 F.3d 1022, 1028 (7th Cir.1993) (citing Fed. R. Bankr. P. 3001(c), (d) and (e)) (“If the documentation is missing, the creditor cannot rest on the proof of claim. It does not follow that he is forever barred from establishing the claim.... A creditor should therefore be allowed to amend his incomplete proof of claim ... to comply with the requirements of Rule 3001, provided that other creditors are not harmed by the belated completion of the filing.”).
. Debtor's objection gave the claimants an opportunity to respond. However, applicable rules do not require a response to be filed. No prejudice may thus be imputed based on claimants’ failure to file a response. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498843/ | OPINION
Mary P. Gorman, United States Chief Bankruptcy Judge
Before the Court is an Application for Compensation and Reimbursement Pursu*365ant to 11 U.S.C. § 330 (“Application”) filed by Attorney Jill M. Arnold on behalf of her firm, Ostling & Associates, Ltd., seeking an award of fees for representing the Debtors in this Chapter 13 case. The Application requests approval of attorney fees of $1312.50, of which $1000 has been previously paid. For the reasons set forth herein, the Application will be allowed in the amount of $350 and denied in all other respects.
I. Factual and Procedural Background
According to an itemization attached to the Application, Kenneth Gene Hart and Shelly Jean Harrison-Hart (“Debtors”) met with Attorney Lars Eric Ostling of Ostling & Associates, Ltd. (“the Ostling firm”) on October 8, 2014, to discuss the possibility of filing bankruptcy.1 Mr. Os-tling met with the Debtors again on October 17th and October 23rd, and then again on November 1st “to sign rough draft of Petition.” Ms. Arnold met with the Debtors on November 6th and then again on November 14th “to sign Petition.” The Debtors’ Chapter 13 case was filed on November 24, 2014.2 Among the documents filed with the petition was a Disclosure of Compensation of Attorney for Debtor(s) wherein Ms. Arnold reported that she had agreed to accept the “no-look” Chapter 13 fee of $3500. Ms. Arnold stated in the Application that the fee was agreed upon in writing between the Os-tling firm and the Debtors, and that a copy of the agreement was attached as Exhibit D to the Application.3
At paragraph 3(c) of the Debtors’ Statement of Financial Affairs (“SOFA”), which requires debtors to list all payments made within one year immediately preceding the commencement of the case to or for the benefit of creditors who are or were insiders, the Debtors disclosed that they had paid a friend, Angie Thorp, $700 in August 2014 and that Ms. Thorp was still owed $980. They also disclosed that they had paid another friend, Penny Wilson, $650 in September 2014 and that Ms. Wilson was still owed $340. Neither Ms. Thorp nor Ms. Wilson was listed as a creditor on the Debtors’ Schedule F.
Mr. Ostling attended the first meeting of creditors on January 9, 2015, with the Debtors. The Chapter 13 Trustee’s Confirmation Report states, inter alia, “28 days for Amended SOFA and Amended Schedule F” and the Application states that it was determined at the time of the first meeting that the Debtors’ two friends along with Mrs. Hart’s father — also a creditor — were not listed on Schedule F and that an amendment was necessary to add the three omitted creditors. It was also determined that an Amended SOFA was needed in order to disclose a prepetition payment to Mrs. Hart’s father.
On February 23, 2015, Ms. Arnold filed an Amended SOFA which added Mrs. Hart’s father, Ronald Williams, at Paragraph 3(c) and identified him as having been paid $200 “weekly” with the sum of $1000 still owing. A First Amended Chapter 13 Plan was filed the following day. The Trustee filed an Objection to the First Amended Plan wherein he stated, inter *366alia, that an Amended Schedule F had not been filed despite the fact that Angie Thorp, Penny Wilson, and Ronald Williams were still shown on the Amended SOFA as being owed money.
A hearing on the First Amended Plan was held on April 7, 2015. Ms. Arnold appeared on behalf of the Debtors and stated that the Ostling firm had been back and forth with the Debtors trying to get information to file another amended SOFA and Schedule F pursuant to the Trustee’s request. She said that the Ostling firm had been given conflicting information by the Debtors and they were now being told that the omitted creditors were not creditors at all because they had all been paid in full before the case was filed, even though the Debtors originally stated — and either confirmed or did not deny at the first meeting of creditors — that the debts were still owed, at least in part, at the time of filing. Ms. Arnold further stated that the Ostling firm had been given signed statements by the omitted creditors that they had been paid in full before filing, that the Ostling firm had been talking to the Debtors on a weekly basis in order to obtain further “clarification,” and that they would be filing the amendments “to make sure that’s correct.”
Counsel for the Trustee stated that all of the back and forth between the Debtors and their counsel had been disclosed to him just prior to the hearing. He said that whatever the case was, he was concerned that the Debtors made certain representations in their SOFA, yet made no mention at the first meeting that the representations were not accurate or that the omitted creditors had been paid in full. He further explained that it was problematic if the Debtors were not willing to sign and file an accurate Amended Schedule F, but even if the Debtors were willing to sign and file an Amended Schedule F at that point, he was still concerned because the claims bar date was set to run within days.
The Court expressed concern that the Debtors represented that they owed money to the omitted creditors — obviously disclosing the debts to their attorneys as evidenced by the original SOFA — but somehow the creditors were not listed on Schedule F, and that an Amended Schedule F had yet to be filed. Ms. Arnold stated that she simply failed to catch the omission and that it was “an honest mistake.” The Court also voiced concern about the perfunctory nature of the work being done by attorneys at the Ostling firm at the front end of cases and the fact that errors such as those that had occurred here continue to be an ongoing problem with the Ostling firm.
The Court questioned why the Amended Schedule F was not filed on a timely basis after the first meeting on January 9th, and expressed frustration that the problems were so obvious that the Trustee was able to readily identify discrepancies in the SOFA and schedules, yet the Debtors’ counsel had not identified the same discrepancies when preparing the documents. Ms. Arnold offered little by way of explanation or excuse. Notwithstanding how much time had passed, the Court allowed an additional twenty-one days for the filing of another amended plan. The Court stated, however, that the routine no-look fee would not be awarded in this case, and an itemization would be required. The Court stated specifically that an itemization should be submitted only if it were based upon contemporaneously-kept time records.
On April 28, 2015, the Debtors filed a Second Amended Plan. On May 15, 2015, the Trustee filed another objection complaining that, in spite of counsel’s representation that the three debts had been *367paid pre-petition, that statement was contradicted by the original SOFA, the Amended SOFA, and the Debtors’ testimony at the creditors’ meeting.
On June 10th, the Debtors finally filed an Amended Schedule F which listed the three previously omitted creditors. A Second Amended SOFA was also filed clarifying that Mr. Williams had been paid weekly for a period of five weeks pre-petition. With the other documents, the Debtors filed a Third Amended Plan which proposed to pay all creditors in full. The Third Amended Plan was confirmed on July 13, 2015.
Ms. Arnold filed the Application on August 13, 2015. The Application seeks fees for 2.3 hours of Mr. Qstling’s time and 5.2 hours of Ms. Arnold’s time. Both attorneys billed their time at $175 per hour. No paraprofessional fees or costs are being sought. Thus, the total fee sought is 7.5 hours at $175 per hour or $1312.50. In her Application, Ms. Arnold also asserted that the Ostling firm was actually entitled to the full “no-look” fee of $3500, which the Debtors had agreed to pay when they first met with Mr. Ostling.
On September 11, 2015, this Court entered an Order giving Ms. Arnold ten days to file an affidavit stating whether simultaneously-kept time records were maintained and utilized to construct the time itemization included in the Application. The Order clarified, “simultaneously-kept time records involve each person working on the case to note the amount of time involved in any activity at the same time the activity is undertaken and completed. This is distinct from transactional records which would evidence work completed but would require review and reconstruction of time expended in order to complete the Application.”
On September 28, 2015, Ms. Arnold filed her Affidavit in Support of Fee Application wherein she stated that her office keeps contemporaneous transactional records for time purposes in all of its bankruptcy cases “in accordance with the American Bar Association guidelines.” Ms. Arnold explained that the contemporaneous transactional records approach is used because the Central District has adopted the no-look fee approach, and only when the Court requests a fee application is the time and effort needed to go through a file and prepare an actual billing. The Court entered an Order on September 28th giving Ms. Arnold seven days in which to file as an exhibit to the Affidavit a copy of the American Bar Association guidelines referenced therein. In response, Ms. Arnold filed only a copy of Rule 1.5 of the Model Rules of Professional Conduct.
No objection to the Application was filed by any party in interest. The matter is ready for decision.
II. Jurisdiction
This Court has jurisdiction over the issues before it pursuant to 28 U.S.C. § 1334. All bankruptcy cases and proceedings filed in the Central District of Illinois have been referred to the bankruptcy judges. CDIL-LR 4.1; 28 U.S.C. § 157(a). The determination of the amount of attorney fees to be paid to Chapter 13 debtors’ attorneys through a confirmed plan is a core proceeding. See 28 U.S.C. § 157(b)(2)(A), (B), (L). The dispute here arises in the bankruptcy case itself and stems from the provisions of the Code. It may therefore be constitutionally decided by a bankruptcy judge. See Stem Marshall, — U.S. v, 131 S.Ct. 2594, 2618,180 L.Ed.2d 475 (2011).
III. Legal Analysis
A. Debtors’ Attorneys’ Conduct Precludes The Awarding of More than a Minimal Fee
On multiple prior occasions, this Court has admonished the Ostling firm and the *368individual attorneys employed there about their shortcomings in the representation of their debtor clients and about the ethical and professional standards they must adhere to in order to practice competently before this Court and to justify their compensation requests. See, e.g., In re Carter, 2014 WL 4802919 (Bankr.C.D.Ill. Sept. 26, 2014); In re Bergae, 2014 WL 1419586 (Bankr.C.D.Ill. Apr. 11, 2014); In re Brennan, 2013 WL 4046447 (Bankr.C.D.Ill. Aug. 8, 2013); In re Eskew, 2012 WL 4866687 (Bankr.C.D.IU. Oct. 12, 2012). At this point, there can be no doubt that Attorney Ostling and his employees know what they are required to do to competently and professionally represent their debt- or clients. Their collective, repeated failures to meet even the minimum standards required, however, can only be seen as an affirmative choice by the attorneys to continue to cut comers despite the Court’s repeated admonitions.v
Specifically, this Court has admonished the Ostling firm’s attorneys that their client meetings must be more than perfunctory. Brennan, 2013 WL 4046447, at *9. Their practice of having their untrained, unsupervised clerical staff prepare all documents, with the attorneys then spending, at most, a few minutes with the clients to sign the paperwork, is one cause of the repeated problems. Likewise, this Court has admonished the Ostling firm’s attorneys that their review of client information must also be more than perfunctory. Bergae, 2014 WL 1419586, at *5. When the attorneys actually review documents, they often fail to compare information on related documents or double check the accuracy of the information provided even when the information on its face appears suspect. Carter, 2014 WL 4802919, at *6-7 (zero value listed' for commercial building should have raised red flag and caused Ostling firm attorney to make further inquiry). -Initial mistakes are often compounded by the failure of the Ostling firm’s attorneys to take responsibility for their errors and to promptly file corrected documents. Id. at *7.
The Debtors obviously provided Mr. Os-tling and Ms. Arnold information about their debts to Ms. Thorp and Ms. Wilson during their initial meetings. The information about both debts appeared on their original SOFA filed with their petition. But, apparently, neither Mr. Ostling nor Ms. Arnold took the time to carefully review the information provided or the final documents prepared by clerical staff and, accordingly, both debts were omitted from the Debtors’ Schedule F. It is not disputed that the error was discussed with the Trustee at the creditors’ meeting in January 2015, but an Amended Schedule F was not filed until June 2015, long after the claims bar date had passed.
Although Ms. Arnold admitted at an initial hearing that the mistake was hers, in the Application she blames the Debtors, saying that “[ujnfortunately, Debtors failed to list Angie Thorp and Penny Wilson as creditors when filling out the worksheets they had completed for counsel to use when preparing the bankruptcy forms[.]” But that is simply not true. The Debtors did disclose the debts to Ms. Thorp and Ms. Wilson to the Ostling firm. What the Debtors most likely failed to do was list the information both in response to a SOFA question and then again on the actual list of creditors provided to the Os-tling firm. Because neither Mr. Ostling nor Ms. Arnold took the time to analyze the information, the debts not listed by the Debtors in exactly the spot on the worksheets where they should have been listed were not included in the final paperwork.
The problems here are remarkably similar to the problems in Bergae. In Bergae, the debtor disclosed on her SOFA *369that she had partially paid a debt to her mother before filing and that an amount was still owed on that debt. Bergae, 2014 WL 1419586, at *1. Notwithstanding that disclosure, the attorney who filed the case failed to include the debt to the mother on the debtor’s schedules. Id. An amended schedule listing the mother as a creditor was only filed after multiple court appearances and, just as here, long after the claims bar date had passed. Id. at *2. In later seeking compensation for representation of the debtor, Attorney Robert Follmer of the Ostling firm blamed the debtor, claiming that it was her fault that the information about the debt to her mother appeared only on the SOFA and not on the proper schedule. In Bergae, this Court rejected that argument, stating that if a debtor was “responsible not only to provide information about her financial affairs to her attorneys but also to explain to them how to prepare the legal documents, then the attorneys provided no more than a typing service.” Id. at *5. Ms. Arnold’s suggestion that the Debtors here are to blame because information they provided to her was not properly set forth on their bankruptcy documents is equally without merit. In order to justify an award of the $3500 “no-look” fee that the Ostling firm initially claimed in this case, more than a typing service must be provided. Placing blame on the Debtors for how the documents were prepared by the Ostling firm’s clerical staff, who apparently copy directly from whatever paperwork debtors provide, is an admission that Ms. Arnold and Mr. Ostling had little or no involvement in the document preparation. That admission justifies denial of a significant portion of the fees requested.
Also troubling is the fact that, despite the Debtors’ initial admission that they owed money to Ms. Thorp and Ms. Wilson, Ms. Arnold later told this Court and the Trustee that the Debtors were not cooperating in amending their schedules and then later reported that nothing was actually owed to any omitted creditor. This suggests that the Debtors misrepresented the status of their obligations to the creditors either initially or after the discrepancy in their documents was discovered. And equally troubling is the fact that, in the Bergae case, Attorney Follmer made the same representations, first claiming a lack of cooperation from his client and later asserting that no debt was owed. Id. at *6. All of the conflicting representations made by Ms. Arnold in this case cannot be true, and her lack of candor with the Court compels a significant reduction in the fees requested.
The practice of Ostling firm attorneys filing petitions, schedules, SOFAs, and other bankruptcy documents with glaring errors must stop. Whenever an attorney signs, files, submits, or later advocates regarding a document filed in a bankruptcy case, the attorney is representing that “to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,” the factual information contained in the document has “evidentiary support” and the legal contentions contained in the document “are warranted by existing law.” Fed. R. Bankr.P. 9011. The failure to cross check information provided in answer to SOFA questions with information provided for a debtor’s schedules does not constitute the type of reasonable inquiry required by Rule 9011. And the failure to question suspicious or obviously inaccurate information also falls well short of the required standard. Carter, 2014 WL 4802919, at *6.
Ms. ‘Arnold and Mr. Ostling failed to meet the minimum standards required to practice law before this Court in their handling of this case. No reasonable in*370quiry — perhaps no inquiry at all — was made into the accuracy of the information provided by the Debtors, and the bankruptcy documents filed by Ms. Arnold for the Debtors contained obvious errors. The initial failures were compounded by an unreasonable delay in correcting the documents and by Ms. Arnold’s conflicting representations to the Court and the Trustee about the facts of the case. Although this Court will not issue further sanctions in this case pursuant to Rule 9011, both Ms. Arnold and Mr. Ostling are admonished that sanctions other than the denial of requested fees are available and may be imposed if conduct of the type exhibited here occurs again. Fed. R. Bankr.P. 9011.
B. Debtors’ Attorneys’ Application is Deficient and Provides No Support for the Requested Fees
The Application filed by Ms. Arnold is inadequate to justify the fee award requested. This Court has previously set forth the requirements for fee applications and, in particular, the requirement that such applications be supported by contemporaneously-kept time records. See, e.g., Carter 2014 WL 4802919, at *8-11; Ber-gae, 2014 WL 1419586, at *7. And when Ms. Arnold was advised at a hearing on April 7th that the “no-look” fee would not be awarded and a fee application would be required, she was admonished that any application filed should be based on contemporaneously-kept time records. Nevertheless, Ms. Arnold filed the Application here using reconstructed time records and only disclosed that the time itemization attached to the Application was reconstructed after the Court requested her affidavit.
Ms. Arnold filed the Application, citing § 830 as support for the requested fee award. 11 U.S.C. § 380. But as this Court has pointed out to Ostling firm attorneys on repeated occasions, the first factor listed in § 330(a)(3) to be taken into account in awarding fees is “the time spent[.]” 11 U.S.C. § 330(a)(3)(A). If Ms. Arnold does not know how much time was spent on the various activities undertaken in this case by herself and others — and she admittedly does not-^then she cannot provide the relevant information required by statute to justify a fee award, and all fees can properly be denied. See In re Basham, 208 B.R. 926, 931 (9th Cir. BAP 1997), aff'd sub nom In re Byrne, 152 F.3d 924 (9th Cir.1998); In re Newman, 270 B.R. 845, 847-48 (Bankr.S.D.Ohio 2001).
In Carter, Mr. Follmer attempted to justify the Ostling firm’s practice of keeping records of the work done by Ostling firm employees and then later creating time records for fee applications by applying minimum time increments for each activity. Carter, 2014 WL 4802919, at *9. Mr. Follmer claimed that the Ostling firm’s practice of reconstructing time records for fee applications complied with guidelines of the American Bar Association (“ABA”) and the Illinois State Bar Association (“ISBA”). Id. at *11. But in Carter, this Court rejected Mr. Follmer’s arguments, pointing out the flaws in the practice and questioning whether reputable groups such as the ABA and ISBA would actually condone the practice of using wholly reconstructed time records for fee applications. Id. at *9-11.
Notwithstanding the Court’s prior rejection of Mr. Follmer’s arguments, Ms. Arnold made the same arguments here and persisted in the assertion that the practice is ABA-sanctioned. When asked to provide a copy of any ABA publication which supported the practice, Ms. Arnold filed only a copy of Rule 1.5 of the Model Rules of Professional Conduct, apparently downloaded from the ABA website. The rule discusses ethical issues regarding fee collection and, just like § 330(a)(3), includes *371time as the first factor to be considered in determining the reasonableness of a proposed fee. But the rule provides absolutely no support for the Ostling firm’s practice of not keeping time records as work is performed and later reconstructing the records when a fee application is required. Ms. Arnold’s representation that the Os-tling firm’s practice was in compliance with ABA guidelines was false and made in an obvious attempt to mislead the Court as to the propriety of the practice.
The District Court of the Central District of Illinois has adopted the Illinois Rules of Professional Conduct' to govern attorney conduct in all federal courts in the District. CDIL-LR 83.6(D). Rule 3.3 of the Illinois Rules of Professional Conduct is captioned “Candor Toward The Tribunal” and provides that a lawyer must not knowingly “make a false statement of fact or law to a tribunal[.]” Ill. R. Prof. Conduct R. 3.3(a)(1) (eff. Jan. 1, 2010). As set forth above, Bankruptcy Rule 9011 requires attorneys to make a reasonable inquiry into the facts and the law before signing and filing documents or advocating positions before a court. Fed. R. Bankr.P. 9011. It is difficult to see how Ms. Arnold’s representations in the fee application about the reconstructed time records and the existence of ABA guidelines which she alleged supported the practice do not run afoul of both Bankruptcy Rule 9011 and Rule 3.3 of the Illinois Rules of Professional Conduct.
The Application is wholly inadequate to justify the fees requested by Ms. Arnold and the Ostling firm. Ms. Arnold’s lack of candor with this Court about the existence of time records and ABA support for the practice of reconstructing time records justifies a significant reduction in the fees requested.
IV. Conclusion
The problems in this case were caused by the failure of Mr. Ostling and Ms. Arnold to review the information provided to them by the Debtors. They apparently allowed clerical staff to prepare the bankruptcy documents by copying information directly from the Debtors’ worksheets. Because information about two creditors was on the worksheets but was not in exactly the spot staff looks for it, the information was not included on the Debtors’ schedules. Ms. Arnold’s assertion that the Debtors are to blame for the error shows a lack of understanding of her role as an attorney in the bankruptcy process and of the work which needs to be done by an attorney to justify an award of the full “no-look” fee that Ms. Arnold expected to receive here.
Compounding the problems was the failure of Ms. Arnold to promptly correct the error when it was discovered. It is not disputed that the error was discussed at the creditors’ meeting in January 2015. There is simply no excuse for the delay in filing the required amended schedule. Ms. Arnold’s conflicting representations about the delay and whether the unscheduled debts actually existed also aggravated the situation. Not' all of Ms. Arnold’s representations could have been true, but to this day she has not provided a complete explanation for the discrepancies nor taken responsibility for the conflicting information.
This Court cannot force the Ostling firm to keep contemporaneous time records. If such records are not kept, so be it. But the requirements for fee awards are clear — time spent is a relevant factor in determining the reasonableness of any fee. The wholesale reconstruction of time records for a fee application without disclosing that actual records do not exist is just plain wrong. And misrepresenting that reputable bar associations have promulgat*372ed guidelines which support such a practice is stunningly wrong.
The Court will award $350 in fees here. That is a minimal fee and represents just a fraction of what Ms. Arnold and the Os-tling firm expected to receive. But they have previously received multiple notices that the quality of their-work must improve and that their fee applications were inadequate. Obviously, neither Mr. Os-tling nor his employees have taken the Court’s prior admonitions seriously.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
.Mr. Ostling is referred to in the attachments to the Application as Eric Ostling, Eric L. Ostling, “EO,” and "LEO.” Mr. Ostling is registered with this Court and with the Illinois Attorney Registration and Disciplinary Commission as "Lars Eric Ostling.”
. On page two of the Application, Ms. Arnold states that the petition was filed on November 24, 2015. Obviously this statement is in error.
. The purported agreement was not attached to the Application. The Application contains no Exhibit D. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8498844/ | MEMORANDUM DECISION
Margaret Dee McGarity, United States Bankruptcy Judge
This matter came before the Court on Harry Kaufmann Motorcars, Inc.’s (“Kauf-mann”) complaint to determine discharge-ability of debt, based on a fraudulent check tendered for the down payment on a vehicle purchased by Antoinette S. Benton (“Ms.Benton”). The Court held a trial on September 3, 2015, and took the matter under advisement to allow the parties an opportunity to address additional issues. Kaufmann submitted a brief on September 24, 2015, and the issue is now ripe for decision. This Court has jurisdiction under 28 U.S.C. § 1334, and this is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This decision constitutes the Court’s findings of fact and conclusions of law under Federal Rule of Bankruptcy Procedure 7052.
BACKGROUND
Ms. Benton and Edward J. Youngblood, her boyfriend at the time, purchased a 2007 BMW 7 Series from Kaufmann on December 2, 2013. To purchase the vehicle, Ms. Benton applied for financing, and *374a third-party lender agreed to finance a portion of the purchase price. Ms. Benton’s original financing request called for a $5,000 down payment, which was rejected in favor of a $10,000 down payment from Ms. Benton. The total purchase price was $30,000. Upon delivery of the vehicle, Ms. Benton signed all the required paperwork, and Mr. Youngblood submitted a check to Kaufmann in the amount of $9,800.00. Two hundred dollars had been previously paid. The check was later found to be written against a nonexistent corporate account. Ms. Benton and Mr. Youngblood agreed to repay the obligation to Kauf-mann, and they have made a number of payments toward the outstanding balance. The total remaining obligation owed to Kaufmann is $6,800.00. Ms. Benton filed a Chapter 7 petition on October 31, 2014, and Kaufmann commenced this adversary proceeding on February 5, 2015.
ARGUMENTS
Ms. Benton argued at trial that she was as much defrauded by Mr. Youngblood as Kaufmann in this case. She testified that she did not know that the required down payment was $10,000 when she picked up the vehicle; instead, she believed that the amount owed was $5,000. She denied having a conversation with any of the dealership’s representatives regarding the increased down payment. According to Ms. Benton, Mr. Youngblood had agreed on his own to take care of the down payment, but she denied seeing a check exchanged between Mr. Youngblood and Kaufmann. Ms. Benton also denied having any conversations with Kaufmann regarding repayment of the worthless check, despite admitting that she made several payments to the dealership.
Conversely, Kaufmann highlighted the incredibility of Ms. Benton’s testimony, noting that her version of events differed sharply from Kaufmann’s representatives’ testimony. Kaufmann argued that based on her testimony, Ms. Benton knew or should have known that Mr. Youngblood did not have $9,800 available to him as he was not employed at the time and for some time prior to the purchase. Furthermore, the check for back payment of his disability benefits — his sole source of income at the time — was only $7,500. Thus, she knew or should have known that any check Mr. Youngblood presented for the purchase of her vehicle was fraudulent or a “bad check.” Kaufmann also cited Ms. Benton’s lack of candor regarding her living situation, her address, and her relationship with Mr. Youngblood at the time of the purchase of the vehicle as evidence of Ms. Benton creating a false or misleading set of circumstances meant to induce Kaufmann to sell her the vehicle.
Kaufmann cited several cases1 in its letter brief demonstrating that a false representation need not be overt or spoken, and concealment or silence can in some contexts constitute a fraudulent misrepresentation. See Bay State Milling Co. v. *375Martin, 916 F.2d 1221 (7th Cir.1990) (noting that a misrepresentation need not be conveyed by words, but may be conveyed by actions as well); Port Louis Owners Ass’n v. Savage (In re Savage), 366 B.R. 574, 583 (Bankr.E.D.La.2007), rev’d on other grounds, Savage v. Port Louis Owners Ass’n (In re Savage), 333 Fed.Appx. 831 (5th Cir.2009) (“When one has a duty to speak, both concealment and silence can constitute fraudulent misrepresentation; an overt act is not required. Moreover, a misrepresentation need not be spoken; it can be made through conduct”).
DISCUSSION
Kaufmann objects to discharge-ability of the debt owed by Ms. Benton under 11 U.S.C. § 523(a)(2). The burden is on the objecting party to prove exceptions to discharge. Goldberg Secs., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir.1992) (citation omitted). The party objecting to discharge must establish an exception to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). It is well-established that “ ‘exceptions to discharge are to be construed strictly against a creditor and liberally in favor of the debtor.’ ” Scarlata, 979 F.2d at 524 (quoting In re Zarzynski 771 F.2d 304, 306 (7th Cir.1985)).
Since Kaufmann made no allegations regarding a financial statement, the Court will only consider whether or not the facts established at trial support an exception to discharge under § 523(a)(2)(A). Under § 523(a)(2)(A), a debtor is precluded from discharging 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.” To succeed on a § 523(a)(2)(A) claim, the creditor must establish: (1) that the debtor made a false representation that the debtor either knew was false or was made with such reckless disregard for the truth as to constitute willful misrepresentation; (2) the debtor possessed an actual intent to defraud; and (3) the creditor justifiably relied on the representation and was damaged thereby. Field v. Mans, 516 U.S. 59, 73, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995); Ojeda v. Goldberg, 599 F.3d 712, 717 (7th Cir.2010).
A bad check can form the basis of a nondischargeability action under § 523(a)(2)(A), but numerous bankruptcy courts have found that simply presenting a bad check on its own is insufficient to establish nondischargeability. See KC Coring & Cutting Constr., Inc. v. McArthur (In re McArthur), 391 B.R. 453, 457 (Bankr.D.Kan.2008) (“An insufficient funds check, standing alone, is not a false statement. ... Simply ‘playing the float’ to cover checks tendered in payment for a preexisting debt is insufficient.”); Mega Marts, Inc. v. Trevisan (In re Trevisan), 300 B.R. 708, 716 (Bankr.E.D.Wis.2003) (finding that a check is not a representation of any kind).
Nevertheless, some courts have found that a worthless check can form the basis of a nondischargeability action. See, e.g., In re Strecker, 251 B.R. 878, 882 (Bankr.D.Colo.2000) (“The mere issuance of a ‘bad check,’ standing alone, is not grounds for a determination that such debt is not dis-chargeable pursuant to 11 U.S.C. § 523(a)(2).... A determination that such a debt is non-dischargeable can only be established if the debtor did not intend to pay the creditor when the check was issued and knew the check would bounce.”); Meramec Valley Bank v. Newell (In re Newell), 164 B.R. 992, 995 (Bankr.E.D.Mo.1994) (“Ordinarily, the ‘delivery of an ultimately-dishonored check, without more, does not constitute an ac*376tionable representation under § 523(a)(2)(A).’ However, when surrounding circumstances indicate that a debtor intended to deceive a creditor when issuing an insufficient- funds check, and when a debtor knew that sufficient funds did not exist, a debtor is not entitled to a discharge of the debt.”) (internal citations omitted); Jarboe Sales Co. v. Degraffenreid (In re Degraffenreid), 131 B.R. 178, 180 (Bankr.N.D.Okla.1991) (finding debtors did not make false representation by presenting bad checks for payment, except where evidence demonstrates checks were given with intent not to pay and knowing checks would bounce); Stone v. Feldman (In re Feldman), 111 B.R. 481, 485 (Bankr.E.D.Pa.1990) (noting debtor’s knowledge that checks would not be honored distinguished case and satisfied requirement of false representation). As the court noted in Newell, the United States Supreme Court decision in Williams has convinced some courts to find that a check is not a representation, but the court explained that the Supreme Court reached this conclusion when deciding whether an insufficient funds check satisfied one of the elements of a criminal statute. Newell, 164 B.R. at 995 n. 3. This Court need not revisit that issue.
As Ms. Benton did not specifically tender the worthless check to Kaufmann herself, nor did she make any specific, overt representations regarding the financial viability of the check, it is unlikely that Mr. Youngblood’s presentation of the worthless check on its own would satisfy the elements of a nondischargeability claim against Ms. Benton under § 523(a)(2)(A). However, there are additional circumstances material to this transaction. A fundamental issue in this case is whether Ms. Benton had a duty to disclose information to Kaufmann when she knew Mr. Youngblood could not possibly make the required down payment and whether her silence can be construed as a false representation, false pretense, or actual fraud. If allowing Mr. Youngblood to make the down payment with what she had to have known was a fraudulent check was part of a scheme to obtain the car without fully paying for it, she is culpable for her participation in that scheme.
Recently, in Landmark Credit Union v. Reichartz (In re Reichartz), 529 B.R. 696 (Bankr.E.D.Wis.2015), Judge Kelley addressed § 523(a)(2)(A) under a “false pretenses” and “actual fraud” analysis, separate from a “false misrepresentation” made by the debtors. There, Judge Kelley noted that while the “prototypical debt within the scope of § 523(a)(2)(A) involves misrepresentation, the section also -includes 'false pretenses’ and 'actual fraud.’ ” Id. at 699. According to the court of appeals in McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir.2000) (quoting Stapleton v. Holt, 207 Okla. 443, 250 P.2d 451 (1952)), “ ‘[f]raud is a generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or by the suppression of truth.’” Therefore, § 523(a)(2)(A) encompasses a broader category of debts than misrepresentation, including those involving “ ‘any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another.’” Id. (quoting 4 Collier on Bankruptcy ¶ 523.08[1][e] (15th ed.2000)). See also Deady v. Hanson (In re Hanson), 432 B.R. 758, 771 (Bankr.N.D.Ill.2010) (“False pretenses in the context of § 523(a)(2)(A) include implied misrepresentations or conduct intended to create or foster a false impression.”).
A bankruptcy court further defined false pretenses as:
*377[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.... A false pretense is • usually, but not always, the product of multiple, events, acts or representations undertaken by a debtor which purposely create a contrived and misleading understanding of a transaction that, in turn, wrongfully induces the creditor to extend credit to the debtor. A “false pretense” is established or fostered willfully, knowingly and by design; it is not the result of inadvertence.
Sterna v. Paneras (In re Paneras), 195 B.R. 395, 406 (Bankr.N.D.Ill.1996) (quoting Evans v. Dunston (In re Dunston), 117 B.R. 632, 641 (Bankr.D.Colo.1990)). Overt misrepresentations are not a prerequisite for .a false pretenses claim. Memorial Hosp. v. Sarama (In re Sarama), 192 B.R. 922, 928 (Bankr.N.D.Ill.1996). “Instead, omissions or a failure to disclose on the part of the debtor can constitute misrepresentations where the circumstances are such that omissions or failure to disclose create a false impression which is known by the debtor.” Id.
Thus, silence or concealment may constitute false pretenses. Fosco v. Fosco (In re Fosco), 289 B.R. 78, 86 (Bankr.N.D.Ill.2002). As the court of appeals noted in Caspers v. Van Horne (In re Van Horne), 823 F.2d 1285, 1288 (8th Cir.1987), “[bjankruptey courts have overwhelmingly held that a debtor’s silence regarding a material fact can constitute a false representation actionable under section 523(a)(2)(A).” The Eighth Circuit went on to hold that a borrower has a duty to disclose all material facts to the lender, meaning that the creditor has a right to “know those facts touching upon the essence of the transaction.” Id. In Check Control, Inc. v. Anderson (In re Anderson), 181 B.R. 943, 951 (Bankr.D.Minn.1995), a case involving insufficient fund checks written to a casino, the court aptly described the circumstances under which a debtor’s silence may satisfy the code’s requirements:
[W]here the debtor has possession of material information that may bear on the creditor’s willingness to extend a financial accommodation to him; knows that the creditor would consider it; fails to disclose it; creates or allows the creation of the semblance of a very different state of affairs; and reinforces that imposture by the withholding of the material information, the debtor has acted in a way to trigger § 523(a)(2)(A).
Although there is a distinct lack of case law involving circumstances similar to the matter before this Court, the Court draws support from cases involving concealment of a material fact rather than an overt misrepresentation. For example, in Reichartz, 529 B.R. 696, the case involved a car loan made to the debtors who acted as “straw borrowers” for an acquaintance who owned a car dealership. Under their agreement, the debtors took out loans to purchase vehicles from the dealership, and the dealer had promised to repay the loans when he sold the cars. The loans were never repaid, but the debtors argued that they always intended to pay the creditor as soon as the cars were sold. However, the court determined that the debtors’ deposition testimony that they did not intend to deceive the creditor was inconsistent with their actions. The debtors should not have remained silent as to the purpose of the loans, which was a material term of the loan transaction. Id. at 700. See also Citizens & S. Nat’l Bank v. Thomas (In re Thomas), 12 B.R. 765 (Bankr.N.D.Ga.1981) (debtor demonstrated intent to deceive *378where he purchased vehicle for friend with bad credit and concealed fact from creditor).
In this case, Ms. Benton’s behavior clearly satisfies the elements of a false representation, false pretense, or actual fraud. Her communication, or lack thereof, created a false and misleading understanding of the transaction, which Kaufmann justifiably relied upon to its detriment. Kaufmann’s representatives, Peter Obradovich and Harry Kaufmann, testified that Ms. Benton, through her statements and actions, gave them the impression that she and Mr. Youngblood were engaged, living together, and planning to get married. Ms. Benton knowingly participated in creating the impression of a couple with a rosy, prosperous future. In fact, the couple was not engaged, they were “going through a rough patch,” and she was “transitioning” out of the residence she disclosed as her address.
Furthermore, Ms. Benton also helped to perpetrate a false impression regarding the couple’s financial viability. Mr-. Youngblood disclosed to Kaufmann that he owned his own trucking business. At trial, Ms. Benton stated that she was unaware of a trucking business, which Kaufmann’s representatives testified was a factor in accepting the worthless check. Nevertheless, even if she did not know Mr. Young-blood had a trucking business or claimed to have a business&emdash;and this court is highly skeptical&emdash;she knew that at the time of the purchase of the vehicle Mr. Young-blood had not worked for some time due to a medical condition. She also knew that he was either awaiting or had just received a disability payment of $7,500. Ms. Benton’s knowledge of Mr. Youngblood’s finances shows she had to know any check he presented was fraudulent, and that it was impossible for him to “take care” of the down payment. Still, she pretended to be part of a financially secure, stable relationship, let him hand over a worthless check, and got delivery of the car.
If her testimony were to be believed, Ms. Benton turned a blind eye to where the down payment for the vehicle was coming from. Her initial agreement with Mr. Youngblood was that he would pay half of the original $5,000 down payment (later increased to $10,000), and she would pay the other half from her savings account. Because he was “taking care” of the down payment, she tendered no funds at delivery of the vehicle. Ms. Benton, and only Ms. Benton, signed all the purchase documents, which clearly showed a $10,000 down payment. Her excuse for not noticing the $10,000 down payment and $20,000 additional financing on the documents was that it was after office hours, approximately 7:00 at . night, which was both nonsensical and plainly not credible. She testified she did not see Mr. Young-blood give the bad check to Mr. Obrado-vich, but seeing the check itself was not necessary given the clear evidence in the financing documents she signed.
Ms. Benton is trying to use the classic ostrich defense. She knew that Mr. Youngblood had not been employed for some time, and that she was the breadwinner of the household. She apparently never questioned Mr. Youngblood about the source of the funds for the down payment before allowing him to submit a fraudulent check on her behalf, and she never alerted Kaufmann to a possible problem with the check either before or at the time she signed the financing documents. Thus, she benefitted from and participated in the fraud that allowed her to obtain the BMW.
Even in the absence of explicit questioning by Kaufman, Ms. Benton should have revealed the impossibility of Mr. Young-blood’s ability to submit the down payment to Kaufmann, and her failure to disclose it *379was not inadvertent. Ms. Benton’s calculated concealment of such information constitutes a willful misrepresentation under 11 U.S.C. § 523(a)(2)(A).
The final element under 11 U.S.C. § 523(a)(2)(A) requires that the creditor must have justifiably relied on the representation. Here, Kaufmann’s representatives testified that Mr. Youngblood told them that he owned a trucking business and was on the road a lot. This was material to the creditor’s reliance on the legitimacy of the transaction because the worthless cheek appeared to be a check from a business. The appearance that both parties were working and about to be married helped induce Kaufmann to rely on the tender of that check. That reliance was justifiable under the circumstances.
CONCLUSION
In conclusion, the debt owed by Ms. Benton to Kaufmann is found to be excepted from discharge under 11 U.S.C. § 523(a)(2)(A) as Kaufmann sufficiently demonstrated the elements necessary to establish nondischargeability. A separate order will be entered accordingly.
. Only one case cited by Kaufmann involved tender of a bad check, but the case was neither factually similar nor supportive of Kaufmann’s position. In Goldberg Secs., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521 (7th Cir.1992), a market maker tendered a check for $30,000 to a creditor when he only had $22,000 in his account. He subsequently put the necessary funds in his account, and the check never bounced. However, the creditor had also guaranteed the debtor’s failed trades to the tune of $5 million. Following Williams v. United States, 458 U.S. 279, 102 S.Ct. 3088, 73 L.Ed.2d 767 (1982), the Seventh Circuit Court of Appeals reasoned that the debtor's check was not a false pretense under § 523(a)(2)(A), and even if tendering a bad check did satisfy the requirement of a misrepresentation, explained the court, the debtor's check in Scarlata cleared. Here, the check in question was not written or presented by Ms. Benton. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499029/ | MEMORANDUM ORDER STRIKING NOTICE OF PAYMENT CHANGE
Jeffery A. Deller, Chief U.S. Bankruptcy Judge
By way of hearing held on December 18, 2015, the Court heard and considered the Notice of Mortgage Payment Change (regarding Claim No. 11) filed by Wells Fargo Bank, N.A. (‘Wells Fargo”), as well as the responses filed by the Chapter 13 Trustee and the Debtor with respect to the sanie. :
In consultation with'the other Judges of this Court, it is concluded that the Notice of Payment Change filed by Wells Fargo should be stricken. The Court reaches this conclusion because the payment change notice has nothing to do with the Debtor’s current obligations under its note and/or mortgage with Wells Fargo. Rath7 er, the Notice of Payment Change submitted by Wells Fargo is merely an offer (or a request) that the Debtor enter into a loan modification agreement.
The Court appreciates the efficiency of the process undertaken by Wells Fargo to seek a modification by way of a Notice of Mortgage Payment Change. However, to insure that such items- are not merely entered into by default — and without meaningful opportunity for debtors to seek guidance and counsel from their attorneys — it seems more appropriate that mortgage modification approval be obtained by way of a formal motion joined by the debtors (through their counsel if they hdve an attorney). This process is appropriate to insure that any loan modification entered into by the debtors is knowingly made, is voluntary, and is in their best interests. In addition, such transactions appear to be outside the “ordinary course” and a motion would be the appropriate vehicle by operation of 11 U.S.C. § 363 and/or Fed, R. Bankr. P. 9019.
For these reasons, the Notice of Payment Change filed by Wells Fargo is STRICKEN, without prejudice to Wells Fargo and the Debtor filing in the future a motion requesting approval of a loan modification if, and to the extent, an agreement with respect to the same is reached between the parties.
SO ORDERED this SOth day of December, 2015. • | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499030/ | MEMORANDUM OPINION
FRANK J. SANTORO, United States Bankruptcy Judge
This matter comes before the Court on the Amended Complaint to Determine Validity, Priority or Extent of Lien filed by counsel on behalf of the above-captioned Plaintiff on September 11, 2014 (the “Amended Complaint”). Bank of New York Mellon, flk/a The Bank of New York, as Trustee for the Certificateholders' of CWALT, Inc., Alternative Loan Trust 2007-OH2, Mortgage Pass-Through Certificates Series 2007-OH2 (“Bank of New York Mellon”) and Bank of America, N.A. (“Bank of America” and, collectively with Bank of New York Mellon, the “Defendants”) filed a joint answer to the Amended Complaint on October 6, 2014 (the “Answer”).1 The remaining defendants are nominal parties who have not answered the Amended Complaint or filed any other pleadings in this adversary proceeding. .
The Amended Complaint is styled as a complaint to determine extent, validity, and priority of lien pursuant to Federal Rule of Bankruptcy Procedure 7001(2).2 The Plaintiff requests the following relief in connection with her real property located at 3437 S. Crestline Drive, Virginia Beach, Virginia 23464 (the “Property”):
(A) determin[e] the true holder of the Note; (B) modify[ ] the order approving the [loan modification], as necessary, to ensure that the true holder of the [n]ote is included in [the loan modification’s] definition of “Lender,” and confirming [Bank of America’s] authority to enter into the [loan modification] on behalf of the < true holder of the [n]ote; and (C) grant[ ] such other and further declaratory and equitable relief as this honorable Court may deem meet.
Amended Complaint at 8-9.3 However, for clarity in the record, the Court reduces the relief requested to two counts.4 First, a request to modify the Court’s, order approving a loan modification entered on October 8, 2011, in the Plaintiffs main bankruptcy case (the “Loan Modification Order”) to reflect the holder of the note secured by the Property in. the Loan Modification Order’s definition of the lender (hereinafter “Count I”).5 See id; see* also Loan Modification Order,,' ECF 48.6 *764Second, a request for judicial determination of the holder of the note (the “Note”) and beneficiary of the deed of trust on the Property (the “Deed of Trust”) (hereinafter “Count II”). See Amended Complaint at 8. The Plaintiff brings her second claim as a challenge to the validity of Bank of New York Mellon’s lien on the Property pursuant to Federal Rule of Bankruptcy Procedure 7001(2). . See id. at- 2. As described in further detail below, it later became clear to the Court that the relief requested by Count II was a moving target. The crux of Count II is the Plaintiffs allegation that the - transfer of the Note and Deed of Trust by Bank of America’s predecessor in interest to Bank of New'York Mellon, as trustee, was ineffective because it ’did not comply with the terms of a pooling and servicing ’ agreement, (the “PSA”).7 The Plaintiff is not. .a party to the PSA. :
The Defendants consented to the relief requested in Count I as' memorialized by an amended order approving the loan modification entered -in the main' bankruptcy case (the “Amended Loan Modification Order”). See Amended Loan Modification Order, ECF No. 147; see also Transcript of January 6, 2015 Pretrial Conference (hereinafter '“Tr. (1/6)”) at 8, APN 20. The only cldim- for relief set forth in thé Amended Complaint that remains unresolved is Count II. ’
Since the filing-of this adversary proceeding, the Court has convened a plethora of hearings and pretrial' conferences.8 The Court held a'pretrial scheduling conference on July 21, 2015, at which the parties represented they did not intend to file any additional pretrial briefs. At the conclusion of this pretrial scheduling conference, the Court advised that it would determine whether the Plaintiff has standing to maintain Count II when the count is based on alleged violations of a contract— the PSA — to which the' Plaintiff is not a party.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(b) and 1334(b). This is a core mat-ter. 28 U.S.C. § 157(b)(2)(K).9 Having considered the parties’ pleadings and applicable case law, the Court issues this Memorandum Opinion. For the reasons discussed below, Count II will be dismissed.
I. The Amended Complaint and Answer
The central theme of the Amended Complaint is the Plaintiffs uncertainty regarding the identity of the holder of the Note secured by the Deed of Trust on the Property.
The Amended Complaint highlights several alleged discrepancies between the Loan Modification Order and Bank of New York Mellon’s original and amended proofs of claim that the Plaintiff believes call into question the identity of the holder of the Note and beneficiary of the Deed-of Trust, the holder of the Note’s intention to abide by the terms of the underlying loan modification agreement, and the validity of the Loan Modification Order. See Amended *765Complaint' at 4-5, 7-8. To clarify this perceived uncertainty and' ensure the holder of the Note will honor the terms of the Loan Modification Order, the Amended Complaint requests the relief set forth in Count I. Id. at 8-9. As noted above, that relief was granted. See Amended Loan Modification Order, ECF.No. 147.
The Amended Complaint also describes the Plaintiff’s past attempts to participate in the National Mortgage Settlement (the “NMS”), which proved unsuccessful because (1) Bank of America maintained that it does not hold the Note and (2) the Plaintiff was not in default on the relevant date as a result of the loan modification. See Amended Complaint at 5; see also United States v. Bank of Am. Corp., No. 1:12-cv-00361-RMC, Doc. 11 (D.D.C. April 4, 2012) (setting out the terms of the NMS as to Bank of America, et al.). Based upon research the Plaintiff, undertook following Bank of America’s determination that she was ineligible for NMS relief, the Amended Complaint alleges that the transfer of the Plaintiffs Note and Deed of Trust (collectively, .the “Mortgage Documents”) from Bank of America’s predecessor in interest, Countrywide Home Loans, Inc.,10 (“Countrywide”) to Bank of New York Mellon, as trustee, was ineffective. Amended Complaint at 5-6. Specifically, the Plaintiff contends that Bank of America holds the Note because Countrywide “failed to complete the documentation.-required to assign the Note”11 to the .trust for which Bank of New York Mellon is trustee. Id. at 6. Additionally, the Amended Complaint alleges that “Countrywide missed certain .deadlines for completing the document transfer to [Bank of New York Mellon], and that the Note never made it to [Bank of New York Mellon’s trust].” Id. at 7.
Finally, the Plaintiff asserts the Note and Deed of Trust may have become sepa*766rated and,:if the Note and Deed of Trust “have become separated and are held by different entities,” she may own the property “free and clear of liens.” Id. at 8.
In the Answer, the Defendants deny the Plaintiffs allegations of deficiencies with respect to Countrywide’s transfer of the Note to the. trust and the Plaintiffs contentions regarding the effect of these alleged deficiencies on the validity of the transfer.- See Answer ¶¶18, 26-27. The Defendants respond to the allegations of the Amended Complaint by asserting that Bank of America services the Note arid Bank of New’York Mellon is the owner'of the Note, which is endorsed in blank and payable to the bearer. Id. ¶¶ 28(a), 28(b), 28(c). As a ’result of the loan modification approved by the Loan Modification Order, the Defendants state that the Plaintiff is not in default under the Note. Id. ¶ 28(d). As to the validity of the Loan Modification Order, the Defendants contend the order is valid and adequate, but would assent to an amended- order that clearly identifies both the owner and servicer of the Note. Id. ¶ 29.
II. Subsequent Proceedings . and Briefing
At the initial pretrial conference held on January 6, 2015 (the “January Pretrial Conference”), Defendants’ counsel represented that Bank of New York Mellon holds the Note and Bank of America services the Note and maintains possession of the original Note only in its capacity 'as servicer, .which Note could be provided to be inspected. See Tr. (1/6) at 4; see also Answer ¶¶ 28(a), 28(b), 28(c).
To address the Plaintiffs concern surrounding the fact that Bank of America is identified as the “Lender” in the Loan Modification Order, Defendants’ counsel agreed to the entry of an amended order approving the loan modification that would identify Bank of New York Méllon as the holder of the Note and bind Bank óf New York Mellon to the terms' of the Loan Modificatiori Order, consistent with Defendants’ representations in the Answer. Tr. (1/6) at 7-8; see Answer ¶ 29.
At the January Pretrial Conference, the Court rejected the Plaintiffs theory asserted in the Amended Complaint that the Note and Deed of Trust could have become “bifurcated'’ such that the holder of the Note would lose its security interest in the Property. See Tr. (1/6) at 9.12 Accordingly, the Court believed it had resolved any lingering uneértainty regarding the validity of the lien on the Property.13
As' the result of the January Pretrial Conference, the Court directed the parties to jointly submit an order, holding, in pertinent part, that Bank of New York Mellon holds the Note and Bank of America services the Note. See id. The Court also directed the parties to submit an order amending the Loan Modification Order in the main bankruptcy case to clarify that Bank of New York Mellon is the holder of *767the Note and consents to be bound by the terms of the Loan Modification Order. See id.
Plaintiffs counsels subsequently prepared and presented the Amended Loan Modification Order to the Court, endorsed by Defendants’ counsel and counsel for the Chapter 13 Trustee, establishing that (i) Bank of New York Mellon holds the Note, (ii) Bank of America services the .Note; and (iii) Bank of New York Mellon agrees to be bound by the terms contained in the Loan Modification Order.. See Amended Loan Modification Order, ECF No. 147.- .The Amended Loan Modification Order was entered by the Court. Id. The Amended Loan Modification Order, therefore, affords the relief requested by Count I.
Defendants’ counsel presented a 'separate proposed order in the adversary proceeding memorializing thé Court’s ruling with respect to the identities of thé holder and servicer of the Note, which Plaintiffs counsel endorsed with objection. See Transcript of March 17, 2015 Hearing (hereinafter “Tr. (3/17)”) at 2, APN 61. Given that the Court had affordéd the Plaintiff the relief she requested in the Amended Complaint and that the Amended Loan Modification Order — an order both requested by and submitted on behalf of the Plaintiff — established' that' Bank of New York Mellon holds' the Note and Bank of America services the Note, the Court declined to enter the order and instead convened a hearing on' March 17, 2015 (the “March Hearing”), to better understate the Plaintiffs apparent unwillingness to take “yes” for an answer.
At the March Hearing, Plaintiffs counsel explained that she endorsed the ordér memorializing the Court’s ruling with objection because the Plaintiff believed the Court’s ruling at the January Pretrial Conference had circumscribed the relief requested by the Amended Complaint. See id. at 3. The Plaintiff argued that, the Court’s ruling at the January Pretrial Conference did not determine whether Bank of America’s14 transfer of the Mortgage Documents to. Bank of New York Mellon, -as trustee,-was ineffective. because it was made in violation of the terms of the PSA, a determination not clearly requested in the Amended Complaint. See id. at 34. As elaborated for the initial time at the March Hearing, the Plaintiff contends the transfer violated the terms of the PSA because an assignment of the Deed of Trust to the trust was never timely executed by" the proper party pursuant to the terms of the PSA. Id. at 3-4, 16.15 On this basis, the Plaintiff requested a judicial deterihination that Bank of America — not Bank of New York Mellon — holds the Note secured by the Property, which the Plaintiff believes would render her eligible for NMS relief. Id. at 4-5., ,
The March Hearing — held six months after the Amended Complaint was filed— marked the first point at which the Plaintiff articulated and the Court understood that the relief requested in Count II is entirely founded on Countrywide’s alleged noncotopliance with the' PSA. Indeed, because the Amended' Complaint never references the PSA, the Court could not comprehend the relief requested in Count II from the Plaintiff’s coriclusoiy allegations in the1 Amended Complaint' that Countrywide failed to complete required documentation and missed unspecified deddlines with respect to the transfer of the Plaintiffs Mortgage Documents. See Amended Complaint at 5-6, 7. ,
*768Now aware that Count II depended entirely upon the Plaintiffs ability to enforce the alleged violations of the ■ PSA, the Court ordered the Plaintiff to brief several issues, including why she has standing to raise the PSA — an agreement to Which she is not a party — as the basis for her claim. See Order Directing the Filing of Documents and Briefs at 5, APN 26 (hereinafter “Briefing Order”). The Briefing Order also directed the Defendants to file a response brief and a copy of the Note with an affidavit of the custodian of records in support of the'representations made in the Answer and by Defendants’ counsel. Id.
The Defendants filed the affidavit with a copy of the Note. See APN 28. On April 24, 2015, counsel for the Plaintiff subsequently filed a Memorandum of Law on Standing and Choice of Law. See Memorandum of Law on Standing and Choice of Law, APN 29 (hereinafter “First Brief’). The Defendants’ timely filed a response to the First Brief on May 15, 2015. See Response to Debtor’s Memorandum of Law on Standing and Choice, of Law, APN 44 (hereinafter “Response Brief’). By oral ruling, the Court permitted the Plaintiff to file a supplemental- brief on the standing issue. See Transcript of June 30, 2015. Hearing (hereinafter “Tr. (6/30)”) at 22, APN 62. The Plaintiff filed the supplemental brief pro se16 on July 6, 2015. See Brief, APN 52 (hereinafter . “Second Brief’). Shortly after filing the Second Brief and ostensibly to enhance the arguments raised in that brief, the Plaintiff also filed a document pro se styled as a personal affidavit, which was not specifically authorized by the Court , See Affidavit of Sheryl S. Stanworth, APN 55 (hereinafter “Affidavit”).
The Court carefully limited the scope of the issues in the initial briefing to the Plaintiffs standing to' enforce the terms of the PSA as a nonparty to the agreement and related issues of choice of law and conflicts of law. " The Second Brief presented the Plaintiff an opportunity to supplement her argument on the standing issue. While the Plaintiffs’ briefs do, in part, address the legal issues of concern to the Court, the First Brief, Second Brief, and Affidavit all seek to expand the factual allegations and legal theories in support of Count II of the Amended Complaint. The Briefing Order provided a forum only to address the legal'issues presented by the Court and the facts related to those narrow issues. . The Court did not authorize the- Plaintiff, either by counsel or pro se, to amend the Amended Complaint defacto by raising new claims or alternative legal theories in.,support of the ultimate relief she seeks in Count II. See Pegram v. Herdrich, 530 U.S., 211, 230, n. 10, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) (briefs may be used to clarify or elaborate on the allegations and claims in a complaint); see also Fed.R. Bankr.P. 7015; Fed.R.Civ.P. 15(a)(2). Thus, the Court vyill only evaluate the contents of: the First Brief, Second Brief, and Affidavit to the extent they address the narrow legal issues the Court permitted the Plaintiff to brief. The Court will likewise consider the Response Brief insofar as it is responsive to the legal issues the Court .directed the parties to brief.
Following the pretrial scheduling conference on July 21, 2015, the Court advised it *769would determine whether the Plaintiff has standing to maintain Count II, which is premised entirely upon her ability to enforce alleged violations of the PSA. For the reasons discussed below, the Court will dismiss Count II of the Amended Complaint sua sponte for lack of prudential standing.
III. Analysis
A. Standing
In Count II, the Plaintiff requests a judicial determination of the validity of the lien of the. Deed of Trust securing the Note on the Property pursuant to Federal Rule of Bankruptcy Procedure 7001(2). Under the structure of the Bankruptcy Code (11 U.S.C. § 101 et seq.) and the Federal Rules of Bankruptcy Procedure, the Plaintiff may bring this action. ■ However, the authority to bring this action is not unlimited. The Plaintiffs standing to obtain this relief is limited by the allegations of the Amended Complaint. Specifically, Count II is founded upon the Plaintiffs ability to assert noncompliance with the PSA. Thus, the Court must determine the Plaintiffs standing to maintain her claim on this theory.
Standing is a threshold issue in federal litigation because it determines “the propriety of judicial intervention.” Warth v. Seldin, 422 U.S. 490, 518, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). The standing doctrine is comprised of two distinct components: constitutional standing and prudential standing. Bishop v. Bartlett, 575 F.3d 419, 423 (4th Cir.2009) (citing Allen v. Wright, 468 U.S. 737, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984)).
To obtain constitutional standing, a party must satisfy three requirements:
(1) [the party] has suffered an ’injury in fact’ that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that' the injury will be redressed by a favorable decision.
Id. at 423 (quoting Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180-81, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000)). As its label suggests, constitutional standing derives from “Article III of the United States Constitution, which limits judicial authority to. ’Cases’ and ’Controversies.’ ” Id. (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 559-60, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) and Warth, 422 U.S. at 498, 95. S.Ct. 2197).
By comparison, prudential standing. is the product of three self-imposed nonconstitutional limitations on the federal courts’ adjudicative authority. Id. (citing Allen, 468 U.S. at 751, 104 S.Ct. 3315; Valley Forge Christian Coll. v. Ams. United for Separation of Church & State, Inc., 454 U.S. 464, 474-75, 102 S.Ct. 752, 70 L.Ed.2d 700 (1982)). A party must observe '-the following prudential standing considerations:
First, “when the asserted harm is a ’generalized grievance’ shared in substantially equal measure by all or a large class of citizens, that harm alone normally does not warrant exercise of jurisdiction.” Warth, 422 U.S. at 499, 95 S.Ct. 2197; see, e.g., United States v. Richardson, 418 U.S. 166, 94 S.Ct. 2940, 41 L.Ed.2d 678 (1974). Second, “the plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.” Warth, 422 U.S. at 499, 95 S.Ct. 2197; accord Valley Forge, 454 U.S. at 474, 102 S.Ct. 752. Third, “a plaintiffs grievance must arguably fall within the zone of interests protected or regulated by the statutory provision or constitutional guarantee in*770voked in the suit.” Bennett v. Spear, 520 U.S. 154, 162, 117 S.Ct. 1154, 137 L.Ed.2d 281 (1997); see, e.g., Ass’n of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970).
Id.
The second prudential standing consideration is relevant here because Count II rests on the Plaintiffs ability to enforce a contract to.which she is not a party.
1. The Court’s Authority to Examine Prudential Standing
Other courts have reached the issue of whether a borrower has standing't'o dispute compliance with a pooling and servicing agreement in the context of a motion to: dismiss or a motion for summary judgment filed by a defendant.: See, e.g., Grenadier v. BWW Law Grp., No. 1:14-cv-00827-LMB-TCB, 2015 WL 417839, at N (E.D.Va. Jan. 30, 2015); Figueroa v. Deutsche Bank Nat’l Tr. Co., No. 1:13-cv00592-AJT-TRJ, 2013 U.S. Dist. LEXIS 180404, at *1 (E.D.Va. July 10, 2013), aff'd, 548 Fed.Appx. 85 (4th Cir.2013). However, in this case, the Defendants have not filed a dispositive motion , on the issue of the Plaintiffs standing. Prior to the ■Court’s directive to brief the issue of the Plaintiffs standing to assert the PSA as the basis for Count II, the Defendants had only referenced standing in their boilerplate affirmative defenses. See Answer at 6-7. Thus, to the extent the Defendants’ failed to properly raise prudential standing, the Court must first address its authority to raise the issue sua sponte.
The circuits are divided regarding whether a court’s consideration of prudential standing, is " permissive or mandatory when.the parties have failed to properly raise the issue. Several circuits have concluded that prudential standing is jurisdictional .in nature such that the issue cannot be waived and the court’s inquiry is mandatory. See, e.g., Ass’n of Battery Recyclers, Inc. v. EPA, 716 F.3d 667, 674 (D.C.Cir.2013) (quoting Animal Legal Def. Fund, Inc. v. Espy, 29 F.3d 720, 723 n. 2 (D.C.Cir.1994)) (“[T]his Circuit treats prudential standing as ’a jurisdictional issue which cannot be waived . or conceded’ ____”); Cmty. First Bank v. Nat’l Credit Union Admin., 41 F.3d 1050, 1053 (6th Cir.1994), amended (May 8, 1995) (“Standing is not an affirmative defense that must be raised at risk of forfeiture. Instead, it is a qualifying hurdle that plaintiffs must satisfy even if raised sua sponte by the court.”); Thompson v. County of Franklin, 15 F.3d 245, 248 (2d Cir.1994) (“The jurisdictional nature of the standing inquiry, therefore, convinces us that we have an independent obligation to examine [the plaintiffs] standing....”).
Other circuit, courts have determined that the issue of .prudential standing., is waivable, holding that a court may either examine prudential standing sua sponte or deem it waived if a party fails to assert the issue. See,, e.g., Hobby Lobby Stores, Inc. v. Sebelius, 723 F.3d 1114, 1162 (10th Cir.2013), aff'd sub nom., Burwell v. Hobby Lobby Stores, Inc., — U.S. -, 134 S.Ct. 2751, 189 L.Ed.2d 675 (2014) (citations omitted) (“Prudential-standing limitations are subject to waiver. But this com*t has discretion to address prudential standing sua sponte.”); Bd. of Miss. Levee Comm’rs v. EPA 674 F.3d 409, 417-18 (5th Cir.2012) (observing that prudential standing arguments are waivable and the court may determine whether, to consider the issue sua sponte); City of Los Angeles v. County of Kern, 581 F.3d 841, 845 (9th Cir.2009) (“[T]he permissive language in our caselaw — ’can be deemed’ — indicates that the choice to reach -the question [of prudential standing] lies within our discretion.”); Rawoof v. Texor Petroleum Co., 521 F.3d 750, 757 (7th Cir.2008) (“[T]he *771court may raise an unpreserved prudential-standing question on its own, but unlike questions of constitutional standing, it is not obliged to do so.”).
Further, in circuits that have hot yet considered the issue, federal district courts have also determined that a court is, at minimum, authorized to raise prudential standing on its own when the parties have not. See, e.g., Ohio Valley Envtl. Coal., Inc. v. U.S. Army Corps of Eng’rs, No. 2:12-cv-06689, 2014 WL 4102478, at *12 (S.D.W.Va. Aug. 18, 2014); Ricci v. Okin, 770 F.Supp.2d 438, 443 (D.Mass.2011); Nat’l Fed’n of Republican Assemblies v. United States, 218 F.Supp.2d 1300, 1310—11 (S.D.Ala.2002), vacated sub nom. on other grounds, Mobile Republican Assembly v. United States, 353 F.3d 1357 (11th Cir.2003).17
While, the Fourth Circuit Court of Appeals has not directly addressed the narrow issue of a court’s capacity to consider prudential standing when the parties have failed to raise it, the court has observed that prudential standing is not jurisdictional in nature. See United States v. Day, 700 F.3d 713, 721 (4th Cir.2012) (quoting Finstuen v. Crutcher, 496 F.3d 1139, 1147 (10th Cir.2007)). On that basis, the Fourth Circuit may adopt the reasoning of the circuits that hold a court has the discretion either to examine prudential standing sua sponte or deem the issue waived when the parties have failed to raise it. At minimum, virtually all cases demonstrate that a court has discretion to reach the issue sua sponte and, therefore, this Court need not hypothesize whether the Fourth Circuit would ultimately hold that a court’s examination of prudential standing is permissive or mandatory.
Accordingly, to the extent the Defendants waived the issue of prudential standing in this case, the Court elects to consider the Plaintiffs standing to assert the PSA as the basis for relief under Count II on its own initiative.18 See Haulmark Servs., Inc. v. Solid Grp. Trucking, Inc., No. H-14-0568, 2014 WL 5768685, at *2 (S.D.Tex. Nov. 5, 2014) (quoting Pyramid Transp., Inc. v. Greatwide Dallas Mavis, LLC, No. 3:12-CV-0149-D, 2013 WL 840664, at *4 (N.D.Tex. Mar. 7, 2013) (“[T]he court could sua sponte raise the issu'd of whether [the plaintiff] can recover because ‘the limits of prudential standing “requiref ] that a plaintiff must assert its own legal rights and interests, and [not] rest its claim to relief on the legal rights or interests of third parties.” ’ ”). As noted above, the Plaintiff must assert her own legal rights, not the rights of third parties. Here, this requires a determination of the Plaintiffs rights, if any, under the PSA. That inquiry begins with an examination of *772the applicable law guiding the Court’s analysis.
2. Choice of Law
In framing the choice of law analysis, the Court must emphasize that it is not resolving the Plaintiffs claim regarding the effect of alleged noncompliance with the PSA on the identity óf the holder of the Note secured by the Deed of Trust on the Property; rather,, the question before the Court is whether the Plaintiff has standing to enforce the terms of the PSA as the basis for her claim. The PSA provides that it will be construed and governed in accordance with -substantive New York law, and that New York law will dictate the obligations, rights, and remedies of the parties and .certificateholders. PSA § 10.03 (the “Choice of Law Provision”). However, the parties do not agree that the Choice of Law Provision should dictate the substantive law the Court will apply to determine the Plaintiffs standing to enforce the PSA.
The Plaintiff contends in the First Brief the Choice of Law Provision would govern a determination .of the identity of the holder of the Note, but the Plaintiff does not clearly address whether the Choice of Law Provision governs the threshold issue of her standing to enforce the PSA to seek such a determination. First Brief at 12; see also Affidavit ¶3 (generally contending New York law is applicable). The Defendants assert, without offering any supporting authority, that the Choice of Law Provision is wholly inapplicable in this adversary proceeding because the Plaintiff is neither a party to the PSA nor a certificateholder. Response Brief ¶ 15. The Court is not persuaded by the Defendants’ argument, which- is based on an assumed conclusion • regarding the ■ substantive issue the .Court seeks to resolve. It will thus undertake an .independent analysis of the issue.
A bankruptcy court applies the choice of law rules of the forum state, which in the instant case is the law of Virginia. Compliance Marine, Imc. v. Campbell (In re Merritt Dredging Co.) 839 F.2d 203, 206 (4th Cir.1988); McCarthy v. Giron, 1:13-CV-01559-GBL-TCB, 2014 WL 2696660, at *10 (E.D.Va. June 6, 2014) (“[A]bsent a compelling federal interest that dictates otherwise, a bankruptcy court is to apply the forum.state’s choice of law principles for claims that are the subject of state law .... ”); see Response Brief ¶ 13. Defendants properly acknowledge that Virginia courts generally enforce choice of law provisions to decide issues of substantive law, whereas procedural questions are decided by reference to Virginia law. Response Brief ¶ 14 (citing Hooper v. Musolino, 234 Va. 558, [364 S.E.2d 207, 211] (1988). Standing to enforce the terms of a contract is a matter of contract interpretation, which is an issue of substantive law. See Vollmar v. CSX Transp., Inc., 705 F.Supp. 1154, 1166 (E.D.Va.1989) (citing KECO Indus., Inc. v. ACF Indus., Inc., 316 F.2d 513, 514 (4th Cir.1963); Chesapeake Supply & Equip. Co. v. J.I. Case Co., 700 F.Supp. 1415 (E.D.Va.1988)).
Accordingly, when a contract contains a choice of law provision, a court that is applying Virginia law will invoke that provision to determine whether nonparties qualify to enforce the terms of the contract. See, e.g., Canal Ins. Co. v. Lebanon Ins. Agency, Inc., 504 F.Supp.2d 113, 119 (W.D.Va.2007). The United States District Court for the Western District of Virginia recognized that the Virginia Supreme Court will enforce choice of law provisions against parties to a contract and reasoned that'application of a contract’s choice, of law provision to determine a non-party’s status to sue as a third-party beneficiary would similarly effectuate the contracting parties’ intent. Id. Pursuant to *773the choice of law provision in the contract, the court in Canal Insurance applied North Carolina law, rather than Virginia law, in performing its analysis of whether the plaintiff could withstand dismissal of its claim as a matter of law by establishing third-party beneficiary status. Id.
It follows then that the Choice of Law Provision dictates the substantive law the Court will apply in this case to analyze the Plaintiffs standing to enforce the PSA as a nonparty to the agreement. The Choice of Law Provision directs that New York law applies. Accordingly, the Court will look to New York law to determine whether the Plaintiff may allege noncompliance with the terms' of the PSA as the basis for Count II.
3. Plaintiff Lacks Standing to Enforce Noncompliance with the PSA Because She is Neither a Party to nor an Intended Third-Party Beneficiary of the PSA
The Amended Complaint makes no explicit reference to the PSA, yet the relief the Plaintiff seeks under Count II is nevertheless entirely dependent upon her ability to enforce various terms of the PSA. This is because the Plaintiff alleges in the Amended Complaint that, if Countrywide failed to timely complete the required documentation to transfer the Mortgage Documents to the trust, the transfer to the trust was ineffective. Amended Complaint at 5-6, 7, Despite the vague and attenuated allegations in the Amended Complaint, it is now apparent to the Court that the Plaintiffs contentions are based upon the terms of the PSA governing the; trust, which she asserts required Countrywide to transfer the Mortgage Documents to the trust (1) by a date certain and (2) with an assignment of the Deed of Trust in compliance with the PSA. See Tr, (3/17) at 3-4. Simply put, the Plaintiff argues that a PSA-compliant assignment of the Deed of Trust was necessary to complete the transfer of the Note and Deed of Trust to Bank of New York Mellon, as trustee, even if the Note was negotiated to the trust.- First Brief at 10-11; see also Tr. (3/17) at 16.
As a general matter, courts have arrived at a “judicial consensus” that homeowners lack standing to assert noncompliance with pooling and servicing agreements or related contracts between lenders as the basis for a claim for relief:
Whatever the context, it appears that a judicial consensus has developed holding that a borrower lacks standing to (1) ■challenge the validity of mortgage securitization or (2) request a judicial :determination that a loan assignment is invalid due to noncompliance with a pooling and servicing agreement, when the borrower is.neither a party to nor a third party beneficiary of the securitization agreement, ie., the PSA.
In re Walker, 466 B.R. 271, 285 (Bankr.E.D.Pa.2012) (collecting cases).
Multiple circuit courts have expanded the “judicial consensus.” See, e.g., Rogers v. Bank of Am., 787 F.3d 937, 939 (8th Cir.2015); Rajamin v. Deutsche Bank Nat’l Tr. Co., 757 F.3d 79, 87 (2d Cir.2014); Dauenhauer v. Bank of N.Y. Mellon, 562 Fed.Appx. 473, 480 (6th. Cir.2014); Davies v. Deutsche Bank Nat’l Tr. Co. (In re Davies), 565 Fed.Appx. 630, 633 (9th Cir.2014); Edward v. BAC Home Loans Servicing, L.P., 534 Fed.Appx. 888, 891 (11th Cir.2013).19
*774In Rajamin, a group of homeowners sought a determination that securitized trusts did not own their loans and mortgages .because the parties to the trusts’ pooling and servicing agreements did not comply with.their terms. Rajamin, 757 F.3d at 80-81. In considering whether the homeowners had standing to bring, their claims, the Second Circuit Court of Appeals distinguished between third-party beneficiaries to contracts — who are able to enforce the terms of a contract because the contracting parties intended to confer a benefit upon them — and mere incidental beneficiaries, who are not permitted to maintaih a suit on a cdntract under New York law. Id. at 86 (citing Mendel v. Henry Phipps Plaza W. Inc., 6 N.Y.3d 783, 811 N.Y.S.2d 294, 844 N.E.2d 748, [751] (N.Y.2006); Restatement (Second) of Contracts § 315 (1981)).20 The court concluded that the homeowners had failed to demonstrate any intention on the part of the parties ■ to the pooling and servicing agreements that the homeowners would be beneficiaries of the agreements; Id. at 87. On that basis, the court affirmed the district court’s ruling that the plaintiffs lacked standing to enforce the pooling and servicing agreements as they were neither parties to nor-intended third-party beneficiaries of the contracts. Id. The court further found that this determination was unaffected by the homeowners’ contention that their underlying mortgage documents conferred' standing to enforce the terms of the pooling and . servicing agreements, reasoning. that “the notes and deeds of trust to which plaintiffs were parties did not confer upon plaintiffs a right, against non-parties to those agreements to enforce obligations under separate agreements to which plaintiffs were not parties.’’ Id.
The Court concludes that, in- accordance with the Second Circuit’s decision in Raja-min and the wider judicial consensus, the Plaintiff — who is a nonparty to the PSA— must establish that she is • an intended third-party beneficiary of the PSA to maintain Count II.
First, rather than assert that she is an intended third-party beneficiary to, the PSA contract upon which Count II is founded, the Plaintiff instead argues that, she has standing to enforce the PSA because Count II is a proceeding to determine the validity of the lien on her. residence, which she believes will enhance her ability to pursue relief under the NMS, and, therefore, she is raising her own legal rights and contends that “a more particularized grievance is difficult to imagine.. ...” See First Brief at 9-10. However, the Plaintiffs argument misses the mark. Regardless of whether this proceeding implicates her personal residence or the ultimate relief the Plaintiff wished to pursue under the NMS, Count II nevertheless rests upon, her ability to enforce the PSA as the basis for her claim. Therefore, the Court finds that, neither the nature of this proceeding nor' its subject matter confers, standing to enforce the *775PSA when the Plaintiff is a nonparty to the agreement.
In the alternative, based upon reasoning adopted by an Alabama state court in Horace v. LaSalle Bank, No. CV 08-362 (Ala. Cir.Ct. Mar. 30, 2011) (unpublished decision), the Plaintiff asserts that she has standing to enforce the PSA as an intend^ed third-party beneficiary because she and other borrowers would have been unable to obtain mortgage financing if not for the ultimate pooling and securitization of loans under the PSA. See Affidavit ¶ 3; see also Tr. .(6/30) at 17-18. The United States District Court for the Western District of Virginia rejected a homeowner’s argument, also founded upon the reasoning in Horace, that her lender reduced its underwriting standards based upon, its future intention to securitize her loan: “[T]his Court is unpersuaded that the reduction of underwriting standards based upon an intent to securitize a loan automatically makes the borrower an intended beneficiary of a later-established pooling and servicing agreement.” Wittenberg v. First Indep. Mortg. Co., No. 3:10-CV-58, 2011 WL 1357483, *22 (N.D.W.Va. Apr. 11, 2011); see also Rhodes v. JPMorgan Chase Bank, No. 12-80368-CIV, 2012 WL 5411062, at *4 n. 2 (S.D.Fla. Nov. 6, 2012) (“Horace ... is a memorandum order which does not provide any legal authority or factual background, therefore it is of limited use and is neither binding nor persuasive,”). This Court is equally unpersuaded by the rationale in Horace and specifically adopts the reasoning of the Wittenberg and Rhodes courts in rejecting its application in this case. Accordingly, the Court finds the Plaintiff has failed to establish that she is an intended beneficiary of the PSA based upon a purported connection between the PSA or pooling and servicing agreements generally and the availability of mortgage financing.
The Plaintiff has not offered any other argument or pointed, to any provision in the PSA that suggests that- she is an intended beneficiary of the agreement. Instead, the Plaintiff focuses primarily on her eligibility for NMS, relief.21 See, e.g., First Brief at .9-10. Even if her allegations with respect to the parties’ obligations under the PSA. are correct, any potential .benefit to the Plaintiff under the NMS is completely unrelated to the PSA, Accordingly, the Court finds that this makes the Plaintiff, at .most, an incidental beneficiary of the agreement. As the Second Circuit observed in Rajamin, to acquire enforceable contract rights as an intended beneficiary, a benefit cannot be merely incidental. Rajamin, 757 F.3d at 86. Thus, applying the reasoning from Rajamin and the wider judicial consensus, the Court concludes the Plaintiff lacks standing to enforce the PSA as the basis for Count II because she is not a party to the PSA and has failed to establish that she is an intended third-party beneficiary of the agreement.
4. Plaintiff Lacks Standing to Enforce the Terms of the PSA to Challenge the Underlying Assignment of the Deed of Trust as Void
In the Second Brief and Affidavit filed in further support of Plaintiff’s standing .to base Count II on.the alleged noncompliance; ivith the PSA, the Plaintiff, asserts she has standing to enforce violations of the PSA to the extent that these violations rendered the assignment of the Deed of Trust void. See Second Brief at 2; Affidavit ¶8. Thus, the Plaintiff seeks to accomplish indirectly what she could not *776accomplish directly by reframing her challenge as an attack on the validity of the assignment of the Deed of Trust.
Courts have recognized that a homeowner may assert defects in an assignment if such defects render an assignment “invalid, ineffective, or void.” See Culhane v. Aurora Loan Servs. of Neb., 708 F.3d 282, 291 (1st Cir.2013); see also Rajamin, 757 F.3d at 88; Reinagel v. Deutsche Bank Nat’l Tr. Co., 735 F.3d 220, 225 (5th Cir.2013); Livonia Props. Holdings, LLC v. 12840-12976 Farmington Rd. Holdings, LLC, 399 Fed.Appx. 97, 102 (6th Cir.2010), However, homeowners cannot “challenge shortcomings in an assignment that render it merely voidable at the election of one party but otherwise effective to pass legal title.” Culhane, 708 F.3d at 291 (emphasis added); see also Rajamin, 757 F.3d at 90; Wolf v. Fed. Nat’l Mortg. Ass’n, 830 F.Supp.2d 153, 161 (W.D.Va. 2011), aff'd, 512 Fed.Appx. 336 (4th Cir.2013) (internal citations omitted) (citing Velasco v. Sec. Nat’l Mortg. Co., 823 F.Supp.2d 1061, 1067 (D.Haw.2011) and 6A C.J.S. Assignments § 132 (2011)) (“[The homeowner] is not an intended beneficiary of the assignment which is, to be sure, a contract.... As such, she lacks standing to challenge the assignment’s validity.”)
With respect to the interplay between assignments and pooling and servicing agreements, homeowners lack standing to enforce the terms of a pooling and servicing agreement to challenge an underlying assignment because noncompliance with a pooling and servicing agreement does not render an assignment void. See, e.g., Ferguson v. Bank of N.Y. Mellon Corp., 802 F.3d 777, 782-83 (5th Cir.2015) (applying Texas and New York law); Rajamin, 757 F.3d at 86-87, 89-90 (applying New York law); Butler v. Deutsche Bank Tr. Co. Americas, 748 F.3d 28, 37 (1st Cir.2014) (citations omitted) (applying Massachusetts law); Smith v. Litton Loan Servicing, LP, 517 Fed.Appx. 395, 398 (6th Cir.2013) (applying Michigan law); Deutsche Bank Nat’l Tr. Co. v. Adolfo, No. 1:12-cv-00759, 2013 WL 4552407, at *3 (N.D.Ill. Aug. 28, 2013) (applying New York law). Instead, an assignment in contravention of a pooling and servicing agreement is merely voidable. See Rajamin, 757 F.3d at 87, 90.
In .Rajamin, the Second Circuit considered homeowners’ standing to enforce pooling and servicing agreements to challenge the validity of assignments to securitized trusts under both a breach of contract theory and a breach of trust theory. Id. at 86-87, 87-90. The court first recognized that, under principles of New York contract law, contract rights may be waived by the parties for whose benefit they were intended, limiting their enforcement to parties and intended third-party beneficiaries and preventing strangers from vindicating the rights of those who choose • not to assert them. Id. at 86. Accordingly, “[although noncompliance with [pooling and servicing agreement] provisions might have made the assignments unénforceable at the instance of parties to those agreements',” only those entities can enforce the agreement for that purpose. Id. at 87.
In further consideration of homeowners’ standing to challenge allegedly void assignments, thé Second Circuit evaluated whether homeowners had standing to contend under a breach of trust theory that the trusts’ acquisition of their loans was void for failure to comply with pooling and servicing agreements. Id. at 88. The Rajamin ' court’s examinátion of New York trust law gave rise to the same result: “[W]e conclude that as unauthorized acts of a trustee may be ratified by the trust’s beneficiaries, such acts are not void but voidable; and that under New York law *777such acts are voidable only at the instance of a trust beneficiary or a person acting in his behalf.” Id. at 90.22 The court observed that a securitization trust’s beneficiaries are its certificateholders. Id. Accordingly, the court determined that the homeowners also lacked standing to enforce the alleged violations of the pooling and servicing agreements to challenge their mortgage assignments under a breach of trust theory; Id.
There is limited authority that adopts an alternate view of New York trust law. A New York state trial court determined that a borrower may assert that an assignment to a securitization trust is void for failure to comply with the terms of a pooling and servicing agreement because “under New York Trust Law, every sale, conveyance . or other act of the trustee in contravention of the trust is void.” Wells Fargo Bank v. Erobobo, No. 31648/2009, 39 Misc.3d 1220(A), 2013 WL 1831799, at *8 (N.Y.Sup.Ct. Apr. 29, 2013), rev’d, 127 A.D.3d 1176, 9 N.Y.S,3d 312 (2015), leave to appeal dismissed, 25 N.Y.3d 1221, 16 N.Y.S.3d 514, 37 N.E.3d 1158 (2015). However, the Erobobo court’s application of New York trust law was specifically rejected by the Second Circuit in Rajamin, 757 F.3d at 90, and the trial court’s decision was later reversed by a state appellate court in Wells Fargo Bank. v. Erobobo, 127 A.D.3d 1176, 9 N.Y.S.3d 312, leave to appeal dismissed, 25 N.Y.3d 1221, 16 N.Y.S.3d 514, 37 N.E.3d 1158 (2015). .The few courts that adopted a similar interpretation of New York trust law did so in reliance on Erobobo, prior to both the Rajamin decision and the state appellate court’s reversal of the trial court. See, e.g., Saldivar v. JPMorgan Chase Bank (In re Saldivar), Adv. No. 12-01010, 2013 WL 2452699, at *4 (Bankr.S.D.Tex. June 5, 2013); Glaski v. Bank of Am., 218 Cal. App.4th 1079, 160 Cal.Rptr.3d 449, 463 (2013). Accordingly, the Court declines to follow the interpretation of New York law adopted by the trial court in Erobobo.
In support of 'her argument that she may enforce the PSA to ’ challenge the underlying assignment as void, the Plaintiff looks to the Vermont Supreme Court’s decision in Dernier v. Mortgage Network, Inc., 195 Vt. 113, 87 A.3d 465 (2013). Second Brief at 2, The .Plaintiff relies on the court’s statement that the. homeowners would have standing to “assert their claims based on violations of the, [pooling and servicing agreement] only if those violar tions rendered the assignment to defendant absolutely invalid for breach of the [pooling and servicing agreement] provisions.” , See id. (quoting Dernier, 87 A.3d at 473). However, the Plaintiff has separated the first step in the court’s analysis from its final holding. After framing the scope of its inquiry, the court then analyzed whether, under New York law, the alleged violations of the pooling and servicing agreement rendered the mortgage assignment to the .trust void or voidable. Dernier, 87 A.3d at 473. Ultimately, the court adopted the majority position that the homeowners lacked standing because *778such violations render the- assignments merely voidable. Id. at 475. In Rajamin, the Second Circuit specifically acknowledged theDemier court’s interpretation of New York law as representative of the majority interpretation of New York trust law adopted in other jurisdictions. See Rajamin, 757 F.3d at 90 (quoting Dernier, 87 A.3d at 474) (“[Mjost courts in other jurisdictions ...- have interpreted New York law to mean that ’a transfer into-a'trust that violates the terms of a PSA is voidable rather than void.’ ”). Thus, the Dernier decision provides no support for the outcome the Plaintiff seeks.
In the Affidavit, the Plaintiff cites an Illinois Appellate-Court decision irt Bank of America v. Bassman FBT, L.L.C., 366 Ill.Dec. 936, 981 N.E.2d 1, as modified on denial of reh’g (Ill.App.Ct.2012) also for the proposition that she may enforce the PSA to challenge the underlying assignment of the Deed of Trust’ as void. See Affidavit ¶8.23 However, 'in an analysis mirroring that of the Dernier court, the Bassman court first acknowledged that a borrower’s standing to challenge the validity of an! assignment under this theory turns on whether noncompliance with a pooling and servicing agreement rendered the assignment Void or voidable. Bassman, 981 N.E.2d at 8. The court concluded that, under New York law, assignments in contravention of a pooling1 and servicing agreement are merely voidable, not void, such that the borrowers lacked standing to raise the issue". Id. at 9-10. Accordingly, Bassman also lends no support to the Plaintiff’s argument that she has standing to enforce the PSA on this theory.
The Plaintiff also references an unpublished Michigan circuit court decision in HSBC Bank USA v. Young, 11-000693-AV (Mich.Cir. Ct. Oct. 26, 2012) (unpublished decision) for the proposition that a homeowner has standing to enforce PSA violations to challenge the assignment of a mortgage and note. Second Brief at 2. However, the circuit- court’s decision was reversed by the Michigan Court of Appeals because the plaintiff lacked standing to challenge the assignment’under Michigan law. HSBC Bank USA v. Young, No. 313212, 2014 WL 3529418, at *3-4 (Mich. Ct.App. July 15, 2014), appeal denied, 497 Mich. 972, 859 N.W.2d 513 (2015). Accordingly, the Michigan' circuit court decision, which is based upon an ultimately rejected' interpretation of Michigán law, provides no basis for the Plaintiff’s standing to enforce the terms of the PSA to challenge the assignment of the Deed of Trust as void in this matter.
Therefore, the Court finds that the Second Circuit’s application of New York law in Rajamin is both persuasive and applicable in the instant case. The Court holds that violations "of a pooling and servicing agreement merely render an assignment to a securitization trust voidable either by a party or an intended beneficiary as a matter of New York law. As dis'cussed above, the Plaintiff is not a party to the PSA or established that she is'an intended third-party beneficiary of the agreement. Accordingly, the Court concludes that the Plaintiff lacks standing to maintain Count II on the basis that noncompliance with the PSA renders the underlying assignment of the Deed of Trust invalid. -
*7795. Plaintiff Lacks Standing to Enforce the PSA on the Basis of Bad Faith
In the First Brief, the Plaintiff contends the Rajamin ease is distinguishable and her claim should not be barred for lack of standing because she is “not challenging an act of the Trustee, but rather [Bank of Americans use of its ’insider’ status to avoid becoming the Noteholder....” First Brief at 9. The Plaintiff further asserts this distinction is dispositive. Id. It is the Plaintiffs perception that Bank of America somehow exploited its position as both successor to the seller and master servicer under the PSA to deliberately evade an obligation, which was triggered by the alleged violations of the PSA, to assume ownership of the Plaintiffs loan, thereby denying the Plaintiff access to ÑMS relief. Id. at 9-10. In essence, the Plaintiff seeks a determination that she has standing to maintain Count II on the basis of Bank of America’s alleged bad faith in its performance under the PSA.
However, absent enforceable contract rights to support this claim, the Court need not inquire into the nature of Bank of America’s performance of its obligations under the PSA. For the reasons discussed in Section III.A.3, the Plaintiff is, at most, an incidental beneficiary to the PSA, and incidental beneficiaries have no standing to enforce a pooling and servicing agreement. See Rajamin, 757 F.3d at 86-87. Even if Bank of America’s alleged nonperformance under the PSA may have adversely impacted the Plaintiffs ability to qualify for relief under the NMS, the Plaintiff nevertheless lacks standing to- enforce the PSA to vindicate her entitlement to what is at most an unrelated, incidental, potential benefit to the agreement. Despite the Plaintiffs conclusory allegations that Bank of America misused its position to deny her this incidental benefit, she doés not acquire any enforceable rights under the PSA. See Blick v. JP Morgan Chase Bank, No. 3:12-CV-00001, 2012 WL 1030115, at *5 n. 4 (W.D.Va. Mar. 27, 2012), aff'd, 475 Eed.Appx. 852 (4th Cir.2012) (recognizing that the borrowers’ fraud-based argument that their note was securitized after the trust’s closing date was reserved for the “allegedly defrauded certificate-holders”); see also Ennen v. Integon Indem. Corp., 268 P.3d 277, 284 (Alaska 2012) (“The distinction between intended and incidental third-party beneficiaries divides those parties who have a cause of action for bad faith and those who do not.”); Niazi v. JP Morgan Chase Bank, 66 A.D.3d 438, 886 N.Y.S.2d 404, 405 (2009) (holding that a plaintiff who was merely an incidental beneficiary to a building loan agreement could not state a claim for fraud in connection with the agreement). If Bank of America engaged in any bad faith conduct in the performance of its obligations under the PSA, only a party or intended beneficiary with enforceable contractual rights may complain of it.
Thus, the Plaintiffs attempt to distinguish Rajamin by directing her attack as one against Bank of America is not persuasive or dispositive. The Court has already determined that' the Plaintiff is neither a party to nor an intended beneficiary of the PSA. Therefore, regardless of any incidental benefit that may be at stake, the Plaintiff lacks standing to enforce noneompliance with the PSA based upon.Bank of America’s “insider” status. Accordingly, the Court concludes that the Plaintiff cannot maintain Count II on this basis.
IV. Conclusion
Count I of the Amended Complaint was previously resolved by consent with the entry of the Amended Loan Modification Order in the main bankruptcy case, leaving only Count II unresolved. Count II is *780entirely founded upon the Plaintiffs ability to enforce the terms of the PSA to seek a judicial -determination that Bank of America, rather than-Bank of New York Mellon, is the holder of the Note secured by the Deed of Trust on the Property. Having considered the arguments of the parties and for the reasons stated herein, the Court concludes the Plaintiff lacks prudential standing to enforce the PSA as the basis for Count II. Accordingly, because the Amended Complaint does not allege any other cognizable legal theory for Count II, the Court finds that Count II of the Amended Complaint must be dismissed.
A separate Order will be entered by the Court consistent with the findings and conclusions contained in this Memorandum Opinion.
The Plaintiff is advised that an appeal lies from this matter to the United States District Court for the Eastern District of Virginia. Except as provided in Federal Rules of Bankruptcy Procedure 8002(b)-(d), any notice of appeal must be filed with the Clerk of this Court within fourteen (14) days of the date of entry of the Order to be enteréd by the Court. The filing fee for a notice of appeal is $298.00.
The Clerk' shall deliver copies of this Memorandum Opinion to Sheryl S.: Stan-worth, Plaintiff; D. Carol Sasser and Johnie R. Muncy, counsel for the Defendants;' Michael P. Cotter, Chapter 13 Trustee; and to the; unrepresented parties themselves.-
. A duplicate copy of the Answer was also filed on October 6, 2014.
. The Amended Complaint also references Federal Rule of Bankruptcy Procedure 3012, which provides for the valuation óf a claim secured by a lien on property pursuant to 11 U.S.C. § 506(a). See Amended Complaint at 1. This is inapposite here as the Plaintiff seeks to challenge the basis of a lien itself.
. As the Amended Complaint contains both numbered and unnumbered, narrative paragraphs, all citation will be to the page where the relevant information can be found.
. The request for an order "granting such other and further declaratory and equitable relief as this honorable Court may deem meet” is a vague, boilerplate request that does not amount to a separate claim for;relief.
. The Loan Modification Order approves a modification of the loan secured by the Property. See Loan Modification Order at 1-3. Bank of America is identified in the Loan Modification Order as the "Lender.” See id. at 1. (
. "ECF No.” refers to a docket entry in the above-captioned main bankruptcy case, and "APN” refers to a docket entry in the adversary proceeding.
.The PSA is included as part of a Form 8-K filed by the Plaintiff on April 25, 2015, as Exhibit 2 to her Memorandum of Law on Standing and Choice of Law. See Exhibit 2, APN 31. The defendants agree that the PSA can be found in Exhibit 2 from pages 8 through 167. See Response td Debtor’s Memorandum of Law on Standing and Choice of Law, at 3, APN 44.
. The Court convened hearings in this adversary proceeding on January 6, 2015; March 17, 2015; June 30, 2015; July 8, 2015; and July 21,-2015.
. To the extent this not a-core matter, this Memorandum Opinion contains proposed findings of fact and conclusions of law.
. The Court will assume for purposes of this Memorandum Opinion that Bank of America is Countrywide’s successor in interest through its acquisition of Countrywide Financial Corporation on July 1, 2008. Bank of America Completes Countrywide Financial Purchase, http://investor.bankofamerica,com/phoenix. zhtml?c=71595&p=irol-newsArticle&ID
= 1171009# fbid=mGDAK7EcloZ (last visited Dec. 17, 2015).
. The express language of the Amended Complaint references the assignment of the Note. Amended Complaint at 6. The Court observes that the PSA — which is critical to the Amended Complaint, but' never expressly referenced therein — uses the word “assign,” in conjunction with words including "sell”' and “transfer,” to reference the conveyance of mortgage loans to the trust. ■ See PSA § 2.01. This is distinct from the assignment of the related mortgage, which transfers the security for the indebtedness. See, e.g., id. § 2.01(c)(ii), (iii).
Although the Amended Complaint observes there are multiple endorsements to the Note, the Amended Complaint does not allege that any of the endorsements — including the final endorsement in blank — are invalid. See Amended Complaint at 5. Further, the Plaintiff does not dispute the Note is being held by Bank of New York Mellon, as trustee. See Transcript of March 17, 2015 Hearing at 3, APN 61 (“The problem is that the loan, while it’s acknowledged as being held by the trust, is-tThe trust is not a legitimate holder---[A]ll matters that had to be accomplished in order for this note and deed of trust to come ... into the trust, were not accomplished timely.”). Instead, the Plaintiff contends that, irrespective of the validity of the endorsements or the trust's possession of the Note that is payable to the bearer, the transfer of the Mortgage Documents to the trust failed and the trust cannot be the holder of the Note because the Deed of Trust was not timely and properly assigned in compliance with the PSA. See id. at 3, 16.
Thus, the Court construes the Plaintiff's allegations in the Amended Complaint regarding the transfer of the Note as derived from her theory that assignment of the Deed of Trust pursuant to the -terms of the PSA is a necessary condition to affect-the transfer of the Mortgage Documents-including the Note-to the trust.
. This theory has no basis in law! "If there has been a ’split’ between the Note and Deed (of Trust] .,. the transferee of the Note nevertheless receives the debt in equity as a secured party.” Upperman v. Deutsche Bank Nat’l Trust Co., No. 1:10-cv-00149-CMHIDD, 2010 WL 1610414, at *3 (E.D.Va. Apr. 16, 2010) (citing Williams v. Gifford, 139 Va. 779, 124 S.E. 403, 404 (1924)); see also Wolf v. Fed. Nat’l Mortg. Ass’n, 830 F.Supp.2d 153, 162-63 (W.D.Va.2011), aff’d, 512 Fed.Appx. 336 (4th Cir.2013) (citing Horvath v. Bank of N.Y., 641 F.3d 617, 623-624 (4th Cir.2011)) (recognizing that.the transfer of a note or the assignment of a .deed of trust cannot split one from the other).
. At this stage in the proceedings, the Court was unable to discover the PSA!s critical part with respect to the Plaintiff’s claim for relief because the Amended Complaint neither specifically references nor attaches the PSA.
. The Court notes that Bank of America and Countrywide were often used .synonymously during proceedings and in the pleadings.
. See also supra n.M.
. Plaintiff’s counsel filed a motion to withdraw as counsel following the pretrial conference held June 30, 2015. See Motion to Withdraw, APN 47, ECF 167. Following an expedited hearing, the Court granted counsel’s request to withdraw by orders entered July 20,-2015, in both the adversary proceeding ánd main'' bankruptcy case. See Order Granting Motion to Withdraw as Counsel, APN 58, ECF 172. Thereafter, the Plaintiff elected to proceed pro se.
. Several bankruptcy courts have also invoked their authority to examine prudential standing sua sponte. See e.g., In re Grason, 486 B.R. 448, 457 (Bankr.C.D.Ill.2013) (citing G & S Holdings LLC v. Cont'l Cas. Co., 697 F.3d 534, 540 (7th Cir.2012)); Ag Venture Fin. Servs., Inc. v. Montagne (In re Montagne), 421 B.R. 65, 79 (Bankr.D.Vt.2009) (citing Main-Street Org. of Realtors v. Calumet City, Ill., 505 F.3d 742, 749 (7th Cir.2007); Thompson, 15 F.3d at 248); Lohmeyer v. Alvin's Jewelers (In re Lohmeyer), 365 B.R. 746, 753 (Bankr.N.D.Ohio 2007) (citing Cmty. First Bank, 41 F.3d at 1053).
. See Pyramid Transp., Inc. v. Greatwide Dallas Mavis, LLC, No. 3:12-CV-0149-D, 2013 WL 3834626, at *1 (N.D.Tex. July 25, 2013) ("[T]he court raised sua sponte that [the plaintiffj’s ... claim should be dismissed because [the plaintiff] lacks prudential standing and permitted [the plaintiff] to file an opposition response.”); Gaudin v. Saxon Mortg. Servs., Inc., 820 F.Supp.2d 1051, 1052 (N.D.Cal.2011) (internal citation and quotation marks omitted) ("Because standing is a ... threshold determinant[ ] of the propriety of judicial intervention, which may be raised sua sponte, the parties were ordeired to brief the question____”). ;•
. Although the Fourth Circuit is not among the circuits that have addressed the issue, district courts within the Fourth Circuit have likewise concluded that homeowners lack standing to enforce terms of a pooling and servicing agreement because they are neither *774parties to ñor intended third-party beneficiaries of these contracts. See McGee v. Countrywide Bank, No. 1:12CV772, 2013 WL 942394, at *3 (M.D.N.C. Mar. 11, 2013) (citing In re Walker, 466 B.R. at 285; Bittinger v. Wells Fargo Bank, 744 F.Supp.2d 619, 625 (S.D.Tex.2010); In re Kain, Adv. No. 10-80047-HB, 2012 WL 1098465 (Bankr.D.S.C. Mar. 30, 2012)); Wittenberg v. First Indep. Mortg. Co., No. 3:10-CV-58, 2011 WL 1357483 (N.D.W.Va. Apr. 11, 2011) (citing Bittinger, 744 F.Supp.Id at 625-26; Barberan v. Nationpoint, 706 F.Supp.2d 408, 425 n. 10 (S.D.N.Y.2010)).
. The distinction between,, intended third-party beneficiaries and incidental beneficiaries, who may be unintentionally benefitted by the performance of a contract, is widely recognized across jurisdictions. See 13 Williston On Contracts^ 37:21 (4th ed.2015) (collecting cases):
. The Defendants dispute that the Plaintiff would qualify for relief under the NMS because, even if Bank of America was the holder of the Plaintiff’s loan, the loan was not in default on the relevant date. See Response Brief ¶ 10 n.l.
. In a recent opinion, the Honorable Mary Jane Hall of the Circuit Court for the City of Norfolk, Virginia considered whether a borrower could obtain relief relating to a foreclosure of her real property on the basis that the foreclosing entity was not the holder of the note because its acquisition of the note violated the terms of a securitized trust, which operated under New York law. Burgest v. HSBC Bank, USA, No. CL14-8747, 2015 WL 6085286, at *2-4 (Va.Cir.Ct. Oct. 9, 2015). The state court followed the majority position set forth in Rajamin, 757 F.3d at 90, that “trustee actions in contravention of the trust instrument are voidable, rather than void” under New York law and precluded the plaintiff from asserting a violation. of the trust agreement as basis for certain claims. Burgest, 2015 WL 6085286, at *3-4.
. In the Affidavit, the Plaintiff also cites a decision of the Court of Civil Appeals of Texas in Tri-Cities Construction, Inc. v. American National Insurance Co., 523 S.W.2d 426 (Tex.Civ.App.1975) with respect to her argument that a borrower may challenge the validity of añ underlying assignment. See Affidavit ¶ 8. However, this decision does not address the question of whether a violation of a pooling and servicing agreement renders an- assignment void or merely voidable. Accordingly, the court will not consider it. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499031/ | MEMORANDUM OPINION
STEPHEN C. ST. JOHN, Chief United States Bankruptcy Judge
This matter came on for trial on November 13, 2015, on the Complaint to Determine Dischargeability of Debt (the “Complaint”) filed by Stacy L.' Lawrence (“Lawrence”) on April 13, 2015, pursuant to 11 U.S.C. § 523 regarding claims against the debtor, David Michael Combs (the “Debtor”). The Court has jurisdiction over this proceeding pursuant to 28 U.S;d §§ 157(b) and 1334(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409(a). After the conclusion of the presentation of evidence1 and argument of the parties, the Court took the matter under advisement. .The Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
I. The Complaint
This Complaint arises from an apparently highly acrimonious divorce proceeding in the. Circuit Court of the City of Williamsburg-James City County, Virginia (the “Divorce Proceeding”), between Lawrence and the Debtor. Complaint to Determine Dischargeability of Debt, ¶ 6, filed April 13, 2015, Adv. Proc. No. 15-05009-SCS, ECF No. 1 (hereinafter, “Compl.”). The goal of the Complaint is simple: “Lawrence has initiated this adversary proceeding seeking anr order from the Bankruptcy Court declaring that the obligations owed by the Debtor to Lawrence *785as part of their divorce are of the nature of alimony, maintenance, and/or support and are therefore domestic support obligations (‘DSO’) pursuant to 11 U.S.C. § 101(14) [sic ] and thus,- nondischargeable under 11 U.S.C. § 523(a)(5).” Id. ¶1.2 The state court entered a Final Decree of Divorce (the “Divorce Decree”) on July 31, 2012, thereby terminating the parties’ marriage. Id. ¶ 7. The state court thereafter entered an Equitable Distribution Order on May 30, 2014 (the “Order”), which Lawrence asserts includes awards in the nature of alimony, maintenance, or support. Id. ¶¶ 8, 15. Lawrence alleges the Divorce Decree and the Order establish a number of domestic support obligations, as that term is defined by the Bankruptcy Code, owed by the Debtor to her and that the sums are “essential to enable Lawrence to maintain basic necessities. and/or to provide shelter” for her and the parties’ minor child, as follows:
1. Support arrearage arising from a ,February 23, 2012 prepetition judgment entered against the Debtor in the amount of $1,452.27 (“February 23 Support”).
2. Spousal support arrearage resulting from a judgment entered by the state court pursuant to an order entered April 6, 20Í1, in the amount of $3,812.00 with interest at 6% per annum from July 16, 2013, through September 26, 2014, which equals $273.84, for á total of $4,085.84 (“April 6 Support”).
3.Spousal and child support arrearage from November 8, 2010; through February 17; 2011, totaling $6,293.13. Lawrence asserts, “During the period of time the child support was $777.00 per month and spousal support was $1,130.00 per month for a total support obligation each month of $1,907.00. The arrearage covers a period of 3 months and 9 days, with a per diem of $63.57, for a total of $6,293.13, and Lawrence was awarded a judgment in the amount of. $6,293.13, plus the legal rate of interest from July 16, 2013.” (Hereinafter, the “February 17 Support”).3
4 Division of 2010 tax refunds in the ' amount of $2,330.00, which Lawrence ’ alleges represents spousal support. (Hereinafter, the “Tax División”).4
5. Division of retirement accounts and pension plans. Lawrence was awarded $56,500.00 of the Debtor’s retireIhent account with Anheüser-Busch ' and his ’ Individual Retirement Accounts, which' she' alleges represents support (“Retirement Account Division”).
6. Reimbursement of L.E.C.’s5 education fund (“Education Fund”) ' in the amount of $12,750,00, which the Debt- or was ordered to reimburse at a rate of $1,000.00 every six (6) months commencing January 1, 2015," and continuing on June 1 and January 1 of each yéar thereafter until L.E.C. turns *786eighteen (18) in 2019, when the remaining unpaid' balance is due and payable in full (“Education Fund Reimbursement”).
7. Reimbursement of Lawrence for fore- • closure- avoidance costs she paid to Glasser & Glasser on property located at 3986 Bournemouth, Williamsburg, Virginia. Lawrence was awarded a judgment in the amount of $12,923.76 (“Foreclosure Avoidance”).
8. Reimbursement for a payment made . by Lawrence to Lytle Title, for which Lawrence was awarded a judgment in the amount of $7,500.00 (“Lytle Title Reimbursement”).6
9. The Debtor was ordered to pay Lawrence $58,000.00 representing the difference in the equity between properties located at 3986 Bournemouth and 3483 Fenwick Drive, both in Williams-burg, Virginia. (Hereinafter, the “Equity Difference Payment”).
10. Rental income payment of $1,600.00 representing - imputed rental income (“Rental Income Payment”).
11. Reimbursement of L.E.C.’s medical expenses in the amount of $3,949.12, representing ninety-three (93) percent of the uninsured medical and dental expenses incurred in the total amount of $4,496.37 (“Medical Expense Reimbursement”).
12. The . balance due on an original garnishment of spousal support in the amount of $344.48 (“Garnishment Payment”).
See Compl. ¶¶ 9, 13-14, 16, 19 (items 1-12 above are collectively referred to as the ‘‘Lawrence Claim”). Lawrence asserts the total amount, of the domestic support obligation owed to her by the Debtor and not subject to discharge pursuant to 11 U.S.C. § 523(a)(5) is $167,728.60. Compl. ¶¶9, 11, 20.7 The Complaint also prays for an award of attorney fees but fails to specify an amount certain, the circumstances supporting an award, or the basis for such an award. Id. at 5 (prayer for relief). In sum, Lawrence prays this Court declare that she holds a nondischargeable claim against the Debtor in an amount of not less than $167,728.60, along with interest, costs, and attorney fees. 1 Id.; see also id. at ¶20. The Debtor answered the Complaint, denying that the ehtirety of the ■Lawrence Claim constitutes a nondischargeable domestic support obligation. Answer to Complaint ¶¶ 1, 8-9, 11,13, 16, 18-19, filed May 15, 2015, Adv. Proc. No, 15-05009-SCS, ECF No, 6 (hereinafter, “Answer”). Accordingly, the Debtor asserts that the Lawrence Claim is dis-chargeable. Id. ¶ 20.
II. The Bankruptcy Filing
The Debtor filed his voluntary Chapter 13 petition on September 26, 2014 (“Bankruptcy Case”). Pet. filed September 26, 2014, Case No. 14-51339-SCS, ECF No. 1. The Debtor scheduled various claims held by Lawrence as unsecured nonpriority debts, labeled as property settlements, and subject to discharge.8 On October 8, 2014, *787the Debtor filed his Chapter 13 Plan (“Plan”) and related motions in the Bankruptcy Case. The Plan provided for the payment of certain amounts, characterized as domestic support obligations, to Lawrence. Specifically, Section 2.B. provided for payment of two amounts to Lawrence with priority status pursuant to 11 U.S.C. § 507, one in the amount of $3,949.00 and the other in the amount of $6,293.13.9 The Plan proposed to pay both amounts pro rata over 38 months. Plan ¶ 2.B., filed October 8, 2014, Case No. 14-51339-SCS, ECF No. 11. After resolution of an objection to the Plan filed by the Chapter 13 Trustee unrelated to the issues of the Complaint, an order was entered confirming the Plan on March 13, 2015. Order Confirming Plan, entered March 13, 2015, Case No. 14-51339-SCS, ECF No. 43; see also Order Settling Trustee’s Objection to Confirmation of Plan, entered February 19, 2015, Case No. 14-51339-SCS, ECF No. 40.10
III. Findings of Fact
A. Conceded Domestic Support Obligations
Perhaps consistent with the apparent level of animosity in the Divorce Proceeding, Lawrence and the Debtor were unable to reach a factual stipulation. However, the Debtor concedes the - following four obligations are in the nature of support and are not subject to discharge: (1) February 23 Support in the amount of $1,452.27; (2) April 6 Support in the amount of $4,085.84; (3) February 17 Support in the amount of $6,293.13; and (4) the Medical Expense Reimbursement in the amount of $3,949.12. (These items are collectively referred to as the “Conceded Support Payments.”). Transcript of November 13,-2015 Trial at 5-7, ECF No. 19 (hereinafter, “Tr.”), ■ The Conceded Support Payments total $15,780.36. Accordingly, the Court determine these obligations to be nondischargeable.
B. Trial Testimony
The exhibits tendered by Lawrence were admitted- without objection. Tr. at 43.11
The testimony at trial was largely unhelpful in resolving the question of whether all, or some portion, of the Lawrence Claim (other than the Conceded Support Payments) is in the nature of alimony, maintenance, or support. Instead, the witnesses were directed by counsel to rehash much of the sordid history of the Divorce *788Proceeding, which is not relevant to the issues raised in the Complaint.
Upon examination by Lawrence’s counsel,12 the Debtor testified that he and Lawrence were married in 1998,- and their divorce was final in 2012. Tr. at 8, 34-35. The Debtor presently resides at' 3483 Frederick Drive, Toano, Virginia. Id. at 9. The remainder of the Debtor’s testimony largely involved the review of his bankruptcy schedules. The Debtor has been employed by Anheuser-Busch since 2000 and has been - a full-time employee since 2006. Id. at 25; see also Lawrence Exh. 1, Pet., Schedule I, filed September 26, 2014, Case No. 14-51339-SCS, ECF No. 1. The Debtor confirmed his income from Anheuser-Busch was $87,793.22 in 2012; $102,001.32 in 2013; and, as of September 18, 2014, the Debtor had gross income of $88,110.70 for 2014. Tr. at 26-28; see also Lawrence Exh. 1, Pet., Statement of Financial Affairs ¶ 1, filed September 26, 2014, Case No. 14-51339-SCS, ECF No. 1. At the time of filing, the Debtor had an interest in a 40i(k) account with Anheuser-Busch, LLC, valued at $102,607.79; and two (2) retirement accounts, one valued at $12,138.16,13 and the second with a value of $7,219.25. Tr. at 11. The Debtor did not know the current values of these assets. Id. at 11-12,17.
The Debtor reiterated his contention that all portions of the Lawrence, Claim listed in his Schedule F are not in the nature of alimony, maintenance, or support. See id. at 20-24. When asked why certain of the components of the Lawrence Claim (specifically, the February 23 Support; the April 6 Support; the February 17 Support; and the Tax Division) had not been paid, the Debtor asserted that he used any funds he had to pay his spousal and child support obligations and arrearages thereon, as well as other bills he owed. Id. at 38-40. The Debtor likewise declared-that he did not have the funds available to pay Lawrence the Equity Difference Payment. Id. at 40.
The Debtor confirmed he was represented by counsel in the Divorce Proceeding. Id. at 35, 38; see also id. at 82; Lawrence Exh. 3, Divorce Decree entered July 31, 2012, by the Circuit Court of the City of Williamsburg-James City County, Virginia (hereinafter, “Divorce Decree”); Lawrence Exh. 4, Equitable Distribution Order entered May 30, 2014, by the Circuit Court of the City. of Williamsburg-James City County, Virginia (hereinafter, “Order”). The Debtor acknowledged the Divorce Decree awarded primary custody of L.E.C., the only child of the marriage, to Lawrence. Tr. at 35-36. Under the provisions of the Divorce Decree, the Debtor’s obligation to pay Lawrence spousal support terminated when Lawrence married her current spouse, Winston R. Lawrence (“Mr.Lawrence”). Id. at 37.
The remainder of the Debtor’s testimony addressed his scheduled and current assets and his claims against Lawrence, her current husband, and Lawrence’s mother. See id. at 16-20, 29-34, 39^42.
Mr, Lawrence testified that he assisted Lawrence extensively during the Divorce Proceeding because of her total disability caused by an auto-immune disease, which is triggered by stress, and rheumatoid arthritis, which limits her ability to walk long *789distances. Id. at 44, 46, 58-59; see also Lawrence Exh. 7, Stacy L. Lawrence Disability Information. Lawrence’s sole income consists of Social Security disability payments. Tr. at 51. According to Mr. Lawrence, Lawrence has not worked for an extended time. Id. at 59. Contrary to the Debtor’s testimony, see id. at 27-28, Lawrence has never worked for Mr. Lawrence’s business (which Mr. Lawrence described as “lend[ing] people money to flip houses”), and he has never paid her a salary. Id. at 50.
Mr. Lawrence handles the couple’s household finances. Id. at 49-50, 58. He calculated the postpetition amounts allegedly owed by the Debtor to Lawrence, concluding the Debtor was two months delinquent m his child support payments, id. at 52-53, 55-56, and that the Debtor owed Lawrence $7,058.38, representing the Debtor’s obligation' to pay - ninety-three (93) percent of L.E.C.’s medical expenses. Id. at 57-58; see also Lawrence Exh. 6, Summary of Support Arrearages.14
Mr. Lawrence identified attorney fees accrued by Lawrence during the Divorce Proceeding. Tr. at 48-49. The Debtor was ordered to pay $3,500.00 of Lawrence’s attorney fees; according to Mr. Lawrence, these fees remain unpaid. Id, at 49; Order at 5. Lawrence tendered into evidence Exhibit 8, a proof of claim for attorney fees filed February 10, 2015, by Thomas K. Norment Jr., Esquire (“Norment”), for $3,500.00 (the “Norment Claim”). Lawrence Exh. 8, Proof of Claim for Attorneys’ Fees of $3,500.00 filed February 10, 2015. Paragraph 15 of the Order provides the Debtor had previously been ordered to pay Norment $500.00; which was unpaid at the time of entiy of the Order; the Debtor was additionally ordered to pay Norment $3,000.00 -for attorney fees incurred for the May 28, 2014 state court proceeding. See Order at 5.
Mr. Lawrence additionally testified 'that Lawrence had incurred attorney’s fees totaling $19,530.00 related to the Debtor’s bankruptcy proceedings (“Bankruptcy Fees”) since September 24, 2015. Tr. at 49. No further specificity was provided, and no documentary evidence of the Bankruptcy Fees was introduced. Mr. Lawrence testified that the alleged domestic support obligations listed in Exhibit 5 (which document was prepared by Lawrence’s attorney, see id. at -47) did not include the Norment Claim, nor did.it include the.Bankruptcy Fees. Id. at 47-49; see Order at 5; Lawrence Exh. 5, Domestic Support Obligations Summary. Mr. Lawrence agreed with Lawrence’s counsel that the Norment Claim- “would be added to” the total amount Lawrence-claimed to be nondischargeable ($167,728.60). Tr. at 49. ■■ , .
Lawrence’ was the third witness. She testified she has been disabled since 2002 or 2003, receives disability income from the Social Security Administration, and has never worked for Mr. Lawrence. Id. at 67, 69-70. Lawrence assertéd that the elements of her claim were all in the nature of support, the payment of which was essential to maintaining her and her daughter’s lifestyle. Id. at 68-69. ■ Lawrence’s financial condition, both previously and currently, was poor. Id. at- 67, 74. Lawrence experienced difficulty sustaining her and her daughter’s lifestyle due to the Debtor’s failure to fulfill his obligations as set forth in the Order. See id. at'66-72, 74. She and Mr. Lawrence-had to borrow money to pay for their household expenses. Id. at 71-72. - Lawrence further *790testified that her home had been the subject of foreclosure proceedings on multiple occasions because the Debtor failed to pay the mortgage. Id. at 72.
Lawrence was-represented by counsel throughout the Divorce Proceeding. Id. at 65, 76-77. The amounts ordered in the Divorce Decree and the Order to be paid by the Debtor were solely judicial determinations, as she and the Debtor never reached any voluntary agreements regarding the amounts to be paid during the Divorce Proceeding. Id. at 77.
On direct examination by his own counsel, the Debtor stated he was current in his child support payments. Id. at 79. His spousal support payments terminated in August 2012 when.- Lawrence married Mr. Lawrence; Id. at 80-81. The Debtor confirmed that neither he nor Lawrence voluntarily agreed to ahy of the provisions of the‘Order. Id. at-81. The Debtor testified the- terms of the Order were intended as equitable distribution and property division provisions, id. at 83, 8586, 90; he did concede, however, that certain of the Order’s obligations constitute support. Id. at 83-84 (referring to the four Conceded Support Payments — February 23 Support; April 6 Support; February 17. Support;. Medical Expense Reimbursement); see Order at 2, 5. When specifically asked about the intention of a reimbursement for Lytle Title listed in the Order, the Debtor asserted , this provision constituted a property division, representing equity from a home he and Lawrence sold. Tr. at 86; see Order at 3.15
On crossrexamination by Lawrence’s counsel, the .Debtor testified that he used the funds withdrawn from the .Education Fund to pay court-ordered spousal .and child support obligations and mortgage payments. Tr. at 91. During his redirect testimony, the Debtor recounted that his monthly financial obligations in 2011 when he withdrew money from L.E.C.’s Education Fund included $1,129.00 for spousal support; $777.00 for child support; the mortgage payment for Lawrence’s home in the amount of $2,100.00; a mortgage payment of $1,550.00 for the home in which he currently lives; the mortgage payment for a rental property owned by the Debtor, in which there were no renters, of $1,500.00; and a rent payment of $500.00 for the Debtor’s residence at that time. Id. at 92-94. The Debtor had a gross monthly salary of $8,000.00, with a net salary of $4,500.00 monthly at that time. The Debt- or testified he “had. to take that money [from the Education Fund]” to make his court-ordered payments because he was at risk of being sent :to jail if he failed to make the payments. /Nat 94.
The Debtor and his former mother-in-law, Joan E. Roberts, offered conflicting testimony concerning the origin of the deposits into L.E.C.’s Education Fund, see id. at 90-92, 97-99, but it' appears undisputed that the Debtor removed monies from the fund and expended them for purposes other than L.E.C.’s education. Id. at 91; se'e also id. at 97. The Debtor does not dispute that the Order requires him to reimburse the Education Fund. Id. at 90. According to Ms. Roberts, the Debtor has not commenced repayment of the Education Fund as directed by the Order. Id. at 98; see Order at 3.
Accordingly, the oral testimony by the Debtor, Lawrence, Mr. Lawrence, and Ms. Roberts provides de minimis insight into resolving the issues presented, here. Further, the Court is • presented with two. *791anomalies from the Divorce Proceeding that distinguish this from any prior , case adjudicated by this Court. First, none of the provisions of either the Divorce Decree or the Order resulted from any voluntary agreement between the divorcing spouses; instead, the provisions of both orders were solely the product of judicial determination. Second, the Debtor’s obligations are the product of.two distinct orders, with entry of the Divorce Decree separated temporally by nearly two years from the entry of the subsequent Order.
C. The Divorce Decree and the Order
The most influential of the parties’ exhibits in resolving the issues here are the Divorce Decree and the Order. The Divorce Decree was entered by the state court on July 31, 2012, on a nunc pro tunc basis.16 Divorce Decree at 9. The Divorce Decree terminated the marriage of the Debtor and Lawrence and awarded custody of their minor child, L.E.C., to Lawrence. Id. at 2. The Divorce Decree also provided for payment by the Debtor of child support; spousal support; support arrearages; health care coverage for Lawrence and L.E.C. (including the Debtor’s obligation to pay ninety-three (93) percent of L.E.C.’s unreimbursed' medical expenses); and certain mortgages. Id. at 3-5, 7. The state court reserved a number of issues in the Divorce Proceeding for subsequent determination, including equitable distribution; retroactive spousal and child support; the outstanding amount of L.E.C.’s unreimbursed medical expenses; maintenance of life insurance on the Debt- or for L.E.C.’s benefit; transfer of L.E.C.’s Education Fund and savings account; and whether 2010 and 2011 tax returns for the Debtor and Lawrence had been filed. Id. at 8-9. '
The Order, entitled “Equitable Distribution Order,” was not entered until May 30, 2014, Order at 1, -6. The related proceeding commenced on May 28, 2013, and was continued to July 16, 2013. Id. at 1. A subsequent hearing was Conducted on May 28, 2014, “not [as] an evidentiary hearing, but a hearing to clarify the Court’s previous rulings on equitable distribution at the hearings on May 28, 2013, and July 16, 2013.” Id. The findings embodied in the Order “were previously made and reaffirmed by the Court on [May 30, 2014].” Id. The Order provides, in successive paragraphs, for the February 23 Support; the April 6 Support; the February 17 Support; the Tax Division; the Retirement Account Division; the Education Fund Reimbursement; the Foreclosure Avoidance; the Lytle Title Reimbursement; the award of the 3986 Bournemouth, Williamsburg, Virginia property to Lawrence; the award of the 3483 Fenwick Drive, Williamsburg, Virginia property to the Debtor; the Equity Difference Payment; the Rental Income Payment; the Medical Expense Reimbursement; guardian ad-litem fees; attorney fees; and the Garnishment Payment. Order at 2-5. The Order concludes by closing the Divorce Proceeding. Order at 6.
IV. Conclusions of Law
A. The Bankruptcy Code
Section 1328 governs the dischargeability of debts in Chapter 13 bankruptcy proceedings:
(a) Subject to [§ 1328](d), as soon as practicable after completion by the debt- or 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 obli*792gation, 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, unless the court approves a written waiver of discharge executed by the debtor after the order for relief, under this chapter, the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt—
(2) of the kind specified in section 507(a)(8)(C) or in! paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a).....
11 U.S.C. §-1328(a) (2015). Section 523(a)(5) precludes from discharge any debt “for a domestic support obligation,” which is defined by § 101(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 'nonbankruptcy law notwithstanding any other provision of this title, that is—
(A) owed to or recoverable by—
(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or 1
(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance pi’ovided 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 pro•visions of—
(i) a separation agreement, divorce decree, or property settlement agreernent;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D)not assigned to á 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.
Id. § 101(14A).
While debts representing domestic support obligations are riohdischargeable in a Chapter 13 bankruptcy proceeding, debts within the scope of § 523(a)(15) are not excepted from discharge under § 1328(a). In contrast' to § 523(a)(5), debt under §' 523(a)(15) is owed
to a spouse, former spouse, or child of the debtor and not of the kind-described in [§ 523(a)(5)] that, is incurred by the debtor in the. course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record,,or a detexv mination made in accordance with State or territoiial law by a .governmental unit[.] ■ , .
Id. § 523'(a)(15). Thus, debts arising from, among other things, equitable distribution' orders arid property settlement agreements' upon the dissolution of a marriage may be dischargeable if such debts do not constitute domestic support obligations. See-id.; see also id. § 523(a)(5); Pagels v. Pagels (In re Pa *793gels), Adv. Proc. No. 10-07070-SCS, 2011 WL 577337, at *6 (Bankr.E.D.Va. Feb. 9, 2011).
This Court has surveyed the law in this circuit for determining whether claims against a debtor are in the nature of alimony, maintenance, or support pursuant to § 523(a)(5) in numerous cases, including Pagels v. Pagels (In re Pagels), Adv. Proc. No. 10-07070-SCS, 2011 WL 577337 (Bankr.E.D.Va. Feb. 9, 2011), and Brunson v. Austin (In re Austin), 271 B.R. 97 (Bankr.E.D.Va.2001). The characterization of marital debt is critical to the determination of discharge: “If the subject debt is a § 523(a)(15) debt, the debt is dis-chargeable in the Defendant’s Chapter 13 bankruptcy proceeding under § 1328(a). If the subject debt is a § 523(a)(5) debt, the debt is nondischargeable in the Defendant’s Chapter 13 bankruptcy proceeding pursuant to §§ 523(a)(5) and 1328(a).” In re Pagels, 2011 WL 577337, at *6. The non-debtor spouse (in this case, Lawrence) has the burden to demonstrate, by a preponderance of the evidence, that her claims are in the nature of alimony, maintenance, or support. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Tilley v. Jessee, 789 F.2d 1074, 1077 (4th Cir.1986); Beaton v. Zerbe (In re Zerbe), 161 B.R. 939, 940 (E.D.Va.1994).
The Lawrence Claim' satisfies subsections (A), (C), and (D) of 11 U.S.C. § 101(14A). While the Debtor denies that the entirety of the Lawrence Claim is owed to or recoverable by Lawrence, see Answer ¶ 14, the Divorce Decree entered by the Circuit Court of the City of Williamsburg-James’City County on July 31, 2012, as well as the Order, entered by the same court on May 30, 2014, ■ both clearly set forth that the Debtor owes the components of the Lawrence Claim' to Lawrence, the- Debtor’s former spouse. Thus, the Court finds that the debt is recoverable by Lawrence as required by § 101(14A)(A). It is undisputed that the debt was established by an order of the state court before the date of the order for relief in the Debtor’s Bankruptcy Case on September 26, 2014, thus satisfying § 101(14A)(C). The Debtor asserted' in his Answer that he has insufficient knowledge as to whether the Lawrence Claim has been assigned. Answer ¶ 17. Nothing in the record indicates that the debt has been assigned,' and, therefore, the Court finds that § 101(14A)(D) is satisfied here. Therefore, the sole remaining element of § 101(14A) at issue regarding the remaining eight (8) contested components of the Lawrence Claim is that in subsection'(B), whether these components are in the nature of alimony, maintenance, or support.
B. Fourth Circuit Case Law
Judge Waldrep of the United States Bankruptcy Court for the Middle District of North Carolina provided- a thorough analysis of the standards commonly utilized by Fourth Circuit courts to determine whether an obligation constitutes a domestic support obligation in In re Johnson, 397 B.R. 289 (Bankr.M.D.N.C.2008). The analysis for determining whether an obligation is in .the nature of alimony, maintenance, or support .is fact-specific and dependent on federal bankruptcy law, not state law. In re Johnson, 397 B.R. 289, 296 (Bankr.M.D.N.C.2008) (citing Strickland v. Shannon (In re Strickland), 90 F.3d 444, 446 (11th Cir.1996); Yeates v. Yeates (In re Yeates), 807 F.2d 874 (10th Cir.1986); Long v. West (In re Long), 794 F.2d 928 (4th Cir.1986); Adams v. Council, Baradel, Kosmerl & Nolan, P.A. (In re Adams), 254 B.R. 857, 861 (D.Md.2000); Catron v. Catron (In re Catron), 164 B.R. 912, 918-19 (E.D.Va.1994), aff'd, 43 F.3d 1465 (4th Cir.1994); Nelson, Keys & Keys, P.C. v. Hudson (In re Hudson), Adv. No. 07-8011, 2007 WL 4219421, at *1 (Bankr.*794C.D.Ill. Nov. 27, 2007); Brunson v. Austin (In re Austin), 271 B.R. 97, 106 (Bankr.E.D.Wa.2001); Baker v. Baker (In re Baker), 274 B.R. 176, 188 (Bankr.D.S.C.2000)). When analyzing whether an obligation serves as alimony, maintenance, or support under bankruptcy law, Judge Waldrep points out that the bankruptcy court “must not rely on the label used by the parties or the state court, but must look beyond the label to examine whether the debt actually is in the nature of support or alimony.” Id. (citing Cummings v. Cummings, 244 F.3d 1263, 1265 (11th Cir.2001); Brody v. Brody (In re Brody), 3 F.3d 35, 38 (2d Cir.1993)). Judge Waldrep further instructs:
[Domestic support obligation] is a term derived from the definition of a nondischargeable debt for alimony, maintenance, and support contained in the former Section 523(a)(5); therefore, case law construing the former Section 523(a)(5) is relevant and persuasive. Hudson, 2007 WL 4219421, at *1; In re Lepley, No. 0720344, 2007 WL 2669128, at *2 (Bankr.W.D.Mo. Sept. 6, 2007); In re Knox, No. 07-11082, 2007 WL 1541957, at *1 (Bankr.E.D.Tenn. May 23, 2007); see In the Matter of Dankert, No. 07-40109, slip op. at 3 (Bankr.D.Neb. Sept. 27, 2007) (stating that BAPCPA did not change the standard for whether an obligation is: in the nature of support).
In the Fourth Circuit, courts first look at the mutual or shared intent :of the parties ’to create a support obligation. Tilley, 789 F.2d at 1078 (stating that intent is the threshold that must be crossed before any other concerns become relevant); see In re Yeates, 807 F.2d 874, 878 (10th Cir.1986); Long v. Calhoun (In re Calhoun), 715 F.2d 1103, 1109-10 (6th Cir.1983) (showing that the initial- inquiry' is to determine whether there was intent -to create support). The court should look at the parties’ intent at the time of the divorce . or separation. E.g., Brody, 3 F.3d at 38; Tilley, 789 F.2d at 1077; Shaver v. Shaver, 736 F.2d 1314, 1316 (9th Cir.1984). The .labels, attached to certain provisions in a separation agreement are .not dispositive of their “nature,” but the labels are - persuasive evidence of the parties’ intent. Tilley, 789 F.2d at 1077-78 (a label in the agreement erects a “substantial obstacle” for the party seeking to overcome it); Catron, 43 F.3d at *2.
Courts of the Fourth Circuit have articulated an “unofficial” test for the intent inquiry, which provides for the court to look at: (1) the actual substance and language of the agreement, (2) the financial situation of the parties at the time of the agreement, (3) the function served by the obligation at the time of the agreement (ie. daily necessities), and (4) whether there is any evidence of overbearing at the time of the agreement that should cause the court to question the intent of a .spouse. Catron, 164 B.R. at 919 (citing Kettner v. Kettner, No. 91-587-N, 1-991 WL 549386 (E.D.Va. Nov. 19, 1991)) (the Fourth Circuit noted that approval of the use of these factors did not preclude the use of other formulae). Furthermore, because this list is. non-exclusive and the inquiry is fact intensive, courts should consider all relevant evidence. Lepley, No. 07-20344, 2007 WL 2669128, at *3. Ultimately, courts may look beyond the four corners of a divorce decree or the, agreement of the parties to determine the nature of the payments constituting the debts sought to. be discharged. In re Cribb, 34 B.R. 862, 864. (Bankr.D.S.C.1983); see also In re Bristow, No. 04-50235, 2005 WL 1321996, *1-2 (Bankr.M.D.N.C. April 22, 2005).
*795In re Johnson, 397 B.R. at 296-97 (footnotes omitted).
To determine the parties’ intent, the Court will consider the four factors established in In re Catron, discussed in In re Johnson, and utilized by this Court in numerous other cases, including In re Pagels and In re Austin: (i) whether there is any evidence of overbearing at the time1 the Divorce Decree and Order were entered; (ii) the actual language and substaneé of the Divorce Decree and Order; (in) the financial situation of the parties at' the time the Divorce Decree and Order were entered; and (iv) the function served by the obligations set forth in the Divorce Decree and Order. See Catron v. Catron (In re Catron), 164 B.R. 912, 919 (E.D.Va.1994), aff'd, 43 F.3d 1465 (4th Cir.1994) (unpublished table decision); In re Pagels, 2011 WL 577337, at *10; In re Austin, 271 B.R. at 106 (citing In re Crosby, 229 B.R. 679, 681 (Bankr.E.D.Va.1998)).
As to each factor, the Court must undertake a number of considerations. In Kettner v. Kettner, Civ. A. No. 91-587-N, 1991 WL 549386 (E.D.Va. Nov. 19, 1991), Judge Clarke wrote that if a spouse has suffered-overreaching as a result of the other spouse’s actions, the court should question the actions and intent of the overreaching spouse. Judge Clarke provided wisdom as to undertaking such a determination:
In determining whether a spouse’s will has been overborne, the court should consider whether both parties were represented by an attorney, whether the terms of the agreement grossly favor one spouse over the other or leave one spouse with virtually no income, the statements of the spouses in.court, the age, health, intelligence and experience of the spouses, the bargaining positions of the parties, whether there were any misrepresentations, and whether the creditor spouse had knowledge of the debtor spouse’s weakness or inability to fulfill the terms of the-.agreement.
Kettner v. Kettner, Civ. A. No. 91-587-N, 1991 WL 549386, at *2 (E.D.Va. Nov. 19, 1991).
When examining the actual language and substance of the agreement, “the Court should be cognizant of the context in which , the obligation arises under the agreement.” In re Austin, 271 B.R. at 106 (citing In re Catron, 164 B.R. at 919; Grasmann v. Grasmann (In re Grasmann), 156 B.R. 903, 908 (Bankr.E.D.N.Y.1992)). While the Court should consider the label given to an obligation, the Court is not bound by such designation, as any such label may not indicate the true nature of the obligation. Tilley v. Jessee, 789 F.2d 1074, 1077-78 (4th Cir.1986); Kettner, 1991 WL 549386, at *1; see also In re Austin, 271 B.R. at 106-07 (quoting Garza v. Garza (In re Garza), 217 B.R. 197, 201 (Bankr.N.D.Tex.1998); In re Grasmann, 156 B.R. at 908). The Court should take into account how the obligation is to be paid (whether in a lump sum or over a period of time) and. whether the payment is to be made directly to the spouse or to a third party., In re Catron, 164 B.R. at 919; Kettner, 1991 WL 549386, at *1. The Court may jajso consider any tax ramifications resulting from the obligation and any termination provisions regarding the obligation. In re Catron, 164 B.R. at 919; Kettner, 1991 WL 549386, at *1; In re Pagels, 2011 WL 577337, at *10 (quoting In re Austin, 271 B.R. at 106-07).
When considering the parties’ financial situation, the Court should compare each party’s work history, experience, and ability; income stability, potential, and opportunities; physical health; and future income needs. In re Austin, 271 B.R. at 107-08 (citing In re Catron, 164 B.R. at 919; Bedingfield v. Bedingfield (In re Bedingfield), 42 B.R. 641, 647 (S.D.Ga.1983); *796In re Grasmann, 156 B.R. at 908; Zaera v. Raff (In re Raff), 93 B.R. 41, 47 (Bankr.S.D.N.Y.1988)). In the present case, because the parties have- a minor child, the Court will also consider the fact that Lawrence has primary custody of the child. In re Catron, 164 B.R. at 919; Kettner, 1991 WL 549386, at *2.
Evaluating' the role the obligation was intended to perform involves examination'of numerous factors concerning both the parties’ past and future circumstances, including how long the parties were married; whether either party was at fault in the marriage; whether the parties had any children; and the parties’ standard of living during the marriage. See In re Catron, 164 B.R. at 919; Kettner, 1991 WL 549386, at *2 (citing Stone v. Stone (In re Stone), 79 B.R. 633 (Bankr.D.Md.1987); In re Austin, 271 B.R. at 108 (citing Peterson v. Peterson (In re Peterson), 133 B.R. 508, 512 (Bankr.W.D.Mo.1991); In re Raff, 93 B.R. at 47). The Court will also consider if the obligation arises from a past or future commitment- and whether it represents an allocation of debt or a division of property. In re Austin, 271 B.R. at 108 (citing In re Peterson, 133 B.R. at 512-13). Finally, the Court will assess if the obligation was intended to provide daily necessities, “whether” the award was intended to balance a disparity in incomes, and whether, without the debt at issue, the support award would have been sufficient..Id. (citing Baker v. Baker (In re Baker), 146 B.R. 862, 866 (Bankr.M.D.Fla.1992); In re Grasmann, 156 B.R. at 908; In re Peterson, 133 B.R. at 512; In re Raff, 93 B.R. at 47).
C. .Attorney’s Fees
Attorney fees awarded in connection with divorce proceedings can be deter-, mined to. ’be nondischargeable under § 523(a)(5). See Silansky v. Brodsky, Greenblatt & Renehan (In re Silansky), 897 F.2d 743, 745 (4th Cir.1990) (concluding that attorney fees owed by the debtor to the former spouse’s attorney arising from their divorce proceeding was nondischargeable). Courts reach such a conclusion where the obligation underlying the award of attorney fees is also nondischargeable. Beaton v. Zerbe (In re Zerbe), 161 B.R. 939, 940-41 (E.D.Va.1994); see also Ewing v. Ewing (In re Ewing), 180 B.R. 443, 446 (Bankr.E.D.Va.1994) (“The majority rule among Bankruptcy Courts is that an obligation to pay attorneys’ fees is ‘so tied in with the obligation of support as to be in the nature of support or alimony and excepted from discharge.’”) (quoting Romano v. Romano (In re Romano), 27 B.R. 36, 38 (Bankr.M.D.Fla.1983)); Crooks v. Crooks (In re Crooks), Adv. No. 94-3053-S, 1994 WL 16191547, at *2 (Bankr.E.D.Va. Oct. 13, 1994).
Courts contrast the potentially nondischargeable attorney fees awarded in underlying state court matters with fees related to the adversary proceeding to establish the nondischargeability of that certain debt. Courts in this circuit and others have awarded attorney fees incurred for pursuing a nondischargeability action on the basis of language contained in either the operative agreement entered into by the parties or in the underlying state court order providing for such fees in the event of an enforcement action. See, e.g., Shaver v. Shaver (In re Shaver), Adv. No. 14-05005, 2014 WL 3849687, at *4 (Bankr.W.D.Va. Aug. 5, 2014) (finding that the property settlement agreement entered into by the parties permitted the recovery of reasonable attorney fees -incurred by the nondefaulting party to enforce the agreement against • the defaulting party); Rolle v. Wolohan (In re Wolohan), Adv. No. 11-00984, 2012 WL 3561784, at *3 (Bankr.*797D.Md. Aug. 16, 2012) (awarding attorney fees incurred for the nondischargeability action based upon a provision in the separation agreement allowing the recovery of such fees in the event of default in fulfilling the obligations under the agreement); Bevins v. Ballard (In re Ballard), Adv. No. 09-5256, 2011 WL 2133529, at *3 (Bankr.E.D.Ky. May 25, 2011) (concluding that the property settlement provided for the debtor to indemnify the former spouse for attorney fees if the debtor failed to abide by the terms of the agreement); Gilman v. Golio (In re Golio), 393 B.R. 56, 63 (Bankr.E.D.N.Y.2008) (settlement agreement and order of divorce permitted spouse to recover attorney fees for non-compliance).5
The award of attorney fees for pursuing a nondischargeability action where the underlying agreement or order provides for such fees in the event enforcement for noncompliance is necessary comports with the American Rule. However, in 'the absence of contemplation of such fees, the American Rule prohibits such award in nondischargeability actions. Judge Kahn has discussed the American Rule vis-a-vis nondischargeability actions.
Under the American Rule, each party bears the cost of litigation absent statutory authority or an enforceable contractual agreement to the contrary. Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247-48, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975); MR Crescent City, LLC v. Draper (In re Crescent City Estates, LLC), 588 F.3d 822, 825 (4th Cir.2009). Courts generally agree that there is “[n]o statutory basis in the Bankruptcy Code that provides generally for attorney’s fees for a prevailing creditor in a § 523 action,” James R. Barnard, D.D.S., Inc. v. Silva (In re Silva), 125 B.R. 28, 30 (Bankr.C.D.Cal.1991). See, e.g., McCoun v. Rea (In re Rea), 245 B.R. 77, 90 (Bankr.N.D.Tex. 2000) (“The Bankruptcy Code does not provide for the recovery of attorney’s fees for dischargeability litigation.”)....
It is unnecessary in this case for the' Court to decide whether, in an appropriate case, the Court might award attorneys’ fees to the' prevailing party in á non-disehargeábility proceeding where the underlying state cause of action authorizes the award of such fees. The State Court Judgment adjudicated the underlying claims fully (and awarded substantial attorneys’ fees), and the only relief sought in this Court was a determination of dischargeability. This is a purely federal question, and, therefore, to the extent that the Plaintiff seeks fees in this action, it only can be in connection with 'the federal dischargeability determination, rather than pursuant to the underlying claims for which the Plaintiff already was awarded fees by the State Court. Moreover, even if Section 523 provided a mechanism for the award of attorneys’ fees, which it does not, the Plaintiff has not provided the Court with any evidence from which the Court could allocate such fees. See Soler v. United States (In re Soler), 261 B.R. 444, 464 (Bankr.D.Minn.2001) (denying request of the United States for attorney fees and costs, despite determination that debtor’s student loan obligations were non-dischargeable, because the United States did not provide any basis for or evidence for such an award). Finally, the plaintiffs request for' an award of attorney’s fees exceeds the scope of the Complaint, which contains a prayer solely for an award of the costs of the action. The Court therefore denies the Motions for Summary Judgment with respect to the request for attorneys.’ fees.
Thomas v. Causey (In re Causey), 519 B.R. 144, 155-56 (Bankr.M.D.N.C.2014); see also Wells Fargo Bank v. Stalsitz (In *798re Stalsitz), Adv. Proc. No. 13-00021-8-ATS, 2013 WL 5431588, at *3 (Bankr.E.D.N.C. Sept. 30, 2013) (finding there is no provision within the Bankruptcy Code to permit an award of attorney fees to the plaintiff in a nondischargeability action); Elrod v. Bowden (In re Bowden), 326 B.R. 62, 97 (Bankr.E.D.Va.2005) (discussing the American Rule and finding that in Virginia, an award of attorney’s fees generally must be supported by statute or contract) (citing Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247-48, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975); Prospect Dev. Co. v. Bershader, 258 Va. 75, 515 S.E.2d 291, 300 (Va.1999)); Chance v. White (In re White), 265 B.R. 547, 560 (Bankr.N.D.Tex.2001) (“Under the ‘American Rule,’ in cases brought under federal law, attorneys’ fees are not ordinarily recoverable absent specific statutory authority, a contractual right, or aggravated conduct.”).'
D. ' Are the Subject Obligations in the Naturé of Alimony, Maintenance, or Support?
Application of the Catron factors to the instant case is complicated by the multiple components of the Lawrence Claim; accordingly, the Court will bifurcate its analysis. First, the Court will consider the factors that are common to all of the elements of the Lawrence Claim, and then the Court will apply the remaining factors to each component respectively.
1. Analysis of the Catron Factors Common to All Contested Elements of the Lawrence Claim
. a. Overreaching
Applicable to all of the contested portions of the Lawrence Claim, there is no evidence of overreaching by either the Debtor or Lawrence. Both were represented by counsel in the Divorce Proceeding. The Court has thoroughly reviewed the terms of the Divorce Decree and the Order, and neither order, grossly favors one spouse over the other nor leaves one spouse with virtually no income. It is doubtless, as the Debtor testified, that his required payments to Lawrence under the Divorce Decree and the Order were substantial and difficult; however, these payments 'were judicially determined, 'and there is nothing in this record to establish the payments or provisions of the orders were sufficiently unfair or onerous .to constitute overreaching. •
There is no evidence of what occurred, including any testimony given, in the Divorce Proceeding other than the Divorce Decree and the Order themselves. The age, health, intelligence, and experience of the spouses are not influential in suggesting any overreaching. The bargaining positions of the parties similarly shows no complicating circumstances. There is no allegation or evidence of any misrepresentation by either party during the Divorce Proceeding. Similarly, neither Lawrence nop the Debtor contend that Lawrence had any knowledge of the Debtor’s inability to. fulfill the terms of the Divorce Decree or the Order. Accordingly, the Court finds no evidence of overreaching by either party here.
b. The Parties’ Financial Situation
Courts give consideration to .“prior work experience and abilities of the parties, their physical health, potential earning power and business opportunities, and correspondingly. their probable, need in the future.” In re Austin, 271 B.R. at 107-08. In th,e present case, these factors weigh in favor of Lawrence. .The Debtor enjoyed stable employment at Anheuser-Busch as a lab technician throughout the Divorce Proceeding, earning approximately $88,000.00 annually with his overtime compensation at the end of the marriage, and *799approximately $100,000 (including overtime) presently.- He has no diseernable health issues.
Lawrence, in contrast,' was unemployed throughout the Divorce Proceeding and has not worked since approximately 2002. While no evidence was adduced regarding Lawrence’s prior work experience, the unrebutted evidence that she suffers from serious physical disability that in all- likelihood will preclude her future employment weighs in her favor, as does the fact that Lawrence was awarded primary custody of the parties’ minor child upon entry of the Divorce Decree. Accordingly, the Court finds that the parties’ financial circumstances at the time the Divorce Decree and Order were entered favor a finding that the contested portions of the Lawrence Claim constitute support.
c. The Role of the Obligations
, When evaluating the role an obligation is intended to fulfill,, such analysis (can be divided into aspects, .that must be addressed for each contested component of the claim (such as the:.parties’ past and future circumstances; whether the obligation allocates debt or divides property; and whether the obligation was intended to provide for basic necessities), and aspects related to the marriage, which are applicable to the Lawrence Claim' en toto. Regarding the marriage, courts examine how long the parties were married; .any evidence of fault in the marriage; whether the parties, have any children; and the parties’ lifestyle during the marriage. Id. at 108 (citing In re Catron, 164 B.R. at 919). The Divorce Decree provides the Debtor and Lawrence were married on July 3,1998, and last cohabited on September 4, 2010. Divorce Decree at 1. They have one child, of whom Lawrence has primary custody. In this mutually hostile divorce, the scant evidence here precludes any assessment of fault on the part of the Debtor or Lawrence, other than to observe these former spouses appear destined for eternal combat. ■ There is likewise no evidence regarding the parties’ standard of living during their marriage. The Court notes that the Debtor and Lawrence owned two homes at the time the Divorce Decree was entered, with one home apparently serving as a rental property. To the extent these findings impact the analysis of each of the contested elements of the Lawrence Claim, they will be addressed below.
2. Application of the Catron Factors to the Each Contested Element of the Lawrence Claim
In this case, with the lack of any voluntary agreement between the Debtor and Lawrence, an analysis of. the governing written documents, the Divorce Decree and the Order, provides the greatest insight for determining whether all, or some portion, of the contested Lawrence Claim components are in the nature of alimony, maintenance, or support. In this unprecedented factual scenario, the Court is charged not with „ assessing the parties’ intent as manifested in the controlling documents, but rather, with discerning the state court’s reasoning in reaching the determinations embodied in the Divorce Decree and Order. See Long v. West (In re Long), 794 F.2d 928, 931 (4th Cir.1986) (“In this case, the parties submitted the issues of alimony and property division to the,Georgia jury, Consequently, the issue before this court becomes a question of what'' the Georgia jury intended: the $65,000 lump-sum award to be.”) (citing In re Coil, 680 F.2d 1170, 1172 (7th Cir.1982)); Beaton v. Zerbe (In re Zerbe), 161 B.R. 939, 941 (E.D.Va.1994) (“In a case where á factfinder such as a'judge or jury makes the decision that one parfy must pay the other’s attorney’s fees, it--is the intention of the finder of fact, not of the *800parties, that controls.”); In re Baker, Case No. 12-01090-8-SWH, 2012 WL 6186683, at *3 (Bankr.E.D.N.C. Dec. 12, 2012) (“If the claim arose from a court order; the issue is whether the court issuing the order intended for the obligation to be in the nature of support.”); Monsour v. Monsour (In re Monsour), 372 B.R. 272, 281 (Bankr.W.D.Va.2007) (“Under federal bankruptcy law, the critical determination in classifying indebtedness as support or division of property is the intent of the parties at the time of the execution of the separation agreement. The intent of the trier of fact is dispositive when the issue of alimony, support and division of property is before a judge or jury. If proof of intent is clear, then the determination of intent will control the classification of the obligation”) (citations omitted).
The Court’s analysis is made more difficult by the absence of any portion of the record in the state court, save the resulting Divorce Decree and Order. Neither party tendered into evidence any transcripts, deposition records, reports, exhibits, or pleadings from the Divorce Proceeding. Neither parties’ Divorce Proceeding counsel testified at trial. Even certain other orders, mentioned in the Order and that were apparently interim in nature, are unseen by this Court. The lack of any additional portion of the record is especially concerning as the Order provides that the May 28, 2014 hearing “was not an evidentiary hearing, but a hearing to clarify the Court’s previous rulings on equitable distribution at the hearings on May 28, 2013, and July 16, 2013.” Order at 1. Neither party enlightened the Court regarding whether the Order was prepared by the state court or one or both of the parties’ counsel. Given these circumstances, consideration of the actual language and substance of the Divorce Decree and Order provides the best source of information for resolving the' issues.17 Each of the contested elements of the Lawrence Claim are considered separately in this regard.
a. The Tax Division
In paragraph 4 of the Order, Lawrence was . awarded á judgment of $2,330.00. Order at 2. This obligation, which is provided for only in the Order, is described therein solely as “Division of 2010 tax refunds.” The Order provides no further detail. Other than Lawrence’s testimony — applicable to the totality of her claim — that the funds were necessary for her support, and the Debtor’s’ characterization in his Schedule F filed with his petition that the Obligation resulted from a “property settlement,” neither party offered any additional explanation for this obligation. The mé'ager description of this obligation, as it is solely contained in an order entitled “Equitable Distribution Order,” does hot support a finding that the Tax Division is in- the nature of alimony, maintenance, or' support.' 'Accordingly, Lawrehce has failed tó meet her burden of proving that the’ Tax Division represents a *801nondischargeable debt pursuant to 11 U.S.C. § 523(a)(5).
b.The Retirement Account Division
Paragraph 5 of the Order awards Lawrence a total of $56,500.00 from the Debtor’s Retirement Account with Anheuser-Busch, LLC, and his Individual Retirement Accounts. More detailed in the description of this obligation, the Order provides: “The Plaintiff [Lawrence] is awarded a total of $56,500.00 as her equitable 50%' marital share of the Defendant’s Retirement Account with Anheuser-Busch and the three IRA’s.” Id. While the Order fails to provide a deadline for payment of this sum, whether it must be paid in a lump sum, or whether any tax ramifications may befall Lawrence as a result of the payment, this obligation plainly appears to be in the nature of a property division and not in the nature of alimony, maintenance, or support. While Lawrence testified she considered the Retirement Account Division to be in the nature of support and that she needed these monies to maintain her lifestyle, this specific obligation, being described plainly by the state court as Lawrence’s “equitable 50% marital share” of the retirement accounts, certainly appears to be a property division between the Debtor and Lawrence. Accordingly, the Court concludes that the Retirement Account Division is discharge-able pursuant to 11 U.S.C. § 523(a)(5).
c.The Education Fund Reimbursement
The Debtor was ordered to reimburse the Education Fund belonging to L.E.C. in the amount of $12,750.00. Id. at 3. The Debtor was to begin reimbursing the fund on January 1, 2015, with a payment of $1,000.00; payments were to continue in that amount every six (6) months, on June 1 and January 1 of each year thereafter, until L.E.C. turns eighteen (18) in October 2019, when any ¡remaining unpaid balance is due' and payable in full. Id. Pursuant to -the Order, Lawrence’s mother, Ms. Roberts, is the custodian of the Education Fund. Id. he Order restricts the usage of the Education Fund for “post high school graduation advanced studies at college or vocational training and degrees or certificates.” Id. ■ ■ •
The Debtor testified he withdrew money from the Education Fund to pay support to Lawrence and for his living expenses. Lawrence’s mother testified'she and' her now-deceased husband established and made contributions to the Education Fund for L.E.C., their granddaughter. Tr. at 97; No documentary evidence cóncerning the Education Fund was introduced. However, the language of the Order clearly states the purpose -of the fund—to provide a source of funds for L.E,C.’s posh-secondary education—specially when coupled with the requirement that it be repaid in full at the time L.E.C. turns eighteen (18) in 2019, which will presumably be shortly before or-after L.E.C. graduates high school. Thus, the Gourt finds that the Education Fund and the reimbursement thereof were intended to be for the support and maintenance. of L.E.C., the minor child of the Debtor and Lawrence, and not a property division. Accordingly, the Court finds the Education Fund Reimbursement is in the nature of support and is not discharged pursuant ,to 11 U.S.C. § 523(a)(5).
d.The. Foreclosure Avoidance
The Debtor was ordered to reimburse Lawrence $12,923.76 “for the foreclosure avoidance costs paid to Glasser & Glasser,” and Lawrence was awarded a judgment in this amount. Order at 3. Other than noting that the foreclosure avoidance related to property located at 3986 Bournemouth, Williamsburg, Virginia (“Bournemouth Property”), id., there is no *802further description of this provision in the Order. The evidence on this obligation is also scant. The Divorce Decree makes this provision with respect to the Bournemouth Property: “Pursuant to the Pendente Lite Order of April 6, 2011, the Debtor] is to make and keep current the mortgage on the following homes: 3986 Bournemouth Bend and Fenwick Hills, all located in Williamsburg, Virginia.” Divorce Decree at 5.18 The Order further provides that Lawrence “shall have as her specific real property the marital residence located at 3986 Bournemouth, Williams-burg, Virginia.” Order at 3. Finally, pursuant to the Order, Lawrence assumed responsibility for the mortgage on the Bournemouth Property as of July 1, 2013. Id. 13r4. The Debtor received possession of the second home pursuant to the Order. Id. at 4.19
Lawrence testified that her house had been the subject of foreclosure proceedings on multiple occasions because the Debtor failed to pay the mortgage; however, she did not elaborate further as to when these instances occurred or how the foreclosures were avoided. Despite the absence of further explanation in the Order or by testimony, the sole logical explanation for the obligation of the Foreclosure Avoidance is that, at some point after entry of the Divorce Decree but prior to entry of the Order, the Debtor must have failed to timely pay the mortgage on the Bournemouth Property, in which Lawrence lived and which constitutéd the former marital residence of the parties. .Also logical is that Lawrence advanced monies to prevent the foreclosure of the mortgage on this property.' As the Bournemouth Property was the residence of Lawrence and presumptively her daughter of whom she had primary custody, maintaining the residence would certainly be in the nature of support and maintenance, not only of Lawrence but also the parties’ minor child. While the evidentiary trail here is somewhat cryptic, it appears the Foreclosure Avoidance was derivative of the Debtor’s failure to maintain his obligation contained in the Divorce Decree to pay the mortgage on the residence of Lawrence, Therefore, the C.ourt finds the Foreclosure Avoidance is in the nature of support and, as such, is not dischargeable pursuant to 11 U.S.C. § 523(a)(5).
e. The Lytle Title Reimbursement
The Order directs the Debtor “to reimburse [Lawrence] $7,500.00 for Lytle Title Escrow”; accordingly, Lawrence was awarded a judgment in that amount. Id. at 3.- The Order does' not further elaborate on the nature of this debt' or the purpose for which these monies were spent. The parties’ exhibits also fail to enlighten regarding this obligation, including why and how it arose and the property to which the obligation relates. The only mentions of this obligation in the testimony were by the Debtor, who described the 'obligation aé an “escrow issue,” Tr. at 41, and “equity from'á home we sold.” Id. at 86. There is no contradictory evidence in -the record, other than Lawrence’s general assertion that all of the obligations owed by the Debtor arising from the Order were intended to be support and were needed for her subsistence. Given its apparent origin as somehow relating to.real estate, and with, no evidence contrary to the Debtor’s succinct description as equity from a home sale, the Court must conclude that Lawrence has failed to carry her burden of *803proof to show this obligation is in the nature of alimony, maintenance, or support. Therefore, the Court finds.that the Lytle Title Reimbursement represents a dischargeable debt pursuant to 11 U.S.C. § 523(a)(5).
f.The Equity Difference Payment
As set forth above, Lawrence was awarded the property located at 3986 Bournemouth, Williamsburg, Virginia, and the Debtor was awarded possession of the property located at 3483 Fenwick Drive, Williamsburg, Virginia, pursuant to the Order. Order at 3-4. The Debtor was ordered, in paragraph 11 of the Order, to pay Lawrence $58,000.00 “representing the difference in the equity between the two properties ... based upon the evidence and valuations presented during the court hearings.” Id. at 4. There is no further description of this’ obligation in the Order. The award of the respective residences to' the parties in paragraphs 9 and 10 of the Order cértainly are in the nature of a property division. Paragraph 11 of the Order is 'a continuation of the property division set forth in paragraphs 9 and 10, and it clearly appears to have been the state court’s intention to equalize the value of the divided property between the Debt- or and Lawrence by ordering the Equity Difference Payment. While Lawrence asserts her need for payment of this; obligation for her maintenance, the Equity Difference Payment does not appear to be in the nature of alimony, maintenancé, or support. Rather,, this payment constitutes a- property division between- the Debtor and Lawrence. Accordingly, the Court concludes that the Equity Difference Payment is dischargeable pursuant to 11 U.S.C. § 523(a)(5).
g.The Rental Income Payment
Paragraph 12 of the .Order requires the Debtor to pay Lawrence $1,600.00, which amount “represents] a balancing of the imputed rental income” for the Bournemouth Property and the Fenwick Drive property. Id. at 5-6. The state court made clear that, the imputation of rental income was part of the division of the parties’ real property, as contained in paragraphs 9/ 10, and 11 of the Order, acknowledging in paragraph 11 that “[t]he Court has previously considered and ruled all credits or reductions in principal have been taken into consideration and there will be no further reductions or credits other than recited in paragraph-12 [concerning the imputed rental income].” Id. at 4. The concomitant provisions of paragraphs 9, 10, 11, and 12. of the Order constitute the equalization of the value of the two real properties divided among the Debtor and Lawrence. Thus the Rental Income Payment award was plainly intended by the state court to be. in the nature of a property division. Therefore, the Court finds that the Rental Income Payment does not constitute alimony, maintenance, or support under 11 U.S.C. § 523(a)(5), and, thus, is dischargeable.
h.The Garnishment Payment
According to the Order, a balance remained “due on the original garnishment of March 16, 2012, of $344.48” as of May 28,'2014. Id. at 5. Lawrence asserted in the Complaint that the Garnishment Payment related to spousal'support. Co'mpl. ¶9. Other than this bold assertion, neither party provided any enlightenment regarding the garnishment, including, given the lack of elarity in the Order, even who was obligated to pay the supporting obligation. The mere recital of the balance due on. an othex'wise unexplained garnishment is insufficient to support a finding that the Garnishment Payment represents a nondischargeable debt. Accordingly, the Court concludes that Lawrence has failed *804to sustain her burden to 'show that this obligation is not subject to discharge.
3. Attorney’s Fees
Lawrence also seeks an award of and a determination that attorney’s fees she has incurred are in the nature of alimony, maintenance, or support. These fees consist of the Norment Claim, in the Amount of $3,500.00-related to-the Divorce Proceeding, and the Bankruptcy Fees, totaling $19,530.00. The Court finds that neither claim represents a'nondischargeable obligation for the reasons that follow.
First, the Complaint fails to set forth a sufficient claim for the Norment Claim. The requirements regarding the sufficiency of a pleading are set forth in Federal Rule of Civil’ Procedure 8, as incorporated by the Federal Rules of Bankruptcy Procedure in Rule 7008. Rule 8 requires a pleading to contain “á' short and plain statement of the claim showing that the pleader is "entitled to relief____” Fed. R.Civ.P. 8(a)(2). Thus, the plaintiff is required to “ ‘give the defendant fair notice of what the plaintiffs claim ’ is and the grounds upon which it rests.’” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). The standard espoused by Rule 8 “is ‘not onerous.’ Rather, a complaint meets Rule. 8’s requirements if, in light of the nature of the action, the complaint sufficiently alleges each element of the cause of action so as-to inform the opposing party of the claim and its general basis.” Chao v. Rivendell Woods, Inc., 415 F.3d 342, 348 (4th Cir.2005) (quoting Bass v. E.I. DuPont de Nemours & Co., 324 F.3d 761, 764 (4th Cir.2003)).
The Complaint makes no mention of or reference to the Norment Claim and fails to provide any notice to the Debtor — let alone the Court — that the Complaint seeks a determination that the Norment Claim is nondischargeable pursuant to 11 U.S.C. § 523(a)(5). The only mentions in the Complaint of Lawrence’s intent to seek any relief pertaining to any attorney fees are two (2) very general and casual mentions in paragraph 20 and the Prayer. During the trial, Mr. Lawrence testified that the Debtor was ordered to pay the Norment Claim and that the amount of the Norment Claim was not included in the total amount Lawrence claimed to be nondischargeable. Tr. at 48-49. Lawrence’s counsel asserted, in his closing argument, that the amount of the Norment Claim should be added to the total amount that Lawrence believed to be nondischargeable. See id. at 114-15.20 These fleeting allusions' by Mr. Lawrence and the belated argument by Lawrence’s counsel are wholly and simply insufficient to permit this Court to adjudicate the nondischargeability of the Norment Claim.21
*805Even in light of the requirement found in Rule 8(e) that pleadings should “be construed so as to do justice,” Fed.R.Civ.P. 8(e), such liberality .cannot be expanded here to read the two (2) scant mentions of attorney fees in Lawrence’s Complaint as referring to the Norment Claim. As this Court stated in Smith v. Porter (In re Carr & Porter, LLC), 416 B.R. 239 (Bankr.E.D.Va.2009), “The liberality of the notice pleading permitted by Rule 8 of the Federal Rules of Civil Procedure is axiomatic; however, the issue at this juncture ‘is not a liberal construction issue, but whether the trial court [is] obligated to construct a cause of action from allegations in a complaint filed by a party who was unwilling or unable to plead the cause of action himself.’ ” Smith v. Porter (In re Carr & Porter, LLC), 416 B.R. 239, 249-50 (Bankr.E.D.Va.2009), aff'd sub nom. Smith v. Porter, 416 B.R. 264 (E.D.Va.2009) (alterations in original) (quoting Glenn v. First Nat’l Bank in Grand Junction, 868 F.2d 368, 372 (10th Cir.1989)).
In addition, at no point prior to trial did Lawrence seek leave to amend her Complaint to include the Norment Claim pursuant to Federal Rule of Civil Procedure 15, made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7015.22 Further, Lawrence did not and has not moved to amend her pleadings to conform to the evidence. Were Lawrence to make 'such a motion at this extremely late stage,' the mandate of both the language of the rule and of Supreme Court precedent that leave to amend be freely given, see Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962), may not rescue Lawrence from her transgressions. This Court has discussed the standard to be followed to determine whether leave to amend a complaint should be granted, which includes examination of whether prejudice would befall the opposing party; whether the moving party has engaged in bad faith;- and whether the amendment Would be futile. See In re Carr & Porter, LLC, 416 B.R. at 250-53 (quoting Johnson v. Oroweat Foods Co., 785 F.2d 503, 509 (4th Cir.1986)); see also Foman, 371 U.S. at 182, 83 S.Ct. 227. While thq Court provides no advisory opinion on the matter, it is indisputable that seeking such an amendment only after. this Court has raised the issue would weigh heavily against Lawrence.
As discussed in Section IV.C., fees related to the pursuit of a nondischargeability *806action are generally awarded only on the basis of language contained in an agreement.between the parties or an underlying state-court order. . Otherwise, the American Rule . prohibits the allocation of attorney fees for such an action absent statutory authority. Here, neither the Divorce Decree nor Order make any provision for the payment of attorney fees in the event an enforcement action is necessary. There is no statutory basis in 11 U.S.C. §■ 523 for this Court to award Lawrence the attorney fees she. has incurred to pursue this nondischargeability action, let alone find that those fees too are, nondischargeable. Lawrence has not proffered any other basis for an award of attorney’s fees here.
However, the Court need not decide these issues -with respect to eithér'the Norment Claim or the Bankruptcy Fees, as' the lack of detail and specificity and the meager references in the Complaint preclude any such determination. Further, there is no documentation proffered regarding the Bankruptcy Fees, and the only testimony offered- thereon also lacked specificity; It is completely unclear as to when the Bankruptcy Fees were" incurred or under what circumstances, including whether all or some portion of the fees were expended in prosecution of the Complaint or in other proceedings in this bankruptcy case.'- Lawrence’s failure to sustain her burden of proof regarding attorney’s fees that she has incurred either in the Divorce Proceeding or in .the instant matter precludes further consideration of -the dischargeability of any attorney fees here.
Summary
For the reasons stated above, the Court finds:-"1 ' , "
1. The following obligations owed by the Debtor to Lawrence are in the nature of alimony, maintenance, or support and are not discharged: (1) February ■23 Support in the amount of $1,452.27; (2) April 6 Support, in the amount of $4,085.84; (3) February 17 Support in the amount of $6,293.13; and (4) the Medical Expense Reimbursement in the- amount of $3,949.12, these debts having been conceded by the Debtor to be nondischargeable.
2. The Court further finds'that the following obligations owed by the Debtor to Lawrence are also in the nature of alimony, maintenance, or support and will not be discharged even if the Debtor successfully completes his Chapter 13 Plan: (1) the Education Fund Réimbursement in the amount of $12,750.00; and (2) the Foreclosure Avoidance in the amount of $12,923.76. Therefore, the Court finds that the nondischargeable obligations, owed by the Debtor to Lawrence (the Conceded Support Payments, plus the Education Fund Reimbursement and the Foreclosure Avoidance) total $41,454.12.
3.. The remaining obligations owed by the Debtor to Lawrence are not in the nature, of alimony, maintenance, or support and instead are property divisions. Accordingly, the Court finds that the following obligations owed by the Debtor to Lawrence will be discharged . upon successful completion by the Debtor of his Chapter 13 Plan and his receipt of a discharge pursu- . ant to 11 U.S.C. § 1328(a): (1) the Tax Division; (2) the Retirement Account Division; (3) the Lytle Title Reimbursement; (4) the Equity Difference Payment; (5) the Rental Income Payment; and (6) the Garnishment Payment.
4; The- Court finds that Lawrence’s request for an' award of attorney fees . and additional request that those fees be declared to be nondischargeable ■ should also be denied.
*8075. As- the Court has found that the Education Fund Reimbursement represents a .nondischargeable debt, the Court finds that the remaining portion ■ of the Motion for Relief from Automatic Stay filed by Lawrence on Septem- . ber 29,- 2015, against the Debtor in the underlying bankruptcy case is moot. The Court will enter an order in the main bankruptcy case to this .effect.
A separate order will be entered pursuant to Federal Rule of Bankruptcy Procedure 9021 consistent with the.findings in this Memorandum Opinion.
. The Clerk shall transmit a copy of this Memorandum Opinion to the Plaintiff, Star cy L. Lawrence; Jeffrey L. Marks, counsel for the Plaintiff; the Debtor and Defendant, David Michael Combs; Barry W: Spear, counsel for the Debtor and Defendant; R. Clintp Stackhouse, Jr., Chapter 13 Trustee; and Kenneth N. Whitehurst, III, Assistant United State Trustee.
ORDER DETERMINING DEBT IN PART TO BE NONDISCHARGEABLE PURSUANT TO 11 U.S.C. § 523(a)(5)
For the reasons set forth in the Memorandum Opinion issued in the above-captioned matter on January 21, 2016, the Court ORDERS that the following obligations owed by the Debtor,, David Michael . Combs, to the Plaintiff, Stacy L. Lawrence, are in the nature of alimony, maintenance, or support and will not be discharged even if the Debtor successfully completes his Chapter 13 Plan and fulfills all other requirements to obtain a discharge pursuant to 11 U.S.C. § 1328:(1) support arrearage arising from a February 23, 2012 prepetition judgment entered against the Debtor, David Michael Combs, in state court in the amount of $1,452.27; (2) spousal support arrearage resulting from a judgment entered by th’e state court in the amount of $4,085.84; (3) spousal and-child support arrearage from November 8, 2010, through February 17, 2011, for which the Plaintiff, Stacy L. Lawrence, was awarded a judgment in state court for $6,293.13; and (4> reimbursement of the parties’ minor child’s uninsured medical and dental expenses in the amount of $3,949.12;
- The Court further ORDERS that the following obligations owed by the Debtor, David Michael Combs, to the.Plaintiff, Stacy L. Lawrence, are also in . the nature of alimony, maintenance, or support and will not be discharged even if the Debtor successfully completes his Chapter 13 Rian and, fulfills all other requirements to obtain a discharge, pursuant.... to 11 U.S.C. § 1328:.(1) reimbursement pf fhe parties’, minor child’s education fund in the aniopnt of $12,750.00; and (2) .reimbursement of the Plaintiff, Stacy L. Lawrence, for foreclosure avoidance costs, for which the Plaintiff awarded a judgment in the amount of $12,923.76. Therefore, the Court ORDERS that the nondischargeable obligations owed by the Debtor, David Michael Combs, to the Plaintiff, Stacy L. Lawrence, total $41,454.12.
The Court further ORDERS that the remaining obligations owed by the Debtor, David Michael Combs, to the Plaintiff, Stacy L. Lawrence, are not in the nature of alimony, maintenance, or support and instead are property divisions: (1) the division of 2010 tax refunds in the amount of $2,330.00; (2) the division of retirement accounts and pension plans in 'the amount of $56,500.00; (3) reimbursement for a payment made by the Plaintiff, Stacy L. Lawrence, to Lytle Title, for which she was awarded a judgment in the amount of $7,500.00; (4) the sum of $58,000.00, representing the difference in ‘the equity between ¡two properties formerly owned- by the parties; (5) a rental income payment of $1,600.00; and (6) a.garnishment payment *808in the amount of $344.48. Accordingly, the Court ORDERS that these obligations owed by the Debtor, David Michael Combs, to the Plaintiff, Stacy L. Lawrence, will be discharged upon successful completion by the Debtor of his Chapter 13 Plan and his receipt of a discharge pursuant to 11 U.S.C. § 1328(a).
The • Court further ORDERS that the Plaintiffs request for an award of attorney fees and additional request that those fees be declared to be nondischargeable is DENIED.
Finally, the Court ORDERS that the remaining portion of the Motion for Relief from Automatic Stay filed by the Plaintiff, Stacy L. Lawrence, on September 29, 2015, against the Debtor, David Michael Combs, in the underlying bankruptcy case is moot. A separate order will be entered in the main bankruptcy case to this effect.
. Counsel for the parties agreed at the trial that the evidence presented regarding Lawrence’s Complaint should be considered a simultaneous presentation of evidence in support of the parties’ respective positions on the Motion for Relief from Automatic Stay ("Motion”) filed by Lawrence on September 29, 2015, against the Debtor in the underlying bankruptcy case. Transcript of November' 13, 2015 Trial at 43, Adv. Proc. No. 15-05009-SCS, ECF No. 19. A preliminary hearing was held on the Motion on November 6, 2015, at which time the Court determined that a final hearing should be conducted on November 13, 2015, contemporaneous with the previously scheduled trial in this matter. By order entered November 19, 2015; the Court granted the Motion in part, which allowed Lawrence to return to state court to pursue her remedies there regarding the Debtor’s alleged postpetition arrears regarding child support and medical expenses for the parties’ minor child. The Court withheld ruling on; Lawrence’s request for relief to return to state court regarding the Debtor’s alleged failure to timely commence'reimbursement payments for the parties’ minor child's education fund, as the Debtor’s obligation to reimburse this fund constitutes a portion of the claim that Lawrence seeks the Court to declare to be nondischargeable.'.
. The term "domestic support obligation” is defined in § 101(14A) of Title • 11, not § 101(14) as set forth in the Complaint.
. Despite the representation made in the Complaint, a review of the Order reveals that the provision for interest on this obligation was stricken from the Order. Order at 2.
. Lawrence represented in the Complaint that she was awarded the legal rate of interest from July 16, 2013, on the Tax Division; however,' the provision for interest on this obligation was stricken from the Order, Order at 2
. Pursuant to Federal Rule of Bankruptcy Procedure 9037, because the parties child appears to be under the age of majority, the Court' will refer to the child by initials only,
. Again, Lawrence represented in the Complaint that she was awarded the legal rate of interest from July 16, 2013, on the Lytle Title Reimbursement; however, the provision for interest on this reimbursement was stricken from the Order. Order at 3.
. Lawrence filed a proof of. claim asserting a priority claim in the amount of $167,728.60 pursuant to 11-, U.S.C.. § .507(a)(1) on February 10, 2015. Compl. ¶ 10, ,.
The Debtor scheduled the following debts owed tq Lawrence as property settlements, thereby, taking the position that.the debts are subject to discharge: the February 23 Support; the April 6 Support; the Tax Division; the Education Fund Reimbursement; the Foreclosure Avoidance; the Lytle Title Reim*787bursement; . the Equity Difference Payment; and the Rental Income Payment. See Pet., Schedule F, at 20-22, filed September 26, 2014, Case No. 14-51339-SCS, ECF No. 1.
. The $3,949.00 claim amount corresponds most closely with the.Medical Expense Reimbursement ($3,949.12). See Compl, ¶ 9. The claim in the amount of $6,293.13 corresponds with the February 17 Support claim. Id. The Debtor scheduled the February 17 Support, and the Medical Expense Reimbursement as unsecured priority claims, taking the position that these debts represent domestic support obligations. See Pet., Schedule E, at 17, filed September 26, 2014, Case No. 14-51339-SCS, ECF No. 1.
. Lawrence objected to confirmation of the Debtor’s Plan, but her objection was filed more than a month after the deadline for objecting to the plan. See Objection to Confirmation filed January 12, 2015, Case No. 14-51339-SCS, ECF No. 27. Lawrence did not file a motion for leave to file a late objection. ‘ ‘
.Likewise, pursuant to.-the Pretrial Order entered by this Court on June 9, 2015, because Lawrence did not object to the Debtor’s Exhibits, the Debtor's Exhibits also stand as admitted. See Pretrial Order at 1, entered June 9, 2015, Adv. Proc. No. 15-05009-SCS, ECF No. 8. The Debtor's Exhibits consist of the Divorce Decree and the Order, which duplicate Lawrence's Exhibits 3 and 4, respectively.
. The Debtor took the witness stand twice, once as Lawrence’s, witness and once in support of his own case.
. According to the Debtor’s Schedule B, the asset listed with a value of $12,138.16 represents an aggregate value of two (2) accounts, Lawrence Exh, 1, Pet., Schedule B, filed September 26, 2014, Case No. 14-51339-SCS, ECF No. 1.
. Lawrence testified that, one to two weeks prior to trial, he prepared the portion of Exhibit 6 related to the Debtor’s child support ■payments by comparing his records with those supplied by the Debtor’s Divorce Proceeding counsel. See Tr, at 52-54.
. During examination by Lawrence’s counsel, the Debtor referred to this obligation, as relating to an "escrow issue.’’., Tr., at 41.
.' Neither party provided any explanation for entry of the Divorce ’ Decree on a nunc protunc basis.
. Pursuant to Virginia Code § 20-107.3(E), when making equitable distribution determinations, Virginia state courts must consider ten (10) enumerated statutory factors, in addition to any other factors the court deems appropriate under the circumstances of the case. Va.Code Ann. § 20-107.3(E) (2015). These factors include the duration of the marriage; contributions of each party to the family; the age and physical condition of the parties; and the parties' debts. Id. § 20-107.3(E)(1), (3), (4), (7). While the statute commands the state court to consider these factors, the Order is silent regarding the state court's consideration of them in the instant matter. In any event, the factors are not binding on this Court’s consideration in light of the requirement that the Court undertake the analysis herein pursuant to federal bankruptcy law, not state law. See In re Johnson, 397 B.R. 289, 296 (Bankr.M.D.N.C.2008).
. The referenced Pendente Lite Order was not offered into evidence by either party in this matter.
. The Divorce Decree refers to this property as "Fenwick Hills,” see Divorce Decree at 5, while the Order refers to the address of this ■ property as 3483 Fenwick Drive. Order at 4.
, Lawrence’s counsel made reference during, his closing argument to an amended complaint. See Tr. at 114. - However, no amended complaint was filed in this adversary proceeding.
. It is of no moment that the Order directed the Debtor to pay Norment the attorney’s fees, as opposed to reimbursing Lawrence for the payment of those fees. Williams v. Williams (In re Williams), 703 F.2d 1055, 1057 (8th Cir.1983) (‘‘[Ujndertakings by one spouse to pay the other’s "debts, including a debt to a lawyer for fees, can be ‘support’ for bankruptcy purposes.”); Beaton v. Zerbe (In re Zerbe), 161 B.R. 939, 940-41 (E.D.Va.1994) (“[I]t makes no difference in this case that the payment was to be made to an attorney rather than to debtor’s ex-wife. The majority of courts have held that debts in the nature of attorney’s fees from a divorce are in fact debts for support or maintenance of the ex-spouse and thus non-disehargeable.’’) (citing Silansky v. Brodsky, Greenblatt & Renehan (In re Silansky), 897 F.2d 743, 744 (4th Cir.1990); Brace v. Moran (In re Brace), 13 B.R. 551, 553 *805(Bankr.N.D.Ohio 1981)); Sinton v. Blaemire (In re Blaemire), 229 B.R. 665, 668 (Bankr.D.Md.1999) (“[T]he identity of the payee is not determinative of whether the debt [attorney fees related to representation of minor children- during custody and child support proceedings] is dischargeable.”); see also In re Edinger, 518 B.R. 859, 866 (Bankr.E.D.N.C.2014).
. Rule 7015 of the Federal Rules of Bankruptcy Procedure provides, in pertinent part:
(b) Amendments During and After Trial.
(1) Based on an Objection at Trial. If, at trial, a party objects that evidence is not within the issues raised in the pleadings, the court may permit the pleadings to be amended. The court should freely permit an amendment when doing so will aid in presenting the merits and; the objecting party fails to satisfy the- court that the evidence would prejudice that party’s action or defense on the merits. The court may grant a continuance to enable the objecting party to meet the evidence. ’ ■
(2) For Issues Tried by Consent, When an issue uot raised by the pleadings is tried by the parties’ express or implied consent, it must be treated in all respects as if raised in the pleadings. A party may move — at any time, even after judgment — to amend the pleadings to conform them to the evidence and to raise an unpleaded issue. But failure -to amend’ does not affect the result of the trial of that issue.
Fed. R. Bankr.P. 7015(b) (2015). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499032/ | MEMORANDUM OPINION ON ORDER GRANTING MOTION TO DISMISS
Mark X. Mullin, United States Bankruptcy Judge
The Court dismissed an involuntary petition against Harry McMillan because the *809creditor who filed it was not a qualified petitioner. McMillan then sued Donal Schmidt and two other defendants under 11 U.S.C. § 303(i), which provides that after a contested dismissal of an involuntary petition, a bankruptcy court may grant judgment for fees and costs against “the petitioners,”1 and a judgment for actual and punitive damages against “any petitioner” that filed the petition in bad faith.2 Before the Court now is Schmidt’s motion to dismiss the complaint under Federal Civil Rule 12(b)(6)3 on the ground that Schmidt did not sign and file the involuntary petition and thus cannot be liable as a “petitioner” under § 303(i). The Court agrees with Schmidt and therefore will grant his motion.
1. Background4
Defendants Donal Schmidt and Thimothy Wafford were officers of Sun River Energy, Inc. They had a falling-out- with Plaintiff Harry McMillan, a Sun River shareholder and consultant. On December 16, 2011, Schmidt and Wafford entered into a Joint Prosecution Agreement with Thomas Aigner, an unrelated judgment creditor of McMillan. Pursuant to the Joint Prosecution Agreement, Schmidt, Wafford, and Aigner agreed, in relevant part, that—
• Aigner would file an involuntary bankruptcy petition against McMillan;
• Schmidt and Wafford would have authority to select bankruptcy counsel and control the prosecution of Aigner’s claims in the bankruptcy, except that Aigner would retain the right to settle his claims; and
• Schmidt and Wafford would pay the reasonable and., necessary costs and fees of prosecuting Aigner’s claims in the bankruptcy, but they would be . reimbursed from any recovery on Aigner’s claims.5
On December 21, 2011, Aigner signed and filed With this Court an involuntary bankruptcy 'petition against McMillan,6 who answered the petition and counterclaimed against Aigner for fees, costs, and actual and punitive damages pursuant to 11 U.S.C. § 303(i).7 Aigner filed an amended involuntary petition on February 2, 2012 with two additional petitioning creditors, Fusion Labs, Inc. and Lawrence *810Maestri.8 The Court later permitted Fusion Labs to withdraw as a petitioning creditor with McMillan’s consent,9 leaving Aigner and Maestri as the only two petitioning creditors.
The Court held an evidentiary hearing on the involuntary petition and the counterclaim that lasted oyer nine noneonsecutive days. In a Memorandum Opinion entered on June 4,2013, the Court concluded that it would dismiss the involuntary petition because the Joint Prosecution Agreement effectuated a “transfer” of a portion of Aigner’s claims ünder Bankruptcy Rule 1003(a), thus precluding Aigner from being a qualified petitioner.10 The Court then considered and denied McMillan’s request for actual and punitive damages against Aigner under § 303(i)(2), finding that Aigner did not file the petition , in bad faith.11 In a footnote, the Court noted:. “This is not to say that Sun River, Schmidt, and Wafford did not act other than in good faith, .but they, are not petitioners and therefore are not before the court.”12 The Court retained jurisdiction -to consider any award of fees and costs under § 303(i)(l).13
’ McMillan sought reconsideration of the Court’s statement in the June 4 Memorandum Opinion that Sun River,- Schmidt, and Wafford were'not petitioners presently before the Court.14 In an August 22, 2013 Memorandum Order, the Court considered and distinguished, in detail, the cases upon which McMillan relied and concluded again that Sun River, Schmidt, and Wafford were not petitioners within the meaning of § 303(i). Therefore, the Court denied McMillan’s reconsideration request.15 The Court also noted that even if Schmidt and Wafford could be considered petitioners, McMillan would have to file an adversary proceeding against them for such relief.16 On August 27, 2013, the Court entered a judgment dismissing the involuntary petition.17
McMillan appealed, and the District Court affirmed after concluding that this *811Court did not have in personam jurisdiction over Schmidt and Wafford because they did not appear as parties in -the contested involuntary proceeding and had not been served with process through a formal adversary proceeding.18 Although the District Court said it was unnecessary to reach the issue of whether Schmidt and Wafford were “petitioners,” the court nevertheless concluded that this Court did not commit reversible error in concluding that Schmidt and Wafford were not “petitioners.” 19
On further appeal, the Fifth Circuit affirmed, concluding that the only avenue by which McMillan could seek relief under § 303(i) against Schmidt and Wafford was through service of process in a formal adversary proceeding.20 An adversary proceeding was required because Schmidt and Wafford were not “petitioning creditors” and thus were not parties to the contested motion for fees. Because the Fifth Circuit affirmed the District Court on this procedural issue, the Fifth Circuit did not address McMillan’s argument that the term “petitioner” in § 303(i) constitutes a broader category of potential parties than the actual “petitioning creditors” that signed and filed the involuntary petition.21
On August 5, 2015, McMillan filed the present adversary proceeding against Maestri, Schmidt, and Wafford,22 In his first claim for relief, McMillan requests an award of fees and costs against Maestri under § 303(i)(l) because Maestri is a petitioner who actually signed and filed the involuntary petition.
In his second through fifth claims for relief, McMillan requests an award of fees and costs against Schmidt and Wafford under § 303(i)(l) because Schmidt and Wafford — even though they did not actually sign, file, or join in the involuntary petition — “became” or had “become” petitioners because:
• the Joint Prosecution Agreement - ceded control and prosecution of the involuntary petition from Aigner to Schmidt and Wafford.23
• Schmidt and Wafford were the principals under the Joint Prosecution Agreement who controlled Aigner as their agent in the bankruptcy case.24
• Schmidt and Wafford were-Aigner’s agents under the Joint Prosecution Agreement' for purposes of prosecu1> ing the involuntary petition.
• Schmidt and Wafford were joint venturers with Aigner under Texas law and are therefore jointly and severally liable for the obligations of the joint venture.
In his sixth claim for relief, McMillan requests an award of punitive damages against Maestri, Schmidt, ánd Wafford under § 303(i)(2) because they allegedly filed the involuntary petition in bad faith.
Schmidt responded to the Complaint by filing his motion to dismiss for failure to *812state a claim,25 arguing that because he did not' sign and file the- involuntary petition, he cannot be liable as a ‘'‘petitioner” within the meaning of § 303(i). The parties further briefed the issue in McMillan’s response and related brief26 and in Schmidt’s reply.27
II. Jurisdiction and Venue
The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334,-151, and 157 and the standing order of reference in this district.' This proceeding is core pursuant to 28 U.S.C. § 157(b)(2)(A), (0). Venue is proper in this district under 28 U.S.C. § 1409(a).
III. Analysis
A court may dismiss a complaint if it is clear that no relief could be granted under any set of facts that could be proved consistent with, the allegations,28 In reviewing a Rule 12(b)(6) motion, the court must accept all well-pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff.29
Even accepting the facts alleged in the Complaint in the light most favorable to McMillan, the Court cannot grant him relief against Schmidt because Schmidt was not a “petitioner” within the meaning, of § 303, and the statute allows relief only against “petitioners.” The text, structure, purpose, and history of § 303 together compel this conclusion.
A. In a case that does not involve a partnership debtor or a debtor subject to a foreign proceeding, the text of § 303 limits the term “petitioners” to the petitioning creditors who actually signed and filed the involuntary petition, or who later joined in the petition.
Section 303 of the Bankruptcy Code governs involuntary bankruptcy petitions. Several subsections are relevant here. First, under subsection (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 the Bankruptcy Code.30 A party files an involuntary petition by — in relevant part — signing the involuntary petition under penalty of perjury and, if represented, having counsel sign the petition.31
*813Subsection (b) continues: A petition against a debtor may be filed by three or more holders of unsecured, noncontingent, undisputed claims aggregating at least $15,325, or if there are fewer than twelve such creditors, by a single holder.32 A petition against a partnership debtor may be filed by fewer than all of the general partners, or if all the general partners are themselves in bankruptcy, by a general partner in the partnership, by the trustee of such general partner, or by the holder of a claim against the partnership.33 A petition against a débtor involved in a foreign proceeding may be filed by a foreign representative of the estate.34 Section 303(b) thus recognizes three categories of parties that are potentially eligible to file an involuntary petition: (1) unsecured creditors with undisputed, noncontingent claims, (2) general partnérs of a partnership debtor, and (3) foreign representatives of a debtor in a foreign proceeding.
Subsection (c) provides that before the case is dismissed or relief is ordered against the alleged debtor, an unsecured creditor “may join in the petition with the same effect as if such joining creditor were a petitioning creditor under subsection (b)” of § 303.35 This is the one and only time the term “petitioning, creditor” is used in § 303. This provision permits unsecured creditors who did not originally file the involuntary to join in it and be treated as if they were a petitioning creditor.
Subsection (e) provides that a bankruptcy court may require “the petitioners under this section” to post a bond to indemnify the debtor for any-fees,- costs, or damages that may- be later awarded to the debtor under subsection (i) if the case is dismissed.36 This is the first time the term “petitioners” is used in § 303. By referring to- “petitioners” rather than to “petitioning creditors,”-the provision indicates (logically) that all three categories of petitioning parties under subsection (b)— unsecured creditors, general partners, and foreign representatives — may be required to indemnify the debtor for fees, costs, and .expenses if the ease is dismissed.
Subsection (i) provides that after a contested dismissal of an involuntary petition, a bankruptcy court-may grant judgment for fees and costs against “the petitioners,”37 and a.-judgment for actual and punitive damages against “any petitioner that filed the petition- in bad faith.”38 This provision necessarily refers to “petitioners” and “any petitioner” rather than to “petitioning creditors” and “any petitioning creditor” because the provision applies broadly to any party who signed and filed or joined in the involuntary under § 303(b) or (c) and who may be required to -post a bond under § 303(e) — that is, it applies to unsecured creditors, general partners, and *814foreign representatives who signed and filed or joined in the involuntary, as the casemay.be. •
In- this case, -Aigner is-the unsecured creditor who signed and filed the involuntary petition under penalty, of perjury pur-, suant to § 303(b). Later,- Fusion Labs, Inc. and Lawrence Maestri joined in the involuntary petition under penalty of perjury pursuant to § 303(c), having the same effect as if they were .petitioning creditors. The Court dismissed Fusion Labs as a petitioning creditor with McMillan’s agreement. Under the plain language of § 303, because this bankruptcy does not involve a partnership debtor or a debtor in a foreign proceeding, the petitioning creditors Aigner and Maestri are the only “petitioners” against whom § 303(i) relief can. be awarded. . -
McMillan argues that Schmidt and Wafford are liable under § 303(i) because they “became” petitioners by controlling Aigner, acting as- Aigner’s principal or agent, or -being joint venturers with Aigner. The plain language of § 303(i), however, forecloses those arguments. Schmidt and Wafford did not sign and file the involuntary petition under penalty-of perjury urn der § 303(b) and they did not join the petition under penalty of perjury under § 303(c). Therefore, they were not petitioning creditors and cannot be “petitioners” under the literal language of the statute.
McMjllan cites . Rosenberg39 for. the proposition that the focus, should be omthe “de facto petitioning creditor” rather than on who signed the petition. But the Elev: enth Circuit in Rosenberg did. “not view [the] .case as presenting an issue of third party, or agency liability — rather, the narrow question is whether [Lyon Financial Services, a creditor] was in fact the actual petitioner here and thus properly held liable under § 303(i)(l).”40 The court concluded that Lyon Financial Services was the actual “petitioning creditor” because it approved the involuntary, its officer signed the petition with'Lyon Financial’s address and fictitious business name under her signature, and it listed other parties as the petitioning creditors without their authorization.41 The unique facts present in Rosenberg are not present here.
In contrast, the Fifth Circuit has already concluded that Schmidt and Wafford were not the actual “petitioning creditors”, and were not before this Court on a motion for fees because they did not sign and file -the involuntary petition.42 The Fifth Circuit made “no pronouncement” on whether “petitioner” may be broader than “petitioning creditor” under the Bankruptcy Code.43 As noted above, “petitioner” is indeed broader than “petitioning creditor” because a petitioner could also be a general partner of a partnership debtor or a foreign representative of a debtor’s estate in a foreign proceeding. But the term “petitioner” is no broader than that. Because there is no partnership - debtor or foreign estate in this bankruptcy, Schmidt and Wafford could be petitioners only if they were actual petitioning creditors or joining creditors. They were neither.
McMillan also cites In re Oakley Custom Homes,44 where the court in a contest*815ed involuntary petition awarded relief against counsel for the petitioners and against an agent of the petitioners. But it is unclear from that opinion whether the court relied on Bankruptcy Rule 9011, § 303(i), or other statutory authority in awarding relief against counsel for the petitioners.45 It is also unclear upon what authority ,the court relied to award relief against the petitioners’ agent or whether the agency theory of liability was even contested. Oakley Custom Homes simply has no persuasive analysis.
This Court instead follows a long line,of cases concluding that the plain language of § 303 allows relief only against the actual petitioning parties who signed and filed or joined in the involuntary petition.46
B. Section 303 is structured as a comprehensive remedial scheme that addresses a full range of specific remedies to protect an alleged debtor.
Section 303 of the Bankruptcy Code is structured as a self-contained statute to deal?with all aspects of an involuntary bankruptcy. Section 303 governs who may be an involuntary debtor and under which Chapters of the Bankruptcy Code.47 It explains how to commence an involuntary bankruptcy,- who may be a petitioner, and who may answer the petition.48 It governs the conduct and business of a debtor after the petition is filed but before ah order for relief is entered.49 It explains when and under what circumstances a bankruptcy court may-enter an order for- relief against the debtor, or instead dismiss the petition.50 And- most important for present purposes, § 303 contains four specific protections for an alleged debtor.
First, as- noted above, the court -may require.-any petitioner to post a bond to indemnify the debtor for any fees, costs, or damages that may be later awarded to the debtor under subsection (i) if the. case is dismissed.51 Second, the statute allows the court to seal all court records related to a dismissed-involuntary petition against an individual if = the petition is false or contains any materially false, fictitious, or *816fraudulent statement.52 "Third, if the court dismisses an involuntary petition against an individual, the court may enter an order prohibiting consumer reporting agencies from making any. consumer report that contains any information - related to the involuntary bankruptcy.53 - Fourth, the court may award fees, costs, and damages against petitioners- in a dismissed case, as described in detail above.54
These provisions together reflect a comprehensive remedial scheme that provides a full range of protections for the debtor. The Ninth Circuit viewed § 303 the same way in In re Miles,55 where the court concluded that § 803(i), completely preempts state law tort causes of action for damages predicated upon the filing of an involuntary petition; The-' court affirmed the dismissal of removed state law tort causes of action by the alleged debt- or’s relatives against the petitioners and their- counsel.- “[W]e can infer from Congress’s clear intent to provide damage awards only to the debtor-in federal proceedings predicated upon, the bad faith filing of an involuntary petition that Congress did not intend third, parties to be able to circumvent this rule by pursuing those very claims in state court.”56
The sound logic of the Miles opinion applies here as well. The Court can infer from Congress’s clear intent to provide damage awards" only . against' the actual petitioners who signed and filed the involuntary petition that Congress did not intend an alleged debtor to be able to circumvent this rule by arguing that third parties somehow become “petitioners” by virtue of state law concepts of agency and joint venture.
In an aside, the dissenting Fifth Circuit judge in McMillan suggested “serious consideration” of the possibility that § 303(i) implicitly incorporates common law doctrines of agency liability, noting that other statutes have incorporated common law doctrines.57 ’ All or most of those statutes, however, provide for tort-like actions that incorporate ordinary tort-related vicarious liability rules, or expressly provide that the rights in the statute are cumulative of any existing at law or in equity.58
*817Section 303 has no language expanding its reach to include state law claims or theories of liability, and this Court agrees with the Ninth Circuit that “mischief ... can occur by the wholesale application' of common law tort concepts into an exclusively bankruptcy statutory cause of action.”59 In Maple-Whitworth, the bankruptcy court erred by applying common law tort principles to impose joint and several liability on all petitioners as a class, rather than exercising the discretion given by § 303(i) to consider the totality of the circumstances in imposing liability on, if appropriate, fewer than all petitioners. “Tort concepts and class theories of liability are irrelevant to these discretionary and flexible considerations.”60
This Court agrees that state law concepts of liability, such as agency and joint venture, are irrelevant to the determination whether to award relief under § 303(i). Section 303 provides flexibility in determining how to protect an individual alleged debtor such as McMillan and which petitioners may be liable, but the self-contained structure of the statute shows that relief is available only against the actual petitioners who signed and filed the involuntary petition.
C. Section 303(i) serves a fee-shifting purpose and perhaps a deterrence purpose, both of which are furthered by the statute’s specific protections for an alleged debtor,
Section 303(i) primarily is a fee-shifting statute,61 “[T]he underlying policy purpose is to allow an alleged debtor to recover its reasonable costs and attorney’s fees, •regardless of whether there was bad faith or improper purpose (in other words, Section 303(i)(l) creates a statutory exception to the usual ‘American Rule,’ so that the losing involuntary petitioners will pay in the context of an unsuccessful involuntary petition).”62 Allowing McMillan to seek fees and costs against the actual petitioners, Aigner and Maestri, serves the fee-shifting purpose of the statute.63
McMillan argues that § 303(i)’s purpose is, in part, to discourage improper involuntary petitions, noting that consequential and punitive damages may be awarded to the alleged debtor if a petitioner files the petition in bad faith. McMillan may be right, but the Court has previously denied McMillan’s request for damages against Aigner under § 303(i)(2) because the Court found that Aigner did not file the petition in bad faith. That finding was not appealed and is now final. And the Court will examine in this adversary proceeding Maestri’s intent in filing the involuntary petition. The Court can further any deter*818rence purpose of § 303 by employing the statute’s specific remedies, if necessary, against any bad-faith petitioner.,
McMillan further argues that “[distinguishing responsibility under § 303(i) on so little a basis as whether a person actually signed an involuntary pétition only serves to promote the abuse which Congress intended to deter.”64 McMillan is wrong to trivialize the signing and filing of papers under penalty of perjury. Those who sign and file an involuntary petition assume the potential rewards of being a petitioner, such as an administrative claim for fees and expenses incurred in the process.65 But those who sign and filé ah involuntary petition also, assume the risks, including a .potential judgment for fees, costs, and damages.66
D. Section 303(i)’s limited legislative history reflects Congress’s intent to protect alleged debtors from áctual petitioning creditors.
The limited legislative history to § 303(i) reflects an intent. to protect an alleged debtor from actual* petitioning creditors. The relevant Senate and House Reports state that “if a petitioning creditor filed the petition in bad faith, the court may award the debtor any damages proximately caused by the filing of the petition. These damages may include such items as loss of business during and after the pendency of the case, and so on.”67 The same Reports state that § 303(e)’s. bonding requirement is designed to “discourage frivolous petitions” as well as “spiteful petitions, based on a desire to embarrass the debtor .,. or to put the debtor out of business without good cause ....”68
This legislative history reflects deliberation by Congress on how best to protect an alleged debtor from improper involuntary petitions by a “petitioning creditor.” Nothing, in the legislative history reflects an intent to provide protections against parties other than a “petitioner” or “petitioning creditor.”
Furthermore,- Congress presumably is aware of the litany of cases holding that § 303(i) does not allow relief against third parties, such as attorneys,69 yet it has never amended the statute since its 1978 enactment to allow relief against third parties.70
In short, the legislative and statutory histories are consistent with the plain language of § 303 and do not support McMillan’s argument that “petitioner” includes third parties such as Schmidt and Wafford.
IY. Conclusion
Even accepting the facts alleged in the Complaint in the light most favorable to McMillan, the Court cannot grant him re*819lief- against Schmidt because Schmidt was not a petitioner within the- meaning of § 303, and the statute allows relief only against petitioners. Therefore, the Court will enter, a separate order granting Schmidt’s motion to dismiss.
. 11 U.S.C. § 303(i)(l).
. 11 U.S.C. § 303(i)(2).
. Adv. ECF No. 8. "Adv. ECF No.” refers to the docket number of pleadings filed in this adversary proceeding, and "Bankr.ECF No." refers to the docket number of pleadings filed in McMillan’s dismissed bankruptcy case.
. This background is drawn from allegations in McMillan's complaint [Adv. ECF No. 1], from the Joint Prosecution Agreement referred to in the complaint, and from publicly-available filings in McMillan’s involuntary bankruptcy case and this adversary proceeding. See Funk v. Stryker Corp., 631 F.3d 777, 782-83 (5th Cir.2011) (in Rule 12(b)(6) context, court may consider documents incorporated into the complaint by reference, and matters of which a court may take judicial notice) including the filing of publicly-availáble documents). The Joint’ Prosecution Agreement is supposed to be attached to McMillan’s complaint as Exhibit A, but the document is not included in his filing. The Joint Prosecution Agreement was admitted into evidence as McMillan’s exhibit number 5 8’in the involuntary-petition trial.
. The Joint Prosecution Agreement is described in more detail in the Court’s June 4, 2013 Memorandum Opinion. Bankr.ECF No. 70 (June 4, 2003 Memorandum Opinion) (J. Lynn), reported at Aigner v. McMillan, Case No. 11-47029-DML-7, 2013 WL 2445042, at *2-3 (Bankr.N.D.Tex. June 4, 2013) (J. Lynn).
. Involuntary Petition, Bankr.ECF No. 1.
. Answer to Involuntary Petition and Counterclaim, Bankr.ECF No. 11.
. Amended Involuntary Petition, Bankr.ECF No. 16.
.. Agreed Motion to Permit Withdrawal of Petitioning Creditor Fusion Labs, Inc., Bankr.ECF No. 20; Qrder Granting Agreed Motion to Permit Withdrawal of Petitioning Creditor Fusion Labs, Inc., Bankr.ECF No. 21.
. Aigner v. McMillan, 2013 WL 2445042, at *5-6. Although the parties had stipulated that the alleged debtor had fewer than twelve creditors, the June 4 opinion did not address Maestri’s status as a petitioning creditor under 11 U.S.C. § 303(c).
. Id. at *5.
. Id. at *4 n, 20.
. Id. at *7.
. Motion for Attorneys Fees, Costs and Damages Pursuant to 11 U.S.C. § 303(i)and to Amend Order Pursuant to Fed. R. Bankr. Proc. 59 (If Necessary), Bankr. ECF No. 72. Through this motion, McMillan also asked for attorney’s fees, costs, damages, and other relief, but the Court reserved consideration of those issues for another day.
. Memorandum Order (J. Lynn), Bankr.ECF No. 86 (distinguishing Orange Blossom Ltd. P'ship v. So. Cal. Sunbelt Developers, Inc. (In re So. Cal. Sunbelt Developers, Inc.), 608 F.3d 456 (9th Cir.2010); Rosenberg v. DVI Receivables, XIV, LLC (In re Rosenberg), Bankruptcy No. 09-13196-BKC-AJC, Adversary No. 10-3812-BKC-AJC-A, 2012 WL 3990725 (Bankr.S.D.Fla. Sept. 11, 2012); Rosenberg v. DVI Receivables, XIV, LLC (In re Rosenberg), 471 B.R. 307 (Bankr.S.D.Fla.2012); In re Oakley Custom Homes, Inc., 168 B.R. 232 (Bankr.D.Colo.1994)).
. Id. at ll.n. 43. The Court noted that it was leaving. for .another day the question whether Maestri was a petitioner under § 303(i).. Id. at 11 n, 44.
. Judgment-, Bankr.ECF No. 88. The judg- ■ ment did not address Maestri-’s status as a petitioning creditor under § 303(c).
. In re McMillian, No. 4:13-CV-0807-0, 2014 WL 1032453, at *2 (N.D.Tex. Mar. 18, 2014).
. Id.
. McMillan v. Schmidt, 614 Fed.Appx. 206, 210-11 (5th Cir.2015).
. Id. at 209-11.
. Complaint for'Attorneys Fees, Costs and Damages Pursuant to '11 XJ.S.C. § 303(i), Adv. ECF No. 1 (the "Complaint").
.- Judge Lynn previously rejected this argument in the Court's August'22, 2013 Memorandum Order.
. Judge Lynn also rejected this argument in the Court’s August 22, 2013 Memorandum Order.
. Defendant Donal R, Schmidt's Memorandum in Support of Motion to Dismiss for Plaintiffs Failure to State a Claim (Rule 12(b)(6)), Adv. ECF No. 8.
. 'Response to Motion to Dismiss, Adv. ECF No, 17; Brief in Support of. Response to Motion to Dismiss, Adv. ECF No. 17-1, According to McMillan, Schmidt’s only argument is that this Court cannot grant relief because'the District Court and Fifth Circuit have already ruled on the issue. Brief in Support of Response to Motion to Dismiss at 4, 6-8. Schmidt’s arguments are broader .than McMillan suggests. Although the Court disagrees -with Schmidt’s preclusion argument and does not address, it further, Schmidt also argues directly that he is not a petitioner under § 303(i) because he did not file the involuntary petition.
. Defendant Donal R. Schmidt’s Reply to Plaintiffs Response to Motion to Dismiss for Plaintiffs Failure to State a Claim (Rule 12(b)(6)), Adv. ECF No.' 18.
. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984).
. Baker v. Putnal, 75 F.3d 190, 196 (5th Cir.1996).
. 11 U.S.C. § 303(b).
. See Fed. R. Bankr. P. 1002 (petition filed with clerk to commence case); L.B.R, 1002-2 (recognizing that petitions are a form of pleading that must be signed by unrepresented individuals or by counsel for represented parties); Fed. R. Bankr. P. 1008 (requiring petition to be verified or contain an unsworn declaration under 28 U.S.C. § 1746); L.B.R, 5005-1 (requirements for filing papers include contact information for party or attorney filing a pleading, and if *813filed by an attorney, the names of parties represented); Official Form B5 (involuntary petition form containing unsworn declaration language for each petitioner) (superseded on Dec. 1, 2015); Official. Forms B105 and B205 (involuntary petition forms containing unsworn declaration language for each petitioner)' (eff. Dec. 1, 2015); Fed. R. Bankr. P. 9011 (requiring petition and other pleadings and papers to be signed by attorney or unrepresented party).
.11 U.S.C. § 303(b)(1), (b)(2).
. 11 U.S.C. § 303(b)(3). For convenience, ■ when referring to these parties going forward, the Court will simply refer to ".general partners.’' . .
. 11 U.S.C. § 303(b)(4).
. 11 U.S.C. § 303(c).
. 11 U.S.C. § 303(e).
. 11 U.S.C. § 303(i)(l).
. 11 U.S.C. § 303(i)(2).
. DVI Receivables, XIV, LLC v. Rosenberg (In re Rosenberg), 779 F.3d 1254, 1268 (11th Cir.2015).
. Id. (emphasis added).
. Id. at 1258, 1269 & n. 11.
. McMillan v. Schmidt, 614 Fed.Appx. 206, 210-11 (5th Cir.2015).
. Id.
. 168 B.R. 232 (Bankr.D.Colo.1994).
. Id. at 241 (citing, among other authorities, Bankruptcy Rule 9011 and 28 U.S.C. § 1927).
. See, e.g., In re Glannon, 245 B.R. 882, 892-93 (D.Kan.2000) (concluding that' attorneys for petitioning creditors cannot be liable under plain language of § 303(i); noting that attorneys may be liable under Federal Civil Rules instead); In re Int’l Mobile Advert. Corp., 117 B.R. 154, 158 (Bankr.E.D.Pa.1990) (attorney for petitioning creditor may be liable under Bankruptcy Rule 9011, but not under § 303(i) because counsel was not a petitioner); In re Fox Island Square P’ship, 106 B.R. 962, 967 (Bankr.N.D.Ill.1989) (§ 303(i) “does not provide for an award against the petitioners’ attorney.’.'); In re Advance Press & Litho, Inc., 46 B.R. 700, 706 (Bankr.D.Colo.1984) (§ 303(i) not applicable to counsel; "When a judgment is entered against creditors whose actions were predicated upon • faulty legal advice, the creditor's remedy is elsewhere to be resolved.”); In re Ramsden, 17 B.R. 59, 61 (Bankr.N.D.Ga.1981) ("The court finds no authority to assess the costs and damages against the attorney whose acts of omission and commission caused these frivolous actions to be filed and heard. The judgment authorized under the statute seems directed only’against offending petitioners.”). See also In re Commonwealth Sec. Corp., No. 06-30746-SGJ-7, 2007 WL 309942, at *8 (Bankr.N.D.Tex. Jan. 25, 2007) (noting that "Section 303(i) technically does not permit for a sanction against a petitioner’s attorney”).
. 11 U.S.C. § 303(a).
. 11 U.S.C. § 303(b), (c), (d).
. 11 U.S.C. § 303(f)-(g).
. ■ 11U.S.C. § 303(h), (j).
. IT ,U.S.C. § 303(e).
. 11 U.S.C. § 303(k)(l).
. 11 U.S.C. § 303(k)(2).
. 11 U.S.C. § 303(1).
. 430 F.3d 1083, 1086 (9th Cir.2005).
. Id. at 1091. Accord In re VII Holdings Co., 362 B.R. 663, 668 (Bankr.D.Del.2007) (non-debtors, including nonpetitioning creditors, may not recover damages for a bad-faith filing).
. McMillan v. Schmidt, 614 Fed.Appx. 206, 214 (5th Cir.2015) (Dennis, C.J., dissenting) (citing Meyer v. Holley, 537 U.S. 280, 123 S.Ct. 824, 154 L.Ed.2d 753 (2003) (Fair Housing Act); Am. Soc’y of Mech. Eng’rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 102 S.Ct. 1935, 72 L.Ed.2d 330 (1982) (Sherman Act); Wood v. Holiday Inns, Inc., 508 F.2d 167 (5th Cir.1975) (Fair Credit Reporting Act); Paul F. Newton & Co. v. Tex. Commerce Bank, 630 F.2d 1111 (5th Cir.1980) (Securities Exchange Act); Chowdhury v. Worldtel Bangladesh Holding, Ltd., 746 F.3d 42 (2d Cir.2014) (Torture Victim Protection Act); 1-800 Contacts, Inc. v. Lens.com, Inc., 722 F.3d 1229 (10th Cir.2013) (Lanham Act)).
. See, e.g., Meyer v. Holley, 537 U.S. at 285, 123 S.Ct. 824 (interpreting Fair Housing Act: “{T]he Court has assumed that, when Congress creates a tort action, it legislates against . a legal' background of ordinary tort-related vicarious liability rules and consequently in- . tends its legislation to incorporate those rules.”); Paul F. Newton & Co. v. Tex. Commerce Bank, 630 F.2d at 1118 (concluding that common law agency principles, including -the doctrine of respondeat superior, remain viable in actions brought under Securities Exchange Act; noting that section 28 of the Act expressly makes the rights and liabilities imposed by the Act cumulative of any existing at ' law or in equity).
. In re Maple-Whitworth, Inc., 556 F.3d 742, 745-46 (9th Cir.2009) (citing BAP dissenting opinion), opinion corrected at 559 F.3d 917 (9th Cir.2009).
. In re Maple-Whitworth, 556 F.3d at 746.
. In re Commonwealth Sec. Corp., No. 06-30746-SGJ-7, 2007 WL 309942, at *6 (Bankr.N.D.Tex. Jan. 25, 2007). Section 303(i)’s primary policy purpose is thus different than that of Rule 9011, which is not fee shifting but to deter wrong. Id.. “With Rule 9011, the Rule 901 i movant has no entitlement to fees or any other particular sanction. ’ ’ Id.
. Id. at *6.
. The Court, Judge Lynn presiding, previously reserved its ruling on McMillan’s requests for fees' and costs under § 303(i)(l). Aigner v. McMillan, No. 11-47029-DML-7, 2013 WL 2445042, at *7 (Bankr.N.D.Tex. June 4, 2013); Memorandum Order at 2, Bankr. ECF No. 86. The ‘Court has not yet ruled on that issue in this adversary proceeding.
. Response to Motion to Dismiss at 10.
. See 11 U.S.C. § 503(b)(3)(A) (allowing a petitioning creditor under § 303 to seek an administrative expense claim for its actual, necessary expenses). ,
. Seé 11 U.S.C. § 303(i).1
. H.R. Rep. -No. 95-595, at 324.(1977) (em-' phasis added), as reprinted in, 1978 U.S.C.C.A.N. 5963, 6280; S. Rep. No. 95-989, at 34 (1978), as reprinted in 1978 U.S.C.C.A.N, 5787, 5820.
. H.R. Rep. No. 95-595, at 323 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6279; S. Rep. No. 95-989, at 33 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5819. • ’
. See supra note 46.
. Section 303(i)’s predecessors likewise appear to have allowed for relief only against the parties to the involuntary petition. See In re Ross, 135 B.R. 230, 235-37 (Bankr.E.D.Pa.1991) (reviewing § 303(i) history as well as predecessor statutes and Bankruptcy Rule 115(e), which allowed fees and costs to the "prevailing party”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499033/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW AFTER TRIAL
Scott W. Dales, United States . Bankruptcy Judge.
I. BACKGROUND
At the center of this dispute between an unhappy creditor and a bankruptcy, trustee lies a now-defunct manufacturing facility in Benton Harbor, Michigan (the, “property”). The Property, commonly known as 489 North Shore Drive, Benton Harbor, Michigan, served as. the factory, war.e,house, and offices of Modern Plasties Corporation (the “Debtor”), as well as the collateral for a prepetition commercial loan that Bank of America (“BOA”) made to finance the Debtor’s1 manufacturing business.'
The plaintiff in this case, New Products Corporation (“New Products” or the “Plaintiff’), is a “Tier 1”- automotive supplier with its headquarters and manufacturing facility across the street from the Property. New Products, founded by the same man who established the Debtor And still managed by the' founder’s granddaughter, originally held a general unsecured claim against the ‘ Debtor in the amount of $19,113.82, but later acquired BOA’s rights against the Debtor and the Property under a post-petition assignment of the bank’s loan documents. The principal defendant in this case is the former' chapter 7 trustee, Thomas R. Tibbie- (the “Trustee” or “Mr. Tibbie”). Mr. Tibbie served as the trustee of the Debtor’s bankruptcy estate from his appointment on January 26, 2009 until the charges of negligence (or worse) that New Products leveled against him prompted his resignation on January 9, 2015.1 The Trustee’s surety, Federal Insurance Company (“FIC”), is also a defendant. For convenience, the court will refer to the Trustee, the estate, and FIC collectively as the “Defendants.”
Evidently frustrated with the Trustee’s handling of the case, and seeing an opportunity to acquire the Property as a buffer against future development and possibly for future expansion of its own business, New Products succeeded to BOA’s claims against the Debtor and its mortgage against the Property through a post-petition assignment, effective March 4, 2013 (the “Assignment Date”).
New Products came to believe that, while the Property was within the bankruptcy estate and under the Trustee’s aegis, scrappers freely entered the premises, removing copper wires, steel beams, piping, “bus ducts,” lighting fixtures, plumbing fixtures, furnaces, even support beams — “everything that wasn’t nailed down” and much of what was. The Plaintiff blames the Trustee for not taking steps to preserve the Property it eventually acquired an interest in, against the scrapping or looting.
A. This Adversary Proceeding
A few months after the Assignment Date, after successfully opposing the Trustee’s request to approve his final report of distribution, New Products sued the Trus*821tee and FIC to recover from them the post-petition diminution in value of the Property that they attributed to the Trustee’s alleged breaches of fiduciary duty to the estate, BOA and to New Products.
More specifically, and as set forth in its First Amended Complaint (the “Complaint,” AP ECF No. 15),2 New Products' alleges that the Trustee breached his fiduciary duty:
(1) by failing to protect the Property against vandalism or looting (Complaint at ¶¶ 23,42, 46, 47);
(2) by failing to insure the Property after BOA said it would no longer do so (id. ¶¶ 23, 62, 65);
(3) by failing to object to property tax assessments (id. ¶¶ 23 and 68);
(4) by failing to determine environmental contamination on the premises (id. ¶¶ 23, 51);
(5) by failing to maximize the value of the Property through sale (id. ¶ 20) or jumping to the conclusion that only the developers of the nearby “Harbor Shores” golf course would be interested in buying it (id. ¶ 28); and
(6) by leasing the Property as. a parking lot to Harbor Shores for too little income.(id. ¶¶ 37-40).
The Defendants, in contrast,' contend that the Property was “underwater,” not necessarily because of the leaking roof and standing water within the building (which largely predated the bankruptcy filing) but because the unavoidable liens against .the Property greatly exceeded its value. Without any equity for the estate, and because BOA had no interest in going out-of-pocket to protect or insure -its own collateral, the Defendants contend that the Trustee acted appropriately by, in effect, holding onto the Property and generating income from it, such as a carve-out, option payments, and parking lot license feés, without expending any resources or effort to preserve it. They contend, without contradiction, that BOA acquiesced in this approach for more than four years,, never objecting, nor requesting adequate protection, nor moving for relief from stay, por to compel abandonment.
After six motions for -summary judgment,3 the court narrowed the issues by (1) precluding New Products from recovering damages caused.by the Trustee’s,decision to cancel the casualty insurance (see Memorandum of Decision and Order, AP EOF No. 88); (2) limiting the Trustee’s personal liability to. any willful breach of duty (id.); and (3) holding that New Products purchased only BOA’s contract rights against the Debtor but not any of the tort claims BOA may .have had against the Trustee (including claims that BOA may have been able to assert for pre-assignment breaches of fiduciary duty). See Memorandum of Decision and Order, AP ECF No. 139 p. 5. This last point means that New Products could assert only the direct claims it might hold against the Trustee for the diminution of the Property’s value that occurred between the March 4, 2013 Assignment Date, and January 6, 2014 (the date the Trustee technically abandoned the property). Id. at p. 8.
In a prior ruling, the court also concluded that the Trustee’s duty, to use estate resources to preserve or improve the Property. would depend almost entirely *822upon whether there was equity in the Property that would inure to the bankruptcy estate. See Order Denying Parties’ Summary Judgment Motions and Bifurcating Issues for Trial, AP EOF No. 188. In other words,' bankruptcy trustees must not use estate resources if doing so will benefit only secured creditors. Id.; cf. ll'U.S.C. § 506(c) (authorizing trustee to surcharge collateral).4
■ Given this view of a trustee’s duty and the allegations seemingly premised on the notion that the Trustee ought to have used estate resources to protect and enhance' the -value of the Property, the court bifurcated the issues for trial, focusing first on the Property’s value and whether there was any equity in it. Given the central role that the Property’s value played in the pre-trial motion practice, the court hoped that an early decision on this issue would assist it in determining whether the Trustee violated his duty to preserve the Property before reaching other issues regarding the Trustee’s breach of fiduciary duty, whether the breach caused' any damages, and if so, the amount of those damages. See -Order Denying Parties’ Summary Judgment Motions and Bifurcating Issues for Trial, AP EOF No. 188, at p. '4. Thus, the first phase of trial, which began on January-14, 2016, was limited to establishing the value of the Property as of March 4, 2013, as well as the extent of the encumbrances against it.
In response to a motion in limine, which the Defendants filed mainly to exclude the testimony of New Products’s expert witness, New Products conceded that it was taking an unconventional approach to -valuation in that, instead of appraisers and real estate professionals, it would depend upon the vice president of a commercial construction firm to testify about the scrap value of the components of the building. New Products argued that the value of these parts exceeded the “market value” of the Property, as would be determined by the more traditional valuation methodologies, used by appraisers, such as the sales comparison approach. In other words, New Products’s theory rested on proving that the vaiue of the damaged and purloined parts of the building exceeded the amount of the encumbrances, which would result in the equity necessary to trigger the Trustee’s fiduciary duty to protect and insure the Property (against damage)5 for the benefit of the estate and thus, the unsecured creditors.
B. The First Phase of Trial
The first phase of the trial commenced with New Products’s calling Michael Frederick to the stand. Mr. Frederick'is the vice president of Frederick Construction, and is the expert witness that New Products retained under Rule 26(a)(2)(B). New Products also presented the live testimony of two men associated with Randy’s Metal Recycling (Nicholas Schlipp and his grandfather, Delbert Schlipp), before concluding its presentation of live testimony with Cheryl Miller, the chief executive officer of New Products.
- With the agreement of the parties, the court also admitted the transcripts of deposition testimony from Steven Siravo and *823Ronald Miller pursuant to Rule 32(a)(4). The court has reviewed the deposition transcripts, paying particular attention to the Plaintiffs bench-filed designations of “key portions” to which the Plaintiff has called the court’s.attention. See Plaintiffs Designations of Key Portions of Deposition Transcripts (AP ECF Nos. 270 and 271).
During New Products’s pres.entation of itg case, the court admitted numerous documents into evidence, including the Stipulation of Facts (Exh. BBBB). Many of the documents were culled from filings in the base case and adversary proceeding, others (such as email strings, appraisal documents, correspondence and invoices) were duly produced during discovery. The court received the specifically-identified documents into evidence, largely without controversy; based on the parties’ pre-trial stipulation.6
The court’s decision.to exclude the opinion of the Plaintiffs only expert, Mr. Frederick, eviscerated the Plaintiffs case,7 leaving Plaintiffs counsel to grasp at various straws from within the record to establish value. This setback, coupled with their view of the record generally, probably preeipitated the Defendants’ oral motion under Rule 52(c) (the “Rule-52 -Motion”), which they made at the conclusion of New Products’s presentation.
C. ' Rule 52 Motion for Judgment on Partial Findings
In their Rule 52 Motion, the Defendants argue that the Plaintiff presented no evidence even tending to undermine the absence of equity as embodied in the Stipulation of Facts. (Exh. BBBB, ¶ 5). Because of the signal role of equity following the court’s prior decisions in the case, .the De-; fendants further asked the court to find that Mr. Tibbie did not breach his duty to New Products, and therefore to enter judgment dismissing the case entirely.
Rule 52(c), which applies in this adversary proceeding by virtue" of Fed. R. Bankr.P. 7052, provides as follows:
If a party has been fully heard on an ’’issue ’ during a noiijury .trial and the court finds against the 'party oh that issue, the ■ court may enter judgment against the party on a claim or defense that, under the controlling law, can be *824maintained or defeated only with a favorable finding on that issue.
Fed.R.Civ.P. 52(c). This rule permits, but does not require, a court to enter judgment after the conclusion of a plaintiffs proofs in non-jury trials. Ingham County v. Strojny (In re Strojny), 337 B.R. 150, 154 (Bankr.W.D.Mich.2006).
Rule 52 is useful when the plaintiff has not demonstrated the elements of its claim either in fact or law, or where the plaintiffs own evidence may have established one of the defendant’s defenses as a matter of fact or law. Eberhardt v. Comerica Bank, 171 B.R. 239, 243 (E.D.Mich.1994) (citing CMS Software Design Systems v. Info Designs, Inc., 785 F.2d 1246, 1248 (5th Cir.1986)).8 The rule “authorizes the court to enter judgment at any time that it can appropriately make a dispositive finding of fact on the evidence.” Fed. R.Civ.P. 52(c), Advisory Committee Note to 1991 Amendment.
In response to the Rule 52 Motion, Plaintiffs counsel initially argued that the standard governing the court’s task under Rule 52 is essentially the same as the standard under Rule 50. He urged the court to draw inferences in his client’s favor, much as the court did under Rule 56 and as a court in a jury trial would, before taking the case from the jury. After the court recessed, counsel candidly conceded his error, confirming the court’s view that findings under Rule 52(c) are the same as in any bench trial, with the caveat that the party against whom the motion is directed has been fully heard on the issue.
Indeed, despite the initial confusion, there are important distinctions between the court’s role in considering a motion for directed verdict under Rule 50 and one for judgment on partial findings -under Rule 52(c). Lytle v. Household Mfg., Inc., 494 U.S. 545, 554, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990) (explaining difference between former standards under Rule 41 and Rule 50). As under- its pre-1991 predecessor, the court’s evaluation differs - from that under Rules 50 or 56, which are designed to remove questions from the fact finder. Id. Instead, “[a] judgment on partial findings is made after the court has heard all the evidence bearing on the crucial issue of fact, and the finding is reversible only if the appellate court finds it to be “clearly erroneous.” ' See Fed.R.Civ.P. 52(c), Advisory Committee Note to 1991 Amendment. A court that enters judgment on partial findings, like one that enters judgment at the conclusion of all evidence, must never: theless state its findings of fact and conclusions of law separately, in accordance with Rule 52(a). See Fed.R.Civ.P. 52(c).
From early in the case, certainly predating the Defendants’ first motion for summary judgment, the value of the Property, and the implications of that value on any evaluation of Mr. Tibbie’s duties as trustee, took center stage. Indeed, because of the importance of the issue, and the factual dispute surrounding .it, the court denied the Defendants’ Third Motion for Summary Judgment (AP ECF No. 184), a week after they filed it, without putting the Plaintiff to the expense of responding to it. . <
*825Because the dispute about the value of the Property stubbornly interfered with the court’s assessment of Mr. Tibbie’s administration of the asset, the court concurred in the Defendants’ suggestion (made during a pretrial conference on October 14, 2015) to hold a separate hearing to consider value and its impact on the analysis. See Fed.R.Civ.P. 42(b) (“to expedite and economize, the court may order separate trial on one or more separate issues”).
At a pretrial hearing on the Defendants’ motion in limine, the court discussed with the parties their expectations of what would occur during the first phase of the bifurcated trial. See, generally, Transcript of Hearing on Motion in Limine held December 17, 2015 (AP EOF No. 243) at 22:14 to 29:2. New Products’s counsel stated that, at the first phase of the trial, the court would consider “the issue of value and essentially was there some equity for unsecured creditors that would trigger a duty on the part of Mr. Tibbie to preserve the property; and then, you know, what occurred during various points of his tenure or with the property that would affect the value?” Id. at 22:17-21. This understanding was consistent with the court’s view of the case, and its decision to hear testimony regarding the “central issue” of value, given its close relationship to a trustee’s performance of his duty:
As the court has observed in this Order and throughout the proceeding, whether Mr. Tibbie owed a duty to use estate resources to preserve the property depends almost entirely on whether there was equity in the property, above the encumbrances against it, including but not limited to the mortgage the Plaintiff now holds. See, e.g., Memorandum of Decision and Order dated December 18, 2014 (DN 69) at p. 10 (“Where a particular piece of estate property is fully encumbered, a trustee ought not to expend estate resources to protect or preserve that property, because the benefit of the expenditure inures to the secured creditors at the expense of the unsecured.”).
See Order Denying Parties’ Summary Judgment Motions and Bifurcating Issues for Trial (AP EOF No. 188) at p. 4. '
This opinion, including the following passages, constitutes the court’s findings of fact and conclusions of law, as required by Rule 52(a) and (c).
II, FINDINGS OF FACT'
A. Generally
The Debtor filed its chapter 7 bankruptcy petition on January 26, 2009 (the “Petition Date”), thereby creating a bankruptcy estate that included the Property. BOA filed a proof of claim in the Debtor’s bankruptcy, for $1,275,912.01 that was secured in part.by the Property.
With the consent of BOA, the Trustee unsuccessfully attempted to sell the Property to Ox Creek Development, LLC (“Ox Creek”) for between $590,000.00 and $650,-000.00 — considerably less than the Property’s pre-petition appraised value of $1,050,-000.00 — after negotiating a modest carve-out in exchange for the estate’s role in the sale process. Again with BOA’s consent or acquiescence,, the Trustee also negotiated a pre-sale option agreement, and licensed or, “leased” the parking lot for a golf event, generating additional funds. Though BOA might have argued that the option and lease payments represented proceeds of its collateral, it did not advance the argument and simply permitted the estate to keep these modest fruits of the Trustee’s various negotiations despite their relationship to the collateral.
When, roughly four years after the commencement of the Debtor’s case, it became clear that the Trustee’s sale efforts would *826fail, BOA conducted an auction to- sell its promissory notes, mortgages and other loan documents (the “Loan Documents”), eventually assigning .them to New Products on .March 4, 2013, for $225,000.00.
On April 4, 2013, Berrien County filed a motion for relief from the automatic stay to permit it to pursue tax foreclosure proceedings (BC ECF No. 121). Shortly after the taxing authority filed its motion, and soon after the assignment of the loan documents from BOA to New Products,9 the Trustee filed his final report, giving notice of ids proposed distributions and deemed abandonment of property — including the Property at issue in this opinion— pursuant to § 554(c). See Trustee’s -Final Report (TFR) filed June 10, 2014 (the “TFR,” Exh. 25).
New Products objected to the TFR and shortly thereafter, on September 27, 2013, commenced this adversary proceeding against the Trustee and his surety,' complaining of the Trustee’s neglect and mistreatment of the Property. Given the allegations of the Trustee’s neglect, the court was unwilling to approve the TFR without an evidentiary hearing,' and so the Trustee withdrew his report.
The Trustee eventually abandoned the estate’s interest in the Property, effective as of January 6, 2014, following the expiration of an additional notice period for environmental regulators, over New Products’s objection. See Objection by Creditor New Products Corporation to Trustee’s Notice of Proposed Abandonment and Request for Hearing (BC ECF No. 166).
B. The Property and its Value
The Property is a manufacturing facility situated on approximately 12 acres in Benton Harbor, Michigan. The main building, initially constructed in 1936, consisted of approximately 127,000 square feet at one time used for manufacturing, office, and related purposes. More specifically, the Debtor used the Property in the production of molded plastics since its inception. The Property served as collateral for loans the Debtor obtained from BOA. As of the Petition Date, the Debtor owed BOA $1,275,912.01 (Exh. BBBB). Prior to the filing of the Debtor’s bankruptcy petition on January 26, 2009, the Debtor had experienced financial difficulties rendering it unable to meet its' obligations to BOA, state and local taxing authorities, among other creditors including New Products. Deferred maintenance compromised the integrity of the roof, resulting in pools of standing water within the building which were visible during a prepetition auction of equipment conducted at the behest of BOA (Exh. 30). ’ During the Trustee’s only visit to the building interior at the Property in January 2009, his credible testimony established the Property was in a deplorable and unsafe condition.
■ On December 29, 2008, in the course of winding down its operations, the Debtor agreed to sell' the Property, with BOA’s approval, to Ox Creek for $650,000.00 (the “First Proposed Sale”), See Purchase Agreement dated December 29, 2008 (Exh. W). Ox Creek was reportedly involved in the development of the Harbor Shores golf course.
Several months after the Petition Date, the Trustee agreed to complete the sale to Ox Creek, but through a sale addendum, he allowed a $60,000.00 credit, to the buyer at closing, reducing the net sale amount to *827$590,000.00 (the “Second- Proposed Sale”) (id). The First and -Second Proposed Sales both depended on BOA’s willingness to accept far less than its debt at closing in order to convey clear title. Moreover, as part of the Second Proposed Salé BOA agreed to remit $10,000.00 to the estate as a carve-out of the Bank’s collateral, representing the only meaningful benefit' for unsecured creditors from the Property at that time. Unfortunately, this sale 'fell through.
Regardless, Ox Creek remained interested in the Property, offering to purchase it for $590,000.00, and agreeing to make option payments for four months to preserve its right to purchase (the “Third Proposed Sáíe,” Exh. YY). Though Ox Creek and the Trustee structured the Third Proposed Sale in a slightly different manner, the purchase price remained effectively the same as with the Second Proposed Sale. On September 22, 2009, after notice and an opportunity for hearing, the court approved the Third Proposed Sale (Exh. ZZ), finding no reason to question at that time the arms-length nature of the negotiation that arrived at the $590,000.00 purchase price. But, as with the previous sale, this transaction also fell through.
Nevertheless,.because there was a buyer in .hand on the Petition. Date, who was willing to pay a $650,000.00 purchase price, the court finds this to be an exceedingly persuasive indicator of the Property’s value as of the Petition Date.. This is so, notwithstanding the appraisal r,eport. of Professional Appraisal Services, Inc., which suggested a value in- 2008 of $1,050,000.00. Even this report expressed reservations about a declining real estate market, which turned out to be true. (Exh. A).
Significantly, BOA — the lienholder with the greatest stake in the Property— blessed the proposed sales at the $650,000.00 and then $590,000.00 amounts, giving rise to a' strong inference that the purchase prices fairly represented the value of the. Property at the time, even acknowledging that large financial institutions like BOA may have many reasons for their action, or inaction, with respect to collateral. BOA’s willingness to pay the estate a carve-out for the privilege of having the Trustee sell the Property (and keeping the bank out of the chain, of title of a potentially contaminated industrial site) may reflect, in part, an aversion to risk or reliance on other collateral, but its willingness to. discharge its mortgage for far less than its claim, speaks volumes about the lender’s dim view of the Property’s value. Indeed, Mr. Siravo’s deposition testimony establishes that BOA was unwilling to spend any money to insure its collateral, supporting an inference of less, rather than more, value than the $650,000.00 it was willing to accept prepetition. Similarly, taking judicial notice of the docket entries in the base case, it is clear that BOA never sought relief from stay, to liquidate its collateral, similarly supporting an inference that the bank did not ascribe much value to the Property. This is not surprising, given the tax liens, the deferred maintenance and generally poor condition of the Property, and the considerable risk of environmental cleanup costs. . In view of the foregoing, and especially given the proximity of the December 29, 2008 Purchase Agreement to the Petition Date, the court finds (based on the preponderance of the evidence) that the Property was worth not more than $650,000.00 on the Petition Date.
In reaching this decision, the court credits Mr. Tibbie’s -testimony that, notwithstanding the language at ¡the top of the third column on Form 1, he wrote “$600,-000.00” to -memorialize his preliminary assessment of the. value of the Property, *828rather than the equity in the Property. His testimony establishes his- carelessness or inattention while completing the several reporting forms, but his explanation was believable. Given the explanation/ which the court was not privy to' when drawing inferences in New Products’s favor at the summary judgment-stage, the admissions included within the Trustee’s reports do not establish equity.
As for the value of the Property three and a half years later — on the Assignment Date — -likewise, the court finds, based on the preponderance of the evidence, that the $590,000.00 purchase price implicit in the Second Proposed Sale (and expressed in the third) represents the best evidence of value on that later date.
In reaching this conclusion, the court is mindful of the credible testimony from Nicholas Schlipp and his grandfather, Delbert Schlipp, to the effect that, prior to the assignment, the elder Mr. Schlipp and unnamed associates actively harvested metal and other scrap from the Property, five days a week, eight hours a day, for seven months, post-petition. Although Delbert Schlipp testified that he did not participate in removing' structural components from the building, he was hot the only scrapper on site, and the photographs introduced as part of Exhibit 40 show structural deterioration resulting from the removal of cinder blocks, support beams, and other substantial supporting pieces of the building. This further exposed the premises to the elements and quite likely compromised the integrity of the building.
Although the invoices included as part of Exhibit 44 show that scrappers (and perhaps Mr. Robert Orlaske) benefitted from what can only be described as post-petition looting, the court is unwilling‘to simply deduct the proceeds of the scrap sales from the $590,000.00 purchase price established in the Third Proposed Sale, without some expert testimony corroborating this method of valuation.
This reluctance also stems from the evidence that shows it was the location of the Property, rather than the structures built upon it,.that accounted for most of the value. For instance, James Ringler from Grubb & Ellis opined in 2008 that the highest and best use for the Property was as a redevelopment site. (Exh. H). Referring to enlarged aerial photographs, Ms. Miller showed the proximity of the Harbor Shores golf and residential developments to the Property. The Trustee testified that in 2009, after he visited the site, he came away with the feeling that the building was dangerous, but was nonetheless able to wring out some income from the real property by leasing it during a golf event at the neighboring golf course. In addition, the record includes two letters sent from the City of Benton Harbor to the Debtor in December 2011, in essence, condemning the building. . Although the city gives the Debtor the opportunity to bring the structure “up to code,” the building inspector suggests that the Debtor consider demolishing it as an alternative. (Exh. FF). It' is more than simply conceivable that the building itself contributed very little to the value of the Property, especially given its consistently worsening state, as compared to the constancy of the $590,000.00 purchase price. The court has also considered the appraisal of Professional' Appraisal Services (Exh. C), which updated its earlier appraisal (Exh. A), and suggested a retrospective estimate of value of $930,000.00 as of the Petition Date. Again, however, considering the condition of the building (which the author of the appraisal did not inspect) and the impact of environmental concerns which almost certainly would have justified a discount, the court finds the prices consistently reflected in the aborted sales transactions to *829be more persuasive evidence of value in the admittedly unusual' circumstances of this case, even though the sales did not close. There is nothing in the record to suggest that they failed to close because the Trustee or BOA thought the price was too low.
The court has also considered the testimony of Cheryl Miller regarding her view of the Property, her decision to cause New Products to purchase BOA’s Loan Documents, and her post-assignment visits to the Property. Although her testimony implied that she was unaware of the post-petition scrapping activity on the premises, she also testified she was regularly at work in the New Products offices. This regular attendance at the office, the proximity of her office to the Property (across the street), and the testimony from Delbert Schlipp regarding the fact that for seven months he and his confederates threw the scrap in dumpsters and hauled it in truckloads from the Property, 'make it difficult for the court to believe she was unaware of the activity- of which she now complains. Indeed, she testified that -one of the photographs showing the Property’s environs captured the image of her Buick automobile in the New Products parking lot. The court also finds incredible her testimony that, as a- sophisticated business person in charge of a self-described global, Tier 1 automotive supplier, she authorized her company to spend $225,000.00 on the Loan Documents with the ultimate purpose of acquiring the Property, without setting foot on the interior of the Property — unless the condition of the building was immaterial to the decision. She acted, in other words, as if the value of the Property was not dependent on the condition of the structure.
She also testified that, after the Assignment Date, she made regular visits to the Property during which she photographed the interior, evidently in an effort to document the Trustee’s failure to adequately protect' her newly-acquired collateral, which she said was deteriorating due to the elements and continued . scrapping. Yet, as far as the docket shows, her company did not file any motions for relief from the automatic stay, for, adequate protection, or to compel abandonment. In other words,, aside from building a case against the Trustee in the months following the assignment by chronicling the deterioration, New Products behaved just as its predecessor (BOA) had — unwilling itself to spend money to preserve the. Property or even to take action to compel the Trustee to do so. This similarly cavalier approach to the building — by the first lien-holders - pre and post-assignment — bears on the court’s conclusion that the value of the Property was largely driven by its location rather than the improvements. If BOA and New Products' behaved in this manner with respect to the Property, it probably explains why the Trustee did, too.
C. Encumbrances and Equity
As for the amount of the encumbrances, the court relies largely on ..the parties’ Stipulation of Facts (Exh., BBBB) and finds that the liens of the State of Michigan Unemployment Insurance Agency (“MUIA”), BOA and the Berrien County Treasurer totaled $1,608,610.35' as of the Petition Date (see Exh. BBBB at ¶2). Based on that same exhibit, the court finds that BOA received payment of $239,639.87, from the sale of other collateral on August 13, 2010 (id. at ¶ 3), which reduced its claim, and therefore its lieh, by that amount. Moreover, by March- 4, 2013, Berrien County had asserted a tax lien against the Property in the amount of $307,182.36 (id. at ¶ 4). Because the record includes no evidence that in any way challenges the Berrien County tax lien, the *830court finds that the tax lien in the amount of $307,182.36 also encumbered the Property to that extent on the Assignment Date.’.
To summarize, the liens on the Petition Date, in the aggregate of $1,608,610.35 exceeded the value of the Property on that date ($650,000.00) by approximately $958,610.00; AS of the Assignment Date, due largely to the'$180,306.00 increase in the Berrien County tax lien, but also reflecting the $239,639.00 reduction in BOA’S claim on account of the sale of collateral in Coloma, Michigan, hens against the Property at that time ($1,549,277.00) exceeded the value of the''Property ($590,000.00) by approximately'$959,277.00.'
III. CONCLUSIONS OF LAW
The point of bifurcating the value issue from other issues, such as damages, was to permit thé court to determine whether the condition or value of the Property was such that “an ordinarily prudent rnan in the conduct of his private affairs under similar circumstances and with a similar object in view” would have behaved as Mr. Tibbie allegedly did. See Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 461-62 (6th Cir.1982); United States ex rel. Central Savings Bank v. Lasich (In re Kinross Mfg. Corp.), 174 B.R. 702, 705 (Bankr.W.D.Mich.1994).
Although bankruptcy professionals and courts generally acknowledge that a bankruptcy trustee has a duty to preserve property of the estate, the relevant statute frames the fiduciary’s obligation differently: “The trustee shall ... be accountable for all property received.” 11 U.S.C. § 704(a)(2). This concept of accountability recognizes the extremely difficult job of a bankruptcy trustee who, after all, is a fiduciary of an estate in which numerous beneficiaries or stakeholders hold competing and often conflicting interests; To hold that a trustee, in order to, “account” to secured creditors has an unqualified duty to spend money to preserve fully-encumbered estate property would make it impossible for the same.trustee to “account” to- the unsecured creditors. By framing the trustee’s duty more flexibly in terms of accountability rather than preservation, the drafters recognized the, collective nature) of the proceeding, and the frequently divergent interests in the .case and the property of the estate. As in most bankruptcy controversies,. a trustee must be guided by the need to maximize value for the estate, not just secured creditors (for whom the Bankruptcy Code affords ample protection),
As the court observed in response to the Defendants’ summary judgment motion over a year ago:
Where a particular piece of estate property is fully encumbered, a trustee ought not to expend estate resources to. protect or preserve that property,'because the benefit of’the expenditure -inures to the secured creditors at the expense of the unsecured. See, e.g., United States ex rel. Central Savings Bank v. Lasich (In re Kinross Mfg. Corp), 174 B.R. 702 (Bankr.W.D.Mich.1994); Stated differently, a trustee should not spend -money that would otherwise go to unsecured creditors to prop, up the collateral of .a particular secured creditor. Cf. 11 U.S.C. § 506(c). Of course, as a practical matter, it is frequently difficult to know the value of a thing or parcel of property. As long as the property is within a trustee’s legal custody, however, a trustee may be duty-bound to preserve it.
See Memorandum of Decision and Order dated December 18, 2014 (AP ECF No. 69) at p. 10. Indeed, in ruling on the Defendants’ prior summary judgment motions, if there had been “no genuine issue” *831that the.Property was substantially .underwater, the court would have dismissed the law suit over a year ago — and practically said as much at that time. Id. At that time, the court also stated: . .
... if the Property promised no benefit to the estate, the Trustee would'have no need or justification to use unencumbered estate, resources to preserve it. Indeed, unsecured creditors could justifiably complain under those circumstances if the Trustee used estate property to benefit BOA at their expense: if the Property were truly underwater,, it would be perfectly reasonable, not to spend money to insure it,, indefinitely, fence it, or otherwise maintain it, or seek to ‘ reduce a tax assessment, for example. ' ’
Id. at p. 11 — 12. The court regards these statements as the law of the case, which constitute “controlling, law” within the meaning of Rule 52(c). Entertainment Productions, Inc. v. Shelby County, 721 F.3d 729 (6th Cir.2013) (“[ujnder the law-of-the-case doctrine, findings made at one point in the litigation become the law of the ease for subsequent stages of that sanie litigation”).
In the course of the hearing to determine value, the court carefully considered the manner in which BOA treated the Property, or more accurately, refrained from treating the Property, relying on the deposition testimony of BOA’s Mr. Siravo as-well‘as the credible testimony of Mr. Tibbie.- Similarly, the court considered the manner in which Ms. Miller responded. Significantly, .the three most interested stakeholders — BOA, New Products, and the Trustee — took no steps to .preserve the building,- suggesting, that its contribution to the value of the Property would not warrant the effort.
- . Having concluded that the utter absence of equity — -where liens exceeded the value., of the Property, by over $950,-QOO.OO-^-the court finds that, the value-related evidence amply establishes the -Defendants’ defense. Eberhardt, 171 B.R. at 243. The court, and the Code/ support his theory — that the substantial negative equity .justified -the Trustee’s conduct. This defense, in the language of Rule 52(c), is one that “can . -.., be defeated only with a favorable finding*’ on the question of equity. After- the -Plaintiff- has been fully heard on the question of equity, the court has found in favor of.the.Defendants1 on that issue. ,
The court is- unimpressed with New Pfoducts’s novel suggestion that the Trustee should havé done more in order to maximize the carve-out, option payments, or rental income. Each Of these bériefits tci- the estate- depended not’ siniply OH the Trustee’s efforts and negotiation skills, but on the cooperation of the first secured lender; A carve-out is not equity, it is the product of a secured creditor’s self-interested consent to share its collateral position with -the estate, generally in exchange fob the benefit of disposing of collateral through the bankruptcy process, rather than through foreclosure with its attendant risks arid delay. Permitting the estate to earn rental income and option payments— through the use of BOA’s collateral — depends 'on the agreement of the secured creditor. That the Trustee was able to derive some benefit from the Property without paying to fix or even fence -the building shows that he maximized value for the estate and did so with the agreement of BOA. As the court observed earlier, New Products cannot now second-guess its assignor’s decision to cooperate.’ And, with' respect to the suggestion that the Trustee should have abandoned the property sooner given the absence of equity, the court is similarly unpersuaded. ’ The statute provides that, the Trustee “may *832abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.” 11 U.S.C. § 554(a) (emphasis added). The modest success that the Trustee had in getting BOA to agree that the estate could keep the carve-outs, option payments, and parking lot revenue, and do so without spending estate resources on the Property, justifies the Trustee’s decision to postpone abandonment for as long as he had the cooperation of the entity holding the first lien.10
Given the complete absence of- equity, and the relative unimportance of the building in the evaluation of-the Property, the court finds that Mr. Tibbie behaved as “an ordinarily prudent man in the conduct of his private affairs under. similar circumstances and with a similar object in view” would have behaved, and in fact as BOA and New Products behaved before, and immediately after, the assignment, respectively. Weaver, 680 F.2d at 461-62; In re Kinross Mfg. Corp., 174 B.R. at 705.
■Accordingly, the court will direct the Clerk to enter judgment dismissing, the case.
IV. CONCLUSION AND ORDER
The court’s impression .of this case is certainly mixed. On the one hand, the photographs showing the devastating ef-. fects of the scrappers’ post-petition harvest of copper, steel, and other materials is shocking, if not revolting. However, trustees, secured creditors, and even bankruptcy judges must approach assets unsentimentally in a system designed to “collect and reduce to money the property of the estate for which the trustee serves ...” 11 U.S.C. § 704(a) (the first duty of a chapter 7 trustee).- Understanding, as the court does, that BOA and the trustee agreed expressly or impliedly to neglect the building' because it did not make- economic sense to do otherwise makes it easier to accept what happened to it in this case. The coixrt would understand, however, if Ms. Miller does not see the situation in the same way, given her family’s history with the Debtor and the Property. Nevertheless, the Trusteed conduct did not give rise to a claim for damages, despite the damage it may have inflicted on his reputation, given the litigation and; other risks he assumed by administering the Property as he did. See, especially, supra n.5. ■
Finally, although the Bankruptcy. Code stacks the deck in favor of secured creditors, especially in a chapter 7 case, secured creditors must play the hand they are dealt. See, e.g„ 11 U.S.C. §§ 362(d), 363(e), ’554(b). The observation of the Honorable James D. Gregg, with respect to adequate protection, bears repeating: “if you don’t ask for it, you won’t get it.” In re Kain, 86 B.R. 506, 512 (Bankr.W.D.Mich.1988). Here, nobody asked. Precluding recovery' under the circumstances of this case is consistent with this principle, and protects the estate and its unsecured creditors from an end-run around the statutory scheme.
NOW, THEREFORE, IT IS HEREBY ORDERED that the -Rule 52. Motion is GRANTED and the Clerk shall, enter judgment dismissing the Complaint.
IT IS FURTHER ORDERED that the Clerk shall serve a copy of this Order pursuant: to Fed. R. Bankr.P. ’9022 and LBR 5005-4 upon Melissá L. Demorest, Esq., Mark S. Demorest, Esq., John Ches*833ter Fish, Esq., Cody H. Knight, Esq., Matthew Cooper, Esq., Elizabeth M. Von Eitzen, Esq., Mathew Cheney, Esq., and the United States Trustee.
IT IS SO ORDERED.
. Because New Products sued Mr. Tibbie in his personal and official capacities) the successor trustee, Laura Geriovich, appeared and participated in the case, through counsel, to protect the bankruptcy estate’s interests following Mr. Tibbie's resignation.
. In this opinion, the court will refer to entries in the docket of the Adversary Proceeding as "AP ECF No._” and to entries in the main bankruptcy base case docket as “BC ECF No.
. See AP ECF Nos. 56, 57, 118, 182, 183, 184.
. All statutory references in this opinion refer to the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., unless otherwise indicated.
. Nothing in this (or any prior) opinion of the court should be read to suggest that a trustee need not obtain liability or other types of insurance designed to manage other types of -risk- that a bankruptcy trustee or estate may face. For example, the judgment in this case might be different if, instead of facing a secured party at trial, the Trustee faced the parents of a child who wandered onto the • Property. Today’s dispute involves the failure to protect the Property, not third parties.
. The court admitted only ,a subset of the documents the parties agreed could be admitted, as set forth in their pretrial Stipulation Regarding the Admissibility of Exhibits (AP - ECF No. 245). The rules assign to the court . the task of admitting evidence, and the court does not feel bound to admit documents en masse simply because the parties so stipulate] Instead of adopting the parties’ "wholesale” approach, the court adopted a “retail” method, requiring document-specific offer and admission of exhibits. The court proceeded in this fashion to produce a more focused arid manageable record for trial and perhaps appeal.
. In denying the in limine motion as it pertained to Mr. Frederick’s opinion testimony, the court warned New Products that it would not permit the witness to stray too far away from his supposed report — the September 2015 letter identified as Exh. 28 (not admitted but included as part of- Defendants’ Motion in Liminé, (AP ECF No. 2137)). At trial, in response to Defendants’ “objections to the basis for the opinion testimony, including the fact "that Mr. Frederick purported to rely on matters not mentioned in the report, the. court refused to admit his opinion on two grounds. First, allowing him to bolster his opinion with matters not mentioned in the "report” unfairly'surprised the Defendants, and second, the apparently casual conversations with vendors (whose names he could not initially recall) and his reference to a website on the cost of various metals (not disclosed in the report and only hazily recalled during his testimony) did nonqualify as "sufficient facts or data” on which to .base his testimony under’ Fed. R.Evid. 702(b). As a result, the court refused io admit Mr. Frederick’s opinion that the scrap value of the Property exceeded the encumbrances.
. Here, the Plaintiff contends that the absence of equity in the Property is in the nature of an affirmative defense that the Defendants must establish to avoid liability. The Defendants contend, however, that to prove a case for breach of fiduciary duty the Plaintiff must establish a breach of duty and cannot do so if (as Defendants argue) the Property is wholly encumbered. Because, as explained below, the evidence overwhelmingly establishes the absence of equity, the court need not identify which party bears the burden of proof on the value proposition. The proof on these questions is clear.
. From the various objections to the Trustee’s proposals that New Products filed while it held only an unsecured claim, it must have been clear to the Trustee, - after the Assignment Date, that he could no longer count on cooperation from the holder of the principal secured claim against the- Property.
. In his TFR, filed roughly three months after the Assignment Date, and shortly after Berrien County filed its stay relief motion, the Trustee proposed to abandon the Property. New Products opposed the abandonment by objecting to the TFR, and later in response to the Trustee’s separate motion to abandon the Property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499035/ | TIMOTHY A. BARNES, Judge
MEMORANDUM DECISION
The matter before the court arises out of the Second Amended Adversary Complaint Objecting to the Discharge of Debt Owed to the Plaintiff [Adv. Dkt. No. 32] (the “Complaint”), filed by Uassan A. Muhammad (the “Plaintiff) in the above-captioned adversary proceeding (the “Adversary”), seeking a determination of dischargeability of debt under section 523(a)(2)(A) of the Bankruptcy Code (as defined below) against the debtor, Joseph W. Sneed (the “Debtor”) in connection with the parties’ business and personal relationship of more than.20 years.
*851The matter was tried before the court in a two-day trial that took place on September 22, 2015 and September 23, 2015 (the “Trial”). For the reasons set forth herein, the court holds that the debt is dischargeable by the Debtor, and finds in favor, of the Debtor on all Counts of the Complaint.1
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"). A separate order will be entered pursuant to Bankruptcy Rule 9021.
JURISDICTION
The federal district courts have “original and exclusive jurisdiction” of all cases under title 11 of the United States Code (the “Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have “original but not exclusive jurisdiction” of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § .1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. 111. Internal Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any proceeding arising under the Bankruptcy Code or arising in a cáse under title 11. 28 U.S.C. § 157(b)(1). A proceeding for determination of the dischargeability of a particular debt only may arise in a case under title 11 and is specified as a core proceeding.' 28 U.S.C. § 157(b)(2)(I); Birriel v. Odeh (In re Odeh), 431 B.R. 807, 810 (Bankr.N.D.Ill.2010) (Wedoff, J.); Baermann v. Ryan (In re Ryan), 408 B.R. 143, 151 (Bankr.N.D.Ill.2009) (Squires, J.).
While none of the parties have raised the issue of whether this court has constitutional authority to enter a final judgment on all counts of the Complaint in light of the United States Supreme Court’s decision in Stern v. Marshall, 564 U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this court has an independent duty to determine whether it has such authority. Rutkowski v. Adas (In re Adas), 488 B.R. 358, 379 (Bankr.N.D.Ill.2013) (Hollis, J.).
The. Complaint is based on section 523(a)(2)(A) of the Bankruptcy Code. Section 523 is unequivocally a bankruptcy cause of action. While such actions may turn on state law, determining the scope of a debtor’s discharge is a fundamental part of the bankruptcy process. See. Deitz v. Ford (In re Deitz), 469 B.R. 11, 20 (B.A.P. 9th Cir.2012). As observed by one bankruptcy court, “there can be little doubt that [a bankruptcy court], as an Article I tribunal, has the constitutional authority to hear and finally determine what claims are non-dischargeable in a bankruptcy case.” Farooqi v. Carroll (In re Carroll), 464 B.R. 293, 312 (Bankr.N.D.Tex.2011); see also Deitz, 469 B.R. at 20; White Eagle, Inc. v. Boricich (In re Boricich), 464 B.R. 335, 337 (Bankr.N.D.Ill.2011) (Schmetterer, J.).
As nondischargeability is a core proceeding that arises -under the Bankruptcy Code, it is within the court’s core jurisdiction. See 28 U.S.C. § 157(b)(1). Under existing Supreme Court precedent, there is no question as to the court’s authority to *852hear and determine such claims. See generally Stern, 564 U.S. -, 131 S.Ct. 2594.
Accordingly, final judgment is within the scope of the court’s authority.
' SUMMARY OF ISSUES PRESENTED
The Plaintiff seeks a determination that debts allegedly owed by the Debtor are nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. Having obtained a state court judgment, the Plaintiff alleges that the debts represented by that judgment and related orders were obtained through false pretenses, false representation or actual fraud. The Plaintiff further allegeá that a separate but •related, mechanics lien ■ obligation was equally obtained through'false pretenses, false representation or actual fraud. While the Debtor appears to be obligated on the debts, the Plaintiff did not prove by. a preponderance of the evidence that the debts were - incurred > by false pretenses, false representations or actual fraud. As a result, the debts are dischargeable.
PROCEDURAL HISTORY
In considering the relief sought by the Plaintiff, the court has considered the evidence and argument presented by the parties at the Trial, has reviewed the Complaint, the attached exhibits submitted in conjunction therewith, and has reviewed and found each of the following of particular relevance:
(1) Debtor’s Answer to Second Amended Adversary Complaint Objecting to the Discharge of Debt Owed to the Plaintiff [Adv. -Dkt. No. 40] (the “Answer”);
(2) Final Pretrial Order Governing Complaint Objecting to Debtor’s Discharge and Dischargeability of Particular Debt [Adv. Dkt. No. 66] (the “Final Pretrial Order”);
(3) Joint Pretrial Statement and related filings [Adv. Dkt. No. 70] (the “Joint Pretrial Statement”);
(4) Debtor’s Proposed Findings of Fact and Conclusions of Law [Adv. Dkt. . No. 73];2
(5) Plaintiffs Proposed Findings of Fact and Conclusions of Law [Adv. Dkt. No. 74]; and
(6) Plaintiffs Closing Statement [Adv. Dkt. No. 75].
The court has also considered the procedural history and previous court filings in this Adversary, including:
(a) Plaintiffs Verified- Adversary Complaint Objecting to the Discharge of . Debt Owed to the Plaintiff [Adv. ’ Dkt. No. 1]; .
(b) Plaintiffs Motion for Entry of Default [Adv. Dkt. No. 5]; •
(c) Debtor’s Motion for More Definite ■ Statement [Adv. Dkt. No. 7];
(d) Plaintiffs First Amended Adversary Complaint Objecting to the Discharge of Debt Owed to the Plaintiff [Adv. Dkt. No. 14];
(e) Order Mooting Motion for More Definite Statement [Adv. Dkt. No. 17];
(f) Order Denying for the Reasons Stated on the Record Motion for Entry of Default [Adv. Dkt. No. 18];
(g) Debtor’s Motion to Dismiss Adversary [Adv. Dkt. No. 19] (the “Motion to Dismiss”);
(h) Plaintiffs Motion for Entry of Default [Adv. Dkt. No. 20];
*853(i) Plaintiff’s Response to Debtor’s Motion to Dismiss [Adv. Dkt. No. 25];
(j) Debtor’s Reply to Plaintiff’s Response to Debtor’s Motion to Dismiss [Adv. Dkt. No. 27]; ■
(k) Order Denying Motion for Entry of Default [Adv. Dkt. No. 30];
(l) Order Granting in Part and Denying in Part Motion to Dismiss [Adv. Dkt. No. 31] (the “Partial Dismissal Order”);
(m) Order Withdrawing Motion to Dismiss Adversary [Adv. Dkt. 43];
(n) Plaintiffs - Motion for Summary Judgment and related filings [Adv. Dkt. No. 44];
(o) Debtor’s Response Opposing Plain- • tiffs Motion for Summary Judgment and related filings [Adv. Dkt. No. 45]; and
(p) Order Denying Motion fór Summary Judgment [Adv. Dkt. No. 49].
Though the foregoing items do not constitute an exhaustive list of the filings, in the Adversary, the court has taken judicial notice of the contents of the docket in this matter. See Levine v. Egidi, No. 93C188, 1993 WL 69146, at *2 (N.D.Ill. Mar. 8, 1993) (authorizing a bankruptcy court to take judicial notice of its own docket); In re Brent, 458 B.R. 444, 455 n. 5 (Bankr.N.D.Ill.1989) (Goldgar, J.) (recognizing same).
ADDITIONAL PROCEDURAL POSTURE
The original complaint included claims under sections 523(a)(2)(A) and (a)(2)(B) and sections 727(a)(4) and (a)(5) of the Bankruptcy Code. The Debtor- sought in his Motion to Dismiss to have all of these claims dismissed.3 The Motion was granted as to claims under section 523(a)(2)(B) and sections 727(a)(4) and- (a)(5) of the Bankruptcy Code, but was denied as to the claim under section 523(a)(2)(A). Thus, the sole remaining claim that went to Trial, as noted above, is a claim under section 523(a)(2)(A).
Prior to the Trial the court issued the Final Pretrial Order, which stated that any exhibit proposed in the Joint - Pretrial Statement to which an objection was not raised in the 'Joint Pretrial Statement would be received in evidence without an offer during the Trial. At the Trial, all of the Debtor’s exhibits were therefore admitted in the absence of such an objection from the Plaintiff. Similarly, all of the Plaintiffs exhibits in the Joint Pretrial Statement were also admitted. The Plaintiff attempted to introduce additional , exhibits at the Trial (Exhibits No. 27-28). These exhibits were not included, however, in the Joint Pretrial Statement and the Debtor objected to their admission based on the impropriety of their late disclosure and lack of probative value. The court *854sustained the Debtor’s objections and Exhibit Nos. 27-28 were excluded.
At the conclusion of the Trial, the Debt- or moved for a directed verdict. In response, the court requested posttrial briefing from both parties. The court’s ruling on the motion for directed verdict is subsumed into this Memorandum, Decision.
BACKGROUND
•This Adversary arises out of a dispute between the Debtor and the Plaintiff involving real property located at 4852 S Ashland Avenue, Chicago, Illinois (the “Property”).
.In March 2006, the Debtor purchased the Property. At or around that time, he represented to the Plaintiff that he (the Debtor) was the sole owner. In July 2006, he offered the Plaintiff half ownership of the Property on the condition that they would refurbish it together as co-owners. Nonetheless, the-Debtor never transferred half ownership, of the Property to the Plaintiff.
' In March 2007, the Debtor contracted with TIB- Services, Inc. (“TIB”), a construction business owned by the ¡Plaintiffs wife, Maria Bailey (“Bailey”), to purchase construction materials and for labor to rehabilitate the Property. TIB performed but was not paid, and on or about January 15, 2008, Bailey, on behalf of TIB, filed and recorded a $78,000.00 mechanics lien against the Property. On that same date, Bailey, on behalf of herself and TIB, assigned both her and TIB’s interest to the Plaintiff.
From,2007 to 2012, the Plaintiff was also associ&ted with numerous businesses operating at the Property, including:' (1) Great Finishes, Inc.;’1 (2) -Mother’s Touch Home Health' (“Mother's Touch) ”); (3) Master’s Medical Billing; (4) TIB Services, Inc.; (5) A & H Caring Connections, Inc.; (6) The Law Office of Raymond J. Sanders; (7) The Law Office of Emmit Marshall; and (8) 4852 S. Ashland, Inc.
In September 2012, the Debtor was injured in a car accident and was bedridden for several months. During that period, the Plaintiff was locked out of and ejected from the Property by the Debtor’s family and agents. But for the resulting litigation, this appears' to be the end of the Plaintiffs and the Debtor’s dealings with each other.
The Plaintiff filed several court actions against the Debtor in the Circuit Court of Cook County, Illinois (the “State Court”). These included Case No. 12 CH 42455 (the “Ejectment Litigation")'-and Case' No. 12 L 066076 (the ■ “Fraud Litigation”).- It appears that TIB also assigned its claims in those actions to the Plaintiff prior to commencement of those actions.
In the Ejectment Litigation, the State Court found that the Debtor had unlawfully locked out, evicted and ejected the plaintiff, Mother’s Touch," in violation of state law. ' On June 6, 2013, the Debtor admitted that he had taken self-help steps to evict Mother’s Touch in violation of the Illinois Forcible Detainer Act. On November 5, 2013, the State Court found the Debtor liable for $5,219.00: $1,351.00 in business property; $1,000.00 for lost photographs; and $2,868.00 for attorney’s fees. ■ '
In the Fraud Litigation, the Plaintiff (also the plaintiff that litigation) alleged that the Debtor committed fraud and deceptive practices against him. “On September 24, 2013, the State Court entered an agreed order providing that, the Debtor would transfer 50% ownership in the property to the Plaintiff by October 15, 2013 and would be responsible for half of the TIB mechanics lien, which Bailey had assigned on her and TIB’s behalf to the Plaintiff in her role as owner of TIB. Pur*855suant to the agreed order, the Plaintiff withdrew his other complaints against the Debtor, including his complaints. in the Ejectment Litigation. On September 30, 2013, in another agreed order, the mechanics lien was reduced through binding arbitration to $60,000.00, with the Debtor responsible. for $30,000.00. The Debtor did not comply with the agreed orders and was sanctioned twice for $1,000.00 ($2,000.00 in total), on October 15, 2013 and November 25,2013, respectively.
Importantly, -in neither the Ejectment Litigation nor the Fraud Litigation did the State Court make any finding of fraud nor did the" agreed orders' address the allegation of fraud. It does not appear that the orders were appealed.
On January 17, 2014, the Debtpr filed a petition for relief under chapter 13 of the Bankruptcy. Code, Case No. 14bk01361, and on February 11, 2014, the. Plaintiff commenced this Adversary, Thq Plaintiff seeks a finding that the aforementioned debts are not dischargeable under section 523(a)(2)(A) of the Bankruptcy Code because the debts were procured through actual fraud, false representation or false pretenses.
FINDINGS OF FACT4
From the review and1 consideration of the procedural background, as well as the evidence presented at the Trial (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 Parties
(1)The Debtor is an individual domiciled in Chicago, Illinois.
(2) For the past 20 years; the Debtor’s .primary business has been working . for the City of Chicago in the Department of Revenue. -,
(3) The Debtor is also- a licensed real estate broker and has been involved in various business -ventures.
(4) The Plaintiff is an .individual domiciled in Chicago, Illinois.
(5) For the past 20 to 25 years, the Plaintiff’s primary, business has been in real estate - and varied business ventures. .
(6) Over the years, the Plaintiff and the Debtor worked together and assisted each other with regard .to political causes, and various, business opportunities, .including the purchase, renovation and sale of various parcels of „ real estate. .. ,
,(7) -The various business relationships between the Plaintiff and the Debtor ■ were not always reduced to writing.
B. Property
(8) In March 2006, the Debtor informed the Plaintiff that he had purchased the Property. 1
(9) In March 2006, "the Debtor, the Plaintiff and their mothers formed a corporation called 4852 S. Ashland Inc. (in 2010, d/b/a Ashland Convenience Food and Liquors) that operated a convenience store located on the 'Property. The two mothers equally owned 50% of the interests and shares in the corporation.
(10) In July 2006, the ‘Debtor offered the Plaintiff half ownership of the Property oii the condition that they would together refurbish the Property as co-owners.
*856(11) In March 2007, the Debtor contracted with TIB Services, a con- ' struction business owned by Bailey, to purchase construction materials and for labor to renovate the Property.
(12) Bailey and the Debtor reduced the agreement between TIB and the Debtor to writing, but Bailey did not require that -the Debtor produce documentation as to ownership of the Property.
(13) On or about January 15, 2008, Bailey on behalf of TIB' recorded a $78,000.00 mechanics lien against the Property. :
(14) In August 2011, the Plaintiffs mother died, and her last will and testament bequeathed him half ownership in 4852 S. Ashland Inc.
(15)' At all relevant times, the Debtor was sole ownér of record of the Property.
(16) The Debtor never recorded any instrument transferring half ownership of the Property to the Plaintiff.
(17) On November 12, 2012, the Plaintiff was locked out of the Property by individuals purportedly representing the Debtor.
C. State Court Litigation
(18) On December 5, 2012, the Plaintiff filed the Ejectment Litigation in State Court seeking to recover damages for illegal eviction and ejectment from the Property, as well as loss, deferred, and back wages, from the Debtor.
(19) The Plaintiff alleged that .the Debt- or was responsible for his unlawful ejectment and lockout from the Property, as well as for fraud and deceptive practices.
■ (20) In the Ejectment Litigation, the Debtor counterclaimed for $35,000.00 in unpaid rent from' December 2007 to December 2012.
(21) On December 5, 2012, the court issued an ex parte temporary restraining order and found that the Debtor had unlawfully locked out, evicted and ejected plaintiff in that litigation in violation of state law.
(22) On September 24, 2013, Judge Thomas R. Mulroy, Jr. approved the agreed order in the Fraud Litigation, in which the Plaintiff and the Debtor agreed to a number of actions, including dismissal. of all pending cases, including the Ejectment Litigation and Fráud Litigation. The order also providéd that the Plaintiff and the Debtor would each be half owners in the corporation as well as the Property. Both parties were also ordered to share equal responsibility for utility debts for the Property, the TIB debt and the Mother’s Touch debt.5
(23) On September 30,2013, Jhdge Mulroy approved an additional agreed order reducing TIB’s lien to $60,000.00, with the Plaintiff and the Debtor responsible for $30,000.00 each.
(24) The Debtor was sanctioned by Judge Mulroy on two separate occasions (October 15, 2013" and November 25, 2013) for failure to abide by the agreed orders in the Fraud Litigation. In each instance the sanction was $1,000.00.
(25) On November 25, 2013, Judge Sophia H. Hall issued a five page *857written finding (the "State Court Decision”) in the Ejectment Litigation.6 Judge Hall found in favor of Mother’s Touch concerning the wrongful ejectment, the final issue not resolved in the pretrial settlement conference. Judge Hall found that Mother’s Touch had 'an enforceable lease and- that the Debtor was ' liable for wrongful ejectment. ■ She found in favor of Mother’s Touch regarding the Debtor’s counterclaim, finding ' no evidence in support of the counterclaim for back rent.
(26) In the Ejectment Litigation, Judge Hall found that the Debtor was liable for damages for $5,219.00: $1,351.00 in business property; $1,000.00 for lost photographs; and $2,868.00 for attorney’s fees.
(27) With respect to the Debtor specifically, Judge Hall found in relevant part as follows:
Plaintiff had an enforceable lease and was ejected from the property by defendant Sneed’s agents who had his power of attorney and who were his sisters. The court believes that defendant Sneed knew of this ejectment, either at the time or soon after the act, and did nothing to remedy the situation. Consequently defendant Sneed is liable for the damages caused by ejecting this lawful tenant having a valid lease from its business premises.
APPLICABLE LAW
A. Nondischargeability
The Complaint asserts claims under section 523(a)(2)(A) of the Bankruptcy Code in relation to multiple debts.
The Plaintiff alleges that the Debtor’s actions and omissions constitute false misrepresentations; false pretenses or actual fraud, with respect -to the Plaintiff, standing in the place of TIB as the assignee of TIB’s mechanics lien against the Property. More specifically, the Plaintiff alleges that the Debtor, in requesting construction services from TIB on the Property, omitted the material fact that the Plaintiff was not a co-owner of the Property, fraudulently inducing TIB to provide services, for which the debt was incurred. As the claim is brought by the Plaintiff as the assignee of TIB’s ■ mechanics lien, the court must therefore inquire into false, representations, false pretenses, or actual fraud by the Debtor against TIB.
The other debt amounts appear to stem from the Ejectment Litigation damages award and from sanctions owing to the Debtor’s refusal to follow the agreed orders from the Ejectment and Fraud Litigations. To award judgment in favor of the Plaintiff, this court must find the existence of false pretenses, false representation^), or actual fraud and find that such fraud is attributable directly or indirectly to the Debtor. See Wachovia Sec., LLC v. Jahelka (In re Jahelka), 442 B.R. 663, 668 (Bankr.N.D.Ill.2010) (Goldgar, J.).
The party seeking to establish an exception to the discharge of a debt bears the burden of proof. Goldberg Secs., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir.1992); Harris Trust and Savings Bank v. Gunsteen (In re Gunsteen), 487 B.R. 887, 899 (Bankr.N.D.Ill.2013) (Schmetterer, J.). A creditor must meet this burden by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, *858291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see also In re McFarland, 84 F.3d 943, 946 (7th Cir.1996). To further the policy of providing a debtor, a fresh start, exceptions to the discharge of a debt are to be construed strictly against a creditor and liberally in favor of a debtor. See In re Crosswhite, 148 F.3d 879, 881 (7th Cir.1998); Meyer v. Rigdon, 36 F.3d 1375, 1385 (7th Cir.1994).
1. 11 U.S.C. § 523(a)(2)(A)
Section 523 enumerates specific, ■ limited exceptions to the dischargeability of debts. Section 523(a)(2)(A) provides, in relevant part, that an individual debtor is not discharged from any .debt:
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debt- or’s or an insider’s financial condition .....
11 U.S.C. § 523(a)(2)(A).
First, a plaintiff must establish that the debtor- owes him a debt. See Zirkel v. Tomlinson (In re Tomlinson), Adv. No. 96 A 1539, 1999 WL 294879, at *7 (Bankr.N.D.Ill. May 10, 1999) (Katz, J.).
In this instance, while the Plaintiffs ex-a'ct’claims aren’t clear, there is sufficient information that these are debts that are owed.7 The Debtor does not dispute that he is personally liable on the mechanics lien, for example. The Debtor' lists $37,219.00 in debt on his Schedule F of his Chapter 13 petition and lists the Plaintiff as the debt holder. At the Trial, the Debt- or acknowledged .that he knew of both Bailey and TIB and that he had signed a document confirming and acknowledging that the material and work performed at the Property were “completed in a substantial workmanlike manner.” Tr, 55, Sept. 22, 2015. As a result of the state court decision finding in favor of the Plaintiff in the Fraud. Litigation, the Debtor was ordered to pay $30,000.00 and was subsequently sanctioned $1,000.00 on two separate occasions for failure to cooperate. The Debtor was also found liable for damages in the Ejectment Litigation in the amount of $5,219.00. Therefore, it does appear that the Debtor is personally liable for the TIB mechanics lien, the ejectment damages, and the court sanctions.
Second, a plaintiff must show that the debt- falls within one of the specified grounds under section 523(a)(2)(A). Jahelka, 442 B.R. at 668. Three separate grounds for holding a debt to be nondischargeable are included under section 523(a)(2)(A): false pretenses, false representation or actual fraud. Id.; see also Deady v. Hanson (In re Hanson), 432 B.R. 758, 771 (Bankr.N.D.Ill.2010) (Squires, J.) (citing Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308, 314 (Bankr.N.D.Ill.2001) (Goldgar, J.)).
a.. False Representation and False Pretenses
To .except a debt from discharge under section 523(a)(2)(A) based on false pretenses or a false representation, the creditor must establish the following elements: (1) the debtor made a false representation or omission of fact; (2) which the debtor (a)' knew was false or made with reckless disregard for its truth, and (b) made with an intent to deceive; and (3) upon which the creditor justifiably relied. Reeves v. Davis (In re Davis), 638 F.3d 549, 553 (7th Cir.2011); see also Ojeda v. *859Goldberg, 599 F.3d 712, 716-17 (7th Cir.2010); In re Bero, 110 F.3d 462, 465 (7th Cir.1997); Jahelka, 442 B.R. at 668-69. A creditor must establish all three elements to support a finding of false pretense or false representation. Ryan, 408 B.R. at 156; see also Rae v. Scarpello (In re Scarpello), 272 B.R. 691, 700 (Bankr.N.D.Ill.2002) (Squires, J.). Failure to establish any one fact is outcome determinative. Hanson, 432 B.R. at' 771 (citing Jairath, 259 B.R. at 314).
Under section 523(a)(2)(A), a false representation is an express misrepresentation that can be demonstrated by a spoken or written statement but must also be demonstrated through conduct. See Scarpello, 272 B.R. at 700; Nite Lite Signs & Balloons, Inc. v. Philopulos (In re Philopulos), 313 B.R. 271, 281 (Bankr.N.D.Ill.2004) (Schmetterer, J.); New Austin Roosevelt Currency Exch., Inc. v. Sanchez (In re Sanchez), 277 B.R. 904, 908 (Bankr.N.D.Ill.2002) (Schmetterer, J.). Thus a spoken or written statement is not required for a'false representation, so “[a] debtor’s silence regarding a material fact can constitute a false representation under § 523(a)(2)(A).” Hanson, 432 B.R. at 772 (internal quotation omitted); see also Scarpello, 272 B.R. at 700. “A debtor’s failure to disclose pertinent information may be a false representation where the circumstances imply a specific set of facts and disclosure is necessary to correct what would otherwise be a false impression.” Ryan, 408 B.R. at 157 (citing Trizna & Lepri v. Malcolm (In re Malcolm), 145 B.R. 259, 263 (Bankr.N.D.Ill.1992) (Wedoff, J.)).
In contrast, “[f]alse pretenses in the context of section 523(a)(2)(A) include implied misrepresentations or conduct intended to create or foster a false impression.” Media House Productions, Inc. v. Amari (In re Amari), 483 B.R. 836, 846 (Bankr.N.D.Ill.2012) (Schmetterer, J.) (citing Sterna v. Paneras (In re Paneras), 195 B.R. 395, 406 (Bankr.N.D.Ill.1996) (Squires, J.)). The implication arises when a debtor, with the intent to mislead a creditor, engages in “a series of events, activities or communications which, when considered collectively, create a false and misleading set of circumstances, ... or understanding of a transaction, in which [the] creditor is wrongfully induced by [the] debtor to transfer property or extend credit to the debtor____” Paneras, 195 B.R. at 406 (internal quotations omitted); see also Amari, 483 B.R. at 846.
A false pretense does not necessarily require overt misrepresentations. Paneras, 195 B.R. at 406. “Instead, omissions or a failure to disclose on the part of the debtor can constitute misrepresentations where the circumstances are such that omissions or failure to disclose create a false impression which is known by the debtor.” Id.; see also Hanson, 432 B.R. at 771 (finding that a false pretense is “established or fostered willfully, knowingly and by design; it is not the result of inadvertence”).
An element common to a false representation and' false pretenses is reliance. The United State's Supreme Court has clarified that section 523(a)(2)(A) requires only a showing of “justifiable” reliance. See Field v. Mans, 516 U.S. 59, 73-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995); see also Mayer v. Spanel Int’l Ltd., 51 F.3d 670, 673 (7th Cir.1995). Justifiable reliance is a less demanding standard than reasonable reliance and “does not mean that [the creditor’s] conduct must conform to the standard of the reasonable man.” Paneras, 195 B.R. at 406 (quoting Field, 516 U.S. at 71, 116 S.Ct. 437). Rather, justifiable reliance “requires only that the creditor did not ‘blindly [rely] upon a misrepre*860sentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.’ ” Ojeda, 599 F.3d at 717 (iquoting Field, 516 U.S. at 71, 116 S.Ct. 437).
Whether a party justifiably relies on a misrepresentation is “determined by looking at the circumstances of a particular case and the characteristics of á particular plaintiff.” Id.-, see also Bombardier Capital, Inc. v. Dobek (In re Dobek), 278 B.R. 496, 508 (Bankr.N.D.Ill.2002) (Schmetterer, J.). “[A] person is'justified in relying on a representation of fact ‘although he might have ascertained the falsity of the representation had he made an investigation.’” Mercantile Bank v. Canovas, 237 B.R. 423, 429 (Bankr.N.D.Ill.1998) (Lefkow, J.) (quoting Field, 516 U.S. at 70, 116 S.Ct. 437). “However, a plaintiff may not bury his head in the sand and willfully ignore obvious falsehoods.” Johnston v. Campbell (In re Campbell), 372 B.R. 886, 892 (Bankr.C.D.Ill.2007) (internal quotations omitted).
Several courts in this Circuit have determined that “[t]o satisfy the reliance element of § 523(a)(2)(A), the creditor must show that the debtor made a material misrepresentation . that was the cause-in-fact of the debt that the creditor wants excepted from discharge.” Scarpello, 272 B.R. at 700; see also Mayer, 51 F.3d at 676 (“reliance means the conjunction of .a material misrepresentation with causation in fact”); Hanson, 432 B.R. at 773. Accordingly, these courts have required the plaintiff to show that the debtor’s conduct proximately caused the plaintiffs loss, thus making proximate cause an additional requirement under section 523(a)(2)(A). See Heptacore, Inc. v. Luster (In re Luster), 50 Fed. Appx. 781, 784 (7th Cir.2002); Tomlinson, 1999 WL 294879, at *7; Microtech Int’l v. Horwitz (In re Horwitz), 100 B.R. 395, 397-398 (Bankr.N.D.Ill.1989) (Katz, J.).
In the Complaint, the Plaintiff alleges that the Debtor made false representations both affirmatively and by omission to induce the Plaintiff to provide financing for construction labor and materials (the TIB mechanics lien) on the Property. Specifically, the Plaintiff alleges: (a) that the Debtor lied and then failed to disclose that the deed to the Property did not include the Plaintiff as a co-owner before obtaining construction services from TIB to rehab the Property; (b) that the Debtor never intended to add the Plaintiff to the Property deed; and (c) that the Debtor’s misrepresentations induced TIB to perform construction services on the Property.
The Plaintiff contends that the Debtor intended to deceive and defraud him and argues that he would not have incurred responsibility for construction services or incurred other obligations with respect to the Property but for the Debtor’s misrepresentation.
In the Plaintiffs Proposed Findings of Fact and Conclusions of Law [Adv. Dkt. No. 74], he asks the court to find that the Debtor promised to file and record a quit claim deed, but the Plaintiff offered no proof of this fact at the Trial, other than the Plaintiffs own, self-serving testimony. On cross-examination, the Plaintiff testified that he moved several businesses to the Property and that he and the Debtor proceeded as though they were joint owners.8 Tr. 170-71, Sept. 23, 2015. The Plaintiff also testified that he had seen a deed in writing transferring half ownership to him, Tr. 179, Sept. 23, 2015, but the *861Plaintiff did not produce any evidence' of the documentation. The Plaintiff did assert that if’ the Debtor was not going to add the Plaintiff to the Property’s deed as co-owner, TIB would not have performed construction services and the Plaintiff would not have incurred obligations regarding the Property. Tr. 180-81, Sept. 23, 2015.
While the Plaintiff argued that TIB would not have performed the construction services if the Debtor had not deceived him regarding the Plaintiffs ownership status, Tr. 221, Sept. 23, 2015, Bailey testified only that while she preferred to have things in black and white, the Plaintiff had assured her that the Debtor was trustworthy. Tr. 119, Sept. 22, 2015. She did not testify that the-Debtor told her that the Plaintiff was a co-owner, and she did not allege that she would not -have provided the construction services if the Plaintiff was in fact not a co-owner. See Tr. 119, Sept. 22,2015.
At the Trial, the Debtor denied that he made any promises regarding the deed and payment on TIB’s services. Tr. 188-201, Sept. 22, 2015. Further, despite the Plaintiff’s allegations, on direct examination, the Debtor testified that in a previous real estate project the Plaintiff joined him as a co-owner on the Property, but nothing was reduced to writing. Tr. 40-41, Sept. 22, 2015. , This gives the appearance that the Plaintiff was consistently lax in his dealings, at least so far as they concerned the Debtor.
The Plaintiff also failed to provide any proof that the Debtor made any misrepresentations directly to TIB. As the debt was incurred between the Debtor and TIB, even if the Plaintiff had proven that the Debtor made misrepresentations to him, in order to find the debts dischargeable, the Plaintiff would have had to show how those misrepresentations caused TIB to justifiably rely. As noted above, Bailey’s testimony was not sufficient to prove such reliance.
Nor are the Plaintiff’s" allegations regarding the Debtor’s post-judgment conduct prevailing. While it is true that the court fines may be considered debts that arose later in time and thus might independently be shown to have triggered section 523(a)(2)(A), the Plaintiff has failed to make any showing that the conduct by which the Debtor was sanctioned was the result of any misrepresentation or false pretensés. The Complaint alleges only that the Debtor was sanctioned for refusing to follow the agreed orders.'
The court has considered each of the foregoing allegations in light of the facts adduced at the Trial' and determihed by the State Court, and concludes that the Plaintiff has not established that the Debt- or made, with knowledge of his falsity or reckless disregard for the truth, misrepresentations or omissions of fact related to á fraudulent scheme. The court further concludes that whatever misrepresentations or omissions of fact may have been made were not shown to have induced TIB Services to provide construction services and labor. The court concludes that TIB did not justifiably rely on those misrepresentations or omissions of fact, and that the resulting debts do not satisfy this element of the tests under section 523(a)(2)(A).
b. Actual Fraud
A different analysis is used when a creditor alleges actual fraud. In order to except a debt fi*om discharge on the basis of actual fraud, a creditor must establish that: (1) a fraud occurred; (2) the debtor intended to defraud; and (3) the fraud created the debt that is the subject of the discharge dispute’. Jahelka, 442 B.R. at 669; see also Ryan, 408 B.R. at 157; Scarpello, 272 B.R. at 701; Jairath, 259 B.R. 308, 314. The fraud excep*862tion to thg. dischargeability -of debts ,in bankruptcy does not reach constructive frauds, only actual ones. McClellan v. Cantrell, 217 F.3d 890, 894 (7th Cir.2000); see also Ryan, 408 B.R. at 157. In addition, “broken promises to pay are just that, broken promises and not fraud.” Stelmokas v. Sinkuniene (In re Sinkuniene), Adv. No. 10ap01418, 2012 WL 4471583, at *10 (Bankr.N.D.Ill. Sept. 27, 2012) (Barnes, J.). However, if the promising party never had an intention to perform, it could constitute fraud. See Sullivan v. Glenn (In re Glenn), 502 B.R. 516, 540 (Bankr.N.D.Ill.2013) (Barnes, J.) (citing Chriswell v. Alomari (In re Alomari), 486 B.R. 904, 912 (Bankr.N.D.Ill.2013) (Schmetterer, J)).
, Unlike false pretenses and false representations, “actual fraud” does not require proof of a misrepresentation or reliance. McClellan, 217 F.3d at 892; see also Jahelka, 442 B.R. at 669; Hanson, 432 B.R. at 771. While there is no definite rule defining fraud,, “it includes, all surprise, trick, cunning, dissembling, and any unfair .way by which another is cheated.” McClellan, 217 F.3d at 893 (internal quotations omitted).,
While the Plaintiff does not make out a clear case for fraud in the Complaint, it was clearly his goal to do so. This puts the court in an awkward position.' While the law is clear that the court should attempt to look through the pleading deficiencies of a pro se plaintiff,9 the law is equally clear that pleading fraud is subject to a higher standard than pleading in general. Fed.R,Civ.P. 9(b) (made applicable by Fed. R. Bankr.P. 7009); Ashcroft v. Iqbal, 556 U.S. 662, 686, 129, S.Ct. 1937, 173 L.Ed.2d 868 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 576, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In this case,, because the issue of intent, as with misrepresentation and false pretenses, has not been satisfied, it does no harm to accept that it was the Plaintiff’s goal to set forth a case for fraud. Presuming, therefore, that the first and third elements of fraud set forth above have been satisfied, the court turns directly to the issue of intent.
c. Intent
As noted above, much of this matter turns on the issue of intent. Scienter, or intent to deceive, is a required element under section 523(a)(2)(A) whether the claim is for a false representation, false pretenses, or: actual fraud. Mayer, 51 F.3d at 673; Pearson v. Howard (In re Howard), 339 B.R. 913, 919 (Bankr.N.D.Ill.2006) (Schwartz, J.).
Intent to deceive is measured by the debtor’s subjective intention at the time of the representations or other purportedly fraudulent conduct. See Scarpello, 272 B.R. at 700; see also CFG Wireforms v. Monroe (In re Monroe), 304 B.R. 349, 356 (Bankr.N.D.Ill.2004) (Schmetterer, J.). Subsequent acts of fraud or omissions do not demonstrate that the debtor had the requisite intent at the time the representations* were made. Standard Bank & Trust Co. v. Iaquinta (In re Iaquinta), 95 B.R. 576, 578 (Bankr.N.D.Ill.1989) (Squires, J.).
An intent to deceive may be established through direct evidence or inference. Monroe, 304 B.R. at 356 (citing In re Sheridan, 57 F.3d 627 (7th Cir. *8631995)). Because direct.proof of fraudulent intent is often unavailable, fraudulent intent “may be determined from the totality of the circumstances of a case and may b.q inferred when the facts and circumstances present a picture of deceptive conduct on the debtor’s part.” Cent. Credit Union of Ill. v. Logan (In re Logan), 327 B.R. 907, 911 (Bankr.N.D.Ill.2005) (Cox, J.) (internal quotations omitted); see also Hanson, 432 B.R. at 773. Thus, “[wjhere a person knowingly or Recklessly makes false .representations which., the person knows or should know will-induce another to act, the finder of fact may logically infer an intent to deceive.” Glenn, 502 B.R. at 532 (citing Jairath, 259 B.R. at 315).
As discussed in detail earlier, the crux of this Adversary is whether the Debtor made such misrepresentations or omissions with the intent to deceive the Plaintiff or TIB. The Plaintiff contendsthat the Debtor had the intent' to defraud him and TIB. The court concludes that he has failed to prove this.
The circumstances surrounding the Plaintiff and the Debtor’s business dealings suggest that the men often acted as partners in business ventures, but not necessarily with equal ownership in writing, and no indicia of the Debtor’s intent to defraud the Plaintiff. The Debtor never admitted to telling the Plaintiff that he would make any filings regarding each having half ownership of the Property, and the Plaintiff did not produce evidence sufficient to call the Debtor’s credibility into question on their relationship, past practices, or the interactions giving rise to the debts at issue here. The Debtor’s testimony makes clear that the Plaintiff and the Debtor often conducted business wherein both would be treated as co-owners, despite a lack of understanding in- writing.
At the Trial, the Plaintiff argued in his opening statement that he was led to believe that he was. a half owner of the Property and that as. a result he “extended or caused to be extended a substantial amount of money, time and material.” Tr. 29,. Sept. 22; 2015,, The Plaintiff did not reference . TIB directly,, nor did he allege that TIB was fraudulently induced to act. It .was. only on cross-examination that the Plaintiff alleged that TIB would not have performed construction services but for the Debtor’s deception regarding the Plaintiffs ownership status. Tr. 221, Sept. 23,2015. .
■ 1 On direct examinátion, the Debtor’s testimony did not suggest that he and the Plaintiff had worked together on the Property any differently than on previous projects, making any intent t,o deceive seem unlikely. The Debtor also testified that he and the Plaintiff had not .reduced a previous property development project to writing, Tr. 41, Sept. 22, 2015, and further that the. Debtor had told the. Plaintiff that he was.the sole owner of the Property, Tr. 44, Sept. ,22,'2015. The . Debtor also stated that he wasn’t sure if he had told the Plaintiff that he would add him to the land trust through which the Debtor owned the Property. Tr.- 62, Sept. 22, 2015. On cross-examination, the Plaintiff alleged that he saw a. deed produced by the Debt- or on which the Plaintiff was listed as .co-owner, but the Plaintiff provided no other evidence to that effect. Tr, 179, Sept. 23, 2015.
Moreover, the ;Plaintiff did not make a clear link between any promises from the Debtor and subsequent action on the part of TIB beyond stating on cross-examination that neither he nor his wife would have put up funds unless the Plaintiff’s role as co-owner was clear.. Tr. 181, Sept. 23, 2015. Bailey only testified that the Plaintiff assured her of the Debtor’s trustworthiness, not that the Debtor had an intent to deceive her. : Tr., 119, Sept, 22, *8642015. Bailey did not testify as to whether the Debtor directly made any misrepresentations to her, suggesting she relied on the Plaintiffs assurances, and not on any of the Debtor’s assurances. If anything, it appears the Plaintiff induced' Bailey to perform. The Plaintiff did not demonstrate that the Debtor had the intent to deceive TIB. Furthermore, the Plaintiff did not produce sufficient evidence - to call the Debtor’s credibility into 1 question. The court finds no direct evidence or indicia of the Debtor’s alleged intent to deceive and that, therefore, the,Plaintiff has.failed to prove this element. .
It appears that the Plaintiff in this' matter understood • what was necessary to plead his case under section 523 for fraud, but he simply failed to prove the elements: For the foregoing reasons, the court finds that the Plaintiff has not established by a preponderance of the evidence that the Debtor knowingly made false representations or omissions which he knew or should have known would induce TIB to provide construction services on the Property, and the Plaintiffs debt is dischargeable.
CONCLUSION
As noted above and for the foregoing reasons, the Plaintiff has not proven his cause of action under section 523(a)(2)(A). Accordingly, judgment will be entered in favor of the Debtor on all Counts of the Complaint.
A separate Order will be issued concurrent with this Memorandum Decision.
ORDER
This matter comes before the court on the Second Amended Adversary Complaint Objecting to the Discharge -of Debt Owed to the Plaintiff (the “Complaint”) to determine dischargeability of debt under sections 523(a)(2)(A) of title 11 of the United States Code filed by Hassan A. Muhammad (the “ Plaintiff) against debtor Joseph W. Sneed (the “Debtor”) [Docket No. 32] in' the above-captioned adversary; the court having jurisdiction over the subject matter; all necessary parties appearing at trial that took place on September 22, 2015 and September 23, 2015 (the “Trial”); the court having considered the testimony and the evidence presented by all parties and the arguments of all parties in their filings and at the Trial; and in accordance with the Memorandum-Decision of the court in this matter issued concurrently herewith Wherein thé court found “that the Plaintiff has not proven his cause of action;
' NOW, THEREFORE, TT IS HEREBY ORDERED:
(1) That judgment is entered in favor of the Debtor on all Counts of the Complaint; and . .
(2) That the debt owed by the Debtor at issue in the ■ Complaint is dischargeable.
. There is some confusion over exactly what those counts are, which is discussed in more detail below.
. Docket 73 as filed by the Debtor in actuality contained several additional items. Following the proposed findings of fact was the Debtor’s proposed Conclusions of taw; attached as an exhibit was the Debtor’s Closing Statement Following Trial.
. One thing the Motion to Dismiss did not do, surprisingly, is assert the grounds asserted by the defendant in another of the Plaintiff's nondischargeability adversaries. See Muhammad v. Reed, 532 B.R. 82, 89-92 (Bankr.N.D.Ill.2015) (Barnes, J.). In Reed, the Defendant asked the court to dismiss the cause of action on grounds that the Plaintiff inappropriately took assignment of the debt in. that case to litigate pro se on behalf of an entity that could not proceed on its own. The court noted that the Seventh Circuit has ruled that public policy forbids "assignment of claims to a pro se litigant, solely for the purpose of litigating____” Id. at 89. While the court held that the defendant in Reed failed to adduce sufficient evidence to succeed with this theory on the assignment specifically at issue therein, the defendant did successfully link the Plaintiff to multiple" entities, including those at issue in the present case'. Id. at 91-92. Despite the court’s published ruling in Reed, the Debtor did not seek relief on these grounds in this matter, and this court will not therefore sua sponte act in this regard.
. 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. Adjudicative facts may also be found and determined later in this Memorandum Decision.
. Muhammad v. Sneed and Sneed, No. 12 L 66076 (Ill.Cir.Ct. Sept. 24, 2013) (the Fraud Litigation)..
. Mother’s Touch Home Health, Inc. v. Park Nat’l Bank, Trust # OP13394, Joseph Sneed as Trust Beneficiary, and Unknown Agents, No. 12CH42455 (Ill.Cir.Ct. Nov. 5, 2013) (the Ejectment Litigation).
. At the Trial, the Plaintiff testified on cross-examination that $37,219.00 was the correct debt amount and that the amount he was claiming of $36,736.26 accounted for partial payments already made to him by the Debtor. Tr. 158, Sept. 23, 2015.
. The Plaintiff rested his presentation without addressing these issues, which were only directly addressed on cross-examination.
. "Allegations of a pro se complaint are held ’to less stringent standards than formal pleadings drafted by lawyers ... ’ Accordingly, pro se complaints are liberally construed.” Alvarado v. Litscher, 267 F.3d 648, 651 (7th Cir.2001) (quoting Haines v. Kerner, 404 U.S. 519, 520, 92 S.Ct. 594, 30 L.Ed.2d 652 (1972) (per curiam)); see also Wilson v. Civil Town of Clayton, Ind., 839 F.2d 375, 378 (7th Cir.1988). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499036/ | MEMORANDUM OPINION ON DEFENDANT’S MOTION TO DISMISS PURSUANT TO FED. R. CIV. 12(B)(6)
Jack B. Schmetterer, United States Bankruptcy Judge.
This adversary proceeding arises out of and relates to the chapter 13 case of Faye T. Pantazelos (The ‘Debtor* or-the ‘Plaintiff). Debtor’s Amended Complaint seeks recovery of compensation paid to Defendant on account of legal services rendered prior to the filing of the instant bankruptcy proceeding pursuant to sections 547, 550, 542 and 329 of the Bankruptcy Code. Before the Court for ruling is the motion of J. Kevin Benjamin, Theresa Benjamin, and Benjamin Brand LLP (collectively, the ‘Defendants*) to dismiss Debtor’s Amended Complaint for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) and for failure to state a claim for relief pursuant to Rule 12(b)(6). Fed. R. Civ. P. 12(b)(1) and (b)(6) (made applicable by Fed. R. Bankr. P. 7012).
For the reasons states below, Defendant’s Motion to Dismiss will be denied by separate order.
I. BACKGROUND
A. Procedural History
On April 12, 2015, the Debtor filed the instant adversary proceeding against the Defendant (Dkt. # 1). The Amended Complaint was filed on May 21, 2015 (Dkt. # 5). Defendant filed a Motion to Extend .time to Answer on June 11, 2015 (Dkt. # 7) which was granted on June 29, 2015 (Dkt. # 13). The Defendant filed its Motion to Dismiss on July 28, 2015 (Dkt. # Í4). A scheduling order was entered by this Court on July 28, 2015, setting a response date of August 18, 2015 and a reply date of September 15, 2015 (Dkt. # 17). The Defendant filed a late reply on September 16, 2015 (Dkt. # 20). On September 21, -2015, this Court entered an order striking the September 16th Reply Brief (Dkt. # 20). Defendant filed- a Motion to Extend time to file its reply on November 10, 2015 (Dkt. # 32) which was granted on November 13, 2015. Defendant’s Reply was' filed on November 13, 2015 (Dkt. #36).
*869B. Facts Alleged in the Complaint
The Prior Bankruptcy Cases:
The Plaintiff alleges as follows; Debtor employed the Defendant as her bankruptcy counsel for a prior case filed under chapter 13, No. 13-BK-29200, filed before this Court on July 22, 2013 (“Case 1”). Case 1 was dismissed on November 5,' 2014. Before dismissal, on July 22, 2013, Defendant filed a Disclosure of Compensation with this Court indicating that he had been paid $423.00 in fees for services to be rendered in the case. After dismissal of Case 1 for failure to make plan payments, the Defendant filed a Notice of Motion on Application for Attorney Fees and an Amended Application for Compensation for Representation Chapter 13 Debtor(s) before this Court on November 13, 2015 seeking compensation of $14,870.20. The November 13, 2015 Application was not granted, as Case 1 was already dismissed and no funds were held by the Trustee to be the source of the requested payment.
Debtor again employed the, Defendant as her bankruptcy counsel in a chapter 11 proceeding, No. 13-BK-01419, filed before this Court on January 15, 2013 (“Case 2”).1 Also on January 15th in Case 2, Defendant filed a Disclosure of Compensation with the Court indicating that he had been paid $6,000.00 in fees for services, to be rendered in that case. .
The Debtor/Plaintiff filed the instant chapter 13 bankruptcy petition on March 13, 2015 with new counsel. Debtor’s former bankruptcy counsel and his law firm are the Defendants in this adversary proceeding. Debtor’s Amended Complaint seeks from the Defendants recovery pursuant to sections 547, 550, 542 and 329 of the Bankruptcy Code for funds paid to the Defendants relating to Case 1 and Case 2.
Count 1: Avoidance and Recovery of Preference: 11 U.S.C. § 547(b), § 550(a):
Count 1 pleads that; on December 16, 2014, the Debtor/Plaintiff paid the Defendant $14,000,00. December 16, 2014 is within 90 days of the instant bankruptcy filing. The $14,000.00 check was on account of legal services rendered or to be rendered in Case 1, and thus was payment on an antecedent debt. The Debtor/Plaintiff made’ the payment while insolvent and it enabled the Defendánt to receive more than it would have received under the Bankruptcy Code.
Count 2: Recovery of Money Owed to the Estate, 11. U.S.C. § 542(b):
After the dismissal of Case 1, Defendant told the Debtor to’ pay him $4,000.00 in order to- cure the default cited by the Trustee in his motion to dismiss that case. Debtor obtained a cashier’s check for $4,000.00 on November 24, 2014 made out to Defendant. The payment was made on account of a false representation -constituting fraud by the Defendant. Defendant falsely represented to Defendant that payment of the $4,000.00 would cure the default in Case 1. Defendant knew the case had already been dismissed but made the statement knowing that the Debtor would rely on the statement and issue the payment, which the Debtor did. Thus, the Defendant obtained the payment from the Debtor without legal justification and therefore converted the funds for-his own benefit.
Count 3: Debtor’s Transactions with At-, torneys:
Defendant received $6,000.00 in advance of Case 2. No motion to employ was en*870tered or fee application granted'in’Case 2. Defendant retained the funds which allegedly exceed-the value of the services provided by the Defendant to the Debtor.
II. APPLICABLE STANDARDS
The Defendant asserts two bases for dismissal with prejudice. First, that this Court lack subject matter jurisdiction under FRCP 12(b)(1) because the Plaintiff lacks standing to bring the suit and that the ruling in Stern v. Marshall divests this Court of jurisdiction. Second, the Defendant argues that the- Plaintiff has failed to state a claim for relief pursuant to Rule 12(b)(6).
Specifically, the Motion to Dismiss seeks dismissal for .the following reasons:
1. Dismissal of all Counts pursuant to FRCP 12(b)(1) for lack of standing: Count I: ¶ 4-11; Count II: ¶27~ 28;2
2. -Dismissal of Count I pursuant to-the . holding- in Stern v. Marshall ¶ 12-17; and
3. Dismissal- pursuant to FRCP 12(b)(6) for failure to state a claim for relief: Count I: ¶ 18-26; Count ' IR ¶ 29-30; Count III: ¶ 33-34. ■
A. Standards on Rule 12(b)(1) ■ Motion to Dismiss
A motion to dismiss under Rule 12(b)(1) challenges the court’s subject matter jurisdiction. Settlers’ Hous. Serv. v. Schaumburg Bank & Trust Co. (In re Settlers’ Hous. Serv.), 540 B.R. 624, 630 (Bankr.N.D.Ill.2015) (Schmetterer, J.). Whether or not a plaintiff has standing to bring a lawsuit is a jurisdictional requirement which may be challenged through a motion made pursuant to Rule 12(b)(1). Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443 (7th Cir.2009). When resisting a motion to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction, the plaintiff bears the burden of demonstrating that subject matter jurisdiction exists for his or her claims. Id. at 443; Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992).
“When considering a challenge to standing at the. pleading stage, the court must determine whether the challenge is a facial or factual challenge, or both.” Lee v. City of Chicago, 330 F.3d 456, 468 (7th Cir.2003); Apex, 572 F.3d at 443-45. A facial attack determines whether the “the plaintiff has sufficiently alleged a basis of.subject matter jurisdiction” while “a- factual challenge lies where: the ‘complaint, is formally sufficient but the contention is. that there is in fact no subject matter jurisdiction.’ ” Apex, 572 F.3d at 443-444 (citing United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946, (7th Cir.2003). If it is a facial attack, the court must take all well-pleaded facts as true and construe the pleadings and all reasonable inferences drawn from the pleadings in a light most favorable to the non-moving party. Commodity Trend Service, Inc. v. Commodity Futures Trading Com’s, 149 F.3d 679, 685 (7th Cir.1998). On the other hand, courts may look beyond the complaint when a defendant brings a factual attack against jurisdiction. Apex 572 F.3d at 444.
In- the instant case,. the Defendant does not challenge the veracity of the-facts alleged in the Amended Complaint. Instead, the Defendant’s .arguments, are facial as he asserts that the Amended Complaint fails to - allege sufficient facts to support subject matter jurisdiction. Therefore, the Court must take all well-*871pleaded facts as true and construe the pleadings in. a light most favorable to the non-moving party, the Debtor.
B. Standards on Rule 12(b)(6) Motion to Dismiss
To survive a motion to dismiss under Rule 12(b)(6): “a pleading must'contain a ‘short and plain statement of the claim showing that the pleader is entitled to relief.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 677-78, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Fed. R. Civ. P. 8(a)(2)). “[A] complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ... A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id., at 678, 129 S.Ct. 1937 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). The issue is “whether it has pleaded a cause of action sufficient to entitle it to offer evidence in support of its claims.” Spiers Graff Spiers v. Menako (In re Spiers Graff Spiers), 190 B.R. 1001, 1006 (Bankr.N.D.Ill.1996) (Schmetterer, J.). “A pleading that offers ‘labels and conclusions’ or a ‘formulaic recitation of the elements of a cause of action will not do.’ ” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). However, “[sjpecific facts are not necessary; the 'statement need only ‘give the defendant fair notice of what the ... claim is and the grounds upon which it' rests.’ ” Erickson v. Pardus, 551 U.S. 89, 93, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007) (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955) (ellipsis in original). Dismissal with prejudice is only appropriate if it appears that no set of facts could entitle the plaintiff to relief: Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). The Court must consider both pleaded facts and reasonable inferences drawn from, pleaded facts in a light most favorable to Plaintiff when reviewing the Defendant’s motions to dismiss. Reger Dev., LLC v. Natl City Bank, 592 F.3d 759, 763 (7th Cir.2010).
III. DISCUSSION
A. Subject matter jurisdiction LIES TO HEAR AND ADJUDICATE THIS PROCEEDING.
: Because a lack of subject matter jurisdiction would preclude further consideration, Defendant’s jurisdictional challenge under Fed. R. Civ. P.- 12(b)(1) must be examined. First,-does the Court have jurisdiction to adjudicate the proceeding or is it precluded by the ruling in Stem v. Marshall? Second, does the Plaintiff have standing to bring her suit? Without standing, there would be no basis for subject-matter jurisdiction, thé claims cannot proceed and must be dismissed. Fed. R. Civ. P.-12(b)(1). ' ’ •
1. Stem does not require dismissal of Count I.
Bankruptcy courts ape courts of limited jurisdiction and derive their ability to hear and determine bankruptcy cases, matters and proceedings from the district courts. Section 1334 provides that ..“the district courts shall have original but not exclusive jurisdiction of; all civil proceedings, arising under .title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). While § 1334 sets forth1 jurisdiction of the. district. courts, 28'U.S.C. § 157(a) enables district courts to refer all such cases and proceedings, “to the1 bankruptcy judges for the district.” 28 U.S.C. § 157(a). Pursuant to Internal Operating Procedure 15(a) of the United States District-Court for the Northern District of Illinois,-such matters have 'been, referred to the bankruptcy-judges'of this District.
*872“The manner in which a bankruptcy judge may act” in a proceeding “depends on the type of proceeding involved.” Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 2603, 180 L.Ed.2d 475 (2015). A bankruptcy judge may enter a final judgment in any core proceeding arising under title 11 or arising in a case under title 11, 28 U.S.C. § 157(b)(1), as long as there is no “constitutional impediment.” Enesco Grp., Inc. v. Campanaro (In re Enesco Grp., Inc.), 2013 Bankr.LEXIS 3272, 2013 WL 4045756, at *6 n. 6 (Bankr.N.D.Ill. Aug. 8, 2013)(Goldgar, A.B.) (citing Stern, 131 S.Ct. at 2605). In a procfeeding “related to” a bankruptcy cáse, however, the judge can only propose findings of fact and conclusions of law to the district court. 28 U.S.C. § 157(c). The district court must then enter any final judgment. Id. The only exception is when the parties consent to the entry of judgment by the bankruptcy judge. 28 U.S.C. § 157(c)(2); see Wellness Int’l Network, Ltd. v. Sharif, —— U.S. -, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015).
The Defendant asks this Court to dismiss the Amended Complaint for lack of subject matter jurisdiction based on the United States Supreme Court’s decision in Stern v. Marshall, 131 S.Ct. 2594. In Stem, a creditor filed an unliquidated proof of claim and asserted a defamation claim in the bankruptcy case. The debtor thereafter filed a state daw counterclaim against the creditor fob tortious'interference. The bankruptcy judge- determined that the debtor’s counterclaim was a core proceeding and proceeded to award damages to the debtor. The Supreme Court held that while the bankruptcy court had the statutory authority to enter a final judgment on the debtor’s counterclaim, it lacked the constitutional authority to do so under Article III of the Constitution. Stern, 131 S.Ct. at 2608. Similarly, Stem held that the “state law counterclaim for tortious interference was independent of the federal bankruptcy daw and not necessarily resolvable by a:ruling on the creditor’s-proof of claim [for defamation] in bankruptcy.” Id. at 2611. The opinion explained that the debtor’s claim was “in no way derived from or dependent upon bankruptcy law.....Id. at 2618.
Here, the Defendant relies on Stem for its assertion that the bankruptcy court lacks subject matter jurisdiction to hear or determine the Debtor’s claims and thus the Amended Complaint, should be dismissed. Contrary to the Defendant’s broad reading of Stem, that decision does not implicate subject matter jurisdiction. Stem, reasoned that “[sjection 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. That allocation does not implicate questions of subject matter jurisdiction” Stern, 131 S.Ct. at 2607 (citation omitted). “Stem addresses the authority of bankruptcy courts to enter final judgment assuming that subject matter jurisdiction exists.” Levey v. Hanson’s Window & Constr., Inc. (In re Republic Windows & Doors, LLC), 460 B.R. 511, 515 (Bankr.N.D.Ill.2011) (Cox, J.).
Count I of the Amended Complaint is- a preference claim under section 547 of the Bankruptcy Code, which gives the complainant the right, to recover certain payments made shortly before this bankruptcy case Was filed. 11 U.S.C. § 547(a). Preference claims only exist as a matter of bankruptcy law and involve an express bankruptcy provision. Krol v. Key Bank N.A. (In re MCK Millennium Ctr. Parking, LLC), 532 B.R. 716, 719 (Bankr.N.D.Ill.2015) (Cox,. J.). In fact, the right of recovery under section 547 “promotes the ‘prime bankruptcy policy of equality of distribution among creditors’ ” and “by providing for the recapture of last-*873minute payments to creditors, the avoidance power reduces the incentive to rush to dismember a financially-unstable debt- or.” In re Smith, 966 F.2d 1527, 1535 (7th Cir.1992) (quoting H.R.Rep. No. 595, 95th Cong., 2d Sess. 177-78 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6137-39).
Since a.preference claim, “stems from the bankruptcy itself’ bankruptcy- courts have authority to hear and determine preference actions pursuant to the holding in Stem. Stern v. Marshall, 131 S.Ct. at 2618; see e.g., MCK Millennium Ctr. Parking, LLC, 532 B.R. at 719-20 (after Stern bankruptcy courts have constitutional authority to determine preference actions); Reid v. Presbitero (In re First Choice Drywall, Inc.), Bankr.No. 10-BK-10691, AP No. 12-A-00625, 2012 WL 4471570, at *2-3 (Bankr.N.D.Ill. September 25, 2012) (Schmetterer, J.) (same); KHI Liquidation Trust v. Wisenbaker Builder Servs., Inc. (In re Kimball Hill, Inc.), 480 B.R. 894, 905 (Bankr.N.D.Ill. 2012) (Barnes, T.) (same); Martino v. Miszkowicz (In re Miszkowicz), 513 B.R. 553, 556 (Bankr.N.D.Ill.2014) (Cox, J.) (same); Van Winkle v. 3Form, Inc. (In re Trainor Glass Co.), 2015 WL 224412, *2, 2015 Bankr.LEXIS 148, *5, 72 Collier Bankr.Cas.2d (MB) 1871 (Bankr.N.D.Ill. Jan. 14, 2015) (Doyle, C.) (same).
No language in Stem precludes jurisdiction in this case to hear or determine a preference suit even when a Defendant fails to' file a proof of claim. The Defendant’s quotation from Stem — “when the defendant in a preference lawsuit has ‘not filed a proof of claim, the trustee’s preference action [would] not become part of the claims-allowance process’” — is taken out of context and -is inapplicable. Dkt. # 14, ¶ 15 (internal quotation omitted). That section of the Stem opinion reasoned that when a creditor does file a proof of claim, it cannot then claim to be heard before an Article III Court. Stem, 131 S.Ct. at 2616. This is not the case here, and neither party -has argued that the claims in the Amended Complaint should be heard by an Article III tribunal.
Stem did not hold that if a proof of claim is not filed,-then there is no jurisdiction by the bankruptcy court to adjudicate a preference claim. It did not hold that if a cause of action fails to involve the claim allowance process and instead seeks to “augment the bankruptcy .estate” that the bankruptcy judge lacks jurisdiction. Instead, “[the] bankruptcy court may enter final orders on preference claims regardless of whether a proof of claim had been filed because, the proceeding ‘stems from the bankruptcy itself” and would thus otherwise not “exist[] without regard to any bankruptcy proceeding.” In re Kimball Hill, Inc., 480 B.R. at 904-905; Stern, 131 S.Ct. at 2618.
Defendant argues that the preferential transfer claim, although “core,” is a Stem claim, and thus this Court is powerless to even hear the matter. Dkt. # 14 ¶ 16 and 17. If an action is a Stem-claim, this Coúrt must submit proposed findings of fact and conclusions of law instead of rendering a final judgment on' the matter. Stern, 131 S.Ct. at 2608. Defendant argues that' if a claim is “core” but is also a Stem claim, that a bankruptcy court not only cannot issue a final determination on the matter, but cannot even hear the matter and submit proposed findings of fact and conclusions of law to the District Court-. Defendant mistakenly reasons that bankruptcy courts may only submit proposed findings of fact if the matter is non-core pursuant to 28 U.S.C. § 157(c)(1) because there is no statutory equivalent for core matters. Dkt. # 14 at ¶ 17. . This argument was expressly rejected by the Supreme Court in Executive Benefits Insurance. Agency v. Arkison, — U.S. -, *874134 S.Ct. 2165, 189 L.Ed.2d 83 (2014). In Executive Benefits, the Court explained that Defendant’s argument created a “gap” that “renders the bankruptcy court powerless.” Id, at 2173. Instead, the Court found that; “the statute permits Stem claims to proceed as non-core within the meaning of. § 157(c).” Id, The Court explained,
The -plain text of this severability provision clones the so-called ■ “gap” created by Stem claims. When a court identifies a claim- as a Stem claim, it has necessarily “held invalid” the “application” of § 157(b) — i.e., the “core” label and its attendant procedures — to the litigant’s claim. Note following § 151. In that circumstance, the statute 'instructs that “the remainder of th[e] Act ... is not affected thereby.” Ibid. That remainder includes § 157(c), which governs non-core proceedings. With the “core” category no longer available for the Stem claim at. issue, we look to § 157(c)(1). to determine whether the claim may be adjudicated as a non-core claim — specifically, whether it is “not a core proceeding” but is “otherwise related to a case under title 11.” If the claim .satisfies the criteria of § 157(c)(1), .the bankruptcy court simply treats the claims as non-core: The bankruptcy court should hear the proceeding and submit proposed. findings of fact and conclusions of law to the district court for de novo review and entry of judgment.
Id. Thus, even if the claims at issue in this case were Stem claims, this Bankruptcy Court would have authority to hear the proceeding' and dismissal- would be inappropriate: • However, in this case, the preference suit is core and Defendant has shown no constitutional impediment preventing this Court’s exercise of jurisdiction under Stem.
- The Defendant’s request to dismiss Count I pursuant to FRCP 12(b)(1) and Stem v. Marshall is therefore denied by separate order.
2. Plaintiff has standing to pursue her claims before this Bankmptcy Court.
Defendant argues that Plaintiff does not have standing to pursúe the claims in the Amended Complaint because (1) the claims have been waived because there is no provision in the unconfirmed chapter 13-plan providing for pursuit of the claims and (2) the claims are property of the bankruptcy estate and can only be brought by the chapter 13 trustee.
i. Debtor has standing to assert the claims.
Chapter 13 grants the debtor possession of the bankruptcy estate’s property. Cable v. Ivy Tech State College, 200 F.3d 467, 472 (7th Cir.1999). Section 541 defines property of the estate to include “all legal or equitable interests of the debt- or in property as- of the commencement of the case.” 11 U.S;C. § 541(a)(1). “[A]U legal or equitable interests” include “dioses in action and other legal claims that could be prosecuted for benefit of the estate.” Cable, 200 F.3d at 473 (citing In re Smith, 640 F.2d 888 (7th Cir.1981) (“[a]ll causes of action become property of the estate under section 541.”)).
■ Debtor listed two claims against the Defendant on Schedule B of her bankruptcy petition, filed March 13, 2015.. Dkt. # 1-3. Specifically, the claims are “for funds paid to his account for transmittal to trustee in prior Chapter 13” for $4,000- and a “preference claim” for $14,000. Dkt: #-1-3, .Pg. 12. Plaintiffs claims against. Defendant arose prior to the commencement of the bankruptcy proceedings and are potential “claims that can be prosecuted for the benefit of the estate;”-thus the claims al*875leged in the Amended Complaint are property of the bankruptcy estate.
A “[chapter 13] debtor has express authority to sue and be sued” on behalf of the bankruptcy estate. Cable, 200 F.3d at 472. Federal Rule of Bankruptcy Procedure .6009 provides that “the; trustee or debtor in possession may prosecute ... any pending action or proceeding by ... the debtor, or commence and prosecute any action or proceeding in behalf of the estate before any tribunal.” Fed. R¡ Bankr. P. 6009. Thus, a Chapter 13 debt- or retains possession of the bankruptcy estate’s property and has concurrent standing with the bankruptcy trustee to “pursue legal claims for the benefit of the estate and its creditors.” Rainey v. UPS, 466 Fed.Appx. 542, 544 (7th Cir.2012); see also Cable, 200 F.3d at 472. As long as the bankruptcy proceeding is pending, Plaintiff, as “a Chapter 13 debtor[,] can inform the. trustee of previously undisclosed legal claims, and unless the trustee elects to abandon that property, may litigate the claims on behalf of the estate and for the benefit of the creditors without court approval.” Rainey, 466 Fed.Appx. at 544. Because the Debtor/Plaintiff is permitted to pursue her claims on behalf of the bankruptcy estate as a debtor-in-possession, she has standing to pursue the' claims alleged in the Amended Complaint/
ii. There was no waiver of claims in Debtor’s unconfirmed chapter 13 plan.
The Debtor’s chapter 13 plan is not yet confirmed, and therefore its language does not have the same effect of a confirmed plan. Thus, Defendant’s reliance on Kimball Hill is misplaced. In re Kimball Hill, Inc., 449 B.R. 767 (Bankr.N.D.Ill.2011). Not only was Kimball Hall a chapter 11 case, whereas this is a chapter 13 case, but in that case the court was dealing with a confirmed plan. The instant case has hot proceeded to confirmation yet. In Kimball, the confirmed plan created a. Liquidation Trust to assert claims. In this case, we have a Debtor seeking to assert claims. Importantly, the express language of the confirmed plan in Kimball that created the Liquidation Trust also limited debtor’s ability to prosecute causes of action post confirmation. No such entity to prosecute on behalf of the Debtor Is contemplated in this case. The instant adversary proceeding may therefore be prosecuted by the debtor in possession.
The Defendants in Kimball also argued that section 1123(b)(3)(B) of the Code required that the chapter Í1 plan expressly provide for these causes of action. There is no chapter 13 corollary to § 1123(b)(3)(B), and it need not be decided if such requirements are imposed on a chapter 13 debtor or if so whether the claims on Schedule B would be sufficient, however, because the most recent plan filed by the Debtor on December 9, 2015 reads:
The Debtor is the plaintiff in an adversary proceeding entitled Pantazelos v. Benjamin et al., Adv. No. 15 A 00314, pending in this District. The Debtor will turn over to the Trustee all nonexempt proceeds of any recovery in this adversary proceeding. The one-time payment , of $18,000 in Section D is computed on the amount expected to be recovered in that adversary proceeding. If the recovery in that proceeding is more or less than the amount stated in Section D, the payment to the Trustee will be more or less, accordingly.
Dkt. # 104.3 Therefore the Debtor’s Plan reserves, to the extent a reservation would *876be necessary, causes of action against the Defendant.
B. Application of Rule 12(b)(6).
' Defendant argues that all counts should be dismissed for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). For the folio-wing reasons, the request shall be denied by separate order with respect to all counts.
1. Count I
Count I seeks to avoid a prebankruptcy transfer pursuant to § 547(b) and § 550. Section 547(b) provides a trustee may avoid any transfer on an interest in property of the debtor if the transfer meets four requirements. ' The transfer must be: (1) to or for the benefit of the creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made;' (3) made while the debtor was insolvent; and (4) .made within 90' days before the daté óf filing the petition. 11 U.S.C. § 547(b); In re Superior Toy & Mfg. Co., 78 F.3d 1169, 1171 (7th Cir.1996).
The Complaint alleges that- the transfer was (1) made for the- benefit of the Defendant (2) on account, of a debt owed by the Debtor to the Defendant from Case 1, (3) made while the Debtor was pursuing bankruptcy, indicting a lack of solvency; and (4) was made on December 16, 2014 which was within the 90 day period prior to the filing of the instant bankruptcy petition. Thus, the’Debtor has alleged the elements necessary fob a claim under § 547(b).
Defendants’ request to dismiss Count I pursuant 'to FRCP 12(b)(6) will therefore be denied.
2. Count II
Section 542(b) provides that: “[A]n entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debt- or.” 11 U.S.C. § 542(b). “[A]n action is properly characterized as one for turnover where the trustee or debtor in possession is seeking to obtain [debts] of or owned by the debtor, as opposed to seeking property owed to the debtor.” Borock v. Turner Constr. Co. (In re Sardo Corp.), 1996 WL 362756, *14, 1996 Bankr.LEXIS 766, *44 (Bankr.N.D.Ill. June 11, 1996) (Squires, J.) (finding that a- breach of contract action was not properly pled as a motion for turnover). “Implicit in the concept of turnovér is the idea that the property res itself being sought is clearly property of (or owned by) the debtor but is not in the debtor’s possession, but is in the possession of the defendant.” Id.
Turnover is not a method to determine the disputed rights of parties. Instead, turnover “is intended as a remedy to obtain what is acknowledged to be property of the bankruptcy estate.” Krol v. Crosby (In re Mason), 386 B.R. 715, 721 (Bankr.N.D.Ill.2008) (Squires, J.). Thus, a turnover action cannot be used as a tool to acquire property the debtor did not have a right to possess or use at the commencement of a case. Solow v. Am. Airlines, Inc. (In re Midway Airlines), 221 B.R. 411, 458 (Bankr.N.D.Ill.1998) (Squires, J.).
In this case, the Debtor “puts the cart before the horse.” DII Northwest *877LLC v. Carey (In re Nat’l Jockey Club), 451 B.R. 825, 830 (Bankr.N.D.Ill.2011) (Hollis, P.). Like in DII Northwest, the “simple allegation of wrongdoing by Defendant ... does not create a legally enforceable obligation of the type contemplated by § 542(a). There is a difference between property potentially owed to a debtor and property owned by the debtor.” Id. The Debtor has not alleged that the “debt” is clearly her property and is simply not in her possession. Instead, the Debtor alleges that the Defendant obtained the money improperly, alluding to possible fraud.
The Complaint does not explicitly seek relief under § 548 or any other fraud provisions. Debtor’s Response Brief argues more clearly that the Defendant defrauded the Debtor. Response, Dkt. # 19, Pg. 3. Generally, “arguments first made in the reply brief are waived.” TAS Distrib. Co., Inc. v. Cummins Engine Co., Inc., 491 F.3d 625, 630-31 (7th Cir.2007) (citation omitted). However, it may be that Debtor simply mischaracterized the nature of Count II in her Amended Complaint by labeling it a claim for turnover pursuant to § 542(b). “[U]nder Rule 8(a)(2) it is not necessary that the plaintiff set forth the legal theory on which he relies if he sets forth sufficient factual allegations to state a claim showing that he is entitled to any relief which the court may grant.” Rohler v. TRW, Inc., 576 F.2d 1260, 1264 (7th Cir.1978), Additionally, “[t]he complaint need not specify the correct legal theory nor point to the right statute to survive a Rule 12(b) motion to dismiss.” Whitehead v. AM Int'l, 860 F.Supp. 1280, 1286 (N.D.Ill.1994). But, “bare bones conclusory allegations” which “fail[] totally to allege the necessary elements of the alleged claims” will be insufficient.” Heller Fin., Inc. v. Midwhey Powder Co., 883 F.2d 1286, 1295 (7th Cir.1989).
Rule 9(b) requires that fraud be pleaded with particularity, in contrast to the more liberal requirements of notice pleading. Rule 9(b) requires that a complaint alleging misrepresentation, the commonest kind of fraud, set forth the identity of the persons making a misrepresentation; the time, place, and content of the misrepresentation; and the method by which the misrepresentation was communicated to the plaintiff. Bankers Trust Co. v. Old Republic Insurance Co., 959 F.2d 677, 683 (7th Cir.1992). Put differently, a plaintiff must allege the “who, what, when, where, and how: the first, paragraph of any newspaper story.” DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990). In this case, the facts taken in the light most favorable to the Debtor as Plaintiff, establish a plausible claim for common law fraud. Debtor alleges that the Defendant misrepresented to the Debtor that by making the $4,000.00 she would be able to cure Case 1 even though the Defendant knew that the Case 1 had already been dismissed. Debtor goes on to allege that Defendant intended for Debtor to rely and that Debtor did in fact rely.
Thus, even though Count II’s legal theory is mischaracterized, this Court is not “bound by the legal characterizations.” Republic Steel Corp. v. Pennsylvania Engineering Corp., 785 F.2d 174, 183 (7th Cir.Ill.1986). Therefore, Defendant’s Motion to Dismiss is denied with respect to Count II.
3. Count III
Count III seeks recovery of legal fees paid by the Debtor to the Defendant on account of Case II. Although not cited *878in the Complaint, it is clear that the Debt- or is seeking relief under 11 U.S.C. § 329 of the same name “Debtor’s Transactions with Attorneys.”4 Section 329(b) requires that an attorney return compensation that “exceeds the reasonable value of services” rendered even if there, was an agreement otherwise. 11 U.S.C. § 329(b). Debtor alleges that Case II was--filed on'January 15, 2013 and was dismissed on May 2, 2013. The Debtor alleges that -no motion to employ or fee application was granted by the Court in Case 2. The Defendant providés no supporting argument or reason as to why this section of the Complaint fails under FRCP 12(b)(6).
The-Complaint pleads that the Debtor did make a payment to the Defendant for the Defendant’s services as attor: ney. The Compíaint also alleges-that Case 2 was terminated in less than four months. Thus, these "facts taken- in-the light most favorable to the Debtor as Plaintiff, establish a' plausible claim for relief under § 329(b).
Defendants’ request to dismiss Count III pursuant to FRCP 12(b)(6) will therefore be denied. i ■
CONCLUSION
For the aforementioned reasons, the Motion to.Dismiss will be denied by separate order with respect to all counts.
. Court docket, the United States Trustee's Motion to Dismiss, filed April 18, 2013, alleged that the Debtor failed to file timely monthly operating reports and failed to timely obtain counsel. Dkt. # 47. The Motion was granted on May 21, 2013. Dkt. # 56.
. For Count III, no argument is made, although Heading G reads: “Count III of the Complaint Should be Dismissed Because the Plaintiff has No Standing to Bring Non-Disclosed Claims Against the Defendants.”
. The Debtor’s November 17, 2015 (Dkt. # 92) proposed plan also provides for the *876prosecution of the claims against the' Defendant. The proposed plans filed on March 27, 2015 (Dkt. # 16) and -August 7, .2015 (Dkt. # 69) did' not provide for the prosecution of such claims.
. Debtor also references Section 329 in her Response. Response, Diet. # 19, Pg, 3. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499037/ | OPINION
Mary P. Gorman, United States Chief Bankruptcy Judge’
' ’ The issue before the Court is whether a real estate mortgage obtained by an unlicensed lender is valid and enforceable under Illinois law. The Trustee has filed a complaint to avoid a mortgage held by JPMorgan Chase on the Debtor’s residence, claiming that the original lender and mortgagee was unlicensed and therefore the mortgage is void. JPMorgan Chase has responded, by filing a motion to dismiss asserting that under controlling Illinois law, even if the original lender was unlicensed, the mortgage remains valid and. enforceable. Recause JPMorgan is correct and current Illinois law specifically provides that violations of the licensing statute do not result in mortgages obtained by unlicensed lenders being void, the motion to dismiss will be granted.
*881I. Factual and Procedural Background
Robert Jordan filed his voluntary petition under Chapter 7 on February 5, 2015. On his Schedule A — Real Property, he disclosed ownership of a residence on Wall Street in Moweaqua, Illinois. On his Schedule D — Creditors Holding Secured Claims, he listed Chase Mortgage as holding a mortgage on the Wall Street property.
JPMorgan Chase Bank (“JPMorgan”) filed a motion for relief from stay claiming to be the holder of the mortgage on Mr. Jordan’s residence. Attached to the motion were copies of a note and mortgage, both dated October 7, 2011, and identifying the original lender as MONEYWORK$. Also attached to the motion were assignments of the mortgage from MONEY-WORK$ to the State Bank of Lincoln and from the State Bank of Lincoln to JPMorgan. After all parties in interest were given notice and an opportunity to be heard and no objection to the motion was filed, an order was entered on June 8, 2015, granting JPMorgan its requested relief.
On July 7, 2015, Jeffrey D. Richardson, the Chapter 7 Trustee (“Trustee”), filed his adversary complaint against JPMorgan asserting that the original lender, referred to in his complaint as MoneyWorks, was a sole proprietorship owned by an individual, Teresa K. Christman. He claimed that Ms. Christman was not licensed as a mortgage lender in Illinois when the loan to Mr. Jordan was made and that, due to that licensing violation, the mortgage obtained through the transaction was void.
JPMorgan filed its motion to dismiss asserting that Ms. Christman was properly licensed at the time of the transaction and that even if she was not, mortgages granted to unlicensed lenders in Illinois are not invalid. The motion to 'dismiss has been fully briefed and is ready for' decision.
II. Jurisdiction
This Court has jurisdiction over the issues before it .pursuant to'28 U.S.C. § 1334. All bankruptcy cases an'd proceedings filed' in the Central District of Illinois have been referred to the bankruptcy judges. CDIL-LR 4.1; 28 U.S.C. § 157(a). Actions to determine the validity, extent, or priority of liens are core proceedings. 28 U.S.C. § 157(b)(2)(K).
The cause of action at issue here arises solely under Illinois law and not under title 11. The action does not specifically “arise in” this case because the Trustee will only prevail if he can establish that the Debtor had a valid cause of action under Illinois law to void his mortgage at the time he filed this case. In bringing this action, the Trustee is stepping into the Debtor’s shoes rather than relying on his so-called strong-arm powers or his status as bona fide purchaser for value. 11 U.S.C. § 544(a). The matter is clearly related to the case as the resolution of the issues presented will impact the administration of the case and determine whether a distribution will be available for unsecured creditors. But “related to” jurisdiction is generally reserved for non-core matters. 28 U.S.C. § 157(c)(1). Here, the proceedings are core, and the existence of subject matter jurisdiction is not at issue. Rather, a question arises as to whether this Court has the constitutional authority to. enter a final order in the case. See Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011).
Bankruptcy courts have exclusive in rem jurisdiction over property of the estate. 28 U.S.C. § 1334(e). An avoidanee action may be undertaken to recover estate' property and, when the avoidance action is against a creditor who has filed a claim in the case, the bankruptcy court has *882constitutional, authority to. enter a final order resolving the dispute. See Peterson v. Somers Dublin Ltd., 729 F.3d 741, 747 (7th Cir.2013). Here, however, JPMorgan has not filed a claim. And the full scope of what is or is not a Stem claim that a bankruptcy court lacks constitutional authority to fully and finally adjudicate has not been precisely defined. Thus, this Court is concerned that because of the unique nature of the avoidance action presented here, the cause of action resembles the type of state-law contract claim that has been held to be outside of a bankruptcy court’s constitutional authority to finally adjudicate. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989).
The fix for questions - regarding the constitutional authority of a bankruptcy court-to adjudicate a. pending matter is consent by both parties. Wellness Int’l Network, Ltd. v. Sharif, - U.S. -, 135 S.Ct. 1932, 1944-45, 191 L.Ed.2d 911 (2015). Consent to the-entry of a final order where constitutional authority is not present or is questionable must be knowing and voluntary but need not be express; consent may be implied. Id. at 1948. Here, the Court finds that both the Trustee and JPMorgan have impliedly consented to this Court’s entry of a final order. The Trustee filed his complaint raising no questions regarding the Court’s constitutional authority to enter the final order he requested in the complaint. Likewise, JPMorgan’s • motion to dismiss asks . the Court to enter a final order of dismissal. A final order will be entered básed on the implied consent of both parties.
III. Legal Analysis
. JPMorgan’s motion to dismiss asserts that the Trustee : has not stated a claim upon which relief can be granted and, therefore, the complaint should be dismissed. Fed.R.Civ.P. 12(b)(6); Fed. R. Bankr.P. 7012. In order to withstand a motion to dismiss, a complaint must allege enoügh facts to plausibly suggest a claim for relief. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A complaint must provide a defendant with fair notice of the claim being made and the grounds 'for the relief requested. Id. at 555, 127 S.Ct. 1955. And a complaint should plausibly suggest that the plaintiff has a right to relief by providing allegations that raise the right to relief above the ’ speculative level. E.E.O.C. v. Concentra Health Services, Inc., 496 F.3d 773, 776 (7th Cir.2007). If a complaint includes only labels and conclusions or formulaic recitations of the elements of a cause of action, it is insufficient and may be dismissed. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). But regardless of the quantity of facts - alleged, the cause of action that is being asserted must actually exist under applicable law. Where the alleged cause of action is not recognized, a complaint is- properly dismissed. Teamsters Local Union No. 705 v. Burlington Northern Santa Fe, LLC, 741 F.3d 819, 826 (7th Cir.2014); Neil v. Kovitz Shirfrin Nesbit, 2014 WL 4897315, at *4 (N.D.Ill. Sept. 27, 2014); Guarantee Trust Life Ins. v. Insurers Administrative Corp., 2010 WL 3834026, at *3 (N.D.Ill. Sept. 24, 2010).
In his complaint, the Trustee identified his cause of action as being brought under the Illinois Residential Mortgage License Act (“RMLA”). 205 ILCS 635/1-1. The RMLA provides in part that “[n]o person, partnership, association, corporation or other entity-shall engage in the business of brokering, funding, originating, servicing or purchasing residential mortgage loans without first - obtaining a license^]” 205 ILCS 635/l-3(a). In creating the RMLA, *883the Illinois legislature found that licensing of mortgage .lenders was necessary “for the protection of the citizens” of Illinois and to create stability in the Illinois economy. 205 ILCS 635/1-2. Enforcement of the RMLA is generally undertaken by the Secretary of Financial and Professional Regulation with assistance from the Attorney General, and the failure to comply with the licensing requirements of the RMLA may result in an injunction compelling compliance and the imposition of fines in amounts up to $25,000. 205 ILCS 635/1-3(a),(c),(e). Although the original RMLA was silent as to the existence of a private" right of action to enforce the licensing requirements, on July 23, 2015, the RMLA was amended to provide:
A mortgage loan brokered, funded, originated, serviced, or-purchased by a party who. is not licensed under, this Section shall not be held to be invalid solely on the basis of a violation under this Section. The changes made to this Section, by this amendatory Act of the 99th General Assembly are declarative of existing law.
205 ILCS 635/1 — 3(e); 2015 Ill. Legis. Serv. P.A. 99-113 (H.B. 2814).
The amendment to the RMLA appears to have been prompted by a 2014 decision by the Appellate Court, of Illinois that held that a mortgage made by an unlicensed lender “is void as against public policy.”1 First Mortgage Co., LLC v. Dina, 2014 IL App (2d) 130567, ¶ 21, 381 Ill.Dec. 712, 11 N.E.3d 343, 348 (2014), appeal denied 20 N.E.3d 1253, 386 Ill.Dec. 475 (2014). The Trustee relied on the holding in Dina when he filed his complaint several weeks before .the RMLA was amended. He claims that, notwithstanding the statutory amendment that purports to negate the effect of the Dina holding, he is entitled to rely on Dina because it was the controlling law when his complaint was filed. JPMor-. gan says that the Trustee cannot state a cause of action relying on Dina because the July 2015 amendment clarified that no private right of action ever existed to remedy licensing violations. And in any event, JPMorgan says that Ms. Christman was properly licensed and that the proof she was licensed is so obvious that the dispute can be decided through a motion to dismiss. "
When considering a motion to dismiss under Rule 12(b)(6), a court must review the complaint in the light most favorable to the plaintiff, and well-pleaded facts must be accepted as true. Williams v. Ramos, 71 F.3d 1246, 1250 (7th Cir.1995); Fed.R.Civ.P. 12(b)(6). Generally, factual disputes cannot be resolved through ,a motion to dismiss because a court’s consideration is limited to matters set forth in the pleadings. But judicial notice of historical documents, documents contained in the public record, and reports of administrative bodies may be proper when deciding a motion to dismiss. Menominee Indian Tribe of Wisconsin v. Thompson, 161 F.3d 449, 456 (7th Cir.1998).
Here, JPMorgan asks the Court to take judicial notice of a printout from the website of the Illinois Department of Financial & Professional Regulation (“IDFPR”) la*884beled “Licensee Search.” The document refers to the entity “Moneyworks” and identifies the contact person as “Teresa K: Christman d/b/a/ MONEYWORK$.” The document shows the issue date for the license in question as March 6, 2000, and the expiration date as December 31, 2013. JPMorgan claims that the printout provides unassailable evidence that Ms. Christman was a licensed mortgage lender from 2000 until 2013.
The Trustee has countered JPMorgan’s assertions' about Ms. Christman’s license by pointing out that the IDFPR ’printout makes no representation that Ms. Christ-man was continuously licensed throughout the period in question. He also suggests that information from the website of the Nationwide Mortgage Licensing System (“NMLS”) provides more details about particular licenses and notes that the IDFPR website contains a link to the NMLS website with the suggestion that it be consulted for additional information. The Trustee attached to his response to the motion to dismiss a copy of a printout from the NMLS website showing the same license number and beginning and ending dates for Ms. Christman’s license as shown on the IDFPR websité. Bút the NMLS printout also shows periods of time when Ms. Christman’s license was not active and she was not authorized to conduct business. According to the NMLS document, Ms. Christman was not an authorized mortgage lender during the period of June 7, 2011, through February 13, 2012. As the mortgage at issue here was signed on October 7, 2011, the NMLS printout raises a serious question of fact as to whether Ms. Christman was licensed at the time of the mortgage transaction with Mr. Jordan.
In its reply brief, JPMorgan does not respond to the Trustee’s allegations regarding the additional information from the NMLS website and apparently concedes that a factual dispute exists about Ms. Christman’s license that cannot be resolved simply by reviewing the IDFPR’s website. Thus, for purposes of the motion to dismiss, this Court must consider the well-pleaded facts of the Trustee’s complaint as true. In considering the matter before it, this Court must assume that Ms. Christman was not a licensed mortgage lender on October , 7, 2011, when she obtained the mortgage from Mr. Jordan now held by JPMorgan.
JPMorgan argues that even if Ms. Christman was not properly licensed when she obtained the mortgage from Mr. Jordan, the remedy for the licensing violation is not avoidance of the mortgage. Thus, JPMorgan says that the Trustee cannot state a cause of action to avoid the mortgage and the case must be dismissed. Relying on Dina, the Trustee disagrees and argues that the amendment to the RMLA is not applicable here.
In deciding issues of state law, a federal court should follow the decisions of the highest court of the state and, in the absence of such authority, should predict how the highest court would rule and decide the case in the same way. Mind-Games, Inc. v. Western Publishing Co., Inc., 218 F.3d 652, 655-56 (7th Cir.2000). In making the prediction of how the highest court would rule, bankruptcy courts may consider “ ‘all relevant data’ including ‘state appellate decisions, ...' state supreme court dicta, restatements of law, law review commentaries, and the majority rule among other states.’ ” Drown v. Perfect (In re Giaimo), 440 B.R. 761, 769 (6th Cir. BAP 2010). But when an appellate court has ruled directly on the issue, that decision should control the prediction un*885less there are “persuasive indications” that the supreme -court would “decide the issue differently.” Allen v. Transamerica Ins. Co., 128 F.3d 462, 466 (7th Cir.1997).
Dina was a case of first impression in Illinois and the Illinois Supreme Court denied the defendant’s request for leave to appeal. Dina, 20 N.E.3d at 1253. Although one might assume that the denial of the request for leave to appeal was a signal of the Illinois Supreme Court’s approval of the lower court decision, the Illinois Supreme Court has made clear that such denials “carry no connotation of approval or disapproval of the appellate court action, and signify only that four members of this court, for reasons satisfactory to them, have not voted to grant leave.” People v. Vance, 76 Ill.2d 171, 183, 390 N.E.2d 867, 872, 28 Ill.Dec. 508 (1979).
There are no other Illinois Supreme Court or appellate court cases that are on point to the issue raised here. In the absence of any Illinois case law other than Dina addressing the issue of the validity of a mortgage obtained by an unlicensed lender, this Court would be inclined to allow the Dina holding to control the prediction of how the Illinois Supreme Court would rule on the issue. See In re Nothdurft, 521 B.R. 640, 643 (Bankr.C.D.Ill.2014) (sole Illinois appellate court decision on point controls prediction notwithstanding .criticism of the decision by several bankruptcy courts). But the absence of Illinois .case law contrary to Dina is not enough to control the prediction under the circumstances presented here. The Illinois legislature ■ amended the RMLA to abrogate the Dina holding.- Determining the applicability of the amendment to these proceedings impacts the outcome here.
The Trustee asserts that, because Mr. Jordan filed his bankruptcy in February 2015 and the Trustee filed his complaint against JPMorgan several weeks before the amendment was passed, the amendment does not apply in this case. The Trustee claims that he had a vested right in his cause of action against JPMorgan before the amendment became effective that cannot be divested retroactively by the amendment. JPMorgan argues to the contrary that, because the amendment clarified existing law, it applies here, and the amendment supports a finding that the Trustee does not have — and never did have — a cause of action to avoid , its mortgage on Mr. Jordan’s property. Both parties agree that the key to resolving their dispute is determining whether the amendment changed the 'law or: simply clarified existing law. And again, ‘the analysis requires predicting hów the Illinois'Supreme Court would rule on the issue. ’ '■
Generally, under Illinois law; an amendment to a statute is presumed to have' been intended to change the law. People v. Parker, 123 Ill.2d 204, 211, 526 N.E.2d 135, 138, 121 Ill.Dec. 941 (1988). But the presumption is rebutted when the circumstances indicate that the legislature intended to interpret or clarify existing law rather than substantively change it. Id. In .determining the intent, of the legislature, courts should consider whether the legislature declared its-intent to clarify rather than change existing law, whether-a conflict or ambiguity regarding the law existed at the time of the'amendment, and whether the amendment is “consistent with a reasonable interpretation of the pri- or enactment and its -legislative history.” K. Miller Const. Co., Inc. v. McGinnis, 238 Ill.2d 284, 299, 938 N.E.2d 471, 481, 345 Ill.Dec. 32 (2010) (citing Middletown v. *886City of Chicago, 578 F.3d 655, 663-64 (7th Cir.2009)).
The first K. Miller factor clearly weighs in favor of JPMorgan here because the amendment contains an express statement that it is “declarative of existing law.” 205 ILCS 635/l-3(e). The second factor'also supports JPMorgan’s position. The legislature decided shortly 1 after the Illinois Supreme Court denied the request for leave to appeal that the Dina holding conflicted ' with the original intent of the RMLA. The legislature acted promptly to resolve that conflict and, in doing so, avoided the potential of a split of authority arising among the appellate courts.
The final, factor also supports JPMorr gan. The;.original statute contains specific provisions for the enforcement of the licensing requirements and vests the authority to enforce the law in the Secretary of Financial and Professional Regulation. 205 ILCS 635/1-3. No mention is made in the statute of a, private right of action to enforce the licensing requirements. Likewise, the remedies for violation of the licensing requirements are specifically set forth and include fines payable to the State and injunctive relief. Id. No mention is made of any private remedies such as the avoidance of mortgages obtained by unlicensed lenders.
When the original RMLA was called for a final vote-in the Senate, the'‘sponsoring Senator’stated:’ “We are not attempting to put anyone out of business really, this is an oversight Act. In terms of the specificity of the provisions, it does give the savings and loan commissioner the right to investigate.” 85th 111. Gen. Assem., Senate Proceedings, June 29, 1987, at 179-80, (statement of Senator Keats on SB 1297), http:// ilga.gov/Senate/transcripts/Strans85/ST 062987.pdf (last visited Jan. 7, 2016). This legislative history squares with the decía-, ration - in the- 2015 amendment to the RMLA that existing law does not provide that mortgages granted to unlicensed lenders are invalid solely on the basis of a violation of,the RMLA. All relevant factors suggest that the 2015 amendmeht to the RMLA did not change the law in existence' at the time but rather clarified what that law was. ■ ■
The Illinois Supreme Court has liberally applied the factors used in determining whether a statutory amendment clarifies or changes a law. In K. Miller, the Court- reviewed an amendment to the Home Repair and Remodeling Act (“Act”) that removed a provision stating that it was “unlawful” to begin work on a remodeling project costing more than $1000 before signing a written contract and added a provision stating that remedies for violations of the Act were to be sought under the" Consumer Fraud and Deceptive Business Practices Act. K. Miller, 238 Ill.2d at 298, 345 Ill.Dec. 32, 938 N.E:2d at 481. Although it found that the legislature had “entirely rewritten” the relevant provisions' of the Act, the Illinois Supreme Court nevertheless held that the statutory amendments were a “clarification of the prior statute and must be accepted as a legislative declaration of the meaning of the original Act.” Id. at 481-82, 345 111. Dec. 32, 938 N.E.2d 471, 481. The July.-2015 amendment to the RMLA was much more limited than the amendments- at issue in K. Miller. Based on the analysis in K. Miller, this Court must predict that the Illinois" Supreme Court would find the 2015 amendment to the RMLA was a clarification of existing law that must be applied in this case to determine that the Trustee cannot .state a cause of action against JPMorgan relying on the Dina holding.
*887In. support of his position, the .Trustee relies heavily on Gifford State Bank v. Richardson (In re Crane), 487 B.R. 906 (C.D.Ill.2013), aff'd 742 F.3d 702 (7th Cir.2013). The Trustee claims that Crane holds that a Chapter. 7 trustee’s rights in estate property vest upon .the commencement of a case and cannot be changed by amendments to state law. But the Trusted misstates Crane’s holding. In Crane, the District Court reviewed an amendment to the Illinois Conveyances Act that had taken effect after the bankruptcy court had ruled in favor of the Trustee but before the District Court Had ruled on an appeal of the bankruptcy court order. Id. at 915.' The Crane court actually held that while a trustee’s rights generally cannot be modified after they have vested,the amendment to the Conveyances Act “clarifies, rather than alters” the statute and therefore the amendment was “persuasive authority” that reinforced that District Court’s decision to reverse the bankruptcy court. Id. The District'Court found that the amendment was applicable to the appeal even though it had become effective after the bankruptcy court had entered the order it was reviewing. Crane provides no support for the Trustee’s arguments here.
The Trustee has attempted to state a cause of action in his complaint alleging that, because the original lender who obtained the mortgage now held by JPMorgan was unlicensed, the mortgage obtained was void. But that cause of action does not exist under Illinois law, 2Q5 ILCS 635/l-3(e). The 2015 amendment to the RMLA clarified rather than-changed the law in that regard, and.this Court predicts that the Illinois Supreme Court would agree. The motion to dismiss of JPMorgan must be granted.
IV. Conclusion
When the Trustee -filed his ' complaint against JPMorgan, he had'every reasoñ to believe that he -was alleging a valid and legally recognized cause of action. But the RMLA was, at the timé, the'subject of an amendment pending before the Illinois legislature.' When the amendment passed and became effective during the pendency of this case, it clarified that mortgages obtained by unlicensed lenders are hot void solely because of the licensing violation. This, clarification undercut the Trustee’s position and rendered his cause of action invalid. The Illinois Supreme Court has liberally allowed and ■ recognized the authority .of the legislature to make clarifying amendments to .statutes and, because the cause ,of, action- at issue here is based solely on, Illinois law, this Court must decide this qase based on Illinois precedent.
.Thér'é is no cause of action in Illinois to void a mortgage solely on the- basis that the lender was unlicenséd at the time of the transaction. JPMorgan’s motion to dismiss will be granted.
. This, Opinion is to serve as Findings of Fact and Conclusions, of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
. There is little legislative history available regarding the amendment; the amendment moved through the legislative process without debate or objection. But it is a fair to say that the Dina decision prompted the amendment. The amendment’s sole provision clarifies that mortgages made by unlicensed lenders are not void, and that provision directly abrogates the Dina holding. Further, the amendment was initially filed for legislative consideration in February 2015, just five months after the Illinois Supreme Court denied a request for leave to appeal the Dina decision. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499038/ | ORDER GRANTING DEFENDANTS’ MOTIONS FOR DISMISSAL
GREGORY F. KISHEL, CHIEF ■ UNITED STATES BANKRUPTCY JUDGE
This adversary proceeding came before the court for hearing on two separate motions for dismissal. One movant was Defendant DZ Bank AG Deutsche Zentral-Genossenschaftsbank,- Frankfurt am Main (“DZ Bank”). It appeared by its attorney, H. Peter Haveles, Jr., Kaye Scholer LLP. The remaining named Defendants (collectively, “the Opportunity Finance defendants”) made the other motion. They appeared by their attorney, Joseph G. Petrosinelli, Williams & Connolly LLP. The Plaintiff (“the Trustee”) appeared by his attorneys, Richard T. Thomson, Stephen J. Creasey, and Amy L. Schwartz, Lapp, Libra, Thomson, Stoebner & Puseh. This decision is based on the written submissions for both motions, the Trustee’s Second Amended Complaint, and the arguments of counsel.
*890INTRODUCTION
This adversary proceeding is another outgrowth of the largest bankruptcy cases ever commenced in the District of Minnesota — those of Petters Company, Inc. (“PCI”) and certain of its affiliates, BKY 08-45257, and the related group of cases in which the Polaroid Corporation was the lead debtor, BKY 08-46617. The precipitant of the bankruptcy filings was the failure of massive criminal activity perpetrated by Thomas J. Petters. through PCI. Measured by aggregate, losses, it was the largest case of financial fraud in Minnesota history. It appears to have been the third largest Ponzi scheme in United States, history. ...
Before late September, 2008, Tom Petters was a prominent presence in- entrepreneurial circles in Minnesota. After starting in the 1980s as a direct retailer of overstock and surplus merchandise, he built a sizeable corporate edifice under the umbrella of PCI and another holding company, Petters Group Worldwide, LLC (“PGW”). Through PCI, Tom Petters held himself out as an intermediary for the sale and acquisition of merchandise inventory directly between retailers, outside customary producer-retailer channels. In retail-trade circles, this sort of activity'is called “diverting.” After Tom Petters was arrested in early October, 2008, it emerged that the great majority of PCI’s activity was “diverting” of a different sort — a sham, an elaborate Ponzi scheme. Over a period of years, more than 200 parties were involved in lending to PCI that was ostensibly to finance inventory transactions. Post-collapse investigation revealed that such funding was actually used to repay earlier lenders to PCI.
Federal criminal charges were brought against Tom Petters. In connection with them, a receiver was appointed to secure and marshal his assets. Soon after that, the receiver put PCI and a group of its affiliated entities into bankruptcy under Chapter 11. The Trustee’ in the PCI-related cases is engaged in a massive “clawback” litigation effort to remediate the brunt of the scheme’s failure on the lender-investors left unsatisfied at the end.1
Apart from his activity through PCI, Tom Petters had acquired interests in independent, established business operations of veiy different profiles; Sun Country Airlines (acquired in full October, 2006); the mail-order retailer Fingerhut Direct Marketing, n/k/a Bluestem Brands (significant equity acquired 2004/2007); and, here, the Polaroid Corporation (acquired in full April, 2005).2 PCI’s faltering and failure had a rapid cascade-effect for the Polaroid Corporation and its affiliates.3 Bankruptcy filings for the Polaroid Corporation and a group of its affiliates followed, within two months.4
*891As pleaded, however, this adversary proceeding comes out of the prehistory of all that. It is based on acts and events, that happened before Tom Petters acquired the, Polaroid Corporation’s actual structure.
The Trustee’s suit is premised on a discrete chain of business and lending transactions. He describes them in the complaint as follows.5 Before April, 2005, Tom Petters transacted with the, Polaroid enterprise as it was operated under previous ownership. He used .a company in.his personal enterprise structure for these dealings. The Polaroid Corporation of that time was his contractual counterparty. Through these transactions Tom Petters procured and distributed new consumer goods, under license of the Polaroid brand and marks. To put it directly: the transactions at issue in this adversary proceeding involved the generalized banner of the Polaroid" name; but, at the time of the transactions at issue Tom Petters was contracting. with the Polaroid enterprise,from the outside.6 The Opportunity Finance defendants were involved in those transactions, as lenders that provided the funding to Tom Petters for the acquisition, branding, and disposition -of the 'goods. DZ Bank, as a senior secured, lender to the Opportunity Finance defendants, provided those parties the funding for their lending to the Petters enterprise.
In his initial pleading, the Trustee postured this adversary proceeding similarly to the'“clawback” litigation pending in the PCI cases.7 The Trustee cites 11 U.S.C. § 544(b) as his statutory empowerment to sue' for avoidance.8 He relies on the fraudulent-transfer law of Minnesota for the substantive governance.9 For these cases, the applicable statute is the' Minnesota enactment of the Uniform Fraudulent Transfer Act, MinmS tat. §§ 513.41 — 513.51 (2014) (“MUFTA”).10 His complaint bla*892zons many of the saíne factual theories, legal concepts, and arguments to justify this suit; it-fe'atures much the same'wording1 in its text.---';The effort is obvious: to evoke a strong resonance with the essence of “clawback” — a complex of legal remedies advanced to relieve end-victims from1 the patent inequity left after the failure of a Ponzi scheme.11
However — as will be seen — there are marked differences between the theory and basis of suit for the PCI docket, and, the pleaded factual basis and legal substance of this adversary proceeding. This is a product of the historical boundary line that lies at Tom Petters’s acquisition of the Polaroid enterprise in 2005, when he ceased to be a contractual counterparty with the enterprises’s previous owner and himself took the ownership of the Polaroid enterprise that ended up in bankruptcy.
At this point, the most crucial difference lies at the bottom of the legal framework for avoidance litigation in bankruptcy: the named plaintiffs standing as trustee to bring suit on the subject transfers, and whether his chosen remedy even applies to those- transfers. For a motion for' dismissal, that issue presents the biggest defect in the Trustee’s fact-pleading — transplanted as it was from litigation that featured similar legal claims but different fact-pleading. Were that defect somehow remedied, there is another large gap in the facts he pleads for the relief he seeks'. That one stems from a development in precedential case law that occurred after this matter was sued out.
THE PARTIES; THEIR POSTURE IN RELATION TO THE CLAIMS IN SUIT
The Trustee is the statutory steward of the bankruptcy estates of the Polaroid debtors, the corporate entities that are in bankruptcy in these cases.12 See 11 U.S.C. §§ 701, 702(d), and 704. He was appointed as such after the Polaroid debtors’ cases were converted for liquidation under Chapter 7 in late August, 2009.13 For his avoidance claims in this adversary proceeding, however, he tries to assume a status derivative of a different company named Petters Consumer Brands, LLC (“PettersCB”), or a company descended from PettersCB.
PettersCB was the entity in Tom Petters’s personal enterprise structure that did business in consumer electronic goods bearing the Polaroid brand name, before Tom Petters acquired the whole Polaroid enterprise in April, 2005.14 Second *893Amended Complaint, ¶36 (“During the time in question, [PettersCB] was in the business of buying consumer electronics to which [it] would affix the ‘Polaroid’ brand name and sell to retailers like Best Buy.”). Through this adversary proceeding, the Trustee invokes MUFTA to avoid payments of money made to one or more of the Opportunity Finance defendants from 2003 through 2005, on financing they provided for transactions to which PettersCB was a contractual party. Second Amended Complaint, ¶ 40. He also sues Defendant Opportunity Finance, LLC (individually, “OppFinLLC”) in separate .counts under common-law theories (breach of contract and fraud). Somewhat confusingly, he classifies the relief he requests under those counts by using the same wording as under the statutory counts — the avoidance of transfers.
The Trustee identifies two multi-membered groupings within the defendants he sues. The first consists of four - natural persons — all members of the Sabes family — plus Sabes Minnesota Limited Partnership, a family partnership formed by them. • (His collective nomenclature for these defendants, “the Sabes Family Defendants,” will be used for consistency.) The second consists of three artificial entities — OppFinLLC, Opportunity Finance Securitization, LLC, and Opportunity Finance Securitization II, LLC (collectively, “Opportunity Finance Entity-Defendants”). Three of the Sabes Family Defendants are alleged to have been connected variously to the' Opportunity Finánce Entity-Defendants, as “a founder” (Robert W. Sabes); the operator “on a day-to-day basis” (Jon R. Sabes); and “a principal” (Steven Sabes). Second Amended Complaint, ¶¶ 9,11,12.
The Trustee names OppFinLLC as the specific defendant-entity that , extended money or credit, via loans, to enable PettersCB to acquire consumer electronic goods for resale. Second Amended Complaint, ¶¶ 40-41, 43-45. It is alleged that OppFinLLC required PettersCB to create a separate entity, Petters Consumer Brands Funding, LLC (“PettersCB Funding”). PettersCB Funding was to serve as a “bankruptcy remote vehicle” for these financing transactions. Second Amended Complaint, ¶46.15 The Trustee asserts that both sides of participant in this “bankruptcy remote” arrangement failed to comply with the structural separation and operating requirements of their agreements. In the Trustee’ estimation, “[a]t most,' [PettersCB] Funding was a. mere conduit through which money was -transferred,” Second Amended Complaint, ¶¶ 49t-51, Thus, as the Trustee would have it, the arrangement may not be given “bankruptcy remote” effect now, as a potential shelter from avoidance. ■ -
OppFinLLC “or other Defendants” are identified as the recipients of payment on *894the debt associated with these financing arrangements, liable, as such for the purposes of avoidance. The total of such payments is stated as more than $251,000,000.00, including more than $3,298,000.00 in “interest on the loans.” Second Amended Complaint, ¶ 45. These payments are characterized as the fraudulent transfers that the Trustee would avoid. Second Amended, Complaint, ¶¶ 90, 96,102,109. .
In two other counts, OppFinLLC is also identified as the recipient of a payment of $349,000.00 from PettersCB in April, 2005. The Trustee alleges that those parties denominated this as the satisfaction of a prepayment penalty; ■ but he maintains that OppFinLLC had no entitlement to receive it under law or the terms of any promissory., note. Second Amended. Complaint, ¶¶52-54. The Trustee seeks to recovers corresponding sum under the theories of breach of contract and fraud. Second Amended Complaint, ¶¶ 111-113, 116-123.
The Opportunity Finance Entity-Defendants and the Sabes Family Defendants are identified generally as “initial transferees of’ all identified transfers by PettersCB, or “the persons for whose benefit” the transfers “were made, or immediate or mediate transferees of the' initial transferee.” Second Amended Complaint, ■ ¶ 89. The Second Amended Complaint is virtually devoid of any other fact-pleading on the involvement of the Sabes Family Defendants as participants or recipients.
A third constituency within the defense side, DZ Bank is sued on the terse allegation that it “provided funding to one or more of the Opportunity Finance [Entity-] Defendants,” Second Amended Complaint, ¶ 14, “to fund loans or other investments in one of Tom Petters’ [sic] entities,” Second Amended Complaint, ¶ 31.c. In their motions, the Opportunity Finance defendants and DZ Bank acknowledge this role. Notice of Motion to Dismiss the Second Amended Complaint of DZ Bank AG [Dkt. No. 48], 7-8; Notice of Bearing and Motion to Dismiss Second Amended Complaint of Opportunity Finance [Dkt. No. 49], 4-5.- They assign the title of “senior secured lender” to DZ Bank for its participation in the lending that ultimately went to PettersCB or for its benefit. The Trustee alleges that DZ Bank “withdrew from providing [all] financing” to Tom Petters after it was “unable to obtain adequate assurances from Petters and his entities regarding the existence of the goods which were the collateral for the ... transactions.” Second Amended Complaint, ¶ 31.c.16
The Trustee does not plead anything else as to DZ Bank’s involvement in the events sued-on. His theory of liability for DZ Bank appears to lie solely in his global reference to “Defendants” in his pleading on the liability of all defendants “in addition to” OppFinLLC. By that, the Trustee seems to assert that DZ Bank was a “personf ]■ for whose benefit all or part” of PettersCB’s transfers were made, or an “initial transfereeE ] or immediate or mediate transferees of’ OppFinLLC. Hence, the Trustee would háve DZ Bank subject to judgment in avoidance of all transfers held to have been fraudulent in their making, and equally liable for the full amount of judgment. . Second Amended Complaint, ¶¶ 80-83. In a very few words, this pleading hedges all over the place on this part of the Trustee’s case, in multiple permutations — -either DZ Bank was a direct *895recipient from the transferor and hence directly liable on any fraudulent transfer; or it is liable as a subsequent transferee. That about covers the range under 11 U.S.C. §§ 550(a)(l)-(2).17
MOTIONS AT BAR
1. Dismissal, as Originally Sought
In lieu of filing answers, the Opportunity Finance defendants and DZ Bank made motions for dismissal under Fed.R.Civ.P. 12(b)(6), as incorporated by Fed. R. Bankr.P. 7012(b). They structured their motions on the now-familiar argument sprung from the Supreme Court’s decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009): the Trustee has failed to plead facts sufficient to make out a plausible case for avoidance of the payments they received in 2003-2005 on the loans originally advanced for the transactions in Polaroid-branded merchandise. 1
In the main, the movants assert their “bankruptcy remote” structure as a bulwark against avoidance. As they would have it, the Trustee failed to recognize the actual transferor to OppFinLLC, which was PettersCB Funding. .Thus, they argue, he has no pleaded claim against any named defendant because PettersCB Funding was an. entity distinct from any of the Debtors, and one that had no creditors at all other than OppFinLLC or its affiliates. Thus, they maintain, the Trastee fails to adequately plead as to either actual or constructive fraud under MUFTA: PettersCB Funding had no - other creditors to actually defraud or to furnish standing under § 544(b), and there is no pleading at all on PettersCB Funding’s insolvency, further, they argue, the ■ payments on which the Trustee sues v/ere repayments of secured debt incurred under their “bankruptcy remote” structure; and as they would, have it, such payments were not transfers actionable under MUFTA at all, or they furnished reasonably equivalent value by -the abatement of antecedent and secured debt. Much of the factual predicate for these arguments does not appear within the four corners of the Trustee’s complaint — the content of which is supposed to be the sole focus of a motion under Rule 12(b)(6). To dodge around this, the movants use easelaw-derived ploys to expand the record for consideration of dismissal.
2. Governing Legal Authority
The Eighth Circuit has applied Twombly and Iqbal many times since their issuance. Under-its rulings, however, there is no change to the- long-recognized, threshold approach to reviewing a complaint’s allegations for their substantive sufficiency under Rule 12(b)(6):
When evaluating a motion to dismiss, we accept as true all factual allegations in the complaint and draw all reasonable inferences in favor of the nonmoving party, ...
McDonough v. Anoka County, 799 F.3d 931, 945 (8th Cir.2015) (citing Richter v. *896Advance Auto Parts, Inc., 686 F.3d 847, 850 (8th Cir.2012) (per curiam)). As before, in determining whether a complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its- face,’ ” the court is to reject “[tjhreadbare recitals of the elements of a cause of action, supported by-mere conclusory statements,” and “legal conclusions couched as factual allegations.” Id. (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 and Papasan v. Attain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986) (interior quotes omitted)).
As noted in McDonough, facial plausibility is present when a complaint’s “factual content ... allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” 799 F.3d at 945 (citing Iqbal, 556 U.S. at 678, 129 S.Ct. 1937). Determining this is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679, 129 S.Ct. 1937. This does not saddle a plaintiff with a “probability requirement at the pleading- stage.” Twombly, 550 U.S. at 556, 127 S.Ct. 1955. But nonetheless, the pleaded facts must-“affirmatively and plausibly suggest that [the plaintiff] has the right [it] claims,” against the defendant it has named and sued. Stalley y. Catholic Health Initiatives, 509 F.3d 517, 521 (8th Cir.2007) (citing Twombly, 550 U.S. at 554-557, 127 S.Ct. 1955).
3. Dismissal, as Actually Warranted
As the defense originally briefed the motions 'at bar, the attack on the Trustee’s pleading was quite involved. Then, the issue billowed out to a massive cumber, through the Trustee’s written response and the oral argument.
Much of that can be cleared out of the way, however. The defense challenges the adequacy of the Trustee’s pleading in two fundamental ways. - Neither defense presentation gets it quite right as to either of those aspects; but in theme and thrust they set out the track. In the end, the Trustee’s theory of suit is fatally flawed. Under the facts pleaded, he does not have a right of recovery in avoidance against any of the Defendants, in his capacity in these cases.
After that, it does not appear that the Trustee can remedy the deficiencies by alternate fact-pleading. The Trustee had the onus to plead a plausible case in the first instance, and indisputable aspects of his pleading deprive him, of that. These fundamental points of historical occurrence and sequence are conclusive, and they cut against any right to relief in favor of the bankruptcy estates. The Trustee cannot deny them now, for a repleading. Thus, granting leave to 'essay an amendment would be futile; these fundaments present an insuperable bar to relief under the only law that the Trustee cites as authority for avoidance.18 This' adversary - proceeding must be dismissed, in -its entirety and right now.
*897ANALYSIS
I. The Trustee’s Standing to Seek the Avoidance of Transfers Made by PettersCB, a Non-Debtor Entity (Counts I — IV)
A. The Issue — As Framed by the Parties, as Reidentified by the Court
Under the turmoil of the parties’ massed arguments there is a threshold issue with the Trustee’s pleading: his standing to sue these defendants under his pleaded theory of suit.
The use of that word is a little misleading, since there is the independent, constitutionally-founded requirement of standing under Article III to bring suit in the federal courts.19 Here, a different standing requirement is statutorily-based and specific to the law of bankruptcy. The question that jumps out from the Trustee’s pleading is: how does this plaintiff-trustee, as the steward of the bankruptcy estates of specific corporate entities, have standing to sue for the avoidance of the transfers that he identifies in his pleading — payments of money made by or out -of a corporate entity (PettersCB or PettersCB Funding) that was not itself among the companies that were eventually put into bankruptcy to commence the cases in which this adversary proceeding was brought? The Trustee’s fact-pleading featured almost nothing toward that issue.
The Opportunity. Finance defendants drove at something like this, when they challenged the Trustee by arguing a theory premised on the presence of PettersCB Funding as a “bankruptcy remote vehicle” in the chain of transactional participants. But neither grouping of defendant-movants challenged the Trustee’s standing at the lower level where it seemed to arise— at an asserted participant-nexus through PettersCB, as the ostensible originator of the value transferred that now was to be recovered and as the designated entity that wpuld have .conveyed that value in a fraudulent transfer.20
This point was raised w sponte from the bench at oral argument. The Trustee’s counsel had to scramble -to respond, and the response was hone too clear. With that'little input, this issue of standing was left hanging. Nonetheless, there is enough before the court to enable a treatment. Not the least, this is because the Trustee’s pleading on this most basic level is. so deficient, there is not much to say for it — and He could not replead: in .the alternative without unjustifiably contradicting the original.
*898This issue springs from the very fundament of the, liquidation process in bankruptcy. The bankruptcy estate is a creation solely of statute, 11 U.S.C. § 541. Its steward, the trustee, is likewise empowered solely by statute. Generally speaking, trustees under Chapter 7 have the power to garner money and property into the estate for administration front two different sources in law. In re Ozark Rest. Equip. Co., Inc., 816 F.2d 1222, 1224-1226 (8th Cir.1987). The first is not relevant at this point.21 The second is the recovery via statutory avoidance pursuant to Chapter 5 of the Bankruptcy Code, of assets transferred from the debtor’s possession, ownership, or' right, voluntarily or involuntarily, before the bankruptcy filing. Such transfers must be of the sorts specified in the avoidance statutes. E.g., In re Ozark Rest. Equip. Co., Inc., 816 F.2d at 1226 and 1229 (discussing “strong arm” avoidance empowered under 11 U.S.C. § 544(a)(1) and separate avoidance provision of 11 U.S.C. § 544(b)).22
The Trustee here asserts that 11 U.S.C. § 544(b) empowers him to avoid the payment-transfers he identifies in his complaint. He, however, is the steward of the estates of the Polaroid-related entities that are in bankruptcy in the underlying cases. That circumstance goes to the key point— which is that a trustee’s empowerment under § 544(b) to avoid transfers must derive from the right of a specific creditor of the debtor that is in' bdnkmptc# in the case from which a particular avoidance proceeding is sued. In re Petters Co., Inc., 495 B.R. at 895 (citing In re Marlar, 267 F.3d at 753). Such a predicate creditor must have held an unsecured claim cognizable in that debtor’s bankruptcy case as of the relevant date — that is, as of the time of that debtor’s bankruptcy filing. In re Petters Co., Inc., 494 B.R. at 441.
Under bankruptcy law, a claim is a “right to payment.” 11 U.S.C. § 101(5). To confer standing on a trustee under § 544(b), the claim'must have a requisite solidity; it must be allowable as conceived by bankruptcy law — i.e., it must entitle its holder to receive distribution from the bankruptcy estate. In re Petters Co., Inc., 495 B.R. at 895 (citing In re Wintz Cos., 230 B.R. 848, 859 (8th Cir. BAP 1999)). At minimum, allowability rests on a pre-petition legal enforceability “against the debt- or and property of the debtor.” T1 U.S.C. § 502(b)(1) (providing for disallowance of a claim that is “unenforceable against the debtor and property of the debtor”). And it goes without saying that “the debtor” against which a claim is to be enforceable for allowance, is perforce the debtor, individual or corporate, that is in bankruptcy through the underlying case. Thus,
to exercise her § 544(b)(1) avoidance power, the trustee must show that the transfer is voidable under state law by at least one unsecured creditor of the bankruptcy estate with an allowable claim..
In re Marlar, 267 F.3d at 753.23
The Trustee filed his Second Amended Complaint in the wake of these various *899rulings. He seemed to take special pains over the directive in the Second Memorandum in the PCI litigation, that a trustee suing under § 544(b) had .to “identify by name,” one creditor or more “whose standing he uses to sue” the particular defendant, “which creditor would have had the right to sue to avoid that transfer on the date that that [djebtor filed for bankruptcy relief.” 495 B.R. at 901.
And what does the Trastee plead to meet this requirement, for his statutory standing? As follows:
At all times material hereto, there was and is at least one creditor who held and who holds unsecured claims against PCB that were and are allowable under Bankruptcy Code § 502 or that were and are not allowable only under Bankruptcy Code § 502(e). By way of example, and not by way of limitation, such creditors are United Parcel Service, Hewlett-Packard Financial Services Company, NSTAR Electric Company, TW Telecom, Inc., Roadway Express, Agilysys, Inc., Custom FAQs Solutions Ltd, Microsoft Corporation and Microsoft Licensing, GP, AT & T Corp., Nor-wood Municipal Light Department, Wanlida Group Co., Ltd., and other creditors listed on the Schedule F as undisputed obligations of Polaroid Corporation. Pursuant to 11 U.S.C. § 544(b)(1) the Trustee may avoid the Transfers because the Transfers are avoidable under applicable nonbankruptcy law by a creditor holding an unsecured claim in the bankruptcy case.
Second Amended Complaint, ¶¶ 87, 92, 98, 104 (emphasis and double-emphasis added). Yet, earlier in the same paragraphs, the Trustee asserts that
At all times material hereto, there was and is at least one creditor who held and who holds unsecured claims against PCB that were and are allowable under Bankruptcy Code § 502 or that were and are not allowable only under Bankruptcy Code § 502(e).
Id. (double-emphasis added). This is the Trustee’s basis for the ensuing'reference-back to “such creditors.” As noted, earlier in his Second Amended Complaint the Trustee set up “PCB” as a collective reference to PettersCB and Debtors Polaroid Holding Company and Polaroid Consumer Electronics, LLC. This appears to stem from his conclusory assertion that Polaroid Holding Company and Polaroid Consumer Electronics, LLC “are the successors in interest to” PettersCB. Second Amended Complaint, ¶ 1.
But ... every last bit of the Trustee’s pleading of historical fact supports only one possible inference: there were. only two possible actors as transferor in the string of transfers on which he sues, PettersCB or PettersCB Funding, in their individual corporate right. And this could be no other way; every last impugned payment is dated to a time before Tom Petters acquired the Polaroid enterprise in April, 2005. Every one is said to have been made- by, or through, PettersCB or the related PettersCB Funding.
Both of those entities are said to have been within Tom Petters’s own enterprise structure. Second Amended , Complaint, ¶ 5. Likewise, Polaroid Holding Company and PCE came within Tom Petters’s enterprise structure ... eventually. But, despite the mumbling-together of these two Debtors and PettersCB under the muddled pleading-tag of “PCB,” the Trustee never alleges that Polaroid Holding Company and PCE were actually involved as transferors or chain-participants, for a single one of the impugned transfers. So even though the pleading defines its abbreviation of “PCB” as including these three very different entities, “collectively,” the only rational way to interpret the Tras*900tee’s pleading of historical fact is to identify PettersCB as the one entity possibly identifiable as the transferor, -under the Trustee’s 'theory for all of .the claims at bar.24
Further clouding the waters, the Trustee generally identifies “the detriment [to] PCB’s creditors” as the result of “the use of PCB by its ultimate owner, Thomas J. Petters.” Second Amended Complaint, ¶ 19 (emphasis added).
B. Outcome on the Fundamental Issue
In the most direct sense of the problem at bar: the Trustee can not have standing, in the sense of a fiduciary-plaintiff empowered by bankruptcy law to sue for the avoidance of any transfer made by PettersCB or by PettersCB Funding. Neither of those entities are among the Debtors in the underlying cases in which he serves as a steward of the estates. Henee the Trustee has no legal status at all, directly as to PettersCB or PettersCB Funding, their creditors if any, and any aspect of théir past business activity.25
The Trustee’s terse, eonclusory identification of two of the named Debtors as “successor in interest” to PettersCB does not fill this void. In the first place, there is no pleading for this adversary proceeding, as to any transactional sequence through which they would have become “successors in interest” to PettersCB in any way. The Trustee does not allege a merger of whole entities, a conveyance of assets or assignment of attributes, a substitution of contractual parties through novation, or otherwise. During the Trustee’s fleeting proffer at oral argument, it- was suggested that merger was the vehicle; but from that it was quite unclear as to which entities would have been melded by merger and to what consequence.26
*901But to get to the crucial issue at bar, it can be assumed that there was such a merger, and either Polaroid Holding Company or PCE was the resulting successor.27 If the Trustee then is suing on behalf of the estates of one or both of those Debtors, the fundamental , flaw emerges as to his invocation of MUFTA against these transfers.
MUFTA’s remedies are “[d]e’signed to ‘prevent debtors from placing property that is otherwise available for the payment of their debts out of the reach of their creditors....”’ Finn v. Alliance Bank, 860 N.W.2d 638, 644 (Minn.2015) (quoting Citizens State Bank Norwood Young Am. v. Brown, 849 N.W.2d 55, 60 (Minn.2014)). Under the rationale of Minnesota’s fraudulent transfer law outside of bankruptcy, avoiding transfers that are otherwise final under general law. is justified when the assets transferred would have been available for the satisfaction of the claims of the suing creditor, voluntarily or involuntarily. Minn.Stat. §§ 513.47(a)(1) (allowing creditor-plaintiff under MUFTA to “obtain ... avoidance of the transfer ... to the extent necessary to satisfy the creditor’s claim”), 513.47(b) (allowing creditor that “has obtained a judgment on a claim against the debtor,” to “levy execution on the asset transferred or its proceeds”) (both 2014). And under MUFTA, a creditor suing for avoidance must itself establish standing to sue in avoidance, in the sense of having a legally-enforceable right -to payment from the debtor. Minn-Stat. §§ 513.44(a) (defining transfers that are “fraudulent as to a creditor” whose “claim arose before or after the transfer was made”), 513.45 (defining transfers that are “fraudulent as to a creditor whose claim arose before the transfer was made”), 513.41(4) (defining “creditor” as “a person who has a claim”), 513.41 (defining “claim” as “a right .to payment,” broadly framed by ‘numerous non-limiting characteristics).
When these requisites .for creditor-standing under MUFTA are recognized, the flaw gapes wide open in the Trustee’s pleaded notion of his own standing. It is best-expressed by a question: in December, 2008, how could a creditor of Polaroid Holding Corporation or PCE have justified reaching back beyond the line of April, 2005, to sue a transferee of PettersCB ? The absurdity of the notion is clear, if such a creditor held a claim that arose from direct contractual privity between it and Polaroid Holding Corporation or PCE. A transfer made by PettersCB years earlier would not have deprived such a creditor of anything at all, to which it could have *902justifiably looked for satisfaction of its claim against its own debtor (Polaroid Holding Corporation or PCE).-
- Looking far afield of that direct scenario, a set of facts can be envisioned that would structure-out under the ■•Trustee’s premise that Polaroid Holding Corporation or PCE are objectively-traceable successors in interest" to the named transferor, PettersCB. This would require a very specific stacking.of historical events, however:
1. The creditor’s claim accrued ■ before Tom Petters’s acquisition, as a result of direct contractual privity between it and PettersCB or PettersCB Funding.
2. The claim would have accrued during the period of the challenged transfers, or at least before PettersCB and Pet-' tersCB Funding passed out of the picture by merger or dissolution.
3. The creditor’s claim was not paid timely under its own térms.
4. The creditor’s claim was not satisfied before Petters CB was merged into Polaroid Holding Company and PettersCB Funding was dissolved.
5. The liability on the debt was .expressly preserved and passed to one of the Debtors as part <?f the complex of transactions through which Tom Petters changed his alignment with the Polaroid enterprise by acquiring that enterprise in full.
To be legally viable, however, such a succession of creditor-entitlement would require an express, objective undertaking by all involved parties. Under the general principles of contract law, an enforceable passage of a liability of PettersCB could not have occurred by the unilateral doing of Tom Petters through his entities’ acts; it would have required objectively-manifested consent of all three parties to. the crucial fifth step, through -a novation, of some sort.. This would include the creditor. Hanson v. Nelson, 82 Minn. 220, 84 N.W. 742, 743 (1901) (for novation in substitution of contractually-bound parties to be effective, consent .must be explicitly expressed by all parties, those originally signatory and: those to be substituted in); Cornwell v. Megins, 39 Minn. 407, 40 N.W. 610, 611 (1888) (consent to substitution of parties to contract must go to the release of original party and to assumption by substituted party); Epland v. Meade Ins. Agency Assocs., Inc., 564 N.W.2d 203, 207 (Minn.1997) (for substitution of party by novation to be effective against counter-party, counterparty must have consented “to the delegation, thus completely-substituting one party .for another”), > ...
This sequence of events would not-have been entirely impossible. But how plausible is it, that it would have occurred? Lenders or trade suppliers generally make their decision to extend credit based on the worthiness of the specific party they are dealing with; and after that is done, and a debt created, it is more likely that they would take a proffered merger as an opportunity to get clear'on the account, even if they countenance doing business with the new entity in the future. A thorough vetting of the incoming merger-partner might override the natural motivation to get an existing credit paid off and then start from even., But absent that, it is just not plausible that novations would have been suffered by the creditors of PettersCB, expressly or implicitly.
And more to the point of the motions at bar: the Trustee pleads absolutely nothing, to support a legal status as successor-in-interest for either of the two named Debtors, with actual novations or otherwise. The Trustee does plead other facts going to' standing. But,. they cut in a different direction — and that one is even more wrong. • The predicate creditors ac*903tually named in the Second Amended Complaint are not even identified through Polaroid Holding Corporation and PCE as their, liable debtors. They are specifically identified as., scheduled, creditors of the Polaroid Corporation. The Polaroid Corporation, however,, is not in the factually-pleaded, firmament as an actual transfer- or — or even as an ostensible successor-in-interest to an actual transferor, under the Trustee’s stretched but gapped theory of suit.
As a result, there is no basis in the Trustee’s present fact-pleading on which to accord him statutory standing to sue the defendants on transfers they received from PettersCB.28 PettersCB is not in bankruptcy, and hence the Trustee does not stand as a fiduciary-steward with power to' sue in relation- to it, its assets, or its transactions. There is no fact-pleading at all on which to conclude that a creditor of any of the three Debtors named in the complaint could have sued in avoidance of past transfers by PettersCB. There is no fact-pleading at all on which any of the three Debtors would have legally succeeded to PettersCB as a debtor liable to any of PettersCB’s creditors. One cannot envision a plausible sequence of events on which they would have succeeded to that specific status. For such an extraordinary proposition, the Trustee had to ñamé a creditor identified' to either of the two Debtors he would have considered as successors to PettersCB, as the predicate creditor from which he would derive standing. He does not do so. The Debtor from which he does offer predicate creditors is not one of the two he identifies as a successor-in-interest to PettersCB.
This multiple layering of defects on the threshold issue of standing is fatal to Counts I — IV of the Trustee’s complaint. Those counts fail to state a claim on which relief under MUFTA might be granted to the Trustee as to the transfers he sues on. This merits dismissal under Rule 12(b)(6). It is not possible to conceive of any alternate set of facts to set up standing for the Trustee, absent irreconcilable conflict with the historical facts already pleaded. That means that a grant of leave to amend would be futile. So, the dismissal of all counts founded on MUFTA must be .with prejudice.
II. Bankruptcy Estates’ Right to Sue on Claims Under State Law (Counts V — VI)
Under two other counts of his Second Amended Complaint, the Trustee seeks a recovery on a single, separate, discrete payment made — in the amount of “approximately $349,000.00,”- disbursed to OppFinLLC o'n April 27, 2005, “as a prepayment penalty.” Second Amended Complaint, ¶ 52. Ue does not allege in so many words that this payment was made in connection with' the Opportunity Finance-PettersCB financing relationship. But there is a reference to how the “notes upon which the Prepayment Penalty Transfer was made ... expressly provided for prepayment -without penalty,” Second Amended Complaint, ¶ 54, and the Opportunity Finance-PettersCB relationship involved lending, in very large total amounts, Second Amended Complaint, ¶¶ 43-44. The Trustee does not ever state that the lending was documented through promissory notes. But one can assume that was done; this would have been the only eommpreially-reasonable way to handle it. Thus the place of this payment within that broader financial relationship is inferred as an additional assertion of fact.
That is the only pleading of fact on this cause of action. From there, it gets corn*904plicated on the plane of substantive legal theory.
In Count V, the Trustee, characterizes the extraction of this payment as a breach of contract. The assertion is that the underlying notes on which OppFinLLC demanded payment “expressly récited that there would be none,” i.e. any prepayment penalty. Second Amended Complaint, ¶¶ 111-113.
In Count VI, the Trustee pleads that OppFinLLC “represented [to PettersCB] that $12,039,403.78 was owed to [OppFinLLC] on the Prepayment Penalty Notes, $349,000 of which amount was a prepayment penalty.” Second Amended Complaint, ¶ 116. He then characterizes this demand as a statement of “then-present, material fact that was capable of being known by” OppFinLLC, Second Amended Complaint, ¶ 118; that was false, Second Amended Complaint, 1117; that was made by OppFinLLC with Iqiowíedge of its falsity, Second Amended Complaint, 11119; that was “reasonably and foreseeably relied upon” by PettersCB, inducing it to make the payment, Second Amended Complaint, ¶¶ 120-121; and that PettersCB was damaged by the loss of the funds paid on the demand, Second Amended Complaint, ¶¶ 122-123.
So much for the fact-pleading for Counts V and VI. Facial persuasiveness aside, they seem to be simple claims' under the common law for money damages. It gets a little confusing in the Trustee’s prayer for relief, however. Citing a mash-up of ¶¶ 544(b), 550(a), 551, and “the common law of Minnesota,” the Trustee categorizes his desired relief as:
(a) avoiding the Prepayment Penalty Transfer, including but not limited to an avoidance of all of the obligations and pledges of assets made in favor of Defendants; ■ -
(b) preserving the avoided Prepayment Penalty Transfer for the benefit of the bankruptcy estate; and
(c) awarding a money judgment in favor of the Trustee against Defendants in the amount' of the Prepayment Penalty Transfer, plus pre- and post-judgment interest, 'ahd costs and disbursements....
Second Amended Complaint, Prayer for Relief, ¶ C. Then an odd little request strays in. It cannot be matched to any of the fact-pléading and it is facially nonsensical:
On all Claims for Relief, establishment of a constructive trust over the proceeds of the Transfers in favor of the Trustee for the benefit of PCB’s estate —
Second Amended Complaint, Prayer for Relief, ¶ D (emphasis added).
Counts V and VI fail to state a claim on which relief may be granted to the Trustee, postured as1 he is in his fiduciary status for the Debtors’ estates.- There are two reasons and they are qualitatively different.
The first is technical in orientation. It goes to the substantive sensibility of these counts’ pleading,'and it goes back from the end. As to Counts V — -VI, the Trustee’s full prayer for relief is blather — an anomalous and gratuitous slathering of the language of avoidance remedies over simple fact-pleading for common-law causes of action. One cannot even speculate why all that was added. Not a bit of the pleaded fact for Counts V and VI matches to any substantive, requirement under MUFTA.
The second goes back to the Trustee’s bedrock statutory standing, though the pivotal point is different due to the pleaded substantive basis for recovery under these counts. Postured as they are — claims for damages under nonbankruptcy law— Counts V and VI are the sort of thing that *905a trustee in bankruptcy can sue out. But, a trustee suing on causes of action pled on broad narratives like these does so under the first empowerment noted supra, n.21: in administration of an asset — a cause of action — that accrued to a debtor pre-petition and then passed into the estate upon the bankruptcy filing. E.g., In re Senior Cottages of Am., LLC, 482 F.3d 997, 1001 (8th Cir.2007); United States ex rel. Gebert v. Transport Admin. Servs., 260 F.3d 909, 913 (8th Cir.2001); Wolfe v. Gilmour Mfg. Co., 143 F.3d 1122, 1126 (8th Cir.1998); Whetzal v. Alderson, 32 F.3d 1302, 1303 (8th Cir.1994); In re Ozark Rest. Equip. Co., Inc., 816 F.2d at 1225 (all standing for general proposition that prepetition causes of action in favor of debtor pass into bankruptcy estate by operation of § 541(a)).
However, the Trustee’s pleading does not and can not establish that these causes of action passed into the bankruptcy estates of any of the named Debtors. Any injury and harm under the described facts (breach of contract, fraudulent inducement, resultant damages) would have been inflicted in 2005 on PettersCB, not on any of the named Debtors. PettersCB did not go into bankruptcy in its own right. It is not in bankruptcy as a debtor-entity in any of the cases within the Polaroid Corporation group. The Trustee’s bald assertion that two Debtors are currently successors-in-interest to PettersCB does not fill the gap in a chain of right — both for the reason treated earlier (no pleading as to how that would have happened) and because there is no separate fact-pleading as to how PettersCB’s loss of the monies would have legally injured or factually harmed either Debtor, years afterward. There is no plausible basis in the Trustee’s pleading of fact through which either Debtor would have- held these particularized causes of action when they filed for bankruptcy, to pass into their estates on those filings.
The Second Amended Complaint does not' state a claim on which relief under Counts V and VI could be granted in favor of any of the Debtors’ bankruptcy estates, and in particular for the Polaroid Holding Corporation and PCE estates. Again, the circumstances do not warrant giving the Trustee another chance to plead additional factual basis for a specific succession of property rights in claims against third parties, from PettersCB to. either, named Debtor. The Trustee had three opportunities to flesh out a defensible structure for assenting these claims. None of the versions of his complaint shows any more thought as to how he was , empowered to sue on them. Thus, Counts V and VI are to be dismissed, with prejudice and without grant of leave to further (fourth) amend.
HI. Avoidability of Transfers Made by PettersCB on Financing Transactions with Opportunity Finance Defendants, as a Substantive Matter
Its pleading on standing aside,, .the Second Amended Complaint still founders under Rule 12(b)(6). On the pleaded facts, its. fraudulent transfer claims fail on their substance. This follows from the Minnesota Supreme Court’s most recent application of MUFTA, Finn v. Alliance Bank. Finn ’s_ precedential rulings apply on-point to the pleaded transactional facts here.
Finn’s holdings are fact-driven. They spring from the specific factual content of the pleadings or the evidence that was presented, to the trial court in that case.29 *906However, the material factual aspects of Finn do not differ from the transactional history pled here. Given Finn’s pronouncements on its very specific matrix of fact, the Trustee’s case for avoidance fails right on the face of the Second Amended Complaint. This occurs under both statutory variants of fraudulent transfer, for actual or (¡obstructive fraud.
The major Finn-driven shortcoming blazons early in the Trustee’s complaint:
... For example, unlike many of Tom Fetters’ companies, PCB actually purchased, warehoused, and sold to prominent retailers high volumes of consumer electronic equipment, branded with the “Polaroid” name[,]
Second Amended Complaint, ¶ 24 (emphasis added); and
PCB used' such money, credit, or purported assumptions of debt to purchase consumer electronics for resale to retailers like Best Buy or to cause payments to third parties claiming rights in, or otherwise concerning, such consumer electronics[,]
Second Amended Complaint, ¶ 41 (emphasis added).
The 'description of transactional fact here is declarative and unequivocál. Paragraph 46 of the Second Amended Complaint, describes a structure through which' the financing, acquisition and sale of consumer-goods inventory, accounts receivable, collection, and the eventual repayment of OppFinLLC were to be administered toward the intended “bankruptcy remoteness,” contrived to insulate OppFinLLC from liability in avoidance. Then, as a- flat statement of historical events over the course of the two-year relationship, the Trustee describes the actual use of the structure, or parts of it, to lend monies out of OppFinLLC, toward PettersCB’s actual acquisition of real goods. There are the two statements of general historical fact in ¶¶24 and 41. Then there is:
Contrary to the plan, the Consumer Goods Loan advances were given directly to PCB, not to PCB Funding.
Second Amended Complaint, ¶49.30 The Trustee uses concrete-terms to describe an actual flow of the funds back to OppFinLLC after the real-life goods were liquidated and the associated third-party accounts receivable were reduced to cash:
Regardless of whatever theoretical efficacy the plan might have had, however, Opportunity Finance, PCB, and PCB Funding did not follow it---- When Opportunity Finance swept, the PCB Funding bank account to pay itself the principal and interest due on it? loans, Opportunity Finance returned the excess — ie., what should have been profit belonging to PCB Funding on PCB Funding’s purchase of the accounts receivable from PCB — to PCB, not to PCB Funding. Thus, whatever the paperwork might have said, the parties did not treat PCB Funding as the owner of the accounts receivable. This means that the transfer of the proceeds .of the accounts receivable was made directly to *907Opportunity Finance by PCB, not PCB Funding____
Second Amended Complaint, ¶ 48 (emphasis added).-
That much is overtly acknowledged about PettersCB engaging in actual merchandise transactions in real life, financed by the lending from OppFinLLC. More crucially, the Trustee’s fact,-pleading on PettersCB’s transactions with OppFinLLC lacks something else. The Trustee never alleges that any of the money PettersCB borrowed from OppFinLLC was diverted mvay from real transactions in Polaroid-licensed merchandise, in fraud of OppFinLLC or any other person or entity. He never pleads that money originated by OppFinLLC was funneled through PettersCB into the main churn of Tom Petters’s Ponzi scheme — the activity that Tom Petters carried on throúgh the core of PCI, broadly pretensed on non-existent “diverting” transactions in ostensibly-preexisting consumer merchandise inventory. Nor does he ever accuse Tom Petters of using a separate scheme-structure like PCI’s in 2004-2005, that would have been centered around an, exploitation of the Polaroid brand and maintained to defraud lender-investors under -a specific pretense of dealing in Polaroid-branded merchandise.31
To coin a colloquialism in resonance with Finn, it all pleads as legit, in the transactional backdrop. The Trustee cites only one external term of the loans from OppFinLLC as anomalous in his estimation, or out of line with a fair exchange of equivalent value: the interest rate ultimately borne by PettersCB, said to have been “12% per annum.” Second Amended Complaint, ¶ 63. The Trustee impugns this as excessive, “substantially [greater than] the market rate” for such transactions. Second Amended Complaint, ¶!¶ 64, 67. But that is only a conclusory pronouncement; the Trustee does not quote actual contemporaneous, prevailing market rates for similar lending, to make out the excessiveness, Without that, it seems as if the accusation was made in order to reinforce the ensuing characterization: the aggregate interest was “false profits” paid to OppFinLLC. Second Amended Complaint, ¶¶ 65, 67.
In context, “false profits” is a loaded phrase. Trustees in Ponzi-scheme cases use it as boilerplate argument for á specific aspect of the payment of interest out of a Ponzi scheme. In this parlance, “false profits” received by a transferee are said to be paid by using stolen money-cash infusions from later-defrauded investors— to satisfy earlier-maturing obligations to other investors for interest or dividends. In this latter-day usage, the phrase “false profits”'is wielded evocatively, to draw a sharp distinction from the genuinely-earned fruits of business investments in the real world. Ponzi scheme perpetrators use the pretense of that to induce new investors to -pay in; hence the notion of payments received from a scheme’s fraudulent churn as derived from “falsity.”
But the Trustee here does not use the term for the situation for which it was crafted. Rather, he slaps it onto the return on investment from financing genuine deals, on the sole pleaded ground that the rate on the lending was somehow excessive, predatory. He also tries to impugn PettersCB’s engagement in actual deals as a part of a broader pretense, to draw investors into the fraudulent operations *908elsewhere in Tom Petters’s enterprise structure.
The Trustee pleads this toward a key-statutory element of the ' theory of constructive fraud under MUFTA, a lack of reasonably equivalent value received by PettersCB for the transfer of monies to OppFinLLC in payment. Minn.Stat. §§ 513.44(a)(2) and 513.45(a) (2014). The nexus between these facts and the law, however, is none too clear from the Trustee’s complaint as a whole.
At one point, Second Amended Complaint, ¶40, the Trustee seems to invoke the third component of the Ponzi scheme presumption as it'was later divided out in-Finn, “that, any transfer from a Ponzi scheme was [conclusively] not for reasonably equivalent value,” 860 N.W.2d at 646.32 At several others, the insinuation is broader: PettersCB could not have received reasonably equivalent value from repaying a lender on any loan to it, legitimately contracted and used or not. The way the Trustee pleads the facts, PettersCB could not have defensibly entered into any borrowing transaction, because it could not succeed in the long term under its business plan: PettersCB “consistently lost money and l’an at a net loss”; it “could not realistically expect to make a profit” due to high costs, poor product quality, and shrunken margins industry-wide; and it “was destined to fail ... and ultimately and inexorably did fail.” Second Amended Complaint, ¶¶ 37-39.33
The Finn court rejected a Ponzi scheme presumption across the board, as to all three of the component presumptions it gleaned from the earlier analysis by the Minnesota Court of Appeals. 860 N.W.2d at 648-649 and 653. The rejected component relevant here was á “require[ment] to *909presume that any transfer from a Ponzi scheme was not for reasonably equivalent value.” 860 N.W.2d at 646. The rejection followed from the way Finn redirected the focus of fraudulent-transfer analysis for a failed Ponzi scheme, “on[to] individual transfers, rather than a pattern of transactions that are part of a greater ‘scheme’.” 860 N.W.2d at 647. The “nature of the inquiry under MUFTA” is to be “asset-by-asset and transfer-by-transfer,” requiring proof of “the elements of a fraudulent transfer with respect to each, transfer rather than relying on a presumption related to the former structure of the entity making the transfer.” Id.
The Trustee’s pleading on reasonably equivalent value- lacks this specificity, or any at all. As he would have it, no lending to PettersCB could have furnished a platform for a corresponding receipt of value when it repaid the ■ debt later: OppFinLLC’s original lending to PettersCB was worthless, because it only prolonged an inherently unprofitable operation in PettersCB, not sustainable within its own confines. There is only one fact-allegation more specific than that, and it is barely so: the merchandising of Polaroid-branded goods and the operation of PettersCB were maintained only as a front, to bolster a pretense of high overall success for Tom Petters personally so he could draw other investors into the PCI-centered scheme.
Even when the Trustee originally advanced this notion, it overreached the logic of thé Ponzi scheme presumption under the precedent he used. • In the original federal framing, only payments- made by a perpetrator “in furtherance of the scheme,” are subject to avoidance. Finn, 860 N.W.2d at 645 (citing Perkins v. Haines, 661 F.3d 623, 626 (11th Cir.2011), and quoting the noted phrase). Through' his Second Amended Complaint, the Trustee seeks to avoid payments of money generated from actual sales of concrete goods, consummated consistently with the original contractual expectations for OppFinLLO’s lending to PettersCB.
But, just as the underlying genuine loan-participation transactions did for the perpetrator in Finn, the actual deals pleaded by the Trustee provided PettersCB'with a “legitimate source of earnings” with which to pay OppFinLLC, on debt that had been taken on to finance those very deals. Cf. 860 N.W.2d at 652' (recognizing presence of real-life, genuine business deals in relevant transactional history there, as reason to reject all three parts of Ponzi scheme presumption). Even though an -active Ponzi scheme was surging in other parts of Tom Petters’s enterprise structure, the Second Amended Complaint stretched too far in the way it would classify its real-goods-real-proceeds events to meet the causality-based requirement of the federal presumption, a- ‘-‘furtherance” of a Ponzi scheme.’ See In re Petters Co., Inc., 495 B.R. at 908 (emphasizing centrality of this requirement in presumption’s defensibility).34
*910One can envision several ways in which Tom Petters could have tied PettersCB’s operation into his main scheme.. The Trustee , does not plead a one of them. He does not allege that PettersCB was part of the central, entity-structure through which Tom Petters carried on his scheme under the pretense of mass engagement in “diverting” transactions. The transactions pleaded here were very different in nature from those that Tom Petters pretensed for the scheme; the Trustee admits that Tom Petters really did act through PettersCB to procure the manufacture of goods for Polaroid branding, and then sold them to real customers. As described in pleadings for the clawback litigation in the Petters Company, Inc. cases, the engine of the PCI-centered scheme was very different: using one or several entities to ostensibly serve as a factor between a holder of preexisting goods and an end-customer, with the Petters entity ostensibly acquiring the goods using, borrowed monies and then “diverting” them to its pretensed customer. . .
On a more limited, scale, the Trustee, does not allege that ..any-net- profit from PettersCB’s transactions was transferred, to the PCI, structure to offset an operar tional insolvency there. The pleaded allegation.actually cuts to the opposite sort of flow,- that “[a]t the times of the Transfers, [PettersCB] was capitalized and propped up with funds obtained by fraud through the Ponzi scheme.” Second Amended Complaint, ¶ 70; also, Second Amended Complaint, ¶ 57.
In relation to the central scheme within Tom ■ Petters’s organization; only one role for PettersCB is pleaded in the Second-Amended Complaint, or can be reasonably inferred from it: “to give [Tom Petters’s] business activities,” “himself and his organization,” a “false air” or a “false appearance” of “legitimacy.” Second Amended Complaint, ¶¶24 and 42. But otherwise the Second Amended Complaint depicts PettersCB as standing separately, with its transactions and transfers divorced structurally and operationally from the central churn of money within the Petters scheme.35 In the context of the’ Trustee’s other fact-pleading, such a role is far too intangible to recognize as a junction “in furtherance -of” a Ponzi scheme, for the activation of the federally-evolved presumption.36
*911So the Second Amended Complaint was factually deficient under the very substantive principles ,on which the .Trustee relied. The pleaded factual basis for an actual-fraud theory under MUFTA necessarily relied on. the federally-developed presumption. Second Amended Complaint, ¶¶ 55-57. But the Trustee did not plead facts to link PettersCB’s transacting into the only real Ponzi scheme he identified, that within PCI’s, operations. To the extent he tried to make opt constructive fraud by a separate inference- or presumption of no reasonably -equivalent value to PettersCB from the repayments, the federal case law required the factual presence of a de facto gap in a chain of transactions — the absence of .real-life, underlying business or investments, opportunities which the Ponzi-scheme purveyor was. ostensibly promoting by its pretenses. In the federal case law’s analysis, ,the exploitation of successive lies between two generations of investors justifies an equitable override of the finality of past repayments. In re Petters Co., Inc., 499 B.R. at 355-359 (discussing analysis of Scholes v. Lehmann, 56 F.3d at 756-758 and its recognition, of the rolling fraud within a Ponzi scheme’s operation). But the Second Amended- Complaint pleads no such vacuum-pocket within PettersCB’s business operations. To opposite effect, it pleads that PettersCB did real-life deals using the funding provided by the Opportunity Finance Entity-Defendants. , The Trustee does not plead a faetual basis for a finding of no reasonably equivalent value, even under the federal rules of decision.
That gave enough reason to reject the Trustee’s pleading on its substance under MUFTA, on its original legal sensibility. In any event, Finn conclusively bars the only theories that could be underlying the Trustee’s pleading . under MUFTA, for both of its variants;
As to MUFTA’s actual-fraud variant, the Trustee-seems to rely in his pleading on'a presumption of fraudulent intent, triggered by Tom Petters’s concurrent ihvolvement in a Póñ&i scheme — not only with other parties ’but through entirely different entities within his enterprise structure.' Second Amended Complaint, ¶¶55-57. ' Finn’s summary of the presumption of intent accurately describes the Trustee’s theory on intent here: Tom Petters, as the perpetrator of a Ponzi scheme, “invariably intended] to cheat all investors” he induced, no matter what the nature of their' deals, and hence any and all transfers he made to any and all investors were “made with fraudulent intent,” no matter their source. 860 N,W.2d at 647. Thus,'ais the 'Trustee pleads, he would be entitled to á broad-brushed presumption of such intent for all payments that PettersCB funded " for the satisfaction of OppFinLLC’s lending to PettersCB. But Finn rejects such a presumption,' to the extent it would apply to every single transfer. of property made by a transferor that was concurrently perpetrating a Ponzi scheme. 860 N.W.2d at '647-648.
The Trustee does try to plead the alternate factual basis for a, finding of fraudulent intent, the badges-based approach of Minn.Stat. ‘ § 513.44(b), (2014). Second Amended Complaint, ¶¶ 28-35. 'intent to defraud investor-creditors within the broader context of a Ponzi scheme may be proven in this way. Ritchie Capital Mgmt., LLC v. Stoebner, 779 F.3d at 862-866.*91237 However, all of the Trustee’s pleaded facts go to the way in which PCI was operated, to the detriment of its own lenders and investors. Not a single pleaded fact goes to how; PettersCB would have paid OppFinLLC with a contemporaneous intent to hinder, delay, or defraud its own creditors. The Trustee relies solely on an inapplicable, presumption of all-encompassing fraudulent intent. Apparently he would have that plus badges-based fact-finding stretched beyond entity-boundaries and resonant with alleged fraud on creditors of other entities. That goes far outside MUFTA’s contemplation, and it has to fail. This means that the Trustee does not plead a claim for actually-fraudulent transfer on which relief may be granted against the Opportunity Finance defendants under Minn.Stat, § 513.44(a)(1).
The reasons are somewhat , more involved for MUFTA’s constructive-fraud variant, but Finn defeats the Trustee’s pleading under that as well. The Trustee would have it presumed that PettersCB,or PettersCB Funding did not receive reasonably equivalent value for the monies they directed to satisfy OppFinLLC. It is not clear whether he directs this to the full amount paid. It is safe to assume that he would avoid the payments at least to the extent of their ostensible interest-component, under rulings extant when he made his second amendment. In re Petters Co., Inc., 499 B.R. at 359-363.
The Trustee asserts the benefit of this presumption, on his summary assertion that “[d]uring the time at issue .... (2003 through 2005), Tom Petters used [PettersCB] to further his Ponzi scheme,” as “one component of the larger Ponzi structure ..-. used ... to ■ give his business activities a false air of legitimacy and to extend the duration of the Ponzi scheme.” Second Amended Complaint, ¶24. Yet again, in the same breath the Trustee admits that PettersCB “actually purchased, warehoused, and sold” real Polaroid-branded goods. Id. There is a gratuitous accusation that Tom Petters “used [PettersCB] to launder money from his Ponzi scheme.” Second Amended Complaint, ¶25. That allegation is isolated, opaque, and conclusory. In the same breath, it is pled that Tom Petters diverted money generated from the'main churn of his scheme'' into ''PettersCB, “to run [it] and prop up its losses.” Id. This statement is no less conclusory. • But more to the fact, it does not plausibly support the notion of Tom Petters using the operation of PettersCB to further the scheme he was carrying on through other' entities and with other investors. The money would be running the wrong way. He does not plead that any funds sourced in OppFinLLC were diverted away from the contractually-contemplated transactions in Polaroid-branded goods, to the satisfaction of previously-défrauded investors into the main scheme'Or otherwise. And there is the more general pleading that would have PettersCB incorporated into’ the main operation of the PCl-based scheme. Second Amended Complaint ¶¶ 55-57. That has been rejected already due to its conclusory character, devoid of plausible supporting fact-content.
To the extent that the Trustee relies on the component presumption of no reason*913ably equivalent value alone, Finn sinks that legal theory of recovery. A complaint fails under Rule 12(b)(6) as to Minn. Stat. §§■ 513.44(a)(2) and 513.45(a) (2014) where the plaintiff relies solely on the transferor’s separate “engage[ment] in a Ponzi scheme” involving transactions similar to the one for which the subject transfer was made, to compel a finding of no reasonably equivalent value. 860 N.W.2d at 654. This follows from Finn’s two earlier pronouncements. First, this presumption “eliminates the possibility that an investor has a legally-enforceable' claim against the debtor[-perpetrator] based on the investment contract,” 860 N.W.2d at 651 (emphasis added). Second, the presumption’s shortcut defeats the purpose of a transfer-specific analysis, 860 N.W.2d at 650, under which MUFTA would consider the satisfaction of an honestly-contracted antecedent debt as value which would be considered reasonably-equivalent if the abatement went dollar-for-dollar, 860 N.W.2d at 654.38
Finn’s major ruling was its rejection of the Ponzi scheme presumption for MUF-TA. But the opinion went further than that, to treat at least one aspect of the substantive reach of MUFTA, in clawback litigation. Outside the lawsuit at bar, there is currently a pointed and bóna fide controversy over the full reach of Finn into the main churn of a Ponzi scheme.39 At this point, it can be said that Finn settled one thing for the application of MUFTA’s constructive-fraud remedies to transactional history: that features the presence of a Ponzi scheme perpetrated by the transferor. On the specific facts before it, the Finn court held that the debt- or-transferor does receive' reasonably equivalent value for the repayment in full of debt owing per contractual terms to an investor that -had'funded a- real-life, bona fide, closed, and consummated business transaction — despite the fact that the debt- or-transferor was perpetrating an operating Ponzi scheme to defraud other investors through the same type of transaction. 860 N.W.2d at 655 (stating that transferee claimed reasonably equivalent “value ... [in] the satisfaction of the debt owed by [the debtor-perpetrator] und.er the participation agreement between the parties,” and emphasizing that “the [particular] loan was real and not oversold”).40 This applies to the repayment of both principal and interest. 860 N.W.2d at 655-656 (holding that “the satisfaction of ... [the] antecedent debt constituted ‘value’ under MUF-TA,” and affirming trial court’s finding of reasonable equivalence on undisputed proof that interest rate was commercially reasonable).41
*914So in summary of this central substantive holding, from Finn, the factual, historical presence of . a real-life deal for the original investment defeats a clawback plaintiffs.prima facie case on constructive fraud — by depriving the plaintiff of an essential element of its case under Minn. Stat. § 513.44 (2014). 860 N.W.2d at 655.42
Here, when the Trustee pleads as historical fact the .transactional staging tor ward the .transfers he would avoid, he does not identify anything but real-life transactions. AlLof them were .financed by money generated by OppFinLLC. He does not plead any facts to directly place any transaction into the layered lies of the main churn of Tom Petters’s Ponzi scheme — which involved wholly fictitious transactions of a different nature. At most, he suggests that the money from OppFinLLC and the real-goods transactions was augmented with outside funds to meet the operational needs of PettersCB. Second Amended Complaint, ¶70. (“At the' times of the Transfers, [PettersCB] was capitalized and propped up with funds obtained by fraud through the Ponzi scheme.”)
This, too, is conclusory and unilluminating— certainly not plausible support for a theory oí liability under a complicated statute. Also, it is inappropriately colloquial— “propped up” is neither a legalism nor a legal term of art, and. the gist of the accusation is opaque. At most, the epithet suggests that the funds traceable ;to and from'OppFinLLC and through the real-goods transactions were commingled, with some funds funneled Out of the PCI-centered scheme, toward some' undisclosed use by PettersCB. Under Finn, any such commingling is irrelevant. The Ponzi scheme perpetrator there commingled honestly-used funds with dishonestly-obtained funds, 860 N.W.2d at 642; but Finn does not recognize commingling standing alone as evidence of a lack of reasonably equivalent value to the transferor, for payment made out of the commingled pool.
Finn was issued after ihese motions were submitted. As binding precedent, Finn unquestionably speaks to one scenario out of a failed Ponzi scheme; and it rejects MUFTA’s application to it. That very fact-pattern is the one. that appears on.,the face of the Trustee’s pleading against the Opportunity Finance defendants. A complaint based solely on that does not plausibly lay out a claim on which relief may be granted.
There is no way that the Trustee could replead an alternate set of facts to counter this effect of Finn, without indefensibly contradicting the factual premises for his présent theory of recovery'. It would be futile to grant leave to replead on the merits under MUFTA.43 Dismissal with prejudice of his MUFTA-based claims against the Opportunity Finance defendants is thus merited under this alternate ground.
IV. Liability of DZ Bank
In the wake of that analysis, there is virtually nothing to defend the adequacy of the Trustee’s pleading against DZ Bank. He does not plead any facts to make out DZ Bank as an initial transferee of the payments made by PettersCB. In fact, *915that would run against the whole sense of his involved pleading about the structuring of the transactions — specifically the presence of one or possibly two SPE-intermediaries in the chain of transferors and transferees under “the bankruptcy remote” contractual provisions for lending and repayment.44 He certainly does not allege that those presences were leaped over somehow to direct funds immediately to DZ Bank. And if the Trustee had pled DZ Bank’s direct receipt of payments from funds generated by PettersCB, the rulings made on standing and the merits under MUFTA would require the very same outcome for DZ Bank as for the Opportunity Finance defendants. '
From the terse and opaque pleading, it is 'more likely that DZ Bank is sued as a subsequent transferee. The failure of the Trustee’s action against the Opportunity Finance defendants bars him from recovering from DZ Bank. A trustee may recover from “any immediate or mediate transferee of [an] initial transferee.” In re Sherman, 67 F.3d 1348, 1356 (8th Cir.1995). However, it is self-evident from the face of the statute that a trustee may recover against an immediate or mediate transferee only “to the extent that [the] transfer is avoided” on its merits, i.e. only if the transfer is avoidable as to the initial transferee. 11 U.S.C. § 550(a).
Thus, DZ Bank is entitled to the dismissal of the Trustee’s complaint, as vaguely-worded and-framed as it is toward that defendant.
OUTCOME
There is no repair for the fact-pleading in. the Trustee’s Second- Amended Complaint. Due to several serious, fundamental flaws, it fails to plausibly set forth a factual basis on which he could recover on any of his pleaded legal theories against any of the defendants.
ORDER
IT IS THEREFORE ORDERED that this adversary proceeding is dismissed, in its entirety and'with prejudice.
. See, e.g.. In re Petters Company, Inc., 494 B.R. 413, 418-419; 495 B.R. 887; and 499 B.R. 342 (all Bankr.D.Minn.2013).
.- ’ PGW or other entities in Tom Petters’s complicated enterprise structure were the vehicles for these acquisitions.
. It has been alleged that Tom Petters diverted cash from the PCI enterprise structure into the operations of the Polaroid enterprise after his acquisition. This would have happened during the time that the Polaroid enterprise was trying to develop new, digitally-based product lines to replace its phased-out legacy business of instant-film photography. It has been alleged that the cash infusions partially supported the operations during that time. (These points of fact are relevant to other litigation in these cases and the PCI cases; thus these summaries of party-allegations are not findings on the facts themselves.)
.The Polaroid debtors filed under Chapter 11 in their ,own right in late December, 2008. The most significant assets of the Polaroid debtors Were sold in May, '2009 through a process structured under 11 U.S.C. § 363.
. This is a summary of fact-pleading, with some judicial observations about the gist of the facts pled. There are no findings of fact here.
. In light of his later acquisition, it is possible that Tom Petters was using this experience to test-drive the Polaroid brand ant} its market strength at that time.
. The Opportunity Finance defendants have been sued in two adversary proceedings on the litigation docket in the PCI cases,'ADV 10-4301 and ÁDV 10-4375. Those matters concern transactions between the Opportunity Finance defendants and PCI, transáctións that were entirely distinct from the ones at issue here. However, blurring a line, the Trustee here asserts that some of his theories of liability under 11 U.S.C. § 550(a) are founded on his ‘‘belief ____based in part on documentation surrounding the [tjransfers” that are at- issue in the PCI adversary proceedings. Second Amended Complaint [Diet, No. 46], ¶ 80. Whatever that means.
. Subject to an exception not applicable .here, this statute provides:
. ,,.,the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voi’dáble under applicable law by a creditor holding an- unsecured- claim that is allowable, under [11. U.S.C. § ] 502 ... or that is not allowable only under [11 U.S.C. §] 502(e)....
11 U.S.C. § '544(b)(1)."
. In application, § 544(b)(1) enables the trustee to invoke the. state substantive law of fraudulent transfer, if an unsecured creditor could have used it outside of bankruptcy to challenge its debtor’s transfers of assets. E.g., In re Marlar, 267 F.3d 749, 755-756 (8th Cir.2001); In re Popkin & Stern, 223 F.3d 764, 768 n. 11 (8th Cir.2000); In re Estate of Graven, 64 F.3d 453, 456 n. 5 (8th Cir.1995); In re Graven, 936 F.2d 378, 383 n.7 (8th Cir.1991); In re DLC, Ltd., 295 B.R. 593, 601 (8th Cir. BAP 2003).
. In 2015 MUFTA was amended and retitled using a new uniform law,, the Uniform Voidable Transactions Act.201-5 Minn. Laws, ch. 17. The enactment made changes to vocabulary and some substance, but the large bulk of MUFTA’s 'provisions is .still law. The amend*892ment applies only to transactions occurring after August 1, 2015. 2015 Minn. Laws, c. 17, § 13. Thus, MUFTA's provisions in their entirety still apply to this adversary proceeding.
. See In re Petters Co., Inc., 499 B.R. at 355-359 (discussing analysis in Scholes v. Lehmann, 56 F.3d 750 (7th Cir.1995)).
. "The Polaroid debtors” will be a collective reference to the specific entities named in the caption for the underlying cases — i.e., the entities that are in bankruptcy, in these cases and-before this court.
. The sale process under § ¡363 was conducted and a' sale was consummated while the Polaroid debtors were-still debtors in possession. After that, the cases were converted on motion of the United States Trustee; there was no longer a going concern' and liquidation under Chapter 7 was adjudged to be in the better interests of creditors than post-confirmation liquidation under Chapter 11.
.The use of an expanded form of abbreviation for this entity is deliberate, to draw that ■ temporally-driven distinction. So far the parties to this lawsuit have used "PCB” to signify PettersCB. However, "PCE ” — Polaroid Consumer Electronics, LLC — is present as a debt- or and a historical participant in later events, and its past dealings are in active controversy in pending litigation in these -cases. As came out at oral argument, the "PCB” cognomen *893has already created too much confusion. “PCE” has long been the tag for the Polaroid-affiliated Debtor-entity throughout the underlying cases — so that abbreviation is the one to be preserved.
. As the Trustee pled the terms of the arrangement, PettersCB Funding was to be ah intermediate participant in the financing. OppFinLLC as lender was to advance directly to PettersCB Funding; PettersCB Funding would readvance to .PettersCB to fund PettersCB’s actual transaction in Polaroid-branded goods; PettersCB Funding would receive PettersCB’s pledge or assignment of the resulting account receivable as' security; PettersCB Funding would then receive the payment from PettersCB’s customer on PettersCB’s direction; and PettersCB Funding would allow OppFinLLC to make an authorized sweep of PettersCB Funding’s bank account to satisfy OppFinLLC on its lending. Second Amended Complaint, ¶ 46. The excess of the account balance over the debt payment was to' be PettersCB Funding’s property. ' Id. ■
. This pleaded assertion is a reference to DZ ■ Bank’s separate engagement in senior secured lending to PCI for the ostensible, diverting transactions. Context suggests that DZ Bank’s senior secured funding for the Polaroid-related transactions here did not outlast the PCI-related lending. . .. .
. Subject to exceptions not relevant here, this statute provides:
.. .to the extent that a transfer is-avoided under [11 U.S.C. § ] 544, ... the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or , ,
(2) any immediate or mediate transferee of such initial transferee.
. Before Twombly and Iqbal, the standard for pleading under Rule 8(a), as applied under Rule 12(b)(6), was couched by Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). It was more deferential to plaintiffs. Generally, dismissal was disfavored unless the plaintiff had pled allegations that showed on the face of its complaint that there was "some insuperable bar to relief." E.g., Coleman v. Watt, 40 F.3d 255, 258 (8th Cir.1994); Ring v. First Interstate Mtg., Inc., 984 F.2d 924, 926 (8th Cir.1993); Bramlet v. Wilson, 495 F.2d 714, 716 (8th Cir.1974). As a floor for adequate pleading, this was pretty minimal. Twombly and Iqbal raised the bar above that level. But, they certainly do not destroy the obvious, corollary point of this formulation: where á complaint does show in its fact-pleading “some insuperable bar to relief,” it is to be dismissed without granting an opening for an attempted revival under other fácts.
. See Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 591 (8th Cir.2009) (discussing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)).
. To summarize what was noted earlier: the Opportunity Finance defendants’ argument was that PettersCB Funding would have been the transferor on any payment made on a debt to OppFinLLC, under the terms of the "bankruptcy remote” structure' that OppFinLLC had required of Tom Fetters before it would lend on these transactions. PettersCB Funding was deliberately set up to be an entity permanently without debt to outside, third-party creditors; so, the movants insist, there never'could have been a “predicate creditor” that could have sued OppFinLLC outside of bankruptcy; and hence the Trustee could not haye been empowered under § 544 to sue any recipient of payment from funds that originated in PettersCB’s business transactions. This' argument did point oút a gap— but it was at a higher level, under the statutory requirement of a predicate creditor that would furnish a trustee the derivative status of plaintiff. And, it tacitly assumed that the Trustee could- take his .standing through PettersCB or .PettersCB Funding — the unrecognized point of elision in the Trustee’s theory of suit.
.That would be pursuant to 11 U.S.C. § 704(1), the direct resort to assets that were in the possession, ownership, or right of the debtor as of the bankruptcy filing. 816 F.2d at 1224-1225. Such ■ assets • pass into the bankruptcy estate by operation of 11 U.S.C, § 541(a)(1), and hence are subject to a trustee’s administration immediately.
. In the same opinion, the Eighth Circuit rejected the notion that the vesting of a general equitable power in the court under the."all-writs act” of 11 U.S.C. § 105(a) was a third, independent source of substantive empowerment to sue. 816 F.2d at 1230.
. This all flows directly from the language of the statute, quoted Supra at p. 891, n.8.
. The Trustee alleges that the creation of PettersCB Funding in mid-2003 and its presence in the transactional chain after that were essentially a sham, because OppFinLLC and PettersCB never treated it as a separate corporate entity in the way they funneled funds to and fro. Second Amended Complaint, ¶¶ 47-51. He thus pleads as if PettersCB was the transferor-in-fact. All of the defendants insist that PettersCB Funding must be treated as the transferor because of their contractual structure for bankruptcy-remoteness. They do not acknowledge a • possibility that the .Trustee insinuates: in the rapid-fire, multiple, exchanges of money that Tom Petters favored, other participants may have jumped over PettersCB Funding for at least some transfers,' making payments directly to PettersCB notwithstanding the niceties of the structure. For present purposes, it is not necessary to get into this dispute.
. This sets aside the possibility thqt PettersCB Funding did not even have corporate existence when any of the Debtors filed for bankruptcy, or when the Trustee sued out this adversary proceeding. See Certificate of Cancellation of PCB Funding, LLC, Exh. 3 to Opportunity Finance Motion' for Dismissal [Dkt. No. 49]. (The Opportunity Finance défendants slipped in this document under the guise of being "necessarily embraced by” the Trustee’s pleading, and therefore properly considered on a motion under Rule 12(b)(6). Generally speaking, defendants moving for dismissal under Rule 12(b)(6) take excessive liberties in using this ploy to stretch the content of the record. In re Petters Co., Inc., 532 B.R. 100, 116 (Bankr.D.Minn.2015). However, since the issuance of Porous Media Corp v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir.1999), local precedent has furnished a rationalization for the practice.)
.The structural process of the acquisition was described in the complaint in a different adversary proceeding, one brought jointly in the Petters Company, Inc. and Polaroid Corporation cases:
In April 2005, [the] Polaroid Corporation became a wholly-owned subsidiary of PGW pursuant to a merger between [the] Polaroid Corporation’s then-parent corporation, Polaroid Holding Company and Petters Consumer Brands, LLC.... PCB was a wholly-owned subsidiary of PGW.
Kelley, et al v. JPMorgan Chase & Co., et al, ADV 10-4443 [enumeration in PCI cases] and *90110-4444 [enumeration in Polaroid Corporation cases], Complaint [Adv. 10-4444, Dkt. No. 1], ¶ 3. The pleading in that lawsuit is not part of the pleading in this one, obviously; hence it cannot be deemed to this proceeding if adequacy under Rule 12(b)(6) had to reach this point of fact-pleading. The plaintiff-Trustee in the matter at bar is a joint plaintiff there. It is not known why these simple averments were not reprised somewhere in the three successive versions of a complaint here. '
. It logically could not have been both: how could a corporate body split but then directly merge parts of it as distinct entities with more than one preexisting, separate corporate body? And if per the cited pleading in ADV 10-4444 Polaroid Holding Company nested into PGW’s enterprise structure, i.e. by a merger with PettersCB, how did the separate entity of PCE become a “successor in interest” to PettersCB in a legally-cognizable way? PCE, a distinct corporate entity, is a subsidiary of the Polaroid Corporation-which in turn would be a subsidiary of Polaroid Holding Company. The Trustee's failure to plead any factual basis for a succession is ever more vexing. And this all makes the Trustee’s little flourish of pleading seem ever more .facile— i.e. his collective definition of his pleading-tag "PCB” for assertions of historical fact and his térsely-worded identification of both of the Debtors as "successors in interest.”'
. For that matter, he would lack Article III standing on the same analysis.
. Finn came out of avoidance litigation brought by the receiver for a failed business entity that had been the vehicle for a Ponzi scheme. The opinion in Finn was issued on consolidated appeals involving two different defense constituencies in the-lawsuit. 860 N.W.2d at 643-644. One was an appeal from a grant of summary judgment in favor *906of the receiver and- against a single defendant-recipient. The other was an appeal from the dismissal of the receiver’s action against- a separate group of defendant-recipients. The rulings on that motion had addressed the adequacy of the- receiver’s pleading, plus. a statute-o£-limitations issue. Factual sufficiency thus was at issue in both of Finn 's consolidated appeals; but the factual content was lodged in different niches in the sequence of the litigation process. 860 N.W.2d at 655'.
. The reference "PCB” obviously signifies PettersCB alone. It could not possibly be the collective, pleading-Specific abstraction of the two Debtors and PettersCB.
. As noted earlier, the pretense of investing by lending to support ostensibly-profitable retainer-to-retailer flips of consumer merchandise has been alleged as the vehicle of the Ponzi scheme that Tom Petters carried on through PCI.
. This is suggested by the Trustee’s choice of language to make a link between PettersCB’s borrowing and the general Petters Ponzi scheme: "From 2003 through 2005, Tom Petters caused PCB to obtain money or credit from Opportunity Finance, or to assume purported obligations of others to Opportunity Finance, all in . furtherance of the Ponzi scheme.’’ Second Amended Complaint, ¶ 40. Under the 'enunciation of the Ponzi scheme presumption in earlier federal jurisprudence, potential avoidability under the presumption was limited to transfers "in furtherance of" a Ponzi scheme. In re Polaroid Corp., 472 B.R. 22, 35-36, 53 (Bankr.D.Minn.2012), aff'd on other grounds, Ritchie Capital Mgmt., LLC v. Stoebner, 779 F.3d 857 (8th Cir.2015); In re Petters Co., Inc., 495 B.R. at 907-908 (collecting circuit-level opinions in which the presumption was framed with this language). The causal nexus suggested by the notion of "furtherance” is a significant • limitation on the scope of transfers subject to avoidance after application of the presumption. The Finn court does not acknowledge that.- Finn never explicitly addresses the significance of the phrase. This nonrecognition is also evidenced in the looser and more connotative language Finn uses to put its subject transactions into the context it constructs. E.g., 860 N.W,2d at 656 (terming investment into genuine, bona fide financing transaction placed by defendant with counterparty that was also a Ponzi scheme purveyor, "a part of a greater Ponzi scheme” — when arguably it was not "part of” the scheme at all); 860 N.W.2d at 650 (terming source of payments to investor-participant as "Ponzi-scheme proceeds,” despite repeated emphasis on real-life existence of underlying transaction and pointed observation that success of underlying transaction furnished a means to fund repayment to investor-participant). ■
. At least in isolation, implications of this notion are mind-boggling. If a corresponding rule of law were adopted, it would have a far greater sweep in the bankruptcy arena than the Ponzi scheme presumption could ever have. Just think of the number of business enterprises that end up in bankruptcy because they were originally launched with shoddy organization, flawed analysis and forecasting, poorly-founded business plans, or inept management. Is every lender to such borrowers to be subject to the avoidance of payments made to them, merely because hindsight suggests that failure was "destined” and "inexorably”?
. This prompts an observation, as superfluous as it may be: the.Finn court could have left the federally-evolved presumption alone, assuming its viability for the sake of analysis. This still would have allowed the affirmance of the trial court's outcomes on the ground that the real-deals-real-proceeds scenarios before it did not "further[] ... the scheme” there. The basic facts cited in Finn could not support a finding that the perpetrator’s scheme was furthered in any concrete way from the engagement in the legitimate deals there. There was one minor option to support such a conclusion — a possible (and only residual) benefit from a deal-specific, limited amount of profit remaining in the commingled bank account of Finn's perpetrator, which then could, be used to. further the scheme. Clearly, the Finn court did not think this would be enough; it did not even men*910tion it. As to the rest, t.he genuine cash proceeds would have been traceable right through the commingled account, to the' repáyment of the investors in’ the deals that generated the proceeds. (Remember, the. perpetrator in Finn was acting only as a servicer and agent for the transferee-defendants, with an obligation to promptly -forward all' payments received from the note obligor.) There was no allegation of temporary diversion of funds toward repayment of other, defrauded investors — let alone a permanent co.n-version as invariably occurs when a Ponzi scheme is prolonged through the rolling fraud of the classic structure,
. At one point (and only one), the Trustee alleges that PettersCB “was part of the Ponzi scheme and destined to fail with the Ponzi scheme, and-... the Transfers furthered, and were intended to further, the Ponzi scheme.” Second Amended Complaint, ¶ 55. He does not allege one thing to answer the crucial question, “How?” The allegation is entirely conclusory, and thus does not suffice under Rule 12(b)(6).
. The pleaded situation here is different from the relationships between perpetrator and transfer-recipient that could entail a "luster factor" palpable enough to find "furtherance" in the making of certain transfers to non-investors. See In re Petters Co., Inc., 532 B.R. at 104-105 (charity-recipients of large, well-publicized donations); In re Petters Co., Inc., 495 B.R. at 910—911 (ditto, plus employee-recipients of bonuses derived from ostensible, publicly-touted success of purveyor’s business). The most important would be the proximate connection in these other situations, between the perpetrator-entity and the *911recipient: á direct-and reinforcing reflection on the perpetrator-transferor. This contrasts with the indirect link here, seguing through the person and personality of Tom Petters as it would have to. The ostensible furnishing of luster from Tom Petters’s early transactions in Polaroid-branding is" too attenuated to defensibly classify a payment on the transaction as having been “in-furtherance” of his main scheme.
. The Eighth Circuit issued Ritchie Capital Mgmt., LLC v. Stoebner after Finn was rendered, and expressly directed its analysis to the badges-based approach in mind of Finn 's rulings on state law. 779 F.3d at 862 and n, 6. Finn itself seemingly countenances that a badges-based case for actual fraudulent intent may be adequately pled on sufficiently-detailed allegations that the subject transfers were made within a Ponzi scheme’s operation. 860 N.W.2d at 654 (affirming ruling to this effect made by Minnesotd- Court of’ Appeals).
. This was the ruling as to the Finn receiver-plaintiff’s action against the so-called "Respondent Banks,” who had challenged his pleaded case on motions for dismissal. Finn really did not address the essential statutory requirement of reasonable equivalence; but it is self-evident that a dollar-for-dollar reduction satisfies it. In re Duke and King Acquisition Corp., 508 B.R. 107, 146 (Bankr.D.Minn.2014).
. This issue is currently under submission in the litigation docket for the Fetters Company, Inc. cases.
. This was the ruling as to the Finn receiver-plaintiff’s action against Alliance Bank, which had challenged the sufficiency of the receiver’s case on a motion for summary judgment.
.Under the federal courts’ development of fraudulent-transfer analysis and the Ponzi scheme presumption, the repayment of principal does furnish reasonably equivalent value ■ to the.perpetrator. However, it is not clear from the Minnesota Supreme Court’s opinion in Finn whether the plaintiff conceded this. The trial court in Finn seemed to have used that substantive rule in granting judgment to the receiver for the recovery of interest. The principle applied was that "any payments received in excess of ... principal investment were wanting in reasonably equivalent value to the transferor. 860 N.W.2d at 655.
. It also satisfies half of the elements of the affirmative defense under Minn.Stat. § 513.48(a) (2014), the receipt by a transferee in good faith and for reasonably equivalent value. That alternate significance of reasonably equivalent value is not implicated by these motions.
. Again, this all assumes that the Trustee’s pleading could somehow be tweaked to establish his standing to sue under MUFTA and § 544(b).
. Per .the Second Amended Complaint (and as the Opportunity Finance defendants admit), Defendant Opportunity Finance Securitization II, LLC was set up as a further bankruptcy-remote entity in the chain, for receipt of lent money directly from DZ Bank. Second Amended Complaint, ¶¶ 6 and 14; Opportunity Finance Motion for Dismissal [Dkt, No, 49], 4-5. Apparently the Sabes Family Defendants thought that one bankruptcy-remote entity was not enough and two would be better. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499039/ | *918MEMORANDUM OF DECISION
Honorable Jim D. Pappas, United States Bankruptcy Judge
Introduction
‘ This decision addresses two motions filed in this chapter 131 case. Chapter 13 trustee Kathleen A. McCallister (“Trustee”) has filed a motion to dismiss this case in which she alleges' that debtor Virgil Wood (“Debtor”) has failed to make the payments required under the terms of his confirmed plan. Dkt. No. 92. Debtor opposes dismissal, and to remedy his alleged payment defaults, Debtor filed a Motion to Modify Plan (“the Modification”). Dkt. No. 95. Trustee objected to the Modification. Dkt. No. 99.
The Court conducted' an evidentiary hearing and heard oral argument concerning both motions on- November 3, 2015, at the conclusion of which the Court instructed'Debtor’s counsel to' file a brief to further explain'and support Debtor’s position. See Minute Entry; Dkt. No. 113. Debtor filed the brief, and Trustee filed a reply' brief. Dkt. Nos. 114,115. Having considered the evidence, testimony, briefs and arguments'óf the parties,-this Memorandum constitutes the Court’s findings of fact and conclusions of law, and disposes of both motions. Fed. R. Bankr.P. 7052; 9014.
Facts
On January 30, 2013, Debtor and his spouse, Peggy Wood, (“Peggy”,2 and collectively “the debtors”) filed a chapter 13 bankruptcy petition. Dkt. No. 1. In their first two proposed plans, the debtors offered to surrender an older 38 foot boat and trailer (“the Boat”) to the secured creditor 'holding a lien on the Boat. Dkt. No. 11, ¶ 6.2; Dkt. No. 22, ¶6.2. However, later in the case, in a proposed second amended plan, the debtors elected to retain the Boat and to make 60 monthly payments to the creditor on its secured claim of $416.60, for a total of $24,996, over the course of their plan. Second Amended Plan, Dkt. No. 25, at ¶¶ 5.1, 6.2.3 The plan also provided for monthly payments of $98.42 to the same secured creditor so the debtors could retain a small tractor. Id. at ¶5,1; Claims Reg. No. 8-1. With Trustee’s support, on May 20,-. 2013, the debtors’ second amended plan was confirmed obligating them to make total monthly payments of $1,737 to Trustee over the next five years. Order. Confirming Chapter 13 Plan, Dkt. No. 41.
In February, 2014, the debtors submitted an “Application to Purchase Automobile” (“App. to Purchase”) to Trustee. Exh. 204. In it, they sought Trustee’s approval of their purchase of a 2008 Dodge Durango on credit, ostensibly because Debtor would likely be losing access to his work vehicle, and the debtors both needed vehicles to get to their jobs. Id. Trustee alleges that while she agreed to this purchase, she noted on the App. to Purchase that her assent to the debtors’. proposal came with a condition: that they thereafter propose “no decrease in plan pay*919ments — or mortgage payments.” 7d4
Shortly thereafter, on March 28, 2014, the holder of the debtors’ home mortgage filed a “Motion for Court Approval of Loan Modification Agreement” asking the Court to approve a modification of the debtors’ loan agreement to lower the interest rate and reduce their monthly mortgage payments by $528.38. Dkt. No. 52. Debtor testified at the hearing that this mortgage modification was negotiated with the mortgage lender to provide the debtors the extra funds needed to make the Durango payments. Trustee did not object, and there being no other objections to the motion, on August 22, 2014, the Court entered an order approving the loan modification. Dkt. No. 57. .The loan modification was implemented and the. debtors’ monthly mortgage payments were reduced.,
Beginning'in early February 2015,’ a flurry of activity occurred in the chapter 13 case. It seems that, at about that time, Debtor and Peggy separated; on February 11,2015, Peggy filed a notice'of change of address with the Clerk signaling that she was no longer living at the debtors’ former residence. Dkt. No. 66. Then, on August 18, 2015, Peggy filed a Motion to Bifurcate the chapter 13 case. Dkt. No. 86. Without objection from Trustee, the Court granted the bifurcation motion on September 10, 2015, Dkt. Nos. 90 and 91, and a separate bankruptcy case was opened for her. See In re Peggy Diane Wood, Case No. 15-40882-JDP. On October 5, 2015, Peggy’s case was converted to a chapter 7, case.
On February 8, 2015, Debtor. filed amended schedules I and J to reflect the changes to income and expenses resulting from Peggy’s departure. Dkt. No. 64. The amended schedule I indicated a decrease in monthly income-of $1,807. The amended schedule J reflected a decrease in Debtor’s monthly expenses, including those for telephone/cell phone/internet/satellite service, food and housekeeping supplies, medical and dental expenses, and transportation, as well as elimination of the car payment on the Durango. The amended schedule J also showed increases in Debtor’s expenses for clothing, laundry, and dry. cleaning, entertainment, haircuts and gifts. -All told, Debtor’s expenses decreased by $1,145. Dkt. Nos. 1, 51, 64.
On February 8>, 2015, Debtor-also filed a motion to modify the confirmed chapter 13 plan proposing that he pay the reduced amount' of $1,075 per month for the remainder of the plan, a figure presumably attained by subtracting the expenses reflected in Debtor’s amended schedule.J, $3,384, from Debtor’s sole income under the amended schedule Í, $4,459. Dkt. No. 62. Trustee objected' to this motion, Dkt. No. 67, and, at a May 6, 2015 hearing, Debtor withdrew the motion. See Minute Entry, Dkt. No. 79.' Despite withdrawing the motion to modify, however, Debtor began making the reduced $1,075 monthly payment to Trustee.5
, On September 11, 2015, following his first reduced payment, Trustee filed the Motion to Dismiss based .upon Debtor’s failure to make the full amount of the plan payments. Dkt. No. 92. Debtor did not object to Trustee’s. motion, and instead *920responded on September 24, 2015, by filing the Modification. Dkt. No.- 95. The Modification again proposes to reduce Debtor's plan payments from $1,737 to $1,075, with an additional $230 per month to be’paid for the remaining 32 months of the plan term to cure the accrued arrearages. Id.
Analysis and Disposition
A. Trustee’s Motion to Dismiss
The Court first- briefly addresses Trustee’s dismissal motion based upon Debtor’s failure to make the full amount of the required payments.- Debtor does not dispute-thht, while the confirmed plan calls for payments of $1,737 per month,’ sinee September 2015, Debtor has made monthly payments of $1,075. As a result, Debtor is in default under the terms of the confirmed plan.
Clearly, Debtor made a reckless decision to unilaterally reduce his payments absent an order modifying the terms of the confirmed plan. A material default by a debtor with respect to a,’ term of a confirmed plan may constitute adequate cause to dismiss a chapter '13 case. § 1307(c)(6). Even so, under these facts, in the exercise of its discretion, the Court declines to dismiss the case. Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP 2011) (the bankruptcy court’s dismissal of a chapter 13 case is reviewed for an abuse of discretion); In re Cluff, 2012 WL 1552391 *3 (Bankr.D.Idaho Apr. 30, 2012). Debtor experienced a significant change in his personal and financial circumstances following his separation from his spouse. Given this unfortunate development, the critical inquiry here is whether the amount of the monthly plan payments ought to be adjusted to accommodate Debtor’s new circumstances, Debtor has a good job and a' steady incomé, desires to complete the plan and, if possible, receive a discharge, and while a change in the plan payment amount may or may not be' warranted, dismissal is not appropriate at this time even thqugh Debtor has failed to make adequate payments to Trustée.
B. Debtor’s Motion to Modify Plan
Debtor argues that because his spoused income1 is no longer available to make plan payments,6 a modification is necessary to reduce the payment to reflect his-changed income and expenses. Trustee disagrees, generally contending that Debtor should adjust his standard of living and continue the present payments, rather than ask unsecured creditors to sacrifice the difference. More specifically, Trustee makes three arguments in opposition to the Modification: (1) that based upon events surrounding Trustee’s approval of the App. to Purchase of the Durango, Debtor should be estopped from proposing a modification to reduce his plan payments; (2) that while his circumstances 'have changed, Debtor’s revised expenses are excessive and many exceed IRS allowances, and he still has the ability to make the original plan payments; and (3) that the Modification has not been proposed in good faith because Debtor in*921tends to retain and pay for “luxury” goods through the modified plan.
The legal foundation for the Modification is § 1329(a)(1), wherein the Code allows a confirmed plan to be modified to increase or decrease the amount of payments, provided the modified plan complies with the general confirmation requirements of § 1325(a). § 1329(a)(1); In re Defrehn, 03.3 IBCR 174, 176 (Bankr.D.Idaho 2003). As the moving party, Debtor bears the burden of showing facts sufficient to demonstrate that a plan modification is warranted. In re Hall, 10.3 IBCR 77, 77-78 (Bankr.D.Idaho 2010). However, in contrast to the rules for confirmation of the debtors’ second amended chapter 13 plan, the adequacy of the monthly payments proposed in the Modification need not satisfy the “projected disposal income” requirements of § 1325(b). Sunahara v. Burchard (In re Sunahara), 326 B.R. 768, 781 (9th Cir. BAP 2005).
Against this legal backdrop, the Court will consider each of Trustee’s arguments opposing the Modification.
1. Estoppel
Trustee first argues that, because of the circumstances surrounding the debtors’ post-confirmation proposal to purchase the Durango, and Trustee’s approval of that proposal, Debtor should be equitably estopped from reducing his plan payments. Simply put, because Trustee conditioned her approval of the Durango’s acquisition on the debtors’ alleged agreement that they 'would not thereafter reduce their mortgage or plan payments, Debtor is acting inequitably in'proposing the Modification. The Court disagrees.
If appropriate in a bankruptcy case, estoppel is a defense that may be raised only by a party who relied upon the actions of another to his or her detriment. Hopkins v. Idaho State Univ. Credit Union (In re Herter), 11.2 IBCR 90, 94 (Bankr.D.Idaho 2011), aff'd 13.1 IBCR 10, 13-14 (D.Idaho 2013). The elements of equitable estoppel are: (1) the party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended;- (3) the party asserting estoppel must be ignorant of the true facts; and (4) the party asserting estoppel must rely on the other’s conduct to his injury. In re Herter, 13.1 IBCR at 14.
Because the Code expressly sets forth the requirements for plan modification, the Court doubts that an equitable estoppel defense is appropriate in this context.7 But even if the defense is available, Trustee. does not argue that she would be personally prejudiced by a reduction in Debt- or’s plan payments. Presumably, Trustee claims prejudice based upon the reduction in payments to unsecured creditors contemplated by the Modification. However, Trustee has not demonstrated the extent of that “injury,” nor has she offered the facts, to establish the other elements required for an estoppel defense to the Modification,
Trustee apparently added a handwritten note to the App. to Purchase submitted to her by the debtors providing'that her assent to their vehicle purchase was subject to “no decrease in plan payments — or mortgage payments.”- While the App. to *922Purchase shows it was approved By Trustee on February 13, 2014, there is nothing in evidence to suggest that Debtor knew about, or agreed to, Trustee’s “condition” to the application. Instead, it appears that Peggy completed the application, perhaps because, the Durango was to be her vehicle. Trustee’s handwritten notation appears to have been a unilateral requirement added after the App. to Purchase was submitted by the debtors. Indeed, the App. to Purchase does not bear the signature of either the debtors, nor is Trustee’s “condition” initialed or in any way acknowledged by Debtor, or Peggy. Exh. 204.
In addition, while the App. to Purchase was signed by Trustee on February 13, 2014, about six weeks later, on March 28, 20Í4, Debtor’s mortgage lender filed the motion for approval of the loan modification. Dkt. No. 52. The evidence shows that Trustee was aware of the debtors’ efforts to modify the 'mortgage at the same time the Durango purchase was being discussed. Exh. 203. Despite this, Trustee’s “condition” makes no exception for lowering the mortgage payments to enable Debtor and Peggy to make the payments on the Durango. If Trustee was firm on her requirement that neither plan nor mortgage payments be lowered 'if the debtors purchased the Durángo, Trustee would be expected to object to the proposed mortgage modification to defend her condition. Yet she- did not. Having arguably allowed the debtors to once breach the condition she allegedly placed on the purchase of the Durango, the Court declines to allow Trustee to now selectively enforce the “no decrease in plan payments” provision in the name of equity.
&■ Good Faith
To sustain a proposed modification of the plan under § 1329-, Debtor must show that it satisfies the confirmation requirements of § 1325(a). Consequently, Debtor must prove the Modification has been submitted in good faith for purposes of § 1325(a)(3). Trustee argues that Debt- or has failed to prove his good faith, both as a general matter, because his modified monthly expenses are excessive, and more particularly, because, at the expense of his unsecured creditors, he is using the Modification to retain and pay the liens against “luxury” goods.
a. Good Faith Generally
To determine - a chapter 13 debtor’s good faith (or lack, thereof), bankruptcy courts must “tak[e] into account the particular features .of each Chapter 13 plan.” In re Yochum, 96.2 I.B.C.R. 77, 78 (Bankr.D.Idaho 1996) (citing In re Porter, 102 B.R. 773, 775 (9th Cir. BAP 1989)). As the Ninth Circuit has instructed, the good faith test “should examine the intentions of the debtor and the legal effect of the confirmation of a Chapter IS plan in light of the spirit and purposes of Chapter 13.” In re Hieter, 09.1 IBCR 28, 30 (Bankr.D.Idaho 2009) (citing Chinichian v. Campolongo (In re Chinichian), 784 F.2d 1440, 1444 (9th Cir.1986)). More precisely, the Court should consider:
(1) whether the debtor has misrepresented facts in his or her petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed the Chapter 13 petition or plan in an inequitable manner;
(2) the debtor’s history of filings and dismissals;
(3) whether the debtor’s only purpose in filing for Chapter 13 protection is to defeat state court litigation; and
(4) whether egregious behavior is present.
Id. (citing Ho v. Dowell (In re Ho), 274 B.R. 867, 876 (9th Cir. BAP 2002)).
*923Here, Trustee’s objections'to the Modification focus on whether Debtor is attempting to inequitably and unfairly manipulate the terms of the Bankruptcy Code to the prejudice of his creditors. Based upon the facts, the Court agrees with Trustee.
b. Debtor’s Ability to Pay and ’ His Excessive Expenses
Trustee contends that Debtor should not be permitted to modify the confirmed plan because he has the ability to make the current payments, and his projected, expenses are excessive and exceed IRS allowances. Trustee reminds the Court that, in this context, § 707(b)(2)(A) mandates that a * debtor’s monthly expenses “shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards,” and shall be the debtor’s actual monthly expenses-for the categories specified ;as Other Necessary Expenses, issued by the Internal Revenue Service for the area in which the debtor resides. Even if the IRS. allowances implicated by. § 707(b)(2)(A) and § 1325(b)(3) are inapplicable to modification in chapter 13 cases, the Court has previously held that it may consider the allowances as part of its determination of the reasonableness of a debtor’s spending to assess a debtor’s good faith under § 1325(a). In re Stitt, 403 B.R. 694, 704 (Bankr.D.Idaho 2008).
Following Peggyis departure from the household, Debtor filed amended schedules showing his income and expenses. Dkt. No. 64. These schedules list his transportation expenses as $430 monthly, while the IRS allowance for transportation for a single person is $236. Dkt. No. 64. Debtor’s expenses for; home maintenance, food, housekeeping, laundry, clothing, entertainment, pet expenses, and home office supplies are listed in the amended schedules at $765 per month,' which amount also significantly exceeds the IRS allowance for a single man of $585. Dkt. No. 64.
Debtor has offered no evidence to suggest that there are any unusual, factual reasons justifying his deviation from the IRS allowances. Rather, it' appears Debt- or is simply resisting Trustee’s efforts to conform-his spending habits to those represented in the allowances. Absent a factual justification for ■ them, the Court agrees with- Trustee that Debtor’s proposed expenses for..these categories are excessive and unreasonable, and indicate a lack of good faith. This is reason enough for the Court to- deny Debtor’s Modification.
c. Applicability of § 1325(b) to § 1329 Modifications
Trustee also contends that Debt- or’s attempt;to use chapter 13 to retain and pay for unnecessary “luxury” goods— in Debtor’s case, a large, boat and a small tractor — evidences a. lack of- good faith. This argument, in turn, places, the question of the applicability of § 1325(b) to plan modifications under § 1329(a) squarely before the Court. . ■ ■ .
Reviewing the adequacy of a debtor’s proposed plan payments requires navigation of several related Code provisions. Section 1325(b)(1) provides that, if the trustee objects, unless the proposed plan pays claims in; full, a debtor must commit all of his or her projected disposable income to plan payments. Section 1325(b)(2) specifies that a debtor’s disposable income is his or her current monthly income “less amounts reasonably necessary to be ex-, pended — ... for.the maintenance or support of the debtor or a dependent of a debtor.” Section 1325(b)(3) then provides that “[ajmounts reasonably necessary to be expended under paragraph (2) ... shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2).” In turn, § 707(b)(2) requires that current *924monthly income shall be reduced by “[t]he debtor’s average monthly payments on account of secured debts.” § 707(b)(2)(A)(iii). Under this scheme, then, Debtor could deduct plan payments on secured debts from current monthly income, and thus disposable income, without qualification.
Trustee acknowledges that, in calculating a debtor’s projected disposable income in weighing the confirmation-of a debtor’s original plan, proposed payments on secured debts, even those incurred for a debtor’s purchase of “luxury” goods, are included. However, Trustee contends that a different standard applies to proposed modifications, and that payments on luxury' secured debts may be impermissible because § 1325(b)’s disposable income rules are inapplicable. ■
That a debtor’s decision to pay secured debt for luxury goods may hot serve as the basis for questioning the debt- or’s good faith in proposing a plan was firmly established in Drummond v. Welsh (In re Welsh), 711 F.3d 1120 (9th Cir.2013). In response to Trustee’s arguments, Debtor contends that'iw re Welsh controls here, and prevents ,the Court from inquiring into whether Debtor’s proposal to pay secured claims through his modified plan is, or is not, reasonable. Debtor is incorrect.
In Welsh, the debtors 'proposed a chapter 13 plan which included payments on secured claims for an expensive home, several- vehicles, an Airstream trailer, and two ATVs, while at- the same time éxcluding Mr. Welsh’s social security income-as a source for plan payments to unsecured creditors. Id. at 1123. As proposed in the debtors’-plan, after all plan payments-had been made, only about $14,700 would be paid toward the debtors’ $180,500 unsecured debt. Id. The trustee objected, asserting that the proposed- plan was not submitted in good faith under § 1325(a)(3). In affirming the bankruptcy court’s decision to confirm the plan, rejecting Trustee’s arguments, the Ninth Circuit noted that the Code requires a debtor to deduct payments on secured debts in determining disposable income under § 707(b), and that “Congress did not see fit to limit or qualify the kinds of secured payments that are subtracted from current monthly income to-reach a disposable income figure.” Id. at 1135. As a ’result, this “forecloses a court’s consideration of a debtor’s ... payments to secured creditors as part of the inquiry into good faith under 11 U.S.C. § 1325(a).” Id. Simply put, under In re Welsh, when a plan is being considered for confirmation, the nature and amount of a debtor’s payments to secured creditors cannot be considered in the bankruptcy court’s examination of the debtor’s good faith.
In extending the holding of Welsh to plan modifications, Debtor contends that the “disposable income”'‘ analysis under § 1325(b) must surely apply to modified plans as well, lest “absurd” results follow. After all, if any type of secured debt is acceptable in determining the adequacy of payments under the original plan for confirmation, how can those same debts be unacceptable when a debtor’s circumstances change and a plan modification is proposed?
This Court considered a similar question, pre-Welsh, in a contest over the disposition of a debtor’s post-confirmation social security • payments. In In re Hall, during the course of their chapter 13 plan, one of the debtors became eligible to receive both a lump sum, and monthly social security benefits. 10.3 IBCR77, 77 (Bankr.D.Idaho 2010). Because of this improvement in their income, the trustee sought to modify their confirmed plan to require that the social security funds be paid to debtors’ creditors. The debtors *925contended that the disposable income requirements of § 1325(b) should be applied to a proposed modified plan under § 1329(a), and because social security benefits are not considered in a disposable income analysis, the plan should not be modified.
In denying approval of the modification, the Court cited In re Sunahara, wherein the BAP considered the applicability of § 1325(b) to plan modifications under § 1329. 326 B.R. at 775-782. In Sunahara, the panel held that § 1329(b) “expressly applies certain specific Code sections to plan modifications but does not apply § 1325(b). Period.” Id. at 782 (emphasis in original). Recognizing that other courts have differed over this issue, the Court in In re Hall concluded that “because the plain language of § 1329 does not include any reference to § 1325(b), even though § 1329 includes specific reference to several other Code sections, the requirements of § 1325(b) should not be applicable to § 1329 modifications.” In re Hall, 10.3 IBCR at 79. The relevant inquiry is, then, does Welsh suggest that the BAP’s holding in Sunahara, and this Court’s decision in In re Hall, are no longer viable? It does not.
In re Welsh was not a modification case. Because confirmation of the debtors’ original plan was at issue, the Code requires that all aspects of § 1325 be examined when deciding whether the debtor’s plan should be confirmed, including subsection (b). But the Code imposes a different, more restricted, analysis for modification. And Welsh does not require that the Court disregard the express language of the Code specifically listing which portions of § 1325 are applicable in judging a proposed modification of a confirmed plan. Because it was decided in a different context, In re Welsh does not impact the reasoning in In re Hall or in Sunahara, both of which were modification cases. Accordingly, because the disposable income provisions of § 1325(b) do not figure in the modification analysis, Debtor cannot rely upon the disposable income test to support the adequacy of his proposed plan payments in connection with a good faith analysis of the Modification. Instead, the Court may properly consider whether the payments to his secured creditors are reasonable in assessing his good faith in proposing to reduce his plan payments via a modification.
d. Debtor’s Retention of the Boat and Tractor
Debtor proposes to continue paying $98.42 per month to retain a small tractor that, according to the evidence, he uses only occasionally in the winter to plow his driveway. While Debtor testified that, without the tractor, he may have to pay someone $50-100 per snowfall to plow his driveway, absent other proof, it is doubtful that doing so would be nearly as expensive as paying almost $1,200 per year to the secured creditor to retain the tractor. Thus, Debtor has not made a persuasive case that it is reasonable for him to retain the tractor and pay for it through the Modification using funds otherwise available to pay unsecured creditors.
The Boat is an even more glaring problem for Debtor. When the total amount owed to the secured creditor is compared to its value, the Boat is (pardon the pun) “underwater.” Paying the secured claim on the Boat through his modified plan would cost Debtor — and, indirectly, his unsecured creditors — about $5,000 per year going forward over the remaining term of the plan. Debtor offered no testimony about whether he currently uses the Boat, only that he intends to live on it “after retirement.” As a practical matter, then, Debtor is proposing to pay for both his home, and his future retirement home, *926with current chapter 13 plan payments. Trustee, and the unsecured creditors, can be justifiably perplexed and frustrated by Debtor’s logic. Debtor’s approach evidences a lack of good faith.
Conclusion
That Debtor’s financial situation has changed for reasons not of his own making does not alone establish that the Modification is an appropriate reaction to those changes. In proposing to modify his confirmed plan, Debtor invites an analysis of the good faith of his budget and spending habits. Because his monthly expenses are excessive, and his proposed plan payments to two secured creditors are unnecessary, the Modification fails the good faith test.
The Court will not dismiss Debtor’s case at this time in order to allow him to com template this Decision and his situation. Presumably, Debtor must either decide to cure the plan payment,.delinquencies and continue the payments under the confirmed plan, or propose another, more realistic modification. If he does neither within a reasonable time, Trustee can again request dismissal. Trustee’s motion to dismiss and Debtor’s Motion to Modify will be denied in a separate order.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
. Reference to Ms. Wood by her first name is for clarity; no disrespect is intended.
.This plan treatment is based upon an allowed secured claim for the creditor of $21,165, plus 6.75% interest. Presumably, this amount is based upon the value listed for ' the Boat in the secured creditor’s proof of claim, which also indicates the total balance due on the claim is in excess of $37,000, Claims Reg. No. 9-1 at 1-2.
. The App. to Purchase was not filed, with the Court, and the confirmed plan was not modified to reflect, the debtors’ acquisition of, and payments for, the Durango,
. While Debtor has continuously made the reduced payment, on August 13, 2015, at Trustee’s request, the Clerk issued a wage order to Debtor’s employer requiring that a total of $1,764 be deducted from Debtor’s monthly pay. Dkt. No. 84. This wage order was vacated by stipulation of the parties on November 17, 20151. Dkt. No. 116.
. According to Debtor, after the plan was confirmed, Peggy decided to retire from her job. The amount she receives each month via Social Security and .retirement benefits is roughly equal to her income prior to her retirement. But regardless of the source and amount of her income, Debtor and Peggy separated and are estranged, and as a result, her income is no longer available to Debtor to make plan payments. While Debtor testified he hopes to eventually reconcile, as a practical matter, because -Peggy and Debtor no longer reside together, and she has elected to •’abort the chapter 13 case in favor of her own chapter 7 case, Debtor’ situation must be analyzed under the Code as though he were single.
. As discussed below, the Code requires that modified chapter 13 plans be "proposed in good faith.” §§ 1325(a)(3), 1329(a). While the Court need not decide such in this case, it would seem that the good faith requirement is sufficient to accommodate the sorts of equitable considerations which an estoppel defense is designed to promote without reliance on the Court’s more general, equitable powers under § 105(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8499041/ | MEMORANDUM DECISION
SHELLEY C. CHAPMAN, UNITED STATES BANKRUPTCY JUDGE
TABLE OF CONTENTS
BACKGROUND ... 21
A. The Terms of the Federation Notes and the Portfolio Swap ... 22
1. Economic Terms ... 22
2. Unwinding the Federation Notes Upon Early Termination of the Portfolio Swap... 24
3. Applicable Law... 24 ■
B. The Custodian Business of ANZ Bank and ANZ Nominees and Their Involvement as Custodian for Certain Federation Notes... 25
1. The Custodian Business ... 25
2. The Involvement of ANZ Bank and ANZ Nominees with the Federation Notes ... 25
C. The Distribution to ANZ Nominees ... 27
D. Proofs of Claim Filed by ANZ Nominees and ANZ Bank ... 27
E. Procedural History ... 28
STANDARD OF REVIEW ... ,29
DISCUSSION ... 29
A. In Personam Jurisdiction ... 29
1. ANZ Nominees Has Not Willingly Submitted to the Court’s Jurisdiction ... 30
2. Mere Department Analysis ... '30
*213. In Personam Jurisdiction Over ANZ Bank ... 33
a. The Court Does Not Have General Jurisdiction Over ANZ Bank ... 33
b. ANZ Bank Has Not Consented to the Court’s Jurisdiction in this Matter ... 33
c. The Court Does Not Otherwise Have Specific Jurisdiction Over ANZ Bank ... 36
i. The Mere Department Test is Applicable to a Specific Jurisdiction Analysis ... 36
ii. ANZ Bank Does Not Have Minimum Contacts with the United States ... 38
B. In Rem Jurisdiction ... 40
1. LBSF Has a Property Interest in the Transaction Documents Governing the Federation Notes ... 42
2. LBSF Has a Property Interest in Its Security Interest on the Investment Agreements and Other Collateral ... 43
CONCLUSION ... 43
Before the Court is a motion to dismiss (the “Motion”) filed by ANZ Nominees Limited (“ANZ Nominees”) in the above-captioned adversary proceeding brought by Lehman Brothers Special Financing Inc. (“LBSF”). ANZ Nominees takes the position that this Court has neither in personam jurisdiction nor in rem jurisdiction to resolve this adversary proceeding as it relates to ANZ Nominees, an Australian entity doing business solely in Australia and New Zealand. LBSF responds with three arguments for denying the Motion. First, LBSF contends that ANZ Nominees voluntarily submitted itself to the jurisdiction of this Court by filing a proof of claim in the chapter 11 case of Lehman Brothers Holdings Inc. (“LBHI”). Second, LBSF asserts that ANZ Nominees is a mere department of ANZ Bank Limited (“ANZ Bank”) and that ANZ Nominees should be treated as equivalent to ANZ Bank for purposes of the jurisdictional analysis. LBSF asserts that ANZ Bank undertook actions outside the United States, including filing proofs of claim in the LBHI case, that provide the requisite “minimum contacts” necessary to support in personam jurisdiction over ANZ Bank and therefore ANZ Nominees. Third, and in the alternative, LBSF takes the position that this Court has in rem jurisdiction to resolve this adversary proceeding as it relates to ANZ Nominees because this adversary proceeding concerns a dispute over property of the LBSF estate. For the reasons set forth below, the Court grants ANZ Nominees’ motion to dismiss for lack of personal jurisdiction. The Court further holds that it has in rem jurisdiction over the property that is the subject of this adversary proceeding as it relates to ANZ Nominees.
BACKGROUND
LBSF, a wholly-owned subsidiary of Lehman Brothers Inc. and an indirect subsidiary of LBHI, initiated this adversary proceeding on September 14, 2010 against various investment vehicles, trustees, and noteholders who had participated in certain transactions involving credit default swap agreements. In each of these transactions, LBSF (as the credit default swap counterparty) and the noteholder held competing interests in collateral securing an issuer’s obligations to (i) LBSF under a credit default swap and (ii) a noteholder under a credit-linked synthetic portfolio note. The transaction documents for these transactions include provisions that govern the priority of payment from the liquidation of such, collateral. Those so-called priority of payment provisions entitle the relevant noteholder or noteholders, *22under certain circumstances, to receive distributions from the liquidation of the collateral prior to LBSF. In each transaction subject to this adversary proceeding, LBSF alleges that the noteholders received such distributions. Among other reasons, LBSF brings this action to obtain a declaratory judgment that the priority of payment provisions are unenforceable ipso facto clauses and to avoid distributions made to noteholders pursuant to those provisions.
As between LBSF and movant ANZ Nominees, this adversary proceeding concerns certain notes issued by Series 2007-1 Federation A-l Segregated Portfolio and Series 2007-1 Federation A-2 Segregated Portfolio (together, the “Federation Notes”). Each of Series 2007-1 Federation A-l Segregated Portfolio and Series 2007-1 Federation A-2 Segregated Portfolio was a segregated portfolio of Securitized Product of Restructured Collateral Limited SPC, itself a segregated portfolio company incorporated in the Cayman Islands.1 After the bankruptcy filings of LBHI and LBSF, ANZ Nominees, as sub-custodian for certain beneficial holders of the Federation Notes, received an AUD 17,166,240.17 distribution from BNY Mellon Australia Pty Limited, an Australian affiliate of BNY Mellon, the trustee of the Federation Notes (the “Trustee”). ANZ Nominees subsequently forwarded the distribution to those certain beneficial holders of the Federation Notes for whom it acted as sub-custodian. LBSF now seeks to recover the distribution from the Trustee to ANZ Nominees.
A. The Terms of the Federation Notes and the Portfolio Swap
1. Economic Terms
The Federation Notes were issued by (i) Series 2007-1 Federation A-l Segregated Portfolio in a principal amount of AUD 50,000,000 and (ii) Series 2007-1 Federation A-2 Segregated Portfolio in a principal amount of AUD 14,450,000. The terms of the Federation Notes provided for annual interest payments at a rate of the three-month Bank Bill Swap Reference Rate for Australian dollars plus 1.00%.
Payment to the holders of the Federation Notes was to be derived from two sources. First, each of the issuers would invest all or substantially all of the proceeds from the sale of the Federation Notes with Cooperatieve Céntrale Raiffeisen-Boerenleenbank, B.A. (“Rabobank”) pursuant to an investment agreement (each, an “Investment Agreement”)2 that would serve as the primary collateral for the Federation Notes.3 Each Investment Agreement provided that Rabobank would pay the relevant issuer quarterly interest on the proceeds of the Federation Notes in an amount approximately equal to the average Bank Bill Swap Reference Rate for Australian dollars during the quarter, less *230.06%.4 Thus, the first source of payment, and the primary collateral securing the Federation Notes, was insufficient to meet each issuer’s interest payment obligations with respect to the Federation Notes.
Second, each issuer of the Federation Notes would enter into a portfolio credit default swap with LBSF (the “Portfolio Swap”). The Portfolio Swap provided for LBSF to make payments to the applicable issuer equal to the product of a fixed rate of interest and the initial notional amount (equal to the initial principal amount of the Federation Notes issued by each issuer) of a reference portfolio of securities (the “Reference Portfolio”).5 The Portfolio Swap further provided that each issuer would pay LBSF an amount generally equivalent to the Australian dollar equivalent of the losses experienced by the Reference Portfolio over the applicable period (the “AUD Tranche Loss Amount”).6 To pay LBSF the AUD Tranche Loss Amount, each issuer was required to withdraw the AUD Tranche Loss Amount from the funds invested in the Investment Agreements.7 Thus, the Investment Agreements served first as the source of payment for AUD Tranche Loss Amounts and second as a source of payment for the Federation Notes. Moreover, LBSF enjoyed a security interest in the Investment Agreements and other issuer collateral to secure its contractual right to repayment.8
Functionally then, the “deal” embedded in the Federation Notes was that the holders of the Federation Notes were to provide credit default protection to LBSF with respect to the Reference Portfolio in exchange for fixed payments from LBSF and that such protection would be backed by each issuer’s Investment Agreement.9 The Reference Portfolio consisted of home equity loans secured by residential property located in the United States.10 The Federation Notes offering materials noted that some of the securities comprising the Reference Portfolio may have been of sub-prime credit quality11 and the Reference Portfolio was described in an April 2007 marketing presentation of the Federation Notes as “40 U.S. Non-Prime RMBS Bonds.”12 The offering materials further disclosed that “[r]ecently, the sub-prime mortgage loan market has experienced increasing levels of delinquencies and defaults;” 13 the April 2007 marketing presentation included a report prepared by *24Moody’s Investor Services entitled “Challenging Times for the U.S. Subprime Mortgage Market.”14 In other words, holders of the Federation Notes wagered that the fixed payments to be made by LBSF would exceed the losses experienced by the Reference Portfolio (ie„ home equity loans of questionable quality) in an amount sufficient to meet interest and principal payments on the Federation Notes.
As a condition to issuance of the Federation Notes, the Federation Notes issued by the Series 2007-1 Federation A-l Segregated Portfolio were required to receive Standard & Poors’ highest rating of “AAA” and the Federation Notes issued by the Series 2007-1 Federation A-2 Segregated Portfolio were required to receive a rating of “A+” from Standard & Poor’s.15 Each condition was apparently met, despite the risks disclosed in the offering materials and the marketing of the Federation Notes.
2. Unwinding the Federation Notes Upon Early Termination of the Portfolio Swap
Declaration of an Early Termination Date with respect to the Portfolio Swap constituted an Event of Default with respect to the Federation Notes that resulted in automatic acceleration of unpaid principal and interest.16 In the event of such an acceleration, each Investment Agreement would be deemed to have matured and become payable to the Federation Notes issuers.17 Then, such amounts, along with all other proceeds collected by the issuers, would become payable to the holders of the Federation Notes by the “Paying Agent”18 or the issuer’s custodian 19 in accordance with “Final Scheduled Payment Date Priority of Payments.”20
Under that scheme, and consistent with the structure of the transaction, all AUD Tranche Loss Amounts owed to LBSF were to be paid first in all instances. If LBSF was not the defaulting party pursuant to the terms of the Portfolio Swap, LBSF was to be paid all termination payments owed to it pursuant to the terms of the Portfolio Swap second. However, if LBSF was the defaulting party pursuant to the terms of the Portfolio Swap, it was to be paid all termination payments owed to it pursuant to the terms of the Portfolio Swap only after payments of interest and principal to the holders of the Federation Notes.21
3. Applicable Law
The Federation Notes, the indentures governing the Federation Notes, and the Portfolio Swap Agreements were each gov*25erned by New York law.22 The custodian is a party to each of the indentures governed by New York law.23 The “Agency Agreements,” pursuant to which BTA Institutional Services Australia Limited provided services as Paying Agent to each issuer, were governed by Australian law.24
B. The Custodian Business of ANZ Bank and ANZ Nominees and Their Involvement as Custodian for Certain Federation Notes
1. The Custodian Business
ANZ Bank, a company organized under the laws of Australia, has a worldwide presence, including a branch office in New York.25 As part of its product offerings during the relevant times, ANZ Bank offered clients “ANZ Custodian Services.” A brochure for ANZ Custodian Services described it as “part of Australia and New Zealand Banking Group Limited (ANZ).”26 The brochure further stated that “ANZ offers domestic and sub-custody covering a broad client base in our home markets of Australia and New Zealand. We provide custody of all asset classes in Australia and New Zealand.”27 ANZ Custodian Services was contained within ANZ Bank’s Transaction Banking business.28
Paul Garry, a director of ANZ Nominees, testified that ANZ Nominees itself had no employees and that employees of ANZ Bank, and specifically ANZ Custodian Services, provided all services on behalf of ANZ Nominees.29 Mr. Garry described the business of ANZ Nominees as “act[ing] as a sub — as the sub-custodian for ANZ [Bank]”30 and confirmed that ANZ Nominees ceased taking on new accounts as a result of ANZ Bank’s determination that it intended to sell its custody business.31
ANZ Nominees’ role as sub-custodian for ANZ Bank was formalized in that certain Sub-Custody Agreement, dated November 25, 2004 between ANZ Nominees and ANZ Bank (the “Sub-Custody Agreement”).32 The Sub-Custody Agreement provided that all fees ANZ Nominees charged for its sub-custodial services would be paid by the client directly to ANZ Bank, with ANZ Nominees charging ANZ Bank only expenses incurred in providing the sub-custody services (excluding day-to-day overhead such as salaries, rents, and office expenses).33
2. The Involvement of ANZ Bank and ANZ Nominees With the Federation Notes
The Federation Notes were offered “outside the United States, to persons who *26are not U.S. Persons or U.S. residents, in reliance on Regulation S [of the Securities Act].”34 The Federation Notes were registered, lodged, and traded in the Australian securities registry, Austraclear.35 An Australian entity affiliated with Lehman Brothers, Grange Securities Limited (“Grange”), marketed the Federation Notes to Australian investors.36 Separately, certain Australian entities (the “Australian Holders”) became beneficial holders of the Federation Notes and delivered their beneficial interests in the Federation Notes to Citi Australia or UBS AG Australia to hold such interests as custodian.37
From May 9, 2007 through December 3, 2007, ANZ Nominees held Federation Notes as custodian for Grange, which ANZ Nominees understood was acting as custodian for certain beneficial holders of Federation Notes.38 In connection with this role, on May 17, 2Ó07, the Trustee sent a copy of the offering materials to an ANZ Bank e-mail address entitled “Corporate Actions 3”39; ANZ Nominees acknowledges that it received a copy of the offering materials for the Federation Notes on or about May 17, 2007 as a result of this email.40 In August 2007, ANZ Bank received an e-mail from a client requesting advice on limiting its losses in connection with the Federation Notes.41 In February 2008, ANZ Bank employee Angus Graham forwarded a presentation from Lehman Brothers offering investors in the Federation Notes restructuring options and exhorted his internal ANZ Bank team to devise similar options and take them to ANZ Bank clients.42
Between August and October 2008, nineteen of the Australian Holders requested that ANZ Bank take custody of their beneficial interests in the Federation Notes from Citi Australia or UBS AG Australia; ANZ Bank fulfilled those requests pursuant to custody agreements with each beneficial holder and took custody of such entities’ beneficial interests in the Federation Notes.43
Although the record is not entirely clear,44 presumably ANZ Bank appointed ANZ Nominees as sub-custodian with respect to the beneficial interests in the Federation Notes pursuant to the Sub-Custody Agreement. Pursuant to the various custody agreements, ANZ Nominees, as ANZ Bank’s sub-custodian, was responsi*27ble for, among other things, collecting income from the Federation Notes in its custody and distributing it to the beneficial holders of such Federation Notes.45 Each of the various custody agreements is governed by the laws of Victoria, Australia.46 Neither ANZ Nominees nor ANZ Bank is party to the indenture governing the Federation Notes nor any of the agreements related to the issuance of the Federation Notes.
C. The Distribution to ANZ Nominees
On October 8, 2008, the Australian affiliate of the Trustee forwarded to an ANZ Bank email address entitled “Fixed Interest Operations” a letter the Trustee had sent to all holders of the Federation Notes notifying such holders of a default under the Portfolio Swap on account of LBHI and LBSF’s bankruptcy filings (the “October 8 Notice”).47 The October 8 Notice further requested written direction to (and indemnification of) the Trustee from the holders of a majority of the Federation Notes (the “Controlling Class”) as to whether the Trustee should declare an early termination date with respect to the Swap Portfolio and, in so doing, accelerate the Federation Notes.48 Finally, the October 8 Notice attached a direction letter and indemnity to be signed and returned to the Trustee by a Controlling Class.49 ANZ Nominees states that it never responded to the October 8 Notice50 and discovery between the parties has not produced any response from ANZ Bank or ANZ Nominees to the October 8 Notice.51
In late October 2008, ANZ Nominees, as registered holder of certain of the Federation Notes, received a “Notice of Designation of Early Termination Date”52 and a “Notice of Distribution of Principal and Interest”53 from the Trustee.54 The two notices informed holders of the Federation Notes that (i) the Trustee had designated October 30, 2008 as the early termination date of the Portfolio Swap; (ii) termination of the Portfolio Swap resulted in the acceleration of all unpaid principal and accrued and unpaid interest owing on the Federation Notes; and (iii) all principal and accrued and unpaid interest owing on the Federation Notes would be paid to the registered holder on October 30, 2008.55 On October 30, 2008, ANZ Nominees received a transfer of AUD 17,166,217.40 (the “Distributed Funds”) and distributed the entirety of such amount to the accounts of the holders whose beneficial interests in the Federation Notes it held in its custody.56
D. Proofs of Claim Filed by ANZ Nominees and ANZ Bank
Proof of claim number 50672 in the LBHI case (“Claim No. 50672”) was filed by “ANZ Nominees Ltd in trust for Tasmanian Perpetual Trustees Ltd.”57 Claim *28No. 50672 is signed by an individual identifying. himself or herself as “duly authorised officer of Tasmanian Perpetual Trustees Ltd.”58 Mr. Garry represents that Tasmanian Perpetual Trustees Ltd. is not an affiliate of ANZ Nominees and that ANZ Nominees did not authorize or have any involvement in the filing of Claim No. 50672,59
ANZ Bank filed proof of claim number 29532 in the LBSF case60 and proofs of claim numbers 21493 and 26192 in the LBHI case.61 Claim number 29532 in the LBSF case was expunged by order of this Court, with the consent of ANZ Bank, on August 25, 2011.62 ANZ Bank voluntarily withdrew claim numbers 21493 and 26192 in the LBHI case on March 2, 2010.63 Notably, each of the three proofs of claim filed by ANZ Bank was withdrawn or expunged prior to the commencement of LBSF’s proceeding against ANZ Nominees on July 23, 2012.64
E. Procedural History
This adversary proceeding was commenced on September 14, 2010 [ECF No. 1]. LBSF filed an amended complaint (the “First Amended Complaint”) on October 1, 2010 [ECF No. 8]. On July 23, 2012, LBSF filed a second amended complaint [ECF No. 303], The second amended complaint added ANZ Nominees as a defendant for the first time. On September 15, 2014, LBSF filed a third amended complaint [ECF No. 831] and on October 13, 2015, LBSF filed a fourth amended complaint [ECF No. 1156].
Beginning on October 20, 2010, litigation in this action was stayed by a series of orders [Case No. 08-13555, ECF Nos. 12199, 17763, 24198, 29506, 33970, 34697, 38806, 42081]. On January 31, 2014, this Court entered a bridge order extending the litigation stay until the later of May 20, 2014 or thirty days after the date on which the Court entered a scheduling order governing this adversary proceeding [Case No. 08-13555, ECF No. 42417]. On July 14, 2014, this Court entered such a scheduling order, which, among other things, permitted defendants to submit letter requests seeking the Court’s permission to raise individualized defenses [ECF No. 794].
ANZ Nominees submitted such a letter request on July 31, 2014, seeking to file a motion to dismiss for lack of personal jurisdiction [ECF No. 801]. LBSF filed a letter opposing ANZ Nominees’ request [ECF No. 807]. On October 6, 2014, this Court granted ANZ Nominees’ request and permitted limited jurisdictional discovery [ECF No. 837]. ANZ Nominees filed its motion to dismiss on October 15, 2014 [ECF Nos. 841], together with declarations and a memorandum of law in support thereof [ECF Nos. 842, 843, 844], ANZ Nominees and LBSF agreed to briefing and discovery schedules on November 3, 2014 [ECF No. 876]. After completing jurisdictional discovery,"LBSF filed its opposition to ANZ Nominees’ motion to dismiss on April 30, 2015 [ECF No. 1091] (the “Opposition”) and a declaration in support thereof [ECF No. 1092]. On June 11, *292015, ANZ Nominees filed its reply [EOF No. 1109] (the “Reply”), an appendix to the Reply [EOF No. 1112], and supplemental declarations in support thereof [EOF Nos. 1110, 1111]. The Court heard argument on the Motion on November 24, 2015 (the “Hearing”).
STANDARD OF REVIEW
Rule 12(b)(2) of the Federal Rules of Civil Procedure, incorporated into Rule 7012(b) of the Bankruptcy Rules, provides that a case may be dismissed for lack of personal jurisdiction. See Fed. R. Bankr. P. 7012(b). To survive a Rule 12(b)(2) motion, the plaintiff bears the burden to make a prima facie showing that jurisdiction exists. See O’Neill v. Asat Trust Reg. (In re Terrorist Attacks on September 11, 2001), 714 F.3d 659, 673 (2d Cir.2013) (citing Penguin Grp. (USA) Inc. v. Am. Buddha, 609 F.3d 30, 34 (2d Cir.2010)). The plaintiffs prima facie showing must include an averment of facts, which, if credited, would suffice to establish jurisdiction over the defendant. Metro. Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 567 (2d Cir.1996) (citing Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 507 (2d Cir.1994)) (internal quotation marks omitted). However, “[w]hen a defendant rebuts plaintiffs’ unsupported allegations with direct, highly specific testimonial evidence regarding a fact essential to jurisdiction - and plaintiffs do.not counter that evidence - the allegation may be deemed refuted.” In re Methyl Tertiary Butyl Ether (“MTBE”) Prod. Liab. Litig., No. 1:00-1898, MDL No. 1358, 2014 WL 1778984, at *1 (S.D.N.Y. May 5, 2014).
DISCUSSION
LBSF argues that the Court has in personam jurisdiction over ANZ Nominees and, in the alternative, that the Court has in rem jurisdiction over (i) the Distributed Funds and (ii) “LBSF’s property interest in senior payment priority.”65 The Court finds that it does not have in personam jurisdiction over ANZ Nominees, but that it has (and will exercise) in rem jurisdiction over LBSF’s property interests in the transaction documents underlying the Federation Notes and LBSF’.s security interest in the collateral securing the Federation Notes.
A. In Personam Jurisdiction
Rule 7004(d) of the Bankruptcy Rules permits nationwide service of process. See Fed. R. Bankr. P. 7004(d). A bankruptcy court may exercise personal jurisdiction over a defendant served under Rule 7004(d) “[i]f the exercise of jurisdiction is consistent with the Constitution and the laws of the United States.” Fed. R. Bankr. P. 7004(f). Because valid service of process under Rule 7004(d) “is sufficient to establish personal jurisdiction, state long-arm statutes are inapplicable, and the only remaining inquiry for a bankruptcy court is whether exercising personal jurisdiction over the defendant would be consistent with the Due Process Clause of the Fifth Amendment.” Bickerton v. Bozel S.A. (In re Bozel S.A.), 434 B.R. 86, 97 (Bankr.S.D.N.Y.2010) (citing In re Enron Corp., 316 B.R. 434, 440, 444-45 (Bankr.S.D.N.Y.2004)). The “forum state” is the United States as a whole, and “a court should consider the defendant’s contacts throughout the United States.” In re Amaranth Natural Gas Commodities Litig., 587 F.Supp.2d 513, 527 (S.D.N.Y.2008).
LBSF argues that this Court has in personam jurisdiction over ANZ Nominees because (i) ANZ Nominees willingly submitted to the jurisdiction of this Court by filing Claim No. 56072 in the LBHI case *30and (ii) ANZ Nominees is a mere department, for jurisdictional purposes, of ANZ Bank, which is itself subject to specific in personam jurisdiction as a result of its involvement with the Federation Notes and because it filed proofs of claim in the bankruptcy cases of both LBSF and LBHI. LBSF concedes that this Court does not have general or specific in personam jurisdiction over ANZ Nominees in the event that ANZ Nominees did not willingly submit to the Court’s jurisdiction or ANZ Nominees is not found to be a mere department of ANZ Bank.
If ANZ Nominees willingly submitted to the Court’s jurisdiction, as LBSF contends, the Court need not conduct further jurisdictional inquiry. Similarly, if ANZ Nominees did not willingly submit to the Court’s jurisdiction and ANZ Nominees is not a mere department of ANZ Bank, the Court cannot have in personam jurisdiction over ANZ Nominees. Accordingly, the Court will first address LBSF’s argument that ANZ Nominees has submitted to the Court’s jurisdiction, followed by analyzing whether ANZ Nominees is a mere department of ANZ Bank for jurisdictional purposes. If (i) ANZ Nominees has not willingly submitted to the Court’s jurisdiction and (ii) ANZ Nominees is a mere department of ANZ Bank for jurisdictional purposes, the Court will address LBSF’s argument that ANZ Bank and its departments are subject to in personam jurisdietion.
1. ANZ Nominees Has Not Willingly Submitted to the Court’s Jurisdiction
LBSF cites to Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) and Cent. Vt. Pub. Serv. Corp. v. Herbert, 341 F.3d 186, 191-92 (2d Cir.2003) for the proposition that a party that files a proof of claim subjects itself to the broad equitable powers of a bankruptcy court; LBSF also cites to Kline v. ED Zueblin, AG (In re Am. Exp. Grp. Int’l Servs., Inc.), 167 B.R. 311, 313 (Bankr.D.D.C.1994) for the proposition that filing a proof of claim is akin to filing a complaint in this Court, which vests the Court with jurisdiction over the filing party for all purposes. Applying this law, LBSF contends that Claim No. 50672 represents ANZ Nominees’ submission to the Court’s jurisdiction.66 ANZ Nominees contends that ANZ Nominees did not file Claim No. 56072.
The Court has examined Claim No. 56072 and notes that it was signed by an individual identifying himself or herself as “duly authorised officer of Tasmanian Perpetual Trustees Ltd.”67 LBSF has not challenged Mr. Garry’s representation that (i) Tasmanian Perpetual Trustees Ltd. is not affiliated with ANZ Nominees and (ii) ANZ Nominees did not authorize the filing of Claim No. 56072. The record does not contain anything that contradicts Mr. Garry’s representation. Accordingly, the Court cannot conclude that ANZ Nominees filed or authorized the filing of Claim No. 56072. Thus, the Court finds that Claim No. 56072 does not reflect ANZ Nominees’ submission to the Court’s jurisdiction.
2. Mere Department Analysis
As ANZ Nominees did not willingly submit to the Court’s jurisdiction and LBSF concedes that ANZ Nominees is not otherwise subject to the Court’s jurisdiction except as a mere department of ANZ Bank, the Court must now determine, for purposes of its jurisdictional analysis, *31whether ANZ Nominees is properly regarded as a department of ANZ Bank.
A court may exercise jurisdiction over a defendant not otherwise subject to the court’s jurisdiction where the defendant is a “mere department” of an entity over which the court has personal jurisdiction. See GEM Advisors, Inc. v. Corporacion Sidenor, S.A., 667 F,Supp.2d 308, 319 (S.D.N.Y.2009). The question under the mere department analysis is “whether the allegedly controlled entity was a shell for the allegedly controlling party,” Int’l Equity Invs., Inc. v. Opportunity Equity Partners, Ltd., 475 F.Supp.2d 456, 458 (S.D.N.Y.2007) (internal quotation marks omitted); it is not necessary that the entity was used to commit fraud, a showing normally required to pierce the corporate veil under U.S. law. See GEM Advisors, 667 F.Supp.2d at 319. To determine whether a party is a mere department of a controlling entity, courts consider four factors set forth by the Second Circuit in Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120-22 (2d Cir.1984):
(1) Whether there exists common ownership and the presence of an interlocking directorate and executive staff,
(2) The degree of financial dependency of the subsidiary on the parent,
(3) The degree to which the parent interferes in the selection and assignment of the subsidiary’s executive personnel and fails to observe corporate formalities, and
(4) The degree of the parent’s control of the subsidiary’s marketing and operational policies.
Id.; see also GEM Advisors, 667 F.Supp.2d at 319. A court may assert jurisdiction where there is a subsidiary amenable to jurisdiction that is a mere department of the parent-defendant, see Storm LLC v. Telenor Mobile Commc’ns AS, No. 06 Civ. 13157, 2006 WL 3735657, at *13 (S.D.N.Y. Dec. 15, 2006), or where there is a subsidiary-defendant that is a “mere department” of a parent amenable to jurisdiction, see Int’l Equity Invs., 475 F.Supp.2d at 458. The Court will assess each of the Beech factors in turn.
With respect to the first Beech factor, ANZ Nominees concedes that it is wholly owned by ANZ Bank and that ANZ Nominees and ANZ Bank have interlocking directors and staff.68 Accordingly, the first Beech factor, common ownership and the presence of an interlocking directorate, weighs in favor of a finding that ANZ Nominees is a mere department of ANZ Bank.
To establish the second Beech factor, “a plaintiff must show that the subsidiary ‘cannot run its business without the financial backing of its parent.’ ” Williamson v. Verizon Communications Inc., No. 11 Civ. 4948(LTS)(HBP), 2013 WL 227691 at *1 (S.D.N.Y. Jan. 22, 2013) (quoting In re Ski Train Fire in Kaprun Austria on Nov. 11, 2000, 230 F.Supp.2d 403, 410 (S.D.N.Y.2002)). LBSF argues that the second Beech factor is established because ANZ Nominees conducts limited business operations and because ANZ Bank reports ANZ Nominees’ profits on its consolidated financial statements.69 ANZ Nominees contends that these allegations are insufficient and cites to Williamson for the proposition that an allegation of consolidated *32earnings reports is insufficient to satisfy the second Beech factor.70
While the Court agrees with ANZ Nominees and the Williamson court that an allegation of consolidated earnings reports, by itself, is insufficient to establish ANZ Nominees’ financial dependence on ANZ Bank, the record here is sufficient to support a finding that ANZ Nominees is financially dependent on ANZ Bank. First, as LBSF notes, ANZ Nominees conducted limited business operations, which operations were dependent on ANZ Bank. In fact, . Mr. Garry described ANZ Nominees’ business as acting as a sub-custodian for ANZ Bank. There is nothing in the record suggesting that ANZ Nominees solicited its own clients, and Mr. Garry confirmed that the “vast majority” of ANZ Nominees’ custodial account holders would have first been clients of ANZ Bank.71 In addition, ANZ Nominees stopped accepting new customers when ANZ Bank determined to sell its custody business and, as Mr. Garry confirmed, remains inactive today. , Accordingly, the record demonstrates that ANZ Nominees could not generate business without the support of ANZ Bank.
Further, the Sub-Custody Agreement demonstrates that ANZ Nominees did not earn fees on its sub-custody business; rather, account holders paid ANZ Bank directly and ANZ Nominees was only eligible for reimbursement of expenses incurred in providing the sub-custody services (excluding day-to-day overhead such as salaries, rents, and office expenses). Thus, ANZ Nominees generated no revenue on the Sub-Custody Agreement, which formed the “vast majority” of its business, and was not entitled to reimbursement of its day-to-day overhead expenses. ANZ Nominees was also dependent on employees who were paid by ANZ Bank to provide its services. Accordingly, there can be no doubt that ANZ Nominees could not run its business without the financial backing of ANZ Bank.
The third and fourth Beech factors also weigh in favor of a mere department finding. Although it is uncontested that ANZ Nominees observed corporate formalities and had its own directors who owed ANZ Nominees fiduciary duties,72 it is clear that ANZ Bank exercised complete control over (i) the assignment and selection of ANZ Nominees’ executive personnel and (ii) ANZ Nominees’ marketing and operational policies. Indeed, ANZ Nominees had no employees of its own and was wholly reliant on ANZ Bank employees to provide services. There is also nothing in the record indicating that ANZ Nominees had a marketing or operational policy independent of ANZ Bank’s ANZ Custodian Services business. Indeed, as Mr. Garry confirmed, when ANZ Bank decided to sell the ANZ Custodian Services business, ANZ Nominees essentially ceased operations.
In accordance with the foregoing, the Court finds that, for purposes of its jurisdictional analysis, the Beech factors overwhelmingly support treating ANZ Nominees as a department of ANZ Bank.
*333. In Personam Jurisdiction Over ANZ Bank
To exercise personal jurisdiction over a corporation, such entity must have sufficient “minimum contacts” with the forum such that “maintenance of the suit does not offend traditional notions of fair play and substantial justice.” Int’l Shoe Co. v. State of Washington, 326 U.S, 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945). To satisfy the minimum contacts requirement, there must be “some act [of the entity] by which the [entity] purposefully avails itself of the privilege of conducting activities within-the forum State, thus invoking the benefits and protections of its laws.” Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958). A court can exercise two categories of personal jurisdiction: general jurisdiction and specific jurisdiction. Daimler AG v. Bauman, — U.S. —, 134 S.Ct. 746, 754, 187 L.Ed.2d 624 (2014). “General, all-purpose jurisdiction permits a court to hear ‘any and all claims’ against an entity.” Gucci Am., Inc. v. Li, 768 F.3d 122, 134 (2d Cir.2014) (citations omitted). “Specific jurisdiction, on the other hand, permits adjudicatory authority only over issues that ‘arise[e] out of or relat[e] to the [entity]’s contacts with the forum.” Gucci, 768 F.3d at 134 (quoting Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414 n. 8, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984)). If insufficient contacts exist for a court to exercise -general personal jurisdiction, it may still exercise specific jurisdiction. See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985).
a. The Court Does Not Have Géneral Jurisdiction Over ANZ Bank
LBSF concedes in its papers that ANZ Bank and ANZ Nominees are not subject to this Court’s general jurisdiction.73
b. ANZ Bank Has Not Consented to the Court’s Jurisdiction in this Matter
LBSF contends that this Court has specific jurisdiction over ANZ Bank (and thus ANZ Nominees as a department of ANZ Bank) for purposes of this adversary proceeding by virtue of ANZ Bank’s filing proofs of claim in the LBSF and LBHI casés.74 In response, ANZ Nominees argues that, because each of the claims was withdrawn or “voluntarily” expunged before ANZ Nominees became a defendant in this adversary proceeding, each claim should be regarded as a nullity, insufficient to establish consent to jurisdiction.75
In support of its argument, ANZ Nominees cites to Cruisephone Inc. v. Cruise Ships Catering, and Servs. N.V. (In re Cruisephone), 278 B.R. 325 (Bankr.E.D.N.Y.2002). There, the plaintiff initiated an adversary proceeding against a creditor who had filed a. proof of claim but had withdrawn the claim subsequent to the commencement of an adversary proceed*34ing. The creditor moved to dismiss the adversary proceeding for lack of personal jurisdiction. While the court found that a proof of claim “is a submission to the bankruptcy court’s jurisdiction to establish that creditor’s right to participate in the distribution of the bankruptcy estate,” it agreed with the creditor that a proof of claim withdrawn as of right prior to the commencement of the adversary proceeding was irrelevant to the personal jurisdiction analysis. See Cruisephone Inc., 278 B.R. at 330. The Court agrees with the analysis of Cndsephone Inc. Accordingly, proofs of claim numbers 21493 and 26192 filed by ANZ Bank in LBHI’s case, each of which was withdrawn before LBSF commenced proceedings against ANZ Nominees, cannot serve as the basis for submission to this Court’s jurisdiction by ANZ Bank (or ANZ Nominees as a department of ANZ Bank) for purposes of adjudicating this adversary proceeding.76
Claim number 29532, filed by ANZ Bank against LBSF, does not fit neatly into the holding of Cruisephone Inc. inasmuch as, unlike the withdrawn claims in Cruisephone Inc., claim number 29532 was expunged, albeit with the consent of ANZ Bank, by order of this Court. Thus the Court must determine whether a proof of claim that is expunged prior to the debtor’s filing of an adversary proceeding is properly viewed as the creditor’s submission to the court’s jurisdiction in that adversary proceeding. Although this question was the subject of thoughtful discussion by counsel at the Hearing, neither party addressed the question squarely in its papers and neither party was able to refer the Court to any law on point at the Hearing. Research subsequent to the Hearing uncovered the decision in Picard v. The Estate of Doris Igoin, Laurence Apfelbaum, and Emilie Apfelbaum (In re Bernard L. Madoff Investment Securities LLC), 525 B.R. 871 (Bankr.S.D.N.Y.2015) (“Apfelbaum ”), in which Judge Bernstein provided a thoughtful and well-reasoned analysis of just this question.
In Apfelbaum, the SIPA Trustee for the debtor commenced an adversary proceeding against certain French defendants to avoid and recover allegedly fraudulent transfers. The French defendants filed a motion to dismiss the adversary proceeding for lack of personal jurisdiction. The Trustee opposed the motion, arguing, among other things, that the court had jurisdiction based on the defendants’ filing SIPA customer claims in the debtor’s SIPA proceeding. The SIPA customer claims were denied by the Trustee without objection and finally disallowed by the court prior to the adjudication of the motion to dismiss; accordingly, the outcome of the adversary proceeding had no impact on the allowance of the SIPA customer claims. Apfelbaum, 525 B.R. at 880.
In analyzing the Trustee’s argument that the court had jurisdiction over the French defendants by virtue of the SIPA customer claims, Judge Bernstein first stated the law as follows: “As a rule, filing a claim subjects the creditor to the equitable power of the bankruptcy court because it triggers the process of allowance and disallowance of claims. Consistent [with] the rule’s rationale, the submission to personal jurisdiction is limited to litigation concerning the claims allowance process.” 525 B.R. at 887. Judge Bernstein cited to *35Germain v. Connecticut Nat’l Bank, 988 F.2d 1323 (2d Cir.1993) as illustrative of that principle. In Germain, a chapter 7 trustee sought a jury trial on his claims state law claims seeking money damages against a creditor of the debtor. The creditor argued that the trustee did not have a right to a jury trial because, in the creditor’s view, (1) a creditor who submits a proof of claim loses its right to a jury trial and (2) there was no reason for the debtor or the debtor’s estate to be treated differently from a creditor. See Germain, 988 F.2d at 1330; Apfelbaum, 525 B.R. at 887. The Second Circuit rejected the creditor’s argument, finding that “[t]he argument collapses at the first step.” 988 F.2d at 1330. The Second Circuit reasoned:
It is reasonable to assume that a creditor or debtor who submits to the equity jurisdiction of the bankruptcy court thereby waives any right to a jury trial for the resolution of disputes vital to the bankruptcy process, such as those involving the determination of who is a valid creditor and which creditors are senior in the creditor hierarchy. We will not presume that the same creditor or debtor has knowingly surrendered its constitutional right to a jury trial for resolution of disputes that are only incidentally related to the bankruptcy process.
Id.
The Second Circuit further determined that for a dispute to be vital to the bankruptcy process such that filing a proof of claim would result in a waiver, “the dispute must be part of the claims-allowance process or affect the hierarchical reordering of creditors’ claims.” Id. Judge Bernstein observed that the Second Circuit found that the trustee’s claims in Germain were not part of the claims-allowance process and did not affect the hierarchical reordering of creditors’ claims. Apfelbaum, 525 B.R. at 887. The Second Circuit drew the distinction because:
The Trustee asks for money damages to compensate the estate for the destruction of the debtor’s business. If he wins, the estate is enlarged, and this may effect the amount the [creditor] and its fellow creditors ultimately recover on their claims, but it has no effect whatever on the allowance of the [creditor’s claims— Therefore suits like the Trustee’s action in this case which would augment the estate but which have no effect on the allowance of a creditor’s claim simply cannot be part of the claims-allowance process.
Germain, 988 F.2d at 1327.
Applying the principle illustrated in Germain, Judge Bernstein held that the SIPA trustee’s adversary proceeding did not affect the claims allowance process and, therefore, the court did not have personal jurisdiction over the French defendants on the basis of their disallowed proofs of claim:
Here, [defendants’] customer claims have been finally denied by the Trustee, and the disposition of the adversary proceeding will not affect their disallowed claims. Hence, the adversary proceeding does not implicate the claims allowance process. Instead, the Trustee is seeking legal relief in the form of the recovery of money damages, and [defendants] did not submit themselves to personal jurisdiction with respect to the Trustee’s fraudulent transfer action by filing SIPA claims.
Apfelbaum, 525 B.R. at 888.77
The principles illustrated in Germain and applied by Judge Bernstein in *36Apfelbaum are equally applicable here. As in Apfelbaum, ANZ Bank’s filing of proof of claim number 29532 against LBSF here represents its (and its departments, including ANZ Nominees) submission to the jurisdiction of the .Court only with respect to litigation concerning the claims allowance process. As LBSF’s adversary proceeding seeks money damages from ANZ Nominees so as to enlarge the estate, and will have no affect on the allowance or priority of claim number 29532, which was disallowed prior to LBSF commencing proceedings against ANZ Nominees, this adversary proceeding does not concern the claims allowance process. Accordingly, ANZ Bank did not subject itself and its departments to jurisdiction with respect to this adversary proceeding by filing claim number 29532 against LBSF.
c. The Court Does Not Otherwise Have Specific Jurisdiction Over ANZ Bank
To establish specific in person-am jurisdiction, the defendant’s “suit-related conduct” must create the necessary connection to the forum state. Walden v. Fiore, — U.S. —, 134 S.Ct. 1115, 1121, 188 L.Ed.2d 12 (2014). The defendant’s connection to the forum must arise out of contacts the “defendant himself creates,” and those contacts must be between the defendant and “the forum [s]tate itself, not ... persons who reside there.” Id. at 1122 (emphasis in original). To show minimum contacts with the United States, the plaintiff must demonstrate that the defendant “purposefully availed” itself of the privilege of doing business in the forum and “could foresee being haled into court there.” See Bank Brussels Lambert v. Fiddler Gonzalez & Rodriguez, 305 F.3d 120, 127 (2d Cir.2002). However, the foreseeability of causing harm in the forum state, without more, is not enough to establish minimum contacts. See Walden, 134 S.Ct. at 1125. This is to ensure “that a defendant will not be haled into a jurisdiction solely as a result of ‘random,’ ‘fortuitous,’ or ‘attenuated’ contacts, or of the unilateral activity of another party or a third person.” Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) (citing Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984)).
Even if a court finds that the defendant has the requisite minimum contacts, it can refuse to exercise jurisdiction if the exercise of jurisdiction would not be reasonable. MTBE, 2014 WL 1778984, at *2. The reasonableness inquiry “asks whether it is reasonable under the circumstances of the particular case to assert personal jurisdiction.” Amaranth, 587 F.Supp.2d at 527.
i. The Mere Department Test is Applicable to a Specifíc Jurisdiction Analysis
As an initial matter, ANZ Nominees argues that application of the mere department is inapplicable in the context of a specific jurisdiction analysis.78 ANZ Nominees concedes that the court in GEM Advisors applied the mere department test in the context of the New York long-arm statute but contends that the court did not offer any specific jurisdiction analysis.79 ANZ Nominees contends that the mere department test is inapplicable to a specific jurisdiction analysis because it is an outgrowth of the test for general jurisdiction, asserting that the court in Refco *37Group Ltd., LLC v. Cantor Fitzgerald, L.P., No. 13 Civ. 1654(RA) 2014 WL 2610608 (S.D.N.Y. June 10, 2014), “refus[ed] to apply the test before analyzing specific personal jurisdiction” and citing to footnote 10 of the Refco decision as the basis for such assertion.80 The Court finds that the GEM Advisors court did apply the mere department test in the context of a specific jurisdiction analysis; nothing in the Refco decision, or any other decision submitted to the Court, suggests that such application is no longer appropriate.
In GEM Advisors, the court considered whether a foreign corporation could be subject to the court’s personal jurisdiction under N.Y. C.P.L.R. § 302(a), including section 302(a)(1). GEM Advisors, 667 F.Supp.2d at 318. Section 302(a)(1) is a means of asserting specific jurisdiction-over a non-domiciliary defendant for a cause of action “arising from ... transact[ion][of] any business within the state ...” N.Y. C.P.L.R. § 302(a)(1); Best Van Lines, Inc. v. Walker, 490 F.3d 239, 246 (2d Cir.2007) (describing an analysis under section 302(a)(1) as an evaluation of specific jurisdiction); Levitin v. Sony Music Entertainment, 101 F.Supp.3d 376, 390 (S.D.N.Y.2015) (plaintiffs made prima facie showing of specific jurisdiction over defendants by showing defendants transacted business in New York under section 302(a)(1)). The plaintiffs in GEM Advisors alleged that the foreign corporation, IFN, was subject to jurisdiction under N.Y. C.P.L.R. § 302(a)(1) because its subsidiary, Sidenor, was an agent or mere department of IFN and had transacted business in New York. After finding that Sidenor was an agent and mere department of IFN and that Sidenor had transacted business in New York, 667 F.Supp.2d at 319-320, the GEM Advisors court then concluded that personal jurisdiction over IFN existed under N.Y. C.P.L.R. § 302(a)(1) because “[plaintiff] has made an adequate prima facie showing that IFN is amenable to personal jurisdiction because of its relationship with Side-nor, which ... transacted business in New York....” Id. at 321. Accordingly, the GEM Advisors court employed the mere department test in the context of a specific jurisdiction analysis.
In Refco, the plaintiff attempted to establish the court’s general jurisdiction over foreign entities under the theory that such entities were mere departments of “a parent corporation which has a presence in New York.” Refco, 2014 WL 2610608 at *8 n. 10. The Refco court observed, with a citation to a footnote in the Second Circuit’s decision in Sonera Holding B.V. v. Cukurova Holding AN, 750 F.3d 221 (2d Cir.2014), that constitutionality of the mere department test as a means of establishing general jurisdiction “may not be fully consistent with the constitutional principles articulated in Daimler.” Id. After noting this tension, the Refco court applied the mere department test and determined that, in any event, the allegations in the complaint were insufficient to establish that the foreign entities were mere departments of the New York parent. Id. In other words, the Refco court in footnote 10 expressed doubt over the constitutionality of finding general jurisdiction over a foreign entity based on a mere department theory prior to determining that the issue was moot because the foreign entities were not mere departments in any event. There is nothing in footnote 10 of the Refco decision that suggests a refusal to apply the mere department test to a specific jurisdiction analysis.
Further, the constitutional tension referred to in Refco is not related to the *38mere department test and its applicability to a specific jurisdiction analysis. In the Sonera Holding footnote cited in Refco, the Second Circuit stated:
[W]e note some tension between Daimler’s “at home” requirement and New York’s “doing business” test for corporate “presence,” which subjects a corporation to general jurisdiction if it does business there “not occasionally or casually, but with a fair measure of permanence and continuity.” (citations omitted). Not every company that regularly “does business” in New York is “at home” there. Daimler’s gloss on due process may lead New York courts to revisit Judge Cardozo’s well-known and oft-repeated jurisdictional incantation.
Sonera Holding, 750 F.3d at 225 n. 2.
Accordingly, while the Second Circuit and the Refco court both expressed concern over whether it was constitutional to establish general jurisdiction over a foreign defendant through the actions of its mere department in the forum, neither court issued a ruling or expressed an opinion as to the propriety of establishing specific jurisdiction over a foreign defendant through the actions of its mere department in the forum.81
ii. ANZ Bank Does Not Have Minimum Contacts with the United States
LBSF argues that ANZ Bank has minimum contacts with the United Stated because “ANZ [Bank] took affirmative action to cause the transfer to it of property of the LBSF estate after the petition date, with knowledge of the bankruptcy and in violation of the stay, which caused serious harm to LBSF, and the underlying causes of action against ANZ [Bank] arise out of those activities.”82
LBSF’s argument is largely premised on the notion that ANZ Bank must have directed the Trustee to terminate the Portfolio Swap, thereby setting in motion the chain of events that led to ANZ Nominees receiving and distributing the Distributed Funds.83 This alleged action, contends LBSF, is sufficient to establish (i) the “minimum contacts” of ANZ Bank and ANZ Nominees with the United States and (ii) that ANZ Nominees and ANZ Bank violated the automatic stay, which, LBSF asserts, is itself a basis for specific jurisdiction.84 Although ANZ Nominees received a request for direction with regard to terminating the Portfolio Swap from the Trustee in connection with the October 8 Notice, LBSF concedes that ANZ Bank and ANZ Nominees did not produce an executed direction letter in discovery.85 Nevertheless, LBSF contends that, because the Trustee did in fact take action and terminate the Portfolio Swap, “there is a compelling inference that ANZ executed and returned the ‘response document’ directing the Trustee to designate an early termination date and distribute the funds[.]” 86 However, ANZ Nominees denies sending any direction to the Trustee and the record simply does not support drawing the inference LBSF urges.
In his supplemental declaration, Mr. Garry explains that ANZ Nominees did *39not provide direction to the Trustee because “ANZ Nominees never received instructions from the beneficial holders on whose behalf it held the Federation Notes to provide any such instructions to the Trustee.”87 This explanation is consistent with the Sub-Custody Agreement and with ANZ Bank’s custody agreements with the Australian Beneficial Holders. Those documents provide that the custodian or sub-custodian, as the case may be, is permitted to take only limited actions without evidence of authority from the client or custodian, respectively.88 ANZ Nominees, as sub-custodian, and ANZ Bank, as custodian were not authorized to pay out moneys from the custodial account except upon receipt of “Proper Instructions” (¿a, express authorization from the custodian or client, as the case may be).89 Accordingly, it is fully consistent with such agreements that ANZ Nominees and ANZ Bank would only have directed the Trustee, and thereby committed the Australian Beneficial Holders to pay out moneys to indemnify the Trustee, upon receipt of such “Proper Instructions.” There is nothing in the record indicating ANZ Nominees or ANZ Bank received such Proper Instructions from the Australian Beneficial Holders. Thus, to make the inference urged by LBSF, the Court would have to (a) infer, despite Mr. Garry’s undisputed representation to the contrary, that ANZ Nominees and ANZ Bank received Proper Instructions and acted upon them or (b) infer that ANZ Nominees and ANZ Bank acted to direct the Trustee without Proper Instructions, even though such direction would perhaps have constituted a violation of the Sub-Custody Agreement and custody agreements, respectively. The Court declines to make either inference.
Moreover, the October 8 Notice stated that the Trustee required direction only from the Controlling Class, ie., a majority of the holders of Federation Notes. In other words, the Trustee could have acted on direction from the Controlling Class, without any response to the October 8 Notice from ANZ Nominees, unless the holdings of the Australian Beneficial Holders were such that the Australian Beneficial Owners constituted the Controlling Class. LBSF has not alleged that the holdings of the Australian Beneficial Holders were sufficient to constitute the Controlling Class.90 Accordingly, it is at least as valid, and simpler, to infer that the Trustee acted on direction from a Controlling Class that did not include the Australian Beneficial Holders as to make the inference urged by LBSF, that the Australian Beneficial Holders constituted a Controlling Class on whose behalf the Trustee was directed to terminate the Portfolio Swap.
In accordance with the foregoing, the Court rejects LBSF’s argument that ANZ Bank or ANZ Nominees has sufficient minimum contacts with the United States by virtue of its allegedly having directed *40the Trustee to terminate the Portfolio Swap.91
In the absence of an inference that ANZ Nominees or ANZ Bank affirmatively directed the Trustee to terminate the Portfolio Swap, LBSF is left with arguments that (i) the Court has specific jurisdiction over ANZ Bank because ANZ Bank knew at the time it took on its roles as custodian on behalf of the Australian Beneficial Holders that the Federation Notes had a connection to the United States and the LBSF estate and that it knew that its receipt of the Distributed Funds would cause harm to the LBSF estate92 and (ii) the Court has specific jurisdiction over ANZ Bank by virtue of the New York long-arm statute.93 Neither of these arguments is meritorious.
First, as this Court explained in Lehman Brothers Special Financing Inc. v. Bank of America National Association, et al. (In re Lehman Brothers Holdings Inc.), 535 B.R. 608 (Bankr.S.D.N.Y.2015) (“Shield ”), the foreseeability of harm being felt in the forum state and, relatedly, of being haled into court in the forum state, is not sufficient to meet the minimum contacts test articulated by the Supreme Court in Walden. See Shield, 535 B.R. at 623. Accordingly, the Court finds that ANZ Bank does not have the requisite minimum contacts with the United States to justify asserting specific jurisdiction over it in this adversary proceeding.
Second, and also as this Court explained in Shield, even if ANZ Bank could be reached under the New York long-arm statute, to assert specific jurisdiction, the Court would still need to find that ANZ Bank had established minimum contacts with the United States. See Shield, 535 B.R. at 624 (“even if [defendant] can be reached under the New York long-arm statute, that conclusion would not invalidate the minimum contacts analysis performed above, nor would it eliminate this Court’s obligation to engage in it.”). As the Court finds that ANZ Bank does not have the requisite minimum contacts with the United States to justify asserting specific jurisdiction, it cannot assert jurisdiction under the New York long-arm statute.
B. In Rem Jurisdiction
The court in which a bankruptcy proceeding is pending has “exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.” 28 U.S.C. § 1334(e) (emphasis supplied); see also Sinatra v. Gucci (In re Gucci), 309 B.R. 679, 681 (S.D.N.Y.2004). Property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case,” 11 U.S.C. § 541(a)(1), and includes “even strictly contingent interests,” Mid-Island Hosp., Inc. v. Empire Blue Cross & Blue Shield (In re Mid-Island Hosp., Inc.), 276 F.3d 123, 128 (2d Cir.2002). A debtor’s security interest in collateral or a debtor’s interest in an executory contract as of the commencement of the case comprises property of the estate. See Lehman Bros. Special Financing Inc. v. BNY Corp. Tr. Servs. Ltd., 422 B.R. 407, 411, 418 (Bankr.S.D.N.Y.2010). A contract is executory if “termination requires the non-debtor party *41to undertake some post-petition affirmative act.” In re Margulis, 323 B.R. 130, 135 (Bankr.S.D.N.Y.2005) (citations omitted).
The bankruptcy court’s in rem jurisdiction is broad and reaches property, wherever located. See 28 U.S.C. § 1334(e). In other contexts, a court may only exercise in rem jurisdiction over property physically within the court’s jurisdiction at the time of the suit. See 4A Charles Alan Wright & Arthur R. Miller, FEDERAL PRACTICE & PROCEDURE § 107 (3d ed.). However, in the bankruptcy context, Congress explicitly gave bankruptcy courts global reach over the debt- or’s property via section 541(a) of the Bankruptcy Code and section 1334(e) of title 28 of the United States Code. See Hong Kong & Shanghai Banking Corp., Ltd. v. Simon (In re Simon), 153 F.3d 991, 996 (9th Cir.1998), cert. denied, 525 U.S. 1141, 119 S.Ct. 1032, 143 L.Ed.2d 41 (1999) (“Congress intended extraterritorial application of the Bankruptcy Code as it applies to property of the estate.”); Gucci 309 B.R. at 683 (declaring that “[s]ection 1334(e) ... embodies a Congressional determination that bankruptcy courts should determine rights in property of bankrupt estates regardless of where that property may be found”); Nakash v. Zur (In re Nalcash), 190 B.R. 763, 768 (Bankr.S.D.N.Y.1996) (exercising in rem jurisdiction to enforce automatic stay against foreign receiver related to foreign assets of foreign debtor).
Despite the bankruptcy court’s broad reach to assert jurisdiction over foreign property, the bankruptcy court’s in rem jurisdiction cannot be enforced extra-territorially without in personam jurisdiction over the defendant. See Found, for Research v. Globo Communicacoes e Participacoes S.A. (In re Globo Comunicacoes e Partipacoes S.A.), 317 B.R. 235, 251-52 (S.D.N.Y.2004). In other words, “the bankruptcy court is precluded from exercising control over property of the estate located in a foreign country without the assistance of the foreign courts.” In re Int’l Admin. Servs., Inc., 211 B.R. 88, 93 (Bankr.M.D.Fla.1997).
LBSF asserts that the Court can assert in rem jurisdiction on the basis of the LBSF estate’s purported property interests in (i) the Distributed Funds and (ii) LBSF’s purported senior right to priority.94 As ANZ Nominees correctly points out, LBSF concedes .that the both the Distributed Funds and the purported senior payment priority are not property of the estate until the purportedly unenforceable flip clause is rendered unenforceable.95 These purported property interests, the Distributed Funds, and LBSF’s purported “senior” right to priority, are therefore the subject of this dispute and thus constitute property claimed by the Debtor. Accordingly, these interests cannot form the basis for the Court’s exercise of in rem jurisdiction. See In re Colonial Realty Co., 980 F.2d 125, 131 (2d Cir.1992).
This Court has previously held, however, that it can exercise its in rem jurisdiction on the basis of the estate’s property interests in transaction documents and collateral. Shield, 535 B.R. at 629; see also Lehman Bros. Special Financing Inc. v. BNY *42Corp. Tr. Servs. Ltd., 422 B.R. 407, 411, 418 (Bankr.S.D.N.Y.2010). Accordingly, it is necessary to consider whether LBSF’s estate has a property interest in either (i) the transaction documents governing the Federation Notes or (ii) in the Investment Agreements and other collateral securing the Federation Notes.
1. LBSF Has a Property Interest in the Transaction Documents Governing the Federation Notes
The bankruptcy estate is composed of, inter alia, “all legal or equitable interests of the debtor in property as of the commencement of the case.” Lehman Bros. Special Financing Inc. v. BNY Corp. Tr. Servs. Ltd., 422 B.R. 407, 418 (Bankr.S.D.N.Y.2010) (emphasis in original) (“BNY”). In BNY, the Court found that LBSF had a property interest in the transaction documents there at issue. BNY, 422 B.R. at 418. The trustee took the position that the so-called “flip clause” that purportedly altered the payment priorities in favor of the noteholders and against LBSF was self-executing and triggered by LBHI’s bankruptcy filing on September 15, 2008 such that LBSF had no property interest in the transaction documents as of the commencement of its own case, on October 3, 2008. See id. Judge Peck found that the transaction documents were executory contracts and analyzed them in accordance with the principle that executory contracts are property of the estate where, as of the commencement of the case, “termination requires the non-debtor party to undertake some post-petition affirmative act.” See id. Judge Peck found that, as of the LBSF petition date, the transaction documents at issue in BNY “required certain affirmative acts be taken prior to the effectiveness of any modification of payment priority.” BNY, 422 B.R. at 418. Among other affirmative acts, Judge Peck found that “payments required by [the transaction documents] cannot be calculated until after termination of the relevant Swap Agreement” and “[t]he relevant termination events took place after commencement of the LBSF case.” Id. Accordingly, Judge Peck held that “LBSF held a valuable interest in the Transaction Documents as of the LBSF Petition Date and, therefore, such interest is entitled to protection as part of the bankruptcy estate.” Id.
The Federation Notes and the transaction documents governing them, like the transaction documents in BNY, were executory contracts as of the commencement of the LBSF case. Thus, for the LBSF estate to have a property interest in the transaction documents governing the Federation Notes, termination of such transaction documents must have “require[d] the non-debtor party to undertake some post-petition affirmative act” as of the commencement of the case on October 3, 2015. BNY, 422 B.R. at 418 (citations omitted). Here, as with the transaction documents at issue in BNY, the transaction documents governing the Federation Notes could not be terminated until the Trustee took the affirmative action of terminating the Portfolio Swap. Accordingly, the LBSF estate has a property interest 'in the transaction documents governing the Federation Notes.96
*43
2. LBSF Has a Property Interest in Its Security Interest on the Investment Agreements and Other Collateral
The offering memorandum states (and ANZ Nominees has not disputed) that LBSF has a security interest in the Investment Agreements.97 Consistent with BNY and Shield, such a security interest is a sufficient basis for the Court to exercise its in rem jurisdiction.
In accordance with the above, the Court finds that it has in rem jurisdiction over LBSF’s property interest in the transaction documents associated with the Federation Notes and in LBSF’s security interest in the collateral securing the Federation Notes. The Court’s finding that neither ANZ Nominees nor ANZ Bank has minimum contacts for the purposes of the assertion of specific personal jurisdiction does not preclude the Court’s exercise of in rem jurisdiction. See Shield, 535 B.R. at 629.
CONCLUSION
For all of the foregoing reasons, ANZ Nominees’ motion to dismiss for lack of personal jurisdiction is granted. Notwithstanding the Court’s lack of personal jurisdiction over ANZ Nominees, the Court has in rem jurisdiction and concomitant adjudicatory authority over the property at issue in this dispute and shall exercise such jurisdiction. The parties are directed to settle an order consistent with this decision.
. See Declaration of Kate Apostolova [ECF No. 842] (the "Apostolova Decl.”) Ex. 1 (Series 2007-1 Federation A-l Segregated Portfolio Offering Memorandum) at cover page; Apostolova Decl. Ex. 2 (Series 2007-1 Federation A-2 Segregated Portfolio Offering Memorandum) at cover page,
. See Declaration of Matthew Gurgel in Further Support of ANZ Nominees Limited's Motion to Dismiss the Third Amended Complaint of Lehman Brothers Special Financing Inc. [ECF No. 1111] (the "Gurgel Decl.”) Ex. 11 (Investment Agreement between Rabobank and the Series 2007-1 Federation A-l Segregated Portfolio); Gurgel Decl. Ex. 12 (Investment Agreement between Rabobank and the Series 2007-1 Federation A-2 Segregated Portfolio).
. See Apostolova Decl. Ex, 1 at p. 23 (Use of Proceeds); Apostolova Decl. Ex. 2 at 23 (Use of Proceeds).
. See Gurgel Decl. Ex. 11 at § 2.4(a); Gurgel Decl. Ex. 12 at § 2.4(a).
. See Apostolova Decl. Ex, 1 at 9, 18-19 (describing terms of Portfolio Swap and Reference Obligations); Apostolova Decl. Ex. 2 at 9, 18-19 (describing terms of Portfolio Swap and Reference Obligations).
. See Apostolova Decl. Ex. 1 at 9, Appendix D (describing terms of Portfolio Swap); Apostolova Decl. Ex. 2 at 9, Appendix D (describing terms of Portfolio Swap).
. See Apostolova Decl. Ex. 1 at 2; Apostolova Decl. Ex. 2 at 2.
. Apostolova Decl. Ex. 1 at 16 ("Moreover, the security interest of the Trustee under the Indenture is not only for the benefit of the holders of the [Federation Notes] but is also for the benefit of [LBSF]."); Apostolova Decl. Ex, 2 at 16 (same),
. See Apostolova Decl. Ex. 1 at 20 ("The Issuer is exposed to the credit default risk of the Reference Portfolio, The holders of the Notes will bear such credit default risk and, as a consequence, may lose some or all of their investment.”); Apostolova Decl. Ex. 2 at 20 (same).
. See Opposition 1110,
. See Apostolova Decl. Ex, 1 at 19; Apostolova Decl. Ex. 2 at 19.
. See Opposition ¶ 16.
. Apostolova Decl. Ex. 1 at 19; Apostolova Decl. Ex. 2 at 19.
. Opposition ¶ 16,
. See Apostolova Decl. Ex. 1 at cover page ("It is a condition to the issuance of the Notes that the Notes be rated "AAA” by Standard & Poor’s.”); Apostolova Decl. Ex. 2 at cover page ("It is a condition to the issuance of the Notes that the Notes be rated "A+” by Standard & Poor’s.”).
. See Apostolova Decl. Ex. 1 at 29; Apostolova Decl. Ex. 2 at 29.
. See Apostolova Decl. Ex. 1 at 2 (“The [Investment Agreement] will mature on or before . the Business Day immediately preceding the Final Scheduled Payment Date”); Apostolova Decl, Ex. 2 at 3 (same).
. BTA Institutional Services Australia Limited.
. Bank of New York, London Branch.
. See Apostolova Decl. Ex. 1 at 29; Apostolova Decl. Ex. 2 at 29.
. See Apostolova Decl. Ex. 1 at 8; Apostolova Decl. Ex. 2 at 8-9.
. Apostolova Decl. Ex. 1 at 36; Apostolova Decl. Ex. 2 at 36.
. Id.
. Id.
. See Opposition ¶ 11 (quoting ANZ Bank's website).
. See Declaration of William F. Dahill in Opposition to ANZ Nominees Ltd.'s Motion to Dismiss [EOF No. 1092] (the "Dahill Decl.”) Ex. 5.
. Id.
. Declaration of Paul Garry in Further Support of ANZ Nominees’ Motion to Dismiss, dated June 11, 2015 [ECF No. 1110] ("Garry Supp. Decl.”) ¶ 6.
. See Dahill Decl. Ex. 2 (Mr. Gariy Dep. Tr.) at 8:19-9:7. See also Gariy Supp. Decl. ¶ 6.
. Dahill Decl. Ex. 2 (Mr. Garry Dep. Tr.) at 17:23-18:7.
. See Dahill Decl. Ex. 2 (Mr. Garry Dep. Tr.) at 17:4-22.
. Gurgel Decl. Ex. 2.
. See Sub-Custody Agreement ¶ 11.1(a); 11,2; Definition of "Expenses and Outlays.”
. See Apostolova Decl. Ex. 1 at 2; Apostolova Decl. Ex. 2 at 14.
. See Apostolova Decl. Ex. 1 at 27; Apostolova Decl. Ex, 2 at 27.
. See Opposition ¶ 16; Memorandum in Support at 2.
. See Declaration of Paul Garry in Support of ANZ Nominees' Motion to Dismiss [ECF No. 843] (the "Garry Decl.”) ¶ 4.
. Dahill Decl. Ex. 13.
. Dahill Decl. Ex. 1.
. Id.
. Dahill Decl. Ex. 6.
. See Dahill Decl. Ex. 11.
. See Id. See also Gurgel Decl. Exs. 4-7 (custody agreements between ANZ Bank and certain beneficial holders of the Federation Notes).
. Each of the custody agreements speaks generically of "Assets” or "Property” to be specified by schedules or acknowledgements between the parties. The Court was not provided with any such schedules or acknowledgements specifying the property subject to the various custody agreements. It is nonetheless undisputed between the parties that ANZ Nominees came to hold certain beneficial interests in the Federation Notes as custodian, Accordingly, for purposes of this decision, the Court assumes that ANZ Nominees came to hold certain beneficial interests in the Federation Notes as custodian.
. See Gurgel Decl. Exs, 2-7 (custody agreements).
. Id.
. Dahill Decl. Ex. 17.
. See id.
. See id.
. See Gurgel Decl. Ex. 1 (Mr. Garry Dep. Tr.) at 129:10-17; Garry Supp. Decl. ¶ 9.
. Opposition ¶ 21.
. Dahill Decl. Ex. 18.
. Dahill Decl. Ex. 19.
. See Garry Decl. ¶ 8.
. See Dahill Decl. Exs. 18-19.
. See Garry Decl. ¶¶ 8-9.
. Dahill Decl. Ex. 22.
. Id.
. See Garry Supp. Decl. ¶ 11.
. Dahill Decl. Ex. 23.
.Gurgel Decl. Exs. 16, 17,.
. Gurgel Decl. Ex. 15 (Order Granting Debtors' One Hundred Sixty-First Omnibus Objection to Claims (Settled Derivatives Claims)).
. Gurgel Decl. Ex. 18 (Amended Withdrawal of Proofs of Claim Nos. 21493, 21494, 26192, and 30048).
.See Reply at 26 n.26.
. Opposition ¶¶ 61, 66.
. Opposition ¶ 28.
. Id.
. See Reply at 32-33 (acknowledging that ANZ Nominees is wholly owned by ANZ Bank and that ANZ Nominees’ directors are employed by ANZ Bank).
. Opposition ¶ 44.
. Reply at 32-33 (citing Williamson, 2013 WL 227691 at *2 ("This allegation of consolidated earnings reports is insufficient to show that [subsidiaries] are financially dependent on [parent].”)
. See Dahill Ex. 2 at 18:10-18 (Mr. Garry Dep, Tr.) ("Q: Did [ANZ Nominees] hold assets in custody for any third party who was not also a client of [ANZ Bank]? A: I can't say for certain that there were not some customers who purely came to custody, but I think the vast majority would also have had a relationship with ANZ [Bank] in some form of bank account at the very least.”).
.See Garry Supp. Deck ¶¶ 3-4.
.Opposition ¶ 38 ("LBSF does not contend that ANZ is subject to this Court's general jurisdiction; rather LBSF contends that the activities ANZ undertook with respect to its receipt and transfer .of property of the LBSF bankruptcy estate in violation of the automatic stay, which caused significant harm to LBSF in the United States, provide the requisite contacts to support specific jurisdiction over ANZ in an action related to those activities.”).
, See Opposition ¶ 25 ("Finally, ANZ Nominees, ANZ Bank and its affiliates filed proofs of claim in the LBHI and LBSF Chapter 11 cases. ANZ Nominees thereby consented to this Court's jurisdiction over it for purposes of the adjudication of this adversary proceeding.”).
. See Reply at 26.
. ANZ Nominees also argues that claim numbers 21493 and 26192 are insufficient to establish consent to jurisdiction for purposes of this adversary proceeding because such claims were filed against LBHI, not LBSF, the plaintiff in this adversary proceeding. See Reply at 27, While the Court does not need to reach this argument for tire reasons above, this too is a compelling argument,
. Judge Bernstein did find, however, that the court had personal jurisdiction over the *36French defendants on other grounds. See Apfelbaum, 525 B.R. at 882-887.
. See Reply at 28-29.
. See Reply at 29.
. Reply at 29.
. Subsequent to Sonera Holding, the Second Circuit further addressed the question in Gucci America Inc. v. Li, 768 F.3d 122 (2d Cir.2014), holding that general jurisdiction could not be established over a foreign bank solely on the basis of its having branches in New York.
. Opposition ¶ 32.
. See Opposition ¶ 34.
. See Opposition ¶¶ 32-38.
. Opposition ¶ 21,
. Opposition ¶ 21.
. Garry Supp. Decl. ¶ 9.
. See Sub-Custody Agreement ¶2.11; see also e.g., Gurgel Decl. Ex. 4 (Custody Agreement between ANZ Bank and FUG Securities Ltd.) ¶ 2.9.
. See Sub-Custody Agreement ¶ 2,9; see also e.g., Gurgel Decl. Ex. 4 (Custody Agreement between ANZ Bank and FIIG Securities Ltd.) ¶ 2.7.
.In fact, LBSF alleges that the Australian Beneficial Holders received a 100% recovery on the principal value of their Federation Notes in the amount of AUD 17,166,217.40. See Opposition ¶¶ 23-24. This indicates that the Australian Beneficial Holders held less than a majority of the value of the AUD 64,-500,000 principal Federation Notes and perhaps could not have constituted a Controlling Class.
.As the Court explained in Shield (defined below), even if the Court were to find that ANZ Bank or ANZ Nominees had violated the automatic stay, such violation, by itself, would not confer specific jurisdiction; rather, the Court would still have to find that ANZ Bank or ANZ Nominees, as the case may be, had sufficient contacts with the United States. See Shield, 535 B.R. at 623,
. See Opposition ¶¶ 38-41.
. See Opposition ¶¶ 47-52.
. See Opposition ¶¶ 65-66.
. See Reply at 23 (quoting Opposition ¶ 65 (”[o]nce the flip clause is rendered unenforceable, section 542(a) required both the Trustee and ANZ to deliver to LBSF, not to Noteholders, such property.”)); Reply at 25 (quoting Opposition ¶ 69 ("[A]s of the petition date, and assuming the unenforceable nature of the flip clause, the Court has worldwide jurisdiction over the property of the Estate, including LBSF’s senior payment priority and lien in and to the funds.”).
. It follows that the scope of LBSF’s property interest in the transaction documents as of the commencement date of the LBSF case is limited to the rights it enjoyed pursuant to the transaction documents as of the commencement date of the LBSF case. For example, LBSF could not have had a right to a termination payment in connection with the termination of the Portfolio Swap as of the commencement date of the LBSF case on October 3, 2008 because the Portfolio Swap was not terminated until October 30, 2008. As of the commencement date of its case, LBSF at least had a property interest in payment of the *43AUD Tranche Loss Amounts pursuant to the transaction documents governing the Federation Notes, See Apostolova Decl. Ex. 1 at 29 (detailing “Final Scheduled Payment Date Priority of Payments”).
. Apostolova Decl. Ex. 1 at 16 ("Moreover, the security interest of the Trustee under the Indenture is not only for the benefit of the holders of the [Federation Notes] but is also for the benefit of [LBSF].”). | 01-04-2023 | 11-22-2022 |
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